Form 487 Advisors Disciplined
April 7, 2020 11:39 AM EDT
1933 Act File No.: 333-236188
1940 Act File No.: 811-21056
CIK No.: 1797645
Securities
and Exchange Commission
Washington, D.C. 20549
Amendment
No. 1
to
REGISTRATION STATEMENT
ON
Form S-6
For
Registration under the Securities Act
of 1933 of Securities of Unit Investment
Trusts Registered on Form N-8B-2
A. | Exact name of trust: | Advisors Disciplined Trust
2007 |
B. | Name of depositor: | Advisors
Asset Management, Inc. |
C. | Complete address of depositor’s principal executive offices: |
18925 Base Camp Road
Monument, Colorado 80132
D. | Name and complete address of agent for service: |
|
With a copy to: |
Scott Colyer |
Scott R. Anderson |
Advisors Asset Management, Inc. |
Chapman and Cutler LLP |
18925 Base Camp Road |
111 West Monroe Street |
Monument, Colorado 80132 |
Chicago, Illinois 60603-4080 |
E. | Title of securities being registered: Units of undivided beneficial interest |
F. | Approximate date of proposed public offering: |
As
Soon As Practicable After The Effective Date Of The Registration Statement
☒ | Check
box if it is proposed that this filing will become effective on April 7, 2020 at 10:00 a.m.
pursuant to Rule 487. |
Balanced Portfolio, Series 2020-2
|
|
|
|
Cohen & Steers Equity Dividend & Income Closed-End Portfolio, Series
2020-2
|
|
|
|
Dividend Strength Portfolio, Series 2020-2 A Hartford Investment Management
Company (HIMCO) Portfolio |
|
|
|
Financial Opportunities Portfolio, Series 2020-2 |
|
|
|
Ubiquitous Strategy Portfolio, Series 2020-2 |
|
|
|
(Advisors Disciplined Trust 2007) |
|
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|
Prospectus
April 7, 2020
As with any investment, the Securities and Exchange Commission has
not approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any contrary representation is a criminal
offense.
INVESTMENT
OBJECTIVE
The trust seeks to provide high current
income with capital appreciation as a secondary objective. There is no assurance the trust will achieve its objective.
PRINCIPAL INVESTMENT
STRATEGY
The trust invests in a diversified
portfolio consisting of two equally-weighted components:
|
|
High 50® Dividend Strategya
specialized dividend-oriented strategy that seeks to provide above average total return. |
|
|
Tactical Income Closed-End Strategycommon stocks of
closed-end investment companies (closed-end funds) seeking high current income with capital appreciation potential. |
We* selected these components in an
effort to provide an enhanced total return while reducing overall portfolio volatility through diversification of assets and investment strategies. We
selected the securities within each of these components as described below. By combining these investment strategies, we sought to create a portfolio
balanced between stocks and other income-producing securities, such as corporate bonds, government bonds, corporate loans, convertible securities,
preferred securities and equity securities. We currently offer separate unit investment trusts that invest according to the same or similar investment
strategies as the components described above. The components, portfolio securities and structure of the trust offered in this prospectus may differ in
certain respects from those of other trusts we may be offering that use similar investment strategies.
The following describes the two
components of the trusts portfolio. The initial trust portfolio seeks to invest in each component in approximately equal weightings as of the
trusts inception and the weightings will vary thereafter in accordance with fluctuations in stock prices.
High 50® Dividend
Strategy. This component invests in stocks selected using a specialized dividend-oriented strategy that seeks to provide above average total
return. We selected this component using the following strategy:
|
|
We begin with the companies included in the New York Stock
Exchange Composite Index, Nasdaq Composite Index and NYSE MKT Composite Index. |
|
|
Stocks are eliminated if at the time of selection: |
|
|
the companys stock market capitalization is $1 billion or
less, |
|
|
the companys headquarters is located outside the United
States, |
|
|
the stocks are securities of limited partnerships, exchange-traded
funds, investment companies or shares of beneficial interest to the extent such securities are not otherwise excluded from the composition of the
indexes. |
|
|
Of the remaining stocks we select the five securities with the
highest dividend yields as of March 31, 2020 from the remaining securities of companies in each of the nine Global Industry
Classification Standard (GICS®) sectors other than the Financials and Real Estate sectors and the five securities with the highest
dividend yields as of March 31, 2020 from the remaining securities of companies in the Financials and Real Estate GICS®
sectors combined (for a total of 50 securities). The trust invests in these 50 stocks. |
* |
|
AAM, we and related terms
mean Advisors Asset Management, Inc., the trust sponsor, unless the context clearly suggests otherwise. |
2 Investment
Summary
The eleven industry sectors used in the
strategy are the GICS® sectors published by S&P Dow Jones Indices and MSCI Inc. Please note that we applied the strategy to select
the portfolio at a particular time. If we create additional units of the trust after the trusts inception date, the trust will purchase the
securities originally selected by applying the strategy. This is true even if a later application of the strategy would have resulted in the selection
of different securities. In addition, companies which, based on publicly available information as of two business days prior to the date of this
prospectus, are the target of an announced business acquisition which we expect will happen within six months of the date of this prospectus have been
excluded from the universe of securities from which the trusts securities are selected.
The trusts strategy begins with
the New York Stock Exchange (NYSE) Composite Index, the Nasdaq Composite Index and the NYSE MKT Composite Index. The NYSE Composite Index is designed
to measure the performance of all common stocks listed on the NYSE, including ADRs, real estate investment trusts (REITs) and tracking stocks. All
closed-end funds, exchange-traded funds, limited partnerships and derivatives are excluded from the index. The Nasdaq Composite Index measures all
domestic and international based common type stocks traded on The Nasdaq Stock Market. To be eligible for inclusion in this index the securitys
U.S. listing must be exclusively on The Nasdaq Stock Market (with certain exceptions), and have a security type of ADRs, common stock, limited
partnership interests, ordinary shares, REITs, shares of beneficial interest or tracking stocks. Security types not included in this index are
closed-end funds, convertible debentures, exchange-traded funds, preferred stocks, rights, warrants, units and other derivative securities. The NYSE
MKT Composite Index is an index representing the aggregate value of the common shares or ADRs of all NYSE MKT-listed companies, REITs, master limited
partnerships and closed-end investment companies. The publishers of the indexes are not affiliated with us and have not participated in creating the
trust or selecting the securities for the trust, nor have they reviewed or approved of any of the information contained herein.
Tactical Income Closed-End
Strategy. This component seeks to provide high current income with capital appreciation potential by investing in a portfolio primarily
consisting of common stock of closed-end funds. The underlying funds may invest in a variety of income-producing securities issued by various types of
foreign and/or U.S. issuers. Among other securities, these securities may include corporate bonds, government bonds, corporate loans, convertible
securities, preferred securities and equity securities. These securities may be rated investment grade, below investment grade or unrated by major
security rating agencies.
In selecting closed-end funds, we
considered factors such as historical returns, income potential, potential future growth, portfolio diversification and advisor experience. We use a
disciplined investment methodology to select the funds for inclusion in this component. We begin by constructing a universe of funds that have a stated
investment objective in line with this components investment objective and that the fund advisor appears to be adhering to. From this universe we
select the final securities by utilizing a multi-factor approach based on the following factors:
|
|
Premium/DiscountWe favor funds that are trading at a
discount relative to their peers and relative to their historic average. |
|
|
DividendWe favor funds that have a history of a consistent
and competitive dividend and that appear to possess the ability to keep the dividend level intact. |
|
|
PerformanceWe favor funds that have an above average history
of performance based on net asset value when compared to their peers and a relevant benchmark. |
Investment
Summary 3
Approximately 15.99% of
the portfolio consists of funds classified as non-diversified under the Investment Company Act of 1940. These funds have the ability to
invest more than 5% of their assets in securities of a single issuer which could reduce diversification.
PRINCIPAL
RISKS
As with all investments, you can lose
money by investing in this trust. The trust also might not perform as well as you expect. This can happen for reasons such as these:
|
|
Security prices will fluctuate. The value of your
investment may fall over time. |
|
|
An issuer may be unable to make income and/or principal
payments, or declare dividends, in the future. This may reduce the level of income the trust receives which would reduce your income and cause the
value of your units to fall. |
|
|
The financial condition of an issuer may worsen or its credit
ratings may drop, resulting in a reduction in the value of your units. This may occur at any point in time, including during the primary offering
period. |
|
|
The value of certain securities will generally fall if interest
rates, in general, rise. No one can predict whether interest rates will rise or fall in the future. |
|
|
The trust invests in shares of closed-end funds. You should
understand the information about closed-end funds in the section titled Understanding Your InvestmentClosed-End Funds before you
invest. In particular, shares of these funds tend to trade at a discount from their net asset value and are subject to risks related to factors such as
the managers ability to achieve a funds objective, market conditions affecting a funds investments and use of leverage. The trust and
the underlying funds have management and operating expenses. You will bear not only your share of the trusts expenses, but also the expenses of
the underlying funds. By investing in other funds, the trust incurs greater expenses than you would incur if you invested directly in the
funds. |
|
|
The trust and/or certain funds held by your trust may invest in
securities of small and mid-size companies. These securities are often more volatile and have lower trading volumes than securities of larger
companies. Small and mid-size companies may have limited products or financial resources, management inexperience and less publicly available
information. |
|
|
We do not actively manage the portfolio. While the
closed-end funds have managed portfolios, except in limited circumstances, the trust will hold, and continue to buy, shares of the same securities even
if their market value declines. |
4 Investment
Summary
WHO SHOULD
INVEST
You should consider this investment if
you want:
|
|
to own a defined portfolio of securities selected based on two
distinct investment strategies. |
|
|
to diversify your overall portfolio with investments in various
types of securities. |
|
|
the potential to receive income and capital
appreciation. |
You should not consider this investment
if you:
|
|
are uncomfortable with the risks of an unmanaged investment in the
securities held by the trust. |
|
|
are uncomfortable with the trusts strategies. |
|
|
seek aggressive growth without current income. |
|
|
seek capital preservation or capital appreciation as a primary
objective. |
ESSENTIAL
INFORMATION |
|
Unit price at inception |
|
|
|
|
$10.0000 |
|
|
Inception date |
|
|
|
|
April 7, 2020 |
|
Termination date |
|
|
|
|
April 7, 2022 |
|
|
Distribution dates |
|
|
|
|
25th day of each
month |
|
Record dates |
|
|
|
|
10th day of each
month |
|
|
CUSIP Numbers
|
Standard Accounts Cash distributions |
|
|
|
|
00780H579 |
|
Reinvest distributions |
|
|
|
|
00780H587 |
|
Fee Based Accounts Cash distributions |
|
|
|
|
00780H595 |
|
Reinvest distributions |
|
|
|
|
00780H603 |
|
|
Ticker Symbol |
|
|
|
|
BALBVX |
|
|
Minimum investment |
|
|
|
|
$1,000/100 units |
|
|
Tax Structure |
|
|
|
|
Regulated Investment Company |
|
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|
FEES AND
EXPENSES
The amounts below are estimates of the
direct and indirect expenses that you may incur based on a $10 unit price. Actual expenses may vary.
Sales Fee
|
|
|
|
As a % of $1,000
Invested
|
|
Amount per 100
Units
|
Initial sales fee |
|
|
|
|
0.00 |
% |
|
|
$0.00 |
|
Deferred sales fee |
|
|
|
|
2.25 |
|
|
|
22.50 |
|
Creation & development fee |
|
|
|
|
0.50 |
|
|
|
5.00 |
|
Maximum sales fee |
|
|
|
|
2.75 |
% |
|
$ |
27.50 |
|
|
Organization Costs |
|
|
|
|
0.49 |
% |
|
$ |
4.90 |
|
Annual operating expenses
|
|
|
|
As a % of Net Assets
|
|
Amount per 100 Units
|
Trustee fee & expenses |
|
|
|
|
0.17 |
% |
|
|
$1.61 |
|
Supervisory, evaluation and administration fees |
|
|
|
|
0.10 |
|
|
|
1.00 |
|
Closed-end fund expenses |
|
|
|
|
0.88 |
|
|
|
8.55 |
|
Total |
|
|
|
|
1.15 |
% |
|
$ |
11.16 |
|
The initial sales fee is the difference
between the total sales fee (maximum of 2.75% of the unit offering price) and the sum of the remaining deferred sales fee and the total creation and
development fee. The deferred sales fee is fixed at $0.225 per unit and is paid in three monthly installments beginning July 20, 2020.
The creation and development fee is fixed at $0.05 per unit and is paid at the end of the initial offering period (anticipated to be approximately
three months). When the public offering price per unit is less than or equal to $10, you will not pay an initial sales fee. When the public offering
price per unit is greater than $10 per unit, you will pay an initial sales fee. The trust will indirectly bear the management and operating expenses of
the underlying closed-end funds. While the trust will not pay these expenses directly out of its assets, these expenses are shown in the trusts
annual operating expenses above to illustrate the impact of these expenses.
EXAMPLE
This example helps you compare the cost
of this trust with other unit trusts and mutual funds. In the example we assume that the expenses do not change and that the trusts annual return
is 5%. Your actual returns and expenses will vary. Based on these assumptions, you would pay these expenses for every $10,000 you invest in the
trust:
1 year |
|
|
|
$ |
436 |
|
2 years (approximate life of trust) |
|
|
|
$ |
551 |
|
These amounts are the same regardless of
whether you sell your investment at the end of a period or continue to hold your investment.
Investment
Summary 5
Balanced Portfolio, Series 2020-2
(Advisors Disciplined Trust 2007)
Portfolio
As of the
trust inception date, April 7, 2020
Number of Shares
|
|
|
|
Ticker Symbol
|
|
Issuer(1)
|
|
Percentage of Aggregate
Offering Price
|
|
Market Value per
Share(1)
|
|
Cost of Securities to
Trust(2)
|
COMMON STOCKS 49.80%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication Services 4.98% |
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
T |
|
AT&T, Inc. |
|
|
1.00 |
% |
|
$ |
29.44 |
|
|
$ |
1,501 |
|
159 |
|
|
|
CTL |
|
CenturyLink, Inc. |
|
|
1.00 |
|
|
|
9.43 |
|
|
|
1,499 |
|
158 |
|
|
|
CNK |
|
Cinemark Holdings, Inc. |
|
|
0.98 |
|
|
|
9.28 |
|
|
|
1,466 |
|
101 |
|
|
|
IPG |
|
The Interpublic Group of Companies, Inc. |
|
|
1.01 |
|
|
|
15.02 |
|
|
|
1,517 |
|
106 |
|
|
|
VIAC |
|
ViacomCBS, Inc. |
|
|
0.99 |
|
|
|
13.94 |
|
|
|
1,478 |
|
|
|
|
|
|
|
|
Consumer Discretionary 4.94% |
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
CBRL |
|
Cracker Barrel Old Country Store, Inc. |
|
|
0.99 |
|
|
|
77.82 |
|
|
|
1,479 |
|
223 |
|
|
|
GPS |
|
The Gap, Inc. |
|
|
0.98 |
|
|
|
6.59 |
|
|
|
1,470 |
|
260 |
|
|
|
GT |
|
The Goodyear Tire & Rubber Company |
|
|
0.99 |
|
|
|
5.72 |
|
|
|
1,487 |
|
103 |
|
|
|
KSS |
|
Kohls Corporation |
|
|
0.97 |
|
|
|
14.15 |
|
|
|
1,457 |
|
51 |
|
|
|
RCL |
|
Royal Caribbean Cruises Limited (3) |
|
|
1.01 |
|
|
|
29.61 |
|
|
|
1,510 |
|
|
|
|
|
|
|
|
Consumer Staples 4.99% |
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
MO |
|
Altria Group, Inc. |
|
|
0.97 |
|
|
|
37.28 |
|
|
|
1,454 |
|
85 |
|
|
|
BGS |
|
B&G Foods, Inc. |
|
|
0.98 |
|
|
|
17.32 |
|
|
|
1,472 |
|
299 |
|
|
|
COTY |
|
Coty, Inc. |
|
|
1.00 |
|
|
|
5.00 |
|
|
|
1,495 |
|
34 |
|
|
|
UVV |
|
Universal Corporation |
|
|
1.02 |
|
|
|
45.14 |
|
|
|
1,535 |
|
168 |
|
|
|
VGR |
|
Vector Group Limited |
|
|
1.02 |
|
|
|
9.14 |
|
|
|
1,536 |
|
|
|
|
|
|
|
|
Energy 4.91% |
|
|
|
|
|
|
|
|
|
|
|
|
578 |
|
|
|
AM |
|
Antero Midstream Corporation |
|
|
0.94 |
|
|
|
2.45 |
|
|
|
1,416 |
|
93 |
|
|
|
CVI |
|
CVR Energy, Inc. |
|
|
1.00 |
|
|
|
16.14 |
|
|
|
1,501 |
|
256 |
|
|
|
ETRN |
|
Equitrans Midstream Corporation |
|
|
0.99 |
|
|
|
5.78 |
|
|
|
1,480 |
|
90 |
|
|
|
HP |
|
Helmerich & Payne, Inc. |
|
|
1.00 |
|
|
|
16.62 |
|
|
|
1,496 |
|
63 |
|
|
|
OKE |
|
ONEOK, Inc. |
|
|
0.98 |
|
|
|
23.33 |
|
|
|
1,470 |
|
|
|
|
|
|
|
|
Financials 2.94% |
|
|
|
|
|
|
|
|
|
|
|
|
351 |
|
|
|
NLY |
|
Annaly Capital Management, Inc. |
|
|
1.00 |
|
|
|
4.25 |
|
|
|
1,492 |
|
240 |
|
|
|
ARI |
|
Apollo Commercial Real Estate Finance, Inc. |
|
|
0.96 |
|
|
|
5.97 |
|
|
|
1,433 |
|
181 |
|
|
|
CIM |
|
Chimera Investment Corporation |
|
|
0.98 |
|
|
|
8.15 |
|
|
|
1,475 |
|
|
|
|
|
|
|
|
Health Care 5.03% |
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
ABBV |
|
AbbVie, Inc. |
|
|
1.01 |
|
|
|
75.73 |
|
|
|
1,515 |
|
31 |
|
|
|
CAH |
|
Cardinal Health, Inc. |
|
|
1.02 |
|
|
|
49.35 |
|
|
|
1,530 |
|
20 |
|
|
|
GILD |
|
Gilead Sciences, Inc. |
|
|
1.04 |
|
|
|
77.73 |
|
|
|
1,555 |
|
107 |
|
|
|
PDCO |
|
Patterson Companies, Inc. |
|
|
0.94 |
|
|
|
13.10 |
|
|
|
1,402 |
|
44 |
|
|
|
PFE |
|
Pfizer, Inc. |
|
|
1.02 |
|
|
|
34.57 |
|
|
|
1,521 |
|
(Continued)
6 Investment
Summary
Balanced Portfolio, Series 2020-2
(Advisors Disciplined Trust 2007)
Portfolio
(continued)
As of the trust inception date, April 7, 2020
Number of Shares
|
|
|
|
Ticker
Symbol
|
|
Issuer(1)
|
|
Percentage of
Aggregate Offering Price
|
|
Market Value per
Share(1)
|
|
Cost of Securities
to Trust(2)
|
COMMON STOCKS (continued)
|
|
|
|
|
|
|
|
Industrials 5.01% |
|
|
|
|
|
|
|
|
|
|
|
|
199 |
|
|
|
CVA |
|
Covanta Holding Corporation |
|
|
1.02 |
% |
|
$ |
7.65 |
|
|
$ |
1,522 |
|
139 |
|
|
|
KAR |
|
KAR Auction Services, Inc. |
|
|
1.00 |
|
|
|
10.80 |
|
|
|
1,501 |
|
23 |
|
|
|
PCAR |
|
PACCAR, Inc. |
|
|
1.00 |
|
|
|
64.94 |
|
|
|
1,494 |
|
58 |
|
|
|
R |
|
Ryder System, Inc. |
|
|
1.00 |
|
|
|
25.90 |
|
|
|
1,502 |
|
163 |
|
|
|
SCS |
|
Steelcase, Inc. |
|
|
0.99 |
|
|
|
9.13 |
|
|
|
1,488 |
|
|
|
|
|
|
|
|
Information Technology 5.00% |
|
|
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
ADS |
|
Alliance Data Systems Corporation |
|
|
1.00 |
|
|
|
31.16 |
|
|
|
1,496 |
|
6 |
|
|
|
AVGO |
|
Broadcom, Inc. |
|
|
1.01 |
|
|
|
252.44 |
|
|
|
1,515 |
|
110 |
|
|
|
DXC |
|
DXC Technology Company |
|
|
0.99 |
|
|
|
13.52 |
|
|
|
1,487 |
|
13 |
|
|
|
IBM |
|
International Business Machines Corporation |
|
|
1.00 |
|
|
|
114.82 |
|
|
|
1,493 |
|
80 |
|
|
|
XRX |
|
Xerox Holdings Corporation |
|
|
1.00 |
|
|
|
18.71 |
|
|
|
1,497 |
|
|
|
|
|
|
|
|
Materials 5.05% |
|
|
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
CC |
|
The Chemours Company |
|
|
1.02 |
|
|
|
8.35 |
|
|
|
1,528 |
|
37 |
|
|
|
CMP |
|
Compass Minerals International, Inc. |
|
|
1.00 |
|
|
|
40.55 |
|
|
|
1,500 |
|
69 |
|
|
|
UFS |
|
Domtar Corporation |
|
|
1.01 |
|
|
|
21.85 |
|
|
|
1,508 |
|
38 |
|
|
|
GEF/B |
|
Greif, Inc. |
|
|
1.01 |
|
|
|
39.87 |
|
|
|
1,515 |
|
121 |
|
|
|
OLN |
|
Olin Corporation |
|
|
1.01 |
|
|
|
12.50 |
|
|
|
1,513 |
|
|
|
|
|
|
|
|
Real Estate 1.98% |
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
EPR |
|
EPR Properties |
|
|
0.97 |
|
|
|
20.99 |
|
|
|
1,448 |
|
211 |
|
|
|
PK |
|
Park Hotels & Resorts, Inc. |
|
|
1.01 |
|
|
|
7.20 |
|
|
|
1,519 |
|
|
|
|
|
|
|
|
Utilities 4.97% |
|
|
|
|
|
|
|
|
|
|
|
|
98 |
|
|
|
CNP |
|
CenterPoint Energy, Inc. |
|
|
1.00 |
|
|
|
15.30 |
|
|
|
1,499 |
|
20 |
|
|
|
D |
|
Dominion Energy, Inc. |
|
|
0.99 |
|
|
|
74.11 |
|
|
|
1,482 |
|
51 |
|
|
|
OGE |
|
OGE Energy Corporation |
|
|
0.99 |
|
|
|
28.96 |
|
|
|
1,477 |
|
62 |
|
|
|
PPL |
|
PPL Corporation |
|
|
0.99 |
|
|
|
23.92 |
|
|
|
1,483 |
|
56 |
|
|
|
UGI |
|
UGI Corporation |
|
|
1.00 |
|
|
|
26.63 |
|
|
|
1,491 |
|
CLOSED-END FUNDS 50.20%
|
|
|
|
|
|
|
|
|
|
|
|
889 |
|
|
|
FAX |
|
Aberdeen Asia-Pacific Income Fund, Inc. |
|
|
1.98 |
|
|
|
3.34 |
|
|
|
2,969 |
|
730 |
|
|
|
AWP |
|
Aberdeen Global Premier Properties Fund |
|
|
2.00 |
|
|
|
4.11 |
|
|
|
3,000 |
|
457 |
|
|
|
AOD |
|
Aberdeen Total Dynamic Dividend Fund |
|
|
2.02 |
|
|
|
6.63 |
|
|
|
3,030 |
|
164 |
|
|
|
NIE |
|
AllianzGI Equity & Convertible Income Fund |
|
|
2.03 |
|
|
|
18.55 |
|
|
|
3,042 |
|
304 |
|
|
|
NFJ |
|
AllianzGI NFJ Dividend Interest & Premium Strategy Fund |
|
|
2.01 |
|
|
|
9.92 |
|
|
|
3,016 |
|
218 |
|
|
|
BHK |
|
BlackRock Core Bond Trust |
|
|
2.01 |
|
|
|
13.78 |
|
|
|
3,004 |
|
(Continued)
Investment
Summary 7
Balanced Portfolio, Series 2020-2
(Advisors Disciplined Trust 2007)
Portfolio
(continued)
As of the trust inception date, April 7, 2020
Number of Shares
|
|
|
|
Ticker
Symbol
|
|
Issuer(1)
|
|
Percentage of
Aggregate Offering Price
|
|
Market Value per
Share(1)
|
|
Cost of Securities
to Trust(2)
|
CLOSED-END FUNDS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
455 |
|
|
|
BGR |
|
BlackRock Energy and Resources Trust |
|
|
2.00 |
% |
|
$ |
6.58 |
|
|
$ |
2,994 |
|
651 |
|
|
|
BGY |
|
BlackRock Enhanced International Dividend Trust |
|
|
2.00 |
|
|
|
4.61 |
|
|
|
3,001 |
|
180 |
|
|
|
BUI |
|
BlackRock Utilities Infrastructure & Power Opportunities Trust |
|
|
2.07 |
|
|
|
17.22 |
|
|
|
3,100 |
|
282 |
|
|
|
BWG |
|
BrandywineGLOBAL Global Income Opportunities Fund, Inc. |
|
|
1.98 |
|
|
|
10.54 |
|
|
|
2,972 |
|
430 |
|
|
|
GLO |
|
Clough Global Opportunities Fund |
|
|
2.00 |
|
|
|
6.96 |
|
|
|
2,993 |
|
189 |
|
|
|
RNP |
|
Cohen & Steers REIT and Preferred and Income Fund, Inc. |
|
|
2.00 |
|
|
|
15.83 |
|
|
|
2,992 |
|
355 |
|
|
|
ETJ |
|
Eaton Vance Risk-Managed Diversified Equity Income Fund |
|
|
2.01 |
|
|
|
8.46 |
|
|
|
3,003 |
|
321 |
|
|
|
ETY |
|
Eaton Vance Tax-Managed Diversified Equity Income Fund |
|
|
2.02 |
|
|
|
9.42 |
|
|
|
3,024 |
|
347 |
|
|
|
ECF |
|
Ellsworth Growth and Income Fund Limited |
|
|
2.02 |
|
|
|
8.74 |
|
|
|
3,033 |
|
322 |
|
|
|
FEN |
|
First Trust Energy Income and Growth Fund |
|
|
1.98 |
|
|
|
9.23 |
|
|
|
2,972 |
|
497 |
|
|
|
FT |
|
Franklin Universal Trust |
|
|
1.96 |
|
|
|
5.92 |
|
|
|
2,942 |
|
359 |
|
|
|
HFRO |
|
Highland Income Fund |
|
|
2.00 |
|
|
|
8.36 |
|
|
|
3,001 |
|
654 |
|
|
|
ASG |
|
Liberty All Star Growth Fund, Inc. |
|
|
2.04 |
|
|
|
4.67 |
|
|
|
3,054 |
|
374 |
|
|
|
NHF |
|
NexPoint Strategic Opportunities Fund |
|
|
2.00 |
|
|
|
7.99 |
|
|
|
2,988 |
|
155 |
|
|
|
QQQX |
|
Nuveen NASDAQ 100 Dynamic Overwrite Fund |
|
|
2.03 |
|
|
|
19.64 |
|
|
|
3,044 |
|
545 |
|
|
|
RMT |
|
Royce Micro-Cap Trust, Inc. |
|
|
1.99 |
|
|
|
5.47 |
|
|
|
2,981 |
|
311 |
|
|
|
RVT |
|
Royce Value Trust, Inc. |
|
|
2.02 |
|
|
|
9.75 |
|
|
|
3,032 |
|
200 |
|
|
|
HQL |
|
Tekla Life Sciences Investors |
|
|
2.02 |
|
|
|
15.11 |
|
|
|
3,022 |
|
666 |
|
|
|
IGD |
|
Voya Global Equity Dividend and Premium Opportunity Fund |
|
|
2.01 |
|
|
|
4.51 |
|
|
|
3,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00 |
% |
|
|
|
|
|
$ |
149,813 |
|
Notes to Portfolio
(1) |
|
Securities are represented by contracts to purchase
such securities. The value of each security is based on the most recent closing sale price of each security as of the close of regular trading on the
New York Stock Exchange on the business day prior to the trusts inception date. In accordance with Accounting Standards Codification 820,
Fair Value Measurements, the trusts investments are classified as Level 1, which refers to security prices determined using quoted
prices in active markets for identical securities. |
(2) |
|
The cost of the securities to the sponsor and the
sponsors profit or (loss) (which is the difference between the cost of the securities to the sponsor and the cost of the securities to the trust)
are $149,813 and $0, respectively. |
(3) |
|
This is a security issued by a foreign
company. |
|
|
Common stocks comprise
49.80% of the investments in the trust, broken down by country of organization of the issuer as set forth below: |
Liberia |
1.01 |
% |
United States |
48.79 |
% |
8 Investment
Summary
COHEN & STEERS EQUITY DIVIDEND & INCOME
CLOSED-END PORTFOLIO |
|
|
|
INVESTMENT
OBJECTIVE
The trust seeks to provide high current
dividend income with capital appreciation as a secondary objective. There is no assurance the trust will achieve its objective.
PRINCIPAL INVESTMENT
STRATEGY
The trust seeks to provide high current
dividend income with capital appreciation potential by investing in a portfolio primarily consisting of common stock of closed-end investment companies
(known as closed-end funds). The underlying funds may invest in a variety of equity and/or income-producing securities issued by various
types of foreign and/or U.S. issuers. These funds typically invest primarily in equity securities but could also invest in various other securities,
such as preferred securities, convertible securities, high yield bonds and other debt securities.
In selecting these closed-end funds,
Cohen & Steers Capital Management, Inc. (the Portfolio Consultant) considered factors such as historical returns, income potential,
potential future growth, portfolio diversification and advisor experience. The Portfolio Consultant uses a disciplined investment methodology to select
the funds for inclusion in the trust. The Portfolio Consultant begins by constructing a universe of funds that have a stated investment objective in
line with the trusts investment objective and that the fund advisor appears to be adhering to. From this universe the Portfolio Consultant
selects the final securities by utilizing a multi-factor approach based on the following factors:
|
|
Premium/DiscountIt seeks funds that are trading at a
valuation discount to either their peers, sector or historic average. |
|
|
DividendIt seeks funds that have a history of consistent
and/or competitive relative dividends and that appear to possess the ability to keep the current dividend level intact. |
|
|
PerformanceIt seeks funds that have a history of performance
on either market price or net asset value that make them relatively attractive when compared to their peers or relevant benchmark. |
Approximately 10.06% of
the portfolio consists of funds classified as non-diversified under the Investment Company Act of 1940. These funds have the ability to
invest more than 5% of their assets in securities of a single issuer which could reduce diversification. Under normal circumstances, the trust will
invest at least 80% of its assets in closed-end investment companies.
PRINCIPAL
RISKS
As with all investments, you can lose
money by investing in this trust. The trust also might not perform as well as you expect. This can happen for reasons such as these:
|
|
Security prices will fluctuate. The value of your
investment may fall over time. |
|
|
The value of the securities in the closed-end funds will
generally fall if interest rates, in general, rise. No one can predict whether interest rates will rise or fall in the future. |
|
|
An issuer may be unable to make income and/or principal
payments in the future. This may reduce the level of dividends a closed-end fund pays which would reduce your income and cause the value of your
units to fall. |
|
|
The financial condition of an issuer may worsen or its credit
ratings may drop, resulting in a reduction in the value of your units. This may occur at any point in time, including during the primary offering
period. |
|
|
The trust invests in shares of closed-end funds. You should
understand the section titled Closed-End Funds before you invest. In particular, shares of these funds tend to trade at a discount from
their net asset value and are subject to risks related to factors such as the |
Investment
Summary 9
managers ability to achieve a funds
objective, market conditions affecting a funds investments and use of leverage. The trust and the underlying funds have management and operating
expenses. You will bear not only your share of the trusts expenses, but also the expenses of the underlying funds. By investing in other funds,
the trust incurs greater expenses than you would incur if you invested directly in the funds.
|
|
Securities of foreign issuers held by the underlying funds in
the trust present risks beyond those of U.S. issuers. These risks may include market and political factors related to the issuers foreign
market, international trade conditions, the global and country-specific political environment, less regulation, smaller or less liquid markets,
increased volatility, differing accounting practices and changes in the value of foreign currencies. |
|
|
We* do not actively manage the portfolio. While the
closed-end funds have managed portfolios, except in limited circumstances, the trust will hold, and continue to buy, shares of the same funds even if
their market value declines. |
PORTFOLIO
CONSULTANT
The Portfolio Consultant, Cohen &
Steers Capital Management, Inc., is a registered investment adviser. Founded in 1986, the Portfolio Consultant is a global investment manager
specializing in liquid real assets, including real estate securities, listed infrastructure, commodities and natural resource equities, as well as
preferred securities and other income solutions. As of December 31, 2019, the Portfolio Consultant had $72.2
billion in assets under management. The Portfolio Consultant manages separate account portfolios for institutional investors, including some of the
worlds largest pension funds and endowments. In addition, the Portfolio Consultant manages open- and closed-end
* |
|
AAM, we and related terms
mean Advisors Asset Management, Inc., the trust sponsor, unless the context clearly suggests otherwise. |
funds for both retail and institutional investors. The Portfolio
Consultant is among the largest real estate investment trust (REIT) managers in the U.S. and employs a significant research and trading
staff. Many investors have come to view the Portfolio Consultant as an important source for income-oriented investment products.
The Portfolio Consultant is not an
affiliate of the sponsor. The Portfolio Consultant makes no representations that the portfolio will achieve the investment objectives or will be
profitable or suitable for any particular potential investor. The sponsor did not select the securities for the trust.
The Portfolio Consultant may use the
list of securities in its independent capacity as an investment adviser and distribute this information to various individuals and entities. The
Portfolio Consultant may recommend to other clients or otherwise effect transactions in the securities held by the trust. This may have an adverse
effect on the prices of the securities. This also may have an impact on the price the trust pays for the securities and the price received upon unit
redemptions or liquidation of the securities. The Portfolio Consultant also may issue reports and makes recommendations on securities, which may
include the securities in the trust.
Neither the Portfolio Consultant nor the
sponsor manages the trust. Opinions expressed by the Portfolio Consultant are not necessarily those of the sponsor, and may not actually come to pass.
The trust will pay the Portfolio Consultant a fee for selecting the trusts portfolio. The trust will also pay a license fee for the use of
certain service marks, trademarks, trade names and/or other property of the Portfolio Consultant.
10 Investment
Summary
WHO SHOULD
INVEST
You should consider this investment if
you want:
|
|
to own securities representing interests in managed funds that
invest in equity and/or income producing securities of foreign and U.S. issuers. |
|
|
the potential to receive monthly distributions of dividends and
income. |
You should not consider this investment
if you:
|
|
are uncomfortable with the risks of an unmanaged investment in
closed-end funds that invest in equity and/or income producing securities of foreign and U.S. issuers. |
|
|
seek capital preservation as a primary objective. |
ESSENTIAL
INFORMATION |
|
|
Unit price at inception |
|
|
|
|
$10.0000 |
|
|
Inception date |
|
|
|
|
April 7, 2020 |
|
Termination date |
|
|
|
|
April 7, 2022 |
|
|
Distribution dates |
|
|
|
|
25th day of each
month |
|
Record dates |
|
|
|
|
10th day of each
month |
|
|
CUSIP Numbers
|
Standard Accounts Cash distributions |
|
|
|
|
00780H611 |
|
Reinvest distributions |
|
|
|
|
00780H629 |
|
Fee Based Accounts Cash distributions |
|
|
|
|
00780H637 |
|
Reinvest distributions |
|
|
|
|
00780H645 |
|
|
Ticker Symbol |
|
|
|
|
EDIAMX |
|
|
Minimum investment |
|
|
|
|
$1,000/100 units |
|
|
Tax Structure |
|
|
|
|
Regulated Investment Company |
|
|
|
|
|
|
|
|
FEES AND
EXPENSES
The amounts below are estimates of the
direct and indirect expenses that you may incur based on a $10 unit price. Actual expenses may vary.
Sales Fee
|
|
|
|
As a % of $1,000 Invested
|
|
Amount per 100 Units
|
Initial sales fee |
|
|
|
|
0.00 |
% |
|
|
$0.00 |
|
Deferred sales fee |
|
|
|
|
2.25 |
|
|
|
22.50 |
|
Creation & development fee |
|
|
|
|
0.50 |
|
|
|
5.00 |
|
Maximum sales fee |
|
|
|
|
2.75 |
% |
|
$ |
27.50 |
|
Organization Costs |
|
|
|
|
0.49 |
% |
|
$ |
4.90 |
|
Annual operating expenses
|
|
|
|
As a % of Net Assets
|
|
Amount per 100 Units
|
Trustee fee & expenses |
|
|
|
|
0.28 |
% |
|
|
$2.75 |
|
Supervisory, evaluation and administration fees |
|
|
|
|
0.10 |
|
|
|
1.00 |
|
Closed-end fund expenses |
|
|
|
|
1.55 |
|
|
|
15.00 |
|
Total |
|
|
|
|
1.93 |
% |
|
$ |
18.75 |
|
The initial sales fee is the difference
between the total sales fee (maximum of 2.75% of the unit offering price) and the sum of the remaining deferred sales fee and the total creation and
development fee. The deferred sales fee is fixed at $0.225 per unit and is paid in three monthly installments beginning July 20, 2020.
The creation and development fee is fixed at $0.05 per unit and is paid at the end of the initial offering period (anticipated to be approximately
three months). When the public offering price per unit is less than or equal to $10, you will not pay an initial sales fee. When the public offering
price per unit is greater than $10 per unit, you will pay an initial sales fee. The trust will indirectly bear the management and operating expenses of
the underlying closed-end funds. While the trust will not pay these expenses directly out of its assets, these expenses are shown in the trusts
annual operating expenses above to illustrate the impact of these expenses.
EXAMPLE
This example helps you compare the cost
of this trust with other unit trusts and mutual funds. In the example we assume that the expenses do not change and that the trusts annual return
is 5%. Your actual returns and expenses will vary. Based on these assumptions, you would pay these expenses for every $10,000 you invest in the
trust:
1 year |
|
|
|
$ |
512 |
|
2 years (approximate life of trust) |
|
|
|
$ |
704 |
|
These amounts are the same regardless of
whether you sell your investment at the end of a period or continue to hold your investment.
Investment
Summary 11
Cohen & Steers Equity Dividend & Income Closed-End
Portfolio, Series 2020-2
(Advisors Disciplined Trust 2007)
Portfolio
As of the
trust inception date, April 7, 2020
Number of Shares
|
|
|
|
Ticker Symbol
|
|
Issuer(1)
|
|
Percentage of Aggregate
Offering Price
|
|
Market Value per
Share(1)
|
|
Cost of Securities to
Trust(2)
|
CLOSED-END FUNDS 100.00%
|
|
|
|
|
|
|
|
|
|
|
|
1,142 |
|
|
|
AOD |
|
Aberdeen Total Dynamic Dividend Fund |
|
|
5.03 |
% |
|
$ |
6.63 |
|
|
$ |
7,572 |
|
594 |
|
|
|
ADX |
|
Adams Diversified Equity Fund, Inc. |
|
|
5.01 |
|
|
|
12.70 |
|
|
|
7,544 |
|
409 |
|
|
|
NIE |
|
AllianzGI Equity & Convertible Income Fund |
|
|
5.04 |
|
|
|
18.55 |
|
|
|
7,587 |
|
588 |
|
|
|
CII |
|
BlackRock Enhanced Capital and Income Fund, Inc. |
|
|
5.00 |
|
|
|
12.81 |
|
|
|
7,532 |
|
948 |
|
|
|
CHI |
|
Calamos Convertible Opportunities and Income Fund |
|
|
4.95 |
|
|
|
7.86 |
|
|
|
7,451 |
|
1,484 |
|
|
|
IGR |
|
CBRE Clarion Global Real Estate Income Fund |
|
|
4.96 |
|
|
|
5.03 |
|
|
|
7,465 |
|
619 |
|
|
|
EOI |
|
Eaton Vance Enhanced Equity Income Fund |
|
|
4.98 |
|
|
|
12.11 |
|
|
|
7,496 |
|
630 |
|
|
|
ETG |
|
Eaton Vance Tax-Advantaged Global Dividend Income Fund |
|
|
5.05 |
|
|
|
12.08 |
|
|
|
7,611 |
|
1,215 |
|
|
|
EXG |
|
Eaton Vance Tax-Managed Global Diversified Equity Income Fund |
|
|
5.02 |
|
|
|
6.22 |
|
|
|
7,557 |
|
860 |
|
|
|
ECF |
|
Ellsworth Growth and Income Fund Limited |
|
|
4.99 |
|
|
|
8.74 |
|
|
|
7,516 |
|
510 |
|
|
|
GDV |
|
The Gabelli Dividend & Income Trust |
|
|
4.99 |
|
|
|
14.73 |
|
|
|
7,512 |
|
273 |
|
|
|
GAM |
|
General American Investors Company, Inc. |
|
|
4.99 |
|
|
|
27.51 |
|
|
|
7,510 |
|
496 |
|
|
|
GOF |
|
Guggenheim Strategic Opportunities Fund |
|
|
4.96 |
|
|
|
15.04 |
|
|
|
7,460 |
|
932 |
|
|
|
SCD |
|
LMP Capital and Income Fund, Inc. |
|
|
5.03 |
|
|
|
8.12 |
|
|
|
7,568 |
|
496 |
|
|
|
MGU |
|
Macquarie Global Infrastructure Total Return Fund, Inc. |
|
|
4.94 |
|
|
|
15.00 |
|
|
|
7,440 |
|
698 |
|
|
|
JCE |
|
Nuveen Core Equity Alpha Fund |
|
|
5.01 |
|
|
|
10.81 |
|
|
|
7,545 |
|
1,158 |
|
|
|
JRS |
|
Nuveen Real Estate Income Fund |
|
|
5.02 |
|
|
|
6.53 |
|
|
|
7,562 |
|
271 |
|
|
|
UTG |
|
Reaves Utility Income Fund |
|
|
4.97 |
|
|
|
27.62 |
|
|
|
7,485 |
|
501 |
|
|
|
HQL |
|
Tekla Life Sciences Investors |
|
|
5.03 |
|
|
|
15.11 |
|
|
|
7,570 |
|
1,006 |
|
|
|
IGA |
|
Voya Global Advantage and Premium Opportunity Fund |
|
|
5.03 |
|
|
|
7.53 |
|
|
|
7,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00 |
% |
|
|
|
|
|
$ |
150,558 |
|
Notes to Portfolio
(1) |
|
Securities are represented by contracts to purchase
such securities. The value of each security is based on the most recent closing sale price of each security as of the close of regular trading on the
New York Stock Exchange on the business day prior to the trusts inception date. In accordance with Accounting Standards Codification 820,
Fair Value Measurements, the trusts investments are classified as Level 1, which refers to security prices determined using quoted
prices in active markets for identical securities. |
(2) |
|
The cost of the securities to the sponsor and the
sponsors profit or (loss) (which is the difference between the cost of the securities to the sponsor and the cost of the securities to the trust)
are $150,558 and $0, respectively. |
12 Investment
Summary
DIVIDEND STRENGTH PORTFOLIO |
|
|
|
INVESTMENT
OBJECTIVE
The trust seeks to provide above average
total return primarily through dividend income. There is no assurance the trust will achieve its objective.
PRINCIPAL INVESTMENT
STRATEGY
The trust seeks to achieve its objective
by investing in a portfolio of U.S. exchange-listed common stocks of companies selected by Hartford Investment Management Company (HIMCO).
HIMCO, the portfolio consultant to the trust, selected the portfolio from the securities in the Russell 1000® Index. In
selecting the securities for inclusion in the trusts portfolio, HIMCO sought to identify high quality stocks with above average dividend yields
and the ability to increase dividend payments. HIMCO selected these securities using a structured quantitative approach combined with fundamental
oversight. HIMCOs quantitative approach sought to identify companies within each industry sector possessing attractive fundamentals such as
strong balance sheets, high quality earnings and attractive growth prospects. HIMCO reviewed final selections for the trusts portfolio to assess
the impact of any recent events (including management issues, legal proceedings and future mergers or acquisitions) on each stocks
prospects.
* |
|
AAM, we and related terms
mean Advisors Asset Management, Inc., the trust sponsor, unless the context clearly suggests otherwise. |
PRINCIPAL
RISKS
As with all investments, you can lose
money by investing in this trust. The trust also might not perform as well as you expect. This can happen for reasons such as these:
|
|
Security prices will fluctuate. The value of your
investment may fall over time. |
|
|
An issuer may be unwilling or unable to declare dividends in
the future, or may reduce the level of dividends declared. This may result in a reduction in the value of your units. |
|
|
The financial condition of an issuer may worsen or its credit
ratings may drop, resulting in a reduction in the value of your units. This may occur at any point in time, including during the initial offering
period. |
|
|
The trust invests in securities selected by HIMCO. In the
event that HIMCO incorrectly assesses an issuers prospects for growth or if HIMCOs judgment about how other investors will value an
issuers growth is wrong, then the price of an issuers stock may decrease or not increase to the level anticipated. |
|
|
We* do not actively manage the portfolio. Except in limited
circumstances, the trust will hold, and continue to buy, shares of the same securities even if their market value declines. |
Investment
Summary 13
PORTFOLIO
CONSULTANT
HIMCO, Hartford Investment Management
Company, is a registered investment adviser.
HIMCO is not an affiliate of the
sponsor. HIMCO selected a list of securities to be included in the portfolio based on the criteria provided by the sponsor. HIMCO makes no
representations that the portfolio will achieve the investment objectives or will be profitable or suitable for any particular potential investor. The
sponsor did not select the securities for the trust.
HIMCO may use the list of securities in
its independent capacity as an investment adviser and distribute this information to various individuals and entities. HIMCO may recommend to other
clients or otherwise effect transactions in the securities held by the trust. This may have an adverse effect on the prices of the securities. This
also may have an impact on the price the trust pays for the securities and the price received upon unit redemptions or liquidation of the securities.
HIMCO may also issue reports and make recommendations on securities, which may include the securities in the trust.
Neither HIMCO nor the sponsor manages
the trust. Opinions expressed by HIMCO are not necessarily those of the sponsor, and may not actually prove correct. The trust will pay HIMCO a fee for
selecting the trusts portfolio. The trust will also pay a license fee for the use of certain service marks, trademarks, trade names and/or other
property of HIMCO.
14 Investment
Summary
WHO SHOULD
INVEST
You should consider this investment if
you want:
|
|
to own a defined portfolio of stocks of U.S. exchange-listed
companies. |
|
|
the potential for above average total return primarily through
dividend income. |
You should not consider this investment
if you:
|
|
are uncomfortable with the risks of an unmanaged investment in
common stocks. |
|
|
are uncomfortable investing in stocks of U.S. exchange-listed
companies. |
|
|
are uncomfortable with the trusts strategy. |
|
|
seek aggressive growth without current income. |
|
|
seek capital preservation. |
ESSENTIAL
INFORMATION |
|
|
Unit price at inception |
|
|
|
|
$10.0000 |
|
|
Inception date |
|
|
|
|
April 7, 2020 |
|
Termination date |
|
|
|
|
April 7, 2022 |
|
|
Distribution dates |
|
|
|
|
25th day of each
month |
|
Record dates |
|
|
|
|
10th day of each
month |
|
|
CUSIP Numbers
|
Standard Accounts Cash distributions |
|
|
|
|
00780H652 |
|
Reinvest distributions |
|
|
|
|
00780H660 |
|
Fee Based Accounts Cash distributions |
|
|
|
|
00780H678 |
|
Reinvest distributions |
|
|
|
|
00780H686 |
|
|
Ticker Symbol |
|
|
|
|
DSPADX |
|
|
Minimum investment |
|
|
|
|
$1,000/100 units |
|
|
Tax Structure |
|
|
|
|
Regulated Investment Company |
|
|
|
|
|
|
|
|
FEES AND
EXPENSES
The amounts below are estimates of the
direct and indirect expenses that you may incur based on a $10 unit price. Actual expenses may vary.
Sales Fee
|
|
|
|
As a % of $1,000
Invested
|
|
Amount per 100
Units
|
Initial sales fee |
|
|
|
|
0.00 |
% |
|
|
$0.00 |
|
Deferred sales fee |
|
|
|
|
2.25 |
|
|
|
22.50 |
|
Creation & development fee |
|
|
|
|
0.50 |
|
|
|
5.00 |
|
Maximum sales fee |
|
|
|
|
2.75 |
% |
|
$ |
27.50 |
|
Organization Costs |
|
|
|
|
0.49 |
% |
|
$ |
4.90 |
|
Annual operating expenses
|
|
|
|
As a % of Net Assets
|
|
Amount per 100 Units
|
Trustee fee & expenses |
|
|
|
|
0.22 |
% |
|
|
$2.18 |
|
Supervisory, evaluation and administration fees |
|
|
|
|
0.11 |
|
|
|
1.00 |
|
Total |
|
|
|
|
0.33 |
% |
|
$ |
3.18 |
|
The initial sales fee is the difference
between the total sales fee (maximum of 2.75% of the unit offering price) and the sum of the remaining deferred sales fee and the total creation and
development fee. The deferred sales fee is fixed at $0.225 per unit and is paid in three monthly installments beginning July 20, 2020.
The creation and development fee is fixed at $0.05 per unit and is paid at the end of the initial offering period (anticipated to be approximately
three months). When the public offering price per unit is less than or equal to $10, you will not pay an initial sales fee. When the public offering
price per unit is greater than $10 per unit, you will pay an initial sales fee.
EXAMPLE
This example helps you compare the cost
of this trust with other unit trusts and mutual funds. In the example we assume that the expenses do not change and that the trusts annual return
is 5%. Your actual returns and expenses will vary. Based on these assumptions, you would pay these expenses for every $10,000 you invest in the
trust:
1 year |
|
|
|
$ |
356 |
|
2 years (approximate life of trust) |
|
|
|
$ |
389 |
|
These amounts are the same regardless of
whether you sell your investment at the end of a period or continue to hold your investment.
Investment
Summary 15
Dividend Strength Portfolio, Series 2020-2
A
Hartford Investment Management Company (HIMCO) Portfolio
(Advisors Disciplined Trust 2007)
Portfolio
As of the
trust inception date, April 7, 2020
Number of Shares
|
|
|
|
Ticker Symbol
|
|
Issuer(1)
|
|
Percentage of Aggregate
Offering Price
|
|
Market Value per
Share(1)
|
|
Cost of Securities to
Trust(2)
|
COMMON STOCKS 100.00%
|
|
|
|
|
|
|
|
Communication Services 9.96% |
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
T |
|
AT&T, Inc. |
|
|
1.99 |
% |
|
$ |
29.44 |
|
|
$ |
3,003 |
|
83 |
|
|
|
CMCSA |
|
Comcast Corporation |
|
|
1.99 |
|
|
|
36.23 |
|
|
|
3,007 |
|
201 |
|
|
|
IPG |
|
The Interpublic Group of Companies, Inc. |
|
|
2.00 |
|
|
|
15.02 |
|
|
|
3,019 |
|
56 |
|
|
|
OMC |
|
Omnicom Group, Inc. |
|
|
1.99 |
|
|
|
53.70 |
|
|
|
3,007 |
|
53 |
|
|
|
VZ |
|
Verizon Communications, Inc. |
|
|
1.99 |
|
|
|
56.70 |
|
|
|
3,005 |
|
|
|
|
|
|
|
|
Consumer Discretionary 7.99% |
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
HD |
|
The Home Depot, Inc. |
|
|
2.03 |
|
|
|
191.33 |
|
|
|
3,061 |
|
34 |
|
|
|
LOW |
|
Lowes Companies, Inc. |
|
|
2.00 |
|
|
|
88.77 |
|
|
|
3,018 |
|
17 |
|
|
|
MCD |
|
McDonalds Corporation |
|
|
2.00 |
|
|
|
177.04 |
|
|
|
3,010 |
|
64 |
|
|
|
TJX |
|
The TJX Companies, Inc. |
|
|
1.96 |
|
|
|
46.11 |
|
|
|
2,951 |
|
|
|
|
|
|
|
|
Consumer Staples 7.93% |
|
|
|
|
|
|
|
|
|
|
|
|
78 |
|
|
|
MO |
|
Altria Group, Inc. |
|
|
1.93 |
|
|
|
37.28 |
|
|
|
2,908 |
|
57 |
|
|
|
MDLZ |
|
Mondelez International, Inc. |
|
|
1.97 |
|
|
|
52.03 |
|
|
|
2,966 |
|
23 |
|
|
|
PEP |
|
PepsiCo, Inc. |
|
|
2.00 |
|
|
|
131.16 |
|
|
|
3,017 |
|
26 |
|
|
|
PG |
|
The Procter & Gamble Company |
|
|
2.03 |
|
|
|
117.81 |
|
|
|
3,063 |
|
|
|
|
|
|
|
|
Financials 12.11% |
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
JPM |
|
JPMorgan Chase & Company |
|
|
2.02 |
|
|
|
89.46 |
|
|
|
3,042 |
|
35 |
|
|
|
MMC |
|
Marsh & McLennan Companies, Inc. |
|
|
2.03 |
|
|
|
87.33 |
|
|
|
3,057 |
|
99 |
|
|
|
MET |
|
MetLife, Inc. |
|
|
2.01 |
|
|
|
30.63 |
|
|
|
3,032 |
|
40 |
|
|
|
PGR |
|
The Progressive Corporation |
|
|
2.02 |
|
|
|
75.99 |
|
|
|
3,040 |
|
61 |
|
|
|
PRU |
|
Prudential Financial, Inc. |
|
|
1.99 |
|
|
|
49.14 |
|
|
|
2,998 |
|
12 |
|
|
|
SPGI |
|
S&P Global, Inc. |
|
|
2.04 |
|
|
|
255.83 |
|
|
|
3,070 |
|
|
|
|
|
|
|
|
Health Care 14.00% |
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
AMGN |
|
Amgen, Inc. |
|
|
1.97 |
|
|
|
211.58 |
|
|
|
2,962 |
|
21 |
|
|
|
LLY |
|
Eli Lilly & Company |
|
|
1.97 |
|
|
|
141.61 |
|
|
|
2,974 |
|
22 |
|
|
|
JNJ |
|
Johnson & Johnson |
|
|
2.04 |
|
|
|
139.76 |
|
|
|
3,075 |
|
32 |
|
|
|
MDT |
|
Medtronic PLC (3) |
|
|
2.00 |
|
|
|
94.09 |
|
|
|
3,011 |
|
38 |
|
|
|
MRK |
|
Merck & Company, Inc. |
|
|
2.02 |
|
|
|
80.31 |
|
|
|
3,052 |
|
88 |
|
|
|
PFE |
|
Pfizer, Inc. |
|
|
2.02 |
|
|
|
34.57 |
|
|
|
3,042 |
|
12 |
|
|
|
UNH |
|
UnitedHealth Group, Inc. |
|
|
1.98 |
|
|
|
248.34 |
|
|
|
2,980 |
|
|
|
|
|
|
|
|
Industrials 11.85% |
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
MMM |
|
3M Company |
|
|
1.96 |
|
|
|
140.70 |
|
|
|
2,955 |
|
21 |
|
|
|
CMI |
|
Cummins, Inc. |
|
|
1.98 |
|
|
|
142.12 |
|
|
|
2,984 |
|
22 |
|
|
|
HON |
|
Honeywell International, Inc. |
|
|
1.96 |
|
|
|
134.00 |
|
|
|
2,948 |
|
20 |
|
|
|
ITW |
|
Illinois Tool Works, Inc. |
|
|
2.00 |
|
|
|
151.04 |
|
|
|
3,021 |
|
52 |
|
|
|
RTX |
|
Raytheon Technologies Corporation |
|
|
1.99 |
|
|
|
57.56 |
|
|
|
2,993 |
|
20 |
|
|
|
UNP |
|
Union Pacific Corporation |
|
|
1.96 |
|
|
|
147.85 |
|
|
|
2,957 |
|
(Continued)
16 Investment
Summary
Dividend Strength Portfolio, Series 2020-2
A
Hartford Investment Management Company (HIMCO) Portfolio
(Advisors Disciplined Trust 2007)
Portfolio
(continued)
As of the trust inception date, April 7, 2020
Number of Shares
|
|
|
|
Ticker
Symbol
|
|
Issuer(1)
|
|
Percentage of
Aggregate Offering Price
|
|
Market Value per
Share(1)
|
|
Cost of Securities
to Trust(2)
|
COMMON STOCKS (continued)
|
|
|
|
|
|
|
|
Information Technology 24.16% |
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
ADI |
|
Analog Devices, Inc. |
|
|
2.03 |
% |
|
$ |
95.80 |
|
|
$ |
3,066 |
|
12 |
|
|
|
AAPL |
|
Apple, Inc. |
|
|
2.09 |
|
|
|
262.47 |
|
|
|
3,150 |
|
22 |
|
|
|
ADP |
|
Automatic Data Processing, Inc. |
|
|
2.04 |
|
|
|
139.65 |
|
|
|
3,072 |
|
73 |
|
|
|
CSCO |
|
Cisco Systems, Inc. |
|
|
2.01 |
|
|
|
41.43 |
|
|
|
3,024 |
|
154 |
|
|
|
GLW |
|
Corning, Inc. |
|
|
2.01 |
|
|
|
19.71 |
|
|
|
3,035 |
|
52 |
|
|
|
INTC |
|
Intel Corporation |
|
|
2.02 |
|
|
|
58.43 |
|
|
|
3,038 |
|
26 |
|
|
|
IBM |
|
International Business Machines Corporation |
|
|
1.98 |
|
|
|
114.82 |
|
|
|
2,985 |
|
18 |
|
|
|
MSFT |
|
Microsoft Corporation |
|
|
1.97 |
|
|
|
165.27 |
|
|
|
2,975 |
|
58 |
|
|
|
ORCL |
|
Oracle Corporation |
|
|
1.98 |
|
|
|
51.49 |
|
|
|
2,986 |
|
46 |
|
|
|
PAYX |
|
Paychex, Inc. |
|
|
1.99 |
|
|
|
65.29 |
|
|
|
3,003 |
|
43 |
|
|
|
QCOM |
|
QUALCOMM, Inc. |
|
|
2.02 |
|
|
|
70.95 |
|
|
|
3,051 |
|
28 |
|
|
|
TXN |
|
Texas Instruments, Inc. |
|
|
2.02 |
|
|
|
108.96 |
|
|
|
3,051 |
|
|
|
|
|
|
|
|
Materials 3.96% |
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
IP |
|
International Paper Company |
|
|
1.99 |
|
|
|
31.53 |
|
|
|
2,995 |
|
79 |
|
|
|
NUE |
|
Nucor Corporation |
|
|
1.97 |
|
|
|
37.51 |
|
|
|
2,963 |
|
|
|
|
|
|
|
|
Real Estate 4.04% |
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
AMT |
|
American Tower Corporation |
|
|
2.03 |
|
|
|
235.18 |
|
|
|
3,057 |
|
56 |
|
|
|
SPG |
|
Simon Property Group, Inc. |
|
|
2.01 |
|
|
|
54.06 |
|
|
|
3,027 |
|
|
|
|
|
|
|
|
Utilities 4.00% |
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
NEE |
|
NextEra Energy, Inc. |
|
|
2.02 |
|
|
|
234.51 |
|
|
|
3,049 |
|
125 |
|
|
|
PPL |
|
PPL Corporation |
|
|
1.98 |
|
|
|
23.92 |
|
|
|
2,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00 |
% |
|
|
|
|
|
$ |
150,745 |
|
Notes to Portfolio
(1) |
|
Securities are represented by contracts to purchase
such securities. The value of each security is based on the most recent closing sale price of each security as of the close of regular trading on the
New York Stock Exchange on the business day prior to the trusts inception date. In accordance with Accounting Standards Codification 820,
Fair Value Measurements, the trusts investments are classified as Level 1, which refers to security prices determined using quoted
prices in active markets for identical securities. |
(2) |
|
The cost of the securities to the sponsor and the
sponsors profit or (loss) (which is the difference between the cost of the securities to the sponsor and the cost of the securities to the trust)
are $150,745 and $0, respectively. |
(3) |
|
This is a security issued by a foreign
company. |
|
|
Common stocks comprise 100.00% of the investments in
the trust, broken down by country of organization of the issuer as set forth below: |
Ireland |
2.00 |
% |
United States |
98.00 |
% |
Investment
Summary 17
FINANCIAL OPPORTUNITIES PORTFOLIO |
|
|
|
INVESTMENT
OBJECTIVE
The trust seeks to provide capital
appreciation. There is no assurance the trust will achieve
its objective.
PRINCIPAL INVESTMENT
STRATEGY
The trust seeks to provide capital
appreciation by investing in a diversified portfolio of common stocks of companies involved in aspects of the financial industry including, among other
things, banking, mortgage finance, consumer finance, specialized finance, investment banking and brokerage, asset management and custody, corporate
lending, insurance, financial investment, and real estate.
In selecting the securities for the
portfolio, we* considered market capitalization, revenues, revenue growth, earnings, earnings growth and valuation to construct a portfolio that we
believe adequately represents the financial industry. Under normal circumstances the trust will invest at least 80% of its assets in securities of
companies involved in aspects of the financial industry.
* |
|
AAM, we and related terms
mean Advisors Asset Management, Inc., the trust sponsor, unless the context clearly suggests otherwise. |
PRINCIPAL
RISKS
As with all investments, you can lose
money by investing in this trust. The trust also might not perform as well as you expect. This can happen for reasons such as these:
|
|
Security prices will fluctuate. The value of your
investment may fall over time. |
|
|
The issuer of a security may be unwilling or unable to make
dividend payments in the future. This may reduce the level of dividends the trust receives which would reduce your income and cause the value of
your units to fall. |
|
|
The financial condition of an issuer may worsen or its credit
ratings may drop, resulting in a reduction in the value of your units. This may occur at any point in time, including during the primary offering
period. |
|
|
The trust is concentrated in securities issued by companies in
the financials sector. Negative developments in the financials sector will affect the value of your investment more than would be the case in a
more diversified investment. |
|
|
The trust may invest in securities of small and mid-size
companies. These securities are often more volatile and have lower trading volumes than securities of larger companies. Small and mid-size
companies may have limited products or financial resources, management inexperience and less publicly available information. |
|
|
We do not actively manage the portfolio. Except in limited
circumstances, the trust will generally hold, and continue to buy, shares of the same securities even if their market value declines. |
18 Investment
Summary
WHO SHOULD
INVEST
You should consider this investment if
you want:
|
|
to own a defined portfolio of stocks of companies involved in
aspects of the financial industry. |
|
|
the potential for capital appreciation. |
You should not consider this investment
if you:
|
|
are uncomfortable with the risks of an unmanaged investment in
common stocks. |
|
|
are uncomfortable investing in companies involved in aspects of
the financial industry. |
|
|
seek current income or capital preservation. |
ESSENTIAL
INFORMATION |
|
|
Unit price at inception |
|
|
|
|
$10.0000 |
|
|
Inception date |
|
|
|
|
April 7, 2020 |
|
Termination date |
|
|
|
|
April 7, 2022 |
|
|
Distribution dates |
|
|
|
|
25th day of January, April, July and
October |
|
Record dates |
|
|
|
|
10th day of January, April, July and
October |
|
|
CUSIP Numbers
|
Standard Accounts Cash distributions |
|
|
|
|
00780H694 |
|
Reinvest distributions |
|
|
|
|
00780H702 |
|
Fee Based Accounts Cash distributions |
|
|
|
|
00780H710 |
|
Reinvest distributions |
|
|
|
|
00780H728 |
|
|
Ticker Symbol |
|
|
|
|
FOPAQX |
|
|
Minimum investment |
|
|
|
|
$1,000/100 units |
|
|
Tax Structure |
|
|
|
|
Regulated Investment Company |
|
FEES AND
EXPENSES
The amounts below are estimates of the
direct and indirect expenses that you may incur based on a $10 unit price. Actual expenses may vary.
Sales Fee
|
|
|
|
As a % of $1,000 Invested
|
|
Amount per 100 Units
|
Initial sales fee |
|
|
|
|
0.00 |
% |
|
|
$0.00 |
|
Deferred sales fee |
|
|
|
|
2.25 |
|
|
|
22.50 |
|
Creation & development fee |
|
|
|
|
0.50 |
|
|
|
5.00 |
|
Maximum sales fee |
|
|
|
|
2.75 |
% |
|
$ |
27.50 |
|
Organization Costs |
|
|
|
|
0.49 |
% |
|
$ |
4.90 |
|
Annual operating expenses
|
|
|
|
As a % of Net Assets
|
|
Amount per 100 Units
|
Trustee fee & expenses |
|
|
|
|
0.20 |
% |
|
|
$1.90 |
|
Supervisory, evaluation and administration fees |
|
|
|
|
0.10 |
|
|
|
1.00 |
|
Total |
|
|
|
|
0.30 |
% |
|
$ |
2.90 |
|
The initial sales fee is the difference
between the total sales fee (maximum of 2.75% of the unit offering price) and the sum of the remaining deferred sales fee and the total creation and
development fee. The deferred sales fee is fixed at $0.225 per unit and is paid in three monthly installments beginning July 20, 2020.
The creation and development fee is fixed at $0.05 per unit and is paid at the end of the initial offering period (anticipated to be approximately
three months). When the public offering price per unit is less than or equal to $10, you will not pay an initial sales fee. When the public offering
price per unit is greater than $10 per unit, you will pay an initial sales fee.
EXAMPLE
This example helps you compare the cost
of this trust with other unit trusts and mutual funds. In the example we assume that the expenses do not change and that the trusts annual return
is 5%. Your actual returns and expenses will vary. Based on these assumptions, you would pay these expenses for every $10,000 you invest in the
trust:
1 year |
|
|
|
$ |
353 |
|
2 years (approximate life of trust) |
|
|
|
$ |
383 |
|
These amounts are the same regardless of
whether you sell your investment at the end of a period or continue to hold your investment.
Investment
Summary 19
Financial Opportunities Portfolio, Series
2020-2
(Advisors Disciplined Trust 2007)
Portfolio
As of the
trust inception date, April 7, 2020
Number of Shares
|
|
|
|
Ticker Symbol
|
|
Issuer(1)
|
|
Percentage of Aggregate
Offering Price
|
|
Market Value per
Share(1)
|
|
Cost of Securities to
Trust(2)
|
COMMON STOCKS 100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials 89.96% |
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
ALL |
|
The Allstate Corporation |
|
|
2.49 |
% |
|
$ |
93.52 |
|
|
$ |
3,928 |
|
47 |
|
|
|
AXP |
|
American Express Company |
|
|
2.50 |
|
|
|
83.87 |
|
|
|
3,942 |
|
129 |
|
|
|
ARES |
|
Ares Management Corporation |
|
|
2.52 |
|
|
|
30.80 |
|
|
|
3,973 |
|
48 |
|
|
|
AJG |
|
Arthur J Gallagher & Company |
|
|
2.50 |
|
|
|
82.21 |
|
|
|
3,946 |
|
183 |
|
|
|
BAC |
|
Bank of America Corporation |
|
|
2.48 |
|
|
|
21.39 |
|
|
|
3,914 |
|
21 |
|
|
|
BRK/B |
|
Berkshire Hathaway, Inc. (3) |
|
|
2.47 |
|
|
|
185.24 |
|
|
|
3,890 |
|
9 |
|
|
|
BLK |
|
BlackRock, Inc. |
|
|
2.57 |
|
|
|
449.52 |
|
|
|
4,046 |
|
41 |
|
|
|
CBOE |
|
Cboe Global Markets, Inc. |
|
|
2.47 |
|
|
|
94.89 |
|
|
|
3,891 |
|
110 |
|
|
|
SCHW |
|
The Charles Schwab Corporation |
|
|
2.52 |
|
|
|
36.08 |
|
|
|
3,969 |
|
96 |
|
|
|
C |
|
Citigroup, Inc. |
|
|
2.50 |
|
|
|
41.12 |
|
|
|
3,948 |
|
208 |
|
|
|
CFG |
|
Citizens Financial Group, Inc. |
|
|
2.48 |
|
|
|
18.79 |
|
|
|
3,908 |
|
116 |
|
|
|
DFS |
|
Discover Financial Services |
|
|
2.46 |
|
|
|
33.46 |
|
|
|
3,881 |
|
254 |
|
|
|
FITB |
|
Fifth Third Bancorp |
|
|
2.49 |
|
|
|
15.47 |
|
|
|
3,929 |
|
25 |
|
|
|
GS |
|
The Goldman Sachs Group, Inc. |
|
|
2.51 |
|
|
|
158.23 |
|
|
|
3,956 |
|
116 |
|
|
|
HIG |
|
The Hartford Financial Services Group, Inc. |
|
|
2.50 |
|
|
|
33.95 |
|
|
|
3,938 |
|
46 |
|
|
|
ICE |
|
Intercontinental Exchange, Inc. |
|
|
2.47 |
|
|
|
84.43 |
|
|
|
3,884 |
|
436 |
|
|
|
IVZ |
|
Invesco Limited (4) |
|
|
2.48 |
|
|
|
8.96 |
|
|
|
3,907 |
|
44 |
|
|
|
JPM |
|
JPMorgan Chase & Company |
|
|
2.50 |
|
|
|
89.46 |
|
|
|
3,936 |
|
391 |
|
|
|
KEY |
|
KeyCorp |
|
|
2.47 |
|
|
|
9.95 |
|
|
|
3,890 |
|
75 |
|
|
|
LPLA |
|
LPL Financial Holdings, Inc. |
|
|
2.54 |
|
|
|
53.31 |
|
|
|
3,998 |
|
38 |
|
|
|
MTB |
|
M&T Bank Corporation |
|
|
2.48 |
|
|
|
102.79 |
|
|
|
3,906 |
|
45 |
|
|
|
MMC |
|
Marsh & McLennan Companies, Inc. |
|
|
2.49 |
|
|
|
87.33 |
|
|
|
3,930 |
|
129 |
|
|
|
MET |
|
MetLife, Inc. |
|
|
2.51 |
|
|
|
30.63 |
|
|
|
3,951 |
|
17 |
|
|
|
MCO |
|
Moodys Corporation |
|
|
2.47 |
|
|
|
229.16 |
|
|
|
3,896 |
|
107 |
|
|
|
MS |
|
Morgan Stanley |
|
|
2.51 |
|
|
|
37.01 |
|
|
|
3,960 |
|
39 |
|
|
|
NDAQ |
|
Nasdaq, Inc. |
|
|
2.52 |
|
|
|
101.59 |
|
|
|
3,962 |
|
103 |
|
|
|
PNFP |
|
Pinnacle Financial Partners, Inc. |
|
|
2.47 |
|
|
|
37.80 |
|
|
|
3,893 |
|
41 |
|
|
|
PNC |
|
The PNC Financial Services Group, Inc. |
|
|
2.48 |
|
|
|
95.31 |
|
|
|
3,908 |
|
52 |
|
|
|
PGR |
|
The Progressive Corporation |
|
|
2.51 |
|
|
|
75.99 |
|
|
|
3,952 |
|
16 |
|
|
|
SPGI |
|
S&P Global, Inc. |
|
|
2.60 |
|
|
|
255.83 |
|
|
|
4,093 |
|
25 |
|
|
|
SIVB |
|
SVB Financial Group (3) |
|
|
2.53 |
|
|
|
159.32 |
|
|
|
3,983 |
|
38 |
|
|
|
TROW |
|
T Rowe Price Group, Inc. |
|
|
2.48 |
|
|
|
102.70 |
|
|
|
3,903 |
|
131 |
|
|
|
TFC |
|
Truist Financial Corporation |
|
|
2.48 |
|
|
|
29.77 |
|
|
|
3,900 |
|
114 |
|
|
|
USB |
|
US Bancorp |
|
|
2.49 |
|
|
|
34.37 |
|
|
|
3,918 |
|
138 |
|
|
|
WFC |
|
Wells Fargo & Company |
|
|
2.51 |
|
|
|
28.63 |
|
|
|
3,951 |
|
132 |
|
|
|
WAL |
|
Western Alliance Bancorp |
|
|
2.51 |
|
|
|
29.96 |
|
|
|
3,955 |
|
(Continued)
20 Investment
Summary
Financial Opportunities Portfolio, Series
2020-2
(Advisors Disciplined Trust 2007)
Portfolio
(continued)
As of the trust inception date, April 7, 2020
Number of Shares
|
|
|
|
Ticker
Symbol
|
|
Issuer(1)
|
|
Percentage of
Aggregate Offering Price
|
|
Market Value per
Share(1)
|
|
Cost of Securities
to Trust(2)
|
COMMON STOCKS (continued)
|
|
|
|
|
|
|
|
Information Technology 7.54% |
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
GPN |
|
Global Payments, Inc. |
|
|
2.55 |
% |
|
$ |
143.74 |
|
|
$ |
4,025 |
|
39 |
|
|
|
PYPL |
|
PayPal Holdings, Inc. (3) |
|
|
2.52 |
|
|
|
101.67 |
|
|
|
3,965 |
|
23 |
|
|
|
V |
|
Visa, Inc. |
|
|
2.47 |
|
|
|
169.44 |
|
|
|
3,897 |
|
|
|
|
|
|
|
|
Real Estate 2.50% |
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
CBRE |
|
CBRE Group, Inc. (3) |
|
|
2.50 |
|
|
|
39.78 |
|
|
|
3,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00 |
% |
|
|
|
|
|
$ |
157,560 |
|
Notes to Portfolio
(1) |
|
Securities are represented by contracts to purchase
such securities. The value of each security is based on the most recent closing sale price of each security as of the close of regular trading on the
New York Stock Exchange on the business day prior to the trusts inception date. In accordance with Accounting Standards Codification 820,
Fair Value Measurements, the trusts investments are classified as Level 1, which refers to security prices determined using quoted
prices in active markets for identical securities. |
(2) |
|
The cost of the securities to the sponsor and the
sponsors profit or (loss) (which is the difference between the cost of the securities to the sponsor and the cost of the securities to the trust)
are $157,560 and $0, respectively. |
(3) |
|
This is a non-income producing security. |
(4) |
|
This is a security issued by a foreign
company. |
|
|
Common stocks comprise 100.00% of the investments in
the trust, broken down by country of organization of the issuer as set forth below: |
Bermuda |
|
|
|
2.48% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
|
97.52% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Summary 21
UBIQUITOUS STRATEGY PORTFOLIO |
|
|
|
INVESTMENT
OBJECTIVE
The trust seeks to provide above average
total return primarily through capital appreciation. There is no assurance the trust will achieve its objective.
PRINCIPAL INVESTMENT
STRATEGY
The trust seeks to achieve its objective
by investing in a portfolio of stocks of companies deriving a substantial portion of their revenues worldwide that Pence Capital Management, LLC (the
Portfolio Consultant) believes are involved in aspects of the transformation of consumer behavior and a shift in how people transact
purchases. Today, shopping has become easier as innovations in electronics and information technology provide consumers access to a wide range of
products from the convenience of almost anywhere and the ease of using their smart phones and tablets. Consumers can fulfill desires spontaneously
without going to brick and mortar stores. Consumers shop online using smart phones and tablets, connect wirelessly from almost anywhere, are able to
purchase almost any product online, pay by credit cards and have products delivered to their doorsteps.
From these companies involved in aspects
of this shift in how people transact purchases, securities were selected for the trusts portfolio by analyzing factors including expected market
dominance over the next three to five years, relative size within industry sectors based on market capitalization, steadiness of past earnings growth
rates and revenue growth, strength of earnings and revenue projects, balance sheet strength, valuation and levels of cash holdings.
* |
|
AAM, we and related terms
mean Advisors Asset Management, Inc., the trust sponsor, unless the context clearly suggests otherwise. |
PRINCIPAL
RISKS
As with all investments, you can lose
money by investing in this trust. The trust also might not perform as well as you expect. This can happen for reasons such as these:
|
|
Security prices will fluctuate. The value of your
investment may fall over time. |
|
|
The financial condition of an issuer may worsen or its credit
ratings may drop, resulting in a reduction in the value of your units. This may occur at any point in time, including during the primary offering
period. |
|
|
The issuer of a security may be unwilling or unable to make
dividend payments in the future. This may reduce the level of dividends the trust receives which would reduce your income and cause the value of
your units to fall. |
|
|
The trust is concentrated in securities issued by companies in
the communication services and information technology sectors. Negative developments in these sectors will affect the value of your investment more
than would be the case in a more diversified investment. |
|
|
We* do not actively manage the portfolio. Except in limited
circumstances, the trust will generally hold, and continue to buy, shares of the same securities even if their market value declines. |
PORTFOLIO
CONSULTANT
The Portfolio Consultant, Pence Capital
Management, LLC, is a registered investment adviser registered with the U.S. Securities and Exchange Commission.
Pence Capital Management, LLC is a
registered investment advisory firm based in Newport Beach, California. The firm uses its proprietary research to identify and deliver actionable
investment insights. The firm is led by Colonel (ret) E. Dryden Pence III, a Harvard-educated economist with thirty years of experience in the
financial industry. His formal training and knowledge in economics combined with his career of more than twenty-two years in Army Intelligence, Special
Operations and Psychological Warfare,
22 Investment
Summary
gives the firm a unique
understanding of human behavior and its effects on the economy and the markets. The Ubiquitous Strategy Portfolio is based on the firms expertise
in portfolio construction.
The Portfolio Consultant is not an
affiliate of the sponsor. The Portfolio Consultant makes no representations that the portfolio will achieve the investment objectives or will be
profitable or suitable for any particular potential investor.
The Portfolio Consultant and/or its
affiliates may use the list of securities in its independent capacity as an investment adviser and distribute this information to various individuals
and entities. The Portfolio Consultant and/or its affiliates may recommend to other clients or otherwise effect transactions in the securities held by
the trust. This may have an adverse effect on the prices of the securities. This also may have an impact on the price the trust pays for the securities
and the price received upon unit redemptions or liquidation of the securities. The Portfolio Consultant and/or its affiliates also may issue reports
and makes recommendations on securities, which may include the securities in the trust.
Neither the Portfolio Consultant nor the
sponsor manages the trust. Opinions expressed by the Portfolio Consultant are not necessarily those of the sponsor, and may not actually come to pass.
The Portfolio Consultant is being compensated for its portfolio consulting services, including selection of the trust portfolio.
Investment
Summary 23
WHO SHOULD
INVEST
You should consider this investment if
you want:
|
|
to own a defined portfolio of stocks. |
|
|
the potential for capital appreciation. |
You should not consider this investment
if you:
|
|
are uncomfortable with the risks of an unmanaged investment in
common stocks. |
|
|
seek high current income or capital preservation. |
ESSENTIAL
INFORMATION |
|
|
Unit price at inception |
|
|
|
|
$10.0000 |
|
|
Inception date |
|
|
|
|
April 7, 2020 |
|
Termination date |
|
|
|
|
April 7, 2022 |
|
|
Distribution dates
|
|
|
|
|
25th day of each
month
|
|
Record dates
|
|
|
|
|
10th day of each
month
|
|
|
CUSIP Numbers
|
Standard Accounts Cash distributions |
|
|
|
|
00780H736 |
|
Reinvest distributions |
|
|
|
|
00780H744 |
|
Fee Based Accounts Cash distributions |
|
|
|
|
00780H751 |
|
Reinvest distributions |
|
|
|
|
00780H769 |
|
|
Ticker Symbol |
|
|
|
|
UBQPQX |
|
|
Minimum investment |
|
|
|
|
$1,000/100 units |
|
|
Tax Structure |
|
|
|
|
Grantor Trust |
|
FEES AND
EXPENSES
The amounts below are estimates of the
direct and indirect expenses that you may incur based on a $10 unit price. Actual expenses may vary.
Sales Fee
|
|
|
|
As a % of $1,000 Invested
|
|
Amount per 100 Units
|
Initial sales fee |
|
|
|
|
0.00 |
% |
|
|
$0.00 |
|
Deferred sales fee |
|
|
|
|
2.25 |
|
|
|
22.50 |
|
Creation & development fee |
|
|
|
|
0.50 |
|
|
|
5.00 |
|
Maximum sales fee |
|
|
|
|
2.75 |
% |
|
$ |
27.50 |
|
Organization Costs |
|
|
|
|
0.49 |
% |
|
$ |
4.90 |
|
Annual operating expenses
|
|
|
|
As a % of Net Assets
|
|
Amount per 100 Units
|
Trustee fee & expenses |
|
|
|
|
0.13 |
% |
|
|
$1.22 |
|
Supervisory, evaluation and administration fees |
|
|
|
|
0.10 |
|
|
|
1.00 |
|
Total |
|
|
|
|
0.23 |
% |
|
$ |
2.22 |
|
The initial sales fee is the difference
between the total sales fee (maximum of 2.75% of the unit offering price) and the sum of the remaining deferred sales fee and the total creation and
development fee. The deferred sales fee is fixed at $0.225 per unit with the first installment commencing on July 20, 2020, the second
installment on August 20, 2020 and the final installment on September 20, 2020. The creation and development fee is fixed
at $0.05 per unit and is paid at the end of the initial offering period (anticipated to be approximately three months). When the public offering price
per unit is less than or equal to $10, you will not pay an initial sales fee. When the public offering price per unit is greater than $10 per unit, you
will pay an initial sales fee.
EXAMPLE
This example helps you compare the cost
of this trust with other unit trusts and mutual funds. In the example we assume that the expenses do not change and that the trusts
annual return is 5%. Your actual returns and expenses will vary. Based on these assumptions, you would pay these expenses for every $10,000 you invest
in the trust:
1 year |
|
|
|
$ |
346 |
|
2 years (approximate life of trust) |
|
|
|
$ |
369 |
|
These amounts are the same regardless of
whether you sell your investment at the end of a period or continue to hold your investment.
24 Investment
Summary
Ubiquitous Strategy Portfolio, Series
2020-2
(Advisors Disciplined Trust 2007)
Portfolio
As of the
trust inception date, April 7, 2020
Number of Shares
|
|
|
|
Ticker Symbol
|
|
Issuer(1)
|
|
Percentage of Aggregate
Offering Price
|
|
Market Value per
Share(1)
|
|
Cost of Securities to
Trust(2)
|
COMMON STOCKS 100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication Services 31.78% |
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
GOOGL |
|
Alphabet, Inc. (3) |
|
|
10.04 |
% |
|
$ |
1,183.19 |
|
|
$ |
20,114 |
|
135 |
|
|
|
T |
|
AT&T, Inc. |
|
|
1.98 |
|
|
|
29.44 |
|
|
|
3,974 |
|
17 |
|
|
|
CHTR |
|
Charter Communications, Inc. (3) |
|
|
3.90 |
|
|
|
459.55 |
|
|
|
7,812 |
|
219 |
|
|
|
CMCSA |
|
Comcast Corporation |
|
|
3.96 |
|
|
|
36.23 |
|
|
|
7,934 |
|
120 |
|
|
|
FB |
|
Facebook, Inc. (3) |
|
|
9.92 |
|
|
|
165.55 |
|
|
|
19,866 |
|
70 |
|
|
|
VZ |
|
Verizon Communications, Inc. |
|
|
1.98 |
|
|
|
56.70 |
|
|
|
3,969 |
|
|
|
|
|
|
|
|
Consumer Discretionary 14.96% |
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
AMZN |
|
Amazon.com, Inc. (3) |
|
|
14.96 |
|
|
|
1,997.59 |
|
|
|
29,964 |
|
|
|
|
|
|
|
|
Financials 2.97% |
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
AXP |
|
American Express Company |
|
|
2.97 |
|
|
|
83.87 |
|
|
|
5,955 |
|
|
|
|
|
|
|
|
Industrials 3.97% |
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
FDX |
|
FedEx Corporation |
|
|
1.96 |
|
|
|
119.02 |
|
|
|
3,928 |
|
42 |
|
|
|
UPS |
|
United Parcel Service, Inc. |
|
|
2.01 |
|
|
|
95.68 |
|
|
|
4,019 |
|
|
|
|
|
|
|
|
Information Technology 40.30% |
|
|
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
AAPL |
|
Apple, Inc. |
|
|
10.09 |
|
|
|
262.47 |
|
|
|
20,210 |
|
61 |
|
|
|
MA |
|
Mastercard, Inc. |
|
|
8.10 |
|
|
|
265.94 |
|
|
|
16,222 |
|
122 |
|
|
|
MSFT |
|
Microsoft Corporation |
|
|
10.06 |
|
|
|
165.27 |
|
|
|
20,163 |
|
79 |
|
|
|
PYPL |
|
PayPal Holdings, Inc. (3) |
|
|
4.01 |
|
|
|
101.67 |
|
|
|
8,032 |
|
95 |
|
|
|
V |
|
Visa, Inc. |
|
|
8.04 |
|
|
|
169.44 |
|
|
|
16,097 |
|
|
|
|
|
|
|
|
Real Estate 6.02% |
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
AMT |
|
American Tower Corporation |
|
|
3.05 |
|
|
|
235.18 |
|
|
|
6,115 |
|
40 |
|
|
|
CCI |
|
Crown Castle International Corporation |
|
|
2.97 |
|
|
|
148.75 |
|
|
|
5,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00 |
% |
|
|
|
|
|
$ |
200,324 |
|
Notes to Portfolio
(1) |
|
Securities are represented by contracts to purchase
such securities. The value of each security is based on the most recent closing sale price of each security as of the close of regular trading on the
New York Stock Exchange on the business day prior to the trusts inception date. In accordance with Accounting Standards Codification 820,
Fair Value Measurements, the trusts investments are classified as Level 1, which refers to security prices determined using quoted
prices in active markets for identical securities. |
(2) |
|
The cost of the securities to the sponsor and the
sponsors profit or (loss) (which is the difference between the cost of the securities to the sponsor and the cost of the securities to the trust)
are $200,324 and $0, respectively. |
(3) |
|
This is a non-income producing security. |
Investment
Summary 25
UNDERSTANDING YOUR INVESTMENT |
|
|
|
HOW TO BUY
UNITS
You can buy units of a trust on any
business day the New York Stock Exchange is open by contacting your financial professional. Unit prices are available daily on the Internet at
www.AAMlive.com. The public offering price of units includes:
|
|
the net asset value per unit plus |
|
|
organization costs plus |
The net asset value per unit
is the value of the securities, cash and other assets in your trust reduced by the liabilities of your trust divided by the total units or your trust
outstanding. We often refer to the public offering price of units as the offer price or purchase price. The offer price will be
effective for all orders received prior to the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time). If we receive
your order prior to the close of regular trading on the New York Stock Exchange or authorized financial professionals receive your order prior to that
time and properly transmit the order to us by the time that we designate, then you will receive the price computed on the date of receipt. If we
receive your order after the close of regular trading on the New York Stock Exchange, if authorized financial professionals receive your order after
that time or if orders are received by such persons and are not transmitted to us by the time that we designate, then you will receive the price
computed on the date of the next determined offer price provided that your order is received in a timely manner on that date. It is the responsibility
of the authorized financial professional to transmit the orders that they receive to us in a timely manner. Certain broker-dealers may charge a
transaction or other fee for processing unit purchase orders.
Value of the Securities.
We determine the value of the securities as of the close of regular trading on the New York Stock Exchange on each day that exchange is open. We
generally determine the value of securities using the last sale price for securities traded on a national securities exchange. For this purpose, the
trustee provides us closing prices from a reporting service approved by us. In some cases we will price a security based on the last asked or bid price
in the over-the-counter market or by using other recognized pricing methods. We will only do this if a security is not principally traded on a national
securities exchange or if the market quotes are unavailable or inappropriate.
We determined the initial prices of the
securities shown under each Portfolio section in this prospectus as described above at the close of regular trading on the New York Stock
Exchange on the business day before the date of this prospectus. On the first day we sell units we will compute the unit price as of the close of
regular trading on the New York Stock Exchange or the time the registration statement filed with the Securities and Exchange Commission becomes
effective, if later.
Organization Costs. During
the initial offering period, part of the value of the units represents an amount that will pay the costs of creating your trust. These costs include
the costs of preparing the registration statement and legal documents, a portfolio consultants security selection fee (if any), federal and state
registration fees, the initial fees and expenses of the trustee and the initial audit. Your trust will sell securities to reimburse us for these costs
at the end of the initial offering period or after six months, if earlier.
The value of your units will decline
when your trust pays these costs.
Sales Fee. The maximum
sales fee is shown under Fees and Expenses for your trust and is 2.75% of the public offering price per unit at the time of
purchase.
26 Understanding Your
Investment
You pay a fee in connection with
purchasing units. We refer to this fee as the transactional sales fee. The transactional sales fee has both an initial and a deferred
component. The transactional sales fee equals 2.25% of the public offering price per unit based on a $10 public offering price per unit. The percentage
amount of the transactional sales fee is based on the unit price on your trusts inception date. The transactional sales fee equals the difference
between the total sales fee and the creation and development fee. As a result, the percentage and dollar amount of the transactional sales fee will
vary as the public offering price per unit varies. The transactional sales fee does not include the creation and development fee which is described
under Fees and Expenses for your trust.
You pay the initial sales fee, if any,
at the time you buy units. The initial sales fee is the difference between the total sales fee percentage (maximum of 2.75% of the public offering
price per unit) and the sum of the remaining fixed dollar deferred sales fee and the total fixed dollar creation and development fee. The initial sales
fee will be 0.00% of the public offering price per unit at a public offering price per unit of $10. If the public offering price per unit exceeds $10,
you will be charged an initial sales fee equal to the difference between the total sales fee percentage (maximum of 2.75% of the public offering price
per unit) and the sum of the remaining fixed dollar deferred sales fee and total fixed dollar creation and development fee. The deferred sales fee is
fixed at $0.225 per unit. Your trust pays the deferred sales fee in equal monthly installments as described under Fees and Expenses for
your trust. If you redeem or sell your units prior to collection of the total deferred sales fee, you will pay any remaining deferred sales fee upon
redemption or sale of your units.
Since the deferred sales fee and
creation and development fee are fixed dollar amounts per unit, your trust must charge these amounts per unit regardless of any decrease in net asset
value. As a result, if the public offering price per unit falls to less than $10 (resulting in the maximum sales fee percentage being a dollar amount
that is less than the combined fixed dollar amounts of the deferred sales fee and creation and development fee) your initial sales fee will be a credit
equal to the amount by which these fixed dollar fees exceed the sales fee at the time you buy units. In such a situation, the value of securities per
unit would exceed the public offering price per unit by the amount of the initial sales fee credit and the value of those securities will fluctuate,
which could result in a benefit or detriment to unitholders that purchase units at that price. The initial sales fee credit is paid by the sponsor and
is not paid by the trust.
If you purchase units after the last
deferred sales fee payment has been assessed, the secondary market sales fee is equal to 2.75% of the public offering price and does not include
deferred payments (i.e. unitholders who buy in the secondary market after collection of the deferred sales fees are not charged deferred sales
fees).
Minimum Purchase. The
minimum amount you can purchase appears under Essential Information for your trust, but such amounts may vary depending on your selling
firm.
Reducing Your Sales Fee.
We offer a variety of ways for you to reduce the fee you pay. It is your financial professionals responsibility to alert us of any discount when
you order units. Except as expressly provided herein, you may not combine discounts. Since the deferred sales fee and the creation and development fee
are fixed dollar amounts per unit, your trust must charge these fees per unit regardless of any discounts. However, if you are eligible to receive a
discount such that your total sales fee is less than the fixed dollar amounts of the deferred sales fee and the creation and development fee, we will
credit you the difference between your total sales fee and these fixed dollar fees at the time you buy units.
Fee Accounts. Investors may
purchase units through registered investment advisers, certified financial planners or registered broker-dealers
Understanding Your
Investment 27
who in each case either charge
investor accounts (Fee Accounts) periodic fees for brokerage services, financial planning, investment advisory or asset management
services, or provide such services in connection with an investment account for which a comprehensive wrap fee charge (Wrap
Fee) is imposed. You should consult your financial advisor to determine whether you can benefit from these accounts. To purchase units in these
Fee Accounts, your financial advisor must purchase units designated with one of the Fee Account CUSIP numbers, if available. Please contact your
financial advisor for more information. If units are purchased for a Fee Account and the units are subject to a Wrap Fee in such Fee Account (i.e., the
trust is Wrap Fee Eligible) then investors may be eligible to purchase units in these Fee Accounts that are not subject to the
transactional sales fee but will be subject to the creation and development fee that is retained by the sponsor. For example, this table illustrates
the sales fee you will pay as a percentage of the initial $10 public offering price per unit (the percentage will vary with the unit
price).
Initial sales fee |
|
|
|
0.00% |
Deferred sales fee |
|
|
|
0.00% |
Transactional sales fee |
|
|
|
0.00% |
Creation and development fee |
|
|
|
0.50% |
Total sales fee |
|
|
|
0.50% |
This discount applies only during the
initial offering period. Certain Fee Account investors may be assessed transaction or other fees on the purchase and/or redemption of units by their
broker-dealer or other processing organizations for providing certain transaction or account activities. We reserve the right to limit or deny
purchases of units in Fee Accounts by investors or selling firms whose frequent trading activity is determined to be detrimental to a
trust.
Employees. We waive the
transactional sales fee for purchases made by officers, directors and employees (and immediate family members) of the sponsor and its affiliates. These
purchases are not subject to the transactional sales fee but will be subject to the creation and development fee. We also waive a portion of the sales
fee for purchases made by officers, directors and employees (and immediate family members) of selling firms. These purchases are made at the public
offering price per unit less the applicable regular dealer concession. Immediate family members for the purposes of this section include your spouse,
children (including step-children) under the age of 21 living in the same household, and parents (including step-parents). These discounts apply to
initial offering period and secondary market purchases. All employee discounts are subject to the policies of the related selling firm, including but
not limited to, householding policies or limitations. Only officers, directors and employees (and their immediate family members) of selling firms that
allow such persons to participate in this employee discount program are eligible for the discount.
Dividend Reinvestment Plan. We do
not charge any sales fee when you reinvest distributions from your trust into additional units of your trust. This sales fee discount applies to
initial offering period and secondary market purchases. Since the deferred sales fee and the creation and development fee are fixed dollar amounts per
unit, your trust must charge these fees per unit regardless of this discount. If you elect the distribution reinvestment plan, we will credit you with
additional units with a dollar value sufficient to cover the amount of any remaining deferred sales fee or creation and development fee that will be
collected on such units at the time of reinvestment. The dollar value of these units will fluctuate over time.
Retirement Accounts. Your
portfolio may be suitable for purchase in tax-advantaged retirement accounts. You should contact your financial professional about the accounts offered
and any additional fees imposed.
28 Understanding Your
Investment
HOW TO SELL
YOUR UNITS
You can sell or redeem your units on any
business day the New York Stock Exchange is open by contacting your financial professional. Unit prices are available daily on the Internet at
www.AAMlive.com or through your financial professional. The sale and redemption price of units is equal to the net asset value per unit,
provided that you will not pay any remaining creation and development fee or organization costs if you sell or redeem units during the initial offering
period. The sale and redemption price is sometimes referred to as the liquidation price. You pay any remaining deferred sales fee when you
sell or redeem your units. Certain broker-dealers may charge a transaction or other fee for processing unit redemption or sale
requests.
Selling Units. We may
maintain a secondary market for units. This means that if you want to sell your units, we may buy them at the current net asset value, provided that
you will not pay any remaining creation and development fee or organization costs if you sell units during the initial offering period. We may then
resell the units to other investors at the public offering price or redeem them for the redemption price. Our secondary market repurchase price is the
same as the redemption price. Certain broker-dealers might also maintain a secondary market in units. You should contact your financial professional
for current repurchase prices to determine the best price available. We may discontinue our secondary market at any time without notice. Even if we do
not make a market, you will be able to redeem your units with the trustee on any business day for the current redemption price.
Redeeming Units. You may
also redeem your units directly with the trustee, The Bank of New York Mellon, on any day the New York Stock Exchange is open. The redemption price
that you will receive for units is equal to the net asset value per unit, provided that you will not pay any remaining creation and development fee or
organization costs if you redeem units during the initial offering period. You will pay any remaining deferred sales fee at the time you redeem units.
You will receive the net asset value for a particular day if the trustee receives your completed redemption request prior to the close of regular
trading on the New York Stock Exchange. Redemption requests received by authorized financial professionals prior to the close of regular trading on the
New York Stock Exchange that are properly transmitted to the trustee by the time designated by the trustee, are priced based on the date of receipt.
Redemption requests received by the trustee after the close of regular trading on the New York Stock Exchange, redemption requests received by
authorized financial professionals after that time or redemption requests received by such persons that are not transmitted to the trustee until after
the time designated by the trustee, are priced based on the date of the next determined redemption price provided they are received in a timely manner
by the trustee on such date. It is the responsibility of authorized financial professionals to transmit redemption requests received by them to the
trustee so they will be received in a timely manner. If your request is not received in a timely manner or is incomplete in any way, you will receive
the next net asset value computed after the trustee receives your completed request.
If you redeem your units, the trustee
will generally send you a payment for your units no later than seven days after it receives all necessary documentation (this will usually only take
two business days). The only time the trustee can delay your payment is if the New York Stock Exchange is closed (other than weekends or holidays), the
Securities and Exchange Commission determines that trading on that exchange is restricted or an emergency exists making sale or evaluation of the
securities not reasonably practicable, and for any other period that the Securities and Exchange Commission permits.
You can request an in-kind distribution
of the securities underlying your units if you tender at least 2,500 units for redemption (or such
Understanding Your
Investment 29
other amount as required by your
financial professionals firm). This option is generally available only for securities traded and held in the United States. The trustee will make
any in-kind distribution of securities by distributing applicable securities in book entry form to the account of your financial professional at
Depository Trust Company. You will receive whole shares of the applicable securities and cash equal to any fractional shares. You may not request this
option in the last 30 days of your trusts life. We may discontinue this option upon sixty days notice.
Rollover Option. Your
trusts strategy may be a long-term investment strategy designed to be followed on an annual basis. You may achieve more consistent long-term
investment results by following the strategy. As part of the strategy, we currently intend to offer a subsequent series of your trust for a rollover
when the current trust terminates. When your trust terminates you will have the option to (1) participate in a rollover and have your units reinvested
into a subsequent trust series through a cash rollover as described in this section, (2) receive an in-kind distribution of securities or (3) receive a
cash distribution.
If you elect to participate in a
rollover, your units will be redeemed on your trusts termination date. As the redemption proceeds become available, the proceeds (including
dividends) will be invested in a new trust series, if available, at the public offering price for the new trust. The trustee will attempt to sell
securities to satisfy the redemption as quickly as practicable on the termination date. We do not anticipate that the sale period will be longer than
one day, however, certain factors could affect the ability to sell the securities and could impact the length of the sale period. The liquidity of any
security depends on the daily trading volume of the security and the amount available for redemption and reinvestment on any day.
We intend to make subsequent trust
series available for sale at various times during the year. Of course, we cannot guarantee that a subsequent trust or sufficient units will be
available or that any subsequent trusts will offer the same investment strategies or objectives as current trusts. We cannot guarantee that a rollover
will avoid any negative market price consequences resulting from trading large volumes of securities. Market price trends may make it advantageous to
sell or buy securities more quickly or more slowly than permitted by the trust procedures. We may, in our sole discretion, modify a rollover or stop
creating units of any future trust at any time regardless of whether all proceeds of unitholders have been reinvested in a rollover. We may decide not
to offer a rollover option upon sixty days notice. Cash which has not been reinvested in a rollover will be distributed to unitholders shortly after
the termination date. Rollover participants may receive taxable dividends or realize taxable capital gains which are reinvested in connection with a
rollover but may not be entitled to a deduction for capital losses due to the wash sale tax rules. Due to the reinvestment in a subsequent
trust, no cash will be distributed to pay any taxes. See Understanding Your InvestmentTaxes.
DISTRIBUTIONS
Distributions. Your trust
generally pays distributions of its net investment income along with any excess capital on each distribution date to unitholders of record on the
preceding record date. If your trust is a grantor trust for federal tax purposes, the trust will generally only make a distribution if the
total cash held for distribution equals at least 0.1% of the trusts net asset value as determined under the trust agreement. The record and
distribution dates and the tax status are shown under Essential Information in the Investment Summary section of this
prospectus for your trust. In some cases, your trust might pay a special distribution if it holds an excessive amount of cash pending distribution. For
example, this could happen as a result of a merger or similar transaction involving a company whose stock is in your portfolio. Your trust will also
generally make required distributions or distributions to avoid imposition of tax at the
30 Understanding Your
Investment
end of each year if it is structured
as a regulated investment company for federal tax purposes. The amount of your distributions will vary from time to time as companies
change their dividends and other income distributions or trust expenses change.
When your trust receives dividends and
other income distributions from a portfolio security, the trustee credits such payments to the trusts accounts. In an effort to make relatively
regular income distributions, if your trust is a regulated investment company for tax purposes and makes monthly distributions, your
trusts monthly income distribution is equal to one twelfth of the estimated net annual income distributions to be received by your trust after
deduction of trust operating expenses. Because a trust does not receive income distributions from the portfolio securities at a constant rate
throughout the year, the income distributions to unitholders from such a trust may be more or less than the amount credited to your trust accounts as
of the record date. For the purpose of minimizing fluctuation in income distributions, the trustee is authorized to advance such amounts as may be
necessary to provide income distributions of approximately equal amounts. The trustee will be reimbursed, without interest, for any such advances from
available income received by a trust on the ensuing record date.
Reports. The trustee or
your financial professional will make available to you a statement showing income and other receipts of your trust for each distribution. Each year the
trustee will also provide an annual report on your trusts activity and certain tax information. You can request copies of security evaluations to
enable you to complete your tax forms and audited financial statements for your trust, if available.
INVESTMENT
RISKS
All investments involve risk. This
section describes the main risks that can impact the value of the securities in your portfolio. You should understand these risks before you invest. If
the value of the securities falls, the value of your units will also fall. We cannot guarantee that your trust will achieve its objective or that your
investment return will be positive over any period.
Market Risk. Market risk
is the risk that the value of the securities in your trust will fluctuate. This could cause the value of your units to fall below your original
purchase price. Market value fluctuates in response to various factors. These can include changes in interest rates, inflation, the financial condition
of a securitys issuer, perceptions of the issuer, or ratings on a security. Even though we supervise your portfolio, you should remember that we
do not manage your portfolio. Your trust will not sell a security solely because the market value falls as is possible in a managed fund. First
detected in late 2019, a novel form of coronavirus disease (COVID-19) spread rapidly around the globe which led the World Health
Organization to declare the COVID-19 outbreak a pandemic in March 2020. The COVID-19 pandemic has adversely affected commercial activities, disrupted
supply chains and greatly increased market volatility. Many countries have reacted to this crisis through prevention measures, such as quarantines, and
government intervention, including placing restrictions on travel and business operations. These measures along with the general uncertainty caused
from this pandemic has resulted in a decline in consumer demand across many industries and imposed significant costs on governmental and business
entities. The potential economic impacts of the COVID-19 pandemic, or any future public health crisis, are impossible to predict and could result in
adverse market conditions which may negatively impact the performance of the securities in the portfolio and the trust.
Selection Risk. Selection
risk is the risk that the securities selected for inclusion by your trust or by a funds management will underperform the markets, relevant
indices or the securities selected by other funds with similar investment objectives and investment strategies. This means
Understanding Your
Investment 31
you may lose money or earn less
money than other comparable investments.
Equity Securities. Your
trust and/or certain funds held by your trust may invest in securities representing equity ownership of a company. Investments in such securities are
exposed to risks associated with the companies issuing the securities, the sectors and geographic locations they are involved in and the markets that
such securities are traded on among other risks as described herein.
Fixed Income Securities.
Certain funds held by your trust may invest in fixed income securities and similar securities. Fixed income securities involve certain unique risks
such as credit risk and interest rate risk among other things as described in greater detail below.
Dividend Payment Risk.
Dividend payment risk is the risk that an issuer of a security is unwilling or unable to pay income on a security. Stocks represent ownership interests
in the issuers and are not obligations of the issuers. Common stockholders have a right to receive dividends only after the company has provided for
payment of its creditors, bondholders and preferred stockholders. Common stocks do not assure dividend payments. Dividends are paid only when declared
by an issuers board of directors and the amount of any dividend may vary over time.
Credit Risk. Credit risk
is the risk that a borrower is unable to meet its obligation to pay principal or interest on a security held by a fund. This could cause the value of
your units to fall and may reduce the level of dividends a fund pays which would reduce your income. The COVID-19 pandemic has resulted in a decline
in economic activity which could negatively impact the ability of borrowers to make principal or interest payment on securities, when
due.
Interest Rate Risk.
Interest rate risk is the risk that the value of fixed income securities and similar securities held by a fund will fall if interest rates increase.
Bonds and other fixed income securities typically fall in value when interest rates rise and rise in value when interest rates fall. Securities with
longer periods before maturity are often more sensitive to interest rate changes. The securities in your trust may be subject to a greater risk of
rising interest rates than would normally be the case due to the current period of relatively low rates.
Closed-End Funds. Your
portfolio may invest in shares of closed-end investment companies. Closed-end funds are subject to various risks, including but not limited to
managements ability to meet the closed-end funds investment objective including when the underlying securities are redeemed or sold, risks
associated with the use of leverage and borrowing and risks associated with shares of the fund trading at a discount or premium to the funds net
asset value. You should understand the section titled Understanding Your InvestmentClosed-End Funds before you
invest.
Non-Diversification Risk.
Certain funds held by your trust may be classified as non-diversified. Such funds may be more exposed to the risks associated with and
developments affecting an individual issuer, industry and/or asset class than a fund that invests more widely.
Business Development Company
Risk. Certain funds held by your trust may invest in business development companies (BDCs). BDCs are closed-end investment
companies that have elected to be treated as business development companies under the Investment Company Act of 1940. BDCs are required to hold at
least 70% of their investments in eligible assets which include, among other things, (i) securities of eligible portfolio companies (generally,
domestic companies that are not investment companies and that cannot have a class of securities listed on a national securities exchange or have
securities that are marginable that are purchased from that company in a private transaction), (ii) securities received by the BDC in connection with
its ownership of securities of eligible portfolio companies, or (iii) cash, cash items, government securities, or high quality debt
securities
32 Understanding Your
Investment
maturing one year or less from the
time of investment. BDCs ability to grow and their overall financial condition is impacted significantly by their ability to raise capital. In
addition to raising capital through the issuance of common stock, BDCs may engage in borrowing. This may involve using revolving credit facilities, the
securitization of loans through separate wholly-owned subsidiaries and issuing of debt and preferred securities. BDCs are less restricted than other
closed-end funds as to the amount of debt they can have outstanding. These borrowings, also known as leverage, magnify the potential for gain or loss
on amounts invested and, accordingly, the risks associated with investing in BDC securities. While the value of a BDCs assets increases,
leveraging would cause the net value per share of BDC common stock to increase more sharply than it would have had such BDC not leveraged. However, if
the value of a BDCs assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had such BDC
not leveraged. In addition to decreasing the value of a BDCs common stock, it could also adversely impact a BDCs ability to make dividend
payments. A BDCs credit rating may change over time which could adversely affect its ability to obtain additional credit and/or increase the cost
of such borrowing. Agreements governing a BDCs credit facilities and related funding and service agreements may contain various covenants that
limit the BDCs discretion in operating its business along with other limitations. Any defaults may restrict the BDCs ability to manage
assets securing related assets, which may adversely impact the BDCs liquidity and operations. BDCs may enter into hedging transaction and utilize
derivative instruments such as forward contracts, options and swaps. Unanticipated movements and improper correlation of hedging instruments may
prevent a BDC from hedging against exposure to risk of loss. BDCs may issue options, warrants, and rights to convert to voting securities to its
officers, employees and board members. Any issuance of derivative securities requires the approval of the companys board of directors and
authorization by the companys shareholders. A BDC may operate a profit-sharing plan for its employees, subject to certain
restrictions.
BDC investments are frequently not
publicly traded and, as a result, there is uncertainty as to the value and liquidity of those investments. BDCs may use independent valuation firms to
value their investments and such valuations may be uncertain, be based on estimates and/or differ materially from that which would have been used if a
ready market for those investments existed. The value of a BDC could be adversely affected if its determinations regarding the fair value of
investments was materially higher than the value realized upon sale of such investments. Due to the relative illiquidity of certain BDC investments, if
a BDC is required to liquidate all or a portion of its portfolio quickly, it may realize significantly less than the value at which such investments
are recorded. Further restrictions may exist on the ability to liquidate certain assets to the extent that subsidiaries or related parties have
material non-public information regarding such assets. BDCs are required to make available significant managerial assistance to their portfolio
companies. Significant managerial assistance refers to any arrangement whereby a BDC provides significant guidance and counsel concerning the
management, operations, or business objectives and policies of a portfolio company. Examples of such activities include arranging financing, managing
relationships with financing sources, recruiting management personnel, and evaluating acquisition and divestiture opportunities. BDCs are frequently
externally managed by an investment adviser which may also provide this external managerial assistance to portfolio companies. Such investment
advisers liability may be limited under its investment advisory agreement, which may lead such investment adviser to act in a riskier manner than
it would were it investing for its own account. Such investment advisers may be entitled to incentive compensation which may cause such adviser to make
more speculative and riskier investments
Understanding Your
Investment 33
than it would if investing for its
own account. Such compensation may be due even in the case of declines to the value of a BDCs investments.
BDCs frequently have high expenses which
may include, but are not limited to, the payment of management fees, administration expenses, taxes, interest payable on debt, governmental charges,
independent director fees and expenses, valuation expenses, and fees payable to third parties relating to or associated with making investments. If
your trust invests in BDCs, then your trust will indirectly bear these expenses. These expenses may fluctuate significantly over time. If a BDC fails
to maintain its status as a BDC it may be regulated as a closed-end fund which would subject such BDC to additional regulatory restrictions and
significantly decrease its operating flexibility. In addition, such failure could trigger an event of default under certain outstanding indebtedness
which could have a material adverse impact on its business.
Investment in Other Investment
Companies. As with other investments, investments in other investment companies are subject to market and selection risk. In addition, if/when
your trust acquires shares of investment companies shareholders bear both their proportionate share of fees and expenses in your trust and, indirectly,
the expenses of the underlying investment companies. Investment companies expenses are subject to the risk of fluctuation including in response
to fluctuation in a funds assets. Accordingly, a funds actual expenses may vary from what is indicated at the time of investment by your
trust. There are certain regulatory limitations on the ability of your trust to hold other investment companies which may impact your trusts
ability to invest certain funds, may impact the weighting of a fund in your trusts portfolio and may impact your trusts ability to issue
additional units in the future.
Sector Concentration Risk.
Sector concentration risk is the risk that the value of your trust is more susceptible to fluctuations based on factors that impact a particular sector
because the exposure to such sectors through the securities held by your trust or through the securities in the funds held by your trust are
concentrated within a particular sector. A portfolio concentrates in a sector when securities in a particular sector make up 25% or more of
the portfolio. Refer to the Principal Risks in the Investment Summary section for your trust in this prospectus for sector
concentrations.
Your trust may invest significantly in
securities of communication services companies. General risks of communication services companies include rapidly changing technology, rapid
product obsolescence, loss of patent protection, cyclical market patterns, evolving industry standards and frequent new product introductions. Certain
communication companies are subject to substantial governmental regulation, which among other things, regulates permitted rates of return and the kinds
of services that a company may offer. Media and entertainment companies are subject to changing demographics, consumer preferences and changes in the
way people communicate and access information and entertainment content. Certain of these companies may be particularly susceptible to cybersecurity
threats, which could have an adverse effect on their business. Companies in this sector are subject to fierce competition for market share from
existing competitors and new market entrants. Such competitive pressures are intense and communication stocks can experience extreme
volatility.
Companies in the communication sector
may encounter distressed cash flows and heavy debt burdens due to the need to commit substantial capital to meet increasing competition and research
and development costs. Technological innovations may also make the existing products and services of communication companies obsolete. In addition,
companies in this sector can be impacted by a lack of investor or consumer acceptance of new products, changing consumer preferences and lack of
standardization or compatibility with existing technologies making implementation of new products more difficult.
34 Understanding Your
Investment
Your trust may invest significantly in
securities issued by companies in the financials sector. Any negative impact on this sector will have a greater impact on the value of units
than on a portfolio diversified over several sectors. You should understand the risks of this sector before you invest. Companies in the financials
sector may include banks and their holding companies, finance companies, investment managers, broker-dealers, insurance and reinsurance companies and
mortgage real estate investment trusts (REITs). Banks and their holding companies are especially subject to the adverse effects of economic
recession; volatile interest rates; portfolio concentrations in geographic markets and in commercial and residential real estate loans; and competition
from new entrants in their fields of business. In addition, banks and their holding companies are extensively regulated at both the federal and state
level and may be adversely affected by increased regulations. Banks face increased competition from nontraditional lending sources as regulatory
changes permit new entrants to offer various financial products. Technological advances allow these nontraditional lending sources to cut overhead and
permit the more efficient use of customer data. Banks are already facing tremendous pressure from mutual funds, brokerage firms and other providers in
the competition to furnish services that were traditionally offered by banks.
Companies engaged in investment
management and broker-dealer activities are subject to volatility in their earnings and share prices that often exceeds the volatility of the equity
market in general. Adverse changes in the direction of the stock market, investor confidence, equity transaction volume, the level and direction of
interest rates and the outlook of emerging markets could adversely affect the financial stability, as well as the stock prices, of these companies.
Additionally, competitive pressures, including increased competition with new and existing competitors, the ongoing commoditization of traditional
businesses and the need for increased capital expenditures on new technology could adversely impact the profit margins of companies in the investment
management and brokerage industries. Companies involved in investment management and broker-dealer activities are also subject to extensive regulation
by government agencies and self-regulatory organizations, and changes in laws, regulations or rules, or in the interpretation of such laws, regulations
and rules could adversely affect the stock prices of such companies.
Companies involved in the insurance,
reinsurance and risk management industry underwrite, sell or distribute property, casualty and business insurance. Many factors affect insurance,
reinsurance and risk management company profits, including interest rate movements, the imposition of premium rate caps, a misapprehension of the risks
involved in given underwritings, competition and pressure to compete globally, weather catastrophes or other disasters and the effects of client
mergers. Already extensively regulated, insurance companies profits may be adversely affected by increased government regulations or tax law
changes.
Mortgage REITs engage in financing real
estate, purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments. Such REITs face
risks similar to those of other financial firms, such as changes in interest rates, general market conditions and credit risk, in addition to risks
associated with an investment in real estate. Risk associated with real estate investments include, among other factors, changes in general U.S.,
global and local economic conditions, declines in real estate values, changes in the financial health of tenants, overbuilding and increased
competition for tenants, oversupply of properties for sale, changing demographics, changes in interest rates, tax rates and other operating expenses,
changes in government regulations, faulty construction and the ongoing need for capital improvements, regulatory and judicial requirements including
relating to liability for environmental hazards, changes in neighborhood
Understanding Your
Investment 35
values and buyer demand, and the
unavailability of construction financing or mortgage loans at rates acceptable to developers.
The financial services sector was
adversely affected by global developments over the last several years stemming from the financial crisis including recessionary conditions,
deterioration in the credit markets and recurring concerns over sovereign debt. These events led to considerable write-downs in the values of many
assets held by financial services companies and a tightening of credit markets that was marked by a general unwillingness of many entities to extend
credit. These factors caused a significant need for many financial services companies to raise capital to meet obligations and to satisfy regulatory
and contractual capital requirements. Many well-established financial services companies were forced to seek additional capital through issuances of
new preferred or common equity and certain companies were forced to agree to be acquired by other companies (or sell some or all of their assets to
other companies). In some cases government assistance, guarantees or direct participation in investments or acquisitions were necessary to facilitate
these transactions. In addition, concerns regarding these issues and their potential negative impact to the U.S. and global economies resulted in
extreme volatility in securities prices and uncertain market conditions.
In response to these issues, government
authorities in the U.S. and other countries have initiated and may continue to engage in administrative and legislative action, including the
Dodd-Frank Wall Street Reform and Consumer Protection Act and resulting rulemaking. These government actions include, but are not limited to,
restrictions on investment activities; increased oversight, regulation and involvement in financial services company practices; adjustments to capital
requirements; the acquisition of interests in and the extension of credit to private entities; and increased investigation efforts into the actions of
companies and individuals in the financial service industry. No one can predict any action that might be taken or the effect any action or inaction
will have. It is possible that any actions taken by government authorities will not address or help improve the state of these difficulties as
intended. No one can predict the impact that these difficulties will have on the economy, generally or financial services companies. These difficulties
and corresponding government action or inaction may have far reaching consequences and your investment may be adversely affected by such
developments.
Your trust may invest significantly in
securities of companies in the information technology sector. Technology companies are generally subject to the risks of rapidly changing
technologies; short product life cycles; fierce competition; aggressive pricing; frequent introduction of new or enhanced products; the loss of patent,
copyright and trademark protections; cyclical market patterns; evolving industry standards; and frequent new product introductions. Technology
companies may be smaller and less experienced companies, with limited product lines, markets or financial resources. Technology company stocks may
experience extreme price and volume fluctuations that are often unrelated to their operating performance and may experience significant declines in
their share values.
Foreign Issuer Risk. Your
trust and/or certain funds held by your trust may invest in the securities of foreign issuers. An investment in securities of foreign issuers involves
certain risks that are different in some respects from an investment in securities of domestic issuers. These include risks associated with future
political and economic developments, international trade conditions, foreign withholding taxes, liquidity concerns, currency fluctuations, volatility,
restrictions on foreign investments and exchange of securities, potential for expropriation of assets, confiscatory taxation, difficulty in obtaining
or enforcing a court judgment, potential inability to collect when a company goes bankrupt and economic, political or social instability. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S. economy for reasons including differences
36 Understanding Your
Investment
in growth of gross domestic product,
rates of inflation, capital reinvestment, resources, self-sufficiency and balance of payments positions There may be less publicly available
information about a foreign issuer than is available from a domestic issuer as a result of different accounting, auditing and financial reporting
standards. Some foreign markets are less liquid than U.S. markets which could cause securities to be bought at a higher price or sold at a lower price
than would be the case in a highly liquid market.
Brokerage and other transaction costs on
foreign exchanges are often higher than in the U.S. and there is generally less governmental supervision of exchanges, brokers and issuers in foreign
countries. The increased expense of investing in foreign markets may reduce the amount an investor can earn on its investments and typically results in
a higher operating expense ratio than investments in only domestic securities. Custody of certain securities may be maintained by a global custody and
clearing institution. Settlement and clearance procedures in certain foreign markets differ significantly from those in the U.S. Foreign settlement and
clearance procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically
associated with the settlement of domestic securities. Round lot trading requirements exist in certain foreign securities markets which could cause the
proportional composition and diversification of your trusts and/or a funds portfolio to vary when your trust or a fund buys or sells
securities.
Currency Risk. Because
securities of foreign issuers not listed on a U.S. securities exchange generally pay income and trade in foreign currencies, the U.S. dollar value of
these securities and income will vary with fluctuations in foreign exchange rates. Most foreign currencies have fluctuated widely in value against the
U.S. dollar for various economic and political reasons. Generally, when the U.S. dollar rises in value against a foreign currency, a security
denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against
a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. dollars. This risk, generally known as
currency risk, means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those
returns.
Depositary Receipts Risk.
Your trust and/or certain funds held by your trust may invest in stocks held in the form of depositary receipts. Depositary receipts
represent receipts for foreign common stock deposited with a custodian (which may include the trustee of your trust). Depositary receipts generally
involve the same types of risks as foreign common stock held directly. Some depositary receipts may experience less liquidity than the underlying
common stocks traded in their home market. Certain depositary receipts are unsponsored (i.e. issued without the participation or involvement of the
issuer of the underlying security). The issuers of unsponsored depositary receipts are not obligated to disclose information that may be considered
material in the U.S. Therefore, there may be less information available regarding these issuers and, as a result, there may not be a correlation
between certain information impacting a security and the market value of the depositary receipts.
Emerging Markets. Your
trust and/or certain funds held by your trust may invest in certain securities issued by entities located in emerging markets. Emerging markets are
generally defined as countries in the initial states of their industrialization cycles with low per capita income. The markets of emerging markets
countries are generally more volatile than the markets of developed countries with more mature economies. All of the risks of investing in foreign
securities described above are heightened by investing in emerging markets countries.
Supranational Entities
Securities. Certain funds held by your trust may invest in obligations issued by supranational entities such as the International Bank for
Reconstruction and
Understanding Your
Investment 37
Development (the World Bank). The
government members, or stockholders, usually make initial capital contributions to supranational entities and in many cases are committed
to make additional capital contributions if a supranational entity is unable to repay its borrowings. There is no guarantee that one or more
stockholders of a supranational entity will continue to make any necessary additional capital contributions. If such contributions are not made, the
entity may be unable to pay interest or repay principal on its debt securities, and a fund may lose money on such investments.
Small and Mid-Size
Companies. Your trust and/or certain funds held by your trust may invest in securities issued by small and mid-size companies. The share prices
of these companies are often more volatile than those of larger companies as a result of several factors common to many such issuers, including limited
trading volumes, products or financial resources, management inexperience and less publicly available information. In particular, companies with
smaller capitalizations may be less financially secure, depend on a smaller number of key personnel and generally be subject to more unpredictable
price changes than larger, more established companies and the markets as a whole. Smaller capitalization and emerging growth companies may be
particularly sensitive to changes in interest rates, borrowing costs and earnings.
Bond Quality Risk. Bond
quality risk is the risk that a bond will fall in value if a rating agency decreases or withdraws the bonds rating.
Prepayment Risk. When
interest rates fall, among other factors, the issuer of a security may prepay their obligations earlier than expected. Such prepayments will result in
early distributions to a fund holding such security and such funds may be unable to reinvest such amounts at the yields originally invested which could
adversely impact the funds and your trust. Certain bonds held by the funds may include call provisions which expose such funds and your trust to call
risk. Call risk is the risk that the issuer prepays or calls a bond before its stated maturity. An issuer might call a bond if interest
rates, in general fall and the bond pays a higher interest rate or if it no longer needs the money for the original purpose. If an issuer calls a bond,
a fund holding such bond will receive principal but future interest distributions will fall. Such fund might not be able to reinvest this principal at
as high a yield. A bonds call price could be less than the price paid for the bond and could be below the bonds par value. Certain bonds
may also be subject to extraordinary optional or mandatory redemptions if certain events occur, such as certain changes in tax laws, the substantial
damage or destruction by fire or other casualty of the project for which the proceeds of the bonds were used, and various other
events.
Extension Risk. When
interest rates rise, among other factors, issues of a security may pay off obligations more slowly than expected causing the value of such obligations
to fall.
Market Discount. Certain
funds held by your trust may invest in bonds whose current market values were below the principal value on the purchase date. A primary reason for the
market value of such bonds being less than the principal value is that the interest rate of such bonds is at a lower rate than the current market
interest rates for comparable bonds. Bonds selling at market discounts tend to increase in market value as they approach maturity.
Premium Bonds. Certain
funds held by your trust may invest in bonds whose current market values were above the principal value on the purchase date. A primary reason for the
market value of such bonds being higher than the principal value is that the interest rate of such bonds is at a higher rate than the current market
interest rates for comparable bonds. The current returns of bonds trading at a market premium are initially higher than the current returns of
comparable bonds issued at currently prevailing interest rates because premium bonds tend to decrease in market value as they approach
38 Understanding Your
Investment
maturity when the principal value
becomes payable. Because part of the purchase price is effectively returned not at maturity but through current income payments, early redemption of a
premium bond at par or any other amount below the purchase price will result in a reduction in yield. Redemption pursuant to call provisions generally
will, and redemption pursuant to sinking fund provisions may occur at times when the bonds have a market value that represents a premium over par or,
for original issue discount securities, a premium over the accreted value.
Municipal Bonds. Certain
funds held by your trust may invest in municipal bonds. Municipal bonds are debt obligations issued by states or by political subdivisions or
authorities of states. Municipal bonds are typically designated as general obligation bonds, which are general obligations of a governmental entity
that are backed by the taxing power of such entity, or revenue bonds, which are payable from the income of a specific project or authority and are not
supported by the issuers power to levy taxes. Municipal bonds are long-term fixed rate debt obligations that generally decline in value with
increases in interest rates, when an issuers financial condition worsens or when the rating on a bond is decreased. Many municipal bonds may be
called or redeemed prior to their stated maturity, an event which is more likely to occur when interest rates fall. In such an occurrence, a fund may
not be able to reinvest the money it receives in other bonds that have as high a yield or as long a maturity. Many municipal bonds are subject to
continuing requirements as to the actual use of the bond proceeds or manner of operation of the project financed from bond proceeds that may affect the
exemption of interest on such bonds from federal income taxation. The market for municipal bonds is generally less liquid than for other securities and
therefore the price of municipal bonds may be more volatile and subject to greater price fluctuations than securities with greater liquidity. In
addition, an issuers ability to make income distributions generally depends on several factors including the financial condition of the issuer
and general economic conditions. Any of these factors may negatively impact the price of municipal bonds held by a fund and would therefore impact the
price of both the fund shares and your trust units. The COVID-19 pandemic has and continues to adversely affect the financial condition of many
states and political subdivisions both through costs associated with combatting the COVID-19 pandemic and by negatively impacting tax revenue streams.
The full impact of the COVID-19 pandemic on state and political subdivisions ability to make payments on debt obligations is impossible to
predict, but could negatively impact the value of bonds, the ability of state and political subdivisions to make payments when due and the performance
of the trust.
Sovereign Debt. Certain
funds held by your trust may invest in sovereign debt. Sovereign debt instruments are subject to the risk that a governmental entity may delay or
refuse to pay interest or repay principal on its sovereign debt, due, for example, to cash flow problems, insufficient foreign currency reserves,
political considerations, the relative size of the governmental entitys debt position in relation to the economy or the failure to put in place
required economic reforms. If a governmental entity defaults, it may ask for more time in which to pay or for further loans. There is no legal process
for collecting sovereign debt that a government does not pay nor are there bankruptcy proceedings through which all or part of the sovereign debt that
a governmental entity has not repaid may be collected.
U.S. Government Obligations
Risk. Certain funds held by your trust may invest in obligations of the U.S. Government. Obligations of U.S. Government agencies, authorities,
instrumentalities and sponsored enterprises have historically involved little risk of loss of principal if held to maturity. However, not all U.S.
Government securities are backed by the full faith and credit of the United States. Obligations of
Understanding Your
Investment 39
certain agencies, authorities,
instrumentalities and sponsored enterprises of the U.S. Government are backed by the full faith and credit of the United States (e.g., the Government
National Mortgage Association); other obligations are backed by the right of the issuer to borrow from the U.S. Treasury (e.g., the Federal Home Loan
Banks) and others are supported by the discretionary authority of the U.S. Government to purchase an agencys obligations. Still others are backed
only by the credit of the agency, authority, instrumentality or sponsored enterprise issuing the obligation. No assurance can be given that the U.S.
Government would provide financial support to any of these entities if it is not obligated to do so by law.
U.S. Treasury Obligations.
Certain funds held by your trust may invest in U.S. Treasury obligations. U.S. Treasury obligations are direct obligations of the United States which
are backed by the full faith and credit of the United States. The value of U.S. Treasury obligations will be adversely affected by decreases in bond
prices and increases in interest rates.
High Yield or Junk
Securities. Certain funds held by your trust may invest in high yield securities or unrated securities. High yield, high risk securities are
subject to greater market fluctuations and risk of loss than securities with higher investment ratings. The value of these securities will decline
significantly with increases in interest rates, not only because increases in rates generally decrease values, but also because increased rates may
indicate an economic slowdown. An economic slowdown, or a reduction in an issuers creditworthiness, may result in the issuer being unable to
maintain earnings at a level sufficient to maintain interest and principal payments. High yield or junk securities, the generic names for
securities rated below BBB by Standard & Poors or Baa by Moodys, are frequently issued by corporations in the
growth stage of their development or by established companies who are highly leveraged or whose operations or industries are depressed. Securities
rated below BBB or Baa are considered speculative as these ratings indicate a quality of less than investment grade. Because high yield securities are
generally subordinated obligations and are perceived by investors to be riskier than higher rated securities, their prices tend to fluctuate more than
higher rated securities and are affected by short-term credit developments to a greater degree. The market for high yield securities is smaller and
less liquid than that for investment grade securities. High yield securities are generally not listed on a national securities exchange but trade in
the over-the-counter markets. Due to the smaller, less liquid market for high yield securities, the bid-offer spread on such securities is generally
greater than it is for investment grade securities and the purchase or sale of such securities may take longer to complete.
Senior Loans. Certain
funds held by your trust may invest in senior loans and similar transactions. Senior loans are issued by banks, other financial institutions and other
investors to corporations, partnerships, limited liability companies and other entities to finance leveraged buyouts, recapitalizations, mergers,
acquisitions, stock repurchases, debt refinancings and, to a lesser extent, for general operating and other purposes. An investment by the funds in
senior loans and similar transactions involves risk that the borrowers under such transactions may default on their obligations to pay principal or
interest when due. Although senior loans may be secured by specific collateral, there can be no assurance that liquidation of collateral would satisfy
the borrowers obligation in the event of non-payment or that such collateral could be readily liquidated. Senior loans are typically structured
as floating rate instruments in which the interest rate payable on the obligation fluctuates with interest rate changes. As a result, the yield on
funds investing in senior loans will generally decline in a falling interest rate environment and increase in a rising interest rate environment.
Additionally, senior loans generally have floating interest rates that may be tied to the London Inter-Bank Offered Rate (LIBOR), which is
currently set to be phased out by 2021.
40 Understanding Your
Investment
The potential phase out of LIBOR
could adversely affect the value of investments tied to LIBOR. Senior loans are generally below investment grade quality and may be unrated at the time
of investment. Senior loans may not fall within the definition of securities and are generally not registered with the SEC and therefore an
investor in senior loans may not receive the protection of the federal securities laws. Senior loans are also generally not registered with state
securities commissions and are generally not listed on any securities exchange. In addition, the amount of public information available on senior loans
is generally less extensive than that available for other types of securities.
Convertible Securities.
Certain funds held by your trust may invest in convertible securities. Convertible securities generally offer lower interest or dividend yields than
non-convertible fixed income securities of similar credit quality because of the potential for capital appreciation. The market values of convertible
securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. However, a convertible securitys
market value also tends to reflect the market price of the common stock of the issuing company, particularly when that stock price is greater than the
convertible securitys conversion price. The conversion price is defined as the predetermined price or exchange ratio at which the
convertible security can be converted or exchanged for the underlying common stock. As the market price of the underlying common stock declines below
the conversion price, the price of the convertible security tends to be increasingly influenced more by the yield of the convertible security. Thus, it
may not decline in price to the same extent as the underlying common stock. In the event of a liquidation of the issuing company, holders of
convertible securities would be paid before that companys common stockholders. Consequently, an issuers convertible securities generally
entail less risk than its common stock. However, convertible securities fall below debt obligations of the same issuer in order of preference or
priority in the event of a liquidation and are typically unrated or rated lower than such debt obligations.
Mandatory convertible securities are
distinguished as a subset of convertible securities because the conversion is not optional and the conversion price at maturity is based solely upon
the market price of the underlying common stock, which may be significantly less than par or the price (above or below par) paid. For these reasons,
the risks associated with investing in mandatory convertible securities most closely resemble the risks inherent in common stocks. Mandatory
convertible securities customarily pay a higher coupon yield to compensate for the potential risk of additional price volatility and loss upon
conversion. Because the market price of a mandatory convertible security increasingly corresponds to the market price of its underlying common stock,
as the convertible security approaches its conversion date, there can be no assurance that the higher coupon will compensate for a potential
loss.
Floating Rate Instruments.
Certain funds held by your trust may invest in floating rate securities. A floating rate security is an instrument in which the interest rate payable
on the obligation fluctuates on a periodic basis based upon changes in a benchmark, often related to interest rates. As a result, the yield on such a
security will generally decline with negative changes to the benchmark, causing your trust to experience a reduction in the income it receives from
such securities. A sudden and significant increase in the applicable benchmark may increase the risk of payment defaults and cause a decline in the
value of the security.
Asset-Backed Securities.
Certain funds held by your trust may invest in asset-backed securities (ABS). ABS are securities backed by pools of loans or other
receivables. ABS are created from many types of assets, including auto loans, credit card receivables, home equity loans, and student loans. ABS are
issued through special purpose vehicles that are bankruptcy remote
Understanding Your
Investment 41
from the issuer of the collateral.
The credit quality of an ABS transaction depends on the performance of the underlying assets. To protect ABS investors from the possibility that some
borrowers could miss payments or even default on their loans, ABS include various forms of credit enhancement. Some ABS, particularly home equity loan
transactions, are subject to interest rate risk and prepayment risk. A change in interest rates can affect the pace of payments on the underlying
loans, which in turn, affects total return on the securities. ABS also carry credit or default risk. If many borrowers on the underlying loans default,
losses could exceed the credit enhancement level and result in losses to investors in an ABS transaction. Finally, ABS have structure risk due to a
unique characteristic known as early amortization, or early payout, risk. Built into the structure of most ABS are triggers for early payout, designed
to protect investors from losses. These triggers are unique to each transaction and can include: a big rise in defaults on the underlying loans, a
sharp drop in the credit enhancement level, or even the bankruptcy of the originator. Once early amortization begins, all incoming loan payments (after
expenses are paid) are used to pay investors as quickly as possible based upon a predetermined priority of payment.
Mortgage-Backed
Securities. Certain funds held by your trust may invest in mortgage-backed securities. Mortgage-backed securities are a type of ABS
representing direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property and can include single-
and multi-class pass-through securities and collateralized mortgage obligations. Mortgage-backed securities are based on different types of mortgages,
including those on commercial real estate or residential properties. These securities often have stated maturities of up to thirty years when they are
issued, depending upon the length of the mortgages underlying the securities. In practice, however, unscheduled or early payments of principal and
interest on the underlying mortgages may make the securities effective maturity shorter than this. Rising interest rates tend to extend the
duration of mortgage-backed securities, making them more sensitive to changes in interest rates, and may reduce the market value of the securities. In
addition, mortgage-backed securities are subject to prepayment risk, the risk that borrowers may pay off their mortgages sooner than expected,
particularly when interest rates decline. This can reduce the funds, and therefore your trusts, returns because the funds may have to
reinvest that money at lower prevailing interest rates.
Restricted Securities.
Certain funds held by your trust may invest in securities that may only be resold pursuant to Rule 144A under the Securities Act of 1933. Such
securities may not be readily marketable. Restricted securities may be sold only to purchasers meeting certain eligibility requirements in privately
negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act. Where
registration of such securities under the Securities Act is required, a fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the time the fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were to develop, the fund might obtain a less favorable price than that
which prevailed when it decided to sell.
Covered Call Option
Strategies. Certain funds held by your trust may invest using covered call option strategies. You should understand the risks of these
strategies before you invest. In employing a covered call strategy, a closed-end fund will generally write (sell) call options on a significant portion
of the funds managed assets. These call options will give the option holder the right, but not the obligation, to purchase a security from the
fund at the strike price on or prior to the options expiration date. The ability to successfully implement the funds investment strategy
depends on the fund advisers ability to predict pertinent market movements, which
42 Understanding Your
Investment
cannot be assured. Thus, the use of
options may require a fund to sell portfolio securities at inopportune times or for prices other than current market values, may limit the amount of
appreciation the fund can realize on an investment, or may cause the fund to hold a security that it might otherwise sell. The writer (seller) of an
option has no control over the time when it may be required to fulfill its obligation as a writer (seller) of the option. Once an option writer
(seller) has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and
must deliver the underlying security at the exercise price. As the writer (seller) of a covered call option, a fund forgoes, during the options
life, the opportunity to profit from increases in the market value of the security underlying the call option above the sum of the premium and the
strike price of the call option, but has retained the risk of loss should the price of the underlying security decline. The value of the options
written (sold) by a fund, which will be marked-to-market on a daily basis, will be affected by changes in the value and dividend rates of the
underlying securities, an increase in interest rates, changes in the actual or perceived volatility of securities markets and the underlying securities
and the remaining time to the options expiration. The value of the options may also be adversely affected if the market for the options becomes
less liquid or smaller.
An option is generally considered
covered if a fund owns the security underlying the call option or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if required, liquid cash or other assets are segregated by the fund) upon conversion or exchange of other securities
held by the fund. In certain cases, a call option may also be considered covered if a fund holds a call option on the same security as the call option
written (sold) provided that certain conditions are met. By writing (selling) covered call options, a fund generally seeks to generate income,
in the form of the premiums received for writing (selling) the call options. Investment income paid by a fund to its shareholders (such as your trust)
may be derived primarily from the premiums it receives from writing (selling) call options and, to a lesser extent, from the dividends and interest it
receives from the equity securities or other investments held in the funds portfolio and short-term gains thereon. Premiums from writing
(selling) call options and dividends and interest payments made by the securities in a funds portfolio can vary widely over
time.
Preferred Securities.
Certain funds held by your trust may invest in preferred securities including preferred stocks, trust preferred securities, subordinated or junior
notes and debentures and other similarly structured securities. Preferred securities combine some of the characteristics of common stocks and bonds.
Preferred securities generally pay fixed or adjustable rate income in the form of dividends or interest to investors. Preferred securities generally
have preference over common stock in the payment of income and the liquidation of a companys assets. However, preferred securities are typically
subordinated to bonds and other debt instruments in a companys capital structure and therefore will be subject to greater credit risk than those
debt instruments. Because of their subordinated position in the capital structure of an issuer, the ability to defer dividend or interest payments for
extended periods of time without triggering an event of default for the issuer, and certain other features, preferred securities are often treated as
equity-like instruments by both issuers and investors, as their quality and value are heavily dependent on the profitability and cash flows of the
issuer rather than on any legal claims to specific assets. Most retail-available preferred securities have a $25 par (or face) value but
can also have par values of $50 or $1,000. Preferred securities are often callable at their par value at some point in time after their original
issuance date. Income payments on preferred securities are generally stated as a percentage of these par values although certain preferred securities
provide for variable or additional participation payments.
Understanding Your
Investment 43
While some preferred securities are
issued with a final maturity date, others are perpetual in nature. In certain instances, a final maturity date may be extended and/or the final payment
of principal may be deferred at the issuers option for a specified time without triggering an event of default for the issuer. Preferred
securities generally may be subject to provisions that allow an issuer, under certain conditions, to skip (non-cumulative preferred
securities) or defer (cumulative preferred securities) distributions. The issuer of a non-cumulative preferred security does not have an
obligation to make up any arrearages to holders of such securities and non-cumulative preferred securities can defer distributions indefinitely.
Cumulative preferred securities typically contain provisions that allow an issuer, at its discretion, to defer distributions payments for up to 10
years. If a preferred security is deferring its distribution, investors may be required to recognize income for tax purposes while they are not
receiving any income. In certain circumstances, an issuer of preferred securities may redeem the securities during their life. For certain types of
preferred securities, a redemption may be triggered by a change in federal income tax or securities laws. As with call provisions, a redemption by the
issuer may negatively impact the return of the security. Preferred security holders generally have no voting rights with respect to the issuing company
except in very limited situations, such as if the issuer fails to make income payments for a specified period of time or if a declaration of default
occurs and is continuing. Preferred securities may be substantially less liquid than many other securities, such as U.S. government securities or
common stock. The federal income tax treatment of preferred securities may not be clear or may be subject to recharacterization by the Internal Revenue
Service. Issuers of preferred securities may be in industries that are heavily regulated and that may receive government funding. The value of
preferred securities issued by these companies may be affected by changes in government policy, such as increased regulation, ownership restrictions,
deregulation or reduced government funding.
Preferred stocks are a category of
preferred securities that are typically considered equity securities and make income payments from an issuers after-tax profits that are treated
as dividends for tax purposes. While they generally provide for specified income payments as a percentage of their par value, these payments generally
do not carry the same set of guarantees afforded to bondholders and have higher risks of non-payment or deferral.
Certain preferred securities may be
issued by trusts or other special purpose entities established by operating companies, and are therefore not direct obligations of operating companies.
At the time a trust or special purpose entity sells its preferred securities to investors, the trust or special purpose entity generally purchases debt
of the operating company with terms comparable to those of the trust or special purpose entity securities. The trust or special purpose entity, as the
holder of the operating companys debt, has priority with respect to the operating companys earnings and profits over the operating
companys common shareholders, but is typically subordinated to other classes of the operating companys debt. Distribution payments of trust
preferred securities generally coincide with interest payments on the underlying obligations. Distributions from trust preferred securities are
typically treated as interest rather than dividends for federal income tax purposes and therefore, are not eligible for the dividends-received
deduction or the lower federal tax rates applicable to qualified dividends. Trust preferred securities generally involve the same risks as traditional
preferred stocks but are also subject to unique risks, including risks associated with income payments only being made if payments on the underlying
obligations are made. Typically, a trust preferred security will have a rating that is below that of its corresponding operating companys senior
debt securities due to its subordinated nature.
44 Understanding Your
Investment
Subordinated or junior notes or
debentures are securities that generally have priority to common stock and other preferred securities in a companys capital structure but are
subordinated to other bonds and debt instruments in a companys capital structure. As a result, these securities will be subject to greater credit
risk than those senior debt instruments and will not receive income payments or return of principal in the event of insolvency until all obligations on
senior debt instruments have been made. Distributions from these securities are typically treated as interest rather than dividends for federal income
tax purposes and therefore, are not eligible for the dividends-received deduction or the lower federal tax rates applicable to qualified dividends.
Investments in subordinated or junior notes or debentures also generally involve risks similar to risks of other preferred securities described
above.
Real Estate Related
Securities. Your trust and/or certain funds held by your trust may invest in securities providing exposure to real estate investments. Risks
associated with the ownership of real estate include, among other factors, changes in general U.S., global and local economic conditions, decline in
real estate values, changes in the financial health of tenants, overbuilding and increased competition for tenants, oversupply of properties for sale,
changing demographics, changes in interest rates, tax rates and other operating expenses, changes in government regulations, faulty construction and
the ongoing need for capital improvements, regulatory and judicial requirements, including relating to liability for environmental hazards, changes in
neighborhood values and buyer demand, and the unavailability of construction financing or mortgage loans at rates acceptable to
developers.
Real Estate Investment
Trusts. Your trust and/or certain funds held by your trust may invest in securities issued by REITs. Many factors can have an adverse impact on
the performance of a REIT, including its cash available for distribution, the credit quality of the REIT or the real estate industry generally. The
success of a REIT depends on various factors, including the occupancy and rent levels, appreciation of the underlying property and the ability to raise
rents on those properties. Economic recession, overbuilding, tax law changes, higher interest rates or excessive speculation can all negatively impact
REITs, their future earnings and share prices. Variations in rental income and space availability and vacancy rates in terms of supply and demand are
additional factors affecting real estate generally and REITs in particular. Properties owned by a REIT may not be adequately insured against certain
losses and may be subject to significant environmental liabilities, including remediation costs. You should also be aware that REITs may not be
diversified and are subject to the risks of financing projects. The real estate industry may be cyclical, and, if REIT securities are acquired at or
near the top of the cycle, there is increased risk of a decline in value of the REIT securities. At various points in time, demand for certain types of
real estate may inflate the value of real estate. This may increase the risk of a substantial decline in the value of such real estate and increase the
risk of a decline in the value of the securities. REITs are also subject to defaults by borrowers and the markets perception of the REIT industry
generally. Because of their structure, and a current legal requirement that they distribute at least 90% of their taxable income to shareholders
annually, REITs require frequent amounts of new funding, through both borrowing money and issuing stock. Thus, REITs historically have frequently
issued substantial amounts of new equity shares (or equivalents) to purchase or build new properties. This may adversely affect REIT equity share
market prices. Both existing and new share issuances may have an adverse effect on these prices in the future, especially if REITs issue stock when
real estate prices are relatively high and stock prices are relatively low.
Mortgage REITs engage in financing real
estate, purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments. Such
REITs
Understanding Your
Investment 45
face risks similar to those of other
financial firms, such as changes in interest rates, general market conditions and credit risk, in addition to risks associated with an investment in
real estate.
MLPs. Your trust and/or
certain funds held by your trust may invest in master limited partnerships (MLPs). MLPs are limited partnership or limited liability
companies that are generally taxed as partnership whose interests are generally traded on securities exchanges. An MLP consists of a general partner
and limited partners. The general partner manages the partnership, has an ownership stake in the partnership and is eligible to receive an incentive
distribution. The limited partners provide capital to the partnership, have a limited (if any) role in the operation and management of the partnership
and receive cash distributions. Unlike stockholders of a corporation, limited partners do not elect directors annually and generally have the right to
vote only on certain significant events, such as mergers, a sale of substantially all of the partnership assets, removal of the general partner or
material amendments to the partnership agreement. Limited partners generally have first right to a minimum quarterly distribution prior to
distributions to the convertible subordinated unit holders or the general partner (including incentive distributions) and typically have arrearage
rights if the minimum quarterly distribution is not met. Most MLPs generally operate in the energy natural resources or real estate sector and are
subject to the risks generally applicable to companies in those sectors. Those risks include, but are not limited to, commodity pricing risk, supply
and demand risk, depletion risk and exploration risk. MLPs are also subject to the risk that authorities could challenge the tax treatment of MLPs for
federal income tax purposes which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of your
trusts investments.
Derivatives Risk. Certain
funds held by your trust may engage in transactions in derivatives. Derivatives are subject to counterparty risk which is the risk that the other party
in a transaction may be unable or unwilling to meet obligations when due. Use of derivatives may increase volatility of a fund and your trust and
reduce returns. Fluctuations in the value of derivatives may not correspond with fluctuations of underlying exposures. Unanticipated market movements
could result in significant losses on derivative positions including greater losses than amounts originally invested and potentially unlimited losses
in the case of certain derivatives. There are no assurances that there will be a secondary market available in any derivative position which could
result in illiquidity and the inability of a fund to liquidate or terminate positions as valued. Valuation of derivative positions may be difficult and
increase during times of market turmoil. Certain derivatives may be used as a hedge against other securities positions however hedging can be subject
to the risk of imperfect alignment and there are no assurances that a hedge will be achieved as intended which can pose significant loss to a fund and
your trust. Recent legislation has called for significant increases to the regulation of the derivatives market. Regulatory changes and rulemaking is
ongoing and the full impact may not be known for some time. This increased regulation may make derivatives more costly, limit the availability of
derivatives or otherwise adversely affect the value or performance of derivatives. Examples of increased regulation include, but are not limited to the
imposition of clearing and reporting requirements on transactions that fall within the definition of swap and security-based
swap, increased recordkeeping and reporting requirements, changing definitional and registration requirements, and changes to the way that
funds use of derivatives is regulated. We cannot predict the effects of any new governmental regulation that may be implemented on the ability of
a fund to use any financial derivative product, and there can be no assurance that any new governmental regulation will not adversely affect a
funds ability to achieve its investment objective. The federal income tax treatment of a derivative may not be as favorable as a direct
investment in the asset that a derivative provides exposure to which may adversely impact the timing, character and amount of
46 Understanding Your
Investment
income a fund realizes from its
investment. The tax treatment of certain derivatives is unsettled and may be subject to future legislation, regulation or administrative
pronouncements.
Swaps. Certain funds held
by your trust may invest in swaps. In addition to general risks associated with derivatives described above, swap agreements involve the risk that the
party with whom a fund has entered into the swap will default on its obligation to pay a fund and the risk that a fund will not be able to meet its
obligations to pay the other party to the agreement. Swaps entered into by a fund may include, but are not limited to, interest rate swaps, total
return swaps and/or credit default swaps. In an interest rate swap transaction, two parties exchange rights to receive interest payments, such as
exchanging the right to receive floating rate payments based on a reference interest rate for the right to receive fixed rate payments. In addition to
the general risks associated with derivatives and swaps described above, interest rate swaps are subject to interest rate risk and credit risk. In a
total return swap transaction, one party agrees to pay another party an amount equal to the total return on a reference asset during a specified period
of time in return for periodic payments based on a fixed or variable interest rate or on the total return from a different reference asset. In addition
to the general risks associated with derivatives and swaps described above, total return swaps could result in losses if the reference asset does not
perform as anticipated and these swaps can have the potential for unlimited losses. In a credit default swap transaction, one party makes one or more
payments over the term of the contract to the counterparty, provided that no event of default with respect to a specific obligation or issuer has
occurred. In return, upon any event of default, such party would receive from the counterparty a payment equal to the par (or other agreed-upon) value
of such specified obligation. In addition to general risks associated with derivatives and swaps described above, credit default swaps involve special
risks because they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the party that has paid
the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of
financial difficulty).
Forward Foreign Currency Exchange
Contracts. Certain funds held by your trust may engage in forward foreign currency exchange transactions. Forward foreign exchange transactions
are contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time
of the contract. Forward foreign currency exchange contracts do not eliminate fluctuations in the value of non-U.S. securities but rather allow a fund
to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities
for gain.
Indexed and Inverse
Securities. Certain funds held by your trust may invest in indexed and inverse securities. In addition to general risks associated with
derivatives described above, indexed and inverse securities are subject to risk with respect to the value of the particular index. These securities are
subject to leverage risk and correlation risk. Certain indexed and inverse securities have greater sensitivity to changes in interest rates or index
levels than other securities, and a funds investment in such instruments may decline significantly in value if interest rates or index levels
move in a way a funds management does not anticipate.
Futures. Certain funds
held by your trust may engage in futures transactions. In addition to general risks associated with derivatives described above, the primary risks
associated with the use of futures contracts and options are (a) the imperfect correlation between the change in market value of the instruments held
by a fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the
resulting
Understanding Your
Investment 47
inability to close a futures
contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the investment advisers
inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the
possibility that the counterparty will default in the performance of its obligations. While futures contracts are generally liquid instruments, under
certain market conditions they may become illiquid. Futures exchanges may impose daily or intra-day price change limits and/or limit the volume of
trading. Additionally, government regulation may further reduce liquidity through similar trading restrictions.
Options. Certain funds
held by your trust may engage in options transactions. In addition to general risks associated with derivatives described above, options are considered
speculative. When a fund purchases an option, it may lose the premium paid for it if the price of the underlying security or other assets decreased or
remained the same (in the case of a call option) or increased or remained the same (in the case of a put option). If a put or call option purchased by
a fund were permitted to expire without being sold or exercised, its premium would represent a loss to a fund. To the extent that a fund writes or
sells an option, if the decline or increase in the underlying asset is significantly below or above the exercise price of the written option, a fund
could experience substantial and potentially unlimited losses.
Repurchase Agreement Risk.
If the other party to a repurchase agreement defaults on its obligation under such agreement, a fund may suffer delays and incur costs or lose money in
exercising its rights under the agreement. If the seller fails to repurchase the security under a repurchase agreement and the market value of such
security declines, such fund may lose money.
Short Sales Risk. Certain
funds held by your trust may engage in short sales. Because making short sales in securities that it does not own exposes a fund to the risks
associated with those securities, such short sales involve speculative exposure risk. A fund will incur a loss as a result of a short sale if the price
of the security increases between the date of the short sale and the date on which such fund replaces the security sold short. A fund will realize a
gain if the security declines in price between those dates. As a result, if a fund makes short sales in securities that increase in value, it will
likely underperform similar funds that do not make short sales in securities they do not own. There can be no assurance that a fund will be able to
close out a short sale position at any particular time or at an acceptable price. Although a funds gain is limited to the amount at which it sold
a security short, its potential loss is limited only by the maximum attainable price of the security, less the price at which the security was sold.
Short sale transactions involve leverage because they can provide investment exposure in an amount exceeding the initial investment. A fund may also
pay transaction costs and borrowing fees in connection with short sales.
Commodities. Certain funds
held by your trust may have exposure to the commodities market. This exposure could expose such funds and your trust to greater volatility than
investment in other securities. The value of investments providing commodity exposure may be affected by changes in overall market movements, commodity
index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, embargoes,
tariffs and international economic, political and regulatory developments.
Money Market Securities.
Certain funds held by your trust may invest in money market securities. If market conditions improve while a fund has temporarily invested some or all
of its assets in high quality money market securities, this strategy could result in reducing the potential gain from the market upswing, thus reducing
a funds opportunity to achieve its investment objective.
48 Understanding Your
Investment
Investment Process Risk.
Your trust may invest in securities selected by the portfolio consultant. In the event that the portfolio consultant incorrectly assesses an
issuers prospects for growth or if the portfolio consultants judgment about how other investors will value an issuers growth is
wrong, then the price of an issuers stock may decrease or not increase to the level anticipated.
Legislation/Litigation.
From time to time, various legislative initiatives are proposed in the United States and abroad which may have a negative impact on certain of the
securities held by your trust or underlying funds. In addition, litigation regarding any of the issuers of the securities or of the industries
represented by these issuers may negatively impact the share prices of these securities. No one can predict what impact any pending or threatened
litigation will have on the share prices of the securities.
Liquidity Risk. Liquidity
risk is the risk that the value of a security will fall if trading in the security is limited or absent. No one can guarantee that a liquid trading
market will exist for any security.
No FDIC Guarantee. An
investment in your trust is not a deposit of any bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
CLOSED-END
FUNDS
Closed-end funds are a type of
investment company that holds an actively managed portfolio of securities. Closed-end funds issue shares in closed-end offerings which
generally trade on a stock exchange (although some closed-end fund shares are not listed on a securities exchange). Since closed-end funds maintain a
relatively fixed pool of investment capital, portfolio managers may be better able to adhere to their investment philosophies through greater
flexibility and control. In addition, closed-end funds do not have to manage fund liquidity to meet potentially large redemptions.
Closed-end funds are subject to various
risks, including managements ability to meet the closed-end funds investment objective, and to manage the closed-end fund portfolio when
the underlying securities are redeemed or sold, during periods of market turmoil and as investors perceptions regarding closed-end funds or their
underlying investments change.
Shares of closed-end funds frequently
trade at a discount from their net asset value in the secondary market. This risk is separate and distinct from the risk that the net asset value of
closed-end fund shares may decrease. The amount of such discount from net asset value is subject to change from time to time in response to various
factors.
Certain of the closed-end funds included
in your trust may employ the use of leverage in their portfolios through the issuance of preferred stock. While leverage often serves to increase the
yield of a closed-end fund, this leverage also subjects the closed-end fund to increased risks. These risks may include the likelihood of increased
volatility and the possibility that the closed-end funds common share income will fall if the dividend rate on the preferred shares or the
interest rate on any borrowings rises. The use of leverage may cause a closed-end fund to liquidate portfolio positions when it may not be advantageous
to do so to satisfy its obligations or to meet any required asset segregation requirements.
Certain closed-end funds held by your
trust may engage in borrowing. Borrowing may exaggerate changes in the net asset value of a funds shares and in the return on a funds
portfolio. Borrowing will cost a fund interest expense and other fees. The costs of borrowing may reduce a funds return. Borrowing may cause a
fund to liquidate positions when it may not be advantageous to do so to satisfy its obligations.
Certain closed-end funds held by your
trust may engage in securities lending. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or
at all. As a result, a fund could lose money and there may
Understanding Your
Investment 49
be a delay in recovering the loaned
securities. A fund could also lose money if it does not recover the securities and/or the value of the collateral falls, including the value of
investments made with cash collateral. These events could trigger adverse tax consequences for a fund.
Only the trustee may vote the shares of
the closed-end funds held in your trust. The trustee will vote the shares in the same general proportion as shares held by other shareholders of each
fund. Your trust may be required, however, to reject any offer for securities or other property in exchange for portfolio securities as described under
How the Trust WorksChanging Your Portfolio.
HOW THE TRUST
WORKS
Your Trust. Your trust is
a unit investment trust registered under the Investment Company Act of 1940. We created your trust under a trust agreement between Advisors Asset
Management, Inc. (as depositor/sponsor, evaluator and supervisor) and The Bank of New York Mellon (as trustee). To create your trust, we deposited
securities with the trustee (or contracts to purchase securities along with an irrevocable letter of credit or other consideration to pay for the
securities). In exchange, the trustee delivered units of your trust to us. Each unit represents an undivided interest in the assets of your trust.
These units remain outstanding until redeemed or until your trust terminates. At the close of the New York Stock Exchange on your trusts
inception date, the number of units may be adjusted so that the public offering price per unit equals $10. The number of units and fractional interest
of each unit in your trust will increase or decrease to the extent of any adjustment.
Changing Your Portfolio.
Your trust is not a managed fund. Unlike a managed fund, we designed your portfolio to remain relatively fixed. Your trust will generally buy and sell
securities:
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to issue additional units or redeem units, |
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to take actions in response to certain corporate actions and other
events impacting portfolio securities, |
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in limited circumstances to protect the trust, |
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to make required distributions or avoid imposition of taxes on the
trust, or |
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as permitted by the trust agreement. |
When your trust sells securities, the
composition and diversification of the securities in the portfolio may be altered. If a public tender offer has been made for a security or a merger,
acquisition or similar transaction has been announced affecting a security, the sponsor may direct the trustee to sell the security or accept a tender
offer if the supervisor determines that the action is in the best interest of unitholders. The trustee will distribute any available cash proceeds to
unitholders.
If an offer by the issuer of any of the
portfolio securities or any other party is made to issue new securities, or to exchange securities, for trust portfolio securities, the trustee will
reject the offer unless your trust is a regulated investment company for tax purposes (see Essential InformationTax
Structure in the Investment Summary section for your trust in this prospectus). If your trust is a regulated investment
company for tax purposes and an offer by the issuer of any of the portfolio securities or any other party is made to issue new securities, or to
exchange securities, for trust portfolio securities, the trustee may either vote for or against, or accept or reject, any offer for new or exchanged
securities or property in exchange for a trust portfolio security at the direction of the sponsor.
If any issuance, exchange or
substitution of new or exchanged securities or property in exchange for a trust portfolio security occurs (regardless of any action or rejection by a
trust), any securities and/or property received will be deposited into the trust and will be promptly sold by the trustee pursuant to the
sponsors
50 Understanding Your
Investment
direction, unless the sponsor
advises the trustee to keep such securities or property.
If any contract for the purchase of
securities fails, the sponsor will refund the cash and sales fee attributable to the failed contract to unitholders on or before the next distribution
date unless substantially all of the moneys held to cover the purchase are reinvested in substitute securities in accordance with the trust agreement.
If your trust is a regulated investment company for tax purposes, the sponsor may direct the reinvestment of security sale proceeds if the
sale is the direct result of serious adverse credit factors which, in the opinion of the supervisor, would make retention of the securities detrimental
to the trust. In such a case, the sponsor may, but is not obligated to, direct the reinvestment of sale proceeds in any other securities that meet the
criteria for inclusion in the trust on the trusts inception date. The sponsor may also instruct the trustee to take action necessary to ensure
that a portfolio continues to satisfy the qualifications of a regulated investment company for tax purposes.
We will increase the size of your trust
as we sell units. When we create additional units, we will seek to replicate the existing portfolio to the extent practicable. When your trust buys
securities, it may pay brokerage or other acquisition fees. You could experience a dilution of your investment because of these fees and fluctuations
in security prices between the time we create units and the time your trust buys the securities. When your trust buys or sells securities, we may
direct that it place orders with and pay brokerage commissions to brokers that sell units or are affiliated with us, your trust or the
trustee.
Pursuant to an exemptive order, your
trust may be able to purchase securities from other trusts that we sponsor when we create additional units. Your trust may also be able to sell
securities to other trusts that we sponsor to satisfy unit redemption, pay deferred sales fees or expenses, in connection with periodic tax compliance
or in connection with the termination of your trust. The exemption may enable each trust to eliminate commission costs on these transactions. The price
for those securities will be the closing price on the sale date on the exchange where the securities are principally traded as certified by us to the
trustee.
Amending the Trust
Agreement. The sponsor and the trustee can change the trust agreement without your consent to correct any provision that may be defective or to
make other provisions that will not materially adversely affect your interest (as determined by the sponsor and the trustee). We cannot change this
agreement to reduce your interest in your trust without your consent. Investors owning two-thirds of the units in your trust may vote to change this
agreement.
Termination of Your Trust.
Your trust will terminate on the termination date set forth under Essential Information in the Investment Summary section of
this prospectus for your trust. The trustee may terminate your trust early if the value of the trust is less than 40% of the original value of the
securities in your trust at the time of deposit. At this size, the expenses of your trust may create an undue burden on your investment. Investors
owning two-thirds of the units in your trust may also vote to terminate the trust early. The trustee will liquidate your trust in the event that a
sufficient number of units not yet sold to the public are tendered for redemption so that the net worth of your trust would be reduced to less than 40%
of the value of the securities at the time they were deposited in the trust. If this happens, we will refund any sales fee that you
paid.
You will receive your final distribution
within a reasonable time following liquidation of all the securities after deducting final expenses. Your termination distribution may be less than the
price you originally paid for your units.
The Sponsor. The sponsor
of your trust is Advisors Asset Management, Inc. We are a broker-dealer specializing in providing trading and support services to broker-dealers,
registered representatives, investment advisers and other financial professionals. Our headquarters are
Understanding Your
Investment 51
located at 18925 Base Camp Road,
Monument, Colorado 80132. You can contact our unit investment trust division at 8100 East 22nd Street North, Building 800, Suite 102,
Wichita, Kansas 67226 or by using the contacts listed on the back cover of this prospectus. AAM is a registered broker-dealer and investment adviser, a
member of the Financial Industry Regulatory Authority, Inc. (FINRA) and Securities Investor Protection Corporation (SIPC) and a registrant of the
Municipal Securities Rulemaking Board (MSRB). If we fail to or cannot perform our duties as sponsor or become bankrupt, the trustee may replace us,
continue to operate your trust without a sponsor, or terminate your trust.
We and your trust have adopted a code of
ethics requiring our employees who have access to information on trust transactions to report personal securities transactions. The purpose of the code
is to avoid potential conflicts of interest and to prevent fraud, deception or misconduct with respect to your trust.
The sponsor or an affiliate may use the
list of securities in your trust in its independent capacity (which may include acting as an investment adviser or broker-dealer) and distribute this
information to various individuals and entities. The sponsor or an affiliate may recommend or effect transactions in the securities. This may also have
an impact on the price your trust pays for the securities and the price received upon unit redemption or trust termination. The sponsor may act as
agent or principal in connection with the purchase and sale of securities, including those held by your trust, and may act as a specialist market maker
in the securities. The sponsor may also issue reports and make recommendations on the securities in your trust. The sponsor or an affiliate may have
participated in a public offering of one or more of the securities in your trust. The sponsor, an affiliate or their employees may have a long or short
position in these securities or related securities. An officer, director or employee of the sponsor or an affiliate may be an officer or director for
the issuers of the securities.
The Trustee. The Bank of
New York Mellon is the trustee of your trust with its principal unit investment trust division offices located at 2 Hanson Place, 12th Floor, Brooklyn,
New York 11217. You can contact the trustee by calling the telephone number on the back cover of this prospectus or by writing to its unit investment
trust office. We may remove and replace the trustee in some cases without your consent. The trustee may also resign by notifying us and
investors.
How We Distribute Units.
We sell units to the public through broker-dealers and other firms. These distribution firms each receive part of the sales fee when they sell units.
During the initial offering period, the broker-dealer concession or agency commission for broker-dealers and other firms is 2.00% of the public
offering price per unit at the time of the transaction. The broker-dealer concession or agency commission is 65% of the sales fee for secondary market
sales. No broker-dealer concession or agency commission is paid to broker-dealers, investment advisers or other selling firms in connection with unit
sales in Fee Accounts subject to a Wrap Fee.
Broker-dealers and other firms that sell
units of certain unit investment trusts for which AAM acts as sponsor are eligible to receive additional compensation for volume sales. The sponsor
offers two separate volume concession structures for certain trusts that are referred to as Volume Concession A and Volume Concession
B. The trusts offered in this prospectus are Volume Concession A trusts. Broker-dealers and other firms that sell units of any Volume Concession
A trust are eligible to receive the additional compensation described below. Such payments will be in addition to the regular concessions paid to firms
as set forth in the applicable trusts prospectus.
52 Understanding Your
Investment
The additional concession for sales in a
calendar month is based on total initial offering period sales of all Volume Concession A trusts during the 12-month period through the end of the
preceding calendar month as set forth in the following table:
Initial Offering Period Sales In
Preceding 12 Months |
|
|
|
Volume Concession |
$25,000,000 but less than $100,000,000 |
|
|
|
|
0.035 |
% |
$100,000,000 but less than $150,000,000 |
|
|
|
|
0.050 |
|
$150,000,000 but less than $250,000,000 |
|
|
|
|
0.075 |
|
$250,000,000 but less than $1,000,000,000 |
|
|
|
|
0.100 |
|
$1,000,000,000 but less than $5,000,000,000 |
|
|
|
|
0.125 |
|
$5,000,000,000 but less than $7,500,000,000 |
|
|
|
|
0.150 |
|
$7,500,000,000 or more |
|
|
|
|
0.175 |
|
We will pay these amounts out of our own
assets within a reasonable time following each calendar month.
The volume concessions will be paid on
units of all Volume Concession A trusts sold in the initial offering period, except as described below. For a trust to be eligible for this additional
Volume Concession A compensation, the trusts prospectus must include disclosure related to the additional Volume Concession A compensation; a
trust is not eligible for additional Volume Concession A compensation if the prospectus for such trust does not include disclosure related to the
additional Volume Concession A compensation. In addition, dealer firms will not receive volume concessions on the sale of units which are not subject
to a transactional sales fee. However, such sales will be included in determining whether a firm has met the sales level breakpoints for volume
concessions subject to the policies of the related selling firm. Secondary market sales of all unit trusts are excluded for purposes of these volume
concessions.
Any sales fee discount is borne by the
broker-dealer or selling firm out of the broker-dealer concession or agency commission. We reserve the right to change the amount of compensation paid
to selling firms from time to time. Some broker-dealers and other selling firms may limit the compensation they or their representatives receive in
connection with unit sales. As a result, certain broker-dealers and other selling firms may waive or refuse payment of all or a portion of the regular
concession or agency commission and/or volume concession described above and instruct the sponsor to retain such amounts rather than pay or allow the
amounts to such firm.
We currently may provide, at our own
expense and out of our own profits, additional compensation and benefits to broker-dealers and other firms who sell units of your trust and our other
products. This compensation is intended to result in additional sales of our products and/or compensate broker-dealers and financial advisors for past
sales. A number of factors are considered in determining whether to pay these additional amounts. Such factors may include, but are not limited to, the
level or type of services provided by the intermediary, the level or expected level of sales of our products by the intermediary or its agents, the
placing of our products on a preferred or recommended product list and access to an intermediarys personnel. We may make these payments for
marketing, promotional or related expenses, including, but not limited to, expenses of entertaining retail customers and financial advisors,
advertising, sponsorship of events or seminars, obtaining information about the breakdown of unit sales among an intermediarys representatives or
offices, obtaining shelf space in broker-dealer firms and similar activities designed to promote the sale of our products. We make such payments to a
substantial majority of intermediaries that sell our products. We may also make certain payments to, or on behalf of, intermediaries to defray a
portion of their costs incurred for the purpose of facilitating unit sales, such as the costs of developing or purchasing trading systems to process
unit trades. Payments of such additional compensation described in this paragraph and the volume concessions described above, some of which may be
characterized as revenue sharing, may create an incentive for financial intermediaries and their agents to sell or recommend our products,
including your trust,
Understanding Your
Investment 53
over other products. These
arrangements will not change the price you pay for your units.
We generally register units for sale in
various states in the U.S. We do not register units for sale in any foreign country. This prospectus does not constitute an offer of units in any state
or country where units cannot be offered or sold lawfully. We may reject any order for units in whole or in part.
We may gain or lose money when we hold
units in the primary or secondary market due to fluctuations in unit prices. The gain or loss is equal to the difference between the price we pay for
units and the price at which we sell or redeem them. We may also gain or lose money when we deposit securities to create units. The amount of our
profit or loss on the initial deposit of securities into your trust is shown in the Notes to Portfolio section for your
trust.
TAXESREGULATED
INVESTMENT COMPANIES
This section summarizes some of the main
U.S. federal income tax consequences of owning units of your trust if your trust qualifies as a regulated investment company under federal
tax laws. The tax structure of your trust is set forth under Essential InformationTax Structure in the Investment Summary
section for your trust in this prospectus.
This section is current as of the date
of this prospectus. Tax laws and interpretations change frequently, and these summaries do not describe all of the tax consequences to all taxpayers.
For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker/dealer, or other investor
with special circumstances. In addition, this section does not describe your state, local or foreign tax consequences.
This federal income tax summary is based
in part on the advice of counsel to the sponsor. The Internal Revenue Service could disagree with any conclusions set forth in this section. In
addition, our counsel was not asked to review, and has not reached a conclusion with respect to the federal income tax treatment of the assets to be
deposited in your trust. This may not be sufficient for you to use for the purpose of avoiding penalties under federal tax law.
As with any investment, you should seek
advice based on your individual circumstances from your own tax advisor.
Trust Status. Your trust
intends to qualify as a regulated investment company under the federal tax laws. If your trust qualifies as a regulated investment company
and distributes its income as required by the tax law, your trust generally will not pay federal income taxes. If your trust invests in a partnership,
an adverse federal income tax audit of that partnership could result in the trust being required to pay federal income tax or pay a deficiency dividend
(without having received additional cash).
Distributions. Trust
distributions are generally taxable. After the end of each year, you will receive a tax statement that separates your trusts distributions into
three categories: ordinary income distributions, capital gain dividends and return of capital. Ordinary income distributions are generally taxed at
your ordinary tax rate, however, as further discussed below, certain ordinary income distributions received from your trust may be taxed at the capital
gains tax rates. Generally, you will treat all capital gain dividends as long-term capital gains regardless of how long you have owned your units. To
determine your actual tax liability for your capital gain dividends, you must calculate your total net capital gain or loss for the tax year after
considering all of your other taxable transactions, as described below. In addition, your trust may make distributions that represent a return of
capital for tax purposes and thus will generally not be taxable to you. A return of capital, although not initially taxable to you, will result in a
reduction in the basis in your units and subsequently result in higher levels of taxable capital gains in the future. In addition, if the non-dividend
distribution exceeds your basis in your units, you will
54 Understanding Your
Investment
have long-term or short-term gain
depending upon your holding period. The tax status of your distributions from your trust is not affected by whether you reinvest your distributions in
additional units or receive them in cash. The income from your trust that you must take into account for federal income tax purposes is not reduced by
amounts used to pay a deferred sales fee, if any. The tax laws may require you to treat distributions made to you in January as if you had received
them on December 31 of the previous year. Income from your trust may also be subject to a 3.8 percent medicare tax. This tax generally
applies to your net investment income if your adjusted gross income exceeds certain threshold amounts, which are $250,000 in the case of married
couples filing joint returns and $200,000 in the case of single individuals.
Dividends Received
Deduction. A corporation that owns units generally will not be entitled to the dividends received deduction with respect to many dividends
received from your trust because the dividends received deduction is generally not available for distributions from regulated investment companies.
However, certain ordinary income dividends on units that are attributable to qualifying dividends received by your trust from certain corporations may
be reported by the trust as being eligible for the dividends received deduction.
Sale or Redemption of
Units. If you sell or redeem your units, you will generally recognize a taxable gain or loss. To determine the amount of this gain or loss, you
must subtract your tax basis in your units from the amount you receive in the transaction. Your tax basis in your units is generally equal to the cost
of your units, generally including sales fees. In some cases, however, you may have to adjust your tax basis after you purchase your
units.
An election may be available to you to
defer recognition of capital gain if you make certain qualifying investments within a limited time. You should talk to your tax advisor about the
availability of this deferral election and its requirements.
Capital Gains and Losses and
Certain Ordinary Income Dividends. If you are an individual, the maximum marginal stated federal tax rate for net capital gain is generally 20%
(15% or 0% for taxpayers with taxable incomes below certain thresholds). Some portion of your capital gain dividends may be subject to higher maximum
marginal stated federal income tax rates. Some portion of your capital gain dividends may be attributable to the trusts interest in a master
limited partnership which may be subject to a maximum marginal stated federal income tax rate of 28%, rather than the rates set forth above. In
addition, capital gain received from assets held for more than one year that is considered unrecaptured section 1250 gain (which may be the
case, for example, with some capital gains attributable to equity interests in real estate investment trusts that constitute interests in entities
treated as real estate investment trusts for federal income tax purposes) is taxed at a maximum stated tax rate of 25%. In the case of capital gain
dividends, the determination of which portion of the capital gain dividend, if any, is subject to the 28% tax rate or the 25% tax rate, will be made
based on rules prescribed by the United States Treasury. Capital gains may also be subject to the medicare tax described
above.
An election may be available to you to
defer recognition of the gain attributable to a capital gain dividend if you make certain qualifying investments within a limited time. You should talk
to your tax advisor about the availability of this deferral election and its requirements.
Net capital gain equals net long-term
capital gain minus net short-term capital loss for the taxable year. Capital gain or loss is long-term if the holding period for the asset is more than
one year and is short-term if the holding period for the asset is one year or less. You must exclude the date you purchase your units to determine your
holding period. However, if you receive a capital gain dividend from your trust and sell
Understanding Your
Investment 55
your unit at a loss after holding it
for six months or less, the loss will be recharacterized as long-term capital loss to the extent of the capital gain dividend received. The tax rates
for capital gains realized from assets held for one year or less are generally the same as for ordinary income. The Internal Revenue Code treats
certain capital gains as ordinary income in special situations.
Ordinary income dividends received by an
individual unitholder from a regulated investment company such as your trust are generally taxed at the same rates that apply to net capital gain (as
discussed above), provided certain holding period requirements are satisfied and provided the dividends are attributable to qualifying dividends
received by your trust itself. Distributions with respect to shares in real estate investment trusts are qualifying dividends only in limited
circumstances. Your trust will provide notice to its unitholders of the amount of any distribution which may be taken into account as a dividend which
is eligible for the capital gains tax rates.
In addition, some portion of the
dividends on your units that are attributable to dividends received by your trust from shares in real estate investment trusts may be designated by
your trust as eligible for a deduction for qualified business income, provided certain holding period requirements are satisfied.
In-Kind Distributions.
Under certain circumstances, as described in this prospectus, you may receive an in-kind distribution of trust securities when you redeem units or when
your trust terminates. This distribution will be treated as a sale for federal income tax purposes and you will generally recognize gain or loss,
generally based on the value at that time of the securities and the amount of cash received. The Internal Revenue Service could however assert that a
loss could not be currently deducted.
Rollovers and Exchanges.
If you elect to have your proceeds from your trust rolled over into a future trust, the exchange would generally be considered a sale for federal
income tax purposes.
Treatment of Trust
Expenses. Expenses incurred and deducted by your trust will generally not be treated as income taxable to you. In some cases, however, you may
be required to treat your portion of these trust expenses as income. You may not be able to deduct some or all of these expenses.
Foreign Tax Credit. If
your trust invests in any foreign securities, the tax statement that you receive may include an item showing foreign taxes your trust paid to other
countries. In this case, dividends taxed to you will include your share of the taxes your trust paid to other countries. You may be able to deduct or
receive a tax credit for your share of these taxes.
Investments in Certain Foreign
Corporations. If your trust holds an equity interest in any passive foreign investment companies (PFICs), which
are generally certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends,
certain rents and royalties or capital gains) or that hold at least 50% of their assets in investments producing such passive income, the trust could
be subject to U.S. federal income tax and additional interest charges on gains and certain distributions with respect to those equity interests, even
if all the income or gain is timely distributed to its unitholders. Your trust will not be able to pass through to its unitholders any credit or
deduction for such taxes. Your trust may be able to make an election that could ameliorate these adverse tax consequences. In this case, your trust
would recognize as ordinary income any increase in the value of such PFIC shares, and as ordinary loss any decrease in such value to the extent it did
not exceed prior increases included in income. Under this election, your trust might be required to recognize in a year income in excess of its
distributions from PFICs and its proceeds from dispositions of PFIC stock during that year, and such income would nevertheless be subject to the
distribution requirement and would be taken into account for purposes of the 4% excise tax. Dividends paid by PFICs are not treated as qualified
dividend income.
56 Understanding Your
Investment
Foreign Investors. If you
are a foreign investor (i.e., an investor other than a U.S. citizen or resident or a U.S. corporation, partnership, estate or trust), you should be
aware that, generally, subject to applicable tax treaties, distributions from your trust will be characterized as dividends for federal income tax
purposes (other than dividends which your trust properly reports as capital gain dividends) and will be subject to U.S. income taxes, including
withholding taxes, subject to certain exceptions described below. However, distributions received by a foreign investor from your trust that are
properly reported by your trust as capital gain dividends may not be subject to U.S. federal income taxes, including withholding taxes, provided that
your trust makes certain elections and certain other conditions are met. Distributions from your trust that are properly reported by the trust as an
interest-related dividend attributable to certain interest income received by the trust or as a short-term capital gain dividend attributable to
certain net short-term capital gain income received by the trust may not be subject to U.S. federal income taxes, including withholding taxes when
received by certain foreign investors, provided that the trust makes certain elections and certain other conditions are met. In addition, distributions
to, and the gross proceeds from dispositions of units by, (i) certain non-U.S. financial institutions that have not entered into an agreement with the
U.S. Treasury to collect and disclose certain information and are not resident in a jurisdiction that has entered into such an agreement with the U.S.
Treasury and (ii) certain other non-U.S. entities that do not provide certain certifications and information about the entitys U.S. owners, may
be subject to a U.S. withholding tax of 30%. However, proposed regulations may eliminate the requirement to withhold on payments of gross proceeds from
dispositions. You should also consult your tax advisor with respect to other U.S. tax withholding and reporting requirements.
TAXESGRANTOR
TRUSTS
This section summarizes some of the main
U.S. federal income tax consequences of owning units of your trust if your trust is structured as a grantor trust under the federal tax laws. The tax
structure of your trust is set forth under Essential InformationTax Structure in the Investment Summary section for your
trust in this prospectus.
This section is current as of the date
of this prospectus. Tax laws and interpretations change frequently, and these summaries do not describe all of the tax consequences to all taxpayers.
For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker/dealer, or other investor
with special circumstances. In addition, this section does not describe your state, local or foreign tax consequences.
This federal income tax summary is based
in part on the advice and opinion of counsel to the sponsor. The Internal Revenue Service could disagree with any conclusions set forth in this
section. In addition, our counsel was not asked to review, and has not reached a conclusion with respect to the federal income tax treatment of the
assets to be deposited in your trust. This may not be sufficient for you to use for the purpose of avoiding penalties under federal tax
law.
As with any investment, you should seek
advice based on your individual circumstances from your own tax advisor.
Assets of the Trust. Your
trust is expected to hold one or more of the following: (i) shares of stock in corporations (the Stocks) that are treated as equity for
federal income tax purposes, (ii) equity interests (the REIT Shares) in real estate investment trusts (REITs) that constitute
interests in entities treated as real estate investment trusts for federal income tax purposes, and (iii) shares (the RIC Shares) in funds
qualifying as regulated investment companies (RICs) that are treated as interests in regulated investment companies for federal income tax
purposes.
Understanding Your
Investment 57
It is possible that your trust will also
hold other assets, including assets that are treated differently for federal income tax purposes from those described above, in which case you will
have federal income tax consequences different from or in addition to those described in this section. All of the assets held by your trust constitute
the Trust Assets. Neither our counsel nor we have analyzed the proper federal income tax treatment of the Trust Assets and thus neither our
counsel nor we have reached a conclusion regarding the federal income tax treatment of the Trust Assets.
Trust Status. The trust is
considered a grantor trust under federal income tax laws. In grantor trusts, investors are deemed for federal income tax purposes, to own the
underlying assets of the trust directly. All taxability issues are taken into account at the unit owner level. Income passes through to unit owners as
realized by the trust.
Income is reported gross of expenses.
Expenses are separately reported based on a percentage of distributions. Generally, the cash received by unit owners is the net of income and expenses
reported.
The grantor trust structure is a widely
held fixed investment trust (WHFIT), and falls under what is commonly referred to as the WHFIT regulations.
If your trust is at all times operated
in accordance with the documents establishing your trust and certain requirements of federal income tax law are met, your trust will not be taxed as a
corporation for federal income tax purposes. As a unit owner, you will be treated as the owner of a pro rata portion of each of the Trust Assets, and
as such you will be considered to have received a pro rata share of income (e.g., dividends and capital gains, if any) from each Trust Asset when such
income would be considered to be received by you if you directly owned the Trust Assets. This is true even if you elect to have your distributions
reinvested into additional units. In addition, the income from Trust Assets that you must take into account for federal income tax purposes is not
reduced by amounts used to pay sales fees or trust expenses. Income from the trust may also be subject to a 3.8 percent medicare tax. This
tax generally applies to your net investment income if your adjusted gross income exceeds certain threshold amounts, which are $250,000 in the case of
married couples filing joint returns and $200,000 in the case of single individuals. Interest that is excluded from gross income, including
exempt-interest dividends from any RIC Shares held by the trust, are generally not included in your net investment income for purposes of this
tax.
Your Tax Basis and Income or Loss
upon Disposition. If your trust disposes of Trust Assets, you will generally recognize gain or loss. If you dispose of your units or redeem
your units for cash, you will also generally recognize gain or loss. To determine the amount of this gain or loss, you must subtract your tax basis in
the related Trust Assets from your share of the total amount received in the transaction. You can generally determine your initial tax basis in each
Trust Asset by apportioning the cost of your units, including sales fees, among the Trust Assets ratably according to their values on the date you
acquire your units. In certain circumstances, however, you may have to adjust your tax basis after you acquire your units (for example, in the case of
certain dividends that exceed a corporations accumulated earnings and profits, or in the case of certain distributions with respect to any REIT
Shares that represent a return of capital, as discussed below).
If you are an individual, the maximum
marginal stated federal tax rate for net capital gain is generally 20% (15% or 0% for taxpayers with taxable incomes below certain thresholds). Some
capital gains, including some portion of the capital gain dividends from the RIC Shares, may be taxed at a higher stated federal tax rate. Some portion
of any capital gain dividends you receive might be attributable to a RICs interest in a master limited partnership which may be subject to a
maximum marginal stated federal income
58 Understanding Your
Investment
tax rate of 28%, rather than the
rates set forth above. In addition, capital gain received from assets held for more than one year that is considered unrecaptured section 1250
gain (which may be the case, for example, with some capital gains attributable to equity interests in real estate investment trusts that
constitute interests in entities treated as real estate investment trusts for federal income tax purposes) is taxed at a maximum stated tax rate of
25%. In the case of capital gain dividends, the determination of which portion of the capital gain dividend, if any, is subject to the 28% tax rate or
the 25% tax rate, will be made based on rules prescribed by the United States Treasury. Capital gains may also be subject to the medicare
tax described above.
An election may be available to you to
defer recognition of capital gain if you make certain qualifying investments within a limited time. You should talk to your tax advisor about the
availability of this deferral election and its requirements.
Net capital gain equals net long-term
capital gain minus net short-term capital loss for the taxable year. Capital gain or loss is long-term if the holding period for the asset is more than
one year and is short-term if the holding period for the asset is one year or less. You must exclude the date you purchase your units to determine your
holding period. The tax rates for capital gains realized from assets held for one year or less are generally the same as for ordinary income. The
Internal Revenue Code, however, treats certain capital gains as ordinary income in special situations.
Dividends from Stocks.
Certain dividends received with respect to the Stocks held by the trust, if any, may qualify to be taxed at the same rates that apply to net
capital gain (as discussed above), provided certain holding period requirements are satisfied.
Dividends from RIC Shares and REIT
Shares. Some dividends on REIT Shares or RIC Shares, if any, held by the trust, may be reported by the REIT or RIC as capital gain
dividends, generally taxable to you as long-term capital gains. Some dividends on RIC Shares may qualify as exempt-interest
dividends, which generally are excluded from your gross income for federal income tax purposes. Some or all of the exempt-interest dividends,
however may be taken into account in determining your alternative minimum tax, and may have other tax consequences (e.g., they may affect the amount of
your social security benefits that are taxed). Other dividends on the REIT Shares or the RIC Shares will generally be taxable to you as ordinary
income. Certain ordinary income dividends from a RIC may qualify to be taxed at the same rates that apply to net capital gain (as discussed above),
provided certain holding period requirements are satisfied and provided the dividends are attributable to qualifying dividends received by the RIC
itself. Regulated investment companies are required to provide notice to their shareholders of the amount of any distribution that may be taken into
account as a dividend that is eligible for the capital gains tax rates. In limited circumstances, some of the ordinary income dividends from a REIT may
also qualify to be taxed at the same rates that apply to net capital gains. If you hold a unit for six months or less or if your trust holds a RIC
Share or REIT Share for six months or less, any loss incurred by you related to the disposition of such RIC Share or REIT Share will be disallowed to
the extent of the exempt-interest dividends you received. To the extent, if any, it is not disallowed, it will be treated as a long-term capital loss
to the extent of any long-term capital gain distributions received (or deemed to have been received) with respect to such RIC Share or REIT Share.
Distributions of income or capital gains declared on the REIT Shares or the RIC Shares in October, November or December will be deemed to have been
paid to you on December 31 of the year they are declared, even when paid by the REIT or the RIC during the following January. Some dividends on the
REIT Shares or RIC shares may be eligible for a deduction for
Understanding Your
Investment 59
qualified business income provided
certain holding period requirements are satisfied.
An election may be available to you to
defer recognition of the gain attributable to a capital gain dividend if you make certain qualifying investments within a limited time. You should talk
to your tax advisor about the availability of this deferral election and its requirements.
Dividends Received Deduction.
Generally, a domestic corporation owning units in a trust may be eligible for the dividends received deduction with respect to such unit
owners pro rata portion of certain types of dividends received by the trust. However, a corporation generally will not be entitled to the
dividends received deduction with respect to dividends from most foreign corporations or from REITs or RICs. However, certain dividends on RIC Shares
that are attributable to dividends received by the RIC itself from certain domestic corporations may be reported by the RIC as being eligible for the
dividends received deduction.
In-Kind Distributions.
Under certain circumstances as described in this prospectus, you may request an In-Kind Distribution of Trust Assets when you redeem your units
or at your trusts termination. By electing to receive an In-Kind Distribution, you will receive Trust Assets plus, possibly, cash. You will not
recognize gain or loss if you only receive whole Trust Assets in exchange for the identical amount of your pro rata portion of the same Trust Assets
held by your trust. However, if you also receive cash in exchange for a Trust Asset or a fractional portion of a Trust Asset, you will generally
recognize gain or loss based on the difference between the amount of cash you receive and your tax basis in such Trust Asset or fractional
portion.
Rollovers and Exchanges.
If you elect to have your proceeds from your trust rolled over into a future trust, it is considered a sale for federal income tax purposes and
any gain on the sale will be treated as a capital gain, and any loss will be treated as a capital loss. However, any loss you incur in connection with
the exchange of your units of your trust for units of the next series will generally be disallowed with respect to this deemed sale and subsequent
deemed repurchase, to the extent the two trusts have substantially identical Trust Assets under the wash sale provisions of the Internal Revenue
Code.
Treatment of Trust Expenses.
Generally, for federal income tax purposes, you must take into account your full pro rata share of your trusts income, even if some of
that income is used to pay trust expenses. You may deduct your pro rata share of each expense paid by your trust to the same extent as if you directly
paid the expense. You may not be able to deduct some or all of these expenses.
If any of the RICs pay exempt-interest
dividends, which are treated as tax-exempt interest for federal income tax purposes, you will not be able to deduct some of your share of the trust
expenses. In addition, you will not be able to deduct some of your interest expense for debt that you incur or continue to purchase or carry your
units.
Foreign Investors, Taxes and
Investments. Distributions by your trust that are treated as U.S. source income (e.g., dividends received on Stocks of domestic corporations)
will generally be subject to U.S. income taxation and withholding in the case of units held by nonresident alien individuals, foreign corporations or
other non- U.S. persons, subject to any applicable treaty. If you are a foreign investor (i.e., an investor other than a U.S. citizen or resident or a
U.S. corporation, partnership, estate or trust), you may not be subject to U.S. federal income taxes, including withholding taxes, on some or all of
the income from your trust or on any gain from the sale or redemption of your units, provided that certain conditions are met. You should consult your
tax advisor with respect to the conditions you must meet in order to be exempt for U.S. tax purposes. In addition, distributions to, and the gross
proceeds from dispositions of units by, (i) certain non-U.S. financial institutions that have not entered into an agreement with the
60 Understanding Your
Investment
U.S. Treasury to collect and
disclose certain information and are not resident in a jurisdiction that has entered into such an agreement with the U.S. Treasury and (ii) certain
other non-U.S. entities that do not provide certain certifications and information about the entitys U.S. owners, may be subject to a U.S.
withholding tax of 30%. However, proposed regulations may eliminate the requirement to withhold on payments of gross proceeds from dispositions. You
should also consult your tax advisor with respect to other U.S. tax withholding and reporting requirements.
Some distributions by your trust may be
subject to foreign withholding taxes. Any income withheld will still be treated as income to you. Under the grantor trust rules, you are considered to
have paid directly your share of any foreign taxes that are paid. Therefore, for U.S. tax purposes, you may be entitled to a foreign tax credit or
deduction for those foreign taxes.
Under certain circumstances, a RIC may
elect to pass through to its shareholders certain foreign taxes paid by the RIC. If a RIC makes this election with respect to RIC Shares, you must
include in your income for federal income tax purposes your portion of such taxes and you may be entitled to a credit or deduction for such
taxes.
If any U.S. investor is treated as
owning directly or indirectly 10 percent or more of the combined voting power of the stock of a foreign corporation, and all U.S. shareholders of that
corporation collectively own more than 50 percent of the vote or value of the stock of that corporation, the foreign corporation may be treated as a
controlled foreign corporation (CFC). If you own 10 percent or more of a CFC (through your trust and in combination with your other investments) or
possibly if your trust owns 10 percent or more of a CFC, you will be required to include certain types of the CFCs income in your taxable income
for federal income tax purposes whether or not such income is distributed to your trust or to you.
A foreign corporation will generally be
treated as a passive foreign investment company (PFIC) if 75 percent or more of its income is passive income or if 50 percent or more of
its assets are held to produce passive income. If your trust purchases shares in a PFIC, you may be subject to U.S. federal income tax on a portion of
certain distributions or on gains from the disposition of such shares at rates that were applicable in prior years and any gain may be recharacterized
as ordinary income that is not eligible for the lower net capital gains tax rate. Additional charges in the nature of interest may also be imposed on
you. Certain elections may be available with respect to PFICs that would limit these consequences. However, these elections would require you to
include certain income of the PFIC in your taxable income even if not distributed to the trust or to you, or require you to annually recognize as
ordinary income any increase in the value of the shares of the PFIC, thus requiring you to recognize income for federal income tax purposes in excess
of your actual distributions from PFICs and proceeds from dispositions of PFIC stock during a particular year. Dividends paid by PFICs are not eligible
to be taxed at the net capital gains tax rate.
New York Tax Status. Under
the existing income tax laws of the State and City of New York, your trust will not be taxed as a corporation subject to the New York state franchise
tax or the New York City general corporation tax. You should consult your tax advisor regarding potential foreign, state or local taxation with respect
to your units.
EXPENSES
Your trust will pay various expenses to
conduct its operations. The Fees and Expenses section for each trust in this prospectus shows the estimated amount of these
expenses.
The sponsor will receive a fee from your
trust for creating and developing the trust, including determining the trusts objectives,
Understanding Your
Investment 61
policies, composition and size,
selecting service providers and information services and for providing other similar administrative and ministerial functions. This creation and
development fee is a charge of $0.05 per unit. The trustee will deduct this amount from your trusts assets as of the close of the initial
offering period. No portion of this fee is applied to the payment of distribution expenses or as compensation for sales efforts. This fee will not be
deducted from proceeds received upon a repurchase, redemption or exchange of units before the close of the initial public offering
period.
Your trust will pay a fee to the trustee
for its services. The trustee also benefits when it holds cash for your trust in non-interest bearing accounts. Your trust will reimburse us as
supervisor, evaluator and sponsor for providing portfolio supervisory services, for evaluating your portfolio and for providing bookkeeping and
administrative services. Our reimbursements may exceed the costs of the services we provide to your trust but will not exceed the costs of services
provided to all of our unit investment trusts in any calendar year. All of these fees may adjust for inflation without your approval.
Your trust will also pay its general
operating expenses. Your trust may pay expenses such as trustee expenses (including legal and auditing expenses), various governmental charges, fees
for extraordinary trustee services, costs of taking action to protect your trust, costs of indemnifying the trustee and the sponsor, legal fees and
expenses, expenses incurred in contacting you and any applicable license fee for the use of certain service marks, trademarks and/or trade names. Your
trust may pay the costs of updating its registration statement each year. The trustee will generally pay trust expenses from distributions received on
the securities but in some cases may sell securities to pay trust expenses.
EXPERTS
Legal Matters. Chapman and
Cutler LLP acts as counsel for your trust and has given an opinion that the units are validly issued. Dorsey & Whitney LLP acts as counsel for the
trustee.
Independent Registered Public
Accounting Firm. Grant Thornton LLP, independent registered public accounting firm, audited the statements of financial condition and the
portfolios included in this prospectus.
ADDITIONAL
INFORMATION
This prospectus does not contain all the
information in the registration statement that your trust filed with the Securities and Exchange Commission. The Information Supplement, which was
filed with the Securities and Exchange Commission, includes more detailed information about the securities in your portfolio, investment risks and
general information about your trust. You can obtain the Information Supplement by contacting us or the Securities and Exchange Commission as indicated
on the back cover of this prospectus. This prospectus incorporates the Information Supplement by reference (it is legally considered part of this
prospectus).
62 Understanding Your
Investment
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Sponsor
and Unitholders
Advisors Disciplined Trust 2007
Opinion
on the financial statements
We
have audited the accompanying statements of financial condition, including the trust
portfolio on pages 6, 7, 8, 12, 16, 17, 20, 21 and 25, of Advisors Disciplined Trust
2007 (the Trust) as of April 7, 2020, the initial date of deposit, 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 Trust as of April 7, 2020, in conformity with accounting principles generally
accepted in the United States of America.
Basis
for opinion
These
financial statements are the responsibility of Advisors Asset Management, Inc., the Sponsor.
Our responsibility is to express an opinion on the Trusts 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 Trust 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
conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due to error or fraud.
The Trust 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 Trusts 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
supporting 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 cash or irrevocable letter of credit deposited for the purchase
of securities as shown in the statements of financial condition as of April 7, 2020 by
correspondence with The Bank of New York Mellon, Trustee. We believe that our audits
provide a reasonable basis for our opinion.
/s/
GRANT THORNTON LLP
We
have served as the auditor of one or more of the unit investment trusts, sponsored by
Advisors Asset Management, Inc. and its predecessor since 2003.
Chicago,
Illinois
April 7, 2020
Understanding Your
Investment 63
Advisors Disciplined Trust
2007 Statements of Financial Condition as of April 7, 2020
|
|
|
|
Balanced Portfolio
|
|
Cohen & Steers Equity
Dividend & Income Closed-End Portfolio
|
|
Dividend Strength Portfolio
|
Investment in securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts to purchase underlying securities (1)(2) |
|
|
|
$ |
149,813 |
|
|
$ |
150,558 |
|
|
$ |
150,745 |
|
Total |
|
|
|
$ |
149,813 |
|
|
$ |
150,558 |
|
|
$ |
150,745 |
|
Liabilities and interest of investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organization costs (3) |
|
|
|
$ |
734 |
|
|
$ |
738 |
|
|
$ |
739 |
|
Deferred sales fee (4) |
|
|
|
|
3,371 |
|
|
|
3,388 |
|
|
|
3,392 |
|
Creation and development fee (4) |
|
|
|
|
749 |
|
|
|
753 |
|
|
|
754 |
|
|
|
|
|
|
4,854 |
|
|
|
4,879 |
|
|
|
4,885 |
|
Interest of investors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost to investors (5) |
|
|
|
|
149,813 |
|
|
|
150,558 |
|
|
|
150,745 |
|
Less: initial sales fee (4)(5) |
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Less: deferred sales fee, creation and development
fee and organization costs (3)(4)(5) |
|
|
|
|
4,854 |
|
|
|
4,879 |
|
|
|
4,885 |
|
Net interest of investors |
|
|
|
|
144,959 |
|
|
|
145,679 |
|
|
|
145,860 |
|
Total |
|
|
|
$ |
149,813 |
|
|
$ |
150,558 |
|
|
$ |
150,745 |
|
Number of units
|
|
|
|
|
14,981 |
|
|
|
15,056 |
|
|
|
15,075 |
|
Net asset value per unit
|
|
|
|
$ |
9.676 |
|
|
$ |
9.676 |
|
|
$ |
9.676 |
|
Advisors Disciplined Trust
2007 Statements of Financial Condition as of April 7, 2020
|
|
|
|
Financial
Opportunities Portfolio
|
|
Ubiquitous
Strategy Portfolio
|
Investment in securities |
|
|
|
|
|
|
|
|
|
|
Contracts to purchase underlying securities (1)(2) |
|
|
|
$ |
157,560 |
|
|
$ |
200,324 |
|
Total |
|
|
|
$ |
157,560 |
|
|
$ |
200,324 |
|
Liabilities and interest of investors
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Organization costs (3) |
|
|
|
$ |
772 |
|
|
$ |
982 |
|
Deferred sales fee (4) |
|
|
|
|
3,545 |
|
|
|
4,507 |
|
Creation and development fee (4) |
|
|
|
|
788 |
|
|
|
1,002 |
|
|
|
|
|
|
5,105 |
|
|
|
6,491 |
|
Interest of investors: |
|
|
|
|
|
|
|
|
|
|
Cost to investors (5) |
|
|
|
|
157,560 |
|
|
|
200,324 |
|
Less: initial sales fee (4)(5) |
|
|
|
|
- |
|
|
|
- |
|
Less: deferred sales fee, creation and development
fee and organization costs (3)(4)(5) |
|
|
|
|
5,105 |
|
|
|
6,491 |
|
Net interest of investors |
|
|
|
|
152,455 |
|
|
|
193,833 |
|
Total |
|
|
|
$ |
157,560 |
|
|
$ |
200,324 |
|
Number of units
|
|
|
|
|
15,756 |
|
|
|
20,032 |
|
Net asset value per unit
|
|
|
|
$ |
9.676 |
|
|
$ |
9.676 |
|
See
Notes to Statements of Financial Condition on page 65.
(Continued)
64 Understanding Your
Investment
Notes to Statements of Financial
Condition
(1) |
|
Aggregate cost of the securities is based on the
closing sale price evaluations as determined by the evaluator. |
(2) |
|
Cash or an irrevocable letter of credit has been
deposited with the trustee covering the funds necessary for the purchase of securities in each trust represented by purchase contracts. |
(3) |
|
A portion of the public offering price represents an
amount sufficient to pay for all or a portion of the costs incurred in establishing the trusts. These costs have been estimated at $0.049 per
unit for each trust. A distribution will be made as of the earlier of the close of the initial offering period or six months following
the trusts inception date to an account maintained by the trustee from which this obligation of the investors will be satisfied. To the extent
the actual organization costs are greater than the estimated amount, only the estimated organization costs added to the public offering price will be
reimbursed to the sponsor and deducted from the assets of the trust. |
(4) |
|
The total sales fee consists of an initial sales
fee, a deferred sales fee and a creation and development fee. The initial sales fee is equal to the difference between the maximum sales fee and the
sum of the remaining deferred sales fee and the total creation and development fee. The maximum sales fee is 2.75% of the public offering price per
unit. The deferred sales fee is equal to $0.225 per unit and the creation and development fee is equal to $0.05 per unit. |
(5) |
|
The aggregate cost to investors includes the
applicable sales fee assuming no reduction of sales fees. |
Understanding Your
Investment 65
Contents
Investment
Summary
|
|
A
concise description of essential information about the portfolio |
|
|
|
2 Balanced Portfolio
9 Cohen & Steers Equity Dividend & Income Closed-End Portfolio 13 Dividend
Strength Portfolio
18 Financial Opportunities Portfolio
22 Ubiquitous Strategy Portfolio |
Understanding Your
Investment
|
|
Detailed information to help you understand your investment |
|
|
|
26 How to Buy Units
29 How to Sell Your Units
30 Distributions
31 Investment Risks
49 Closed-End Funds
50 How the Trust Works
54 Taxes Regulated Investment Companies 57 Taxes Grantor Trusts
61 Expenses 62 Experts
62 Additional Information 63 Report of Independent Registered Public Accounting Firm 64 Statements of
Financial Condition
|
Where to Learn
More
|
|
You can contact us for free information about this and other investments, including the Information
Supplement |
|
|
|
Visit us on the Internet http://www.AAMlive.com Call Advisors Asset Management, Inc. (877) 858-1773 Call The
Bank of New York Mellon (800) 848-6468 |
Additional
Information
|
|
This prospectus does not contain all information filed with the Securities and Exchange Commission. To obtain or copy this
information including the Information Supplement (a duplication fee may be required): |
E-mail: |
|
|
|
|
Write: |
|
|
|
Public Reference Section Washington, D.C. 20549 |
Visit: |
|
|
|
http://www.sec.gov (EDGAR Database) |
Call: |
|
|
|
1-202-551-8090 (only for information on the operation of the Public Reference Section) |
|
Refer to:
|
Advisors Disciplined Trust 2007 |
Securities Act file number: 333-236188 |
Investment Company Act file number: 811-21056 |
BALANCED PORTFOLIO,
SERIES 2020-2
COHEN & STEERS
EQUITY
DIVIDEND & INCOME CLOSED-END
PORTFOLIO,
SERIES 2020-2
DIVIDEND STRENGTH
PORTFOLIO,
SERIES 2020-2
A HARTFORD
INVESTMENT
MANAGEMENT COMPANY (HIMCO)
PORTFOLIO
FINANCIAL OPPORTUNITIES
PORTFOLIO, SERIES 2020-2
UBIQUITOUS STRATEGY
PORTFOLIO, SERIES 2020-2
PROSPECTUS
April 7, 2020
Advisors Disciplined
Trust
Information Supplement
for Trusts
Investing in Equity and/or Preferred Securities
January 2020
This Information
Supplement provides additional information concerning Advisors Disciplined Trust unit investment trusts that have prospectuses
dated on and after the date set forth above investing in equity and/or preferred securities. This Information Supplement should
be read in conjunction with the prospectus for a trust. It is not a prospectus. It does not include all of the information that
an investor should consider before investing in a trust. It may not be used to offer or sell units of a trust without the prospectus.
This Information Supplement is incorporated into the prospectus by reference and has been filed as part of the registration statement
with the Securities and Exchange Commission for each applicable trust. Investors should obtain and read the prospectus prior to
purchasing units of a trust. You can obtain the prospectus without charge at www.aamlive.com or by contacting your financial professional
or Advisors Asset Management, Inc. at 18925 Base Camp Road, Suite 203, Monument, Colorado 80132, or at 8100 East 22nd
Street North, Building 800, Suite 102, Wichita, Kansas 67226 or by calling (877) 858-1773. This Information Supplement is
dated as of the date set forth above.
Contents
General Information |
2 |
Investment Policies |
2 |
Risk Factors |
5 |
Administration of the Trust |
54 |
General Information
Each trust is one
of a series of separate unit investment trusts (“UITs”) created under the name Advisors Disciplined Trust and
registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Each trust was
created as a common law trust on the initial date of deposit set forth in the prospectus for such trust under the laws of the state
of New York. Each trust was created under a trust agreement among Advisors Asset Management, Inc. (as sponsor/depositor, evaluator
and supervisor) and The Bank of New York Mellon (as trustee).
When a trust was
created, the sponsor delivered to the trustee securities or contracts for the purchase thereof for deposit in the trust and the
trustee delivered to the sponsor documentation evidencing the ownership of units of the trust. At the close of the New York Stock
Exchange on a trust’s initial date of deposit or the first day units are offered to the public, the number of units may be
adjusted so that the public offering price per unit equals $10. The number of units, fractional interest of each unit in a trust
and any estimated income distributions per unit will increase or decrease to the extent of any
adjustment. Additional units of a trust may be issued from time to time by depositing in the trust additional securities (or contracts
for the purchase thereof together with cash or irrevocable letters of credit) or cash (including a letter of credit or the equivalent)
with instructions to purchase additional securities. As additional units are issued by a trust, the aggregate value of the securities
in the trust will be increased and the fractional undivided interest in the trust represented by each unit will be decreased. The
sponsor may continue to make additional deposits of securities into a trust, provided that such additional deposits will be in
amounts which will generally maintain the existing relationship among the shares of the securities in such trust. Thus, although
additional units will be issued, each unit will generally continue to represent the approximately same number of shares of each
security. If the sponsor deposits cash to purchase additional securities, existing and new investors may experience a dilution
of their investments and a reduction in their anticipated income because of fluctuations in the prices of the securities between
the time of the deposit and the purchase of the securities and because a trust will pay any associated brokerage fees.
Neither the sponsor
nor the trustee shall be liable in any way for any failure in any of the securities. However, should any contract for the purchase
of any of the securities initially deposited in a trust fail, the sponsor will, unless substantially all of the moneys held in
the trust to cover such purchase are reinvested in substitute securities in accordance with the trust agreement, refund the cash
and sales charge attributable to such failed contract to all unitholders on the next distribution date.
Investment Policies
Each trust is a
UIT and is not an “actively managed” fund. Traditional methods of investment management for a managed fund typically
involve frequent changes in a portfolio of securities on the basis of economic, financial and market analysis. The portfolio of
a trust, however, will not be actively managed and therefore the adverse financial condition of an issuer will not necessarily
require the sale of its securities from a portfolio.
The sponsor may
not alter the portfolio of a trust by the purchase, sale or substitution of securities, except in special circumstances as provided
in the applicable trust agreement. Thus, the assets of a trust will generally remain unchanged under normal circumstances. Each
trust agreement provides that the sponsor may direct the trustee to sell, liquidate or otherwise dispose of securities in the trust
at such price and time and in such manner as shall be determined by the sponsor, provided that the supervisor has determined,
if appropriate, that any one or more of the following conditions exist with respect to such securities: (i) that there has been
a default in the payment of dividends, interest, principal or other payments, after declared and when due and payable; (ii) that
any action or proceeding has been instituted at law or equity seeking to restrain or enjoin the payment of dividends, interest,
principal or other payments on securities after declared and when due and payable, or that there exists any legal question or impediment
affecting such securities or the payment of dividends, interest, principal or other payments from the same; (iii) that there has
occurred any breach of covenant or warranty in any document relating to the issuer of the securities which would adversely affect
either immediately or contingently the payment of dividends, interest, principal or other payments on the securities, or the general
credit standing of the issuer or otherwise impair the sound investment character of such securities; (iv) that there has been a
default in the payment of dividends, interest, principal, income, premium or other similar payments, if any, on any other outstanding
obligations of the issuer of such securities; (v) that the price of the security has declined to such an extent or other such credit
factors exist so that in the opinion of the supervisor, as evidenced in writing to the trustee, the retention of such securities
would be detrimental to the trust and to the interest of the unitholders; (vi) that all of the securities in the trust will be
sold pursuant to termination of the trust; (vii) that such sale is required due to units tendered for redemption; (viii) that there
has been a public tender offer made for a security or a merger or acquisition is announced affecting a security, and that in the
opinion of the supervisor the sale or tender of the security is in the best interest of the unitholders; (ix) if the trust is designed
to be a grantor trust for tax purposes, that the sale of such securities is required in order to prevent the trust from being deemed
an association taxable as a corporation for federal income tax purposes; (x) if the trust has elected to be a regulated investment
company (a “RIC”) for tax purposes, that such sale is necessary or advisable (a) to maintain the qualification
of the trust as a RIC or (b) to provide funds to make any distribution for a taxable year in order to avoid imposition of
any income or excise taxes on the trust or on undistributed income in the trust; (xi) that as result of the ownership of the security,
the trust or its unitholders would be a direct or indirect shareholder of a passive foreign investment company as defined in section 1297(a)
of the Internal Revenue Code; or (xii) that such sale is necessary for the trust to comply with such federal and/or state securities
laws, regulations and/or regulatory actions and interpretations which may be in effect from time to time. The trustee may also
sell securities, designated by the supervisor, from a trust for the purpose of the payment of expenses. In the event a security
is sold as a direct result of serious adverse credit factors affecting the issuer of such security and a trust is a RIC for tax
purposes, then the sponsor may, if permitted by applicable law, but is not obligated to, direct the reinvestment of the proceeds
of the sale of such security in any other securities which meet the criteria necessary for inclusion in such trust on the initial
date of deposit.
If the trustee is
notified at any time of any action to be taken or proposed to be taken by holders of the portfolio securities, the trustee will
notify the sponsor and will take such action or refrain from taking any action as the sponsor directs and, if the sponsor does
not within five
business days of the giving of such
notice direct the trustee to take or refrain from taking any action, the trustee will take such reasonable action or refrain from
taking any action so that the securities are voted as closely as possible in the same manner and the same general proportion, with
respect to all issues, as are shares of such securities that are held by owners other than the trust. Notwithstanding the foregoing,
in the event that the trustee shall have been notified at any time of any action to be taken or proposed to be taken by holders
of shares of any registered investment company, the trustee will thereupon take such reasonable action or refrain from taking any
action with respect to the fund shares so that the fund shares are voted as closely as possible in the same manner and the same
general proportion, with respect to all issues, as are shares of such fund shares that are held by owners other than the related
trust.
In the event that
an offer by the issuer of any of the securities or any other party is made to issue new securities, or to exchange securities,
for trust portfolio securities, the trustee will reject such offer, provided that in the case of a trust that is a RIC for tax
purposes, if an offer by the issuer of any of the securities or any other party is made to issue new securities, or to exchange
securities, for trust portfolio securities, the trustee will at the direction of the sponsor, vote for or against, or accept or
reject, any offer for new or exchanged securities or property in exchange for a trust portfolio security. If any such issuance,
exchange or substitution occurs (regardless of any action or rejection by a trust), any securities, cash and/or property received
will be deposited into the trust and will be promptly sold, if securities or property, by the trustee pursuant to the sponsor’s
direction, unless the sponsor advises the trustee to keep such securities, cash or property. The sponsor may rely on the supervisor
in so advising the trustee.
Proceeds from the
sale of securities (or any securities or other property received by a trust in exchange for securities) are credited to the Capital
Account of the trust for distribution to unitholders or to meet redemptions. Except for failed securities and as provided herein,
in a prospectus or in a trust agreement, the acquisition by a trust of any securities other than the portfolio securities is prohibited.
Because certain
of the securities in certain of the trusts may from time to time under certain circumstances be sold or otherwise liquidated and
because the proceeds from such events will be distributed to unitholders and will not be reinvested, no assurance can be given
that a trust will retain for any length of time its present size and composition. Neither the sponsor nor the trustee shall be
liable in any way for any default, failure or defect in any security. In the event of a failure to deliver any security that has
been purchased for a trust under a contract (“Failed Securities”), the sponsor is authorized under the trust
agreement to direct the trustee to acquire other securities (“Replacement Securities”) to make up the original
corpus of such trust.
The Replacement
Securities must be securities as originally selected for deposit in a trust or, in the case of a trust that is a RIC for tax purposes,
securities which the sponsor determines to be similar in character as the securities originally selected for deposit in the trust
and the purchase of the Replacement Securities may not adversely affect the federal income tax status of the trust. The Replacement
Securities must be purchased within thirty days after the deposit of the Failed Security. Whenever a Replacement Security
is acquired for a trust, the trustee shall notify all unitholders of the trust of the acquisition of the Replacement Security and
shall, on the next distribution date which is more than thirty days thereafter, make a pro rata distribution of
the amount, if any, by which the cost
to the trust of the Failed Security exceeded the cost of the Replacement Security. The trustee will not be liable or responsible
in any way for depreciation or loss incurred by reason of any purchase made pursuant to, or any failure to make any purchase of
Replacement Securities. The sponsor will not be liable for any failure to instruct the trustee to purchase any Replacement Securities,
nor shall the trustee or sponsor be liable for errors of judgment in connection with Failed Securities or Replacement Securities.
If the right of
limited substitution described in the preceding paragraphs is not utilized to acquire Replacement Securities in the event of a
failed contract, the sponsor will refund the sales charge attributable to such Failed Securities to all unitholders of the related
trust and the trustee will distribute the cash attributable to such Failed Securities not more than thirty days after the date
on which the trustee would have been required to purchase a Replacement Security. In addition, unitholders should be aware that,
at the time of receipt of such cash, they may not be able to reinvest such proceeds in other securities at a return equal to or
in excess of the return which such proceeds would have earned for unitholders of a trust. In the event that a Replacement Security
is not acquired by a trust, the income for such trust may be reduced.
Risk Factors
An investment in
units of a trust, and/or shares of other registered investment companies (“funds”) held by a trust, if any,
may be subject to some or all of the risks described below. In addition, you should carefully review the objective, strategy and
risk of the trust as described in the prospectus and consider your ability to assume the risks involved before making an investment
in a trust.
Market Risk.
You should understand the risks of investing in securities before purchasing units. These risks include the risk that the financial
condition of the company or the general condition of the stock market may worsen and the value of the securities (and therefore
units) will fall. Securities are especially susceptible to general stock market movements. The value of securities often rises
or falls rapidly and unpredictably as market confidence and perceptions of companies change. These perceptions are based on factors
including expectations regarding government economic policies, inflation, interest rates, economic expansion or contraction, political
climates and economic or banking crises. The value of units of a trust will fluctuate with the value of the securities in the trust
and may be more or less than the price you originally paid for your units. As with any investment, no one can guarantee that the
performance of a trust will be positive over any period of time. Because each trust is unmanaged, the trustee will not sell securities
in response to market fluctuations as is common in managed investments. In addition, because some trusts hold a relatively small
number of securities, you may encounter greater market risk than in a more diversified investment.
Equity Securities.
Investments in securities representing equity ownership of a company are exposed to risks associated with the companies issuing
the securities, the sectors and geographic locations they are involved in and the markets that such securities are traded on among
other risks as described in greater detail below.
Fixed Income
Securities. Investments in fixed income and similar securities involve certain unique risks such as credit risk
and interest rate risk among other things as described in greater detail below.
Dividends.
Stocks represent ownership interests in a company and are not obligations of the company. Common stockholders have a right
to receive payments from the company that is subordinate to the rights of creditors, bondholders or preferred stockholders of the
company. This means that common stockholders have a right to receive dividends only if a company’s board of directors declares
a dividend and the company has provided for payment of all of its creditors, bondholders and preferred stockholders. If a company
issues additional debt securities or preferred stock, the owners of these securities will have a claim against the company’s
assets before common stockholders if the company declares bankruptcy or liquidates its assets even though the common stock was
issued first. As a result, the company may be less willing or able to declare or pay dividends on its common stock.
Credit Risk.
Credit risk is the risk that a borrower is unable to meet its obligation to pay principal or interest on a security. This
could cause the value of an investment to fall and may reduce the level of dividends an investment pays which would reduce income.
Interest Rate
Risk. Interest rate risk is the risk that the value of fixed income securities and similar securities will fall if interest
rates increase. Bonds and other fixed income securities typically fall in value when interest rates rise and rise in value when
interest rates fall. Securities with longer periods before maturity are often more sensitive to interest rate changes.
Liquidity
Risk. Liquidity risk is the risk that the value of a security will fall if trading in the security is limited or absent.
No one can guarantee that a liquid trading market will exist for any security.
Investment
in Other Investment Companies. As with other investments, investments in other investment companies are subject
to market and selection risk. In addition, when a trust acquires shares of investment companies, unitholders bear both their proportionate
share of fees and expenses in the trust and, indirectly, the expenses of the underlying investment companies. Investment companies’
expenses are subject to the risk of fluctuation including in response to fluctuation in a fund’s assets. Accordingly, a fund’s
actual expenses may vary from what is indicated at the time of investment by a trust. There are certain regulatory limitations
on the ability of a trust to hold other investment companies which may impact the trust’s ability to invest in certain funds,
the weighting of the fund in a trust’s portfolio and the trust’s ability to issue additional units in the future.
Closed-end
Funds. Closed-end investment companies (“closed-end funds”) are actively managed investment companies
registered under the Investment Company Act that invest in various types of securities. Closed-end funds issue shares of common
stock that are generally traded on a securities exchange (although some closed-end fund shares are not listed on a securities exchange).
Closed-end funds are subject to various risks, including management’s ability to meet the closed-end fund’s investment
objective, and to manage the closed-end fund portfolio when the underlying securities are redeemed or sold during periods of market
turmoil
and as investors’ perceptions
regarding closed-end funds or their underlying investments change. If a trust invests in closed-end funds, you will bear not only
your share of the trust’s expenses, but also the expenses of the underlying funds. By investing in the other funds, a trust
may incur greater expenses than you would incur if you invested directly in the closed-end funds.
The net asset value
of closed-end fund shares will fluctuate with changes in the value of the underlying securities that the closed-end fund owns.
In addition, for various reasons closed-end fund shares frequently trade at a discount from their net asset value in the secondary
market. This risk is separate and distinct from the risk that the net asset value of closed-end fund shares may decrease. The amount
of such discount from net asset value is subject to change from time to time in response to various factors.
Certain closed-end
funds employ the use of leverage in their portfolios through the issuance of preferred stock, debt or other borrowings. While leverage
often serves to increase the yield of a closed-end fund, this leverage also subjects the closed-end fund to increased risks. These
risks may include the likelihood of increased volatility and the possibility that the closed-end fund’s common share income
will fall if the dividend rate on the preferred shares or the interest rate on any borrowings rises.
Closed-end funds’
governing documents may contain certain anti-takeover provisions that may have the effect of inhibiting a fund’s possible
conversion to open-end status and limiting the ability of other persons to acquire control of a fund. In certain circumstances,
these provisions might also inhibit the ability of stockholders (including a trust) to sell their shares at a premium over prevailing
market prices. This characteristic is a risk separate and distinct from the risk that a fund’s net asset value will decrease.
In particular, this characteristic would increase the loss or reduce the return on the sale of those closed-end fund shares that
were purchased by a trust at a premium. In the unlikely event that a closed-end fund converts to open-end status at a time when
its shares are trading at a premium there would be an immediate loss in value to a trust since shares of open-end funds trade at
net asset value. Certain closed-end funds may have in place or may put in place in the future plans pursuant to which the fund
may repurchase its own shares in the marketplace. Typically, these plans are put in place in an attempt by a fund’s board
of directors to reduce a discount on its share price. To the extent that such a plan is implemented and shares owned by a trust
are repurchased by a fund, the trust’s position in that fund will be reduced and the cash will be distributed.
A trust may be prohibited
from subscribing to a rights offering for shares of any of the closed-end funds in which it invests. In the event of a rights offering
for additional shares of a fund, unitholders should expect that a trust holding shares of the fund will, at the completion of the
offer, own a smaller proportional interest in such fund that would otherwise be the case. It is not possible to determine the extent
of this dilution in share ownership without knowing what proportion of the shares in a rights offering will be subscribed. This
may be particularly serious when the subscription price per share for the offer is less than the fund’s net asset value per
share. Assuming that all rights are exercised and there is no change in the net asset value per share, the aggregate net asset
value of each shareholder’s shares of common stock should decrease as a result of the offer. If a fund’s subscription
price per share is below that fund’s net asset value per share at the expiration of the offer, shareholders would experience
an immediate
dilution of the aggregate net asset
value of their shares of common stock as a result of the offer, which could be substantial.
Business Development
Companies. Business development companies (“BDCs”) are closed-end investment companies that have elected
to be treated as business development companies under the Investment Company Act. BDCs are required to hold at least 70% of their
investments in eligible assets which include, among other things, (i) securities of eligible portfolio companies (generally, domestic
companies that are not investment companies and that cannot have a class of securities listed on a national securities exchange
or have securities that are marginable that are purchased from that company in a private transaction), (ii) securities received
by the BDC in connection with its ownership of securities of eligible portfolio companies, or (iii) cash, cash items, government
securities, or high quality debt securities maturing one year or less from the time of investment.
BDCs’ ability
to grow and their overall financial condition is impacted significantly by their ability to raise capital. In addition to raising
capital through the issuance of common stock, BDCs may engage in borrowing. This may involve using revolving credit facilities,
the securitization of loans through separate wholly-owned subsidiaries and issuing of debt and preferred securities. BDCs are less
restricted than other closed-end funds as to the amount of debt they can have outstanding. Generally, a BDC may not issue any class
of senior security representing an indebtedness unless, immediately after such issuance or sale, it will have asset coverage of
at least 200%. (Thus, for example, if a BDC has $5 million in assets, it can borrow up to $5 million, which would result in assets
of $10 million and debt of $5 million.) These borrowings, also known as leverage, magnify the potential for gain or loss on amounts
invested and, accordingly, the risks associated with investing in BDC securities. While the value of a BDC’s assets increases,
leveraging would cause the net value per share of BDC common stock to increase more sharply than it would have had such BDC not
leveraged. However, if the value of a BDC’s assets decreases, leveraging would cause net asset value to decline more sharply
than it otherwise would have had such BDC not leveraged. In addition to decreasing the value of a BDC’s common stock, it
could also adversely impact a BDC’s ability to make dividend payments. A BDC’s credit rating may change over time which
could adversely affect its ability to obtain additional credit and/or increase the cost of such borrowing. Agreements governing
a BDC’s credit facilities and related funding and service agreements may contain various covenants that limit the BDC’s
discretion in operating its business along with other limitations. Any defaults may restrict the BDC’s ability to manage
assets securing related assets, which may adversely impact the BDC’s liquidity and operations.
BDCs compete with
other BDCs along with a large number of investment funds, investment banks and other sources of financing to make their investments.
Competitors may have lower costs or access to funding sources that cause BDCs to lose prospective investments if they do not match
competitors’ pricing, terms and structure. As a result of this competition, there is no assurance that a BDC will be able
to identify and take advantage of attractive investment opportunities or that they will fully be able to invest available capital.
BDC investments
are frequently not publicly traded and, as a result, there is uncertainty as to the value and liquidity of those investments. BDCs
may use independent valuation firms to
value their investments and such valuations
may be uncertain, be based on estimates and/or differ materially from that which would have been used if a ready market for those
investments existed. The value of a BDC could be adversely affected if its determinations regarding the fair value of investments
was materially higher than the value realized upon sale of such investments. Due to the relative illiquidity of certain BDC investments,
if a BDC is required to liquidate all or a portion of its portfolio quickly, it may realize significantly less than the value at
which such investments are recorded. Further restrictions may exist on the ability to liquidate certain assets to the extent that
subsidiaries or related parties have material non-public information regarding such assets.
BDCs may enter into
hedging transactions and utilize derivative instruments such as forward contracts, options and swaps. Unanticipated movements and
improper correlation of hedging instruments may prevent a BDC from hedging against exposure to risk of loss. BDCs are required
to make available significant managerial assistance to their portfolio companies. Significant managerial assistance refers to any
arrangement whereby a BDC provides significant guidance and counsel concerning the management, operations, or business objectives
and policies of a portfolio company. Examples of such activities include arranging financing, managing relationships with financing
sources, recruiting management personnel and evaluating acquisition and divestiture opportunities. BDCs are frequently externally
managed by an investment adviser which may also provide this external managerial assistance to portfolio companies. Such investment
adviser’s liability may be limited under its investment advisory agreement, which may lead such investment adviser to act
in a riskier manner than it would were it investing for its own account. Such investment advisers may be entitled to incentive
compensation which may cause such adviser to make more speculative and riskier investments than it would if investing for its own
account. Such compensation may be due even in the case of declines to the value of a BDC’s investments.
BDCs may issue options,
warrants and rights to convert to voting securities to its officers, employees and board members. Any issuance of derivative securities
requires the approval of the company’s board of directors and authorization by the company’s shareholders. A BDC may
operate a profit-sharing plan for its employees, subject to certain restrictions. BDCs frequently have high expenses which may
include, but are not limited to, the payment of management fees, administration expenses, taxes, interest payable on debt, governmental
charges, independent director fees and expenses, valuation expenses and fees payable to third parties relating to or associated
with making investments. These expenses may fluctuate significantly over time.
If a BDC fails to
maintain its status as a BDC it may be regulated as a closed-end fund which would subject such BDC to additional regulatory restrictions
and significantly decrease its operating flexibility. In addition, such failure could trigger an event of default under certain
outstanding indebtedness which could have a material adverse impact on its business.
Exchange-Traded
Funds. Exchange-traded funds (“ETFs”) are typically investment companies registered under the Investment
Company Act with shares that trade on a securities exchange. Shares of ETFs may trade at a discount from their net asset value
in the secondary market. This risk is separate and distinct from the risk that the net asset value of ETFs may decrease. The amount
of such discount from net asset value is subject to change from time to
time in response to various factors.
ETFs are subject to various risks, including management’s ability to meet the ETF’s investment objective, and to manage
the ETF portfolio when the underlying securities are redeemed or sold during periods of market turmoil and as investors’
perceptions regarding ETFs or their underlying investments change. A trust and any underlying ETFs have operating expenses. If
a trust invests in ETFs, you will bear not only your share of the trust’s expenses, but also the expenses of the underlying
funds. By investing in the other funds, a trust may incur greater expenses than you would incur if you invested directly in the
funds.
Most ETFs replicate
the composition or returns of a securities index. These ETFs face index correlation risk which is the risk that the performance
of an ETF will vary from the actual performance of the fund’s target index, known as “tracking error.” This can
happen due to transaction costs, market impact, corporate actions (such as mergers and spin-offs) and timing variances. Some funds
use a technique called “representative sampling,” which means that the fund invests in a representative sample of securities
in its target index rather than all of the index securities. This could increase the risk of tracking error.
Some ETFs are open-end
funds. Open-end funds of this type can be actively-managed or passively-managed investment companies that are registered under
the Investment Company Act. These open-end funds have received orders from the Securities and Exchange Commission (the “SEC”)
exempting them from various provisions of the Investment Company Act. Regular open-end funds generally issue redeemable securities
that are issued and redeemed at a price based on the fund’s current net asset value and are not traded on a securities exchange.
Exchange-traded open-end funds, however, issue shares of common stock that are traded on a securities exchange based on negotiated
prices rather than the fund’s current net asset value. These funds only issue new shares and redeem outstanding shares in
very large blocks, often called “creation units,” in exchange for an in-kind distribution of the fund’s portfolio
securities. Due to a variety of cost and administrative factors, a trust that invests in ETFs will generally buy and sell shares
of its underlying open-end fund ETFs on securities exchanges rather than engaging in transactions in creation units. Shares of
exchange-traded open-end funds frequently trade at a discount from their net asset value in the secondary market. This risk is
separate and distinct from the risk that the net asset value of open-end fund shares may decrease. The amount of such discount
from net asset value is subject to change from time to time in response to various factors.
Some ETFs are UITs.
UITs of this type are passively-managed investment companies that are registered under the Investment Company Act. ETFs that
are UITs differ significantly from your trust in certain respects, even though the UITs that may be held in the trust’s portfolio
and the trust itself are registered UITs. UITs that are ETFs have received orders from the SEC exempting them from various
provisions of the Investment Company Act. Regular UITs, such as your trust, generally issue redeemable securities that are issued
and redeemed at a price based on the UIT’s current net asset value and are not traded on a securities exchange. ETFs that
are UITs, however, issue units that are traded on a securities exchange based on negotiated prices rather than the UIT’s
current net asset value. These UITs only issue new shares and redeem outstanding shares in very large blocks, often called “creation
units,” in exchange for an in-kind distribution of the UIT’s portfolio securities. Due to a variety of cost and administrative
factors, a trust that invests in ETFs will generally buy and sell shares of its underlying ETFs on securities exchanges
rather than engaging in transactions
in creation units. Units of exchange-traded UITs frequently trade at a discount from their net asset value in the secondary market.
This risk is separate and distinct from the risk that the net asset value of UIT units may decrease. The amount of such discount
from net asset value is subject to change from time to time in response to various factors.
Inverse ETFs.
Certain ETFs may be “inverse” ETFs. An inverse ETF, sometimes referred to as a “bear ETF” or “short
ETF,” is a special type of index ETF that is designed to provide investment results that move in the opposite direction of
the daily price movement of the index to which it is benchmarked. Put another way, an inverse ETF is designed to go up in value
when its benchmark index goes down in value, and go down in value when its benchmark index goes up in value. Inverse ETFs can be
used to establish a hedge position within an investment portfolio to attempt to protect its value during market declines. Though
inverse ETFs may reduce downside risk and volatility in a down market, they are not suitable for all investors. The value of an
inverse investment may tend to increase on a daily basis by the amount of any decrease in the index, but the converse is also true
that the value of the investment will also tend to decrease on a daily basis by the amount of any increase in the index.
Investing in inverse
ETFs involves certain risks, which may include increased volatility due to the ETFs’ possible use of short sales of securities
and derivatives such as options and futures. Inverse ETFs are subject to active trading risks that may increase volatility and
impact the ETFs’ ability to achieve their investment objectives. The use of leverage by an ETF increases the risk to the
ETF. The more an ETF invests in leveraged instruments, the more the leverage will magnify any gains or losses on those investments.
Most inverse ETFs “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis
only and not over any longer time period. Due to the effect of compounding, the performance of these ETFs over longer periods of
time can differ significantly from the inverse of the performance of the ETF’s underlying index or benchmark during the same
period of time. This effect can be magnified in volatile markets. Inverse ETFs typically are not suitable for retail investors
who plan to hold them for more than one trading session, particularly in volatile markets.
Leveraged
ETFs. Certain ETFs may be “leveraged” ETFs. These ETFs seek to match a multiple or multiples of the performance,
or the inverse of the performance, of a benchmark index on a given day and not for greater periods of time. This means that the
return of a leveraged ETF for a period longer than a single day will be the result of each day’s returns compounded over
the period and not the point-to-point return of the index over the entire time period. As a result, the use of leverage will very
likely cause the performance of such an ETF to be either greater than, or less than, the index performance times the stated multiple
in an ETF’s investment objective. Investors should recognize that the degree of volatility of the underlying index can have
a dramatic effect on an ETF’s longer-term performance. The greater the volatility, given a particular index return, the greater
the downside deviation will be of the ETF’s longer-term performance from a simple multiple of its index’s longer-term
return. Leveraged ETFs use investment techniques that may be considered aggressive, including the use of futures contracts, options
on futures contracts, securities and indexes, forward contracts, swap agreements and similar instruments. Leveraged ETFs are typically
unsuitable for investors who plan to hold them for longer than one trading session, particularly in volatile markets.
Non-Diversification
Risk. Certain funds held by a trust may be classified as “non-diversified.” Such funds may be more
exposed to the risks associated with and developments affecting an individual issuer, industry and/or asset class than a fund that
invests more widely.
Foreign Issuers.
An investment in securities of non-U.S. issuers involves certain investment risks that are different in some respects from an investment
in the securities of domestic issuers. These investment risks include future political or governmental restrictions which might
adversely affect the payment or receipt of payment of dividends on the relevant securities, the possibility that the financial
condition of the issuers of the securities may become impaired or that the general condition of the relevant stock market may worsen
(both of which would contribute directly to a decrease in the value of foreign securities), the limited liquidity and relatively
small market capitalization of the relevant securities market, expropriation or confiscatory taxation, economic uncertainties and
foreign currency devaluations and fluctuations. In addition, for foreign issuers that are not subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), there may be less publicly
available information than is available from a domestic issuer. In addition, foreign issuers are not necessarily subject to uniform
accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic issuers.
The securities of many foreign issuers are less liquid and their prices more volatile than securities of comparable domestic issuers.
In addition, fixed brokerage commissions and other transaction costs in foreign securities markets are generally higher than in
the United States and there is generally less government supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the United States.
Securities issued
by non-U.S. issuers generally pay income in foreign currencies and principally trade in foreign currencies. Therefore, there is
a risk that the U.S. dollar value of these securities will vary with fluctuations in the U.S. dollar foreign exchange rates for
the various securities.
There can be no
assurance that exchange control regulations might not be adopted in the future which might adversely affect payment to a trust
or a fund held by a trust. The adoption of exchange control regulations and other legal restrictions could have an adverse impact
on the marketability of foreign securities and on the ability to liquidate securities. In addition, restrictions on the settlement
of transactions on either the purchase or sale side, or both, could cause delays or increase the costs associated with the purchase
and sale of the foreign securities and correspondingly could affect the price of trust units.
Investors should
be aware that it may not be possible to buy all securities at the same time because of the unavailability of any security, and
restrictions applicable to a trust relating to the purchase of a security by reason of the federal securities laws or otherwise.
Foreign securities
generally have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and may
not be exempt from the registration requirements of such Act. Sales of non-exempt securities in the United States securities markets
are subject to severe restrictions and may not be practicable. Accordingly, sales of these securities will
generally be effected only in foreign
securities markets. Investors should realize that the securities might be traded in foreign countries where the securities markets
are not as developed or efficient and may not be as liquid as those in the United States. The value of securities will be adversely
affected if trading markets for the securities are limited or absent.
Emerging Markets.
Compared to more mature markets, some emerging markets may have a low level of regulation, enforcement of regulations and
monitoring of investors’ activities. Those activities may include practices such as trading on material non-public information.
The securities markets of developing countries are not as large as the more established securities markets and have substantially
less trading volume, resulting in a lack of liquidity and high price volatility. There may be a high concentration of market capitalization
and trading volume in a small number of issuers representing a limited number of industries as well as a high concentration of
investors and financial intermediaries. These factors may adversely affect the timing and pricing of the acquisition or disposal
of securities. In certain emerging markets, registrars are not subject to effective government supervision nor are they always
independent from issuers. The possibility of fraud, negligence, undue influence being exerted by the issuer or refusal to recognize
ownership exists, which, along with other factors, could result in the registration of a shareholding being completely lost. Investors
could suffer loss arising from these registration problems. In addition, the legal remedies in emerging markets are often more
limited than the remedies available in the United States.
Practices pertaining
to the settlement of securities transactions in emerging markets involve higher risks than those in developed markets, in large
part because of the need to use brokers and counterparties who are less well capitalized, and custody and registration of assets
in some countries may be unreliable. As a result, brokerage commissions and other fees are generally higher in emerging markets
and the procedures and rules governing foreign transactions and custody may involve delays in payment, delivery or recovery of
money or investments. Delays in settlement could result in investment opportunities being missed if a trust or a fund held by a
trust is unable to acquire or dispose of a security. Certain foreign investments may also be less liquid and more volatile than
U.S. investments, which may mean at times that such investments are unable to be sold at desirable prices.
Political and economic
structures in emerging markets often change rapidly, which may cause instability. In adverse social and political circumstances,
governments have been involved in policies of expropriation, confiscatory taxation, nationalization, intervention in the securities
market and trade settlement, and imposition of foreign investment restrictions and exchange controls, and these could be repeated
in the future. In addition to withholding taxes on investment income, some governments in emerging markets may impose different
capital gains taxes on foreign investors. Foreign investments may also be subject to the risks of seizure by a foreign government
and the imposition of restrictions on the exchange or export of foreign currency. Additionally, some governments exercise substantial
influence over the private economic sector and the political and social uncertainties that exist for many developing countries
are considerable.
Another risk common
to most developing countries is that the economy is heavily export oriented and, accordingly, is dependent upon international trade.
The existence of overburdened
infrastructures and obsolete financial
systems also presents risks in certain countries, as do environmental problems. Certain economies also depend to a large degree
upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices which, in turn, may be affected
by a variety of factors.
Depositary
Receipts. Certain of the securities in a trust may be in depositary receipt form, including American Depositary
Receipts (“ADRs”) or Global Depositary Receipts (“GDRs”). Depositary receipts represent stock
deposited with a custodian in a depositary. Depositary receipts are issued by a bank or trust company to evidence ownership of
underlying securities issued by a foreign corporation. These instruments may not necessarily be denominated in the same currency
as the securities into which they may be converted.
Depositary receipts
may be sponsored or unsponsored. In an unsponsored facility, the depositary initiates and arranges the facility at the request
of market makers and acts as agent for the depositary receipts holder, while the company itself is not involved in the transaction.
In a sponsored facility, the issuing company initiates the facility and agrees to pay certain administrative and shareholder-related
expenses. Sponsored facilities use a single depositary and entail a contractual relationship between the issuer, the shareholder
and the depositary; unsponsored facilities involve several depositaries with no contractual relationship to the company. The depositary
bank that issues depositary receipts generally charges a fee, based on the price of the depositary receipts, upon issuance and
cancellation of the depositary receipts. This fee would be in addition to the brokerage commissions paid upon the acquisition or
surrender of the security. In addition, the depositary bank incurs expenses in connection with the conversion of dividends or other
cash distributions paid in local currency into U.S. dollars and such expenses are deducted from the amount of the dividend or distribution
paid to holders, resulting in a lower payout per underlying shares represented by the depositary receipts than would be the case
if the underlying share were held directly. Certain tax considerations, including tax rate differentials and withholding requirements,
arising from the application of the tax laws of one nation to nationals of another and from certain practices in the depositary
receipts market may also exist with respect to certain depositary receipts. In varying degrees, any or all of these factors may
affect the value of the depositary receipts compared with the value of the underlying shares in the local market. In addition,
the rights of holders of depositary receipts may be different than those of holders of the underlying shares, and the market for
depositary receipts may be less liquid than that for the underlying shares. Depositary receipts are registered securities pursuant
to the Securities Act and may be subject to the reporting requirements of the Securities Exchange Act.
For the securities
that are depositary receipts, currency fluctuations will affect the United States dollar equivalent of the local currency price
of the underlying domestic share and, as a result, are likely to affect the value of the depositary receipts and consequently the
value of the securities. The foreign issuers of securities that are depositary receipts may pay dividends in foreign currencies
which must be converted into dollars. Most foreign currencies have fluctuated widely in value against the United States dollar
for many reasons, including supply and demand of the respective currency, the soundness of the world economy and the strength of
the respective economy as compared to the economies of the United States and other countries. Therefore, for any securities of
issuers (whether or not they are in depositary receipt form) whose earnings are
stated in foreign currencies, or which
pay dividends in foreign currencies or which are traded in foreign currencies, there is a risk that their United States dollar
value will vary with fluctuations in the United States dollar foreign exchange rates for the relevant currencies.
Currency Risk.
A trust that invests in securities of non-U.S. issuers will be subject to currency risk, which is the risk that an increase in
the U.S. dollar relative to the non-U.S. currency will reduce returns or portfolio value. Generally, when the U.S. dollar rises
in value relative to a non-U.S. currency, a trust’s investment in securities denominated in that currency will lose value
because its currency is worth fewer U.S. dollars. On the other hand, when the value of the U.S. dollar falls relative to a non-U.S.
currency, a trust’s investments denominated in that currency will tend to increase in value because that currency is worth
more U.S. dollars. The exchange rates between the U.S. dollar and non-U.S. currencies depend upon such factors as supply and demand
in the currency exchange markets, international balance of payments, governmental intervention, speculation and other economic
and political conditions. A trust may incur conversion costs when it converts its holdings to another currency. Non-U.S. exchange
dealers may realize a profit on the difference between the price at which a trust buys and sells currencies. A trust may engage
in non-U.S. currency exchange transactions in connection with its portfolio investments. A trust may also be subject to currency
risk through investments in ADRs, GDRs and other non-U.S. securities denominated in U.S. dollars.
Alternative
Minimum Tax Risk. While certain of the distributions from the trust may be exempt from certain taxes, a portion of such
distributions may be taken into account in computing the alternative minimum tax.
Foreign Government
Securities Risk. The ability of a government issuer, especially in an emerging market country, to make timely and complete
payments on its debt obligations will be strongly influenced by the government issuer’s balance of payments, including export
performance, its access to international credits and investments, fluctuations of interest rates and the extent of its foreign
reserves. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could
be vulnerable to fluctuations in international prices of these commodities or imports. If a government issuer cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments,
commercial banks and multinational organizations. There are no bankruptcy proceedings similar to those in the United States by
which defaulted government debt may be collected. Additional factors that may influence a government issuer’s ability or
willingness to service debt include, but are not limited to, a country’s cash flow situation, the ability of sufficient foreign
exchange on the date a payment is due (where applicable), the relative size of its debt burden to the economy as a whole, and the
issuer’s policy towards the International Monetary Fund, the International Bank for Reconstruction and Development and other
international agencies to which a government debtor may be subject.
Supranational
Entities’ Securities. Certain securities are obligations issued by supranational entities such as the International
Bank for Reconstruction and Development (the “World Bank”). The government members, or “stockholders,”
usually make initial capital contributions to supranational entities and in many cases are committed to make additional
capital contributions if a supranational
entity is unable to repay its borrowings. There is no guarantee that one or more stockholders of a supranational entity will continue
to make any necessary additional capital contributions. If such contributions are not made, the entity may be unable to pay interest
or repay principal on its debt securities, and an investor in such securities may lose money on such investments.
Small-Cap
and Mid-Cap Companies. Smaller company stocks customarily involve more investment risk than larger company stocks. Small-capitalization
and mid-capitalization companies may have limited product lines, markets or financial resources; may lack management depth or experience;
and may be more vulnerable to adverse general market or economic developments than large companies. Some of these companies may
distribute, sell or produce products which have recently been brought to market and may be dependent on key personnel.
The prices of small
or mid-size company securities are often more volatile than prices associated with large company issues, and can display abrupt
or erratic movements at times, due to limited trading volumes and less publicly available information. Also, because small-cap
and mid-cap companies normally have fewer shares outstanding and these shares trade less frequently than large companies, it may
be more difficult for a trust which contains these securities to buy and sell significant amounts of such shares without an unfavorable
impact on prevailing market prices.
Real Estate
Investment Trusts. Real estate investment trusts (“REITs”) may be exposed to the risks associated with
the ownership of real estate which include, among other factors, changes in general U.S., global and local economic conditions,
declines in real estate values, changes in the financial health of tenants, overbuilding and increased competition for tenants,
oversupply of properties for sale, changing demographics, changes in interest rates, tax rates and other operating expenses, changes
in government regulations, faulty construction and the ongoing need for capital improvements, regulatory and judicial requirements
including relating to liability for environmental hazards, changes in neighborhood values and buyer demand and the unavailability
of construction financing or mortgage loans at rates acceptable to developers.
Many factors can
have an adverse impact on the performance of a REIT, including its cash available for distribution, the credit quality of the REIT
or the real estate industry generally. The success of a REIT depends on various factors, including the occupancy and rent levels,
appreciation of the underlying property and the ability to raise rents on those properties. Economic recession, overbuilding, tax
law changes, higher interest rates or excessive speculation can all negatively impact REITs, their future earnings and share prices.
Variations in rental income and space availability and vacancy rates in terms of supply and demand are additional factors affecting
real estate generally and REITs in particular. Properties owned by a REIT may not be adequately insured against certain losses
and may be subject to significant environmental liabilities, including remediation costs. You should also be aware that REITs may
not be diversified and are subject to the risks of financing projects. The real estate industry may be cyclical, and, if REIT securities
are acquired at or near the top of the cycle, there is increased risk of a decline in value of the REIT securities. At various
points in time, demand for certain types of real estate may inflate the value of real estate. This may increase the risk of a substantial
decline in the value of such real estate and increase the risk of a decline in the value of the
securities. REITs are also subject to
defaults by borrowers and the market’s perception of the REIT industry generally. Because of their structure, and a current
legal requirement that they distribute at least 90% of their taxable income to shareholders annually, REITs require frequent amounts
of new funding, through both borrowing money and issuing stock. Thus, REITs historically have frequently issued substantial amounts
of new equity shares (or equivalents) to purchase or build new properties. This may adversely affect REIT equity share market prices.
Both existing and new share issuances may have an adverse effect on these prices in the future, especially if REITs issue stock
when real estate prices are relatively high and stock prices are relatively low.
Mortgage REITs engage
in financing real estate, purchasing or originating mortgages and mortgage-backed securities and earning income from the interest
on these investments. Such REITs face risks similar to those of other financial firms, such as changes in interest rates, general
market conditions and credit risk, in addition to risks associated with an investment in real estate.
Master Limited
Partnerships. Master limited partnerships (“MLPs”) are limited partnerships or limited liability companies
that are generally taxed as partnerships whose interests are traded on securities exchanges. MLP ownership generally consists of
a general partner and limited partners. The general partner manages the partnership, has an ownership stake in the partnership
and is eligible to receive an incentive distribution. The limited partners provide capital to the partnership, have a limited (if
any) role in the operation and management of the partnership and receive cash distributions. Most MLPs generally operate in the
energy, natural resources or real estate sectors and are subject to the risks generally applicable to companies in those sectors.
MLPs are also subject to the risk that authorities could challenge the tax treatment of MLPs for federal income tax purposes which
could have a negative impact on the after-tax income available for distribution by the MLPs.
Bond Quality
Risk. Bond quality risk is the risk that a bond will fall in value if a rating agency decreases or withdraws the bond’s
rating.
Prepayment
Risk. When interest rates fall, among other factors, the issuer of a fixed income security may prepay its obligations
earlier than expected. Such amounts will result in early distributions to an investor who may be unable to reinvest such amounts
at the yields originally invested which could adversely impact the value of your investment. Certain bonds include call provisions
which expose such an investor to call risk. Call risk is the risk that the issuer prepays or “calls” a bond before
its stated maturity. An issuer might call a bond if interest rates, in general, fall and the bond pays a higher interest rate or
if it no longer needs the money for the original purpose. If an issuer calls a bond, the holder of such bond will receive principal
but will not receive any future interest distributions on the bond. Such investor might not be able to reinvest this principal
at as high a yield. A bond’s call price could be less than the price paid for the bond and could be below the bond’s
par value. Certain bonds may also be subject to extraordinary optional or mandatory redemptions if certain events occur, such as
certain changes in tax laws, the substantial damage or destruction by fire or other casualty of the project for which the proceeds
of the bonds were used and various other events.
Extension
Risk. When interest rates rise, among other factors, issuers of a security may pay off obligations more slowly than
expected causing the value of such obligations to fall.
“When
Issued” and “Delayed Delivery” Bonds. Certain debt obligations may have been purchased on a “when,
as and if issued” or “delayed delivery” basis. The delivery of any such bonds may be delayed or may not occur.
Interest on these bonds begins accruing to the benefit of investors on their respective dates of delivery. Investors will be “at
risk” with respect to all “when, as and if issued” and “delayed delivery” bonds (i.e., may derive
either gain or loss from fluctuations in the values of such bonds) from the date they purchase their investment.
Premium Securities.
Certain securities may have been acquired at a market premium from par value at maturity. The coupon interest rates on
the premium securities at the time they were purchased by the fund were higher than the current market interest rates for newly
issued securities of comparable rating and type. If such interest rates for newly issued and otherwise comparable securities decrease,
the market premium of previously issued securities will be increased, and if such interest rates for newly issued comparable securities
increase, the market premium of previously issued securities will be reduced, other things being equal. The current returns of
securities trading at a market premium are initially higher than the current returns of comparable securities of a similar type
issued at currently prevailing interest rates because premium securities tend to decrease in market value as they approach maturity
when the face amount becomes payable. Because part of the purchase price is thus returned not at maturity but through current income
payments, early redemption of a premium security at par or early prepayments of principal will result in a reduction in yield.
Redemption pursuant to call provisions generally will, and redemption pursuant to sinking fund provisions may, occur at times when
the redeemed securities have an offering side valuation which represents a premium over par or for original issue discount securities
a premium over the accreted value.
Market Discount.
Certain fixed income securities may have been acquired at a market discount from par value at maturity. The coupon interest
rates on discount securities at the time of purchase are lower than the current market interest rates for newly issued securities
of comparable rating and type. If such interest rates for newly issued comparable securities increase, the market discount of previously
issued securities will become greater, and if such interest rates for newly issued comparable securities decline, the market discount
of previously issued securities will be reduced, other things being equal. Investors should also note that the value of securities
purchased at a market discount will increase in value faster than securities purchased at a market premium if interest rates decrease.
Conversely, if interest rates increase, the value of securities purchased at a market discount will decrease faster than securities
purchased at a market premium. In addition, if interest rates rise, the prepayment risk of higher yielding, premium securities
and the prepayment benefit for lower yielding, discount securities will be reduced.
Original Issue
Discount Bonds. Original issue discount bonds were initially issued at a price below their face (or par) value. These bonds
typically pay a lower interest rate than comparable bonds that were issued at or above their par value. In a stable interest rate
environment, the market value of these bonds tends to increase more slowly in early years and in greater increments as the bonds
approach maturity. The issuers of these bonds may be able to
call or redeem a bond before its stated
maturity date and at a price less than the bond’s par value. Under current law, the original issue discount, which is the
difference between the stated redemption price at maturity and the issue price of the bonds, is deemed to accrue on a daily basis
and the accrued portion is treated as taxable interest income for U.S. federal income tax purposes.
Zero Coupon
Bonds. Certain bonds may be “zero coupon” bonds. Zero coupon bonds are purchased at a deep discount because
the buyer receives only the right to receive a final payment at the maturity of the bond and does not receive any periodic interest
payments. The effect of owning deep discount bonds which do not make current interest payments (such as the zero coupon bonds)
is that a fixed yield is earned not only on the original investment but also, in effect, on all discount earned during the life
of such obligation. This implicit reinvestment of earnings at the same rate eliminates the risk of being unable to reinvest the
income on such obligation at a rate as high as the implicit yield on the discount obligation, but at the same time eliminates the
holder’s ability to reinvest at higher rates in the future. For this reason, zero coupon bonds are subject to substantially
greater price fluctuations during periods of changing market interest rates than are securities of comparable quality which pay
interest.
Restricted
Securities. Certain securities may only be resold pursuant to Rule 144A under the Securities Act. Such securities
may not be readily marketable. Restricted securities may be sold only to purchasers meeting certain eligibility requirements in
privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the
Securities Act. Where registration of such securities under the Securities Act is required, an owner may be obligated to pay all
or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time
an owner may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market
conditions were to develop, an owner might obtain a less favorable price than that which prevailed when it decided to sell.
Preferred
Security Risks. Preferred securities include preferred stocks, trust preferred securities, subordinated or junior notes
and debentures and other similarly structured securities. Preferred securities combine some of the characteristics of common stocks
and bonds. Preferred securities generally pay fixed or adjustable rate income in the form of dividends or interest to investors.
Preferred securities generally have preference over common stock in the payment of income and the liquidation of a company’s
assets. However, preferred securities are typically subordinated to bonds and other debt instruments in a company’s capital
structure and therefore will be subject to greater credit risk than those debt instruments. Because of their subordinated position
in the capital structure of an issuer, the ability to defer dividend or interest payments for extended periods of time without
triggering an event of default for the issuer, and certain other features, preferred securities are often treated as equity-like
instruments by both issuers and investors, as their quality and value are heavily dependent on the profitability and cash flows
of the issuer rather than on any legal claims to specific assets. Preferred securities are often callable at their par value at
some point in time after their original issuance date. Income payments on preferred securities are generally stated as a percentage
of these par values although certain preferred securities provide for variable or additional participation payments.
While some preferred
securities are issued with a final maturity date, others are perpetual in nature. In certain instances, a final maturity date may
be extended and/or the final payment of principal may be deferred at the issuer’s option for a specified time without triggering
an event of default for the issuer. Preferred securities generally may be subject to provisions that allow an issuer, under certain
conditions, to skip (“non-cumulative” preferred securities) or defer (“cumulative” preferred securities)
distributions. The issuer of a non-cumulative preferred security does not have an obligation to make up any arrearages to holders
of such securities and non-cumulative preferred securities can defer distributions indefinitely. Cumulative preferred securities
typically contain provisions that allow an issuer, at its discretion, to defer distributions payments for up to 10 years. If a
preferred security is deferring its distribution, investors may be required to recognize income for tax purposes while they are
not receiving any income. In certain circumstances, an issuer of preferred securities may redeem the securities during their life.
For certain types of preferred securities, a redemption may be triggered by a change in federal income tax or securities laws.
As with call provisions, a redemption by the issuer may negatively impact the return of the security. Preferred security holders
generally have no voting rights with respect to the issuing company except in very limited situations, such as if the issuer fails
to make income payments for a specified period of time or if a declaration of default occurs and is continuing. Preferred securities
may be substantially less liquid than many other securities, such as U.S. government securities or common stock. The federal income
tax treatment of preferred securities may not be clear or may be subject to recharacterization by the Internal Revenue Service.
Issuers of preferred securities may be in industries that are heavily regulated and that may receive government funding. The value
of preferred securities issued by these companies may be affected by changes in government policy, such as increased regulation,
ownership restrictions, deregulation or reduced government funding.
Preferred stocks
are a category of preferred securities that are typically considered equity securities and make income payments from an issuer’s
after-tax profits that are treated as dividends for tax purposes. While they generally provide for specified income payments as
a percentage of their par value, these payments generally do not carry the same set of guarantees afforded to bondholders and have
higher risks of non-payment or deferral.
Certain preferred
securities may be issued by trusts or other special purpose entities established by operating companies, and are therefore not
direct obligations of operating companies. At the time a trust or special purpose entity sells its preferred securities to investors,
the trust or special purpose entity generally purchases debt of the operating company with terms comparable to those of the trust
or special purpose entity securities. The trust or special purpose entity, as the holder of the operating company’s debt,
has priority with respect to the operating company’s earnings and profits over the operating company’s common shareholders,
but is typically subordinated to other classes of the operating company’s debt. Distribution payments of trust preferred
securities generally coincide with interest payments on the underlying obligations. Distributions from trust preferred securities
are typically treated as interest rather than dividends for federal income tax purposes and therefore, are not eligible for the
dividends-received deduction or the lower federal tax rates applicable to qualified dividends. Trust preferred securities generally
involve the same risks as traditional preferred stocks but are also subject to unique risks, including risks associated with income
payments only being made if payments on the underlying obligations are made. Typically, a trust preferred security will have a
rating that is
below that of its corresponding operating
company’s senior debt securities due to its subordinated nature.
Subordinated or
junior notes or debentures are securities that generally have priority to common stock and other preferred securities in a company’s
capital structure but are subordinated to other bonds and debt instruments in a company’s capital structure. As a result,
these securities will be subject to greater credit risk than those senior debt instruments and will not receive income payments
or return of principal in the event of insolvency until all obligations on senior debt instruments have been made. Distributions
from these securities are typically treated as interest rather than dividends for federal income tax purposes and therefore, are
not eligible for the dividends-received deduction or the lower federal tax rates applicable to qualified dividends. Investments
in subordinated or junior notes or debentures also generally involve risks similar to risks of other preferred securities described
above.
High Yield
Securities. “High yield” or “junk” securities, the generic names for securities rated below BBB
by Standard & Poor’s or below Baa by Moody’s (or similar ratings of other rating agencies), are frequently issued
by corporations in the growth stage of their development, by established companies whose operations or industries are depressed
or by highly leveraged companies purchased in leveraged buyout transactions. These obligations that are considered below “investment
grade” and should be considered speculative as such ratings indicate a quality of less than investment grade. High yield
securities are generally not listed on a national securities exchange. Trading of high yield securities, therefore, takes place
primarily in over-the-counter markets that consist of groups of dealer firms that are typically major securities firms. Because
the high yield security market is a dealer market, rather than an auction market, no single obtainable price for a given security
prevails at any given time. Prices are determined by negotiation between traders. The existence of a liquid trading market for
the securities may depend on whether dealers will make a market in the securities. There can be no assurance that a market will
be made for any of the securities, that any market for the securities will be maintained or of the liquidity of the securities
in any markets made. Not all dealers maintain markets in all high yield securities. Therefore, since there are fewer traders in
these securities than there are in “investment grade” securities, the bid-offer spread is usually greater for high
yield securities than it is for investment grade securities. The price at which the securities may be sold to meet redemptions
and the value of a trust may be adversely affected if trading markets for the securities are limited or absent.
An investment in
“high yield, high-risk” debt obligations or “junk” obligations may include increased credit risks and the
risk that the value of the units will decline, and may decline precipitously, with increases in interest rates. During certain
periods there have been wide fluctuations in interest rates and thus in the value of debt obligations generally. Certain high yield
securities may be subject to greater market fluctuations and risk of loss of income and principal than are investments in lower-yielding,
higher-rated securities, and their value may decline precipitously because of increases in interest rates, not only because the
increases in rates generally decrease values, but also because increased rates may indicate a slowdown in the economy and a decrease
in the value of assets generally that may adversely affect the credit of issuers of high yield, high-risk securities resulting
in a higher incidence of defaults among high yield, high-risk securities. A slowdown in the economy, or a development adversely
affecting an
issuer’s creditworthiness, may
result in the issuer being unable to maintain earnings or sell assets at the rate and at the prices, respectively, that are required
to produce sufficient cash flow to meet its interest and principal requirements. For an issuer that has outstanding both senior
commercial bank debt and subordinated high yield, high-risk securities, an increase in interest rates will increase that issuer’s
interest expense insofar as the interest rate on the bank debt is fluctuating. However, many leveraged issuers enter into interest
rate protection agreements to fix or cap the interest rate on a large portion of their bank debt. This reduces exposure to increasing
rates, but reduces the benefit to the issuer of declining rates. The sponsor cannot predict future economic policies or their consequences
or, therefore, the course or extent of any similar market fluctuations in the future.
Lower-rated securities
tend to offer higher yields than higher-rated securities with the same maturities because the creditworthiness of the issuers of
lower-rated securities may not be as strong as that of other issuers. Moreover, if a security is recharacterized as equity by the
Internal Revenue Service for federal income tax purposes, the issuer’s interest deduction with respect to the security will
be disallowed and this disallowance may adversely affect the issuer’s credit rating. Because investors generally perceive
that there are greater risks associated with the lower-rated securities, the yields and prices of these securities tend to fluctuate
more than higher- rated securities with changes in the perceived quality of the credit of their issuers. In addition, the market
value of high yield, high-risk securities may fluctuate more than the market value of higher-rated securities since these securities
tend to reflect short-term credit development to a greater extent than higher-rated securities. Lower-rated securities generally
involve greater risks of loss of income and principal than higher-rated securities. Issuers of lower-rated securities may possess
fewer creditworthiness characteristics than issuers of higher-rated securities and, especially in the case of issuers whose obligations
or credit standing have recently been downgraded, may be subject to claims by debt-holders, owners of property leased to the issuer
or others which, if sustained, would make it more difficult for the issuers to meet their payment obligations. High yield, high-risk
securities are also affected by variables such as interest rates, inflation rates and real growth in the economy.
Should the issuer
of any security default in the payment of principal or interest, the holders of such security may incur additional expenses seeking
payment on the defaulted security. Because the amounts (if any) recovered in payment under the defaulted security may not be reflected
in the value of a fund held by a trust or units of a trust until actually received, and depending upon when a unitholder purchases
or sells his or her units, it is possible that a unitholder would bear a portion of the cost of recovery without receiving any
portion of the payment recovered.
High yield, high-risk
securities are generally subordinated obligations. The payment of principal (and premium, if any), interest and sinking fund requirements
with respect to subordinated obligations of an issuer is subordinated in right of payment to the payment of senior obligations
of the issuer. Senior obligations generally include most, if not all, significant debt obligations of an issuer, whether existing
at the time of issuance of subordinated debt or created thereafter. Upon any distribution of the assets of an issuer with subordinated
obligations upon dissolution, total or partial liquidation or reorganization of or similar proceeding relating to the issuer, the
holders of senior indebtedness will be entitled to receive payment in full before
holders of subordinated indebtedness
will be entitled to receive any payment. Moreover, generally no payment with respect to subordinated indebtedness may be made while
there exists a default with respect to any senior indebtedness. Thus, in the event of insolvency, holders of senior indebtedness
of an issuer generally will recover more, ratably, than holders of subordinated indebtedness of that issuer.
Municipal
Bonds. Certain municipal bonds are “general obligation bonds” and are general obligations of a governmental
entity that are backed by the taxing power of such entity. Other municipal bonds are “revenue bonds” payable from the
income of a specific project or authority and are not supported by the issuer’s power to levy taxes. General obligation bonds
are secured by the issuer’s pledge of its faith, credit and taxing power for the payment of principal and interest. Revenue
bonds, on the other hand, are payable only from the revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue source. There are, of course, variations in the security
of the different bonds, both within a particular classification and between classifications, depending on numerous factors.
Certain municipal
bonds may be obligations which derive their payments from mortgage loans. Certain of such housing bonds may be insured by the Federal
Housing Administration or may be single family mortgage revenue bonds issued for the purpose of acquiring from originating financial
institutions notes secured by mortgages on residences located within the issuer’s boundaries and owned by persons of low
or moderate income. Mortgage loans are generally partially or completely prepaid prior to their final maturities as a result of
events such as sale of the mortgaged premises, default, condemnation or casualty loss. Because these bonds are subject to extraordinary
mandatory redemption in whole or in part from such prepayments of mortgage loans, a substantial portion of such bonds will probably
be redeemed prior to their scheduled maturities or even prior to their ordinary call dates. Extraordinary mandatory redemption
without premium could also result from the failure of the originating financial institutions to make mortgage loans in sufficient
amounts within a specified time period. Additionally, unusually high rates of default on the underlying mortgage loans may reduce
revenues available for the payment of principal of or interest on such mortgage revenue bonds. These bonds were issued under provisions
of the Internal Revenue Code, which include certain requirements relating to the use of the proceeds of such bonds in order for
the interest on such bonds to retain its tax-exempt status. In each case the issuer of the bonds has covenanted to comply with
applicable requirements and bond counsel to such issuer has issued an opinion that the interest on the bonds is exempt from federal
income tax under existing laws and regulations.
Certain municipal
bonds may be health care revenue bonds. Ratings of bonds issued for health care facilities are often based on feasibility studies
that contain projections of occupancy levels, revenues and expenses. A facility’s gross receipts and net income available
for debt service may be affected by future events and conditions including, among other things, demand for services and the ability
of the facility to provide the services required, physicians’ confidence in the facility, management capabilities, competition
with other health care facilities, efforts by insurers and governmental agencies to limit rates, legislation establishing state
rate-setting agencies, expenses, the cost and possible unavailability of malpractice insurance, the funding of Medicare, Medicaid
and other similar third-party pay or programs, government regulation and
the termination or restriction of governmental
financial assistance, including that associated with Medicare, Medicaid and other similar third-party pay or programs.
Certain municipal
bonds may be obligations of public utility issuers, including those selling wholesale and retail electric power and gas. General
problems of such issuers would include the difficulty in financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations, the difficulty of the capital market in absorbing utility
debt, the difficulty in obtaining fuel at reasonable prices and the effect of energy conservation. In addition, federal, state
and municipal governmental authorities may from time to time review existing, and impose additional, regulations governing the
licensing, construction and operation of nuclear power plants, which may adversely affect the ability of the issuers of certain
bonds to make payments of principal and/or interest on such bonds.
Certain municipal
bonds may be obligations of issuers whose revenues are derived from the sale of water and/or sewerage services. Such bonds are
generally payable from user fees. The problems of such issuers include the ability to obtain timely and adequate rate increases,
population decline resulting in decreased user fees, the difficulty of financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental considerations, the increasing difficulty of obtaining
or discovering new supplies of fresh water, the effect of conservation programs and the impact of “no-growth” zoning
ordinances.
Certain municipal
bonds may be industrial revenue bonds (“IRBs”). IRBs have generally been issued under bond resolutions pursuant
to which the revenues and receipts payable under the arrangements with the operator of a particular project have been assigned
and pledged to purchasers. In some cases, a mortgage on the underlying project may have been granted as security for the IRBs.
Regardless of the structure, payment of IRBs is solely dependent upon the creditworthiness of the corporate operator of the project
or corporate guarantor. Corporate operators or guarantors may be affected by many factors which may have an adverse impact on the
credit quality of the particular company or industry. These include cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused illnesses, extensive competition and financial deterioration
resulting from a corporate restructuring pursuant to a leveraged buy-out, takeover or otherwise. Such a restructuring may result
in the operator of a project becoming highly leveraged which may impact on such operator’s creditworthiness which in turn
would have an adverse impact on the rating and/or market value of such bonds. Further, the possibility of such a restructuring
may have an adverse impact on the market for and consequently the value of such bonds, even though no actual takeover or other
action is ever contemplated or effected.
Certain municipal
bonds may be obligations that are secured by lease payments of a governmental entity (“lease obligations”).
Lease obligations are often in the form of certificates of participation. Although the lease obligations do not constitute general
obligations of the municipality for which the municipality’s taxing power is pledged, a lease obligation is ordinarily backed
by the municipality’s covenant to appropriate for and make the payments due under the lease obligation. However, certain
lease obligations contain “non-appropriation”
clauses which provide that the municipality
has no obligation to make lease payments in future years unless money is appropriated for such purpose on a yearly basis. A governmental
entity that enters into such a lease agreement cannot obligate future governments to appropriate for and make lease payments but
covenants to take such action as is necessary to include any lease payments due in its budgets and to make the appropriations therefor.
A governmental entity’s failure to appropriate for and to make payments under its lease obligation could result in insufficient
funds available for payment of the obligations secured thereby. Although “non-appropriation” lease obligations are
secured by the leased property, disposition of the property in the event of foreclosure might prove difficult.
Certain municipal
bonds may be obligations of issuers which are, or which govern the operation of, schools, colleges and universities and whose revenues
are derived mainly from ad valorem taxes or for higher education systems, from tuition, dormitory revenues, grants and endowments.
General problems relating to school bonds include litigation contesting the state constitutionality of financing public education
in part from ad valorem taxes, thereby creating a disparity in educational funds available to schools in wealthy areas and schools
in poor areas. Litigation or legislation on this issue may affect the sources of funds available for the payment of school bonds.
General problems relating to college and university obligations include the prospect of declining student enrollment, possible
inability to raise tuitions and fees sufficiently to cover operating costs, the uncertainty of continued receipt of federal grants
and state funding and government legislation or regulations which may adversely affect the revenues or costs of such issuers.
Certain municipal
bonds may be obligations which are payable from and secured by revenues derived from the ownership and operation of facilities
such as airports, bridges, turnpikes, port authorities, convention centers and arenas. The major portion of an airport’s
gross operating income is generally derived from fees received from signatory airlines pursuant to use agreements which consist
of annual payments for leases, occupancy of certain terminal space and service fees. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations under the use agreements. From time to time the air transport
industry has experienced significant variations in earnings and traffic, due to increased competition, excess capacity, increased
costs, deregulation, traffic constraints and other factors, and several airlines have experienced severe financial difficulties.
Similarly, payment on bonds related to other facilities is dependent on revenues from the projects, such as user fees from ports,
tolls on turnpikes and bridges and rents from buildings. Therefore, payment may be adversely affected by reduction in revenues
due to such factors as increased cost of maintenance, decreased use of a facility, lower cost of alternative modes of transportation,
scarcity of fuel and reduction or loss of rents.
Certain municipal
bonds may be obligations which are payable from and secured by revenues derived from the operation of resource recovery facilities.
Resource recovery facilities are designed to process solid waste, generate steam and convert steam to electricity. Resource recovery
bonds may be subject to extraordinary optional redemption at par upon the occurrence of certain circumstances, including but not
limited to: destruction or condemnation of a project; contracts relating to a project becoming void, unenforceable or impossible
to perform; changes in the economic availability of raw materials, operating supplies or facilities necessary for the
operation of a project; technological
or other unavoidable changes adversely affecting the operation of a project; and administrative or judicial actions which render
contracts relating to the projects void, unenforceable or impossible to perform or impose unreasonable burdens or excessive liabilities.
No one can predict the causes or likelihood of the redemption of resource recovery bonds prior to the stated maturity of the bonds.
Certain municipal
bonds may have been acquired at a market discount from par value at maturity. A “tax-exempt” municipal bond purchased
at a market discount and held to maturity will have a larger portion of its total return in the form of taxable income and capital
gain and less in the form of tax-exempt interest income than a comparable bond newly issued at current market rates.
Certain municipal
bonds may be subject to redemption prior to their stated maturity date pursuant to sinking fund provisions, call provisions or
extraordinary optional or mandatory redemption provisions or otherwise. A sinking fund is a reserve fund accumulated over a period
of time for retirement of debt. A callable debt obligation is one which is subject to redemption or refunding prior to maturity
at the option of the issuer. A refunding is a method by which a debt obligation is redeemed, at or before maturity, by the proceeds
of a new debt obligation. In general, call provisions are more likely to be exercised when the offering side valuation is at a
premium over par than when it is at a discount from par. The exercise of redemption or call provisions will (except to the extent
the proceeds of the called bonds are used to pay for unit redemptions) result in the distribution of principal and may result in
a reduction in the amount of subsequent interest distributions. Extraordinary optional redemptions and mandatory redemptions result
from the happening of certain events. Generally, events that may permit the extraordinary optional redemption of bonds or may require
the mandatory redemption of bonds include, among others: a final determination that the interest on the bonds is taxable; the substantial
damage or destruction by fire or other casualty of the project for which the proceeds of the bonds were used; an exercise by a
local, state or federal governmental unit of its power of eminent domain to take all or substantially all of the project for which
the proceeds of the bonds were used; changes in the economic availability of raw materials, operating supplies or facilities; technological
or other changes which render the operation of the project for which the proceeds of the bonds were used uneconomic; changes in
law or an administrative or judicial decree which renders the performance of the agreement under which the proceeds of the bonds
were made available to finance the project impossible or which creates unreasonable burdens or which imposes excessive liabilities,
such as taxes, not imposed on the date the bonds are issued on the issuer of the bonds or the user of the proceeds of the bonds;
an administrative or judicial decree which requires the cessation of a substantial part of the operations of the project financed
with the proceeds of the bonds; an overestimate of the costs of the project to be financed with the proceeds of the bonds resulting
in excess proceeds of the bonds which may be applied to redeem bonds; or an underestimate of a source of funds securing the bonds
resulting in excess funds which may be applied to redeem bonds. The issuer of certain bonds may have sold or reserved the right
to sell, upon the satisfaction of certain conditions, to third parties all or any portion of its rights to call bonds in accordance
with the stated redemption provisions of such bonds. In such a case the issuer no longer has the right to call the bonds for redemption
unless it reacquires the rights from such third party. A third party pursuant to these rights may exercise the redemption provisions
with respect to a bond at a time when the issuer of the bond might not
have called a bond for redemption had
it not sold such rights. No one can predict all of the circumstances which may result in such redemption of an issue of bonds.
See also the discussion of single family mortgage and multi-family revenue bonds above for more information on the call provisions
of such bonds.
Convertible
Securities. Convertible securities are generally debt obligations or preferred stock of a company that are convertible
into another security of the company, typically common stock. Convertible securities generally offer lower interest or dividend
yields than non-convertible fixed-income securities of similar credit quality because of the potential for capital appreciation.
The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest
rates decline. However, a convertible security’s market value also tends to reflect the market price of the common stock
of the issuing company, particularly when the stock price is greater than the convertible security’s conversion price. The
conversion price is defined as the predetermined price or exchange ratio at which the convertible security can be converted or
exchanged for the underlying common stock. As the market price of the underlying common stock declines below the conversion price,
the price of the convertible security tends to be increasingly influenced more by the yield of the convertible security than by
the market price of the underlying common stock. Thus, it may not decline in price to the same extent as the underlying common
stock, and convertible securities generally have less potential for gain or loss than common stocks. However, mandatory convertible
securities (as discussed below) generally do not limit the potential for loss to the same extent as securities convertible at the
option of the holder. In the event of a liquidation of the issuing company, holders of convertible securities would be paid before
that company’s common stockholders. Consequently, an issuer’s convertible securities generally entail less risk than
its common stock. However, convertible securities generally fall below other debt obligations of the same issuer in order of preference
or priority in the event of a liquidation and are typically unrated or rated lower than such debt obligations. In addition, contingent
payment, convertible securities allow the issuer to claim deductions based on its nonconvertible cost of debt, which generally
will result in deduction in excess of the actual cash payments made on the securities (and accordingly, holders will recognize
income in amounts in excess of the cash payments received).
Mandatory convertible
securities are distinguished as a subset of convertible securities because the conversion is not optional and the conversion price
at maturity is based solely upon the market price of the underlying common stock,
which may be significantly less than par or the price (above or below par) paid. For these reasons, the risks associated with investing
in mandatory convertible securities most closely resemble the risks inherent in common stocks. Mandatory convertible securities
customarily pay a higher coupon yield to compensate for the potential risk of additional price volatility and loss upon conversion.
Because the market price of a mandatory convertible security increasingly corresponds to the market price of its underlying common
stock as the convertible security approaches its conversion date, there can be no assurance that the higher coupon will compensate
for the potential loss.
Senior Loans.
Senior loans may be issued by banks, other financial institutions, and other investors to corporations, partnerships, limited liability
companies and other entities to finance leveraged buyouts, recapitalizations, mergers, acquisitions, stock repurchases, debt refinancings
and, to a lesser extent, for general operating and other purposes. Senior loans generally are of
below investment grade credit quality
and may be unrated at the time of investment. They generally are not registered with the SEC or any state securities commission
and generally are not listed on any securities exchange.
An investment in
senior loans involves risk that the borrowers under senior loans may default on their obligations to pay principal or interest
when due. Although senior loans may be secured by specific collateral, there can be no assurance that liquidation of collateral
would satisfy the borrower’s obligation in the event of non-payment or that such collateral could be readily liquidated.
Senior loans are typically structured as floating rate instruments in which the interest rate payable on the obligation fluctuates
with interest rate changes. As a result, the yield on an investment in senior loans will generally decline in a falling interest
rate environment and increase in a rising interest rate environment. Additionally, senior loans generally have floating interest
rates that may be tied to the London Inter-Bank Offered Rate (“LIBOR”), which is set to be phased out by 2021.
The potential phase out of LIBOR could adversely affect the value of investments tied to LIBOR.
The amount of public
information available on senior loans generally will be less extensive than that available for other types of assets. No reliable,
active trading market currently exists for many senior loans, although a secondary market for certain senior loans does exist.
Senior loans are thus relatively illiquid. If a fund held by a trust invests in senior loans, liquidity of a senior loan refers
to the ability of the fund to sell the investment in a timely manner at a price approximately equal to its value on the fund’s
books. The illiquidity of senior loans may impair a fund’s ability to realize the full value of its assets in the event of
a voluntary or involuntary liquidation of such assets. Because of the lack of an active trading market, illiquid securities are
also difficult to value and prices provided by external pricing services may not reflect the true value of the securities. However,
many senior loans are of a large principal amount and are held by financial institutions. To the extent that a secondary market
does exist for certain senior loans, the market may be subject to irregular trading activity, wide bid/ask spreads and extended
trade settlement periods. The market for senior loans could be disrupted in the event of an economic downturn or a substantial
increase or decrease in interest rates. This could result in increased volatility in the market and in a trust’s net asset
value.
If legislation or
state or federal regulators impose additional requirements or restrictions on the ability of financial institutions to make loans
that are considered highly leveraged transactions, the availability of senior loans for investment may be adversely affected. In
addition, such requirements or restrictions could reduce or eliminate sources of financing for certain borrowers. This would increase
the risk of default. If legislation or federal or state regulators require financial institutions to dispose of senior loans that
are considered highly leveraged transactions or subject such senior loans to increased regulatory scrutiny, financial institutions
may determine to sell such senior loans. Such sales could result in depressed prices. The price for the senior loan may be adversely
affected if sold at a time when a financial institution is engaging in such a sale.
Some senior loans
are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate the senior loans
to presently existing or future indebtedness of the borrower or take other action detrimental to lenders. Such court action could
under certain circumstances include
invalidation of senior loans. Any lender, which could include a fund held by a trust, is subject to the risk that a court could
find the lender liable for damages in a claim by a borrower arising under the common laws of tort or contracts or anti-fraud provisions
of certain securities laws for actions taken or omitted to be taken by the lenders under the relevant terms of a loan agreement
or in connection with actions with respect to the collateral underlying the senior loan.
Floating Rate
Instruments. A floating rate security is an instrument in which the interest rate payable on the obligation fluctuates
on a periodic basis based upon changes in a benchmark, often related to interest rates. As a result, the yield on such a security
will generally decline with negative changes to the benchmark, causing an investor to experience a reduction in the income it receives
from such securities. A sudden and significant increase in the applicable benchmark may increase the risk of payment defaults and
cause a decline in the value of the security.
Asset-Backed
Securities. Asset-backed securities (“ABS”) are securities backed by pools of loans or other
receivables. ABS are created from many types of assets, including auto loans, credit card receivables, home equity loans and student
loans. ABS are issued through special purpose vehicles that are bankruptcy remote from the issuer of the collateral. The credit
quality of an ABS transaction depends on the performance of the underlying assets. To protect ABS investors from the possibility
that some borrowers could miss payments or even default on their loans, ABS include various forms of credit enhancement. Some ABS,
particularly home equity loan transactions, are subject to interest rate risk and prepayment risk. A change in interest rates can
affect the pace of payments on the underlying loans, which in turn, affects total return on the securities. ABS also carry credit
or default risk. If many borrowers on the underlying loans default, losses could exceed the credit enhancement level and result
in losses to investors in an ABS transaction. Finally, ABS have structure risk due to a unique characteristic known as early amortization,
or early payout, risk. Built into the structure of most ABS are triggers for early payout, designed to protect investors from losses.
These triggers are unique to each transaction and can include: a big rise in defaults on the underlying loans, a sharp drop in
the credit enhancement level, or even the bankruptcy of the originator. Once early amortization begins, all incoming loan payments
(after expenses are paid) are used to pay investors as quickly as possible based upon a predetermined priority of payment.
Mortgage-Backed
Securities. Mortgage-backed securities are a type of ABS representing direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real property and can include single- and multi-class pass-through
securities and collateralized mortgage obligations. Mortgage-backed securities are based on different types of mortgages, including
those on commercial real estate or residential properties. These securities often have stated maturities of up to thirty years
when they are issued, depending upon the length of the mortgages underlying the securities. In practice, however, unscheduled or
early payments of principal and interest on the underlying mortgages may make the securities’ effective maturity shorter
than this. Rising interest rates tend to extend the duration of mortgage-backed securities, making them more sensitive to changes
in interest rates, and may reduce the market value of the securities. In addition, mortgage-backed securities are subject to prepayment
risk, the risk that borrowers may pay off their mortgages sooner than expected, particularly when interest rates decline.
Sovereign
Debt. Sovereign debt instruments are subject to the risk that a governmental entity may delay or refuse to pay interest
or repay principal on its sovereign debt, due, for example, to cash flow problems, insufficient foreign currency reserves, political
considerations, the relative size of the governmental entity’s debt position in relation to the economy or the failure to
put in place required economic reforms. If a governmental entity defaults, it may ask for more time in which to pay or for further
loans. There is no legal process for collecting sovereign debt that a government does not pay nor are there bankruptcy proceedings
through which all or part of the sovereign debt that a governmental entity has not repaid may be collected.
U.S. Government
Obligations Risk. Obligations of U.S. government agencies, authorities, instrumentalities and sponsored enterprises
have historically involved little risk of loss of principal if held to maturity. However, not all U.S. government securities are
backed by the full faith and credit of the United States. Obligations of certain agencies, authorities, instrumentalities and sponsored
enterprises of the U.S. government are backed by the full faith and credit of the United States (e.g., the Government National
Mortgage Association); other obligations are backed by the right of the issuer to borrow from the U.S. Treasury (e.g., the
Federal Home Loan Banks) and others are supported by the discretionary authority of the U.S. government to purchase an agency’s
obligations. Still others are backed only by the credit of the agency, authority, instrumentality or sponsored enterprise issuing
the obligation. No assurance can be given that the U.S. government would provide financial support to any of these entities if
it is not obligated to do so by law.
Money Market
Securities. Certain funds held by a trust may invest in money market securities. If market conditions improve while
a fund has temporarily invested some or all of its assets in high quality money market securities, this strategy could result in
reducing the potential gain from the market upswing, thus reducing a fund’s opportunity to achieve its investment objective.
Derivatives
Risk. Certain funds held by a trust may engage in transactions in derivatives. Derivatives are subject to counterparty
risk which is the risk that the other party in a transaction may be unable or unwilling to meet obligations when due. Use of derivatives
may increase volatility of a fund and reduce returns. Fluctuations in the value of derivatives may not correspond with fluctuations
of underlying exposures. Unanticipated market movements could result in significant losses on derivative positions including greater
losses than amounts originally invested and potentially unlimited losses in the case of certain derivatives. There are no assurances
that there will be a secondary market available in any derivative position which could result in illiquidity and the inability
of a fund to liquidate or terminate positions as valued. Valuation of derivative positions may be difficult and increase during
times of market turmoil. Certain derivatives may be used as a hedge against other securities positions; however, hedging can be
subject to the risk of imperfect alignment and there are no assurances that a hedge will be achieved as intended which can pose
significant loss to a fund. The derivatives market is subject to the risk of changing or increased regulation which may make derivatives
more costly, limit the availability of derivatives or otherwise adversely affect the value or performance of derivatives. Examples
of increased regulation include, but are not limited to, the imposition of clearing and reporting requirements on transactions
that fall within the definition of “swap” and
“security-based swap,”
increased recordkeeping and reporting requirements, changing definitional and registration requirements, and changes to the way
that funds’ use of derivatives is regulated. No one can predict the effects of any new governmental regulation that may be
implemented on the ability of a fund to use any financial derivative product, and there can be no assurance that any new governmental
regulation will not adversely affect a fund’s ability to achieve its investment objective. The federal income tax treatment
of a derivative may not be as favorable as a direct investment in the asset that a derivative provides exposure to, which may adversely
impact the timing, character and amount of income a fund realizes from its investment. The tax treatment of certain derivatives
is unsettled and may be subject to future legislation, regulation or administrative pronouncements.
Options.
A trust may hold a fund or funds that write (sell) or purchase options as part of its investment strategy. In addition to general
risks associated with derivatives described above, options are considered speculative. When a fund purchases an option, it may
lose the premium paid for it if the price of the underlying security or other assets decreases or remains the same (in the case
of a call option) or increases or remains the same (in the case of a put option). If a put or call option purchased by a fund were
permitted to expire without being sold or exercised, its premium would represent a loss to a fund. To the extent that a fund writes
or sells an option, if the decline or increase in the underlying asset is significantly below or above the exercise price of the
written option, a fund could experience substantial and potentially unlimited losses.
There can be no
assurance that a liquid market for the options will exist when a fund seeks to close out an option position. Reasons for the absence
of a liquid secondary market on an exchange may include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or
unforeseen of an exchange or The Options Clearing Corporation (“OCC”) may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of options). If trading were discontinued, the secondary
market on that exchange (or in that class or series of options) would cease to exist. However, outstanding options on that exchange
that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their
terms. A fund’s ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve
the risk that broker-dealers participating in such transactions will not fulfill their obligations. If a fund were unable to close
out a covered call option that it had written (sold) on a security, it would not be able to sell the underlying security unless
the option expired without exercise.
The hours of trading
for options may not conform to the hours during which the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. Additionally, the exercise price of an option may be adjusted downward before
the option’s expiration as a result of the occurrence of certain corporate events affecting the underlying equity security,
such as extraordinary dividends, stock splits, merger or other extraordinary distributions or events. In
certain circumstances, a reduction in
the exercise price of an option could reduce a fund’s capital appreciation potential on the underlying security.
To the extent that
a fund purchases options pursuant to a hedging strategy, the fund will be subject to the following additional risks. If a put or
call option purchased by a fund is not sold when it has remaining value, and if the market price of the underlying security remains
equal to or greater than the exercise price (in the case of a put), or remains less than or equal to the exercise price (in the
case of a call), the fund will lose its entire investment in the option. Also, where a put or call option on a particular security
is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less
than the price of the related security. If restrictions on exercise were imposed, a fund might be unable to exercise an option
it had purchased. If a fund were unable to close out an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option may expire worthless.
The writing (selling)
and purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of options depends in part on the ability of a fund’s
adviser to predict future price fluctuations and, for hedging transactions, the degree of correlation between the options and securities
or currency markets.
If a fund employs
a covered call strategy, a fund will generally write (sell) call options on a significant portion of the fund’s managed assets.
These call options will give the option holder the right, but not the obligation, to purchase a security from the fund at the strike
price on or prior to the option’s expiration date. The ability to successfully implement the fund’s investment strategy
depends on the fund adviser’s ability to predict pertinent market movements, which cannot be assured. Thus, the use of options
may require a fund to sell portfolio securities at inopportune times or for prices other than current market values, may limit
the amount of appreciation the fund can realize on an investment or may cause the fund to hold a security that it might otherwise
sell. The writer (seller) of an option has no control over the time when it may be required to fulfill its obligation as a writer
(seller) of the option. Once an option writer (seller) has received an exercise notice, it cannot effect a closing purchase transaction
in order to terminate its obligation under the option and must deliver the underlying security at the exercise price. As the writer
(seller) of a covered call option, a fund forgoes, during the option’s life, the opportunity to profit from increases in
the market value of the security underlying the call option above the sum of the premium and the strike price of the call option,
but has retained the risk of loss should the price of the underlying security decline. The value of the options written (sold)
by a fund will be affected by changes in the value and dividend rates of the underlying equity securities, an increase in interest
rates, changes in the actual or perceived volatility of securities markets and the underlying securities and the remaining time
to the options’ expirations. The value of the options may also be adversely affected if the market for the options becomes
less liquid or smaller.
An option is generally
considered “covered” if a fund owns the security underlying the call option or has an absolute and immediate right
to acquire that security without additional cash consideration (or, if required, liquid cash or other assets are segregated by
the fund) upon
conversion or exchange of other securities
held by the fund. In certain cases, a call option may also be considered covered if a fund holds a call option on the same security
as the call option written (sold) provided that certain conditions are met. By writing (selling) covered call options, a fund generally
seeks to generate income, in the form of the premiums received for writing (selling) the call options. Investment income paid by
a fund to its shareholders (such as a trust) may be derived primarily from the premiums it receives from writing (selling) call
options and, to a lesser extent, from the dividends and interest it receives from the equity securities or other investments held
in the fund’s portfolio and short-term gains thereon. Premiums from writing (selling) call options and dividends and interest
payments made by the securities in a fund’s portfolio can vary widely over time.
Swaps.
Certain funds held by a trust may invest in swaps. In addition to general risks associated with derivatives described above,
swap agreements involve the risk that the party with whom a fund has entered into the swap will default on its obligation to pay
a fund and the risk that a fund will not be able to meet its obligations to pay the other party to the agreement. Swaps entered
into by a fund may include, but are not limited to, interest rate swaps, total return swaps and/or credit default swaps. In an
interest rate swap transaction, two parties exchange rights to receive interest payments, such as exchanging the right to receive
floating rate payments based on a reference interest rate for the right to receive fixed rate payments. In addition to the general
risks associated with derivatives and swaps described above, interest rate swaps are subject to interest rate risk and credit risk.
In a total return swap transaction, one party agrees to pay another party an amount equal to the total return on a reference asset
during a specified period of time in return for periodic payments based on a fixed or variable interest rate or on the total return
from a different reference asset. In addition to the general risks associated with derivatives and swaps described above, total
return swaps could result in losses if the reference asset does not perform as anticipated and these swaps can have the potential
for unlimited losses. In a credit default swap transaction, one party makes one or more payments over the term of the contract
to the counterparty, provided that no event of default with respect to a specific obligation or issuer has occurred. In return,
upon any event of default, such party would receive from the counterparty a payment equal to the par (or other agreed-upon)
value of such specified obligation. In addition to general risks associated with derivatives and swaps described above, credit
default swaps involve special risks because they are difficult to value, are highly susceptible to liquidity and credit risk and
generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying
obligation (as opposed to a credit downgrade or other indication of financial difficulty).
Forward Foreign
Currency Exchange Contracts. Certain funds held by a trust may engage in forward foreign currency exchange transactions.
Forward foreign exchange transactions are contracts to purchase or sell a specified amount of a specified currency or multinational
currency unit at a price and future date set at the time of the contract. Forward foreign currency exchange contracts do not eliminate
fluctuations in the value of non-U.S. securities but rather allow a fund to establish a fixed rate of exchange for a future
point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.
Indexed and
Inverse Securities. Certain funds held by a trust may invest in indexed and inverse securities. In addition to general
risks associated with derivatives described above,
indexed and inverse securities are subject
to risk with respect to the value of the particular index. These securities are subject to leverage risk and correlation risk.
Certain indexed and inverse securities have greater sensitivity to changes in interest rates or index levels than other securities,
and a fund’s investment in such instruments may decline significantly in value if interest rates or index levels move in
a way a fund’s management does not anticipate.
Futures.
Certain funds held by a trust may engage in futures transactions. In addition to general risks associated with derivatives described
above, the primary risks associated with the use of futures contracts and options are (a) the imperfect correlation between
the change in market value of the instruments held by a fund and the price of the futures contract or option; (b) possible
lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired;
(c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the investment adviser’s
inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors;
and (e) the possibility that the counterparty will default in the performance of its obligations. While futures contracts
are generally liquid instruments, under certain market conditions they may become illiquid. Futures exchanges may impose daily
or intra-day price change limits and/or limit the volume of trading. Additionally, government regulation may further reduce
liquidity through similar trading restrictions.
Repurchase
Agreement Risk. A repurchase agreement is a form of short-term borrowing where a dealer sells securities to investors
(usually on an overnight basis) and buys them back the following day. If the other party to a repurchase agreement defaults on
its obligation under such agreement, a fund held by a trust may suffer delays and incur costs or lose money in exercising its rights
under the agreement. If the seller fails to repurchase the security under a repurchase agreement and the market value of such security
declines, such fund may lose money.
Short Sales
Risk. Certain funds held by a trust may engage in short sales. Because making short sales in securities that it
does not own exposes a fund to the risks associated with those securities, such short sales involve speculative exposure risk.
A fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short sale
and the date on which such fund replaces the security sold short. A fund will realize a gain if the security declines in price
between those dates. As a result, if a fund makes short sales in securities that increase in value, it will likely underperform
similar funds that do not make short sales in securities they do not own. There can be no assurance that a fund will be able to
close out a short sale position at any particular time or at an acceptable price. Although a fund’s gain is limited to the
amount at which it sold a security short, its potential loss is limited only by the maximum attainable price of the security, less
the price at which the security was sold. Short sale transactions involve leverage because they can provide investment exposure
in an amount exceeding the initial investment. A fund may also pay transaction costs and borrowing fees in connection with short
sales.
Commodities.
Certain funds held by a trust may have exposure to the commodities market. This exposure could expose such funds and to greater
volatility than investment in other securities. The value of investments providing commodity exposure may be affected by changes
in overall market movements, commodity index volatility, changes in interest rates, or factors
affecting a particular industry or commodity,
such as drought, floods, weather, embargoes, tariffs and international economic, political and regulatory developments.
Concentration
Risk. Concentration risk is the risk that the value of a trust may be more susceptible to fluctuations based on factors
that impact a particular sector because the trust provides exposure to investments concentrated within a particular sector or sectors.
A portfolio “concentrates” in a sector when securities in a particular sector make up 25% or more of the portfolio.
Communication
Services Sector. General risks of communication services companies include rapidly changing technology, rapid product obsolescence,
loss of patent protection, cyclical market patterns, evolving industry standards and frequent new product introductions. Certain
communication companies are subject to substantial governmental regulation, which among other things, regulates permitted rates
of return and the kinds of services that a company may offer. Media and entertainment companies are subject to changing demographics,
consumer preferences and changes in the way people communicate and access information and entertainment content. Certain of these
companies may be particularly susceptible to cybersecurity threats, which could have an adverse effect on their business. Companies
in this sector may be subject to fierce competition for market share from existing competitors and new market entrants. Such competitive
pressures are intense and communication stocks can experience extreme volatility.
Companies in the
communication sector may encounter distressed cash flows and heavy debt burdens due to the need to commit substantial capital to
meet increasing competition and research and development costs. Technological innovations may also make the existing products and
services of communication companies obsolete. In addition, companies in this sector can be impacted by a lack of investor or consumer
acceptance of new products, changing consumer preferences and lack of standardization or compatibility with existing technologies
making implementation of new products more difficult.
Consumer Discretionary
and Consumer Staples Sectors. The profitability of companies that manufacture or sell consumer products or provide consumer
services may be affected by various factors including the general state of the economy and consumer spending trends. The viability
of the retail industry depends on the industry’s ability to adapt and to compete in changing economic and social conditions,
to attract and retain capable management, and to finance expansion. Weakness in the banking or real estate industry, a recessionary
economic climate with the consequent slowdown in employment growth, less favorable trends in unemployment or a marked deceleration
in real disposable personal income growth could result in significant pressure on both consumer wealth and consumer confidence,
adversely affecting consumer spending habits. In addition, competitiveness of the retail industry may require large capital outlays
for technological investments. Increasing employee and retiree benefit costs may also have an adverse effect on the industry. In
many sectors of the retail industry, competition may be fierce due to market saturation, converging consumer tastes and other factors.
Many retailers may be involved in entering global markets which entail added risks such as sudden weakening of foreign economies,
difficulty in adapting to local conditions and constraints and added research costs.
Energy Sector.
Energy companies may include but are not limited to companies involved in: production, generation, transmission, marketing,
control, or measurement of energy; the provision of component parts or services to companies engaged in the above activities; energy
research or experimentation; and environmental activities related to the solution of energy problems, such as energy conservation
and pollution control.
The securities of
companies in the energy field are subject to changes in value and dividend yield which depend, to a large extent, on the price
and supply of energy fuels. Swift price and supply fluctuations may be caused by events relating to international politics, energy
conservation, the success of exploration projects, and tax and other regulatory policies of various governments. As a result of
the foregoing, the securities issued by energy companies may be subject to rapid price volatility.
Any future scientific
advances concerning new sources of energy and fuels or legislative changes relating to the energy sector or the environment could
have a negative impact on the energy sector. Each of the problems referred to could adversely affect the financial stability of
the issuers of any energy sector securities.
Financials
Sector. Companies in the financials sector may include banks and their holding companies, finance companies, investment
managers, broker-dealers, insurance and reinsurance companies and mortgage REITs. Banks and their holding companies are especially
subject to the adverse effects of economic recession, volatile interest rates, portfolio concentrations in geographic markets and
in commercial and residential real estate loans and competition from new entrants in their fields of business. In addition, banks
and their holding companies are extensively regulated at both the federal and state level and may be adversely affected by increased
regulations. Banks may face increased competition from nontraditional lending sources as regulatory changes permit new entrants
to offer various financial products. Technological advances allow these nontraditional lending sources to cut overhead and permit
the more efficient use of customer data. Banks face tremendous pressure from mutual funds, brokerage firms and other providers
in the competition to furnish services that were traditionally offered by banks.
Companies engaged
in investment management and broker-dealer activities are subject to volatility in their earnings and share prices that often exceeds
the volatility of the equity market in general. Adverse changes in the direction of the stock market, investor confidence, equity
transaction volume, the level and direction of interest rates and the outlook of emerging markets could adversely affect the financial
stability, as well as the stock prices, of these companies. Additionally, competitive pressures, including increased competition
with new and existing competitors, the ongoing commoditization of traditional businesses and the need for increased capital expenditures
on new technology could adversely impact the profit margins of companies in the investment management and brokerage industries.
Companies involved in investment management and broker-dealer activities are also subject to extensive regulation by government
agencies and self-regulatory organizations, and changes in laws, regulations or rules, or in the interpretation of such laws, regulations
and rules could adversely affect the stock prices of such companies.
Companies involved
in the insurance, reinsurance and risk management industry underwrite, sell or distribute property, casualty and business insurance.
Many factors affect insurance, reinsurance and risk management company profits, including but not limited to interest rate movements,
the imposition of premium rate caps, a misapprehension of the risks involved in given underwritings, competition and pressure to
compete globally, weather catastrophes or other natural or man-made disasters and the effects of client mergers. Individual companies
may be exposed to material risks including reserve inadequacy and the inability to collect from reinsurance carriers. Insurance
companies are subject to extensive governmental regulation, including the imposition of maximum rate levels, which may not be adequate
for some lines of business. Proposed or potential tax law changes may also adversely affect insurance companies’ policy sales,
tax obligations and profitability. In addition to the foregoing, profit margins of these companies continue to shrink due to the
commoditization of traditional businesses, new competitors, capital expenditures on new technology and the pressure to compete
globally.
In addition to the
normal risks of business, companies involved in the insurance and risk management industry are subject to significant risk factors,
including those applicable to regulated insurance companies, such as: the inherent uncertainty in the process of establishing property-liability
loss reserves, and the fact that ultimate losses could materially exceed established loss reserves, which could have a material
adverse effect on results of operations and financial condition; the fact that insurance companies have experienced, and can be
expected in the future to experience, catastrophic losses, which could have a material adverse impact on their financial conditions,
results of operations and cash flow; the inherent uncertainty in the process of establishing property-liability loss reserves due
to changes in loss payment patterns caused by new claim settlement practices; the need for insurance companies and their subsidiaries
to maintain appropriate levels of statutory capital and surplus, particularly in light of continuing scrutiny by rating organizations
and state insurance regulatory authorities, and in order to maintain acceptable financial strength or claims-paying ability ratings;
the extensive regulation and supervision to which insurance companies are subject, and various regulatory and other legal actions;
the adverse impact that increases in interest rates could have on the value of an insurance company’s investment portfolio
and on the attractiveness of certain of its products; and the uncertainty involved in estimating the availability of reinsurance
and the collectability of reinsurance recoverables.
The state insurance
regulatory framework is also subject to the risk of federal and state legislatures potentially enacting laws that alter or increase
regulation of insurance companies and insurance holding company systems. Previously, Congress and certain federal agencies have
investigated the condition of the insurance industry in the United States to determine whether to promulgate additional federal
regulation. The Sponsor is unable to predict whether any state or federal legislation will be enacted to change the nature or scope
of regulation of the insurance industry, or what effect, if any, such legislation would have on the industry.
All insurance companies
are subject to state laws and regulations that require diversification of their investment portfolios and limit the amount of investments
in certain investment categories. Failure to comply with these laws and regulations would cause non-
conforming investments to be treated
as non-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture.
Mortgage REITs engage
in financing real estate, purchasing or originating mortgages and mortgage-backed securities and earning income from the interest
on these investments. Such REITs face risks similar to those of other financial firms, such as changes in interest rates, general
market conditions and credit risk, in addition to risks associated with an investment in real estate (as discussed herein).
Health Care
Sector. Health care companies involved in advanced medical devices and instruments, drugs and biotech, managed care, hospital
management/health services and medical supplies have potential risks unique to their sector of the health care field. These companies
are subject to governmental regulation of their products and services, a factor which could have a significant and possibly unfavorable
effect on the price and availability of such products or services. Furthermore, such companies face the risk of increasing competition
from new products or services, generic drug sales, termination of patent protection for drug or medical supply products and the
risk that technological advances will render their products obsolete. The research and development costs of bringing a drug to
market are substantial, and include lengthy governmental review processes with no guarantee that the product will ever come to
market. Many of these companies may have losses and not offer certain products for several years. Such companies may also have
persistent losses during a new product’s transition from development to production, and revenue patterns may be erratic.
In addition, health care facility operators may be affected by events and conditions including, among other things, demand for
services, the ability of the facility to provide the services required, physicians’ confidence in the facility, management
capabilities, competition with other hospitals, efforts by insurers and governmental agencies to limit rates, legislation establishing
state rate-setting agencies, expenses, government regulation, the cost and possible unavailability of malpractice insurance and
the termination or restriction of governmental financial assistance, including that associated with Medicare, Medicaid and other
similar third-party payor programs. Legislative proposals concerning health care are proposed in Congress from time to time. These
proposals may span a wide range of topics, including cost and price controls (which might include a freeze on the prices of prescription
drugs), national health insurance incentives for competition in the provision of health care services, tax incentives and penalties
related to health care insurance premiums and promotion of prepaid health care plans.
Industrials
Sector. General risks of industrials companies include the general state of the economy, intense competition, consolidation,
domestic and international politics, excess capacity and consumer spending trends. In addition, capital goods companies may also
be significantly affected by overall capital spending levels, economic cycles, technical obsolescence, delays in modernization,
limitations on supply of key materials, labor relations, government regulations, government contracts and ecommerce initiatives.
Furthermore, certain companies involved in the industry have also faced scrutiny for alleged accounting irregularities that may
have led to the overstatement of their financial results, and other companies in the industry may face similar scrutiny.
Industrials companies
may also be affected by factors more specific to their individual industries. Industrial machinery manufacturers may be subject
to declines in commercial and consumer demand and the need for modernization. Aerospace and defense companies may be influenced
by decreased demand for new equipment, aircraft order cancellations, disputes over or ability to obtain or retain government contracts,
or changes in government budget priorities, changes in aircraft-leasing contracts and cutbacks in profitable business travel.
Information
Technology Sector. Information technology companies generally include companies involved in the development, design, manufacture
and sale of computers and peripherals, software and services, data networking and communications equipment, internet access and
information providers, semiconductors and semiconductor equipment and other related products, systems and services. The market
for these products, especially those specifically related to the internet, may be characterized by rapidly changing technology,
product obsolescence, cyclical markets, evolving industry standards and frequent new product introductions. The success of companies
in this sector depends, in substantial part, on the timely and successful introduction of new products. An unexpected change in
one or more of the technologies affecting a company’s products or in the market for products based on a particular technology
could have a material adverse effect on an issuer’s operating results. Furthermore, there can be no assurance that any particular
company will be able to respond in a timely manner to compete in the rapidly developing marketplace.
Factors such as
announcements of new products or development of new technologies and general conditions of the industry have caused and are likely
to cause the market price of high- technology common stocks to fluctuate substantially. In addition, technology company stocks
may experience extreme price and volume fluctuations that are often unrelated to the operating performance of such companies. Such
market volatility may adversely affect the price of shares of these companies.
Some key components
of certain products of technology issuers may be available only from single sources. There can be no assurance that suppliers will
be able to meet the demand for components in a timely and cost-effective manner. Accordingly, an issuer’s operating results
and customer relationships could be adversely affected by either an increase in price for, or an interruption or reduction in supply
of, any key components. Additionally, technology issuers may have a highly concentrated customer base consisting of a limited number
of large customers who may require product vendors to comply with rigorous industry standards. Any failure to comply with such
standards may result in a significant loss or reduction of sales. Because many products and technologies of technology companies
are incorporated into other related products, such companies are often highly dependent on the performance of the personal computer,
electronics and telecommunications industries. There can be no assurance that these customers will place additional orders, or
that an issuer will obtain orders of similar magnitude as past orders from other customers. Similarly, the success of certain technology
companies is tied to a relatively small concentration of products or technologies. Accordingly, a decline in demand of such products,
technologies or from such customers could have a material adverse impact on companies in this sector.
Many technology
companies rely on a combination of patents, copyrights, trademarks and trade secret laws to establish and protect their proprietary
rights in their products and technologies. There can be no assurance that the steps taken to protect proprietary rights will be
adequate to prevent misappropriation of technology or that competitors will not independently develop technologies that are substantially
equivalent or superior to an issuer’s technology. In addition, due to the increasing public use of the internet, it is possible
that other laws and regulations may be adopted to address issues such as privacy, pricing, characteristics, and quality of internet
products and services. The adoption of any such laws could have a material adverse impact on the issuers of securities in the information
technology sector.
Materials
Sector. Companies in the basic materials sector are engaged in the manufacture, mining, processing, or distribution of
raw materials and intermediate goods used in the industrial sector. These may include materials and products such as chemicals,
commodities, forestry products, paper products, copper, iron ore, nickel, steel, aluminum, precious metals, textiles, cement, and
gypsum. Basic materials companies may be affected by the volatility of commodity prices, exchange rates, import controls, worldwide
competition, depletion of resources, and mandated expenditures for safety and pollution control devices. In addition, they may
be adversely affected by technical progress, labor relations and governmental regulation. These companies are also at risk for
environmental damage and product liability claims. Production of industrial materials often exceeds demand as a result of over-building
or economic downturns, which may lead to poor investment returns.
Real Estate
Sector. Real estate companies include REITs and real estate management and development companies. Companies in the real
estate sector may be exposed to the risks associated with the ownership of real estate which include, among other factors, changes
in general U.S., global and local economic conditions, declines in real estate values, changes in the financial health of tenants,
overbuilding and increased competition for tenants, oversupply of properties for sale, changing demographics, changes in interest
rates, tax rates and other operating expenses, changes in government regulations, faulty construction and the ongoing need for
capital improvements, regulatory and judicial requirements including relating to liability for environmental hazards, changes in
neighborhood values and buyer demand and the unavailability of construction financing or mortgage loans at rates acceptable to
developers. The performance of a REIT may also be adversely impacted by other factors (discussed above).
Real estate management
and development companies often are dependent upon specialized management skills, have limited diversification and are subject
to risks inherent in operating and financing a limited number of projects. To the extent such companies focus their business on
a particular geographic region of a country, they may also be subject to greater risks of adverse developments in that area. These
companies may also be subject to heavy cash flow dependency and defaults by borrowers. Certain real estate management and development
companies have a relatively small market capitalization, which may tend to increase the volatility of the market price of these
securities.
Utilities
Sector. General problems of utility companies include risks of increases in fuel and other operating costs; restrictions
on operations and increased costs and delays as a result of environmental, nuclear safety and other regulations; regulatory restrictions
on the ability to pass
increasing wholesale costs along to
the retail and business customer; energy conservation; technological innovations that may render existing plants, equipment or
products obsolete; the effects of local weather, maturing markets and difficulty in expanding to new markets due to regulatory
and other factors; natural or manmade disasters; difficulty obtaining adequate returns on invested capital; the high cost of obtaining
financing during periods of inflation; difficulties of the capital markets in absorbing utility debt and equity securities; and
increased competition. In addition, taxes, government regulation, international politics, price and supply fluctuations, volatile
interest rates and energy conservation may cause difficulties for utilities. All of such issuers experience certain of these problems
to varying degrees.
California.
The information provided below is only a brief summary of the complex factors affecting the financial situation in California and
is derived from sources that are generally available to investors and are believed to be accurate. Except where otherwise indicated,
the information is based on California’s 2017-18 fiscal year running from July 1, 2017 to June 30, 2018. No independent verification
has been made of the accuracy or completeness of any of the following information. It is based in part on information obtained
from various state and local agencies in California or contained in official statements for various California municipal obligations.
Economic Outlook.
California’s economy continued to grow, but at a slower pace, during the first nine months of the 2017-18 fiscal year. California’s
unemployment rate increased to 4.3% in March 2019, which is expected to stay relatively stable through 2022 due to steady job growth
and increased labor-force participation. California added 175,700 nonfarm jobs since June 30, 2018, with 10 out of 11 major industry
sectors experiencing job growth. California’s personal income for the quarter ending December 2018 was 2.0% higher than in
June 2018, but lower than the 2.6% increase during the same quarter in 2017.
Swings in oil prices,
higher international tariffs, and increasing wages contributed to faster-than-expected inflation in 2018. Inflation in California
rose 3.3% in the 2017-18 fiscal year, and the California Department of Finance projects that it will increase by 3.8% in the 2018-19
fiscal year and 3.4% in the 2019-20 fiscal year. In comparison, national inflation rose 2.3% in the 2017-18 fiscal year and is
expected to increase by 2.5% in the 2018-19 fiscal year and 2.4% in the 2019-20 fiscal year.
In
California’s real estate industry, the housing market showed signs of weakness as home price growth slowed consistently throughout
2018. The median home price in March 2019 was $565,880, a 6.1% decrease from June 2018. Additionally, single-family home sales
for March 2019 totaled 397,210, a decrease of 6.3% from March 2018. California’s
housing market is expected to continue slowing as a result of tighter mortgage lending, higher interest rates, and increased tariffs
that could increase the cost of building homes.
Net
Assets. The primary government’s combined net deficit position
(governmental and business-type activities) as originally reported at June 30, 2017, decreased by $49.2 billion (230.6%) to $70.6
billion a year later but increased $14.5 billion (17.1%) when adjusted for restatements. As previously mentioned, the net position
at the beginning of the 2017-18 fiscal
year was restated as a result of the
recognition of previously unreported net OPEB liability and trial courts’ net pension liability.
The
primary government’s $112.1 billion net investment in capital assets, such as land, buildings, equipment, and infrastructure
(roads, bridges, and other immovable assets) comprise a significant portion of its net position. This amount of capital assets
is net of any outstanding debt used to acquire those assets. California uses
capital assets when providing services to citizens; consequently, these assets are not available for future spending. Although
California’s investment in capital assets is reported net of related
debt, the resources needed to repay this debt must come from other sources because California cannot
use the capital assets to pay off the liabilities.
Another $47.1 billion of the
primary government’s net position represents resources that are externally restricted as to how they may be used, such as
resources pledged to debt service. The internally-imposed earmarking of resources is not presented in this publication as restricted
net position. As of June 30, 2018, the primary government’s combined unrestricted net deficit position was $229.8 billion—$213.3
billion for governmental activities and $16.5 billion for business-type activities.
California General
Fund. California’s main operating fund (the “California General Fund”) ended the 2017-18 fiscal year
with assets of $39.2 billion; liabilities and deferred inflows of resources of $27.0 billion; and nonspendable, restricted, and
committed fund balances of $560 million, $9.8 billion, and $171 million, respectively, leaving the California General Fund with
a positive unassigned fund balance of $1.6 billion. The California General Fund’s unassigned fund balance increased by $3.6
billion (186.6%) and is positive for the first time since the 2010-11 fiscal year, when California began using the current fund
balance classifications for governmental funds as required by GASB Statement No. 54.
The
California General Fund had an excess of revenues over expenditures of $11.4 billion ($135.6
billion in revenues and $124.2 billion in expenditures). Approximately $130.5 billion (96.2%) of the California General Fund revenue
is derived from California’s largest three taxes—personal income
taxes ($92.8 billion), sales and use taxes ($25.1 billion), and corporation taxes ($12.6 billion). As a result of fund classifications
made to comply with generally accepted governmental accounting principles, a total of $335 million in revenue, mostly from unemployment
programs, is included in the California General Fund.
During
the 2017-18 fiscal year, total California General Fund revenue increased by $10.5 billion (8.4%), as a result of increases in personal
income taxes of $8.6 billion (10.2%), corporation taxes of $1.5 billion (13.2%), and sales and use taxes of $170 million (0.7%).
California General Fund expenditures increased by $8.0 billion (6.9%), and
the largest increases were in health and human services, correctional programs, and education expenditures, which were up $3.2
billion, $2.4 billion, and $1.9 billion, respectively. The California General Fund ended the fiscal year with a fund balance of
$12.2 billion, an improvement of $6.4 billion from the prior year’s ending fund balance of $5.8 billion. The California General
Fund’s ending fund balance includes $9.4 billion restricted for budget stabilization if the governor of California must declare
a budget emergency during an economic downturn.
Budget
Outlook. California’s 2018-19 Budget Act was enacted on June 27, 2018 (the “California Budget Act”).
The California Budget Act appropriated $201.4 billion, with $138.7 billion
from the California General Fund, $58.5 billion from special funds, and $4.2 billion from bond funds. The California General Fund’s
budgeted expenditures increased by $11.6 billion (9.2%) over the prior-year budget. The California General Fund’s revenues
were projected to be $133.3 billion after a $4.4 billion transfer to the Budget Stabilization Account (BSA), California’s
rainy day fund. The California General Fund’s revenue comes predominantly from taxes, with personal income taxes expected
to provide 69.0% of total revenue in the 2018-19 fiscal year. California’s major taxes (personal income, sales and use, and
corporation) are projected to supply approximately 97.3% of the California General Fund’s resources in the 2018-19 fiscal
year. The California General Fund was initially projected to end the 2018-19 fiscal year with $15.9 billion in total reserves—$13.7
billion in the BSA, $2.0 billion in the California General Fund’s Special Fund for Economic Uncertainties (SFEU), and $200
million in the new Safety Net Reserve (SNR). In addition to the required minimum annual transfer to the BSA, Proposition 2 requires
the California General Fund to make an equivalent minimum annual amount of debt reduction payments; the 2018-19 spending plan included
$1.7 billion of debt reduction expenditures.
The spending plan
for 2018-19 increased total California expenditures by $13.0 billion over the 2017-18 level, primarily in education, transportation,
and health and human services. In order to meet the Proposition 98 guaranteed minimum funding level for K-12 schools and community
colleges, California General Fund spending increased by $1.5 billion in education. This included a $760 million increase for universities
and an increase of $655 million for childcare and preschool programs.
The Budget included
a $4.7 billion increase in transportation spending due, in large part, to the increase in fuel excise taxes and vehicle charges
attributed to Senate Bill 1 in its first full year of implementation. The funds will be used to maintain and repair transportation
infrastructure and complete transit-related projects. For the 2018-19 fiscal year, the California General Fund’s spending
for health programs increased by $2.9 billion, primarily due to significant growth in projected spending on Medi-Cal, including
a shift in costs to the California General Fund from other state and federal fund sources.
Actual California
General Fund cash receipts through April 30, 2019, were $4.0 billion (3.5%) greater than the Governor’s Budget estimates
for the first 10 months of 2018-19 fiscal year, and disbursements were $1.1 billion (0.9%) greater than estimated. As a result,
the California General Fund’s need for temporary borrowing was $2.9 billion less than projected, resulting in a balance,
as of April 30, 2019, of $2.6 billion in outstanding loans comprised entirely of internal borrowing from other funds.
The revised 2019-20
Governor’s Budget (released in May 2019) provided updated estimates of 2018-19 fiscal year California General Fund revenues,
expenditures, and reserves. The revised estimates project California General Fund revenue of $138.0 billion, expenditures of $143.2
billion, and total year-end reserves of $20.1 billion—$14.4 billion in the BSA, $4.8 billion in the SFEU, and $900 million
in the SNR—which is $4.2 billion more than projected in June 2018 for the enacted budget.
Capital Assets.
As of June 30, 2018, California’s investment in capital assets for its governmental and business-type activities amounted
to $144.6 billion (net of accumulated depreciation/amortization). California’s capital assets include land, state highway
infrastructure, collections, buildings and other depreciable property, intangible assets, and construction/development in progress.
The buildings and other depreciable property account includes buildings, improvements other than buildings, equipment, certain
infrastructure assets, certain books, and other capitalized and depreciable property. Intangible assets include computer software,
land use rights, patents, copyrights, and trademarks. Infrastructure assets are items that normally are immovable, such as roads
and bridges, and can be preserved for a greater number of years than can most capital assets.
As of June 30, 2018,
California’s capital assets increased $4.0 billion, or 2.8% over the prior fiscal year. The majority of the increase occurred
in state highway infrastructure and buildings and other depreciable property.
Debt
Administration. At June 30, 2018, California had
total bonded debt outstanding of $111.0 billion. Of this amount, $80.3 billion (72.4%) represents general obligation bonds, which
are backed by the full faith and credit of California. The current portion
of general obligation bonds outstanding is $3.6 billion and the long-term portion is $76.7 billion. The remaining $30.7 billion
(27.6%) of bonded debt outstanding represents revenue bonds, which are secured solely by specified revenue sources. The current
portion of revenue bonds outstanding is $2.0 billion and the long-term portion is $28.7 billion.
During
the fiscal year, California issued a total of $8.6 billion in new general
obligation bonds to fund various capital projects and other voter-approved costs related to K-12 schools and higher education facilities,
transportation improvements and high-speed rail, water quality and environmental protection, and other public purposes.
Budgetary
Control. California’s annual budget is primarily prepared on a
modified accrual basis for governmental funds. The California Governor recommends a budget for approval by the California Legislature
each year. This recommended budget includes estimated revenues, but revenues are not included in the annual budget bill adopted
by the California Legislature. Under state law, California cannot adopt a
spending plan that exceeds estimated revenues.
Under the California
Constitution, money may be drawn from the treasury only through a legal appropriation. The appropriations contained in the California
Budget Act, as approved by the California Legislature and signed by the California Governor, are the primary sources of annual
expenditure authorizations and establish the legal level of control for the annual operating budget. The budget can be amended
throughout the year by special legislative action, budget revisions by the California Department of Finance, or executive orders
of the California Governor. Amendments to the original budget for the fiscal year ended June 30, 2018, increased spending authority
for the budgetary/ legal basis-reported California General Fund, Transportation Funds, and the Environmental and Natural Resources
Funds.
Appropriations are
generally available for expenditure or encumbrance either in the year appropriated or for a period of three years if the legislation
does not specify a period of availability. At the end of the availability period, the encumbering authority for the unencumbered
balance lapses. Some appropriations continue indefinitely, while others are available until fully spent. Generally, encumbrances
must be liquidated within two years from the end of the period in which the appropriation is available. If the encumbrances are
not liquidated within this additional two-year period, the spending authority for these encumbrances lapses.
Risk Management.
The primary government has elected, with a few exceptions, to be self-insured against loss or liability. The primary government
generally does not maintain reserves. Losses are covered by appropriations from each fund responsible for payment in the year in
which the payment occurs. California is permissively self- insured and, barring any extraordinary catastrophic event, the potential
amount of loss faced by California is not considered material in relation to the primary government’s financial position.
Generally, the exceptions are when a bond resolution or a contract requires the primary government to purchase commercial insurance
for coverage against property loss or liability. There have been no significant reductions in insurance coverage from the prior
year. In addition, no insurance settlement in the last three years has exceeded insurance coverage. All claim payments are on a
“pay-as-you-go” basis, with workers’ compensation benefits for self-insured agencies initially being paid by
the State Compensation Insurance Fund.
The discounted liability
for unpaid self-insurance claims of the primary government is estimated to be $4.3 billion as of June 30, 2018. This estimate is
primarily based on actuarial reviews of California’s workers’ compensation program and includes indemnity payments
to claimants, as well as all other costs of providing workers’ compensation benefits, such as medical care and rehabilitation.
The estimate also includes the liability for unpaid services fees, industrial disability leave benefits, and incurred-but-not-reported
amounts. The estimated total liability of approximately $6.0 billion is discounted to $4.3 billion using a 3.5% interest rate.
Of the total discounted liability, $429 million is a current liability, of which $296 million is included in the California General
Fund, $130 million in the special revenue funds, and $3 million in the internal service funds. The remaining $3.9 billion is reported
as other noncurrent liabilities in the government-wide Statement of Net Position. The University of California, a discretely presented
component unit, is self-insured or insured through a wholly-owned captive insurance company.
Ratings. As
of December 19, 2019, all outstanding general obligation bonds of the state of California were rated “AA-” by S&P
Global Ratings, a division of S&P Global, Inc., and “Aa2” by Moody’s Investors Service, Inc. Any explanation
concerning the significance of such ratings must be obtained from the rating agencies. There is no assurance that any ratings will
continue for any period of time or that they will not be revised or withdrawn.
Local Issuances.
It should be noted that the creditworthiness of obligations issued by local California issuers may be unrelated to the creditworthiness
of obligations issued by the state of California, and there is no obligation on the part of the state to make payment on such local
obligations in the event of default.
The foregoing information
constitutes only a brief summary of some of the general factors which may impact certain issuers of California bonds and does not
purport to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations are subject.
Additionally, many factors including national economic, social and environmental policies and conditions, which are not within
the control of the issuers of such bonds, could affect or could have an adverse impact on the financial condition of the state
and various agencies and political subdivisions thereof. The sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of the bonds, the market value or marketability of such bonds or the ability of the respective
issuers of such bonds to pay interest on or principal of such bonds.
New Jersey.
The information provided below is only a brief summary of the complex factors affecting the financial situation in New Jersey and
is derived from sources that are generally available to investors and are believed to be accurate. Except where otherwise indicated,
the information is based on New Jersey’s 2017-18 fiscal year running from July 1, 2017 to June 30, 2018. No independent verification
has been made of the accuracy or completeness of any of the following information. It is based in part on information obtained
from various state and local agencies in New Jersey or contained in official statements for various New Jersey municipal obligations.
Economic Outlook.
New Jersey’s labor market expanded for an eighth consecutive year. Total nonfarm payroll employment increased by 39,400
jobs in 2018 for an average monthly gain of 3,300 jobs. Job growth for the 2017-18 fiscal year was led by the services sector with
leisure and hospitality services gaining 12,700 jobs; followed by the education and health services sector, up 11,900 jobs; and
the trade, transportation, and utilities sector, which gained 4,900 jobs. Both the construction and manufacturing sectors performed
well, gaining 4,200 jobs and 3,200 jobs, respectively.
New Jersey’s
unemployment rate fell to 3.9% in December of 2017, matching the national unemployment rate. New Jersey’s unemployment rate
declined by 0.8% over the course of 2018. New Jersey’s labor force participation rate has been fairly stable the last several
months at 62.4 percent.
New Jersey’s
housing market had a down year in 2018 with total existing home sales 0.6% lower than a year ago While sales of single-family homes
were roughly even with a year ago, sales of townhomes and condos were 1.0% lower than the prior year. Residential construction
fared slightly better. Permits to build single-family homes in 2018 were 4.6% higher than a year ago. However, the number of permits
to build apartment building units was 9.0% lower for a year-over-year decline of 4.3% in the total number of residential construction
permits.
New Jersey’s
economy continued to expand in 2018. Real Gross Domestic Product (GDP) for New Jersey grew at a 3.3% annual rate in the third quarter
of 2018, the third consecutive quarter that the annualized growth rate was 3.3% or better. Aggregate personal income, which is
a broad measure of income that not only includes wage income but asset and transfer income as well, grew 3.6% in 2018.
The national economic
expansion also continued in 2018. Real GDP grew 2.9% in 2018 and the labor market added 2.7 million jobs. Existing home sales declined
by 3.4% for the year because the housing market was negatively affected by low inventory levels and appreciating prices. Consumer
prices grew 2.4% in 2018 according to the Consumer Price Index with core prices, which excludes food and energy goods, growing
2.1%.
Revenues and
Expenditures. During the 2017-18 fiscal year New Jersey’s revenues, including transfers, totaled $62.5 billion, which
was an increase of $2.2 billion versus the prior fiscal year after restatements. This increase is primarily attributable to higher
Gross Income Tax collections, charges for services, and miscellaneous revenue (asset sales and legal settlements). General taxes
totaled $32.7 billion and accounted for 52.3% of total New Jersey revenues for the 2017-18 fiscal year. New Jersey’s gross
income tax totaled $15.0 billion, the sales and use tax totaled $9.7 billion, and the corporation business tax totaled $2.3 billion.
New Jersey’s three major taxes comprised 82.7% of the total general taxes that were collected during the 2017-18 fiscal year.
General taxes increased by $1.1 billion as compared to the 2016-17 fiscal year.
New Jersey’s
2017-18 fiscal year expenses totaled $69.6 billion, a decrease of $2.1 billion after restatements in comparison to the prior fiscal
year. New Jersey’s spending decreased by $3.7 billion in government direction, management, and control mainly due to decreases
in pension and total other postemployment benefits expenses resulting from changes in assumptions. Partially offsetting this spending
decrease, were spending increases in New Jersey’s lottery fund ($1.1 billion), and interest expenses ($234.9 million).
New Jersey General
Fund. New Jersey’s chief operating fund (the “New Jersey General Fund”) is the fund into which all
State revenues, not otherwise restricted by statute, are deposited. The New Jersey General Fund’s ending fund balance totaled
$5.6 billion, of which $990.6 million represented unassigned fund balance.
On a budgetary basis,
general revenues of $35.4 billion were $3.6 billion lower than the final budget. The negative variance was the result of unearned
grant revenues (both federal and other) of $1.9 billion, a decline of $615.0 million in other revenues, lower services and assessments
of $573.6 million, and a decline in taxes of $439.4 million. Federal and other grant revenues are not earned unless there has been
a grant award and eligible grant expenses incurred. To the extent that federal and grant appropriations are made in anticipation
of grant awards and the incurrence of grant expenditures, grant revenues are budgeted.
Total expenditures
were $4.6 billion lower than original appropriations as set forth in the annual Appropriations Act plus supplemental appropriations
enacted during the 2017-18 fiscal year. A major cause for under-spending resulted from the overestimate of federal funds. This
practice allows New Jersey to receive the maximum federal dollars that become available. During the 2017-18 fiscal year, New Jersey’s
appropriation of federal funds and other grants exceeded expenditures by $1.9 billion, which is available for use in future years.
From a 2017-18 fiscal year program perspective, the following areas under-spent: physical and mental health ($1.8 billion); transportation
programs ($789.7 million); community development and environmental management ($732.5 million); economic planning, development,
and security ($603.2 million); government direction, management, and control ($469.0 million); public safety
and criminal justice ($363.7 million);
special government services (59.5 million); and offset by over-spending in educational, cultural, and intellectual development
($148.0 million).
Net Assets.
The primary government’s assets and deferred outflows of resources totaled $72.7 billion, representing a decrease of $3.2
billion from the prior fiscal year after restatements (that resulted in a $58.5 billion decrease in net position). Restatements
were made to increase capital assets; decrease other assets; increase current liabilities; and the implementation of GASB Statement
No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. As of June 30, 2018, liabilities
and deferred inflows of resources exceeded assets and deferred outflows of resources by $198.1 billion. New Jersey’s unrestricted
net position, which represents net assets that have no statutory commitments and are available for discretionary use, totaled a
negative $214.1 billion. The negative balance is primarily a result of New Jersey implementing, in the 2014-15 fiscal year, GASB
Statement No. 68 and New Jersey’s recognition of other postemployment benefits under GASB Statement No. 45, Accounting
and Financial Reporting by Employers for Postemployment Benefits Other than Pensions. Financing activities contributing to
New Jersey’s negative unrestricted net position include: liabilities from pension obligation bonds, the funding of a portion
of local elementary and high school construction and the securitization of a major portion of annual tobacco master settlement
agreement receipts with no corresponding assets.
Changes in Net
Assets. New Jersey’s 2017-18 fiscal year net position decreased by $7.0 billion. Approximately 52.3% of New Jersey’s
total revenues came from general taxes, while 28.2% came from operating grants. Charges for services amounted to 17.6% of total
revenues, while other items such as capital grants and miscellaneous revenues accounted for the remainder. New Jersey’s expenses
cover a range of services. The largest expense was for educational, cultural, and intellectual development (25.5%), which includes
approximately $359.4 million disbursed by the New Jersey Schools Development Authority (a blended component unit) to help finance
school facilities construction; physical and mental health (21.9%); and government direction, management, and control (21.9%).
Other major expenditures focused on economic planning, development, and security; New Jersey Lottery Fund; and public safety and
criminal justice. During the 2017-18 fiscal year, governmental activities expenses exceeded program revenues. This imbalance was
mainly funded through $33.8 billion of general revenues (mostly taxes). The remaining $7.4 billion resulted in a decrease in net
position. Offsetting the governmental net position decrease, Business-type Activities reflected a net position increase of $348.9
million primarily because the Unemployment Compensation Fund’s available resources exceeded the need to pay claims.
Debt Administration.
As of June 30, 2018, New Jersey’s outstanding long-term obligations for governmental activities totaled $239.0 billion, a
$22.9 billion decrease over the prior fiscal years after restatements (a $22.1 billion decrease in the net pension liability and
total other postemployment benefits liability, a decrease of $1.0 billion in bonded debt and a $0.2 billion increase in other non-bonded
debt). Long-term bonded obligations totaled $45.1 billion, while other long-term obligations totaled $139.9 billion. In addition,
New Jersey has $15.0 billion of legislatively authorized bonding capacity that has not yet been issued. As of June 30, 2018, the
legislatively authorized but unissued debt decreased by $0.2 billion from the prior fiscal year.
Ratings. As
of December 19, 2019, all outstanding general obligation bonds of the State of New Jersey were rated “BBB+” by
S&P Global Ratings a division of S&P Global, Inc. and “A3” by Moody’s Investors Service, Inc. Any explanation
concerning the significance of such ratings must be obtained from the rating agencies. There is no assurance that any ratings will
continue for any period of time or that they will not be revised or withdrawn.
Local Issuances.
It should be noted that the creditworthiness of obligations issued by local New Jersey issuers may be unrelated to the creditworthiness
of obligations issued by the State of New Jersey, and there is no obligation on the part of the state to make payment on such local
obligations in the event of default.
The foregoing information
constitutes only a brief summary of some of the general factors which may impact certain issuers of bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations are subject. Additionally,
many factors including national economic, social and environmental policies and conditions, which are not within the control of
the issuers of such bonds, could affect or could have an adverse impact on the financial condition of the state and various agencies
and political subdivisions thereof. The sponsor is unable to predict whether or to what extent such factors or other factors may
affect the issuers of the bonds, the market value or marketability of such bonds or the ability of the respective issuers of such
bonds to pay interest on or principal of such bonds.
New York.
The information provided below is only a brief summary of the complex factors affecting the financial situation in New York and
is derived from sources that are generally available to investors and are believed to be accurate. Except where otherwise indicated,
the information is based on New York’s 2018-2019 fiscal year running from April 1, 2018 to March 31, 2019. No independent
verification has been made of the accuracy or completeness of any of the following information. It is based in part on information
obtained from various state and local agencies in New York or contained in official statements for various New York municipal obligations.
Economic Condition
and Outlook. With the national economy in its second longest expansion in recorded history, overall economic activity, employment
and wages all continued to increase in New York State in 2018. At both the national (2.9%) and state levels (2.1%), growth in overall
economic activity accelerated in 2018.
While national job
growth accelerated slightly in 2018, employment in New York decelerated modestly with an increase of 1.1% after 1.2% in the previous
year. New York added nearly 110,000 jobs and total employment grew to over 9.6 million.
Along with the increased
number of jobs, the labor force in New York expanded in 2018, adding over 13,000 workers. Additionally, the unemployment rate decreased
to 4.1%, which is the lowest since 1976.
Total wages paid
to all employees increased at a slightly slower rate in New York (4.9%) than nationally (5.0%) in 2018. Gains in the average annual
wage at the national level (increase of 3.4%) were also somewhat stronger than those in New York (increase of 3.1%).
General Government
Results. An operating deficit of $1.3 billion is reported in the state’s general fund (“New York General Fund”)
for the 2018-19 fiscal year. As a result, the New York General Fund now has an accumulated fund balance of $3.4 billion. New York
completed its 2018-19 fiscal year with a combined governmental funds operating surplus of $97 million as compared to a combined
governmental funds operating surplus in the preceding fiscal year of $2.5 billion. The combined operating surplus of $97 million
for the fiscal year ended March 31, 2019 included an operating deficit in the New York General Fund of $1.3 billion, an operating
deficit in the “Federal Special Revenue Fund” of $4 million, an operating surplus in the “General Debt Service
Fund” of $458 million and an operating surplus in “Other Governmental Funds” of $934 million.
New York’s
financial position as shown in its governmental funds balance sheet as of March 31, 2019 includes a fund balance of $13.9
billion comprised of $48.6 billion of assets less liabilities of $32.7 billion and deferred inflows of resources of $2 billion.
The governmental funds fund balance includes a $3.4 billion accumulated New York General Fund balance.
Overall Financial
Position. For the 2018-19 fiscal year, New York reported a net position deficit of $12.5 billion, comprising $72.6 billion
in net investment in capital assets, and $9.7 billion in restricted net position, offset by an unrestricted net position deficit
of $94.8 billion.
The beginning net
position was restated and decreased by $31.9 billion, from $28.6 net position to $3.3 billion net position deficit, as a result
of recognizing total other post-employment benefit liabilities associated with the implementation of GASBS 75, Accounting and
Financial Reporting for Postemployment Benefits Other Than Pensions. This implementation required the primary government to
recognize total other post-employment benefit liabilities of $65 billion ($51 billion of which is for governmental activities and
$14 billion for business-type activities). In governmental activities, the total other post-employment benefit liabilities equate
to about 63.4% of the $80 billion unrestricted net position deficit.
Net position reported
for governmental activities decreased by $807 million to a $4.1 billion net position deficit. Unrestricted net position for governmental
activities—the part of net position that can be used to finance day-to-day operations without constraints established by
debt covenants, enabling legislation, or other legal requirements—had a deficit of $80 billion at March 31, 2019.
The net position
deficit in unrestricted governmental activities, which increased by $2.9 billion (3.7%) in 2019, exists primarily because New York
has issued debt for purposes not resulting in a capital asset related to New York governmental activities and because of the obligation
related to other postemployment benefits ($51 billion). Such outstanding debt included: eliminating the need for seasonal borrowing
by the New York Local Government Assistance Corporation ($1.2 billion); and borrowing for local highway and bridge projects ($4.4
billion), local mass transit projects
($2.1 billion), and a wide variety of grants and other expenditures not resulting in New York capital assets ($14.3 billion). This
deficit in unrestricted net position of governmental activities can be expected to continue for as long as New York continues to
have obligations outstanding for purposes other than the acquisition of New York governmental capital assets.
The net position
deficit in business-type activities decreased by $155 million (1.8%) to $8.3 billion in the 2018-2019 fiscal year as compared to
$8.5 billion in the prior fiscal year, as restated. The improvement in net position deficit for business-type activities was due
to employer contributions and other revenue exceeding unemployment benefit payments for the “Unemployment Insurance Fund”
($323 million) and lottery net income exceeding education aid transfers ($62 million). This was partially offset by City University
of New York Senior Colleges’ expenses exceeding revenues and New York support ($155 million) and State University of New
York expenses exceeding revenues and New York support ($75 million).
New York General
Fund Budgetary Highlights. Total New York General Fund receipts for the year (including transfers from other funds) were $70.5
billion, $2.1 billion below the New York official financial plan estimate, which uses the cash basis of accounting and is adopted
following the enactment of New York’s annual budget (the “initial Financial Plan.”). The primary factors contributing
to lower than projected total receipts were: (i) $1.1 billion in lower personal income tax receipts due to a combination of lower
December 2018 and January 2019 estimated payments; and (ii) approximately $2.4 billion in reduced transfers from the “Revenue
Bond Tax Fund,” mainly due to the prepayment in fiscal year 2019 of debt service on personal income tax bonds due in the
fiscal year 2020 (prepayments reduce the amount of personal income tax receipts available to the new York General Fund in the year
in which they are made, and increase the amount in the year in which they were originally due).
Business tax receipts
were approximately $125 million below initial projections due to the timing of audit receipts, insurance tax payments and refunds.
Miscellaneous receipts were almost $1.5 billion higher than the initial projections mainly due to the receipt of unplanned extraordinary
monetary settlements and higher than expected fines, fees, reimbursements and investment income.
Total New York General
Fund disbursements for the 2018-19 fiscal year (including transfers to other funds) were $3.8 billion below the initial Financial
Plan estimate at approximately $72.8 billion. Lower than projected disbursements were due in large part to the cautious calculation
of New York General Fund local assistance and agency operations expenses and lower than anticipated transfers to support capital
projects spending due to a large amount of bond reimbursements used to reimburse the New York General Fund for prior-year capital
advances and slower than expected spending supported by extraordinary monetary settlements.
In the initial Financial
plan, the Division of Budget projected that the New York General Fund disbursements would exceed receipts by $3.9 billion. The
difference was expected to be funded with the use of $1.9 billion carried forward from 2017-18 that the Division of Budget attributed
to the acceleration of tax payments in response to the Federal Limit of State and Local Taxes deductibility, which became effective
January 1, 2018. In addition, “Extraordinary
Monetary Settlements” on hand
in the New York General Fund were used as planned to support spending from the “Dedicated Infrastructure Investment Fund”
and other funds for authorized purposes. Actual New York General Fund disbursements exceeded receipts by $2.2 billion, or $1.7
billion more favorable than anticipated in the initial Financial Plan.
The operating results
for the 2018-19 fiscal year were affected by the deferral of the final cycle payment to Medicaid Managed Care Organizations, as
well as other payments, from March 27, 2019, until April 1, 2019 (and from fiscal year 2018-19 to fiscal year 2019-20). The fiscal
year 2018-19 deferral had a New York-share value of a $1.7 billion. Absent the deferral, Medicaid spending under the “Global
Cap” would have exceeded the statutorily indexed rate in the 2018-19 fiscal year. This higher spending in the 2018-19 fiscal
year appears to reflect growth in managed care enrollment and costs above projections, as well as certain savings actions and offsets
that were not processed by year-end.
The New York General
Fund ended the 2018-19 fiscal year with a closing cash fund balance of $7.2 billion, which was $1.7 billion higher than the initial
plan. The higher balance is attributable to a higher extraordinary monetary settlement balance mainly due to unplanned payments
received ($1 billion) and the reserve of resources for the timing of payments ($206 million for retroactive labor agreements and
$202 million for a business tax refund), as well as a deposit to the “Rainy Day Fund” ($250 million). The closing balance
is comprised of approximately $2.1 billion in New York’s “Rainy Day Reserve Funds” ($1.3 billion in the “Tax
Stabilization Reserve Account” and $790 million in the “Rainy Day Reserve Fund”), $35 million in the “Community
Projects Fund,” $21 million in the “Contingency Reserve Fund,” and $5.1 billion in the “Refund Reserve
Account.”
Capital Assets.
As of the 2018-2019 fiscal year end, New York has $107.9 billion invested in a broad range of capital assets including, equipment,
buildings, construction in progress, land preparation, and infrastructure, which primarily includes roads and bridges. This amount
represents a net increase (including additions and deductions) of $1.6 billion over the prior fiscal year.
Debt Administration.
New York has obtained long-term financing in the form of voter-approved General Obligation debt (voter-approved debt) and other
obligations that are authorized by legislation but not approved by the voters (non-voter-approved debt), including lease-purchase
and contractual obligations where New York’s legal obligation to make payments is subject to and paid from annual appropriations
made by the New York Legislature or from assignment of revenue in the case of Tobacco Settlement Revenue Bonds. Equipment capital
leases and mortgage loan commitments (which represent $525 million as of March 31, 2019) do not require legislative or voter approval.
Other obligations include certain bonds issued through New York public authorities and certificates of participation. New York
administers its long-term financing needs as a single portfolio of New York-supported debt that includes general obligation bonds
and other obligations of both its governmental activities and business-type activities. Most of the debt reported under business-type
activities, all of which was issued for capital assets used in those activities, is supported by payments from resources generated
by New York’s governmental activities—thus it is not expected to be directly repaid from resources generated by business-type
activities. New York finance law allows the bonded portion of this
single combined debt portfolio, which
includes debt reported in both governmental and business-type activities, to include debt instruments which result in a net variable
rate exposure in an amount that does not exceed 15% of the total outstanding New York-supported debt. As of March 31, 2019, New
York had $97 million in state-supported net variable rate bonds outstanding and $1.4 billion in interest rate exchange agreements,
in which New York issues variable rate bonds and enters into a swap agreement that effectively converts the rate to a fixed rate.
As of March 31,
2019, variable rate bonds, net of those subject to the fixed rate swaps, were equal to 0.2% of the New York state-supported debt
portfolio. Variable rate bonds that were converted to a synthetic fixed rate through swap agreements of $1.4 billion were equal
to 2.6% of the total New York state-supported debt portfolio.
As of March 31,
2019, New York had $59.6 billion in bonds, notes, and other financing agreements outstanding compared to $56.3 billion in the prior
year, an increase of $3.4 billion.
During 2018-19 fiscal
year, New York issued $8.4 billion in bonds, of which $1.5 billion was for refunding and $6.9 billion was for new borrowing.
New York’s
Constitution, with exceptions for emergencies, limits the amount of general obligation bonds that can be issued to that amount
approved by the voters for a single work or purpose in a general election. Currently, New York has $2.5 billion in authorized but
unissued bond capacity that can be used to issue bonds for specifically approved purposes. New York may issue short-term debt without
voter approval in anticipation of the receipt of taxes and revenues or proceeds from duly authorized but not issued general obligation
bonds.
The New York finance
law, through the New York State Debt Reform Act of 2000 (the “New York Debt Reform Act”), also imposes phased-in
caps on the issuance of the new New York-supported debt and related debt service costs. The New York Debt Reform Act also limits
the use of debt to capital works and purposes, and establishes a maximum term length for repayment of 30 years. The New York Debt
Reform Act applies to all New York-supported debt. The New York Debt Reform Act does not apply to debt issued prior to April 1,
2000 or to other obligations issued by public authorities where New York is not the direct obligor.
Litigation. The
State of New York is a defendant in numerous legal proceedings pertaining to matters incidental to the performance of routine governmental
operations. Such litigation includes, but is not limited to, claims asserted against the State of New York arising from alleged
torts, alleged breaches of contracts, condemnation proceedings and other alleged violations of state and federal laws.
Included in New
York’s outstanding litigation are a number of cases challenging the legality or the adequacy of a variety of significant
social welfare programs, primarily involving New York’s Medicaid and mental health programs. Adverse judgments in these matters
generally could result in injunctive relief coupled with prospective changes in patient care that could require substantial increased
financing of the litigated programs in the future.
With respect to
pending and threatened litigation, New York has reported $820 million in the primary government, $64 million is related to governmental
activities and $755 million pertains to State University of New York. State University of New York reported $741 million as of
December 31, 2018 for awarded claims, anticipated unfavorable judgments, and incurred but not reported loss estimates related to
medical malpractice claims and the remaining $15 million is due to a timing difference for the fiscal year end between New York
and State University of New York. In addition, New York is a party to other claims and litigation that its legal counsel has advised
may result in possible adverse court decisions with estimated potential losses of approximately $196 million.
Ratings.
As of December 19, 2019, all outstanding general obligation bonds of the
State of New York were rated “AA+” by S&P
Global Ratings a division of S&P Global, Inc., and “Aa1”
by Moody’s Investors Service, Inc. Any explanation concerning the significance of such ratings must be obtained from the
rating agencies. There is no assurance that any ratings will continue for any period of time or that they will not be revised or
withdrawn.
Local Issuances.
It should be noted that the creditworthiness of obligations issued by local New York issuers may be unrelated to the creditworthiness
of obligations issued by the State of New York, and there is no obligation on the part of the state to make payment on such local
obligations in the event of default.
The foregoing information
constitutes only a brief summary of some of the general factors which may impact certain issuers of bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations are subject. Additionally,
many factors including national economic, social and environmental policies and conditions, which are not within the control of
the issuers of such bonds, could affect or could have an adverse impact on the financial condition of the state and various agencies
and political subdivisions thereof. The sponsor is unable to predict whether or to what extent such factors or other factors may
affect the issuers of the bonds, the market value or marketability of such bonds or the ability of the respective issuers of such
bonds to pay interest on or principal of such bonds.
Administration of the
Trust
Distributions
to Unitholders by Regulated Investment Companies Making Semiannual/Quarterly Distributions or Grantor Trusts. The discussion
in this section applies to all trusts other than trusts that are “regulated investment companies” for tax purposes
that have monthly distribution dates. Income received by a trust is credited by the trustee to the Income Account for the trust.
All other receipts are credited by the trustee to a separate Capital Account for the trust. The trustee will normally distribute
any income received by a trust on each distribution date or shortly thereafter to unitholders of record on the preceding record
date. A trust will also generally make required distributions or distributions to avoid imposition of tax at the end of each year
if it has elected to be taxed as a RIC for federal tax purposes. Unitholders will receive an amount substantially equal to their
pro rata share of the available balance of the Income Account of the related trust. All distributions will be net of applicable
expenses. There is no assurance that any actual distributions will be made since all dividends and other income
distributions received may be used
to pay expenses. In addition, excess amounts from the Capital Account of a trust, if any, will
be distributed on each distribution date or shortly thereafter to unitholders of record on the preceding record date,
provided that the trustee is not required to make a distribution from the Capital Account unless the amount available for distribution
is at least $1.00 per 100 units. Proceeds received from the disposition of any of the securities after a record date and prior
to the following distribution date will be held in the Capital Account and not distributed until the next distribution date applicable
to the Capital Account. Notwithstanding the foregoing, if a trust is designed to be
a grantor trust for tax purposes, the trustee is not required to make a distribution from the Income Account or the Capital Account
unless the total cash held for distribution equals at least 0.1% of the trust’s net asset value as determined under the
trust agreement, provided that the trustee is required to distribute the balance of the Income Account and Capital Account
on the distribution date occurring in December of each year. The trustee is not required to pay interest on funds held in the
Capital or Income Accounts (but may itself earn interest thereon and therefore benefits from the use of such funds).
The distribution
to the unitholders of a trust as of each record date will be made on the following distribution date or shortly thereafter and
shall consist of an amount substantially equal to the unitholders’ pro rata share of the available balance of the Income
Account of the trust after deducting estimated expenses. Because dividends and other income distributions are not received by a
trust at a constant rate throughout the year, such distributions to unitholders are expected to fluctuate.
Distributions
to Unitholders by Regulated Investment Companies Making Monthly Distributions. The discussion in this section applies if
your trust is a RIC that has monthly distribution dates. Income received by a trust is credited by the trustee to the Income Account
for the trust. All other receipts are credited by the trustee to a separate Capital Account for the trust. The trustee will normally
distribute income received by a trust on each distribution date or shortly thereafter to unitholders of record on the preceding
record date. The trust generally pays distributions from its Income Account (pro-rated on an annual basis) along with any excess
balance from the Capital Account on each monthly distribution date to unitholders of record on the preceding record date as described
in greater detail below. All distributions will be net of applicable expenses. The amount of your distributions will vary from
time to time as companies change their dividends and other income distributions or trust expenses change. The trust will also generally
make required distributions or distributions to avoid imposition of tax at the end of each year if it has elected to be taxed as
a RIC for federal tax purposes. Excess amounts from the Capital Account of a trust, if any, will be distributed at least annually
to the unitholders then of record. Proceeds received from the disposition of any of the securities after a record date and prior
to the following distribution date will be held in the Capital Account and not distributed until the next distribution date applicable
to the Capital Account. The trustee shall not be required to make a distribution from the Capital Account unless the cash balance
on deposit therein available for distribution shall be sufficient to distribute at least $1.00 per 100 units. The trustee is not
required to pay interest on funds held in the Capital or Income Accounts (but may itself earn interest thereon and therefore benefits
from the use of such funds).
The distribution
to the unitholders as of each record date will be made on the following distribution date or shortly thereafter. When the trust
receives dividends and other income
distributions from a portfolio security,
the trustee credits the dividends and other income distributions to the trust’s accounts. In an effort to make relatively
regular income distributions, the trust’s distribution from the Income Account on each distribution date to each unitholder
is equal to such unitholder’s pro rata share of the cash balance in the Income Account calculated on the basis of a fraction
(the numerator of which is one and the denominator of which is the total number of distribution dates per year) of the estimated
annual income to the trust for the ensuing twelve months computed as of the close of business on the record date immediately preceding
such distribution after deduction of (1) the fees and expenses then deductible pursuant to the trust agreement and (2) the trustee’s
estimate of other expenses properly chargeable to the Income Account pursuant to the trust agreement which have accrued as of such
record date or are otherwise properly attributable to the period to which such distribution relates. Because the trust does not
receive dividends and other income distributions from the portfolio securities at a constant rate throughout the year, the trust’s
income distributions to unitholders may be more or less than the amount credited to the trust accounts as of the record date. In
the event that the amount on deposit in the Income Account is not sufficient for the payment of the amount intended to be distributed
to unitholders on the basis of the computation described above, the trustee is authorized to advance its own funds and cause to
be deposited in and credited to the Income Account such amounts as may be required to permit payment of the related distribution
to be made as described above. In such an event, the trustee shall be entitled to be reimbursed, without interest, out of income
payments received by the trust subsequent to the date of such advance. Any such advance shall be reflected in the Income Account
until repaid.
General.
Persons who purchase units will commence receiving distributions only after such person becomes a record owner. A person will become
the owner of units, and thereby a unitholder of record, on the date of settlement provided payment has been received. Notification
to the trustee of the transfer of units is the responsibility of the purchaser, but in the normal course of business the selling
broker-dealer provides such notice.
The trustee will
periodically deduct from the Income Account of a trust and, to the extent funds are not sufficient therein, from the Capital Account
of the trust amounts necessary to pay the expenses of the trust. The trustee also may withdraw from said accounts such amounts,
if any, as it deems necessary to establish a reserve for any governmental charges payable out of a trust. Amounts so withdrawn
shall not be considered a part of the related trust’s assets until such time as the trustee shall return all or any part
of such amounts to the appropriate accounts. In addition, the trustee may withdraw from the Income and Capital Accounts of a trust
such amounts as may be necessary to cover redemptions of units.
Statements
to Unitholders. With each distribution, the trustee will furnish to each unitholder a statement of the amount of income
and the amount of other receipts, if any, which are being distributed, expressed in each case as a dollar amount per unit.
The accounts of
a trust are required to be audited annually, at the related trust’s expense, by independent public accountants designated
by the sponsor, unless the sponsor determines that such an audit is not required. The accountants’ report for any audit will
be furnished by the trustee to any unitholder upon written request. Within a reasonable period of time after the last business
day of each calendar year, the trustee shall furnish to each person who at any time
during such calendar year was a unitholder
of a trust a statement, covering such calendar year, setting forth for such trust:
(A) As
to the Income Account:
| (1) | the amount of income received on the securities (including income received as a portion of the
proceeds of any disposition of securities); |
| (2) | the amounts paid for purchases of replacement securities or for purchases of securities otherwise
pursuant to the applicable trust agreement, if any, and for redemptions; |
| (3) | the deductions, if any, from the Income Account for payment into the Reserve Account; |
| (4) | the deductions for applicable taxes and fees and expenses of the trustee, the sponsor, the evaluator,
the supervisor, counsel, auditors and any other expenses paid by the trust; |
| (5) | the amounts reserved for purchases of contract securities, for purchases made pursuant to replace
failed contract securities or for purchases of securities otherwise pursuant to the applicable trust agreement, if any; |
| (6) | the deductions for payment of the sponsor’s expenses of maintaining the registration of the
trust units, if any; |
| (7) | the aggregate distributions to unitholders; and |
| (8) | the balance remaining after such deductions and distributions, expressed both as a total dollar
amount and as a dollar amount per unit outstanding on the last business day of such calendar year; |
(B) As
to the Capital Account:
| (1) | the net proceeds received due to sale, maturity, redemption, liquidation or disposition of any
of the securities, excluding any portion thereof credited to the Income Account; |
| (2) | the amount paid for purchases of replacement securities or for purchases of securities otherwise
pursuant to the applicable trust agreement, if any, and for redemptions; |
| (3) | the deductions, if any, from the Capital Account for payments into the Reserve Account; |
| (4) | the deductions for payment of applicable taxes and fees and expenses of the trustee, the sponsor,
the evaluator, the supervisor, counsel, auditors and any other expenses paid by the trust; |
| (5) | the deductions for payment of the sponsor’s expenses of organizing the trust; |
| (6) | the amounts reserved for purchases of contract securities, for purchases made pursuant to replace
failed contract securities or for purchases of securities otherwise pursuant to the trust agreement, if any; |
| (7) | the deductions for payment of deferred sales charge and creation and development fee, if any; |
| (8) | the deductions for payment of the sponsor’s expenses of maintaining the registration of the
trust units, if any; |
| (9) | the aggregate distributions to unitholders; and |
| (10) | the balance remaining after such distributions and deductions, expressed both as a total dollar
amount and as a dollar amount per unit outstanding on the last business day of such calendar year; and |
(C) The
following information:
| (1) | a list of the securities held as of the last business day of such calendar year and a list which
identifies all securities sold or other securities acquired during such calendar year, if any; |
| (2) | the number of units outstanding on the last business day of such calendar year; |
| (3) | the unit value based on the last trust evaluation of such trust made during such calendar year;
and |
| (4) | the amounts actually distributed during such calendar year from the Income and Capital Accounts,
separately stated, expressed both as total dollar amounts and as dollar amounts per unit outstanding on the record dates for such
distributions. |
Rights of
Unitholders. The death or incapacity of any unitholder will not operate to terminate a trust nor entitle legal representatives
or heirs to claim an accounting or to bring any action or proceeding in any court for partition or winding up of the trust, nor
otherwise affect the rights, obligations and liabilities of the parties to the applicable trust agreement. By purchasing units
of a trust, each unitholder expressly waives any right he may have under any rule of law, or the provisions of any statute, or
otherwise, to require the trustee at any time to account, in any
manner other than as expressly provided
in the applicable trust agreement, in respect of the portfolio securities or moneys from time to time received, held and applied
by the trustee under the trust agreement. No unitholder shall have the right to control the operation and management of a trust
in any manner, except to vote with respect to the amendment of the related trust agreement or termination of the trust.
Amendment.
Each trust agreement may be amended from time to time by the sponsor and trustee or their respective successors, without the consent
of any of the unitholders, (i) to cure any ambiguity or to correct or supplement any provision which may be defective or inconsistent
with any other provision contained in the trust agreement, (ii) to change any provision required by the SEC or any successor governmental
agency, (iii) to make such other provision in regard to matters or questions arising under the trust agreement as shall not materially
adversely affect the interests of the unitholders or (iv) to make such amendments as may be necessary (a) for a trust to continue
to qualify as a RIC for federal income tax purposes if the trust has elected to be taxed as such under the United States Internal
Revenue Code of 1986, as amended, or (b) to prevent a trust from being deemed an association taxable as a corporation for federal
income tax purposes if the trust has not elected to be taxed as a RIC under the United States Internal Revenue Code of 1986, as
amended. A trust agreement may not be amended, however, without the consent of all unitholders of the related trust then outstanding,
so as (1) to permit, except in accordance with the terms and conditions thereof, the acquisition thereunder of any securities other
than those specified in the schedules to the trust agreement or (2) to reduce the percentage of units the holders of which are
required to consent to certain of such amendments. A trust agreement may not be amended so as to reduce the interest in the trust
represented by units without the consent of all affected unitholders.
Except for the amendments,
changes or modifications described above, neither the sponsor nor the trustee nor their respective successors may consent to any
other amendment, change or modification of a trust agreement without the giving of notice and the obtaining of the approval or
consent of unitholders representing at least 66 2/3% of the units then outstanding of the affected trust. No amendment may reduce
the aggregate percentage of units the holders of which are required to consent to any amendment, change or modification of a trust
agreement without the consent of the unitholders of all of the units then outstanding of the affected trust and in no event may
any amendment be made which would (1) alter the rights to the unitholders of the trust as against each other, (2) provide the trustee
with the power to engage in business or investment activities other than as specifically provided in the trust agreement, (3) adversely
affect the tax status of the related trust for federal income tax purposes or result in the units being deemed to be sold or exchanged
for federal income tax purposes or (4) unless a trust has elected to be taxed as a RIC for federal income tax purposes, result
in a variation of the investment of unitholders in the trust. The trustee will notify unitholders of a trust of the substance of
any such amendment to the trust agreement for such trust.
Termination.
Each trust agreement provides that the related trust shall terminate upon the maturity, redemption, sale or other disposition
of the last of the securities held in the trust but in no event is it to continue beyond the trust’s mandatory termination
date. If the value of a trust shall be less than 40% of the total value of securities deposited in the trust during the initial
offering period, the trustee may, in its discretion, and shall, when so directed by the sponsor,
terminate the trust. A trust may be
terminated at any time by the holders of units representing 66 2/3% of the units thereof then outstanding. A trust will be liquidated
by the trustee in the event that a sufficient number of units of the trust not yet sold are tendered for redemption by the sponsor,
so that the net worth of the trust would be reduced to less than 40% of the value of the securities at the time they were deposited
in the trust. If a trust is liquidated because of the redemption of unsold units by the sponsor, the sponsor will refund to each
purchaser of units of the trust the entire sales charge paid by such purchaser.
Beginning
nine business days prior to, but no later than, the scheduled termination date described in the prospectus for a trust, the trustee
may begin to sell all of the remaining underlying securities on behalf of unitholders in connection with the termination of the
trust. The sponsor may assist the trustee in these sales and receive compensation to the extent permitted by applicable law. The
sale proceeds will be net of any incidental expenses involved in the sales.
The sponsor will
generally instruct the trustee to sell the securities as quickly as practicable during the termination proceedings without in its
judgment materially adversely affecting the market price of the securities, but it is expected that all of the securities will
in any event be disposed of within a reasonable time after a trust’s termination. The sponsor does not anticipate that the
period will be longer than one month, and it could be as short as one day, depending on the liquidity of the securities being sold.
The liquidity of any security depends on the daily trading volume of the security and the amount that the sponsor has available
for sale on any particular day. Of course, no assurances can be given that the market value of the securities will not be adversely
affected during the termination proceedings.
Not less than thirty
days prior to termination of a trust, the trustee will notify unitholders thereof of the termination and provide a form allowing
qualifying unitholders to elect an in-kind distribution, if applicable. If applicable, a unitholder who owns the minimum number
of units described in the prospectus may request an in-kind distribution from the trustee instead of cash. To the extent possible,
the trustee will make an in-kind distribution through the distribution of each of the securities of a trust in book entry form
to the account of the unitholder’s bank or broker-dealer at Depository Trust Company. The unitholder will be entitled to
receive whole shares of each of the securities comprising the portfolio of the related trust and cash from the Income and Capital
Account equal to the fractional shares to which the unitholder is entitled. The trustee may adjust the number of shares of any
security included in a unitholder’s in-kind distribution to facilitate the distribution of whole shares. The sponsor may
terminate the in-kind distribution option at any time upon sixty days written notice to the unitholders. Special federal income
tax consequences will result if a unitholder requests an in-kind distribution.
Within a reasonable
period after termination, the trustee will sell any securities remaining in a trust not segregated for in-kind distribution. After
paying all expenses and charges incurred by a trust, the trustee will distribute to unitholders thereof their pro rata share of
the balances remaining in the Income and Capital Accounts of the trust.
The sponsor may,
but is not obligated to, offer for sale units of a subsequent series of a trust at approximately the time of the mandatory termination
date. If the sponsor does offer such units for sale, unitholders may be given the opportunity to purchase such units at a public
offering price. There is, however, no
assurance that units of any new series of a trust will be offered for sale at that time, or if offered, that there will be sufficient
units available for sale to meet the requests of any or all unitholders.
The Trustee.
The trustee is The Bank of New York Mellon, a trust company organized under the laws of New York. The Bank of New York Mellon has
its principal unit investment trust division offices at 2 Hanson Place, 12th Floor, Brooklyn, New York 11217, (800) 848-6468. The
Bank of New York Mellon is subject to supervision and examination by the Superintendent of Banks of the State of New York and the
Board of Governors of the Federal Reserve System, and its deposits are insured by the Federal Deposit Insurance Corporation to
the extent permitted by law.
Under each trust
agreement, the trustee or any successor trustee may resign and be discharged of the trust created by the trust agreement by executing
an instrument in writing and filing the same with the sponsor. If the trustee merges or is consolidated with another entity, the
resulting entity shall be the successor trustee without the execution or filing of any paper instrument or further act.
The trustee or successor
trustee must deliver a copy of the notice of resignation to all unitholders then of record, not less than sixty days before the
date specified in such notice when such resignation is to take effect. The sponsor upon receiving notice of such resignation is
obligated to appoint a successor trustee promptly. If, upon such resignation, no successor trustee has been appointed and has accepted
the appointment within thirty days after notification, the retiring trustee may apply to a court of competent jurisdiction for
the appointment of a successor. In case at any time the trustee shall not meet the requirements set forth in the trust agreement,
or shall become incapable of acting, or if a court having jurisdiction in the premises shall enter a decree or order for relief
in respect of the trustee in an involuntary case, or the trustee shall commence a voluntary case, under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or any receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) for the trustee or for any substantial part of its property shall be appointed, or the trustee shall generally
fail to pay its debts as they become due, or shall fail to meet such written standards for the trustee’s performance as shall
be established from time to time by the sponsor, or if the sponsor determines in good faith that there has occurred either (1)
a material deterioration in the creditworthiness of the trustee or (2) one or more grossly negligent acts on the part of the trustee
with respect to a trust, the sponsor, upon sixty days’ prior written notice, may remove the trustee and appoint a successor
trustee by written instrument, in duplicate, one copy of which shall be delivered to the trustee so removed and one copy to the
successor trustee. Notice of such removal and appointment shall be delivered to each unitholder by the successor trustee. Upon
execution of a written acceptance of such appointment by such successor trustee, all the rights, powers, duties and obligations
of the original trustee shall vest in the successor. The trustee must be a corporation organized under the laws of the United States,
or any state thereof, be authorized under such laws to exercise trust powers and have at all times an aggregate capital, surplus
and undivided profits of not less than $5,000,000.
The Sponsor.
The sponsor of each trust is Advisors Asset Management, Inc. The sponsor is a broker-dealer specializing in providing services
to broker-dealers, registered representatives,
investment advisers and other financial
professionals. The sponsor’s headquarters are located at 18925 Base Camp Road, Monument, Colorado 80132. You can contact
Advisors Asset Management, Inc. at 8100 East 22nd Street North, Building 800, Suite 102, Wichita,
Kansas 67226 or by using the contacts listed on the back cover of the prospectus. The sponsor is a registered broker-dealer and
investment adviser and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities
Investor Protection Corporation (“SIPC”), and a registrant of the Municipal Securities Rulemaking Board (“MSRB”).
Under each trust
agreement, the sponsor may resign and be discharged of the trust created by the trust agreement by executing an instrument in writing
and filing the same with the trustee. If the sponsor merges or is consolidated with another entity, the resulting entity shall
be the successor sponsor without the execution or filing of any paper instrument or further act.
If at any time the
sponsor shall resign or fail to undertake or perform any of the duties which by the terms of a trust agreement are required by
it to be undertaken or performed, or the sponsor shall become incapable of acting or shall be adjudged a bankrupt or insolvent,
or a receiver of the sponsor or of its property shall be appointed, or any public officer shall take charge or control of the sponsor
or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the trustee may (a) appoint
a successor sponsor at rates of compensation deemed by the trustee to be reasonable and not exceeding such reasonable amounts as
may be prescribed by the SEC, (b) terminate the trust agreement and liquidate the related trust as provided therein, or (c) continue
to act as trustee without appointing a successor sponsor and receive additional compensation deemed by the trustee to be reasonable
and not exceeding such reasonable amounts as may be prescribed by the SEC.
The Evaluator
and Supervisor. Advisors Asset Management, Inc., the sponsor, also serves as evaluator and supervisor. The evaluator and
supervisor may resign or be removed by the sponsor and trustee in which event the sponsor or trustee may appoint a successor having
qualifications and at a rate of compensation satisfactory to the sponsor or, if the appointment is made by the trustee, the trustee.
Such resignation or removal shall become effective upon acceptance of appointment by the successor evaluator. If upon resignation
of the evaluator no successor has accepted appointment within thirty days after notice of resignation, the evaluator may apply
to a court of competent jurisdiction for the appointment of a successor. Notice of such resignation or removal and appointment
shall be delivered by the trustee to each unitholder.
Limitations
on Liability. The sponsor, evaluator, and supervisor are liable for the performance of their obligations arising from their
responsibilities under the trust agreement but will be under no liability to any trust or unitholders for taking any action or
refraining from any action in good faith pursuant to the trust agreement or for errors in judgment, or for depreciation or loss
incurred by reason of the purchase or sale of securities, provided, however, that such parties will not be protected against any
liability to which they would otherwise be subjected by reason of their own willful misfeasance, bad faith or gross negligence
in the performance of their duties or its reckless disregard for their duties under the trust agreement. Each trust will indemnify,
defend and hold harmless each of the sponsor, supervisor and evaluator from and against any loss, liability or expense incurred
in acting in such capacity (including the cost and expenses of the defense against such loss, liability or expense) other than
by reason of willful
misfeasance, bad faith or gross negligence
in the performance of its duties or by reason of its reckless disregard of its obligations and duties under the applicable trust
agreement. Such parties are not under any obligation to appear in, prosecute or defend any legal action which in their opinion
may involve them in any expense or liability. The trustee will be indemnified by each trust and held harmless against any loss
or liability accruing to it without gross negligence, bad faith or willful misconduct on its part, arising out of or in connection
with the acceptance or administration of the trust, including the costs and expenses (including counsel fees) of defending itself
against any claim of liability in the premises.
The trust agreement
provides that the trustee shall be under no liability for any action taken in good faith in reliance upon prima facie properly
executed documents or for the disposition of moneys, securities or certificates except by reason of its own gross negligence, bad
faith or willful misconduct, nor shall the trustee be liable or responsible in any way for depreciation or loss incurred by reason
of the sale by the trustee of any securities. In the event that the sponsor shall fail to act, the trustee may act and shall not
be liable for any such action taken by it in good faith. The trustee shall not be personally liable for any taxes or other governmental
charges imposed upon or in respect of the securities or upon the interest thereof. In addition, the trust agreement contains other
customary provisions limiting the liability of the trustee.
Expenses of
the Trust. The sponsor may receive a fee from your trust for creating and developing the trust, including determining the
trust’s objectives, policies, composition and size, selecting service providers and information services and for providing
other similar administrative and ministerial functions. The amount of this “creation and development fee” is set forth
in the prospectus. The trustee will deduct this amount from your trust’s assets as of the close of the initial offering period.
No portion of this fee is applied to the payment of distribution expenses or as compensation for sales efforts. This fee will not
be deducted from proceeds received upon a repurchase, redemption or exchange of units before the close of the initial public offering
period.
For services performed
under a trust’s trust agreement the trustee shall be paid a fee at an annual rate in the amount per unit set forth in such
trust agreement. The trustee shall charge a pro-rated portion of its annual fee at the times specified in such trust agreement,
which pro-rated portion shall be calculated on the basis of the largest number of units in such trust at any time during the primary
offering period. After the primary offering period has terminated, the fee shall accrue daily and be based on the number of units
outstanding on the first business day of each calendar year in which the fee is calculated or the number of units outstanding at
the end of the primary offering period, as appropriate. The annual trustee fee shall be prorated for any calendar year in which
the trustee provides services during less than the whole of such year. The trustee may from time to time adjust its compensation
as set forth in the trust agreement provided that total adjustment upward does not, at the time of such adjustment, exceed the
percentage of the total increase in consumer prices for services as measured by the United States Department of Labor Consumer
Price Index entitled “All Services Less Rent of Shelter” or similar index, if such index should no longer be published.
The consent or concurrence of any unitholder shall not be required for any such adjustment or increase. Such compensation shall
be calculated and paid in installments by the trustee against the Income and Capital Accounts of each trust; provided,
however, that such compensation shall
be deemed to provide only for the usual, normal and proper functions undertaken as trustee pursuant to the trust agreement. The
trustee shall also charge the Income and Capital Accounts of each trust for any and all expenses and disbursements incurred as
provided in the trust agreement.
As compensation
for portfolio supervisory services in its capacity as supervisor, evaluation services in its capacity as evaluator and for providing
bookkeeping and other administrative services of a character described in Section 26(a)(2)(C) of the Investment Company Act, the
sponsor shall be paid an annual fee in the amount per unit set forth in the trust agreement for a trust. The sponsor shall receive
a pro-rated portion of its annual fee from the trustee upon receipt of an invoice by the trustee from the sponsor, upon which,
as to the cost incurred by the sponsor of providing such services the trustee may rely. Such fee shall be calculated on the basis
of the largest number of units in such trust at any time during the primary offering period. After the primary offering period
has terminated, the fee shall accrue daily and be based on the number of units outstanding on the first business day of each calendar
year in which the fee is calculated or the number of units outstanding at the end of the primary offering period, as appropriate.
Such annual fee shall be prorated for any calendar year in which the sponsor provides services during less than the whole of such
year, but in no event shall such compensation when combined with all compensation received from a trust for providing such services
in any calendar year exceed the aggregate cost to the sponsor for providing such services, in the aggregate. Such compensation
may, from time to time, be adjusted provided that the total adjustment upward does not, at the time of such adjustment, exceed
the percentage of the total increase in consumer prices for services as measured by the United States Department of Labor Consumer
Price Index entitled “All Services Less Rent of Shelter” or similar index, if such index should no longer be published.
The consent or concurrence of any unitholder shall not be required for any such adjustment or increase. Such compensation shall
be charged against the Income and/or Capital Accounts of a trust.
The following additional
charges are or may be incurred by a trust in addition to any other fees, expenses or charges described in the prospectus: (a) fees
for the trustee’s extraordinary services; (b) expenses of the trustee (including legal and auditing expenses and reimbursement
of the cost of advances to the trust for payment of expenses and distributions, but not including any fees and expenses charged
by an agent for custody and safeguarding of securities) and of counsel, if any; (c) various governmental charges; (d) expenses
and costs of any action taken by the trustee to protect the trust or the rights and interests of the unitholders; (e) indemnification
of the trustee for any loss or liability accruing to it without gross negligence, bad faith or willful misconduct on its part arising
out of or in connection with the acceptance or administration of the trust; (f) indemnification of the sponsor for any loss,
liability or expense incurred in acting in that capacity other than by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties or its reckless disregard of its obligations and duties under the trust agreement; (g) indemnification
of the supervisor for any loss, liability or expense incurred in acting as supervisor of the trust other than by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations
and duties under the trust agreement; (h) indemnification of the evaluator for any loss, liability or expense incurred in acting
as evaluator of the trust other than by reason of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of
its reckless disregard of its obligations
and duties under the trust agreement; (i) expenditures incurred in contacting unitholders upon termination of the trust;
and (j) license fees for the right to use trademarks and trade names, intellectual property rights or for the use of databases
and research owned by third-party licensors. The sponsor is authorized to obtain from Mutual Fund Quotation Service (or similar
service operated by The Nasdaq Stock Market, Inc. or its successor) a UIT ticker symbol for each trust and to contract for the
dissemination of the unit prices through that service. A trust will bear any cost or expense incurred in connection with the obtaining
of the ticker symbol and the dissemination of unit prices. A trust may pay the costs of updating its registration statement each
year. All fees and expenses are payable out of a trust and, when owing to the trustee, are secured by a lien on the trust.
If the balances in the Income and Capital Accounts are insufficient to provide for amounts payable by the trust, the trustee has
the power to sell securities to pay such amounts. These sales may result in capital gains or losses to unitholders.
Each trust will
pay the costs of organizing the trust. These costs may include, but are not limited to, the cost of the initial preparation and
typesetting of the registration statement, prospectuses (including preliminary prospectuses), the trust agreement and other documents
relating to the applicable trust, SEC and state blue sky registration fees, the costs of the initial valuation of the portfolio
and audit of a trust, the costs of a portfolio consultant, if any, one-time license fees, if any, the initial fees and expenses
of the trustee, and legal and other out-of-pocket expenses related thereto but not including the expenses incurred in the
printing of prospectuses (including preliminary prospectuses), expenses incurred in the preparation and printing of brochures and
other advertising materials and any other selling expenses. A trust may sell securities to reimburse the sponsor for these costs
at the end of the initial offering period or after six months, if earlier. The value of the units will decline when a trust pays
these costs.
Portfolio
Transactions and Brokerage Allocation. When a trust sells securities, the composition and diversity of the securities in
the trust may be altered. In order to obtain the best price for a trust, it may be necessary for the sponsor to specify minimum
amounts in which blocks of securities are to be sold. In effecting purchases and sales of a trust’s portfolio securities,
the sponsor may direct that orders be placed with and brokerage commissions be paid to brokers, including the sponsor or brokers
which may be affiliated with the trust, the sponsor, the trustee or dealers participating in the offering of units.
Contents of Registration Statement
This Amendment to
the Registration Statement comprises the following:
The facing sheet
The prospectus and information supplement
The signatures
The consents of evaluator, independent auditors and legal
counsel
The following exhibits:
| 1.1.1 | Standard
Terms and Conditions of Trust. Reference is made to Exhibit 1.1.1 to the Registration Statement on Form S-6 for Advisors Disciplined
Trust 1670 (File No. 333-210025) as filed on May 6, 2016. |
| 1.3 | Bylaws
of Advisors Asset Management, Inc. Reference is made to Exhibit 1.3 to the Registration Statement on Form S-6 for Advisors
Disciplined Trust 647 (File No. 333-171079) as filed on January 6, 2011. |
| 1.5 | Form
of Dealer Agreement. Reference is made to Exhibit 1.5 to the Registration Statement on Form S-6 for Advisors Disciplined Trust
262 (File No. 333-150575) as filed of June 17, 2008. |
| 2.2 | Form
of Code of Ethics. Reference is made to Exhibit 2.2 to the Registration Statement on Form S-6 for Advisors Disciplined Trust
1853 (File No. 333-221628) as filed on February 21, 2018. |
3.1 Opinion
and consent of counsel as to legality of securities being registered.
| 3.2 | Opinion and consent of counsel as to the federal income and New York tax status of securities being
registered. |
| 3.3 | Opinion of counsel as to the Trustee and the Trusts. |
| 4.1 | Consent of initial evaluator. |
| 4.2 | Consent of independent registered public accounting firm. |
| 7.1 | Powers
of Attorney. Reference is made to Exhibit 7.1 to the Registration Statement on Form S-6 for Advisors Disciplined Trust 1993
(File No. 333-235795) as filed on March 10, 2020. |
Signatures
The Registrant,
Advisors Disciplined Trust 2007, hereby identifies Matrix Unit Trust, Series 1, Series 2, Series 3, Series 4, Series 5 and Series
8; Advisor’s Disciplined Trust, Series 10, Series 11 and Series 13; Advisor’s Disciplined Trust 23 and 40; and Advisors
Disciplined Trust 256, 318, 404, 459, 460, 518, 533, 544, 560, 588, 595, 610, 625, 677, 678, 699, 731, 782, 785, 803, 814, 820,
830, 834, 833, 839, 847, 854, 855, 862, 863, 867, 879, 880, 888, 891, 897, 901, 910, 911, 931, 932, 936, 938, 949, 952, 967, 980,
981, 982, 990, 1000, 1006, 1015, 1049, 1102, 1146, 1198, 1258, 1309, 1341, 1516, 1609, 1682, 1856, 1865, 1884, 1900, 1921, 1937,
1951, 1968 and 1986 for purposes of the representations required by Rule 487 and represents the following:
(1) that the portfolio
securities deposited in the series as to the securities of which this Registration Statement is being filed do not differ materially
in type or quality from those deposited in such previous series;
(2) that, except
to the extent necessary to identify the specific portfolio securities deposited in, and to provide essential financial information
for, the series with respect to the securities of which this Registration Statement is being filed, this Registration Statement
does not contain disclosures that differ in any material respect from those contained in the registration statements for such previous
series as to which the effective date was determined by the Commission or the staff; and
(3) that it has
complied with Rule 460 under the Securities Act of 1933.
Pursuant to the
requirements of the Securities Act of 1933, the Registrant, Advisors Disciplined Trust 2007 has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wichita and State
of Kansas on April 7, 2020.
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Advisors
Disciplined Trust 2007 |
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By Advisors
Asset Management, Inc., Depositor |
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By |
/s/
ALEX R. MEITZNER |
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Alex R. Meitzner |
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Senior Vice
President |
Pursuant to the
requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below on April 7, 2020
by the following persons in the capacities indicated.
SIGNATURE |
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TITLE |
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Scott I. Colyer |
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Director
of Advisors Asset
Management, Inc.
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Lisa A. Colyer |
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Director
of Advisors Asset
Management, Inc.
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) |
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James R. Costas |
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Director
of Advisors Asset
Management, Inc.
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) |
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Christopher T. Genovese |
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Director
of Advisors Asset
Management, Inc.
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) |
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Randy J. Pegg |
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Director
of Advisors Asset
Management, Inc.
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) |
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Jack Simkin |
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Director
of Advisors Asset
Management, Inc.
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) |
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Bart P. Daniel |
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Director
of Advisors Asset
Management, Inc.
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)
) |
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John Galvin |
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Director
of Advisors Asset
Management, Inc.
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)
) |
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By |
/s/ ALEX R. MEITZNER
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Alex R. Meitzner |
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Attorney-in-Fact* |
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*An executed copy of each of the related powers
of attorney is filed herewith or incorporated herein by reference as Exhibit 7.1.
Exhibit 1.1
Advisors Disciplined Trust 2007
Trust Agreement
Dated: April 7,
2020
This Trust Agreement
among Advisors Asset Management, Inc., as Depositor, Evaluator and Supervisor, and The Bank of New York Mellon, as Trustee, sets
forth certain provisions in full and incorporates other provisions by reference to the document entitled “Standard Terms
and Conditions of Trust For Advisors Disciplined Trust, Effective for Unit Investment Trusts Investing in Equity Securities Established
On and After May 1, 2016” (the “Standard Terms and Conditions of Trust”) and such provisions as are set
forth in full and such provisions as are incorporated by reference constitute a single instrument. All references herein to Articles
and Sections are to Articles and Sections of the Standard Terms and Conditions of Trust.
Witnesseth
That:
In consideration
of the premises and of the mutual agreements herein contained, the Depositor, Trustee, Evaluator and Supervisor agree as follows:
Part
I
Standard
Terms and Conditions of Trust
Subject to the provisions
of Part II hereof, all the provisions contained in the Standard Terms and Conditions of Trust are herein incorporated by reference
in their entirety and shall be deemed to be a part of this instrument as fully and to the same extent as though said provisions
had been set forth in full in this instrument.
Part
II
Special
Terms and Conditions of Trust
The following
special terms and conditions are hereby agreed to:
1. The Securities listed in the
Schedules hereto have been deposited in trust under this Trust Agreement.
2. The fractional undivided interest
in and ownership of a Trust represented by each Unit thereof is a fractional amount, the numerator of which is one and the denominator
of which is the amount set forth under “Understanding Your Investment—Statement of Financial Condition–Number of units”
in the Prospectus for the Trust.
3. The aggregate number of Units
described in Section 2.03(a) for a Trust is that number of Units set forth under “Understanding Your Investment—Statement
of Financial Condition—Number of units” in the Prospectus for the Trust.
4. The term “Deferred
Sales Charge Payment Dates” for a Trust shall mean the dates specified for deferred sales fee installments under “Investment
Summary—Fees and Expenses” in the Prospectus for the Trust.
5. The term “Distribution
Date” for a Trust shall mean the “Distribution dates” set forth under “Investment Summary—Essential
Information” in the Prospectus for the Trust.
6. The term “Mandatory
Termination Date” for a Trust shall mean the “Termination date” set forth under “Investment Summary—Essential
Information” in the Prospectus for the Trust.
7. The term “Record
Date” for a Trust shall mean the “Record dates” set forth under “Investment Summary—Essential
Information” in the Prospectus for the Trust.
8. For purposes of the definition
of the term “Income Distribution”, Section 3.05(b)(ii)(B) shall apply to any Trust that is a RIC that has monthly
Distribution and Record Dates and Section 3.05(b)(ii)(A) shall apply to all other Trusts.
9. The Depositor’s annual
compensation as set forth under Section 3.13 shall be that dollar amount per 100 Units set forth under “Investment Summary—Fees
and Expenses—Annual operating expenses—Supervisory, evaluation and administration fees” in the Prospectus for
the Trust.
10. The Trustee’s annual
compensation as set forth under Section 7.04 shall be $0.0105 per Unit.
11. Section 1.01(50) of the Standard
Terms and Conditions of Trust is replaced in its entirety with the following:
“(50) ‘Rollover
Distribution’ shall have the meaning assigned to it in Section 6.04.”
12. Section 1.01(51) of the Standard
Terms and Conditions of Trust is replaced in its entirety with the following:
“(51) ‘Rollover
Unitholder’ shall have the meaning assigned to it in Section 6.04.”
13. Section 1.01(52) is replaced
in its entirety with the following:
“(52) ‘Securities’
shall mean the securities of corporations or other entities, including Contract Securities, deposited in irrevocable trust and
listed in the schedule(s) to the Trust Agreement or which are deposited in or purchased on behalf of a Trust pursuant to Section
2.01(b) or as otherwise permitted hereby, and any securities received in exchange, substitution or replacement for such securities, as may from time to time continue to be held as a part of the Trusts.”
14. The first sentence of Section
3.02 is replaced in its entirety with the following:
“The Trustee
shall collect the dividends, interest and other similar income distributions on the Securities in each Trust as such becomes payable
(including all moneys representing penalties for the failure to make timely payments on the Securities, or as liquidated damages
for default or breach of any condition or term of the Securities or of the underlying instrument relating to any Securities and
other income attributable to a Failed Contract Security for which no Replacement Security has been obtained pursuant to Section
3.12) and credit such income to a separate account for each Trust to be known as the ‘Income Account.’”
15. The first sentence (leading
into sub-paragraphs (i)-(v)) of Section 3.05(a) is replaced in its entirety with the following:
“On or promptly
after the last Business Day of each month, the Trustee shall satisfy itself as to the adequacy of the Reserve Account, making any
further credits thereto as may appear appropriate in accordance with Section 3.04 and shall then with respect to each Trust:”
16. Section 3.07(a)(i) through
(iv) is replaced in its entirety with the following:
“(i) that there has
been a default on any of the Securities in the payment of dividends, interest, principal or other payments, after declared and
when due and payable;
(ii) that any action or
proceeding has been instituted at law or equity seeking to restrain or enjoin the payment of dividends, interest, principal or
other payments on Securities after declared and when due and payable, or that there exists any legal question or impediment affecting
such Securities or the payment of dividends, interest, principal or other payments from the same;
(iii) that there has occurred
any breach of covenant or warranty in any document relating to the issuer of the Securities which would adversely affect either
immediately or contingently the payment of dividends, interest, principal, or other payments after declared and when due and payable,
or the general credit standing of the issuer or otherwise impair the sound investment character of such Securities;
(iv) that there has been
a default in the payment of dividends, interest, principal, income, premium or other similar payments, if any, on any other outstanding
obligations of the issuer or guarantor of such Securities;”
17. Section 3.09 is replaced
in its entirety with the following:
“Section
3.09. Notice and Sale by Trustee. If at any time dividends, interest, principal or other payments, after declared and when
due and payable, on any of the Securities shall not have been paid within thirty (30) days, the Trustee shall notify the Depositor
thereof. If within thirty
(30) days after such notification the
Depositor has not given any instruction to sell or to hold or has not taken any other action in connection with such Securities,
the Trustee may in its discretion sell such Securities forthwith, and the Trustee shall not be liable or responsible in any way
for depreciation or loss incurred by reason of such sale.”
18. Section
3.10(d)(i) is replaced in its entirety with the following:
“(i) The
Depositor may resign and be discharged hereunder, by executing an instrument in writing resigning as Depositor and filing the same
with the Trustee, not less than sixty (60) days before the date specified in such instrument when such resignation is to take effect.
Upon effective resignation hereunder, the resigning Depositor shall be discharged and shall no longer be liable in any manner hereunder
except as to acts or omissions occurring prior to such resignation and any successor depositor appointed by the Trustee pursuant
to Section 7.01(g) shall thereupon perform all duties and be entitled to all rights under this Indenture. The successor Depositor
shall not be under any liability hereunder for occurrences or omissions prior to the execution of such instrument. Notice of such
resignation and appointment of a successor depositor shall be delivered by the Trustee to each Unitholder then of record.”
19. The
first sentence of the third paragraph of Section 6.02(d) is replaced in its entirety with the following:
“If the Depositor does not elect to purchase
any Units of a Trust tendered to the Trustee for redemption, or if Units are being tendered by the Depositor for redemption, that
portion of the Redemption Price which represents dividends or interest shall be withdrawn from the Income Account of such Trust
to the extent available.”
In
Witness Whereof, the undersigned have caused this Trust Agreement to be executed; all as of the day, month and year first
above written.
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Advisors Asset Management, Inc. |
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By |
/s/ALEX R. MEITZNER |
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Senior Vice President |
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The Bank of New York Mellon |
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By |
/s/GERARDO CIPRIANO |
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Vice President |
Schedule A to Trust Agreement
Securities Initially Deposited
in
Advisors Disciplined Trust 2007
Incorporated herein by this reference
and made a part hereof is the schedule set forth under “Investment Summary—Portfolio” in the Prospectus for each
Trust.
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111 West Monroe Street
Chicago, IL 60603-4080
T 312.845.3000
F 312.701.2361
www.chapman.com |
Exhibit 3.1
April 7, 2020
Advisors Asset Management, Inc.
18925 Base Camp Road
Monument, Colorado 80132
Re: Advisors Disciplined Trust 2007 (the
“Fund”)
(File No. 333-236188)
Ladies and Gentlemen:
We have served as
counsel for the Fund, in connection with the preparation, execution and delivery of a trust agreement dated as of the date shown
above (the “Indenture”) among Advisors Asset Management, Inc., as depositor, supervisor and evaluator (the “Depositor”)
and The Bank of New York Mellon, as trustee (the “Trustee”), pursuant to which the Depositor has delivered to
and deposited the securities listed in the schedule to the Indenture with the Trustee and pursuant to which the Trustee has provided
to or on the order of the Depositor documentation evidencing ownership of units (the “Units”) of fractional
undivided interest in and ownership of the unit investment trusts of the Fund (the “Trusts”), created under
said Indenture.
In connection therewith
we have examined such pertinent records and documents and matters of law as we have deemed necessary in order to enable us to express
the opinions hereinafter set forth. We have assumed the genuineness of all agreements, instruments and documents submitted to us
as originals and the conformity to originals of all copies thereof submitted to us. We have also assumed the genuineness of all
signatures and the legal capacity of all persons executing agreements, instruments and documents examined or relied upon by us.
We have not reviewed
the financial statements, compilation of the securities to be acquired by the Trusts, or other financial or statistical data contained
in the registration statement and the prospectus, as to which we understand you have been furnished with the reports of the accountants
appearing in the registration statement and the prospectus. In addition, we have made no specific inquiry as to whether any stop
order or investigatory proceedings have been commenced with respect to the registration statement or the Depositor nor have we
reviewed court or governmental agency dockets.
Statements in this
opinion as to the validity, binding effect and enforceability of agreements, instruments and documents are subject: (i) to limitations
as to enforceability imposed by bankruptcy, reorganization, moratorium, insolvency and other laws of general application relating to or affecting the enforceability of creditors’ rights, and (ii)
to limitations under equitable principles governing the availability of equitable remedies.
The opinions expressed
herein are limited to the laws of the State of New York. No opinion is expressed as to the effect that the law of any other jurisdiction
might have upon the subject matter of the opinions expressed herein under applicable conflicts of law principles, rules or regulations
or otherwise.
Based upon and subject
to the foregoing, we are of the opinion that:
1. The execution and delivery
of the Indenture and the execution and issuance of the Units in the Trusts have been duly authorized; and
2. The Units in each Trust,
when duly executed and delivered by the Depositor and the Trustee in accordance with the aforementioned Indenture, will constitute
valid and binding obligations of such Trust and the Depositor and such Units, when issued and delivered in accordance with the
Indenture against payment of the consideration set forth in the Fund prospectus, will be validly issued, fully paid and non-assessable.
We hereby consent
to the filing of this opinion as an exhibit to the registration statement relating to the Units referred to above and to the use
of our name and to the reference to our firm in said registration statement and in the related prospectus. This opinion is intended
solely for the benefit of the addressee in connection with the issuance of Units of the Trusts and may not be relied upon in any
other manner or by any other person without our express written consent.
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Very truly yours, |
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/s/ CHAPMAN AND CUTLER LLP |
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Chapman
and Cutler LLP |
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SRA/lew
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111 West Monroe Street
Chicago, IL 60603-4080
T 312.845.3000
F 312.701.2361
www.chapman.com |
Exhibit 3.2
April
7, 2020
Advisors Asset Management, Inc.
18925 Base Camp Road
Monument, Colorado 80132
The Bank of New York Mellon
Unit Investment Trust Division
2 Hanson Place, 12th Floor
Brooklyn, New York 11217
Re: Advisors Disciplined Trust 2007
(the “Fund”)
Ladies/Gentlemen:
We have acted as
counsel for the Fund, in connection with the issuance of units of fractional undivided interest in the units of the Fund (the “Units”),
under a trust agreement dated as of the date of this opinion (the “Indenture”) among Advisors Asset Management, Inc.,
as depositor, evaluator and supervisor (the “Depositor”) and The Bank of New York Mellon, as trustee (the “Trustee”).
This opinion applies only to Ubiquitous Strategy Portfolio, Series 2020-2 (the “Trust”). Holders of beneficial interests
in the Trust are referred to herein as the “Unitholders.”
In this connection,
we have examined the registration statement and the prospectus for the Fund (the “Prospectus”), the Indenture, and
such other instruments and documents, as we have deemed pertinent (the “Transaction Documents”). For purposes of this
opinion, we are assuming that the Trust will at all times be operated in accordance with the Indenture and the Prospectus and that
the parties to the Indenture will at all times fully comply with the terms of the Indenture. Failure to operate the Trust at all
times in accordance with the Indenture and the Prospectus or failure to comply fully at all times with the terms of the Indenture
could result in tax treatment different from that described below.
You have informed
us, and we are assuming that the assets of the Trust will consist of a portfolio as set forth in the Prospectus. All of the assets
of the Trust constitute the Trust’s “Trust Assets.” You have not requested us to examine, and accordingly we
have not examined, any of the Trust Assets and express no opinion as to the Federal or state income tax treatment thereof.
The Transaction
Documents include certain representations by the Depositor and the Trustee with respect to which we have no independent knowledge
and have done no independent investigation. Such representations include, without limitation, that: (i) the Trust will acquire
and hold Trust Assets solely for the account of the Unitholders; (ii) the activities of the Trust will
consist of the investment of funds in
the Trust Assets, the collection of the income and proceeds from such investments, and the incidental replacement of Trust Assets
and temporary reinvestment of proceeds under limited and specified circumstances; and (iii) the Trust has not and will not (a)
establish an office, (b) hire employees, or (c) conduct any acts not permitted by the Indenture.
Based upon the foregoing
and assuming the accuracy of the aforementioned representations and assumptions on the date hereof as well as continuing satisfaction
of such representations and assumptions, and based upon an investigation of such matters of law as we consider to be applicable:
(i) We
are of the opinion that, under existing United States Federal income tax law, the Trust is not an association taxable as a corporation
for Federal income tax purposes but will be classified as a grantor trust and will be governed by the provisions of subpart E of
Part I of subchapter J (relating to trusts) of chapter 1, of the Internal Revenue Code of 1986 (the “Code”).
(ii) Section
671 of the Code provides that, where a trust grantor is treated as the owner of any portion of a trust, there shall then be included
in computing the taxable income and credits of the grantor those items of income, deductions and credits against tax of the trust
which are attributable to that portion of the trust to the extent that such items would be taken into account under the Code in
computing taxable income or credits against the tax of an individual. Each Unitholder is treated as the owner of a pro rata portion
of the Trust under Section 676 of the Code. Therefore, a Unitholder will be considered as owning a pro rata share of each of the
Trust Assets in the proportion that the number of Units held by him or her bears to the total number of Units outstanding. We are
of the opinion that, under existing United States Federal income tax law, (a) under subpart E of Part I of subchapter J of chapter
1 of the Code, income of the Trust will be treated as income of each Unitholder in the proportion described above, and an item
of Trust income will have the same character in the hands of a Unitholder as it would have if the Unitholder directly owned a pro
rata portion of the Trust Assets and (b) each Unitholder will be considered to have received his or her pro rata share of income
derived from each Trust Asset when such income would be considered to be received by the Unitholder if the Unitholder directly
owned a pro rata portion of the Trust Assets.
(iii) Although
the discussion in the section of the Prospectus regarding the Federal income tax consequences of owning Units of the Trust does
not purport to discuss all possible United States Federal income tax consequences of the purchase, ownership and disposition of
Units, in our opinion, under existing United States Federal income tax law, such section, taken as a whole, is an accurate summary
in all material respects, to the extent that the discussion constitutes statements of law or legal conclusions with respect to
United States Federal income tax matters. In this regard, please note that (a) we have not examined any of the Trust Assets and
we are therefore unable to express an opinion, and we express no opinion as to the Federal income tax treatment thereof and (b)
the Federal income tax discussion in the Prospectus depends in part on the facts peculiar to individual Unitholders of which we
have made no investigation and have no knowledge.
(iv) Based
upon the existing laws of the State of New York and The City of New York, administrative interpretations thereof and court decisions
as of the date hereof, we are of the opinion that:
(a) The Trust will not be
subject to the New York State franchise tax imposed on domestic and foreign corporations by Article 9-A of the New York State Tax
Law.
(b) The Trust will not have
taxable income subject to the New York State personal income tax imposed by Article 22 of the New York State Tax Law.
(c) The Trust will not be
subject to the unincorporated business tax imposed by Section 11-503 of the Administrative Code of The City of New York (the “Administrative
Code”).
(d) The Trust will not be
subject to the general corporation tax imposed by The City of New York on domestic and foreign corporations under Section 11-603
or 11-653 of the Administrative Code.
(e) The Trust will not have
taxable income subject to the personal income tax imposed by The City of New York under Section 11-1701 of the Administrative Code.
Our opinion is based
on the Code, applicable state and local laws, the regulations promulgated thereunder and other relevant authorities and law, all
as in effect on the date hereof. Consequently, future changes in such laws, the regulations promulgated thereunder and other relevant
authorities and law may cause the tax treatment of the transaction to be materially different from that described above. This opinion
is given as of the date hereof, and we undertake no, and hereby disclaim any, obligation to advise you of any change in any matter
set forth herein. Our opinion represents only our legal judgment, is not a guarantee of a result and, unlike a tax ruling, is binding
neither on the Internal Revenue Service, state or local taxing authorities nor a court of law, and has no official status of any
kind. The Internal Revenue Service, state or local taxing authorities or a court of law could disagree with the opinion expressed
herein. Although we believe that, in a properly presented case, the opinion expressed herein would be found to be correct if challenged,
there can be no assurance that this will be the case. In evaluating these tax issues, we have not taken into account the possibility
that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement
if raised.
This opinion, as
qualified herein, covers only the opinions expressly contained herein, and we express no opinion with respect to any other considerations
which may arise relating to the transaction, any other taxes or any other matters arising under United States Federal, state, local
or foreign law.
The Committee on
Legal Opinions of the American Bar Association promulgated the “Third-Party Legal Opinion Report, Including the Legal Opinion
Accord,” (the “ABA Guidelines”) in 1991. Among other things, the ABA Guidelines provide that attorneys should
not
provide legal opinions as to matters
of fact or financial or economic forecasts (or similar predictions). In this regard, matters discussed expressly or implicitly
within this letter which are determined to be matters of fact or financial or economic forecasts (or similar predictions) should
be interpreted to be a confirmation of our understanding and a statement of our belief rather than a legal opinion, regardless
of the language used.
Chapman and Cutler
LLP does not and will not impose any limitation on the disclosure of the tax treatment or tax structure of any transaction relating
to this matter.
Very truly yours,
/s/ CHAPMAN AND CUTLER LLP
Chapman
and Cutler LLP
SRA/lew
Exhibit 3.3
April 7, 2020
The Bank of New York Mellon
as Trustee of
Advisors Disciplined Trust 2007
2 Hanson Place
Brooklyn, NY 11217
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Re: Advisors
Disciplined Trust 2007 (the “Trust”)
Ladies and Gentlemen:
We are acting as your counsel in connection
with the execution and delivery by you of a certain Reference Trust Agreement (the “Trust Agreement”), dated as of
today’s date, between Advisors Asset Management, Inc., as Depositor, Evaluator and Supervisor (the “Depositor”,
“Evaluator” and “Supervisor”), and you, as Trustee, establishing the Trust, and the execution by you, as
Trustee under the Trust Agreement, of receipts for units evidencing ownership of all of the units of fractional undivided interest
(such receipts for units and such aggregate units being herein respectively called “Receipts for Units” and “Units”)
in the Trust, as set forth in the prospectus, (the “Prospectus”) included in the registration statement on Form S-6,
as amended to the date hereof (the “Registration Statement”), relating to the Trust. The Trust consist of the securities
listed under “Portfolio” in the Prospectus, including delivery statements relating to contracts for the purchase of
certain securities not yet delivered and cash, cash equivalents or an irrevocable letter or letters of credit, or a combination
thereof, in the amount required to pay for such purchases upon the receipt of such securities (such securities, delivery statements
and cash, cash equivalents, letter or letters of credit being herein called the “Portfolio Assets”).
We have examined the Trust Agreement, and originals (or copies certified or otherwise identified to our satisfaction) of such other
instruments, certificates and documents as we have deemed necessary or appropriate for the purpose of rendering this opinion. In
such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals
and the conformity to the original documents of all documents submitted to us as copies. As to any facts material to our opinion,
we have, when relevant facts were not independently established, relied upon the aforesaid instruments, certificates and documents.
Based on the foregoing, we are of the
opinion that:
51 West 52nd Street | New York, NY | 10019-6119 | T 212.415.9200
| F 212.953.7201 | dorsey.com
1. The
Bank of New York Mellon is a corporation organized under the laws of the State of New York with the powers of a trust company under
the Banking Law of the State of New York.
2. The
Trust Agreement and the Standard Terms are in proper form for execution and delivery by you, as Trustee, and each has been duly
executed and delivered by you, as Trustee, and assuming due authorization, execution and delivery by the Depositor, the Trust Agreement
and the Standard Terms are valid and legally binding obligations of The Bank of New York Mellon.
3. The
Receipts for Units are in proper form for execution by you, as Trustee, and have been duly executed by you, as Trustee, and pursuant
to the Depositor’s instructions, the Trustee has registered on the registration books of the Trust the ownership of the Units
by Cede & Co., as nominee of the Depository Trust Company where it has caused the Units to be credited to the account of the
Depositor.
In rendering the foregoing opinion we
have not considered, among other things, the merchantability of the Portfolio Assets, whether the Portfolio Assets have been duly
authorized and delivered or the tax status of the Portfolio Assets under any federal, state or local laws.
The foregoing opinions are limited to
the laws of the State of New York and the federal laws of the United States of America. This opinion is for your benefit and may
not be disclosed to or relied upon by any other person without our prior written consent.
We hereby consent to the filing of this
opinion letter as an exhibit to the Registration Statement relating to the Units and to the use of our name and the reference to
our firm in the Registration Statement and in the Prospectus.
Very truly yours,
/s/ Dorsey & Whitney LLP
Exhibit 4.1
Advisors Asset Management, Inc.
18925 Base Camp Road
Monument, Colorado 80132
April 7, 2020
Advisors Disciplined Trust 2007
c/o The Bank of New York Mellon, as Trustee
BNY Atlantic Terminal
2 Hanson Place, 12th Floor
Brooklyn, New York 11217
Re: Advisors Disciplined Trust 2007 (the “Fund”)
Ladies and Gentlemen:
We have examined
the Registration Statement File No. 333-236188 for the above captioned Fund. We hereby consent to the use in the Registration Statement
of the references to Advisors Asset Management, Inc. as evaluator.
You are hereby authorized
to file a copy of this letter with the Securities and Exchange Commission.
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Very truly yours, |
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Advisors Asset Management, Inc. |
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By |
/s/ALEX R. MEITZNER |
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Alex R. Meitzner |
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Senior Vice President |
Exhibit 4.2
Consent of Independent Registered
Public Accounting Firm
We have issued our
report dated April 7, 2020, with respect to the financial statement of Advisors Disciplined Trust 2007 contained in Amendment
No. 1 to the Registration Statement on Form S-6 (File No. 333-236188) and related Prospectus. We consent to the use of the aforementioned
report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption “Experts”.
Chicago, Illinois
April 7, 2020