File No. 333-_________
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 2023
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14 | ||||
REGISTRATION STATEMENT | ||||
UNDER THE SECURITIES ACT OF 1933 | ☒ | |||
Pre-Effective Amendment No. | ||||
Post-Effective Amendment No. |
EQ ADVISORS TRUST
(Exact Name of Registrant as Specified in Charter)
1290 Avenue of the Americas
New York, New York 10104
(Address of Principal Executive Offices)
(212) 554-1234
(Registrant’s Area Code and Telephone Number)
Steven M. Joenk
Equitable Investment Management Group, LLC
1290 Avenue of the Americas
New York, New York 10104
(Name and Address of Agent for Service)
With copies to:
Shane Daly, Esq. Equitable Investment Management Group, LLC 1290 Avenue of the Americas New York, New York 10104 | Mark C. Amorosi, Esq. K&L Gates LLP 1601 K Street, N.W. Washington, DC 20006 |
Approximate Date of Proposed Public Offering: As soon as practicable after this Registration Statement becomes effective.
It is proposed that this Registration Statement will become effective on the 30th day after filing pursuant to Rule 488 under the Securities Act of 1933, as amended.
Title of securities being registered: Class IA, Class IB and Class K shares of beneficial interest in the series of the Registrant designated as EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio and EQ/Core Plus Bond Portfolio; and Class IB and Class K shares of beneficial interest in the series of the Registrant designated as Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio and Target 2055 Allocation Portfolio.
No filing fee is required because the registrant is relying on Section 24(f) of the Investment Company Act of 1940, as amended, pursuant to which it has previously registered an indefinite number of shares (File Nos. 333-17217 and 811-07953).
EQ ADVISORS TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
Cover Sheet
Contents of Registration Statement
Part A — Combined Proxy Statement and Prospectus
Part B — Statement of Additional Information
Part C — Other Information
Signature Page
Exhibits
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EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
1290 Avenue of the Americas
New York, New York 10104
, 2023
Dear Contractholder:
Enclosed is a notice and Combined Proxy Statement and Prospectus (the “Proxy Statement/Prospectus”) relating to a Special Meeting of Shareholders of each of the following Portfolios of EQ Premier VIP Trust (the “VIP Trust”), a “series” investment company: EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, Target 2055 Allocation Portfolio, and EQ/Core Plus Bond Portfolio (each, an “Acquired Portfolio” and together, the “Acquired Portfolios”). The Acquired Portfolios comprise all of the existing series of the VIP Trust.
The Special Meeting of Shareholders of the Acquired Portfolios is scheduled to be held at the VIP Trust’s offices, located at 1290 Avenue of the Americas, New York, New York 10104, on October 23, 2023, at 10:00 a.m., Eastern time (the “Meeting”). At the Meeting, the shareholders of the Acquired Portfolios who are entitled to vote at the Meeting will be asked to approve the proposals described below.
As an owner of a variable life insurance policy and/or a variable annuity contract or certificate (a “Contract”) that participates in one or more of the Acquired Portfolios through the investment divisions of a separate account or accounts established by Equitable Financial Life Insurance Company (“Equitable Financial”) or another insurance company (each, an “Insurance Company), you (a “Contractholder”) are entitled to instruct the Insurance Company that issued your Contract how to vote the Acquired Portfolio shares related to your interest in those accounts as of the close of business on July 31, 2023. The Insurance Company that issued your Contract is the record owner of the Acquired Portfolio shares related to your interest in those accounts and may be referred to as a “shareholder.”
Following is only a brief summary of the matters to be considered at the Meeting. The attached Notice of Special Meeting of Shareholders and Proxy Statement/Prospectus describe in more detail the matters to be considered at the Meeting. You should read the Proxy Statement/Prospectus prior to completing your voting instruction card.
The Board of Trustees (the “Board”) of the VIP Trust has called the Meeting to request shareholder approval of the reorganization of each Acquired Portfolio from a series of the VIP Trust into a newly-created corresponding series of EQ Advisors Trust (the “EQ Trust,” and together with the VIP Trust, the “Trusts”) (each, an “Acquiring Portfolio” and together, the “Acquiring Portfolios”) (each, a “Reorganization” and together, the “Reorganizations”) as set forth below:
Each Acquired Portfolio is proposed to be reorganized into a corresponding Acquiring Portfolio: | ||||
EQ/Conservative Allocation Portfolio, a series of the VIP Trust | ® | EQ/Conservative Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Conservative Allocation Portfolio”) | ||
EQ/Conservative-Plus Allocation Portfolio, a series of the VIP Trust | ® | EQ/Conservative-Plus Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Conservative-Plus Allocation Portfolio”) | ||
EQ/Moderate Allocation Portfolio, a series of the VIP Trust | ® | EQ/Moderate Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Moderate Allocation Portfolio”) | ||
EQ/Moderate-Plus Allocation Portfolio, a series of the VIP Trust | ® | EQ/Moderate-Plus Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Moderate-Plus Allocation Portfolio”) | ||
EQ/Aggressive Allocation Portfolio, a series of the VIP Trust | ® | EQ/Aggressive Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Aggressive Allocation Portfolio”) | ||
Target 2015 Allocation Portfolio, a series of the VIP Trust | ® | Target 2015 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2015 Allocation Portfolio”) |
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Each Acquired Portfolio is proposed to be reorganized into a corresponding Acquiring Portfolio: | ||||
Target 2025 Allocation Portfolio, a series of the VIP Trust | ® | Target 2025 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2025 Allocation Portfolio”) | ||
Target 2035 Allocation Portfolio, a series of the VIP Trust | ® | Target 2035 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2035 Allocation Portfolio”) | ||
Target 2045 Allocation Portfolio, a series of the VIP Trust | ® | Target 2045 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2045 Allocation Portfolio”) | ||
Target 2055 Allocation Portfolio, a series of the VIP Trust | ® | Target 2055 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2055 Allocation Portfolio”) | ||
EQ/Core Plus Bond Portfolio, a series of the VIP Trust | ® | EQ/Core Plus Bond Portfolio, a newly-created series of the EQ Trust (“New EQ/Core Plus Bond Portfolio”) |
At the Meeting, the shareholders of the Acquired Portfolios who are entitled to vote at the Meeting, with shareholders of each Acquired Portfolio voting separately, will be asked to approve the Reorganization proposals described above. Each Acquired Portfolio and its corresponding Acquiring Portfolio have identical investment objectives, policies (including fundamental investment policies), principal strategies and principal risks. In addition, the fees and expenses of each Acquiring Portfolio are expected to be identical to those of the corresponding Acquired Portfolio (excluding one-time, non-recurring Reorganization expenses) on the closing date of each Reorganization. The Acquired Portfolios and the Acquiring Portfolios are managed by Equitable Investment Management Group, LLC. Accordingly, the Reorganizations will not result in any material changes to the Acquired Portfolios’ investment programs. In each case, if the Reorganization involving an Acquired Portfolio is approved and implemented, each Contractholder that invests indirectly in the Acquired Portfolio will automatically become a Contractholder that invests indirectly in the corresponding Acquiring Portfolio. Contractholders will not recognize any gain or loss for federal income tax purposes as a result of the Reorganizations. Each Acquiring Portfolio has been created as a shell series of the EQ Trust solely for the purposes of acquiring the corresponding Acquired Portfolio’s assets and continuing the corresponding Acquired Portfolio’s investment operations and will not conduct any investment operations until after the closing of the Reorganizations. The consummation of any one Reorganization is not contingent on the consummation of any other Reorganization. If all of the Reorganizations are approved and consummated, the VIP Trust will be dissolved.
In addition, the Board of the VIP Trust has called the Meeting to request that shareholders of all of the Acquired Portfolios elect the Board of Trustees of the VIP Trust. Shareholders are being asked to elect the Board of Trustees in the event the Reorganization Agreement is not approved with respect to an Acquired Portfolio by its shareholders or a Reorganization is not consummated for any other reason.
The Board of the VIP Trust has approved the proposals and recommends that you vote “FOR” the proposals relating to the Acquired Portfolio(s) in which you own shares. Although the Board has determined that a vote “FOR” each proposal is in the best interest of each Acquired Portfolio and its shareholders, the final decision is yours.
You are cordially invited to attend the Meeting. Since it is important that your vote be represented whether or not you are able to attend, you are urged to consider these matters and to exercise your voting instructions by completing, dating, and signing the enclosed voting instruction card and returning it in the accompanying return envelope at your earliest convenience or by relaying your voting instructions via telephone or the Internet by following the enclosed instructions. For further information on how to instruct an Insurance Company, please see the Contractholder Voting Instructions included herein. Of course, we hope that you will be able to attend the Meeting, and if you wish, you may provide voting instructions in person, even though you may have already returned a voting instruction card or submitted your voting instructions via telephone or the Internet. Please respond promptly in order to save additional costs of proxy solicitation and in order to make sure you are represented.
Very truly yours,
Steven M. Joenk Equitable Financial Life Insurance Company |
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EQ PREMIER VIP TRUST
EQ/Conservative Allocation Portfolio
EQ/Conservative-Plus Allocation Portfolio
EQ/Moderate Allocation Portfolio
EQ/Moderate-Plus Allocation Portfolio
EQ/Aggressive Allocation Portfolio
Target 2015 Allocation Portfolio
Target 2025 Allocation Portfolio
Target 2035 Allocation Portfolio
Target 2045 Allocation Portfolio
Target 2055 Allocation Portfolio
EQ/Core Plus Bond Portfolio
(each, an “Acquired Portfolio” and together, the “Acquired Portfolios”)
1290 Avenue of the Americas
New York, New York 10104
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 23, 2023
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of each of the above-named Acquired Portfolios of EQ Premier VIP Trust (the “VIP Trust”) will be held at the VIP Trust’s offices, located at 1290 Avenue of the Americas, New York, New York 10104, on October 23, 2023, at 10:00 a.m., Eastern time (the “Meeting”). The Acquired Portfolios comprise all of the existing series of the VIP Trust. At the Meeting, the shareholders of each Acquired Portfolio who are entitled to vote at the Meeting will be asked to approve the proposals applicable to that Acquired Portfolio, as described below:
For shareholders of the EQ/Conservative Allocation Portfolio only:
1A. | To approve the Agreement and Plan of Reorganization and Termination between the VIP Trust and the EQ Trust (the “Reorganization Agreement”) with respect to the reorganization of the EQ/Conservative Allocation Portfolio, a series of the VIP Trust, into the EQ/Conservative Allocation Portfolio, a newly-created series of the EQ Trust. |
For shareholders of the EQ/Conservative-Plus Allocation Portfolio only:
1B. | To approve the Reorganization Agreement with respect to the reorganization of the EQ/Conservative-Plus Allocation Portfolio, a series of the VIP Trust, into the EQ/Conservative-Plus Allocation Portfolio, a newly-created series of the EQ Trust. |
For shareholders of the EQ/Moderate Allocation Portfolio only:
1C. | To approve the Reorganization Agreement with respect to the reorganization of the EQ/Moderate Allocation Portfolio, a series of the VIP Trust, into the EQ/Moderate Allocation Portfolio, a newly-created series of the EQ Trust. |
For shareholders of the EQ/Moderate-Plus Allocation Portfolio only:
1D. | To approve the Reorganization Agreement with respect to the reorganization of the EQ/Moderate-Plus Allocation Portfolio, a series of the VIP Trust, into the EQ/Moderate-Plus Allocation Portfolio, a newly-created series of the EQ Trust. |
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For shareholders of the EQ/Aggressive Allocation Portfolio only:
1E. | To approve the Reorganization Agreement with respect to the reorganization of the EQ/Aggressive Allocation Portfolio, a series of the VIP Trust, into the EQ/Aggressive Allocation Portfolio, a newly-created series of the EQ Trust. |
For shareholders of the Target 2015 Allocation Portfolio only:
2A. | To approve the Reorganization Agreement with respect to the reorganization of the Target 2015 Allocation Portfolio, a series of the VIP Trust, into the Target 2015 Allocation Portfolio, a newly-created series of the EQ Trust. |
For shareholders of the Target 2025 Allocation Portfolio only:
2B. | To approve the Reorganization Agreement with respect to the reorganization of the Target 2025 Allocation Portfolio, a series of the VIP Trust, into the Target 2025 Allocation Portfolio, a newly-created series of the EQ Trust. |
For shareholders of the Target 2035 Allocation Portfolio only:
2C. | To approve the Reorganization Agreement with respect to the reorganization of the Target 2035 Allocation Portfolio, a series of the VIP Trust, into the Target 2035 Allocation Portfolio, a newly-created series of the EQ Trust. |
For shareholders of the Target 2045 Allocation Portfolio only:
2D. | To approve the Reorganization Agreement with respect to the reorganization of the Target 2045 Allocation Portfolio, a series of the VIP Trust, into the Target 2045 Allocation Portfolio, a newly-created series of the EQ Trust. |
For shareholders of the Target 2055 Allocation Portfolio only:
2E. | To approve the Reorganization Agreement with respect to the reorganization of the Target 2055 Allocation Portfolio, a series of the VIP Trust, into the Target 2055 Allocation Portfolio, a newly-created series of the EQ Trust. |
For shareholders of the EQ/Core Plus Bond Portfolio only:
3. | To approve the Reorganization Agreement with respect to the reorganization of the EQ/Core Plus Bond Portfolio, a series of the VIP Trust, into the EQ/Core Plus Bond Portfolio, a newly-created series of the EQ Trust. |
For shareholders of all of the Acquired Portfolios:
4. | To elect the Board of Trustees of the VIP Trust. |
5. | To transact such other business that may properly come before the Meeting or any adjournments thereof. |
The Board of Trustees of the VIP Trust unanimously recommends that you vote in favor of each proposal on which you are being asked to vote.
Please note that owners of variable life insurance policies and/or variable annuity contracts or certificates (the “Contractholders”) issued by Equitable Financial Life Insurance Company or another insurance company (each, an “Insurance Company) who have invested in shares of one or more of the Acquired Portfolios through the investment divisions of a separate account or accounts of an Insurance Company will be given the opportunity to provide the applicable Insurance Company with voting instructions on the above proposals.
You should read the Proxy Statement/Prospectus attached to this notice prior to completing your proxy or voting instruction card(s). The record date for determining the number of shares outstanding, the shareholders entitled to vote, and the Contractholders entitled to provide voting instructions at the Meeting and any adjournments or postponements thereof has been fixed as the close of business on July 31, 2023. If you attend the Meeting, you may vote or provide your voting instructions in person.
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The Special Meeting of Shareholders of each Acquired Portfolio is a separate meeting, but these Special Meetings of Shareholders are being held jointly and are referred to herein together as the “Meeting,” and each such Special Meeting of Shareholders has a separate quorum requirement with respect to each Acquired Portfolio. (The shareholders of all of the Acquired Portfolios will vote collectively as a single class on Proposal 4, which has a VIP Trust-wide quorum requirement.)
YOUR VOTE IS IMPORTANT
Please return your proxy card(s) or voting instruction card(s) promptly.
Regardless of whether you plan to attend the Meeting, you should vote or provide voting instructions by promptly completing, dating, and signing the enclosed proxy or voting instruction card(s) for the Portfolio(s) in which you directly or indirectly own shares and returning the card(s) in the enclosed postage-paid envelope. You also can vote or provide voting instructions through the Internet or by telephone using the -digit control number that appears on the enclosed proxy or voting instruction card(s) and following the simple instructions. If you are present at the Meeting, you may change your vote or voting instructions, if desired, at that time. The Board of Trustees of the VIP Trust recommends that you vote or provide voting instructions to vote “FOR” each proposal on which you are being asked to vote.
By Order of the Board of Trustees of the VIP Trust,
Shane Daly Secretary |
Dated: , 2023
New York, New York
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EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
CONTRACTHOLDER VOTING INSTRUCTIONS
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF
EQ/CONSERVATIVE ALLOCATION PORTFOLIO
EQ/CONSERVATIVE-PLUS ALLOCATION PORTFOLIO
EQ/MODERATE ALLOCATION PORTFOLIO
EQ/MODERATE-PLUS ALLOCATION PORTFOLIO
EQ/AGGRESSIVE ALLOCATION PORTFOLIO
TARGET 2015 ALLOCATION PORTFOLIO
TARGET 2025 ALLOCATION PORTFOLIO
TARGET 2035 ALLOCATION PORTFOLIO
TARGET 2045 ALLOCATION PORTFOLIO
TARGET 2055 ALLOCATION PORTFOLIO
EQ/CORE PLUS BOND PORTFOLIO,
EACH A SERIES OF EQ PREMIER VIP TRUST
(each, an “Acquired Portfolio” and together, the “Acquired Portfolios”)
TO BE HELD ON OCTOBER 23, 2023
Dated: , 2023
GENERAL
These Contractholder Voting Instructions are being furnished by Equitable Financial Life Insurance Company (“Equitable Financial”) or another insurance company (each, an “Insurance Company” and together, the “Insurance Companies”) to owners of its variable life insurance policies or variable annuity contracts or certificates (the “Contracts”) (the “Contractholders”) who, as of July 31, 2023 (the “Record Date”), had net premiums or contributions allocated to the investment divisions of its separate account or accounts (the “Separate Accounts”) that are invested in shares of one or more of the Acquired Portfolios, each of which is a series of EQ Premier VIP Trust (the “VIP Trust”). The VIP Trust is a Delaware statutory trust that is registered with the U.S. Securities and Exchange Commission as an open-end management investment company.
Each Insurance Company will offer Contractholders the opportunity to instruct it, as the record owner of all of the shares of beneficial interest in an Acquired Portfolio (the “Shares”) held by its Separate Accounts, as to how it should vote on the relevant proposals (each, a “Proposal” and together, the “Proposals”) that will be considered at the Special Meeting of Shareholders of the Acquired Portfolios referred to in the preceding Notice and at any adjournments or postponements thereof (the “Meeting”). The enclosed Combined Proxy Statement and Prospectus, which you should read and retain for future reference, sets forth concisely information about the Proposals that a Contractholder should know before completing the enclosed voting instruction card(s).
Equitable Financial is a wholly owned subsidiary of Equitable Holdings, Inc. (“Equitable Holdings”), which is a publicly-owned company. The principal offices of Equitable Financial and Equitable Holdings are located at 1290 Avenue of the Americas, New York, New York 10104.
These Contractholder Voting Instructions and the accompanying voting instruction card(s), together with the enclosed proxy materials, are being mailed to Contractholders on or about September , 2023.
HOW TO INSTRUCT AN INSURANCE COMPANY
To instruct an Insurance Company as to how to vote the Shares held in the investment divisions of its Separate Accounts, Contractholders are asked to promptly complete their voting instructions on the enclosed voting instruction card(s), sign and date the voting instruction card(s), and mail the voting instruction card(s) in the accompanying postage-paid envelope. Contractholders also may provide voting instructions via telephone or the Internet as indicated on the enclosed voting instruction card(s).
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If a voting instruction card is not marked to indicate voting instructions but is signed and timely returned, it will be treated as an instruction to vote the Shares “FOR” each applicable Proposal.
The number of Shares held in the investment division of a Separate Account corresponding to the Acquired Portfolio for which a Contractholder may provide voting instructions was determined as of the Record Date by dividing (i) a Contract’s account value allocable to that investment division by (ii) the net asset value of one Share of the Acquired Portfolio. Each whole Share of an Acquired Portfolio is entitled to one vote as to each matter with respect to which it is entitled to vote and each fractional Share is entitled to a proportionate fractional vote. At any time prior to an Insurance Company’s voting at the Meeting, a Contractholder may revoke his or her voting instructions with respect to that investment division by providing the Insurance Company with a properly executed written revocation of such voting instructions, by properly executing later-dated voting instructions by a voting instruction card, telephone or the Internet, or by appearing and providing voting instructions in person at the Meeting.
HOW AN INSURANCE COMPANY WILL VOTE
An Insurance Company will vote the Shares for which it receives timely voting instructions from Contractholders in accordance with those instructions. Shares in each investment division of a Separate Account that is invested in one or more Acquired Portfolios for which an Insurance Company receives a voting instruction card that is signed and timely returned but is not marked to indicate voting instructions will be treated as an instruction to vote the Shares “FOR” each applicable Proposal. Shares in each investment division of a Separate Account that is invested in one or more Acquired Portfolios for which an Insurance Company receives no timely voting instructions from Contractholders, or that are attributable to amounts retained by an Insurance Company and its affiliates as surplus or seed money, will be voted by the applicable Insurance Company either “FOR” or “AGAINST” approval of each applicable Proposal, or as an abstention, in the same proportion as the Shares for which Contractholders have provided voting instructions to the Insurance Company. As a result of such proportional voting by the Insurance Companies, it is possible that a small number of Contractholders could determine whether a Proposal is approved.
OTHER MATTERS
The Insurance Companies are not aware of any matters, other than the specified Proposals, to be acted on at the Meeting. If any other matters come before the Meeting, an Insurance Company will vote the Shares upon such matters in its discretion. Voting instruction cards may be solicited by directors, officers and employees of Equitable Investment Management Group, LLC, the investment adviser of the Trusts, or its affiliates as well as officers and agents of the VIP Trust. The principal solicitation will be by mail, but voting instructions may also be solicited by telephone, fax, personal interview, the Internet or other permissible means.
The Special Meeting of Shareholders of each Acquired Portfolio is a separate meeting, but these Special Meetings of Shareholders are being held jointly and are referred to herein together as the “Meeting,” and each such Special Meeting of Shareholders has a separate quorum requirement with respect to each Acquired Portfolio. (The shareholders of all of the Acquired Portfolios will vote collectively as a single class on Proposal 4, which has a VIP Trust-wide quorum requirement.) If the quorum necessary to transact business at the Meeting is not established with respect to the VIP Trust or an Acquired Portfolio, or the vote required to approve a Proposal is not obtained at the Meeting, the persons named as proxies may propose one or more adjournments or postponements of the Meeting in accordance with applicable law to permit further solicitation of voting instructions. The persons named as proxies will vote in their discretion on any such adjournment or postponement. In the event of an adjournment, no notice is required other than an announcement at the meeting at which adjournment is taken.
It is important that your Contract be represented. Please promptly mark your voting instructions on the enclosed voting instruction card(s); then sign and date the voting instruction card(s) and mail the card(s) in the accompanying postage-paid envelope. You may also provide your voting instructions via telephone or the Internet as indicated on the enclosed voting instruction card(s).
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Preliminary Copy
COMBINED PROXY STATEMENT AND PROSPECTUS
Proposed Reorganization of the EQ/CONSERVATIVE ALLOCATION PORTFOLIO EQ/CONSERVATIVE-PLUS ALLOCATION PORTFOLIO EQ/MODERATE ALLOCATION PORTFOLIO EQ/MODERATE-PLUS ALLOCATION PORTFOLIO EQ/AGGRESSIVE ALLOCATION PORTFOLIO TARGET 2015 ALLOCATION PORTFOLIO TARGET 2025 ALLOCATION PORTFOLIO TARGET 2035 ALLOCATION PORTFOLIO TARGET 2045 ALLOCATION PORTFOLIO TARGET 2055 ALLOCATION PORTFOLIO EQ/CORE PLUS BOND PORTFOLIO, each a series of EQ Premier VIP Trust (the “VIP Trust”)
(each, an “Acquired Portfolio” and together, the “Acquired Portfolios”) | into the EQ/CONSERVATIVE ALLOCATION PORTFOLIO EQ/CONSERVATIVE-PLUS ALLOCATION PORTFOLIO EQ/MODERATE ALLOCATION PORTFOLIO EQ/MODERATE-PLUS ALLOCATION PORTFOLIO EQ/AGGRESSIVE ALLOCATION PORTFOLIO TARGET 2015 ALLOCATION PORTFOLIO TARGET 2025 ALLOCATION PORTFOLIO TARGET 2035 ALLOCATION PORTFOLIO TARGET 2045 ALLOCATION PORTFOLIO TARGET 2055 ALLOCATION PORTFOLIO EQ/CORE PLUS BOND PORTFOLIO, each a newly-created series of EQ Advisors Trust (the “EQ Trust”)
(each, an “Acquiring Portfolio” and together, the “Acquiring Portfolios”) |
Dated: , 2023
1290 Avenue of the Americas
New York, New York 10104
1-877-222-2144
This Combined Proxy Statement and Prospectus (the “Proxy Statement/Prospectus”) relates to the solicitation by the Board of Trustees (the “Board”) of the VIP Trust of proxies to be used at the Special Meeting of Shareholders of the Acquired Portfolios to be held at the VIP Trust’s offices, located at 1290 Avenue of the Americas, New York, New York 10104, on October 23, 2023, at 10:00 a.m., Eastern time, or any adjournment or postponement thereof (the “Meeting”). The Acquired Portfolios comprise all of the existing series of the VIP Trust.
This Proxy Statement/Prospectus is being furnished to owners of variable life insurance policies and/or variable annuity contracts or certificates (the “Contracts”) (the “Contractholders”) issued by Equitable Financial Life Insurance Company (“Equitable Financial”) or another insurance company (each, an “Insurance Company” and together, the “Insurance Companies”) who, as of July 31, 2023 (the “Record Date”), had net premiums or contributions allocated to the investment divisions of an Insurance Company’s separate account or accounts (the “Separate Accounts”) that are invested in shares of one or more of the Acquired Portfolios. Contractholders are being provided the opportunity to instruct the applicable Insurance Company to approve or disapprove the proposals contained in this Proxy Statement/Prospectus (each, a “Proposal” and together, the “Proposals”) in connection with the solicitation by the Board of proxies for the Meeting. This Proxy Statement/Prospectus also is being furnished to the Insurance Companies as the record owners of shares and to other shareholders (including retirement plan participants) that were invested in one or more of the Acquired Portfolios as of the Record Date. Distribution of this Proxy Statement/Prospectus and proxy or voting instruction card(s) to the Insurance Companies and other shareholders and to Contractholders is scheduled to begin on or about September , 2023.
This Proxy Statement/Prospectus, which you should read and retain for future reference, sets forth concisely information about the Proposals that you should know before voting or providing voting instructions. For a free copy of the related Statement of Additional Information dated _____, 2023, please call 1-877-222-2144 or write the EQ Trust at the address above.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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SUMMARY OF PROPOSALS AND PORTFOLIOS VOTING
The following tables show which of the below Proposals the shareholders of each Acquired Portfolio are being asked to approve. The numbers/letters in the table columns correspond to the numbers/letters of the Proposals described below:
Proposals | Shareholders Entitled to Vote on the Proposal | |
1A. To approve the Agreement and Plan of Reorganization and Termination between the VIP Trust and the EQ Trust (the “Reorganization Agreement”) with respect to the reorganization of the EQ/Conservative Allocation Portfolio, a series of the VIP Trust, into the EQ/Conservative Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Conservative Allocation Portfolio”). | Shareholders of the EQ/Conservative Allocation Portfolio, a series of the VIP Trust | |
1B. To approve the Reorganization Agreement with respect to the reorganization of the EQ/Conservative-Plus Allocation Portfolio, a series of the VIP Trust, into the EQ/Conservative-Plus Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Conservative-Plus Allocation Portfolio”). | Shareholders of the EQ/Conservative-Plus Allocation Portfolio, a series of the VIP Trust | |
1C. To approve the Reorganization Agreement with respect to the reorganization of the EQ/Moderate Allocation Portfolio, a series of the VIP Trust, into the EQ/Moderate Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Moderate Allocation Portfolio”). | Shareholders of the EQ/Moderate Allocation Portfolio, a series of the VIP Trust | |
1D. To approve the Reorganization Agreement with respect to the reorganization of the EQ/Moderate-Plus Allocation Portfolio, a series of the VIP Trust, into the EQ/Moderate-Plus Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Moderate-Plus Allocation Portfolio”). | Shareholders of the EQ/Moderate-Plus Allocation Portfolio, a series of the VIP Trust | |
1E. To approve the Reorganization Agreement with respect to the reorganization of the EQ/Aggressive Allocation Portfolio, a series of the VIP Trust, into the EQ/Aggressive Allocation Portfolio, a newly-created series of the EQ Trust (“New EQ/Aggressive Allocation Portfolio”). | Shareholders of the EQ/Aggressive Allocation Portfolio, a series of the VIP Trust | |
2A. To approve the Reorganization Agreement with respect to the reorganization of the Target 2015 Allocation Portfolio, a series of the VIP Trust, into the Target 2015 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2015 Allocation Portfolio”). | Shareholders of the Target 2015 Allocation Portfolio, a series of the VIP Trust | |
2B. To approve the Reorganization Agreement with respect to the reorganization of the Target 2025 Allocation Portfolio, a series of the VIP Trust, into the Target 2025 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2025 Allocation Portfolio”). | Shareholders of the Target 2025 Allocation Portfolio, a series of the VIP Trust | |
2C. To approve the Reorganization Agreement with respect to the reorganization of the Target 2035 Allocation Portfolio, a series of the VIP Trust, into the Target 2035 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2035 Allocation Portfolio”). | Shareholders of the Target 2035 Allocation Portfolio, a series of the VIP Trust | |
2D. To approve the Reorganization Agreement with respect to the reorganization of the Target 2045 Allocation Portfolio, a series of the VIP Trust, into the Target 2045 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2045 Allocation Portfolio”). | Shareholders of the Target 2045 Allocation Portfolio, a series of the VIP Trust | |
2E. To approve the Reorganization Agreement with respect to the reorganization of the Target 2055 Allocation Portfolio, a series of the VIP Trust, into the Target 2055 Allocation Portfolio, a newly-created series of the EQ Trust (“New Target 2055 Allocation Portfolio”). | Shareholders of the Target 2055 Allocation Portfolio, a series of the VIP Trust | |
3. To approve the Reorganization Agreement with respect to the reorganization of the EQ/Core Plus Bond Portfolio, a series of the VIP Trust, into the EQ/Core Plus Bond Portfolio, a newly-created series of the EQ Trust (“New EQ/Core Plus Bond Portfolio”). | Shareholders of the EQ/Core Plus Bond Portfolio, a series of the VIP Trust | |
4. To elect the Board of Trustees of the VIP Trust. | The shareholders of all Acquired Portfolios will vote collectively as a single class on the election of each nominee to the Board of Trustees. | |
5. To transact such other business that may properly come before the Meeting or any adjournments thereof. |
Each reorganization referred to in Proposals 1.A. through 1.E., 2.A. through 2.E., and 3 above is referred to herein as a “Reorganization” and together as the “Reorganizations.” The shareholders of each Acquired Portfolio
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will vote separately on the Reorganization of that Acquired Portfolio. The consummation of any one Reorganization is not contingent on the consummation of any other Reorganization. Each Reorganization is intended to qualify for federal income tax purposes as a tax-free reorganization under section 368(a) of the Internal Revenue Code of 1986, as amended.
The VIP Trust is organized as a Delaware statutory trust and is an open-end management investment company registered with the U.S. Securities and Exchange Commission (the “SEC”).
Equitable Investment Management Group, LLC (“EIM”) is the investment adviser of each Portfolio. Equitable Investment Management, LLC, an affiliate of EIM, is the administrator of each Portfolio. Equitable Distributors, LLC, an affiliate of EIM, is the principal underwriter (distributor) of each Portfolio’s shares. The mailing address for each of these companies and for the Trust’s principal executive officers is 1290 Avenue of the Americas, New York, New York 10104.
Distribution of this Proxy Statement/Prospectus and proxy or voting instruction card(s) to the Insurance Companies and other shareholders and to Contractholders is scheduled to begin on or about September , 2023. This Proxy Statement/Prospectus and a proxy or voting instruction card also will be available at _____ on or about September , 2023. It is expected that one or more representatives of each Insurance Company will attend the Meeting in person or by proxy and will vote shares held by the Insurance Company and its affiliates in accordance with voting instructions received from its Contractholders and as otherwise provided herein, and in accordance with voting procedures established by the Trusts.
Additional information about the VIP Trust and the EQ Trust (each, a “Trust” and together, the “Trusts”) has been filed with the SEC and is available, without charge, upon oral or written request.
The following documents have been filed with the SEC and are incorporated by reference into this Proxy Statement/Prospectus, which means that they are considered legally to be part of this Proxy Statement/Prospectus:
• | The Prospectus and Statement of Additional Information of the VIP Trust with respect to the EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, and Target 2055 Allocation Portfolio, dated May 1, 2023, as may be supplemented (File Nos. 333-70754 and 811-10509). |
• | The Prospectus and Statement of Additional Information of the VIP Trust with respect to the EQ/Core Plus Bond Portfolio, dated May 1, 2023, as may be supplemented (File Nos. 333-70754 and 811-10509). |
• | The Annual Report to Shareholders of the VIP Trust with respect to the Acquired Portfolios for the fiscal year ended December 31, 2022, including the audited financial statements and financial highlights for the Acquired Portfolios (File Nos. 333-70754 and 811-10509). |
For a free copy of any of these documents, please call 1-877-222-2144 or write the VIP Trust at the address above.
The Statement of Additional Information dated _____, 2023, relating to the Reorganizations has been filed with the SEC (File No. 333-_____) and is incorporated by reference into this Proxy Statement/Prospectus. For a free copy of the Statement of Additional Information, please call 1-877-222-2144 or write the EQ Trust at the address above. Because the Acquiring Portfolios have not yet commenced operations as of the date of this Proxy Statement/Prospectus, no prospectus or statement of additional information (other than this Proxy Statement/Prospectus and the Statement of Additional Information dated _____, 2023, relating to the Reorganizations) or annual report is available for these Portfolios at this time.
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Each Trust is subject to the informational requirements of the Securities Exchange Act of 1934, as amended. Accordingly, each Trust must file certain reports and other information with the SEC. Reports and other information about each Trust are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov.
Copies of the VIP Trust’s most recent annual and semi-annual reports, including financial statements, previously have been delivered to Contractholders. Contractholders may request additional copies of the VIP Trust’s annual and/or semi-annual reports, free of charge, by writing to the VIP Trust at 1290 Avenue of the Americas, New York, New York 10104 or by calling 1-877-522-5035.
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APPENDIX A FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION | A-1 | |||
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APPENDIX C MORE INFORMATION ON STRATEGIES AND RISK FACTORS (NEW EQ/CORE PLUS BOND PORTFOLIO) | C-1 | |||
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You should read this entire Proxy Statement/Prospectus carefully. For additional information about the Reorganizations described in Proposals 1.A. through 1.E., 2.A. through 2.E., and 3, you should consult the Agreement and Plan of Reorganization and Termination (the “Reorganization Agreement”), a copy of the form of which is attached hereto as Appendix A.
Proposals 1.A. through 1.E., 2.A. through 2.E., and 3. Shareholders with amounts invested in one or more of the Acquired Portfolios as of July 31, 2023, are being asked to approve the Reorganization Agreement (with respect to the Acquired Portfolio(s) in which they are invested), whereby each Acquired Portfolio will be reorganized into a corresponding Acquiring Portfolio, as described below. The Acquired Portfolios and the Acquiring Portfolios are managed by Equitable Investment Management Group, LLC (“EIM” or the “Adviser”).
Among the Acquired Portfolios, each of the EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, and EQ/Aggressive Allocation Portfolio (each, an “EQ Allocation Portfolio” and together, the “EQ Allocation Portfolios”) and the EQ/Core Plus Bond Portfolio has three classes of shares, designated Class A, Class B, and Class K shares, and each of the Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, and Target 2055 Allocation Portfolio (each, a “Target Allocation Portfolio” and together, the “Target Allocation Portfolios”) has two classes of shares, designated Class B and Class K shares (together, the “Acquired Portfolio Shares”).
Among the Acquiring Portfolios, each of the New EQ/Conservative Allocation Portfolio, New EQ/Conservative-Plus Allocation Portfolio, New EQ/Moderate Allocation Portfolio, New EQ/Moderate-Plus Allocation Portfolio, and New EQ/Aggressive Allocation Portfolio (each, a “New EQ Allocation Portfolio” and together, the “New EQ Allocation Portfolios”) and the New EQ/Core Plus Bond Portfolio has three classes of shares, designated Class IA, Class IB, and Class K shares, and each of the New Target 2015 Allocation Portfolio, New Target 2025 Allocation Portfolio, New Target 2035 Allocation Portfolio, New Target 2045 Allocation Portfolio, and New Target 2055 Allocation Portfolio (each, a “New Target Allocation Portfolio” and together, the “New Target Allocation Portfolios”) has two classes of shares, designated Class IB and Class K shares (together, the “Acquiring Portfolio Shares”). The rights and preferences of each class of Acquiring Portfolio Shares are substantially similar to the rights and preferences of the corresponding class of Acquired Portfolio Shares.
The Reorganization Agreement provides, with respect to each Reorganization, for:
• | the transfer of all the assets of the Acquired Portfolio to the corresponding Acquiring Portfolio in exchange solely for Acquiring Portfolio Shares having an aggregate net asset value equal to the Acquired Portfolio’s net assets and the Acquiring Portfolio’s assumption of all the liabilities of the Acquired Portfolio; |
• | the distribution to the shareholders (for the benefit of the Separate Accounts, as applicable, and thus the Contractholders) of those Acquiring Portfolio Shares (the shareholders of the Acquired Portfolio will receive shares of the corresponding class of the Acquiring Portfolio in accordance with the procedures provided for in the Reorganization Agreement); and |
• | the complete termination of the Acquired Portfolio. |
Each Acquiring Portfolio has been created as a shell series of the EQ Trust solely for the purposes of acquiring the corresponding Acquired Portfolio’s assets and continuing the corresponding Acquired Portfolio’s investment operations and will not conduct any investment operations until after the closing of the Reorganizations.
Each Trust’s Board has approved the Reorganizations, pursuant to which the eleven (11) Acquired Portfolios that constitute the VIP Trust will be reorganized into newly-formed identical portfolios of the EQ Trust. These transactions would combine all of the portfolios that are advised by EIM and offered through variable annuity contracts and variable life insurance policies into a single, larger trust, which is expected to eliminate redundancies associated with maintaining two separate trusts for these portfolios and to reduce the costs of administering and operating the portfolios that constitute the mutual fund complex. It is expected that the portfolios will realize efficiencies and savings over time in connection with the Reorganizations and that the proposed transactions will assist in optimizing the structure and operations of the mutual fund complex.
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For each proposed Reorganization, it is estimated that the annual operating expense ratio of each class of shares of the Acquiring Portfolio, immediately following the Reorganization (and excluding the one-time, non-recurring expenses of the Reorganization), will be the same as that of the corresponding class of shares of the corresponding Acquired Portfolio, for the fiscal year ended December 21, 2022. In addition, each Acquiring Portfolio and its corresponding Acquired Portfolio are subject to the same contractual expense caps, but the expense limitation arrangement for each Acquiring Portfolio extends through April 30, 2025, one year beyond that for its corresponding Acquired Portfolio. There is no assurance that fees and expenses will not increase after April 30, 2025, which is when the expense limitation arrangement for each Acquiring Portfolio will terminate if it is not renewed by EIM and the EQ Trust’s Board. EIM has agreed to pay expenses of each Reorganization that exceed an Acquired Portfolio’s expense cap set forth in its expense limitation arrangement. The estimated Reorganization expenses (excluding portfolio transaction costs, which (if any) would be incurred by the Portfolio and indirectly by Contractholders both before and after the Reorganization) for each of the following Acquired Portfolios exceed its respective expense cap and are expected to be paid by EIM: EQ/Conservative Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2055 Allocation Portfolio, and EQ/Core Plus Bond Portfolio. The estimated Reorganization expenses (excluding portfolio transaction costs, which (if any) would be incurred by the Portfolio and indirectly by Contractholders both before and after the Reorganization) for each of the following Acquired Portfolios do not exceed its respective expense cap and are expected to be paid by the respective Acquired Portfolio: EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2035 Allocation Portfolio, and Target 2045 Allocation Portfolio.
For a more detailed comparison of the fees and expenses of each Acquired Portfolio and each Acquiring Portfolio, please see “Comparative Fee and Expense Tables” and “Additional Information about the Acquiring Portfolios” below for your Acquired Portfolio. As further described in “Potential Benefits of the Reorganizations to EIM and its Affiliates” below, the Adviser may realize benefits in connection with the Reorganizations, such as the potential reduction of internal costs associated with maintaining multiple trusts for the portfolios that it advises. For a detailed description of the Board’s reasons for proposing the Reorganizations, see “Additional Information about the Reorganizations — Board Considerations” below.
Each Acquired Portfolio and its corresponding Acquiring Portfolio have identical investment objectives, policies (including fundamental investment policies), principal strategies and principal risks. A comparison of the investment objectives, policies, principal strategies and principal risks of each Acquired Portfolio and its corresponding Acquiring Portfolio is included in “Comparison of Investment Objectives, Policies and Strategies” and “Comparison of Principal Risk Factors” below.
Each Acquired Portfolio and its corresponding Acquiring Portfolio also have identical purchase and redemption procedures, distribution procedures, and exchange rights. Each Portfolio offers its shares to Separate Accounts and certain other eligible investors. Shares of each Portfolio are purchased and redeemed at their net asset value without any sales load. You will not incur any sales loads or similar transaction charges as a result of the Reorganizations. Each Portfolio has no minimum initial or subsequent investment requirements. Shares of each Portfolio are redeemable on any business day (normally any day on which the New York Stock Exchange is open) upon receipt of a request. All redemption requests will be processed and payment with respect thereto will normally be made within seven days after tender. Each Portfolio generally distributes most or all of its net investment income and net realized gains, if any, annually. Dividends and other distributions by each Portfolio are automatically reinvested at net asset value in shares of the distributing class of the Portfolio. For a more detailed description of the purchase and redemption procedures, distribution procedures, and exchange rights, please see “Additional Information about the Acquiring Portfolios” below.
Each Trust is a Delaware statutory trust. As such, each Trust’s operations are governed by its Declaration of Trust and By-laws and applicable Delaware law. The operations of each Trust are also subject to the provisions of the Investment Company Act of 1940, as amended (the “1940 Act”), and the rules and regulations thereunder. The rights of shareholders of the Acquiring Portfolios are substantially similar to the rights of shareholders of the Acquired Portfolios. However, the EQ Trust and the VIP Trust are governed by different organizational documents, including separate Declarations of Trust. Among other differences, the EQ Trust Declaration of Trust contains
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provisions (i) limiting the scope of the Trustees’ fiduciary duties to the Trust, series or shareholders to those imposed by applicable federal law and those included in the Declaration of Trust and (ii) setting forth certain procedural requirements with respect to the ability of a shareholder to bring a derivative action against the Trust. A summary of the similarities and differences between the EQ Trust Declaration of Trust and the VIP Trust Declaration of Trust is provided below in the section entitled “Description of the Securities to Be Issued.”
Subject to shareholder approval, the Reorganizations are expected to be effective at the close of business on November __, 2023, or on a later date each Trust decides upon (the “Closing Date”). As a result of each Reorganization, each shareholder that owns shares of an Acquired Portfolio would become an owner of shares of the corresponding Acquiring Portfolio. Each such shareholder would hold, immediately after the Closing Date, shares of a corresponding class of the corresponding Acquiring Portfolio (as shown in the table below) having an aggregate net asset value equal to the aggregate net asset value of shares of the class of the Acquired Portfolio that were held by the shareholder as of the Closing Date. Similarly, each Contractholder whose Contract values are invested in shares of an Acquired Portfolio would become an indirect owner of shares of the corresponding Acquiring Portfolio. Each such Contractholder would indirectly hold, immediately after the Closing Date, shares of a corresponding class of the corresponding Acquiring Portfolio (as shown in the table below) having an aggregate net asset value equal to the aggregate net asset value of shares of the class of the Acquired Portfolio that were indirectly held by the Contractholder as of the Closing Date.
Acquired Portfolio/Class of Shares | Acquiring Portfolio/Class of Shares | |
EQ/Conservative Allocation Portfolio/Class A | New EQ/Conservative Allocation Portfolio/Class IA | |
EQ/Conservative Allocation Portfolio/Class B | New EQ/Conservative Allocation Portfolio/Class IB | |
EQ/Conservative Allocation Portfolio/Class K | New EQ/Conservative Allocation Portfolio/Class K | |
EQ/Conservative-Plus Allocation Portfolio/Class A | New EQ/Conservative-Plus Allocation Portfolio/Class IA | |
EQ/Conservative-Plus Allocation Portfolio/Class B | New EQ/Conservative-Plus Allocation Portfolio/Class IB | |
EQ/Conservative-Plus Allocation Portfolio/Class K | New EQ/Conservative-Plus Allocation Portfolio/Class K | |
EQ/Moderate Allocation Portfolio/Class A | New EQ/Moderate Allocation Portfolio/Class IA | |
EQ/Moderate Allocation Portfolio/Class B | New EQ/Moderate Allocation Portfolio/Class IB | |
EQ/Moderate Allocation Portfolio/Class K | New EQ/Moderate Allocation Portfolio/Class K | |
EQ/Moderate-Plus Allocation Portfolio/Class A | New EQ/Moderate-Plus Allocation Portfolio/Class IA | |
EQ/Moderate-Plus Allocation Portfolio/Class B | New EQ/Moderate-Plus Allocation Portfolio/Class IB | |
EQ/Moderate-Plus Allocation Portfolio/Class K | New EQ/Moderate-Plus Allocation Portfolio/Class K | |
EQ/Aggressive Allocation Portfolio/Class A | New EQ/Aggressive Allocation Portfolio/Class IA | |
EQ/Aggressive Allocation Portfolio/Class B | New EQ/Aggressive Allocation Portfolio/Class IB | |
EQ/Aggressive Allocation Portfolio/Class K | New EQ/Aggressive Allocation Portfolio/Class K | |
Target 2015 Allocation Portfolio/Class B | New Target 2015 Allocation Portfolio/Class IB | |
Target 2015 Allocation Portfolio/Class K | New Target 2015 Allocation Portfolio/Class K | |
Target 2025 Allocation Portfolio/Class B | New Target 2025 Allocation Portfolio/Class IB | |
Target 2025 Allocation Portfolio/Class K | New Target 2025 Allocation Portfolio/Class K | |
Target 2035 Allocation Portfolio/Class B | New Target 2035 Allocation Portfolio/Class IB | |
Target 2035 Allocation Portfolio/Class K | New Target 2035 Allocation Portfolio/Class K | |
Target 2045 Allocation Portfolio/Class B | New Target 2045 Allocation Portfolio/Class IB | |
Target 2045 Allocation Portfolio/Class K | New Target 2045 Allocation Portfolio/Class K | |
Target 2055 Allocation Portfolio/Class B | New Target 2055 Allocation Portfolio/Class IB | |
Target 2055 Allocation Portfolio/Class K | New Target 2055 Allocation Portfolio/Class K | |
EQ/Core Plus Bond Portfolio/Class A | New EQ/Core Plus Bond Portfolio/Class IA | |
EQ/Core Plus Bond Portfolio/Class B | New EQ/Core Plus Bond Portfolio/Class IB | |
EQ/Core Plus Bond Portfolio/Class K | New EQ/Core Plus Bond Portfolio/Class K |
Each Reorganization is intended to qualify, for federal income tax purposes, as a tax-free reorganization, and the Acquired Portfolios will receive a legal opinion to that effect. Also, Contractholders who had premiums or contributions allocated to the investment divisions of the Separate Accounts that are invested in Acquired Portfolio Shares will not recognize any gain or loss as a result of a Reorganization, and the Trusts will receive a legal opinion to that effect. Please see “Additional Information about the Reorganizations — Federal Income Tax Consequences of the Reorganizations” below for further information.
The Board of each respective Trust has unanimously approved the Reorganization Agreement with respect to the Acquired Portfolios and the Acquiring Portfolios, respectively. Accordingly, the Board of the VIP Trust is
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submitting the Reorganization Agreement for approval by each respective Acquired Portfolio’s shareholders. In considering whether to approve a Reorganization Proposal, you should review the discussion of the Proposal for the Acquired Portfolio(s) in which you were a direct or indirect holder on the Record Date. In addition, you should review the information in this Proxy Statement/Prospectus that relates to all of the Proposals and the Reorganization Agreement generally. The consummation of any one Reorganization is not contingent on the consummation of any other Reorganization. If all of the Reorganizations are approved and consummated, the VIP Trust will be dissolved.
Proposal 4. The shareholders of all of the Acquired Portfolios are being asked to elect the Board of Trustees of the VIP Trust. Shareholders are being asked to elect the Board of Trustees in the event the Reorganization Agreement is not approved with respect to an Acquired Portfolio by its shareholders or a Reorganization is not consummated for any other reason
PROPOSAL 1A: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE EQ/CONSERVATIVE ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE EQ/CONSERVATIVE ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW EQ/CONSERVATIVE ALLOCATION PORTFOLIO”).
PROPOSAL 1B: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE EQ/CONSERVATIVE-PLUS ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE EQ/CONSERVATIVE-PLUS ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW EQ/CONSERVATIVE-PLUS ALLOCATION PORTFOLIO”).
PROPOSAL 1C: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE EQ/MODERATE ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE EQ/MODERATE ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW EQ/MODERATE ALLOCATION PORTFOLIO”).
PROPOSAL 1D: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE EQ/MODERATE-PLUS ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE EQ/MODERATE-PLUS ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW EQ/MODERATE-PLUS ALLOCATION PORTFOLIO”).
PROPOSAL 1E: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE EQ/AGGRESSIVE ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE EQ/AGGRESSIVE ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW EQ/AGGRESSIVE ALLOCATION PORTFOLIO”).
The purpose of Proposals 1.A. through 1.E. is to approve a Reorganization Agreement pursuant to which each EQ Allocation Portfolio will be reorganized into its corresponding New EQ Allocation Portfolio. In considering whether to approve a Reorganization Proposal, you should note the following information regarding the Reorganization of each EQ Allocation Portfolio into its corresponding New EQ Allocation Portfolio:
• | Each Acquiring Portfolio is newly organized and has no assets, operating history, or performance information of its own as of the date of this Proxy Statement/Prospectus. Each Acquiring Portfolio has been created as a shell series of the EQ Trust solely for the purposes of acquiring the corresponding Acquired Portfolio’s assets and continuing the corresponding Acquired Portfolio’s investment operations and will not conduct any investment operations until after the closing of the Reorganizations. If shareholders of an Acquired Portfolio approve its Reorganization, the corresponding Acquiring Portfolio will assume and publish the operating history and performance record of the Acquired Portfolio. |
• | Each Acquiring Portfolio and its corresponding Acquired Portfolio have identical investment objectives, policies, and strategies. Accordingly, the Reorganizations will not result in any material changes to the Acquired Portfolios’ investment programs. |
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• | New EQ/Conservative Allocation Portfolio and its corresponding Acquired Portfolio each seeks to achieve a high level of current income. |
• | New EQ/Conservative-Plus Allocation Portfolio and its corresponding Acquired Portfolio each seeks to achieve current income and growth of capital, with a greater emphasis on current income. |
• | New EQ/Moderate Allocation Portfolio and its corresponding Acquired Portfolio each seeks to achieve long-term capital appreciation and current income. |
• | New EQ/Moderate-Plus Allocation Portfolio and its corresponding Acquired Portfolio each seeks to achieve long-term capital appreciation and current income, with a greater emphasis on capital appreciation. |
• | New EQ/Aggressive Allocation Portfolio and its corresponding Acquired Portfolio each seeks to achieve long-term capital appreciation. |
• | Each Acquiring Portfolio and each corresponding Acquired Portfolio pursues its investment objective by investing in other mutual funds (“Underlying Portfolios”) managed by EIM or Equitable Investment Management, LLC, an affiliate of EIM, and sub-advised by one or more investment sub-advisers. EIM has established an asset allocation target for each Acquiring Portfolio and its corresponding Acquired Portfolio. This target is the approximate percentage of each Portfolio’s assets that is invested in equity securities or fixed income securities as represented by the holdings of the Underlying Portfolios in which a Portfolio invests. For a detailed comparison of the Portfolios’ investment objectives, policies, and strategies, see “Comparison of Investment Objectives, Policies, and Strategies” below. |
• | The principal risks of each Acquiring Portfolio are the same as the principal risks of its corresponding Acquired Portfolio. Each Acquiring Portfolio and its corresponding Acquired Portfolio are subject to affiliated portfolio risk, asset allocation risk, credit risk, derivatives risk, equity risk, foreign securities risk, futures contract risk, interest rate risk, investment grade securities risk, large-cap company risk, leveraging risk, market risk, mid-cap and small-cap company risk, non-investment grade securities risk, portfolio management risk, risks related to investments in Underlying Portfolios, and volatility management risk as principal investment risks. Each of New EQ/Conservative Allocation Portfolio, New EQ/Conservative-Plus Allocation Portfolio, New EQ/Moderate Allocation Portfolio, and New EQ/Moderate-Plus Allocation Portfolio, and its corresponding Acquired Portfolio also have liquidity risk and redemption risk as a principal investment risk. For a detailed comparison of the Portfolios’ risks, see “Comparison of Principal Risk Factors” below. |
• | EIM serves as the investment adviser for the Acquired Portfolios and the Acquiring Portfolios and will advise the Acquiring Portfolios after the Reorganizations. Equitable Investment Management, LLC (the “Administrator”), an affiliate of EIM, serves as the administrator for the Acquired Portfolios and the Acquiring Portfolios and will administer the Acquiring Portfolios after the Reorganizations. |
• | EIM provides day-to-day management of the Acquiring Portfolios. EIM has the ability to hire investment sub-advisers to provide research, stock selection, and trading services for the Portfolios, although the Portfolios do not currently have sub-advisers. EIM has been granted relief by the SEC to hire, terminate and replace sub-advisers of the Portfolios and to amend sub-advisory agreements without obtaining shareholder approval, subject to the approval of the Trust’s Board. If a sub-adviser is retained for a Portfolio, the shareholders of the Portfolio would receive notice of such action. However, EIM may not enter into a sub-advisory agreement on behalf of a Portfolio with an “affiliated person” of EIM unless the sub-advisory agreement, including compensation, is approved by the Portfolio’s shareholders. If a sub-adviser is retained for a Portfolio, EIM would be responsible for overseeing the sub-adviser and recommending its hiring, termination and replacement to the Trust’s Board. The relief does not extend to any increase in the advisory fee paid by a Portfolio to EIM; any such increase would be subject to shareholder approval. For a detailed description of the Adviser to the Acquiring Portfolios, please see “Additional Information about the Acquiring Portfolios — The Adviser” below. |
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• | As shown in the “Summary” above, the shareholders of Class A, Class B, and Class K of an Acquired Portfolio will receive Class IA, Class IB, and Class K shares, respectively, of the corresponding Acquiring Portfolio pursuant to the Reorganizations. Shareholders will not pay any sales charges, redemption fees or other transaction fees in connection with the Reorganizations. Please see “Comparative Fee and Expense Tables,” “Additional Information about the Reorganizations” and “Additional Information about the Acquiring Portfolios” below for more information. |
• | For each proposed Reorganization, it is estimated that the annual operating expense ratios for each Acquiring Portfolio’s Class IA shares, Class IB shares, and Class K shares, immediately following the Reorganization (and excluding the one-time, non-recurring expenses of the Reorganization), will be the same as those of the corresponding Acquired Portfolio’s Class A shares, Class B shares, and Class K shares, respectively, for the fiscal year ended December 31, 2022. In addition, as described below, each Acquiring Portfolio and its corresponding Acquired Portfolio are subject to the same contractual expense caps, but the expense limitation arrangement for each Acquiring Portfolio extends through April 30, 2025, one year beyond that for its corresponding Acquired Portfolio. There is no assurance that fees and expenses would not increase after April 30, 2025, which is when the expense limitation arrangement for each Acquiring Portfolio will terminate if it is not renewed by EIM and the EQ Trust’s Board. For a more detailed comparison of the fees and expenses of the Portfolios, please see “Comparative Fee and Expense Tables” and “Additional Information about the Acquiring Portfolios” below. |
• | The Portfolios have the same maximum advisory fee and the same advisory fee schedule. The maximum advisory fee for each Portfolio is equal to an annual rate of 0.10% of its average daily net assets. The advisory fee schedule for each Portfolio is equal to an annual rate of 0.10% of the Portfolio’s average daily net assets up to and including $1 billion; 0.0925% of the Portfolio’s average daily net assets in excess of $1 billion and up to and including $2 billion; 0.0900% of the Portfolio’s average daily net assets in excess of $2 billion and up to and including $5 billion; 0.0875% of the Portfolio’s average daily net assets in excess of $5 billion and up to and including $9 billion; 0.0825% of the Portfolio’s average daily net assets in excess of $9 billion and up to and including $12 billion; and 0.0800% of the Portfolio’s average daily net assets thereafter. |
• | The Portfolios have the same administration fee schedule. Each Portfolio pays the Administrator its proportionate share of an asset-based administration fee of 0.140% of the first $60 billion of the aggregate average daily net assets of the Aggregated Portfolios; 0.110% of the next $20 billion; 0.0875% of the next $20 billion; 0.0775% of the next $20 billion; 0.0750% of the next $20 billion; and 0.0725% thereafter. The asset-based administration fee is calculated and billed monthly, and each Portfolio is subject to a minimum annual fee of $32,500. For purposes of calculating the asset-based administration fee, the assets of the Acquiring Portfolios and multiple other portfolios of the EQ Trust (together, the “Aggregated Portfolios”) are aggregated together. A complete list of the Aggregated Portfolios is provided in “Additional Information about the Acquiring Portfolios” below. |
• | Each Acquiring Portfolio and its corresponding Acquired Portfolio are subject to the same contractual expense caps, but the expense limitation arrangement for each Acquiring Portfolio extends one year beyond that for its corresponding Acquired Portfolio. |
• | Pursuant to a contract, EIM has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of each Acquired Portfolio through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of this arrangement) so that the annual operating expenses, including acquired fund fees and expenses, of the Acquired Portfolio (other than interest, taxes, brokerage commissions, dividend and interest expenses on securities sold short, other expenditures that are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed the following annualized rates: |
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Acquired Portfolio | Maximum Annual Operating Expense Limit (% of average daily net assets)* | |||||||||||
Class A+ | Class B+ | Class K | ||||||||||
EQ/Conservative Allocation Portfolio | 1.00% | 1.00% | 0.75% | |||||||||
EQ/Conservative-Plus Allocation Portfolio | 1.10% | 1.10% | 0.85% | |||||||||
EQ/Moderate Allocation Portfolio | 1.15% | 1.15% | 0.90% | |||||||||
EQ/Moderate-Plus Allocation Portfolio | 1.20% | 1.20% | 0.95% | |||||||||
EQ/Aggressive Allocation Portfolio | 1.25% | 1.25% | 1.00% |
* | For purposes of calculating the maximum annual operating expense limit, acquired fund fees and expenses are included in annual operating expenses. |
+ | Includes amounts payable pursuant to Rule 12b-1 Plan. |
• | EIM has undertaken to enter into a new contractual expense limitation arrangement with respect to each Acquiring Portfolio pursuant to which the Acquiring Portfolio would be subject to the same contractual expense cap as its corresponding Acquired Portfolio, and the expense limitation arrangement for the Acquiring Portfolio would extend one year beyond that for its corresponding Acquired Portfolio. Under this contract, EIM would agree to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of each Acquiring Portfolio through April 30, 2025 (unless the Board of Trustees consents to an earlier revision or termination of this arrangement) so that the annual operating expenses, including acquired fund fees and expenses, of the Acquiring Portfolio (other than interest, taxes, brokerage commissions, dividend and interest expenses on securities sold short, other expenditures that are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed the following annualized rates: |
Acquiring Portfolio | Maximum Annual Operating Expense Limit (% of average daily net assets)* | |||||||||||
Class IA+ | Class IB+ | Class K | ||||||||||
New EQ/Conservative Allocation Portfolio | 1.00% | 1.00% | 0.75% | |||||||||
New EQ/Conservative-Plus Allocation Portfolio | 1.10% | 1.10% | 0.85% | |||||||||
New EQ/Moderate Allocation Portfolio | 1.15% | 1.15% | 0.90% | |||||||||
New EQ/Moderate-Plus Allocation Portfolio | 1.20% | 1.20% | 0.95% | |||||||||
New EQ/Aggressive Allocation Portfolio | 1.25% | 1.25% | 1.00% |
* | For purposes of calculating the maximum annual operating expense limit, acquired fund fees and expenses are included in annual operating expenses. |
+ | Includes amounts payable pursuant to Rule 12b-1 Plan. |
• | The Class A and Class B shares of each Acquired Portfolio and the Class IA and Class IB shares of each Acquiring Portfolio are each subject to a Rule 12b-1 fee equal to an annual rate of 0.25% of the average daily net assets of the respective share classes. |
• | Following the Reorganizations, each Acquiring Portfolio will be managed in accordance with the investment objective, policies, and strategies of the New Portfolio, which are identical to those of its corresponding Acquired Portfolio. It is not expected that a New Portfolio will revise any of its investment policies upon consummation of the Reorganizations. EIM has reviewed each Acquired Portfolio’s investment objective, policies, and strategies and determined that they are identical to its corresponding New Portfolio’s investment objective, policies, and strategies. Thus, EIM believes that, if the Reorganizations are approved, all or virtually all of an Acquired Portfolio’s holdings could be transferred to and held by its corresponding New Portfolio. It is expected that an Acquired Portfolio will not sell any of its holdings in connection with the Reorganizations, and therefore no brokerage commissions or other transaction costs are expected to be incurred. However, some of an Acquired Portfolio’s holdings may not remain at the time of the Reorganizations due to normal portfolio turnover. Contractholders will not recognize any gain or loss for federal income tax purposes as a result of the Reorganizations. |
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• | EIM has agreed to pay expenses of each Reorganization that exceed an Acquired Portfolio’s expense cap set forth in its expense limitation arrangement. |
• | The Reorganization expenses for the EQ/Conservative Allocation Portfolio, which are estimated to be $76,000 (excluding portfolio transaction costs, if any), exceed its expense cap and are expected to be paid by EIM. |
• | The Reorganization expenses for the EQ/Conservative-Plus Allocation Portfolio, which are estimated to be $97,000 (excluding portfolio transaction costs, if any), do not exceed its expense cap and are expected to be paid by the Portfolio. |
• | The Reorganization expenses for the EQ/Moderate Allocation Portfolio, which are estimated to be $693,000 (excluding portfolio transaction costs, if any), do not exceed its expense cap and are expected to be paid by the Portfolio. |
• | The Reorganization expenses for the EQ/Moderate-Plus Allocation Portfolio, which are estimated to be $502,000 (excluding portfolio transaction costs, if any), do not exceed its expense cap and are expected to be paid by the Portfolio. |
• | The Reorganization expenses for the EQ/Aggressive Allocation Portfolio, which are estimated to be $253,000 (excluding portfolio transaction costs, if any), do not exceed its expense cap and are expected to be paid by the Portfolio. |
Comparison of Principal Risk Factors
The principal risks of each Acquiring Portfolio are the same as the principal risks of its corresponding Acquired Portfolio.
An investment in a Portfolio is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The value of your investment may fall, sometimes sharply, and you could lose money by investing in a Portfolio. There can be no assurance that a Portfolio will achieve its investment objective.
The following table compares the principal risks of an investment in each Portfolio. The most significant risks as of the date of this Proxy Statement/Prospectus are presented first and indicated with an asterisk (*), followed by additional principal risks in alphabetical order. For an explanation of each such risk, see “Additional Information about the Reorganizations — Descriptions of Risk Factors” below. A Portfolio is also subject to the risks associated with the Underlying Portfolios’ investments; please see the “Information Regarding the Underlying Portfolios” in Appendix D for additional information about these risks.
Risks | New EQ/Conservative Allocation Portfolio and EQ/Conservative Allocation Portfolio | New EQ/Conservative- Plus Allocation Portfolio and EQ/ Conservative- Plus Allocation Portfolio | New EQ/Moderate Allocation Portfolio and EQ/Moderate Allocation Portfolio | New EQ/Moderate- Plus Allocation Portfolio and EQ/Moderate- Plus Allocation Portfolio | New EQ/Aggressive Allocation Portfolio and EQ/Aggressive Allocation Portfolio | |||||||||||||||
Market Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Asset Allocation Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Interest Rate Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Credit Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Equity Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Volatility Management Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Risks Related to Investments in Underlying Portfolios | X | * | X | * | X | * | X | * | X | * | ||||||||||
Affiliated Portfolio Risk | X | X | X | X | X | |||||||||||||||
Derivatives Risk | X | X | X | X | X | |||||||||||||||
Foreign Securities Risk | X | X | X | X | X | * | ||||||||||||||
Futures Contract Risk | X | X | X | X | X | |||||||||||||||
Investment Grade Securities Risk | X | X | X | X | X | |||||||||||||||
Large-Cap Company Risk | X | X | X | X | X | |||||||||||||||
Leveraging Risk | X | X | X | X | X |
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Risks | New EQ/Conservative Allocation Portfolio and EQ/Conservative Allocation Portfolio | New EQ/Conservative- Plus Allocation Portfolio and EQ/ Conservative- Plus Allocation Portfolio | New EQ/Moderate Allocation Portfolio and EQ/Moderate Allocation Portfolio | New EQ/Moderate- Plus Allocation Portfolio and EQ/Moderate- Plus Allocation Portfolio | New EQ/Aggressive Allocation Portfolio and EQ/Aggressive Allocation Portfolio | |||||||||||||||
Liquidity Risk | X | X | X | X | ||||||||||||||||
Mid-Cap and Small-Cap Company Risk | X | X | X | X | X | |||||||||||||||
Non-Investment Grade Securities Risk | X | X | X | X | X | |||||||||||||||
Portfolio Management Risk | X | X | X | X | X | |||||||||||||||
Redemption Risk | X | X | X | X |
Comparative Fee and Expense Tables
The following tables show the fees and expenses of the Class A Shares, Class B Shares and Class K Shares of each EQ Allocation Portfolio and the estimated pro forma fees and expenses of the Class IA Shares, Class IB Shares and Class K Shares of the corresponding Acquiring Portfolio after giving effect to the proposed Reorganization. Fees and expenses for each EQ Allocation Portfolio are based on those incurred by the relevant class of its shares for the fiscal year ended December 31, 2022. Each Acquiring Portfolio is newly organized and has not had any operations of its own to date. The pro forma fees and expenses of the Acquiring Portfolio shares assume that the Reorganization was in effect for the fiscal year ended December 31, 2022. The tables below do not reflect any Contract-related fees and expenses, which would increase overall fees and expenses. See the Contract prospectus for a description of those fees and expenses.
Shareholder Fees
(fees paid directly from your investment)
EQ Allocation Portfolio | Pro Forma New EQ Allocation Portfolio (assuming the Reorganization is approved) | |
Not Applicable. | Not Applicable. |
Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
EQ/Conservative Allocation Portfolio | Pro Forma New EQ/ Conservative Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||||||||||
Class A | Class B | Class K | Class IA | Class IB | Class K | |||||||||||||||||||
Management Fee | 0.10% | 0.10% | 0.10% | 0.10% | 0.10% | 0.10% | ||||||||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.25% | 0.00% | 0.25% | 0.25% | 0.00% | ||||||||||||||||||
Other Expenses | 0.16% | 0.16% | 0.16% | 0.16% | 0.16% | 0.16% | ||||||||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.52% | 0.52% | 0.52% | 0.52% | 0.52% | 0.52% | ||||||||||||||||||
Total Annual Portfolio Operating Expenses | 1.03% | 1.03% | 0.78% | 1.03% | 1.03% | 0.78% | ||||||||||||||||||
Fee Waiver and/or Expense Reimbursement† | -0.03% | -0.03% | -0.03% | -0.03% | -0.03% | -0.03% | ||||||||||||||||||
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement | 1.00% | 1.00% | 0.75% | 1.00% | 1.00% | 0.75% |
† | Pursuant to a contract, EIM has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of the EQ/Conservative Allocation Portfolio through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of the arrangement) so that the annual operating expenses (including acquired fund fees and expenses) of the Portfolio (exclusive of taxes, interest, brokerage commissions, dividend and interest expenses on securities sold short, capitalized expenses and extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed 1.00% for Class A and Class B shares and 0.75% for Class K shares of the Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2024. EIM may be reimbursed the amount of any such payments or waivers made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquired Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower. |
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EIM has undertaken to enter into a new contractual expense limitation arrangement with respect to the Acquiring Portfolio pursuant to which the Acquiring Portfolio would be subject to the same contractual expense cap as the Acquired Portfolio, and the expense limitation arrangement for the Acquiring Portfolio would extend one year beyond that for the Acquired Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2025. EIM may be reimbursed the amount of any such payments or waivers (including any such payments or waivers with respect to the Acquired Portfolio prior to the Reorganization) made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquiring Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower. |
Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
EQ/Conservative-Plus Allocation Portfolio | Pro Forma New EQ/ Conservative-Plus Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||||||||||
Class A | Class B | Class K | Class IA | Class IB | Class K | |||||||||||||||||||
Management Fee | 0.10% | 0.10% | 0.10% | 0.10% | 0.10% | 0.10% | ||||||||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.25% | 0.00% | 0.25% | 0.25% | 0.00% | ||||||||||||||||||
Other Expenses 1 | 0.16% | 0.16% | 0.16% | 0.16% | 0.16% | 0.16% | ||||||||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.57% | 0.57% | 0.57% | 0.57% | 0.57% | 0.57% | ||||||||||||||||||
Total Annual Portfolio Operating Expenses | 1.08% | 1.08% | 0.83% | 1.08% | 1.08% | 0.83% |
1 | Other Expenses do not reflect the impact of one-time, non-recurring expenses associated with the Reorganization. If these expenses had been reflected, Other Expenses would have been 0.17%. |
Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
EQ/Moderate Allocation Portfolio | Pro Forma New EQ/Moderate Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||||||||||
Class A | Class B | Class K | Class IA | Class IB | Class K | |||||||||||||||||||
Management Fee | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | ||||||||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.25% | 0.00% | 0.25% | 0.25% | 0.00% | ||||||||||||||||||
Other Expenses 1 | 0.15% | 0.15% | 0.15% | 0.15% | 0.15% | 0.15% | ||||||||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.59% | 0.59% | 0.59% | 0.59% | 0.59% | 0.59% | ||||||||||||||||||
Total Annual Portfolio Operating Expenses | 1.08% | 1.08% | 0.83% | 1.08% | 1.08% | 0.83% |
1 | Other Expenses do not reflect the impact of one-time, non-recurring expenses associated with the Reorganization. If these expenses had been reflected, Other Expenses would have been 0.16%. |
Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
EQ/Moderate-Plus Allocation Portfolio | Pro Forma New EQ/Moderate- Plus Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||||||||||
Class A | Class B | Class K | Class IA | Class IB | Class K | |||||||||||||||||||
Management Fee | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | ||||||||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.25% | 0.00% | 0.25% | 0.25% | 0.00% | ||||||||||||||||||
Other Expenses | 0.15% | 0.15% | 0.15% | 0.15% | 0.15% | 0.15% | ||||||||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.63% | 0.63% | 0.63% | 0.63% | 0.63% | 0.63% | ||||||||||||||||||
Total Annual Portfolio Operating Expenses | 1.12% | 1.12% | 0.87% | 1.12% | 1.12% | 0.87% |
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Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
EQ/Aggressive Allocation Portfolio | Pro Forma New EQ/ Aggressive Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||||||||||
Class A | Class B | Class K | Class IA | Class IB | Class K | |||||||||||||||||||
Management Fee 1 | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | ||||||||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.25% | 0.00% | 0.25% | 0.25% | 0.00% | ||||||||||||||||||
Other Expenses | 0.14% | 0.14% | 0.14% | 0.14% | 0.14% | 0.14% | ||||||||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.67% | 0.67% | 0.67% | 0.67% | 0.67% | 0.67% | ||||||||||||||||||
Total Annual Portfolio Operating Expenses | 1.15% | 1.15% | 0.90% | 1.15% | 1.15% | 0.90% |
1 | Management Fee has been restated to reflect the current fee. |
This example is intended to help you compare the costs of investing in the Portfolios with the cost of investing in other investment options. The example assumes that you invest $10,000 in a Portfolio for the time periods indicated; that your investment has a 5% return each year; that the Portfolio’s operating expenses remain the same; and that the expense limitation arrangement with respect to the Portfolio is not renewed. This example does not reflect any Contract-related fees and expenses, including redemption fees (if any) at the Contract level. If such fees and expenses were reflected, the total expenses would be higher. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
EQ/Conservative Allocation Portfolio | ||||||||||||||||
Class A | $ | 102 | $ | 325 | $ | 566 | $ | 1,257 | ||||||||
Class B | $ | 102 | $ | 325 | $ | 566 | $ | 1,257 | ||||||||
Class K | $ | 77 | $ | 246 | $ | 430 | $ | 963 | ||||||||
Pro Forma New EQ/Conservative Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IA | $ | 102 | $ | 325 | $ | 566 | $ | 1,257 | ||||||||
Class IB | $ | 102 | $ | 325 | $ | 566 | $ | 1,257 | ||||||||
Class K | $ | 77 | $ | 246 | $ | 430 | $ | 963 | ||||||||
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
EQ/Conservative-Plus Allocation Portfolio | ||||||||||||||||
Class A | $ | 110 | $ | 343 | $ | 595 | $ | 1,317 | ||||||||
Class B | $ | 110 | $ | 343 | $ | 595 | $ | 1,317 | ||||||||
Class K | $ | 85 | $ | 265 | $ | 460 | $ | 1,025 | ||||||||
Pro Forma New EQ/Conservative-Plus Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IA | $ | 110 | $ | 343 | $ | 595 | $ | 1,317 | ||||||||
Class IB | $ | 110 | $ | 343 | $ | 595 | $ | 1,317 | ||||||||
Class K | $ | 85 | $ | 265 | $ | 460 | $ | 1,025 | ||||||||
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
EQ/Moderate Allocation Portfolio | ||||||||||||||||
Class A | $ | 110 | $ | 343 | $ | 595 | $ | 1,317 | ||||||||
Class B | $ | 110 | $ | 343 | $ | 595 | $ | 1,317 | ||||||||
Class K | $ | 85 | $ | 265 | $ | 460 | $ | 1,025 | ||||||||
Pro Forma New EQ/Moderate Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IA | $ | 110 | $ | 343 | $ | 595 | $ | 1,317 | ||||||||
Class IB | $ | 110 | $ | 343 | $ | 595 | $ | 1,317 | ||||||||
Class K | $ | 85 | $ | 265 | $ | 460 | $ | 1,025 |
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1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
EQ/Moderate-Plus Allocation Portfolio | ||||||||||||||||
Class A | $ | 114 | $ | 356 | $ | 617 | $ | 1,363 | ||||||||
Class B | $ | 114 | $ | 356 | $ | 617 | $ | 1,363 | ||||||||
Class K | $ | 89 | $ | 278 | $ | 482 | $ | 1,073 | ||||||||
Pro Forma New EQ/Moderate-Plus Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IA | $ | 114 | $ | 356 | $ | 617 | $ | 1,363 | ||||||||
Class IB | $ | 114 | $ | 356 | $ | 617 | $ | 1,363 | ||||||||
Class K | $ | 89 | $ | 278 | $ | 482 | $ | 1,073 | ||||||||
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
EQ/Aggressive Allocation Portfolio | ||||||||||||||||
Class A | $ | 117 | $ | 365 | $ | 633 | $ | 1,398 | ||||||||
Class B | $ | 117 | $ | 365 | $ | 633 | $ | 1,398 | ||||||||
Class K | $ | 92 | $ | 287 | $ | 498 | $ | 1,108 | ||||||||
Pro Forma New EQ/Aggressive Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IA | $ | 117 | $ | 365 | $ | 633 | $ | 1,398 | ||||||||
Class IB | $ | 117 | $ | 365 | $ | 633 | $ | 1,398 | ||||||||
Class K | $ | 92 | $ | 287 | $ | 498 | $ | 1,108 |
Each Portfolio pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs. These costs, which are not reflected in annual fund operating expenses or in the example, affect a Portfolio’s performance. During the fiscal year ended December 31, 2022, the portfolio turnover rate for each of EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, and EQ/Aggressive Allocation Portfolio was 9%, 10%, 10%, 9%, and 7%, respectively, of the average value of the Portfolio. The New EQ Allocation Portfolios have not yet commenced operations and, therefore, do not have portfolio turnover rates to report.
Comparison of Investment Objectives, Policies and Strategies
Each New EQ Allocation Portfolio and its corresponding Acquired Portfolio have identical investment objectives, policies, and strategies. Accordingly, the Reorganizations will not result in any material changes to the Acquired Portfolios’ investment programs.
The following table compares the investment objective of each New EQ Allocation Portfolio with that of its corresponding Acquired Portfolio. The Board of the EQ Trust may change the investment objective of each New EQ Allocation Portfolio without a vote of the Portfolio’s shareholders.
Acquiring Portfolio | Acquired Portfolio | |
New EQ/Conservative Allocation Portfolio | EQ/Conservative Allocation Portfolio | |
Investment Objective | Investment Objective | |
Seeks to achieve a high level of current income. | Same. | |
|
| |
New EQ/Conservative-Plus Allocation Portfolio | EQ/Conservative-Plus Allocation Portfolio | |
Investment Objective | Investment Objective | |
Seeks to achieve current income and growth of capital, with a greater emphasis on current income. | Same. |
19
Acquiring Portfolio | Acquired Portfolio | |
New EQ/Moderate Allocation Portfolio | EQ/Moderate Allocation Portfolio | |
Investment Objective | Investment Objective | |
Seeks to achieve long-term capital appreciation and current income. | Same. | |
|
| |
New EQ/Moderate-Plus Allocation Portfolio | EQ/Moderate-Plus Allocation Portfolio | |
Investment Objective | Investment Objective | |
Seeks to achieve long-term capital appreciation and current income, with a greater emphasis on capital appreciation. | Same. | |
|
| |
New EQ/Aggressive Allocation Portfolio | EQ/Aggressive Allocation Portfolio | |
Investment Objective | Investment Objective | |
Seeks to achieve long-term capital appreciation. | Same. |
The following table compares the principal investment policies and strategies of each New EQ Allocation Portfolio with those of its corresponding Acquired Portfolio. For more detailed information about each Portfolio’s investment strategies and risks, see Appendix B.
Acquiring Portfolio | Acquired Portfolio | |
Each New EQ Allocation Portfolio | Each EQ Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio is managed by Equitable Investment Management Group, LLC (“EIM” or “Adviser”). The Portfolio pursues its investment objective by investing in other mutual funds (“Underlying Portfolios”) managed by the Adviser or Equitable Investment Management, LLC, an affiliate of the Adviser, and sub-advised by one or more investment sub-advisers. | Same. | |
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New EQ/Conservative Allocation Portfolio | EQ/Conservative Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio invests approximately 80% of its assets in the fixed income asset class and approximately 20% of its assets in the equity asset class through investments in Underlying Portfolios. Subject to this asset allocation target the Portfolio generally invests its assets in a combination of Underlying Portfolios that would result in the Portfolio being invested in the following asset categories in the approximate target investment percentages shown in the chart below.
Foreign Equity Securities: 5% Large Cap Equity Securities: 10% Small/Mid Cap Equity Securities: 5% Investment Grade Bonds: 75% High Yield (“Junk”) Bonds: 5% | Same. | |
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New EQ/Conservative-Plus Allocation Portfolio | EQ/Conservative-Plus Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio invests approximately 60% of its assets in the fixed income asset class and approximately 40% of its assets in the equity asset class through investments in Underlying Portfolios. Subject to this asset allocation target the Portfolio generally invests its assets in a combination of Underlying Portfolios that would result in the Portfolio being invested in the following asset categories in the approximate target investment percentages shown in the chart below.
Foreign Equity Securities: 10% Large Cap Equity Securities: 20% Small/Mid Cap Equity Securities: 10% Investment Grade Bonds: 55% High Yield (“Junk”) Bonds: 5% | Same. |
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Acquiring Portfolio | Acquired Portfolio | |
New EQ/Moderate Allocation Portfolio | EQ/Moderate Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio invests approximately 50% of its assets in the equity asset class and approximately 50% of its assets in the fixed income asset class through investments in Underlying Portfolios. Subject to this asset allocation target the Portfolio generally invests its assets in a combination of Underlying Portfolios that would result in the Portfolio being invested in the following asset categories in the approximate target investment percentages shown in the chart below.
Foreign Equity Securities: 15% Large Cap Equity Securities: 20 % Small/Mid Cap Equity Securities: 15% Investment Grade Bonds: 45% High Yield (“Junk”) Bonds: 5% | Same. | |
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New EQ/Moderate-Plus Allocation Portfolio | EQ/Moderate-Plus Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio invests approximately 70% of its assets in the equity asset class and approximately 30% of its assets in the fixed income asset class through investments in Underlying Portfolios. Subject to this asset allocation target the Portfolio generally invests its assets in a combination of Underlying Portfolios that would result in the Portfolio being invested in the following asset categories in the approximate target investment percentages shown in the chart below.
Foreign Equity Securities: 20% Large Cap Equity Securities: 30% Small/Mid Cap Equity Securities: 20% Investment Grade Bonds: 28% High Yield (“Junk”) Bonds: 2% | Same. | |
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New EQ/Aggressive Allocation Portfolio | EQ/Aggressive Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio invests approximately 90% of its assets in the equity asset class and approximately 10% of its assets in the fixed income asset class through investments in Underlying Portfolios. Subject to this asset allocation target the Portfolio generally invests its assets in a combination of Underlying Portfolios that would result in the Portfolio being invested in the following asset categories in the approximate target investment percentages shown in the chart below.
Foreign Equity Securities: 25% Large Cap Equity Securities: 40% Small/Mid Cap Equity Securities: 25% Investment Grade Bonds: 9% High Yield (“Junk”) Bonds: 1% | Same. | |
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Each New EQ Allocation Portfolio | Each EQ Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The target allocation to investment grade and high yield bond asset categories may include securities of both U.S. and foreign issuers. Actual allocations between asset classes and among asset categories can deviate from the amounts shown above by up to 15% of the Portfolio’s assets. The Portfolio is managed so that it can serve as a core part of your larger portfolio. The Underlying Portfolios in which the Portfolio may invest have been selected to represent a reasonable spectrum of investment options for the Portfolio. | Same. |
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Acquiring Portfolio | Acquired Portfolio | |
Each New EQ Allocation Portfolio | Each EQ Allocation Portfolio | |
In addition, the Portfolio may invest in Underlying Portfolios that tactically manage equity exposure. When market volatility is increasing above specific thresholds, such Underlying Portfolios may reduce their equity exposure. During such times, the Portfolio’s exposure to equity securities may be significantly less than if it invested in a traditional equity portfolio and the Portfolio may deviate significantly from its asset allocation targets. Although the Portfolio’s investment in Underlying Portfolios that tactically manage equity exposure is intended to reduce the Portfolio’s overall risk, it may result in periods of underperformance, even during periods when the market is rising. Volatility management techniques may reduce potential losses and/or mitigate financial risks to insurance companies that provide certain benefits and guarantees available under the Contracts and offer the Portfolio as an investment option in their products. The Portfolio may invest in Underlying Portfolios that employ derivatives (including futures contracts) for a variety of purposes, including to reduce risk, to seek enhanced returns from certain asset classes, and to leverage exposure to certain asset classes. | Same | |
The Adviser has based the asset allocation target and target investment percentages for the Portfolio on the degree to which it believes the Underlying Portfolios, in combination, are appropriate for the Portfolio’s investment objective. The Adviser may change the asset allocation targets, target investment percentages and the particular Underlying Portfolios in which the Portfolio invests without notice or shareholder approval. The Adviser may sell the Portfolio’s holdings for a variety of reasons, including to invest in an Underlying Portfolio believed to offer superior investment opportunities. | Same. |
Each New EQ Allocation Portfolio and its corresponding Acquired Portfolio also have identical fundamental investment policies, which relate to borrowing. lending, underwriting, concentration, issuing senior securities, and investing in commodities and real estate. Fundamental investment policies may be changed only by a vote of a Portfolio’s shareholders. More detailed information about the fundamental investment policies is available in the EQ Trust’s Statement of Additional Information.
Comparative Performance Information
Each Acquiring Portfolio is newly organized and has no assets, operating history, or performance information of its own as of the date of this Proxy Statement/Prospectus. After the Reorganization, which is subject to shareholder approval, each Acquiring Portfolio, as the successor to its corresponding Acquired Portfolio, will assume and publish the operating history and performance record of the Class A, Class B and Class K shares of the Acquired Portfolio.
The bar charts and tables below provide some indication of the risks of investing in each Portfolio by showing changes in each EQ Allocation Portfolio’s performance from year to year and by showing how the EQ Allocation Portfolio’s average annual total returns for the past one-, five- and ten-year periods through December 31, 2022, compared to the returns of a broad-based securities market index. The additional broad-based securities market index and the hypothetical composite index show how the Portfolio’s performance compared with the returns of other asset classes in which the Portfolio may invest. Past performance is not an indication of future performance.
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The performance results do not reflect any Contract-related fees and expenses, which would reduce the performance results.
EQ/Conservative Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 4.80% (2020 2nd Quarter) | Worst quarter (% and time period) -6.58% (2022 2nd Quarter) |
EQ/Conservative Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
EQ/Conservative Allocation Portfolio — Class A Shares | -12.62% | 0.71% | 1.80% | |||||||||
EQ/Conservative Allocation Portfolio — Class B Shares | -12.62% | 0.71% | 1.79% | |||||||||
EQ/Conservative Allocation Portfolio — Class K Shares | -12.42% | 0.96% | 2.05% | |||||||||
EQ/Conservative Allocation Index (reflects no deduction for fees, expenses, or taxes) | -11.29% | 1.35% | 2.35% | |||||||||
S&P 500® Index (reflects no deduction for fees, expenses, or taxes) | -18.11% | 9.42% | 12.56% | |||||||||
Bloomberg U.S. Intermediate Government Bond Index (reflects no deduction for fees, expenses, or taxes) | -7.73% | 0.46% | 0.69% |
EQ/Conservative-Plus Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 7.63% (2020 2nd Quarter) | Worst quarter (% and time period) -9.22% (2022 2nd Quarter) |
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EQ/Conservative-Plus Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
EQ/Conservative-Plus Allocation Portfolio — Class A Shares | -14.53% | 1.87% | 3.51% | |||||||||
EQ/Conservative-Plus Allocation Portfolio — Class B Shares | -14.52% | 1.87% | 3.52% | |||||||||
EQ/Conservative-Plus Allocation Portfolio — Class K Shares | -14.40% | 2.12% | 3.76% | |||||||||
EQ/Conservative-Plus Allocation Index (reflects no deduction for fees, expenses, or taxes) | -12.89% | 2.69% | 4.28% | |||||||||
S&P 500® Index (reflects no deduction for fees, expenses, or taxes) | -18.11% | 9.42% | 12.56% | |||||||||
Bloomberg U.S. Intermediate Government Bond Index (reflects no deduction for fees, expenses, or taxes) | -7.73% | 0.46% | 0.69% |
EQ/Moderate Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 9.04% (2020 2nd Quarter) | Worst quarter (% and time period) -10.46% (2022 2nd Quarter) |
EQ/Moderate Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
EQ/Moderate Allocation Portfolio — Class A Shares | -15.47% | 2.33% | 4.25% | |||||||||
EQ/Moderate Allocation Portfolio — Class B Shares | -15.48% | 2.33% | 4.25% | |||||||||
EQ/Moderate Allocation Portfolio — Class K Shares | -15.24% | 2.58% | 4.51% | |||||||||
EQ/Moderate Allocation Index (reflects no deduction for fees, expenses, or taxes) | -13.60% | 3.14% | 5.04% | |||||||||
S&P 500® Index (reflects no deduction for fees, expenses, or taxes) | -18.11% | 9.42% | 12.56% | |||||||||
Bloomberg U.S. Intermediate Government Bond Index (reflects no deduction for fees, expenses, or taxes) | -7.73% | 0.46% | 0.69% |
EQ/Moderate-Plus Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 12.71% (2020 4th Quarter) | Worst quarter (% and time period) -13.89% (2020 1st Quarter) |
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EQ/Moderate-Plus Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
EQ/Moderate-Plus Allocation Portfolio — Class A Shares | -17.00% | 3.58% | 6.08% | |||||||||
EQ/Moderate-Plus Allocation Portfolio — Class B Shares | -17.08% | 3.58% | 6.07% | |||||||||
EQ/Moderate-Plus Allocation Portfolio — Class K Shares | -16.86% | 3.83% | 6.34% | |||||||||
EQ/Moderate-Plus Allocation Index (reflects no deduction for fees, expenses, or taxes) | -14.88% | 4.38% | 6.91% | |||||||||
S&P 500® Index (reflects no deduction for fees, expenses, or taxes) | -18.11% | 9.42% | 12.56% | |||||||||
Bloomberg U.S. Intermediate Government Bond Index (reflects no deduction for fees, expenses, or taxes) | -7.73% | 0.46% | 0.69% |
EQ/Aggressive Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 15.71% (2020 4th Quarter) | Worst quarter (% and time period) -18.00% (2020 1st Quarter) |
EQ/Aggressive Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
EQ/Aggressive Allocation Portfolio — Class A Shares | -18.40% | 4.62% | 7.77% | |||||||||
EQ/Aggressive Allocation Portfolio — Class B Shares | -18.31% | 4.64% | 7.78% | |||||||||
EQ/Aggressive Allocation Portfolio — Class K Shares | -18.16% | 4.90% | 8.04% | |||||||||
EQ/Aggressive Allocation Index (reflects no deduction for fees, expenses, or taxes) | -15.95% | 5.67% | 8.82% | |||||||||
S&P 500® Index (reflects no deduction for fees, expenses, or taxes) | -18.11% | 9.42% | 12.56% | |||||||||
Bloomberg U.S. Intermediate Government Bond Index (reflects no deduction for fees, expenses, or taxes) | -7.73% | 0.46% | 0.69% |
The following tables show the capitalization of each EQ Allocation Portfolio as of June 30, 2023, and of the corresponding New EQ Allocation Portfolio on a pro forma combined basis as of June 30, 2023, after giving effect to the proposed Reorganization. Each Acquiring Portfolio is newly organized and did not have any operations of its own as of the date of this Proxy Statement/Prospectus. Pro forma net assets may not total and net asset values per share may not recalculate due to rounding of net assets.
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
EQ/Conservative Allocation Portfolio — Class A Shares | $ | 10.2 | $ | 8.13 | 1,254,225 | |||||||
Pro forma New EQ/Conservative Allocation Portfolio — Class IA Shares | $ | 10.2 | $ | 8.13 | 1,254,225 | |||||||
EQ/Conservative Allocation Portfolio — Class B Shares | $ | 765.2 | $ | 8.13 | 94,068,216 | |||||||
Pro forma New EQ/Conservative Allocation Portfolio — Class IB Shares | $ | 765.2 | $ | 8.13 | 94,068,216 | |||||||
EQ/Conservative Allocation Portfolio — Class K Shares | $ | 7.3 | $ | 8.12 | 904,875 | |||||||
Pro forma New EQ/Conservative Allocation Portfolio — Class K Shares | $ | 7.3 | $ | 8.12 | 904,875 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 782.7 | — | 96,227,316 |
* | Adjusted to reflect Reorganization costs. |
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Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
EQ/Conservative-Plus Allocation Portfolio — Class A Shares | $ | 14.9 | $ | 8.20 | 1,817,291 | |||||||
Pro forma New EQ/Conservative-Plus Allocation Portfolio — Class IA Shares | $ | 14.9 | $ | 8.20 | 1,817,291 | |||||||
EQ/Conservative-Plus Allocation Portfolio — Class B Shares | $ | 862.0 | $ | 8.20 | 105,070,531 | |||||||
Pro forma New EQ/Conservative-Plus Allocation Portfolio — Class IB Shares | $ | 862.0 | $ | 8.20 | 105,070,531 | |||||||
EQ/Conservative-Plus Allocation Portfolio — Class K Shares | $ | 20.9 | $ | 8.21 | 2,543,216 | |||||||
Pro forma New EQ/Conservative-Plus Allocation Portfolio — Class K Shares | $ | 20.9 | $ | 8.21 | 2,543,216 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 897.8 | — | 109,431,038 |
* | Adjusted to reflect Reorganization costs. |
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
EQ/Moderate Allocation Portfolio — Class A Shares | $ | 1,626.6 | $ | 11.90 | 136,702,952 | |||||||
Pro forma New EQ/Moderate Allocation Portfolio — Class IA Shares | $ | 1,626.6 | $ | 11.90 | 136,702,952 | |||||||
EQ/Moderate Allocation Portfolio — Class B Shares | $ | 3,778.9 | $ | 11.77 | 321,184,652 | |||||||
Pro forma New EQ/Moderate Allocation Portfolio — Class IB Shares | $ | 3,778.9 | $ | 11.77 | 321,184,652 | |||||||
EQ/Moderate Allocation Portfolio — Class K Shares | $ | 249.6 | $ | 11.92 | 20,940,506 | |||||||
Pro forma New EQ/Moderate Allocation Portfolio — Class K Shares | $ | 249.6 | $ | 11.92 | 20,940,506 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 5,655.1 | — | 478,828,110 |
* | Adjusted to reflect Reorganization costs. |
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
EQ/Moderate-Plus Allocation Portfolio — Class A Shares | $ | 194.9 | $ | 9.26 | 21,046,806 | |||||||
Pro forma New EQ/Moderate-Plus Allocation Portfolio — Class IA Shares | $ | 194.9 | $ | 9.26 | 21,046,806 | |||||||
EQ/Moderate-Plus Allocation Portfolio — Class B Shares | $ | 6,904.0 | $ | 9.26 | 745,258,096 | |||||||
Pro forma New EQ/Moderate-Plus Allocation Portfolio — Class IB Shares | $ | 6,904.0 | $ | 9.26 | 745,258,096 | |||||||
EQ/Moderate-Plus Allocation Portfolio — Class K Shares | $ | 52.5 | $ | 9.28 | 5,662,430 | |||||||
Pro forma New EQ/Moderate-Plus Allocation Portfolio — Class K Shares | $ | 52.5 | $ | 9.28 | 5,662,430 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 7,151.4 | — | 771,967,332 |
* | Adjusted to reflect Reorganization costs. |
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
EQ/Aggressive Allocation Portfolio — Class A Shares | $ | 80.3 | $ | 9.71 | 8,277,843 | |||||||
Pro forma New EQ/Aggressive Allocation Portfolio — Class IA Shares | $ | 80.3 | $ | 9.71 | 8,277,843 | |||||||
EQ/Aggressive Allocation Portfolio — Class B Shares | $ | 3,004.0 | $ | 9.71 | 309,431,073 | |||||||
Pro forma New EQ/Aggressive Allocation Portfolio — Class IB Shares | $ | 3,004.0 | $ | 9.71 | 309,431,073 | |||||||
EQ/Aggressive Allocation Portfolio — Class K Shares | $ | 29.1 | $ | 9.73 | 2,991,451 | |||||||
Pro forma New EQ/Aggressive Allocation Portfolio — Class K Shares | $ | 29.1 | $ | 9.73 | 2,991,451 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 3,113.4 | — | 320,700,367 |
* | Adjusted to reflect Reorganization costs. |
AFTER CAREFUL CONSIDERATION, THE BOARDS OF THE VIP TRUST AND THE EQ TRUST UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT WITH RESPECT TO EACH EQ ALLOCATION PORTFOLIO. ACCORDINGLY, THE BOARD OF THE VIP TRUST HAS SUBMITTED THE REORGANIZATION AGREEMENT FOR APPROVAL BY EACH EQ ALLOCATION PORTFOLIO’S SHAREHOLDERS.
Required Vote for each of Proposals 1.A. through 1.E.
The shareholders of each EQ Allocation Portfolio will vote on the approval of Proposals 1.A. through 1.E., as applicable, with respect to that EQ Allocation Portfolio separately from the shareholders of each other EQ Allocation Portfolio. Approval of each of Proposals 1.A. through 1.E. with respect to an EQ Allocation Portfolio will require the affirmative vote of the lesser of (i) 67% or more of the voting securities of the Portfolio present at
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the Meeting, if the holders of more than 50% of its outstanding voting securities are present or represented by proxy, or (ii) more than 50% of its outstanding voting securities. These percentages are required by the 1940 Act. With respect to Proposals 1.A. through 1.E., “voting securities” refers to the shares of an EQ Allocation Portfolio. The approval of any one Reorganization in Proposals 1.A. through 1.E. is not contingent on the approval of any other Reorganization in Proposals 1.A. through 1.E., 2.A. through 2.E., or 3.
The current Trustees of the VIP Trust recommend that the shareholders of each EQ Allocation Portfolio vote “FOR” Proposals 1.A. through 1.E., as applicable.
PROPOSAL 2A: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE TARGET 2015 ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE TARGET 2015 ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW TARGET 2015 ALLOCATION PORTFOLIO”).
PROPOSAL 2B: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE TARGET 2025 ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE TARGET 2025 ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW TARGET 2025 ALLOCATION PORTFOLIO”).
PROPOSAL 2C: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE TARGET 2035 ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE TARGET 2035 ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW TARGET 2035 ALLOCATION PORTFOLIO”).
PROPOSAL 2D: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE TARGET 2045 ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE TARGET 2045 ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW TARGET 2045 ALLOCATION PORTFOLIO”).
PROPOSAL 2E: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE TARGET 2055 ALLOCATION PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE TARGET 2055 ALLOCATION PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW TARGET 2055 ALLOCATION PORTFOLIO”).
The purpose of Proposals 2.A. through 2.E. is to approve a Reorganization Agreement pursuant to which each Target Allocation Portfolio will be reorganized into its corresponding New Target Allocation Portfolio. In considering whether to approve a Reorganization Proposal, you should note the following information regarding the Reorganization of each Target Allocation Portfolio into its corresponding New Target Allocation Portfolio:
• | Each Acquiring Portfolio is newly organized and has no assets, operating history, or performance information of its own as of the date of this Proxy Statement/Prospectus. Each Acquiring Portfolio has been created as a shell series of the EQ Trust solely for the purposes of acquiring the corresponding Acquired Portfolio’s assets and continuing the corresponding Acquired Portfolio’s investment operations and will not conduct any investment operations until after the closing of the Reorganizations. If shareholders of an Acquired Portfolio approve its Reorganization, the corresponding Acquiring Portfolio will assume and publish the operating history and performance record of the Acquired Portfolio |
• | Each Acquiring Portfolio and its corresponding Acquired Portfolio have identical investment objectives, policies, and strategies. Accordingly, the Reorganizations will not result in any material changes to the Acquired Portfolios’ investment programs. |
• | Each Acquiring Portfolio and its corresponding Acquired Portfolio seeks the highest total return over time consistent with its asset mix; total return includes capital growth and income. |
• | Each Acquiring Portfolio and each corresponding Acquired Portfolio pursues its investment objective by investing in other mutual funds (“Underlying Portfolios”) managed by EIM or Equitable Investment Management, LLC, an affiliate of EIM, and sub-advised by one or more investment sub-advisers. EIM has established an asset allocation target for each Acquiring Portfolio |
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and its corresponding Acquired Portfolio. This target is the approximate percentage of each Portfolio’s assets that is invested in equity securities or fixed income securities as represented by the holdings of the Underlying Portfolios in which a Portfolio invests. For a detailed comparison of the Portfolios’ investment objectives, policies, and strategies, see “Comparison of Investment Objectives, Policies, and Strategies” below. |
• | The principal risks of each Acquiring Portfolio are the same as the principal risks of its corresponding Acquired Portfolio. Each Acquiring Portfolio and its corresponding Acquired Portfolio are subject to affiliated portfolio risk, asset allocation risk, credit risk, derivatives risk, equity risk, foreign securities risk, futures contract risk, interest rate risk, investment grade securities risk, large-cap company risk, leveraging risk, market risk, mid-cap and small-cap company risk, non-investment grade securities risk, portfolio management risk, risks related to investments in Underlying Portfolios, and target date risk as principal investment risks. Each of New Target 2015 Allocation Portfolio, New Target 2025 Allocation Portfolio, and New Target 2035 Allocation Portfolio, and its corresponding Acquired Portfolio also have liquidity risk and redemption risk as a principal investment risk. For a detailed comparison of the Portfolios’ risks, see “Comparison of Principal Risk Factors” below. |
• | EIM serves as the investment adviser for the Acquired Portfolios and the Acquiring Portfolios and will advise the Acquiring Portfolios after the Reorganizations. Equitable Investment Management, LLC (the “Administrator”), an affiliate of EIM, serves as the administrator for the Acquired Portfolios and the Acquiring Portfolios and will administer the Acquiring Portfolios after the Reorganizations. |
• | EIM provides day-to-day management of the Acquiring Portfolios. EIM has the ability to hire investment sub-advisers to provide research, stock selection, and trading services for the Portfolios, although the Portfolios do not currently have sub-advisers. EIM has been granted relief by the SEC to hire, terminate and replace sub-advisers of the Portfolios and to amend sub-advisory agreements without obtaining shareholder approval, subject to the approval of the Trust’s Board. If a sub-adviser is retained for a Portfolio, the shareholders of the Portfolio would receive notice of such action. However, EIM may not enter into a sub-advisory agreement on behalf of a Portfolio with an “affiliated person” of EIM unless the sub-advisory agreement, including compensation, is approved by the Portfolio’s shareholders. If a sub-adviser is retained for a Portfolio, EIM would be responsible for overseeing the sub-adviser and recommending its hiring, termination and replacement to the Trust’s Board. The relief does not extend to any increase in the advisory fee paid by a Portfolio to EIM; any such increase would be subject to shareholder approval. For a detailed description of the Adviser to the Acquiring Portfolios, please see “Additional Information about the Acquiring Portfolios — The Adviser” below. |
• | As shown in the “Summary” above, the shareholders of Class B and Class K of an Acquired Portfolio will receive Class IB and Class K shares, respectively, of the corresponding Acquiring Portfolio pursuant to the Reorganizations. Shareholders will not pay any sales charges, redemption fees or other transaction fees in connection with the Reorganizations. Please see “Comparative Fee and Expense Tables,” “Additional Information about the Reorganizations” and “Additional Information about the Acquiring Portfolios” below for more information. |
• | For each proposed Reorganization, it is estimated that the annual operating expense ratios for each Acquiring Portfolio’s Class IB shares and Class K shares, immediately following the Reorganization (and excluding the one-time, non-recurring expenses of the Reorganization), will be the same as those of the corresponding Acquired Portfolio’s Class B shares and Class K shares, respectively, for the fiscal year ended December 31, 2022. In addition, as described below, each Acquiring Portfolio and its corresponding Acquired Portfolio are subject to the same contractual expense caps, but the expense limitation arrangement for each Acquiring Portfolio extends through April 30, 2025, one year beyond that for its corresponding Acquired Portfolio. There is no assurance that fees and expenses would not increase after April 30, 2025, which is when the expense limitation arrangement for each Acquiring Portfolio will terminate if it is not renewed by EIM and the EQ Trust’s Board. For a more detailed comparison of the fees and expenses of the Portfolios, please see “Comparative Fee and Expense Tables” and “Additional Information about the Acquiring Portfolios” below. |
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• | The Portfolios have the same advisory fee rate. The advisory fee for each Portfolio is equal to an annual rate of 0.10% of its average daily net assets. |
• | The Portfolios have the same administration fee schedule. Each Portfolio pays the Administrator its proportionate share of an asset-based administration fee of 0.140% of the first $60 billion of the aggregate average daily net assets of the Aggregated Portfolios; 0.110% of the next $20 billion; 0.0875% of the next $20 billion; 0.0775% of the next $20 billion; 0.0750% of the next $20 billion; and 0.0725% thereafter. The asset-based administration fee is calculated and billed monthly, and each Portfolio is subject to a minimum annual fee of $32,500. For purposes of calculating the asset-based administration fee, the assets of the Acquiring Portfolios and multiple other portfolios of the EQ Trust (together, the “Aggregated Portfolios”) are aggregated together. A complete list of the Aggregated Portfolios is provided in “Additional Information about the Acquiring Portfolios” below. |
• | Each Acquiring Portfolio and its corresponding Acquired Portfolio are subject to the same contractual expense caps, but the expense limitation arrangement for each Acquiring Portfolio extends one year beyond that for its corresponding Acquired Portfolio. |
• | Pursuant to a contract, EIM has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of each Acquired Portfolio through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of this arrangement) so that the annual operating expenses, including acquired fund fees and expenses, of the Acquired Portfolio (other than interest, taxes, brokerage commissions, dividend and interest expenses on securities sold short, other expenditures that are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed the following annualized rates: |
Acquired Portfolio | Maximum Annual Operating Expense Limit (% of average daily net assets)* | |||||||
Class B+ | Class K | |||||||
Target 2015 Allocation Portfolio | 1.10% | 0.85% | ||||||
Target 2025 Allocation Portfolio | 1.10% | 0.85% | ||||||
Target 2035 Allocation Portfolio | 1.10% | 0.85% | ||||||
Target 2045 Allocation Portfolio | 1.10% | 0.85% | ||||||
Target 2055 Allocation Portfolio | 1.10% | 0.85% |
* | For purposes of calculating the maximum annual operating expense limit, acquired fund fees and expenses are included in annual operating expenses. |
+ | Includes amounts payable pursuant to Rule 12b-1 Plan. |
• | EIM has undertaken to enter into a new contractual expense limitation arrangement with respect to each Acquiring Portfolio pursuant to which the Acquiring Portfolio would be subject to the same contractual expense cap as its corresponding Acquired Portfolio, and the expense limitation arrangement for the Acquiring Portfolio would extend one year beyond that for its corresponding Acquired Portfolio. Under this contract, EIM would agree to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of each Acquiring Portfolio through April 30, 2025 (unless the Board of Trustees consents to an earlier revision or termination of this arrangement) so that the annual operating expenses, including acquired fund fees and expenses, of the Acquiring Portfolio (other than interest, taxes, brokerage commissions, dividend and interest expenses on securities sold short, other expenditures that are capitalized in accordance |
29
with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed the following annualized rates: |
Acquiring Portfolio | Maximum Annual Operating Expense Limit (% of average daily net assets)* | |||||||
Class IB+ | Class K | |||||||
New Target 2015 Allocation Portfolio | 1.10% | 0.85% | ||||||
New Target 2025 Allocation Portfolio | 1.10% | 0.85% | ||||||
New Target 2035 Allocation Portfolio | 1.10% | 0.85% | ||||||
New Target 2045 Allocation Portfolio | 1.10% | 0.85% | ||||||
New Target 2055 Allocation Portfolio | 1.10% | 0.85% |
* | For purposes of calculating the maximum annual operating expense limit, acquired fund fees and expenses are included in annual operating expenses. |
+ | Includes amounts payable pursuant to Rule 12b-1 Plan. |
• | The Class B shares of each Acquired Portfolio and the Class IB shares of each Acquiring Portfolio are each subject to a Rule 12b-1 fee equal to an annual rate of 0.25% of the average daily net assets of the respective share classes. |
• | Following the Reorganizations, each Acquiring Portfolio will be managed in accordance with the investment objective, policies, and strategies of the New Portfolio, which are identical to those of its corresponding Acquired Portfolio. It is not expected that a New Portfolio will revise any of its investment policies upon consummation of the Reorganizations. EIM has reviewed each Acquired Portfolio’s investment objective, policies, and strategies and determined that they are identical to its corresponding New Portfolio’s investment objective, policies, and strategies. Thus, EIM believes that, if the Reorganizations are approved, all or virtually all of an Acquired Portfolio’s holdings could be transferred to and held by its corresponding New Portfolio. It is expected that an Acquired Portfolio will not sell any of its holdings in connection with the Reorganizations, and therefore no brokerage commissions or other transaction costs are expected to be incurred. However, some of an Acquired Portfolio’s holdings may not remain at the time of the Reorganizations due to normal portfolio turnover. Contractholders will not recognize any gain or loss for federal income tax purposes as a result of the Reorganizations. |
• | EIM has agreed to pay expenses of each Reorganization that exceed an Acquired Portfolio’s expense cap set forth in its expense limitation arrangement. |
• | The Reorganization expenses for the Target 2015 Allocation Portfolio, which are estimated to be $5,800 (excluding portfolio transaction costs, if any), exceed its expense cap and are expected to be paid by EIM. |
• | The Reorganization expenses for the Target 2025 Allocation Portfolio, which are estimated to be $15,600 (excluding portfolio transaction costs, if any), exceed its expense cap and are expected to be paid by EIM. |
• | The Reorganization expenses for the Target 2035 Allocation Portfolio, which are estimated to be $24,200 (excluding portfolio transaction costs, if any), do not exceed its expense cap and are expected to be paid by the Portfolio. |
• | The Reorganization expenses for the Target 2045 Allocation Portfolio, which are estimated to be $26,400 (excluding portfolio transaction costs, if any), do not exceed its expense cap and are expected to be paid by the Portfolio. |
• | The Reorganization expenses for the Target 2055 Allocation Portfolio, which are estimated to be $19,000 (excluding portfolio transaction costs, if any), exceed its expense cap and are expected to be paid by EIM. |
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Comparison of Principal Risk Factors
The principal risks of each Acquiring Portfolio are the same as the principal risks of its corresponding Acquired Portfolio.
An investment in a Portfolio is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The value of your investment may fall, sometimes sharply, and you could lose money by investing in a Portfolio. There can be no assurance that a Portfolio will achieve its investment objective.
The following table compares the principal risks of an investment in each Portfolio. The most significant risks as of the date of this Proxy Statement/Prospectus are presented first and indicated with an asterisk (*), followed by additional principal risks in alphabetical order. For an explanation of each such risk, see “Additional Information about the Reorganizations — Descriptions of Risk Factors” below. A Portfolio is also subject to the risks associated with the Underlying Portfolios’ investments; please see the “Information Regarding the Underlying Portfolios” in Appendix D for additional information about these risks.
Risks | New Target 2015 Allocation Portfolio and Target 2015 Allocation Portfolio | New Target 2025 Allocation Portfolio and Target 2025 Allocation Portfolio | New Target 2035 Allocation Portfolio and Target 2035 Allocation Portfolio | New Target 2045 Allocation Portfolio and Target 2045 Allocation Portfolio | New Target 2055 Allocation Portfolio and Target 2055 Allocation Portfolio | |||||||||||||||
Market Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Asset Allocation Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Equity Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Interest Rate Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Credit Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Target Date Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Risks Related to Investments in Underlying Portfolios | X | * | X | * | X | * | X | * | X | * | ||||||||||
Affiliated Portfolio Risk | X | X | X | X | X | |||||||||||||||
Derivatives Risk | X | X | X | X | X | |||||||||||||||
Foreign Securities Risk | X | X | X | X | X | |||||||||||||||
Futures Contract Risk | X | X | X | X | X | |||||||||||||||
Investment Grade Securities Risk | X | X | X | X | X | |||||||||||||||
Large-Cap Company Risk | X | X | X | X | X | |||||||||||||||
Leveraging Risk | X | X | X | X | X | |||||||||||||||
Liquidity Risk | X | X | X | |||||||||||||||||
Mid-Cap and Small-Cap Company Risk | X | X | X | X | X | |||||||||||||||
Non-Investment Grade Securities Risk | X | X | X | X | X | |||||||||||||||
Portfolio Management Risk | X | X | X | X | X | |||||||||||||||
Redemption Risk | X | X | X |
Comparative Fee and Expense Tables
The following tables show the fees and expenses of the Class B Shares and Class K Shares of each Target Allocation Portfolio and the estimated pro forma fees and expenses of the Class IB Shares and Class K Shares of the corresponding Acquiring Portfolio after giving effect to the proposed Reorganization. Fees and expenses for each Target Allocation Portfolio are based on those incurred by the relevant class of its shares for the fiscal year ended December 31, 2022. Each Acquiring Portfolio is newly organized and has not had any operations of its own to date. The pro forma fees and expenses of the Acquiring Portfolio shares assume that the Reorganization was in effect for the fiscal year ended December 31, 2022. The tables below do not reflect any Contract-related fees and expenses, which would increase overall fees and expenses. See the Contract prospectus for a description of those fees and expenses
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Shareholder Fees
(fees paid directly from your investment)
Target Allocation Portfolio | Pro Forma New Target Allocation | |
Not Applicable. | Not Applicable. |
Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
Target 2015 Allocation Portfolio | Pro Forma New Target 2015 Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||
Class B | Class K | Class IB | Class K | |||||||||||||
Management Fee | 0.10% | 0.10% | 0.10% | 0.10% | ||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.00% | 0.25% | 0.00% | ||||||||||||
Other Expenses | 0.50% | 0.50% | 0.50% | 0.50% | ||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.56% | 0.56% | 0.56% | 0.56% | ||||||||||||
Total Annual Portfolio Operating Expenses | 1.41% | 1.16% | 1.41% | 1.16% | ||||||||||||
Fee Waiver and/or Expense Reimbursement† | -0.31% | -0.31% | -0.31% | -0.31% | ||||||||||||
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement | 1.10% | 0.85% | 1.10% | 0.85% |
† | Pursuant to a contract, EIM has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of the Target 2015 Allocation Portfolio through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of the arrangement) so that the annual operating expenses (including acquired fund fees and expenses) of the Portfolio (exclusive of taxes, interest, brokerage commissions, dividend and interest expenses on securities sold short, capitalized expenses and extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed 1.10% for Class B shares and 0.85% for Class K shares of the Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2024. EIM may be reimbursed the amount of any such payments or waivers made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquired Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower. |
EIM has undertaken to enter into a new contractual expense limitation arrangement with respect to the Acquiring Portfolio pursuant to which the Acquiring Portfolio would be subject to the same contractual expense cap as the Acquired Portfolio, and the expense limitation arrangement for the Acquiring Portfolio would extend one year beyond that for the Acquired Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2025. EIM may be reimbursed the amount of any such payments or waivers (including any such payments or waivers with respect to the Acquired Portfolio prior to the Reorganization) made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquiring Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower. |
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Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
Target 2025 Allocation Portfolio | Pro Forma New Target 2025 Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||
Class B | Class K | Class IB | Class K | |||||||||||||
Management Fee | 0.10% | 0.10% | 0.10% | 0.10% | ||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.00% | 0.25% | 0.00% | ||||||||||||
Other Expenses | 0.23% | 0.23% | 0.23% | 0.23% | ||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.53% | 0.53% | 0.53% | 0.53% | ||||||||||||
Total Annual Portfolio Operating Expenses | 1.11% | 0.86% | 1.11% | 0.86% | ||||||||||||
Fee Waiver and/or Expense Reimbursement† | -0.01% | -0.01% | -0.01% | -0.01% | ||||||||||||
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement | 1.10% | 0.85% | 1.10% | 0.85% |
† | Pursuant to a contract, EIM has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of the Target 2025 Allocation Portfolio through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of the arrangement) so that the annual operating expenses (including acquired fund fees and expenses) of the Portfolio (exclusive of taxes, interest, brokerage commissions, dividend and interest expenses on securities sold short, capitalized expenses and extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed 1.10% for Class B shares and 0.85% for Class K shares of the Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2024. EIM may be reimbursed the amount of any such payments or waivers made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquired Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower. |
EIM has undertaken to enter into a new contractual expense limitation arrangement with respect to the Acquiring Portfolio pursuant to which the Acquiring Portfolio would be subject to the same contractual expense cap as the Acquired Portfolio, and the expense limitation arrangement for the Acquiring Portfolio would extend one year beyond that for the Acquired Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2025. EIM may be reimbursed the amount of any such payments or waivers (including any such payments or waivers with respect to the Acquired Portfolio prior to the Reorganization) made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquiring Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower. |
Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
Target 2035 Allocation Portfolio | Pro Forma New Target 2035 Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||
Class B | Class K | Class IB | Class K | |||||||||||||
Management Fee | 0.10% | 0.10% | 0.10% | 0.10% | ||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.00% | 0.25% | 0.00% | ||||||||||||
Other Expenses 1 | 0.21% | 0.21% | 0.21% | 0.21% | ||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.50% | 0.50% | 0.50% | 0.50% | ||||||||||||
Total Annual Portfolio Operating Expenses | 1.06% | 0.81% | 1.06% | 0.81% |
1 | Other Expenses do not reflect the impact of one-time, non-recurring expenses associated with the Reorganization. If these expenses had been reflected, Other Expenses would have been 0.22%. |
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Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
Target 2045 Allocation Portfolio | Pro Forma New Target 2045 Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||
Class B | Class K | Class IB | Class K | |||||||||||||
Management Fee | 0.10% | 0.10% | 0.10% | 0.10% | ||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.00% | 0.25% | 0.00% | ||||||||||||
Other Expenses 1 | 0.22% | 0.22% | 0.22% | 0.22% | ||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.49% | 0.49% | 0.49% | 0.49% | ||||||||||||
Total Annual Portfolio Operating Expenses | 1.06% | 0.81% | 1.06% | 0.81% |
1 | Other Expenses do not reflect the impact of one-time, non-recurring expenses associated with the Reorganization. If these expenses had been reflected, Other Expenses would have been 0.24%. |
Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
Target 2055 Allocation Portfolio | Pro Forma New Target 2055 Allocation Portfolio (assuming the Reorganization is approved) | |||||||||||||||
Class B | Class K | Class IB | Class K | |||||||||||||
Management Fee | 0.10% | 0.10% | 0.10% | 0.10% | ||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.00% | 0.25% | 0.00% | ||||||||||||
Other Expenses | 0.32% | 0.32% | 0.32% | 0.32% | ||||||||||||
Acquired Fund Fees and Expenses (Underlying Portfolios) | 0.48% | 0.48% | 0.48% | 0.48% | ||||||||||||
Total Annual Portfolio Operating Expenses | 1.15% | 0.90% | 1.15% | 0.90% | ||||||||||||
Fee Waiver and/or Expense Reimbursement† | -0.05% | -0.05% | -0.05% | -0.05% | ||||||||||||
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement | 1.10% | 0.85% | 1.10% | 0.85% |
† | Pursuant to a contract, EIM has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of the Target 2055 Allocation Portfolio through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of the arrangement) so that the annual operating expenses (including acquired fund fees and expenses) of the Portfolio (exclusive of taxes, interest, brokerage commissions, dividend and interest expenses on securities sold short, capitalized expenses and extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed 1.10% for Class B shares and 0.85% for Class K shares of the Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2024. EIM may be reimbursed the amount of any such payments or waivers made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquired Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower. |
EIM has undertaken to enter into a new contractual expense limitation arrangement with respect to the Acquiring Portfolio pursuant to which the Acquiring Portfolio would be subject to the same contractual expense cap as the Acquired Portfolio, and the expense limitation arrangement for the Acquiring Portfolio would extend one year beyond that for the Acquired Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2025. EIM may be reimbursed the amount of any such payments or waivers (including any such payments or waivers with respect to the Acquired Portfolio prior to the Reorganization) made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquiring Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower. |
This example is intended to help you compare the costs of investing in the Portfolios with the cost of investing in other investment options. The example assumes that you invest $10,000 in a Portfolio for the time periods indicated; that your investment has a 5% return each year; that the Portfolio’s operating expenses remain
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the same; and that the expense limitation arrangement with respect to the Portfolio is not renewed. This example does not reflect any Contract-related fees and expenses, including redemption fees (if any) at the Contract level. If such fees and expenses were reflected, the total expenses would be higher. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
Target 2015 Allocation Portfolio | ||||||||||||||||
Class B | $ | 112 | $ | 416 | $ | 742 | $ | 1,664 | ||||||||
Class K | $ | 87 | $ | 338 | $ | 608 | $ | 1,381 | ||||||||
Pro Forma New Target 2015 Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IB | $ | 112 | $ | 416 | $ | 742 | $ | 1,664 | ||||||||
Class K | $ | 87 | $ | 338 | $ | 608 | $ | 1,381 | ||||||||
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
Target 2025 Allocation Portfolio | ||||||||||||||||
Class B | $ | 112 | $ | 352 | $ | 611 | $ | 1,351 | ||||||||
Class K | $ | 87 | $ | 273 | $ | 476 | $ | 1,060 | ||||||||
Pro Forma New Target 2025 Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IB | $ | 112 | $ | 352 | $ | 611 | $ | 1,351 | ||||||||
Class K | $ | 87 | $ | 273 | $ | 476 | $ | 1,060 | ||||||||
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
Target 2035 Allocation Portfolio | ||||||||||||||||
Class B | $ | 108 | $ | 337 | $ | 585 | $ | 1,294 | ||||||||
Class K | $ | 83 | $ | 259 | $ | 450 | $ | 1,002 | ||||||||
Pro Forma New Target 2035 Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IB | $ | 108 | $ | 337 | $ | 585 | $ | 1,294 | ||||||||
Class K | $ | 83 | $ | 259 | $ | 450 | $ | 1,002 | ||||||||
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
Target 2045 Allocation Portfolio | ||||||||||||||||
Class B | $ | 108 | $ | 337 | $ | 585 | $ | 1,294 | ||||||||
Class K | $ | 83 | $ | 259 | $ | 450 | $ | 1,002 | ||||||||
Pro Forma New Target 2045 Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IB | $ | 108 | $ | 337 | $ | 585 | $ | 1,294 | ||||||||
Class K | $ | 83 | $ | 259 | $ | 450 | $ | 1,002 | ||||||||
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
Target 2055 Allocation Portfolio | ||||||||||||||||
Class B | $ | 112 | $ | 360 | $ | 628 | $ | 1,393 | ||||||||
Class K | $ | 87 | $ | 282 | $ | 494 | $ | 1,103 | ||||||||
Pro Forma New Target 2055 Allocation Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IB | $ | 112 | $ | 360 | $ | 628 | $ | 1,393 | ||||||||
Class K | $ | 87 | $ | 282 | $ | 494 | $ | 1,103 |
Each Portfolio pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs. These costs, which are not reflected in annual fund operating expenses or in the example, affect a Portfolio’s performance. During the fiscal year ended December 31, 2022, the portfolio turnover rate for each of Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, and Target 2055 Allocation Portfolio was 14%, 15%, 10%, 7%, and 5%, respectively, of the average value of the Portfolio. The New Target Allocation Portfolios have not yet commenced operations and, therefore, do not have portfolio turnover rates to report.
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Comparison of Investment Objectives, Policies and Strategies
Each New Target Allocation Portfolio and its corresponding Target Allocation Portfolio have identical investment objectives, policies, and strategies. Accordingly, the Reorganizations will not result in any material changes to the Acquired Portfolios’ investment programs.
The following table compares the investment objective of each New Target Allocation Portfolio with that of its corresponding Target Allocation Portfolio. The Board of the EQ Trust may change the investment objective of each New Target Allocation Portfolio without a vote of the Portfolio’s shareholders.
Acquiring Portfolio | Acquired Portfolio | |
Each New Target Allocation Portfolios | Each Target Allocation Portfolios | |
Investment Objective | Investment Objective | |
Seeks the highest total return over time consistent with its asset mix. Total return includes capital growth and income. | Same. |
The following table compares the principal investment policies and strategies of each New EQ Allocation Portfolio with those of its corresponding EQ Allocation Portfolio. For more detailed information about each Portfolio’s investment strategies and risks, see Appendix B.
Acquiring Portfolio | Acquired Portfolio | |
Each New Target Allocation Portfolio | Each Target Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio is managed by Equitable Investment Management Group, LLC (“EIM” or “Adviser”). The Portfolio seeks to achieve its objective by investing in other mutual funds (the “Underlying Portfolios”) managed by the Adviser or Equitable Investment Management, LLC, an affiliate of the Adviser, and sub-advised by one or more investment sub-advisers, which represent a variety of asset classes and investment styles. The Portfolio is managed to target a specific year of planned retirement (the “retirement year” or “target year”). The retirement year also assumes that an investor retires at age 65; however, the Portfolio should not be selected solely on the basis of an investor’s age or the target year. The Portfolio’s asset mix will become more conservative each year until reaching the year approximately 10 years after the retirement year at which time it is intended that the asset mix will become relatively stable. The Portfolio balances the need for appreciation with the need for income as retirement approaches, and focuses on supporting an income stream over a long-term retirement withdrawal horizon.
The asset classes in which the Portfolio may invest generally are divided into domestic equity securities (such as the common stock of U.S. companies of any size), international equity securities (such as the common stock of foreign companies of any size, including those located in developed and emerging markets) and fixed income investments (such as debt securities issued by the U.S. Government and its agencies and instrumentalities, mortgage- and asset-backed securities, domestic and foreign investment grade and high yield or “junk” bonds, and short-term investments such as money market instruments). The Portfolio is not limited with respect to the maturity, duration or credit quality of the fixed income securities in which it invests. The Underlying Portfolios in which the Portfolio may invest also may invest in companies of any size and may invest in fixed income securities of any maturity, duration or credit quality. The longer a security’s duration, the more sensitive it will be to changes in interest rates, which may increase the volatility of the security’s value and may lead to losses. The Portfolio may hold cash or invest in short- | Same. |
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Acquiring Portfolio | Acquired Portfolio | |
Each New Target Allocation Portfolio | Each Target Allocation Portfolio | |
term paper and other short-term investments (instead of allocating investments to an Underlying Portfolio) as deemed appropriate by the Adviser. The Portfolio may invest in Underlying Portfolios that employ derivatives (including futures contracts) for a variety of purposes, including to reduce risk, to seek enhanced returns from certain asset classes, and to leverage exposure to certain asset classes.
In general, the asset mix of the Portfolio will gradually shift from one comprised largely of Underlying Portfolios that emphasize investments in stocks to one that increasingly favors Underlying Portfolios that emphasize investments in bonds and money market instruments. The asset mix of the Portfolio will become more conservative each year until reaching the year approximately 10 years after the retirement year, at which time the asset mix will become relatively stable. | ||
|
| |
New Target 2015 Allocation Portfolio | Target 2015 Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio is managed to target 2015 as the specific year of planned retirement (the “retirement year” or “target year”). The Portfolio is not designed for a lump sum redemption at or after the target year and does not guarantee a particular level of income. The Portfolio maintains significant allocations to equities after the target year and is generally expected to reach its most conservative allocation 10 years after the target year.
As of December 31, 2022, the Portfolio’s asset mix was allocated approximately 21.4% to domestic equity, 12.1% to international equity, and 66.5% to fixed income. The Portfolio’s Annual and Semi-Annual Reports to shareholders set forth the actual allocation to the Underlying Portfolios as of the date of the report.
The following chart shows the Portfolio’s target allocation for the various asset classes (as represented by the holdings of the Underlying Portfolios in which the Portfolio invests) as of the date of this Prospectus. |
Same. |
New Target 2015 Allocation Portfolio Asset Allocation Targets | ||||
Approximate Number of Years After Retirement Year | 8 Years After Retirement | 10 Years After Retirement | ||
Asset Class | ||||
Domestic Equity | 21% | 15% | ||
International Equity | 12% | 5% | ||
Fixed Income | 67% | 80% |
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The following chart shows the Portfolio’s glide path and illustrates how the asset mix of the Portfolio will change over time. | Same. |
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New Target 2025 Allocation Portfolio | Target 2025 Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio is managed to target 2025 as the specific year of planned retirement (the “retirement year” or “target year”). The Portfolio is not designed for a lump sum redemption at the target year and does not guarantee a particular level of income. The Portfolio maintains significant allocations to equities both prior to and after the target year and is generally expected to reach its most conservative allocation 10 years after the target year.
As of December 31, 2022, the Portfolio’s asset mix was allocated approximately 36.9% to domestic equity, 21.2% to international equity, and 41.9% to fixed income. The Portfolio’s Annual and Semi-Annual Reports to shareholders set forth the actual allocation to the Underlying Portfolios as of the date of the report.
The following chart shows the Portfolio’s target allocation for the various asset classes (as represented by the holdings of the Underlying Portfolios in which the Portfolio invests) as of the date of this Prospectus. | Same. |
New Target 2025 Allocation Portfolio Asset Allocation Targets | ||||||||
Approximate Number of Years Before/After Retirement Year | 2 Years Before | Retirement | 5 Years After | 10 Years After | ||||
Asset Class | ||||||||
Domestic Equity | 37% | 35% | 30% | 15% | ||||
International Equity | 21% | 15% | 10% | 5% | ||||
Fixed Income | 42% | 50% | 60% | 80% |
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The following chart shows the Portfolio’s glide path and illustrates how the asset mix of the Portfolio will change over time. | Same. |
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New Target 2035 Allocation Portfolio | Target 2035 Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio is managed to target 2035 as the specific year of planned retirement (the “retirement year” or “target year”). The Portfolio is not designed for a lump sum redemption at the target year and does not guarantee a particular level of income. The Portfolio maintains significant allocations to equities both prior to and after the target year and is generally expected to reach its most conservative allocation 10 years after the target year.
As of December 31, 2022, the Portfolio’s asset mix was allocated approximately 48.4% to domestic equity, 26.0% to international equity, and 25.6% to fixed income. The Portfolio’s Annual and Semi-Annual Reports to shareholders set forth the actual allocation to the Underlying Portfolios as of the date of the report.
The following chart shows the Portfolio’s target allocation for the various asset classes (as represented by the holdings of the Underlying Portfolios in which the Portfolio invests) as of the date of this Prospectus. | Same. |
New Target 2035 Allocation Portfolio Asset Allocation Targets | ||||||||||||
Approximate Number of Years Before/After Retirement Year | 12 Years Before | 10 Years Before | 5 Years Before | Retirement | 5 Years After | 10 Years After | ||||||
Asset Class | ||||||||||||
Domestic Equity | 48% | 50% | 42% | 35% | 30% | 15% | ||||||
International Equity | 26% | 20% | 18% | 15% | 10% | 5% | ||||||
Fixed Income | 26% | 30% | 40% | 50% | 60% | 80% |
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The following chart shows the Portfolio’s glide path and illustrates how the asset mix of the Portfolio will change over time. | Same. |
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New Target 2045 Allocation Portfolio | Target 2045 Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio is managed to target 2045 as the specific year of planned retirement (the “retirement year” or “target year”). The Portfolio is not designed for a lump sum redemption at the target year and does not guarantee a particular level of income. The Portfolio maintains significant allocations to equities both prior to and after the target year and is generally expected to reach its most conservative allocation 10 years after the target year.
As of December 31, 2022, the Portfolio’s asset mix was allocated approximately 55.8% to domestic equity, 28.6% to international equity, and 15.6% to fixed income. The Portfolio’s Annual and Semi-Annual Reports to shareholders set forth the actual allocation to the Underlying Portfolios as of the date of the report.
The following chart shows the Portfolio’s target allocation for the various asset classes (as represented by the holdings of the Underlying Portfolios in which the Portfolio invests) as of the date of this Prospectus. | Same. |
New Target 2045 Allocation Portfolio Asset Allocation Targets | ||||||||||||||
Approximate Number of Years Before/After Retirement Year | 22 Years Before | 15 Years Before | 10 Years Before | 5 Years Before | Retirement | 5 Years After | 10 Years After | |||||||
Asset Class | ||||||||||||||
Domestic Equity | 56% | 52% | 50% | 42% | 35% | 30% | 15% | |||||||
International Equity | 28% | 23% | 20% | 18% | 15% | 10% | 5% | |||||||
Fixed Income | 16% | 25% | 30% | 40% | 50% | 60% | 80% |
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The following chart shows the Portfolio’s glide path and illustrates how the asset mix of the Portfolio will change over time. | Same. |
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New Target 2055 Allocation Portfolio | Target 2055 Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Portfolio is managed to target 2055 as the specific year of planned retirement (the “retirement year” or “target year”). The Portfolio is not designed for a lump sum redemption at the target year and does not guarantee a particular level of income. The Portfolio maintains significant allocations to equities both prior to and after the target year and is generally expected to reach its most conservative allocation 10 years after the target year.
As of December 31, 2022, the Portfolio’s asset mix was allocated approximately 61.9% to domestic equity, 32.5% to international equity, and 5.6% to fixed income. The Portfolio’s Annual and Semi-Annual Reports to shareholders set forth the actual allocation to the Underlying Portfolios as of the date of the report.
The following chart shows the Portfolio’s target allocation for the various asset classes (as represented by the holdings of the Underlying Portfolios in which the Portfolio invests) as of the date of this Prospectus. | Same. |
New Target 2055 Allocation Portfolio Asset Allocation Targets | ||||||||||||||||
Approximate Number of Years Before/After Retirement Year | 32 Years Before | 25 Years Before | 15 Years Before | 10 Years Before | 5 Years Before | Retirement | 5 Years After | 10 Years After | ||||||||
Asset Class | ||||||||||||||||
Domestic Equity | 62% | 60% | 52% | 50% | 42% | 35% | 30% | 15% | ||||||||
International Equity | 32% | 25% | 23% | 20% | 18% | 15% | 10% | 5% | ||||||||
Fixed Income | 6% | 15% | 25% | 30% | 40% | 50% | 60% | 80% |
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The following chart shows the Portfolio’s glide path and illustrates how the asset mix of the Portfolio will change over time. | Same. |
Acquiring Portfolio | Acquired Portfolio | |
Each New Target Allocation Portfolio | Each Target Allocation Portfolio | |
Principal Investment Strategies | Principal Investment Strategies | |
The Adviser establishes the asset mix of the Portfolio and selects the specific Underlying Portfolios in which to invest using its proprietary investment process, which is based on fundamental research regarding the investment characteristics of each asset class and the Underlying Portfolios (such as risk, volatility, and the potential for growth and income), as well as its outlook for the economy and financial markets. | Same. | |
The Adviser may change the asset allocation targets and may add new Underlying Portfolios or replace or eliminate existing Underlying Portfolios without notice or shareholder approval. The Adviser may sell the Portfolio’s holdings for a variety of reasons, including to invest in an Underlying Portfolio believed to offer superior investment opportunities. | Same | |
The Adviser will permit the relative weightings of the Portfolio’s asset classes to vary in response to the markets, ordinarily by not more than plus/minus 15%. Beyond those ranges, the Adviser generally will use cash flows, and periodically will rebalance the Portfolio’s investments, to keep the Portfolio within its asset allocation targets. However, there may be occasions when those ranges will expand to 20% due to a variety of factors, including appreciation or depreciation of one or more of the asset classes. The Portfolio will purchase Class K shares of the Underlying Portfolios, which are not subject to distribution or service (Rule 12b-1) fees. | Same. |
Each New Target Allocation Portfolio and its corresponding Acquired Portfolio also have identical fundamental investment policies, which relate to borrowing. lending, underwriting, concentration, issuing senior securities, and investing in commodities and real estate. Fundamental investment policies may be changed only by a vote of a Portfolio’s shareholders. More detailed information about the fundamental investment policies is available in the EQ Trust’s Statement of Additional Information.
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Comparative Performance Information
Each Acquiring Portfolio is newly organized and has no assets, operating history, or performance information of its own as of the date of this Proxy Statement/Prospectus. After the Reorganization, which is subject to shareholder approval, each Acquiring Portfolio, as the successor to its corresponding Acquired Portfolio, will assume and publish the operating history and performance record of the Class B and Class K shares of the Acquired Portfolio.
The bar charts and tables below provide some indication of the risks of investing in each Portfolio by showing changes in each Target Allocation Portfolio’s performance from year to year and by showing how the Target Allocation Portfolio’s average annual total returns for the past one-, five- and ten-year (or since inception) periods, as applicable, through December 31, 2022, compared to the returns of a broad-based securities market index. The return of the broad-based securities market index (and any additional comparative index) shown in the right hand column below is the return of the index for the last 10 years or, if shorter, since the inception of the share class with the longest history. Past performance is not an indication of future performance.
The performance results do not reflect any Contract-related fees and expenses, which would reduce the performance results.
Target 2015 Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 10.22% (2020 2nd Quarter) | Worst quarter (% and time period) -10.00% (2020 1st Quarter) |
Target 2015 Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
Target 2015 Allocation Portfolio — Class B Shares | -14.13% | 2.08% | 4.14% | |||||||||
Target 2015 Allocation Portfolio — Class K Shares | -13.93% | 2.31% | 4.40% | |||||||||
S&P Target Date 2015 Index (reflects no deduction for fees, expenses, or taxes) | -12.16% | 3.07% | 5.01% |
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Target 2025 Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 13.72% (2020 2nd Quarter) | Worst quarter (% and time period) -14.88% (2020 1st Quarter) |
Target 2025 Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
Target 2025 Allocation Portfolio — Class B Shares | -15.23% | 3.39% | 5.92% | |||||||||
Target 2025 Allocation Portfolio — Class K Shares | -15.03% | 3.63% | 6.17% | |||||||||
S&P Target Date 2025 Index (reflects no deduction for fees, expenses, or taxes) | -13.13% | 3.75% | 6.23% |
Target 2035 Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 16.05% (2020 2nd Quarter) | Worst quarter (% and time period) -17.89% (2020 1st Quarter) |
Target 2035 Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
Target 2035 Allocation Portfolio — Class B Shares | -16.32% | 4.27% | 6.97% | |||||||||
Target 2035 Allocation Portfolio — Class K Shares | -16.10% | 4.53% | 7.24% | |||||||||
S&P Target Date 2035 Index (reflects no deduction for fees, expenses, or taxes) | -14.99% | 4.63% | 7.42% |
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Target 2045 Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 17.64% (2020 2nd Quarter) | Worst quarter (% and time period) -20.20% (2020 1st Quarter) |
Target 2045 Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
Target 2045 Allocation Portfolio — Class B Shares | -16.73% | 4.79% | 7.75% | |||||||||
Target 2045 Allocation Portfolio — Class K Shares | -16.58% | 5.05% | 8.01% | |||||||||
S&P Target Date 2045 Index (reflects no deduction for fees, expenses, or taxes) | -15.84% | 5.16% | 8.11% |
Target 2055 Allocation Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 19.39% (2020 2nd Quarter) | Worst quarter (% and time period) -22.41% (2020 1st Quarter) |
Target 2055 Allocation Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Since Inception | ||||||||||
Target 2055 Allocation Portfolio — Class B Shares (Inception Date: April 30, 2015) | -17.56% | 5.32% | 6.50% | |||||||||
Target 2055 Allocation Portfolio — Class K Shares (Inception Date: April 30, 2015) | -17.40% | 5.56% | 6.75% | |||||||||
S&P Target Date 2055 Index (reflects no deduction for fees, expenses, or taxes) | -15.97% | 5.31% | 6.63% |
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The following tables show the capitalization of each Target Allocation Portfolio as of June 30, 2023, and of the corresponding New Target Allocation Portfolio on a pro forma combined basis as of June 30, 2023, after giving effect to the proposed Reorganization. Each Acquiring Portfolio is newly organized and did not have any operations of its own as of the date of this Proxy Statement/Prospectus. Pro forma net assets may not total and net asset values per share may not recalculate due to rounding of net assets.
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
Target 2015 Allocation Portfolio — Class B Shares | $ | 18.1 | $ | 7.02 | 2,582,546 | |||||||
Pro forma New Target 2015 Allocation Portfolio — Class IB Shares | $ | 18.1 | $ | 7.02 | 2,582,546 | |||||||
Target 2015 Allocation Portfolio — Class K Shares | $ | 12.2 | $ | 7.02 | 1,739,860 | |||||||
Pro forma New Target 2015 Allocation Portfolio — Class K Shares | $ | 12.2 | $ | 7.02 | 1,739,860 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 30.3 | — | 4,322,406 |
* | Adjusted to reflect Reorganization costs. |
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
Target 2025 Allocation Portfolio — Class B Shares | $ | 119.7 | $ | 10.41 | 11,502,381 | |||||||
Pro forma New Target 2025 Allocation Portfolio — Class IB Shares | $ | 119.7 | $ | 10.41 | 11,502,381 | |||||||
Target 2025 Allocation Portfolio — Class K Shares | $ | 28.2 | $ | 10.42 | 2,702,904 | |||||||
Pro forma New Target 2025 Allocation Portfolio — Class K Shares | $ | 28.2 | $ | 10.42 | 2,702,904 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 147.9 | — | 14,205,285 |
* | Adjusted to reflect Reorganization costs. |
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
Target 2035 Allocation Portfolio — Class B Shares | $ | 190.4 | $ | 13.02 | 14,620,533 | |||||||
Pro forma New Target 2035 Allocation Portfolio — Class IB Shares | $ | 190.4 | $ | 13.02 | 14,620,533 | |||||||
Target 2035 Allocation Portfolio — Class K Shares | $ | 18.8 | $ | 13.04 | 1,438,346 | |||||||
Pro forma New Target 2035 Allocation Portfolio — Class K Shares | $ | 18.8 | $ | 13.04 | 1,438,346 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 209.2 | — | 16,058,879 |
* | Adjusted to reflect Reorganization costs. |
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
Target 2045 Allocation Portfolio — Class B Shares | $ | 181.4 | $ | 13.77 | 13,175,740 | |||||||
Pro forma New Target 2045 Allocation Portfolio — Class IB Shares | $ | 181.4 | $ | 13.77 | 13,175,740 | |||||||
Target 2045 Allocation Portfolio — Class K Shares | $ | 10.6 | $ | 13.78 | 770,081 | |||||||
Pro forma New Target 2045 Allocation Portfolio — Class K Shares | $ | 10.6 | $ | 13.78 | 770,081 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 192.0 | — | 13,945,821 |
* | Adjusted to reflect Reorganization costs. |
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
Target 2055 Allocation Portfolio — Class B Shares | $ | 86.8 | $ | 14.36 | 6,041,692 | |||||||
Pro forma New Target 2055 Allocation Portfolio — Class IB Shares | $ | 86.8 | $ | 14.36 | 6,041,692 | |||||||
Target 2055 Allocation Portfolio — Class K Shares | $ | 0.2 | $ | 14.38 | 17,665 | |||||||
Pro forma New Target 2055 Allocation Portfolio — Class K Shares | $ | 0.2 | $ | 14.38 | 17,665 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 87.0 | — | 6,059,357 |
* | Adjusted to reflect Reorganization costs. |
AFTER CAREFUL CONSIDERATION, THE BOARDS OF THE VIP TRUST AND THE EQ TRUST UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT WITH RESPECT TO EACH TARGET ALLOCATION PORTFOLIO. ACCORDINGLY, THE BOARD OF THE VIP TRUST HAS SUBMITTED THE REORGANIZATION AGREEMENT FOR APPROVAL BY EACH TARGET ALLOCATION PORTFOLIO’S SHAREHOLDERS.
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Required Vote for each of Proposals 2.A. through 2.E.
The shareholders of each Target Allocation Portfolio will vote on the approval of Proposals 2.A. through 2.E., as applicable, with respect to that Target Allocation Portfolio separately from the shareholders of each other Target Allocation Portfolio. Approval of each of Proposals 2.A. through 2.E. with respect to a Target Allocation Portfolio will require the affirmative vote of the lesser of (i) 67% or more of the voting securities of the Portfolio present at the Meeting, if the holders of more than 50% of its outstanding voting securities are present or represented by proxy, or (ii) more than 50% of its outstanding voting securities. These percentages are required by the 1940 Act. With respect to Proposals 2.A. through 2.E., “voting securities” refers to the shares of a Target Allocation Portfolio. The approval of any one Reorganization in Proposals 2.A. through 2.E. is not contingent on the approval of any other Reorganization in Proposals 2.A. through 2.E., 1.A. through 1.E., or 3.
The current Trustees of the VIP Trust recommend that the shareholders of each Target Allocation Portfolio vote “FOR” Proposals 2.A. through 2.E., as applicable.
PROPOSAL 3: TO APPROVE THE REORGANIZATION AGREEMENT WITH RESPECT TO THE REORGANIZATION OF THE EQ/CORE PLUS BOND PORTFOLIO, A SERIES OF THE VIP TRUST, INTO THE EQ/CORE PLUS BOND PORTFOLIO, A NEWLY-CREATED SERIES OF THE EQ TRUST (“NEW EQ/CORE PLUS BOND PORTFOLIO”).
The purpose of Proposal 3 is to approve a Reorganization Agreement pursuant to which the EQ/Core Plus Bond Portfolio, a series of the VIP Trust, will be reorganized into the EQ/Core Plus Bond Portfolio, a newly-created series of the EQ Trust. In considering whether to approve the Proposal, you should note the following information regarding the Reorganization:
• | The New EQ/Core Plus Bond Portfolio is newly organized and has no assets, operating history, or performance information of its own as of the date of this Proxy Statement/Prospectus. The New EQ/Core Plus Bond Portfolio has been created as a shell series of the EQ Trust solely for the purposes of acquiring the EQ/Core Plus Bond Portfolio’s assets and continuing its investment operations and will not conduct any investment operations until after the closing of the Reorganization. If shareholders of the EQ/Core Plus Bond Portfolio approve its Reorganization, the New EQ/Core Plus Bond Portfolio will assume and publish the operating history and performance record of the EQ/Core Plus Bond Portfolio. |
• | The New EQ/Core Plus Bond Portfolio and the Acquired Portfolio have identical investment objectives, policies, and strategies, and utilize the same investment sub-advisers. Accordingly, the Reorganization will not result in any material changes to the Acquired Portfolio’s investment program. |
• | Each Portfolio seeks to achieve high total return through a combination of current income and capital appreciation. Under normal circumstances, each Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in a diversified portfolio of U.S. and foreign bonds or other debt securities of varying maturities and other instruments that provide investment exposure to such debt securities, including forwards or derivatives such as options, futures contracts or swap agreements. In addition, each Portfolio’s assets are allocated among three investment sub-advisers (each, a “Sub-Adviser”), each of which manages its portion of the Portfolio using a different but complementary investment strategy. For a detailed comparison of the Portfolios’ investment policies and strategies, see “Comparison of Investment Objectives, Policies, and Strategies” below. |
• | The principal risks of the New EQ/Core Plus Bond Portfolio are the same as the principal risks of the Acquired Portfolio. Each Portfolio’s principal risks include market risk, interest rate risk, credit risk, mortgage-related and other asset-backed securities risk, investment grade securities risk, non-investment grade securities risk, foreign securities risk, U.S. government securities risk, portfolio management risk, cash management risk, collateralized loan obligations risk, convertible securities risk, derivatives risk, dollar roll and sale-buyback transactions, futures contract risk, hedging risk, inflation-indexed bonds risk, leveraging risk, liquidity risk, loan risk, multiple sub-adviser risk, portfolio turnover risk, preferred stock risk, prepayment risk and extension risk, privately placed and other restricted securities risk, redemption |
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risk, sector risk, variable and floating rate securities risk, when-issued and delayed delivery securities and forward commitments risk, and zero coupon and pay-in-kind securities risk. For a detailed comparison of each Portfolio’s risks, see “Comparison of Principal Risk Factors” below. |
• | EIM serves as the investment adviser for both Portfolios. Equitable Investment Management, LLC (the “Administrator”), an affiliate of EIM, serves as the administrator for both Portfolios. EIM has selected three sub-advisers to manage distinct portions of the assets of the EQ/Core Plus Bond Portfolio, subject to EIM’s oversight. In particular, AXA Investment Managers US Inc. (“AXA IM”), Brandywine Global Investment Management, LLC (“Brandywine Global”), and Loomis, Sayles & Company, L.P. (“Loomis Sayles”) currently serve as sub-advisers to the EQ/Core Plus Bond Portfolio. EIM will advise, the Administrator will administer, and AXA IM, Brandywine Global, and Loomis Sayles will sub-advise, the New EQ/Core Plus Bond Portfolio after the Reorganization. |
• | The Adviser is responsible for overseeing sub-advisers and recommending their hiring, termination and replacement to the Board of Trustees. The Adviser has been granted relief by the SEC to hire, terminate and replace sub-advisers and amend sub-advisory agreements subject to the approval of the Board of Trustees and without obtaining shareholder approval. However, the Adviser may not enter into a sub-advisory agreement on behalf of a Portfolio with an “affiliated person” of the Adviser unless the sub-advisory agreement, including compensation, is approved by the Portfolio’s shareholders. The relief does not extend to any increase in the advisory fee paid by a Portfolio to the Adviser; any such increase would be subject to shareholder approval. For a detailed description of the Adviser and the Sub-Advisers to the New EQ/Core Plus Bond Portfolio, please see “Additional Information about the Acquiring Portfolios — The Adviser” and “— The Sub-Advisers” below. AXA IM, Brandywine Global, and Loomis Sayles are not affiliated persons of the Adviser and, therefore, shareholder approval is not required to hire the sub-advisers or to materially amend the sub-advisory agreements between the Adviser and the sub-advisers. |
• | As shown in the “Summary” above, the shareholders of Class A, Class B, and Class K of the EQ/Core Plus Bond Portfolio will receive Class IA, Class IB, and Class K shares, respectively, of the New EQ/Core Plus Bond Portfolio pursuant to the Reorganization. Shareholders will not pay any sales charges, redemption fees or other transaction fees in connection with the Reorganization. Please see “Comparative Fee and Expense Tables,” “Additional Information about the Reorganizations” and “Additional Information about the Acquiring Portfolios” below for more information. |
• | It is estimated that the annual operating expense ratios for the New EQ/Core Plus Bond Portfolio’s Class IA, Class IB, and Class K shares, immediately following the Reorganization (and excluding the one-time, non-recurring expenses of the Reorganization), will be the same as those of the EQ/Core Plus Bond Portfolio’s Class A, Class B, and Class K shares, respectively, for the fiscal year ended December 31, 2022. In addition, as described below, the Portfolios are subject to the same contractual expense caps, but the expense limitation arrangement for the New EQ/Core Plus Bond Portfolio extends through April 30, 2025, one year beyond that for the EQ/Core Plus Bond Portfolio. There is no assurance that fees and expenses would not increase after April 30, 2025, which is when the expense limitation arrangement for the New EQ/Core Plus Bond Portfolio will terminate if it is not renewed by EIM and the EQ Trust’s Board. For a more detailed description of the fees and expenses of the Portfolios, please see “Comparative Fee and Expense Tables” and “Additional Information about the Acquiring Portfolios” below. |
• | The Portfolios have the same maximum advisory fee and the same advisory fee schedule. The maximum advisory fee for each Portfolio is equal to an annual rate of 0.600% of its average daily net assets. The advisory fee schedule for each Portfolio is equal to an annual rate of 0.600% of the Portfolio’s average daily net assets up to and including $750 million, 0.580% of the Portfolio’s average daily net assets in excess of $750 million and up to and including $1.5 billion, 0.560% of the Portfolio’s average daily net assets in excess of $1.5 billion and up to and including $2.5 billion, 0.540% of the Portfolio’s average daily net assets in excess of $2.5 billion and up to and including $5 billion, and 0.530% of the Portfolio’s average daily net assets thereafter. |
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• | The Portfolios have the same administration fee schedule. Each Portfolio pays the Administrator its proportionate share of an asset-based administration fee of 0.140% of the first $60 billion of the aggregate average daily net assets of the Aggregated Portfolios; 0.110% of the next $20 billion; 0.0875% of the next $20 billion; 0.0775% of the next $20 billion; 0.0750% of the next $20 billion; and 0.0725% thereafter. The asset-based administration fee is calculated and billed monthly, and each Portfolio is subject to a minimum annual fee of $32,500. For purposes of calculating the asset-based administration fee, the assets of the New EQ/Core Plus Bond Portfolio and multiple other portfolios of the EQ Trust (together, the “Aggregated Portfolios”) are aggregated together. A complete list of the Aggregated Portfolios is provided in “Additional Information about the Acquiring Portfolios” below |
• | The Acquiring Portfolio and the Acquired Portfolio are subject to the same contractual expense caps, but the expense limitation arrangement for the Acquiring Portfolio extends one year beyond that for the Acquired Portfolio. |
• | Pursuant to a contract, EIM has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of the Acquired Portfolio through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of this arrangement) so that the annual operating expenses, including acquired fund fees and expenses, of the Portfolio (other than interest, taxes, brokerage commissions, dividend and interest expenses on securities sold short, other expenditures that are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed an annual rate of average daily net assets of 0.93% for Class A and Class B shares and 0.68% for Class K shares of the Portfolio. |
• | EIM has undertaken to enter into a new contractual expense limitation arrangement with respect to the New EQ/Core Plus Bond Portfolio pursuant to which the New EQ/Core Plus Bond Portfolio would be subject to the same contractual expense cap as the Acquired Portfolio, and the expense limitation arrangement for the New EQ/Core Plus Bond Portfolio would extend one year beyond that for the Acquired Portfolio. Under this contract, EIM would agree to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of the New EQ/Core Plus Bond Portfolio through April 30, 2025 (unless the Board of Trustees consents to an earlier revision or termination of this arrangement) so that the annual operating expenses, including acquired fund fees and expenses, of the Portfolio (other than interest, taxes, brokerage commissions, dividend and interest expenses on securities sold short, other expenditures that are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed an annual rate of average daily net assets of 0.93% for Class IA and Class IB shares and 0.68% for Class K shares of the Portfolio. |
• | The Class A and Class B shares of the EQ/Core Plus Bond Portfolio and the Class IA and Class IB shares of the New EQ/Core Plus Bond Portfolio are each subject to a Rule 12b-1 fee equal to an annual rate of 0.25% of the average daily net assets of the respective share classes. |
• | Following the Reorganization, the Acquiring Portfolio will be managed in accordance with the investment objective, policies, and strategies of the New EQ/Core Plus Bond Portfolio, which are identical to those of the EQ/Core Plus Bond Portfolio. It is not expected that the New EQ/Core Plus Bond Portfolio will revise any of its investment policies upon consummation of the Reorganization. EIM has reviewed the EQ/Core Plus Bond Portfolio’s investment objective, policies, and strategies and determined that they are identical to the New EQ/Core Plus Bond Portfolio’s investment objective, policies, and strategies. Thus, EIM believes that, if the Reorganization is approved, all or virtually all of the EQ/Core Plus Bond Portfolio’s holdings could be transferred to and held by the New EQ/Core Plus Bond Portfolio. It is expected that the EQ/Core Plus Bond Portfolio will not sell any of its holdings in connection with the Reorganization, and therefore no brokerage commissions or other transaction costs are expected to be incurred. However, some of the EQ/Core Plus Bond Portfolio’s |
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holdings may not remain at the time of the Reorganization due to normal portfolio turnover. Contractholders will not recognize any gain or loss for federal income tax purposes as a result of the Reorganization. |
• | EIM has agreed to pay expenses of the Reorganization that exceed the Acquired Portfolio’s expense cap set forth in its expense limitation arrangement. The Reorganization expenses for the EQ/Core Plus Bond Portfolio, which are estimated to be $215,000 (excluding portfolio transaction costs, if any), exceed its expense cap and are expected to be paid by EIM. |
Comparison of Principal Risk Factors
An investment in a Portfolio is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The value of your investment may fall, sometimes sharply, and you could lose money by investing in a Portfolio. There can be no assurance that a Portfolio will achieve its investment objective.
The following table compares the principal risks of an investment in each Portfolio. The most significant risks as of the date of this Proxy Statement/Prospectus are presented first and indicated with an asterisk (*), followed by additional principal risks in alphabetical order. For an explanation of each such risk, see “Additional Information about the Reorganizations — Descriptions of Risk Factors” below.
Risks | New EQ/Core Plus Bond Portfolio and EQ/Core Plus Bond Portfolio | |||
Market Risk | X | * | ||
Interest Rate Risk | X | * | ||
Credit Risk | X | * | ||
Mortgage-Related and Other Asset-Backed Securities Risk | X | * | ||
Investment Grade Securities Risk | X | * | ||
Non-Investment Grade Securities Risk | X | * | ||
Foreign Securities Risk | X | * | ||
Currency Risk | X | * | ||
Emerging Markets Risk | X | * | ||
European Economic Risk | X | * | ||
U.S. Government Securities Risk | X | * | ||
Portfolio Management Risk | X | * | ||
Cash Management Risk | X | |||
Collateralized Loan Obligations Risk | X | |||
Convertible Securities Risk | X | |||
Derivatives Risk | X | |||
Dollar Roll and Sale-Buyback Transactions | X | |||
Futures Contract Risk | X | |||
Hedging Risk | X | |||
Inflation-Indexed Bonds Risk | X | |||
Leveraging Risk | X | |||
Liquidity Risk | X | |||
Loan Risk | X | |||
Multiple Sub-Adviser Risk | X | |||
Portfolio Turnover Risk | X | |||
Preferred Stock Risk | X | |||
Prepayment Risk and Extension Risk | X | |||
Privately Placed and Other Restricted Securities Risk | X | |||
Redemption Risk | X | |||
Sector Risk | X | |||
Variable and Floating Rate Securities Risk | X | |||
When-Issued and Delayed Delivery Securities and Forward Commitments Risk | X | |||
Zero Coupon and Pay-in-Kind Securities Risk | X |
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Comparative Fee and Expense Tables
The following tables show the fees and expenses of the Class A Shares, Class B Shares and Class K Shares of the EQ/Core Plus Bond Portfolio and the estimated pro forma fees and expenses of the Class IA Shares, Class IB Shares and Class K Shares of the Acquiring Portfolio after giving effect to the proposed Reorganization. Fees and expenses for the EQ/Core Plus Bond Portfolio are based on those incurred by the relevant class of its shares for the fiscal year ended December 31, 2022. The Acquiring Portfolio is newly organized and has not had any operations of its own to date. The pro forma fees and expenses of the Acquiring Portfolio shares assume that the Reorganization was in effect for the fiscal year ended December 31, 2022. The tables below do not reflect any Contract-related fees and expenses, which would increase overall fees and expenses. See the Contract prospectus for a description of those fees and expenses.
Shareholder Fees
(fees paid directly from your investment)
EQ/Core Plus Bond Portfolio | Pro Forma New EQ/Core Plus Bond Portfolio (assuming the Reorganization is approved) | |
Not Applicable. | Not Applicable. |
Annual Operating Expenses
(expenses that you may pay each year as a percentage of the value of your investment)
EQ/Core Plus Bond Portfolio | Pro Forma New EQ/Core Plus Bond Portfolio (assuming the Reorganization is approved) | |||||||||||||||||||||||
Class A | Class B | Class K | Class IA | Class IB | Class K | |||||||||||||||||||
Management Fee | 0.60% | 0.60% | 0.60% | 0.60% | 0.60% | 0.60% | ||||||||||||||||||
Distribution and/or Service Fees (12b-1 fees) | 0.25% | 0.25% | 0.00% | 0.25% | 0.25% | 0.00% | ||||||||||||||||||
Other Expenses | 0.19% | 0.19% | 0.19% | 0.19% | 0.19% | 0.19% | ||||||||||||||||||
Total Annual Portfolio Operating Expenses | 1.04% | 1.04% | 0.79% | 1.04% | 1.04% | 0.79% | ||||||||||||||||||
Fee Waiver and/or Expense Reimbursement†,* | -0.11% | -0.11% | -0.11% | -0.11% | -0.11% | -0.11% | ||||||||||||||||||
Total Annual Portfolio Operating Expenses After Fee Waiver and/or Expense Reimbursement | 0.93% | 0.93% | 0.68% | 0.93% | 0.93% | 0.68% |
† | Pursuant to a contract, EIM has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of the EQ/Core Plus Bond Portfolio through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of the arrangement) so that the annual operating expenses (including acquired fund fees and expenses) of the Portfolio (exclusive of taxes, interest, brokerage commissions, dividend and interest expenses on securities sold short, capitalized expenses and extraordinary expenses not incurred in the ordinary course of the Portfolio’s business) do not exceed 0.93% for Class A and Class B shares and 0.68% for Class K shares of the Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2024. EIM may be reimbursed the amount of any such payments or waivers made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquired Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower. |
EIM has undertaken to enter into a new contractual expense limitation arrangement with respect to the Acquiring Portfolio pursuant to which the Acquiring Portfolio would be subject to the same contractual expense cap as the Acquired Portfolio, and the expense limitation arrangement for the Acquiring Portfolio would extend one year beyond that for the Acquired Portfolio. The expense limitation agreement may be terminated by EIM at any time after April 30, 2025. EIM may be reimbursed the amount of any such payments or waivers (including any such payments or waivers with respect to the Acquired Portfolio prior to the Reorganization) made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Acquiring Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Portfolio’s expense cap at the time of the waiver or the Portfolio’s expense cap at the time of the reimbursement, whichever is lower.
* | Fee Waiver and/or Expense Reimbursement information has been restated to reflect the current expense limitation arrangement. |
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This example is intended to help you compare the costs of investing in the Portfolios with the cost of investing in other investment options. The example assumes that you invest $10,000 in a Portfolio for the time periods indicated; that your investment has a 5% return each year; that the Portfolio’s operating expenses remain the same; and that the expense limitation arrangement with respect to the Portfolio is not renewed. This example does not reflect any Contract-related fees and expenses, including redemption fees (if any) at the Contract level. If such fees and expenses were reflected, the total expenses would be higher. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
EQ/Core Plus Bond Portfolio | ||||||||||||||||
Class A | $ | 95 | $ | 320 | $ | 563 | $ | 1,261 | ||||||||
Class B | $ | 95 | $ | 320 | $ | 563 | $ | 1,261 | ||||||||
Class K | $ | 69 | $ | 241 | $ | 428 | $ | 968 | ||||||||
Pro Forma New EQ/Core Plus Bond Portfolio (assuming the Reorganization is approved) | ||||||||||||||||
Class IA | $ | 95 | $ | 320 | $ | 563 | $ | 1,261 | ||||||||
Class IB | $ | 95 | $ | 320 | $ | 563 | $ | 1,261 | ||||||||
Class K | $ | 69 | $ | 241 | $ | 428 | $ | 968 |
Each Portfolio pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs. These costs, which are not reflected in annual fund operating expenses or in the example, affect a Portfolio’s performance. During the fiscal year ended December 31, 2022, the portfolio turnover rate for the EQ/Core Plus Bond Portfolio was 187% of the average value of the Portfolio. The New EQ/Core Plus Bond Portfolio has not yet commenced operations and, therefore, does not have a portfolio turnover rate to report.
Comparison of Investment Objectives, Policies and Strategies
The following table compares the investment objectives and principal investment policies and strategies of the EQ/Core Plus Bond Portfolio with those of the New EQ/Core Plus Bond Portfolio. The Board of the EQ Trust may change the investment objective of the Portfolio without a vote of the Portfolio’s shareholders. For more detailed information about each Portfolio’s investment strategies and risks, see Appendix C.
Acquiring Portfolio | Acquired Portfolio | |
New EQ/Core Plus Bond Portfolio | EQ/Core Plus Bond Portfolio | |
Investment Objective | Investment Objective | |
Seeks to achieve high total return through a combination of current income and capital appreciation. | Same. | |
Principal Investment Strategies | Principal Investment Strategies | |
Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in a diversified portfolio of U.S. and foreign bonds or other debt securities of varying maturities and other instruments that provide investment exposure to such debt securities, including forwards or derivatives such as options, futures contracts or swap agreements. | Same. | |
Under normal circumstances, the Portfolio invests primarily in a diversified mix of U.S. dollar-denominated investment grade fixed income securities, particularly U.S. government securities, corporate securities and mortgage- and asset-backed securities. The Portfolio may invest in securities of any maturity. Under normal circumstances, it is expected that the average portfolio duration of the Portfolio will be within 5 years of the duration of the benchmark. As of December 31, | Same. |
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Acquiring Portfolio | Acquired Portfolio | |
New EQ/Core Plus Bond Portfolio | EQ/Core Plus Bond Portfolio | |
2022, the average duration of the benchmark, the Bloomberg U.S. Aggregate Bond Index, was 6.32 years. Duration is a measure used to determine the sensitivity of a security’s price to changes in interest rates. The longer a security’s duration, the more sensitive it will be to changes in interest rates, which may increase the volatility of the security’s value and may lead to losses. As a separate measure, there is no limit on the weighted average maturity of the Portfolio’s fixed income portfolio. | ||
The Portfolio may invest in securities denominated in foreign currencies and in U.S. dollar-denominated securities of foreign issuers, including securities and instruments that are economically tied to emerging market countries. The Portfolio will normally limit its foreign currency exposure (from non-U.S. dollar-denominated securities or currencies) to 40% of its total assets (this limitation does not apply to investment grade sovereign debt denominated in the local currency with less than 1 year remaining to maturity). | Same. | |
The portfolio managers intend to maintain an average weighted portfolio quality of BBB- or better, which is considered investment grade, whether composed of rated securities or unrated securities deemed by the portfolio managers to be of comparable quality. The Portfolio may invest in both investment grade securities and high yield securities (“junk bonds”) subject to a maximum of 40% of its total assets in securities rated below investment grade by Standard & Poor’s Global Ratings (“S&P”), Fitch, Inc. (“Fitch”), or Moody’s Investors Service, Inc. (“Moody’s”) or, if unrated, determined by the Adviser or a sub-adviser to be of comparable quality. The below investment grade securities in which the Portfolio invests are generally rated at least CC by S&P or Fitch or at least Ca by Moody’s or, if unrated, determined by the Adviser or a sub-adviser to be of comparable quality. The Portfolio may continue to hold securities that are downgraded below these ratings (or that default) subsequent to purchase. The Portfolio does not normally invest in securities that are in default or have defaulted with respect to the payment of interest or repayment of principal, but may do so depending on market or other conditions. The Portfolio may have exposure to securities rated below CC or Ca, or to securities that are in default or have defaulted, through its investments in certain derivatives described below. | Same. | |
The Portfolio may invest, without limitation, in forwards and derivative instruments such as options, futures contracts, structured securities or swap agreements (including total return swaps, credit default swaps and interest rate swaps), and in mortgage- and asset-backed securities, subject to applicable law and any other restrictions described in the Portfolio’s prospectus or Statement of Additional Information. Derivatives may be used for various investment purposes, including to hedge portfolio risk, to gain exposure or to short individual securities, to earn income and enhance return, and to manage duration. The Portfolio’s investments in derivatives may involve the use of leverage because the Portfolio is not required to invest the full market value of the contract upon entering into the contract but participates in gains and losses on the full contract price. The use of derivatives also may involve the use of leverage because the heightened price sensitivity of some derivatives to market changes may magnify the Portfolio’s gain or loss. | Same. | |
The Portfolio may enter into foreign currency exchange transactions to hedge against currency exposure in its portfolio. The Portfolio may enter into forward currency exchange contracts and other currency derivatives, such as swaps, options and futures, to shift its investment exposure from one currency into another. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes | Same. |
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Acquiring Portfolio | Acquired Portfolio | |
New EQ/Core Plus Bond Portfolio | EQ/Core Plus Bond Portfolio | |
known as a “cross-hedge,” will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased, much as if the Portfolio had sold a security denominated in one currency and purchased an equivalent security denominated in another. Cross-hedges are intended to protect against losses resulting from a decline in the value of the hedged currency, but will cause the Portfolio to assume the risk of fluctuations in the value of the currency it purchases, and may also limit any potential gain that might result should the value of such hedged currency increase. | ||
The Portfolio may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis. The Portfolio may seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts (such as contracts for derivative instruments) or by using other investment techniques (such as buy backs or dollar rolls). The Portfolio may invest in privately placed and restricted securities (including 144A bonds), collateralized loan obligations, inflation-indexed bonds, convertible bonds, preferred securities, bank loans, and loan participations and assignments. The Portfolio may also invest in zero coupon and pay-in-kind securities.
The Portfolio may engage in active and frequent trading to achieve its investment objective. | Same. | |
Notwithstanding the foregoing, the Portfolio may receive instruments prohibited or not contemplated herein through the conversion, exchange, reorganization, corporate action or bankruptcy of an otherwise permissible investment. The Portfolio may hold or dispose of these investments at the portfolio managers’ discretion. | Same. |
The New EQ/Core Plus Bond Portfolio and the EQ/Core Plus Bond Portfolio also have identical fundamental investment policies, which relate to borrowing, lending, underwriting, concentration, issuing senior securities, and investing in commodities and real estate. Fundamental investment policies may be changed only by a vote of a Portfolio’s shareholders. More detailed information about the fundamental investment policies is available in the EQ Trust’s Statement of Additional Information.
Comparative Performance Information
The Acquiring Portfolio is newly organized and has no assets, operating history, or performance information of its own as of the date of this Proxy Statement/Prospectus. After the Reorganization, which is subject to shareholder approval, the Acquiring Portfolio, as the successor to the Acquired Portfolio, will assume and publish the operating history and performance record of the Class A, Class B, and Class K shares of the Acquired Portfolio.
The bar chart and tables below provide some indication of the risks of investing in each Portfolio by showing changes in the EQ/Core Plus Bond Portfolio’s performance from year to year and by showing how the EQ/Core Plus Bond Portfolio’s average annual total returns for the past one-, five- and ten-year periods through December 31, 2022, compared to the returns of a broad-based securities market index. Past performance is not an indication of future performance.
Effective May 1, 2020, the EQ/Core Plus Bond Portfolio was restructured from a fund-of-funds to a fund that invests directly in securities and other instruments and is actively managed by multiple sub-advisers. If the Portfolio had historically been managed using its current investment strategies and policies, the performance of the Portfolio would have been different.
From April 18, 2014 through April 30, 2020, the Portfolio was managed by EIM as a fund-of-funds and pursued its investment objective through investments in underlying proprietary and unaffiliated mutual funds and exchange-traded funds, which incurred their own operating costs and expenses, including management fees payable to their investment advisers. The Portfolio’s performance as a fund-of-funds reflected the impact of these operating costs and expenses. Prior to April 18, 2014, the Portfolio invested directly in securities and other instruments, had
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different investment policies and strategies, was managed by multiple sub-advisers and, under normal circumstances, approximately 50% of the Portfolio’s net assets were actively managed and approximately 50% of the Portfolio’s net assets were managed to track the performance (before fees and expenses) of a particular index.
The performance results do not reflect any Contract-related fees and expenses, which would reduce the performance results.
EQ/Core Plus Bond Portfolio — Calendar Year Total Returns (Class B)
Best quarter (% and time period) 6.74% (2020 2nd Quarter) | Worst quarter (% and time period) -6.72% ( 2022 2nd Quarter) |
EQ/Core Plus Bond Portfolio — Average Annual Total Returns
(For the periods ended December 31, 2022)
One Year | Five Years | Ten Years | ||||||||||
EQ/Core Plus Bond Portfolio — Class A Shares | -12.86% | 0.91% | 1.03% | |||||||||
EQ/Core Plus Bond Portfolio — Class B Shares | -12.89% | 0.91% | 1.06% | |||||||||
EQ/Core Plus Bond Portfolio — Class K Shares | -12.83% | 1.15% | 1.31% | |||||||||
Bloomberg U.S. Aggregate Bond Index (reflects no deduction for fees, expenses, or taxes) | -13.01% | 0.02% | 1.06% |
The following table shows the capitalization of the EQ/Core Plus Bond Portfolio as of June 30, 2023, and of the New EQ/Core Plus Bond Portfolio on a pro forma combined basis as of June 30, 2023, after giving effect to the proposed Reorganization. The Acquiring Portfolio is newly organized and did not have any operations of its own as of the date of this Proxy Statement/Prospectus. Pro forma net assets may not total and net asset values per share may not recalculate due to rounding of net assets.
Net Assets (in millions) | Net Asset Value Per Share | Shares Outstanding | ||||||||||
EQ/Core Plus Bond Portfolio — Class A Shares | $ | 137.8 | $ | 3.47 | 39,738,244 | |||||||
Pro forma New EQ/Core Plus Bond Portfolio — Class IA Shares | $ | 137.8 | $ | 3.47 | 39,738,244 | |||||||
EQ/Core Plus Bond Portfolio — Class B Shares | $ | 181.4 | $ | 3.46 | 52,493,307 | |||||||
Pro forma New EQ/Core Plus Bond Portfolio — Class IB Shares | $ | 181.4 | $ | 3.46 | 52,493,307 | |||||||
EQ/Core Plus Bond Portfolio — Class K Shares | $ | 437.0 | $ | 3.49 | 125,371,979 | |||||||
Pro forma New EQ/Core Plus Bond Portfolio — Class K Shares | $ | 437.0 | $ | 3.49 | 125,371,979 | |||||||
Total Pro forma Net Assets (assuming the Reorganization is approved)* | $ | 756.2 | — | 217,603,530 |
* | Adjusted to reflect Reorganization costs. |
AFTER CAREFUL CONSIDERATION, THE BOARDS OF THE VIP TRUST AND THE EQ TRUST UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT WITH RESPECT TO THE
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EQ/CORE PLUS BOND PORTFOLIO. ACCORDINGLY, THE BOARD OF THE VIP TRUST HAS SUBMITTED THE REORGANIZATION AGREEMENT FOR APPROVAL BY THE EQ/CORE PLUS BOND PORTFOLIO’S SHAREHOLDERS.
Only the shareholders of the EQ/Core Plus Bond Portfolio will vote on the approval of Proposal 3. Approval of Proposal 3 will require the affirmative vote of the lesser of (i) 67% or more of the voting securities of the Portfolio present at the Meeting, if the holders of more than 50% of its outstanding voting securities are present or represented by proxy, or (ii) more than 50% of its outstanding voting securities. These percentages are required by the 1940 Act. With respect to Proposal 3, “voting securities” refers to the shares of the EQ/Core Plus Bond Portfolio.
The current Trustees of the VIP Trust recommend that the shareholders of the EQ/Core Plus Bond Portfolio vote “FOR” Proposal 3.
PROPOSAL 4: ELECTION OF BOARD OF TRUSTEES OF THE VIP TRUST.
Under this Proposal 4, the shareholders of all of the Acquired Portfolios are being asked to elect nine (9) of the ten (10) Trustee nominees who serve as current members of the Board of Trustees of the VIP Trust, as well as two (2) new trustee nominees (each, a “Nominee” and together, the “Nominees”) to serve on the Board of Trustees of the VIP Trust. One (1) of the current Board members will retire from the Board of Trustees effective December 31, 2023, and is not standing for re-election. Shareholders are being asked to elect the Board of Trustees in the event the Reorganization Agreement is not approved with respect to an Acquired Portfolio by its shareholders or a Reorganization is not consummated for any other reason. If all of the Reorganizations are approved and consummated, the VIP Trust will be dissolved.
The fund complex currently includes three registered investment companies — the EQ Trust, the VIP Trust, and 1290 Funds. EIM serves as the investment adviser to both the EQ Trust and the VIP Trust, and an affiliate of EIM serves as the investment adviser to 1290 Funds. Prior to January 1, 2023, EIM served as the investment adviser to 1290 Funds. These investment companies share certain administrative, legal, compliance, marketing and other functions. Currently, the Board that oversees each registered investment company in the fund complex is comprised of the same 10 trustees. Assuming that the Proposal for the election of the eleven (11) Nominees is approved by the shareholders of the VIP Trust (and, by means of separate proposals in separate proxy statements, both the shareholders of the EQ Trust and the shareholders of 1290 Funds), the same Board members would continue to oversee the VIP Trust, the EQ Trust, and 1290 Funds.
The current Board and its Governance Committee, which consists of all of the current Independent Trustees of the VIP Trust, have determined to increase the size of the Board from 10 to 11 members and have proposed for election by shareholders nine of the 10 current members of the Board as well as two new Board members. The Board’s current Trustees are Mark A. Barnard, Thomas W. Brock, Michael B. Clement, Donald E. Foley, Patricia M. Haverland, Steven M. Joenk, H. Thomas McMeekin, Jeffery S. Perry, Gary S. Schpero, and Kathleen Stephansen. Mr. Joenk is an “interested person” (as defined in the 1940 Act) (an “Interested Trustee”) of the VIP Trust. Messrs. Barnard, Brock, Clement, Foley, McMeekin, Perry and Schpero and Mses. Haverland and Stephensen are not “interested persons” (as defined in the 1940 Act) (each, an “Independent Trustee”) of the VIP Trust. Mr. Brock will retire from the Board effective December 31, 2023, and is not standing for re-election. The Board’s Governance Committee identified the two new Nominees to the Board, Marcia Haydel and Kimberly Thompson Laughton, through the use of a third party search firm and extensive interviews with multiple candidates. If elected by shareholders, Mses. Haydel and Laughton would be Independent Trustees of the VIP Trust.
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As part of its evaluation of this Proposal, the Governance Committee of the Board considered a number of factors, including that the increased size, diversity, skill sets and depth of experience of the Board should enhance the Board’s ability to respond to the increasing complexities of the mutual fund business. The Governance Committee also considered that, as the mandatory retirement date for certain current Board members approaches, it would be advisable to elect two new Board members now so that these new Board members can serve alongside the current Board members as they become increasingly familiar with the Trust and the Acquired Portfolios and their compliance, regulatory and risk management oversight responsibilities.
Upon the recommendation of the Governance Committee, the Board unanimously determined to recommend that shareholders of the VIP Trust vote “FOR” the election of each Nominee at the Meeting to hold office in accordance with the VIP Trust’s governing documents.
Each Nominee has consented to being named in this Proxy Statement/Prospectus and indicated his or her willingness to serve if elected. In the unanticipated event that any Nominee should be unable to serve, the persons named as proxies may vote for such other person as shall be designated by the Board. The persons named on the accompanying proxy card intend to vote at the Meeting (unless otherwise directed) for the election of the Nominees named below as Trustees of the VIP Trust. To be elected, persons nominated as Trustees must receive a plurality of the votes cast, which means that the eleven (11) Nominees receiving the highest number of votes cast at the Meeting will be elected, even if they receive approval from less than a majority of the votes cast. Because the Nominees are running unopposed, the Nominees are expected to be elected as Trustees, as all Nominees who receive votes in favor will be elected. Abstentions, not being votes cast, will have no effect on the outcome of Proposal 4.
Subject to shareholder approval, the Reorganizations of each of the Acquired Portfolios described in Proposals 1.A. through 1.E., 2.A through 2.E, and 3 are expected to be effective at the close of business on November , 2023, or on a later date each Trust decides upon. If the Reorganization Agreement is not approved with respect to an Acquired Portfolio by its shareholders or a Reorganization is not consummated for any other reason prior to January 1, 2024, then, if Ms. Haydel and Ms. Laughton are elected by shareholders of the VIP Trust, their elections would be effective, and they would begin service as Trustees of the VIP Trust, on January 1, 2024.
Information regarding each Nominee is provided below. If elected, each Nominee, except Mr. Joenk, would be an Independent Trustee of the VIP Trust. The business address of all Nominees and Mr. Brock is 1290 Avenue of the Americas, New York, New York 10104. Messrs. Barnard, Clement, Foley, McMeekin, Perry and Schpero and Mses. Haverland, Haydel, Laughton and Stephansen are referred to herein as “Independent Nominees,” and Mr. Joenk is referred to herein as an “Interested Nominee.”
The Governance Committee also considered that, if the Nominees are elected by shareholders of the VIP Trust, all but one of the members of the Board will be Independent Trustees and that the Chairman of the Board will be an Independent Trustee.
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Name, Address and Year of Birth | Position(s) Held and/or to be Held with the VIP Trust | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen and/or to be Overseen by Trustee or Nominee for Trustee*** | Other Directorships Held by Trustee or Nominee for Trustee | |||||
Interested Nominee* | ||||||||||
Steven M. Joenk (1958) | Trustee and Chief Executive Officer | Trustee from September 2004 to present**; Chief Executive Officer from December 2002 to present; and Chairman of the Board from September 2004 through September 2017 | Chairman of the Board and Chief Executive Officer (May 2011 to present) and President (May 2011 to November 2021) of EIM; Chairman of the Board and Chief Executive Officer of Equitable Investment Management, LLC (January 2023 to present); Senior Vice President and Chief Investment Officer of AXA Financial, Inc. (April 2017 to 2019); and Chief Investment Officer (April 2017 to present) and employee (September 1999 to present) of Equitable Financial. | [126] | None. | |||||
Independent Nominees | ||||||||||
Mark A. Barnard (1949) | Trustee | From April 2017 to present** | Retired. Previously, Managing Director – Private Investments, Howard Hughes Medical Institute, 2001 to 2016 (and, prior thereto, Director of Private Investments from 1998 to 2001, and Manager of Private Investments from 1995 to 1998). | [126] | None. | |||||
Michael B. Clement (1957) | Trustee | From January 2019 to present** | Professor of Accounting, University of Texas, from 1997 to 2002 and from 2004 to present (Department of Accounting Chair from 2018 to 2022); Visiting Professor, Harvard Business School, 2023 to present. | [126] | New York Mortgage Trust | |||||
Donald E. Foley (1951) | Trustee | From April 2017 to present** | Retired. Previously, Chairman of the Board and Chief Executive Officer, Wilmington Trust Corporation, 2010 to 2011; Senior Vice President, Treasurer and Director of Tax, ITT Corporation, 1996 to 2010. | [126] | BioSig Technologies, Inc.; Wilmington Funds (12) | |||||
Patricia M. Haverland (1956) | Trustee | From April 2022 to present** | Retired. Previously, Vice President and Chief Investment Officer North America Pensions, Siemens, 2009 to 2018. | [126] | None. | |||||
Marcia Haydel (1962) | Consultant† and Trustee | **, † | Founding Partner and Managing Director, Performance Equity Management, 2005 to present; Portfolio Manager, General Motors Investment Management, 1999 to 2005; Vice President, Alliance Capital Management, 1998 to 1999. | [126] if elected at the Meeting and at separate meetings of the shareholders of the EQ Trust and 1290 Funds | None. |
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Name, Address and Year of Birth | Position(s) Held and/or to be Held with the VIP Trust | Term of Office��and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen and/or to be Overseen by Trustee or Nominee for Trustee*** | Other Directorships Held by Trustee or Nominee for Trustee | |||||
Kimberly Thompson Laughton (1963) | Consultant† and Trustee | **, † | Retired. Previously, President, Schwab Charitable, 2011 to 2021 (and, prior thereto, Vice President from 2007 to 2011); various positions at Charles Schwab Corporation, including Vice President - Mutual Funds enterprise from 2003 to 2005, and Vice President - Fixed Income enterprise from 1999 to 2002. | [126] if elected at the Meeting and at separate meetings of the shareholders of the EQ Trust and 1290 Funds | None. | |||||
H. Thomas McMeekin (1953) | Trustee | From April 2017 to present** | Managing Partner and Founder, Griffin Investments, LLC, 2000 to present; CEO of Blue Key Services, LLC, 2015 to present; previously, Chief Investment Officer, AIG Life & Retirement and United Guaranty Corporation and Senior Managing Director of AIG Asset Management, 2009 to 2012. | [126] | None. | |||||
Jeffery S. Perry (1965) | Trustee | From April 2022 to present** | Founder and Chief Executive Officer, Lead Mandates LLC (business and leadership advisory firm). Retired, Global Client Service Partner, Ernst & Young LLP, 2004 to 2020. | [126] | Fortune Brands Innovations, Inc.; MasterBrand, Inc. | |||||
Gary S. Schpero (1953) | Chairman of the Board | Independent Trustee, April 2017 to present; Lead Independent Trustee, April 2017 to September 2017; Chairman of the Board, October 2017 to present** | Retired. Prior to January 1, 2000, Partner of Simpson Thacher & Bartlett (law firm) and Managing Partner of the Investment Management and Investment Company Practice Group. | [126] | Blackstone Funds (4) | |||||
Kathleen Stephansen (1954) | Trustee | From January 2019 to present** | Senior Economist, Haver Analytics, 2019 to present; Senior Economic Advisor, Boston Consulting Group, 2018 to 2019, and in 2016; Chief Economist, Huawei Technologies USA Inc., 2016 to 2018; various positions at American International Group, including Chief Economist and Senior Managing Director and Senior Investment Strategies and Global Head of Sovereign Research – AIG Asset Management from 2010 to 2016. | [126] | None. |
† | Mses. Haydel and Laughton each serves as a consultant to the Board effective September 1, 2023. |
* | Affiliated with the investment adviser and/or distributor. |
** | Each Nominee elected will hold office for life or until his or her successor is elected or the VIP Trust terminates; except that any Trustee may resign or may be removed, and any Trustee who requests to be retired, or who has become physically or mentally incapacitated or is otherwise unable to serve, may be retired. The VIP Trust’s Board has adopted a policy that currently provides that each Independent Trustee shall retire from the Board as of the last day of the calendar year in which he or she attains the age of 75 years. The VIP Trust’s retirement policy is subject to periodic review by the VIP Trust’s Governance Committee, which may recommend for Board approval any changes to the policy that it determines to be appropriate. |
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*** | The registered investment companies in the fund complex include the VIP Trust, the EQ Trust, and 1290 Funds. Mr. Joenk serves as Trustee and Chief Executive Officer for each of the registered investment companies in the fund complex. Mr. Schpero serves as Chairman of the Board for each such registered investment company. |
Current Independent Trustee Not Nominated for Re-Election
Name, Address and Year of Birth | Position Held with the Trust | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee** | Other Directorships Held by Trustee | |||||
Independent Trustee | ||||||||||
Thomas W. Brock (1947) | Trustee | From April 2017 to present* | Retired. Previously, Director, President and Chief Executive Officer of Silver Bay Realty Trust Corp., June 2016 to May 2017 (and, prior thereto, Director and interim President and Chief Executive Officer from January 2016 to June 2016); Chief Executive Officer and Co-Founder of Stone Harbor Investment Partners, 2006 to 2012. | [126] | Liberty All-Star Funds (2) |
* | Each Trustee will hold office for life or until his or her successor is elected or the VIP Trust terminates; except that any Trustee may resign or may be removed, and any Trustee who requests to be retired, or who has become physically or mentally incapacitated or is otherwise unable to serve, may be retired. The VIP Trust’s Board has adopted a policy that currently provides that each Independent Trustee shall retire from the Board as of the last day of the calendar year in which he or she attains the age of 75 years. The VIP Trust’s retirement policy is subject to periodic review by the VIP Trust’s Governance Committee, which may recommend for Board approval any changes to the policy that it determines to be appropriate. Pursuant to the policy, Mr. Brock will retire on December 31, 2023. Mr. Brock is not standing for re-election and will serve until December 31, 2023. |
** | The registered investment companies in the fund complex include the VIP Trust, the EQ Trust, and 1290 Funds. |
Qualifications and Experience of the Nominees
The current Board believes that all of the Nominees possess substantial executive leadership experience derived from their service as executives, partners and board members of diverse businesses and community and other organizations. The current Board also believes that the different perspectives, viewpoints, professional experience, education, and individual qualities of each Nominee represent a diversity of experiences and a variety of complementary skills. In determining whether a Nominee is qualified to serve as a Trustee of the VIP Trust, the current Board considered a wide variety of information about the Nominee, and multiple factors contributed to the current Board’s decision. However, there are no specific required qualifications for Board membership. Each Nominee is believed to possess the experience, skills, and attributes necessary to serve the Acquired Portfolios and their shareholders because each Nominee demonstrates an exceptional ability to consider complex business and financial matters, evaluate the relative importance and priority of issues, make decisions, and contribute effectively to the deliberations of the Board.
Information about certain of the specific qualifications and experience of each Nominee relevant to the current Board’s conclusion that the Nominee should serve as a Trustee of the VIP Trust is set forth in the table above. Set forth below are certain additional qualifications, experience, attributes, and skills of each Nominee that the current Board believes support a conclusion that the Nominee should serve as Trustee of the VIP Trust in light of the VIP Trust’s business activities and structure.
Steven M. Joenk — Mr. Joenk has a background in the financial services industry, senior management experience with multiple insurance companies, investment management firms and investment companies and multiple years of service as an officer, Trustee and former Chairman of the Board of the VIP Trust and other registered investment companies, including the EQ Trust and 1290 Funds.
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Mark A. Barnard — Mr. Barnard has senior management and investment experience with endowments and foundations, multiple years of service on limited partner advisory boards and on the boards of pension entities and an investment company, and multiple years of service as a Trustee of the VIP Trust, the EQ Trust and 1290 Funds.
Michael B. Clement — Mr. Clement has a background in the financial services industry, background as an accounting scholar and professor, multiple years of service on the board of a real estate investment trust, and multiple years of service as a Trustee of the VIP Trust, the EQ Trust and 1290 Funds.
Donald E. Foley — Mr. Foley has a background in the financial services industry, experience in senior management positions with financial services firms, multiple years of service on the boards of public and private companies and organizations, and multiple years of service as a Trustee of the VIP Trust, the EQ Trust and 1290 Funds.
Patricia M. Haverland — Ms. Haverland has held senior management positions regarding pension plans for financial services and other companies, experience overseeing outside investment managers for pension plans, serving on an advisory council for the U.S. Department of Labor, and serving on the boards of non-profit organizations. Ms. Haverland holds the Chartered Financial Analyst designation. Prior to her election to the Boards of Trustees of the VIP Trust, the EQ Trust and 1290 Funds, Ms. Haverland served as a consultant to the Boards of Trustees from October 1, 2021 to March 31, 2022.
Marcia Haydel — Ms. Haydel has a background in the financial services industry, experience in senior management positions with an asset management firm, multiple years of service on the board of a private company, multiple years of service as an advisory board member of private equity companies, and background as a portfolio manager.
Kimberly Thompson Laughton — Ms. Laughton has a background in the financial services industry, experience in senior management positions with a large financial services firm and non-profit donor-advised fund, and multiple years of service on the boards of non-profit organizations.
H. Thomas McMeekin — Mr. McMeekin has a background in the financial services industry, has held senior management positions with insurance companies, has multiple years of service on the boards of public and private companies and organizations, and has multiple years of service as a Trustee of the VIP Trust, the EQ Trust and 1290 Funds.
Jeffery S. Perry — Mr. Perry has multiple years of experience as a management consultant, including experience as a partner at a global Big 4 professional services firm, and multiple years of service on the boards of public and non-profit organizations and a college. Prior to his election to the Boards of Trustees of the VIP Trust, the EQ Trust and 1290 Funds, Mr. Perry served as a consultant to the Boards of Trustees from October 1, 2021 to March 31, 2022.
Gary S. Schpero — Mr. Schpero has experience as the managing partner of the investment management practice group at a large international law firm and multiple years of service as a Trustee of the VIP Trust, the EQ Trust and 1290 Funds, as well as other unaffiliated investment companies.
Kathleen Stephansen — Ms. Stephansen has a background in the financial services industry, background as an economist, senior management experience with a large financial services firm, and multiple years of service as a Trustee of the VIP Trust, the EQ Trust and 1290 Funds.
Current Independent Trustee Not Nominated for Re-Election
Thomas W. Brock — Mr. Brock has a background in the financial services industry, senior management experience with financial services and investment management firms, multiple years of service on the boards of public companies and organizations and investment companies, and multiple years of service as a Trustee of the VIP Trust, the EQ Trust and 1290 Funds. Mr. Brock will retire from the Board on December 31, 2023.
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The Board currently is comprised of 10 Trustees, and there is one vacancy on the Board (and Mr. Brock’s retirement will create another vacancy). Nine of the 10 current Trustees are Independent Trustees. Mr. Joenk is an Interested Trustee. The current Board has appointed Gary S. Schpero to serve as Chairman of the Board. The Chairman of the Board is recommended by the VIP Trust’s Governance Committee and approved by the full Board. The Chairman of the Board presides at meetings of the Trustees and shall have such other powers and perform such other duties as may be from time to time assigned to him by the Trustees or prescribed by the VIP Trust’s Declaration of Trust or By-laws.
The Board holds seven regular meetings each year to consider and address matters involving the Trust and the Acquired Portfolios. The Board also may hold special meetings to address matters arising between regular meetings. The Independent Trustees also regularly meet outside the presence of management and are advised by independent legal counsel. These meetings may take place in-person, by videoconference or by telephone.
The Board has established a committee structure that includes an Audit Committee, a Governance Committee, and an Investment Committee (which is divided into sub-committees). All Independent Trustees are members of each Committee. The Board believes that this structure allows all of the Independent Trustees to participate in the full range of the Board’s oversight responsibilities. The Board reviews its structure regularly and believes that its leadership structure, including the appointment of an Independent Trustee to serve in the role of Chairman of the Board, is appropriate given the asset size of the VIP Trust, the number of series offered by the VIP Trust and the other registered investment companies in the fund complex, the number of Trustees overseeing the VIP Trust and the other registered investment companies in the fund complex, and the Board’s oversight responsibilities, as well as the VIP Trust’s business activities and advisory structures and its use as an investment vehicle in connection with the Contracts and retirement plans.
The Audit Committee functions to oversee the VIP Trust’s accounting and financial reporting policies and practices and its internal controls, oversee the quality and objectivity of the VIP Trust’s financial statements and the independent audit thereof, and act as a liaison between the VIP Trust’s independent accountants and the Board. To carry out its function, the Audit Committee, among other things, selects, retains or terminates the VIP Trust’s independent accountants and evaluates their independence; meets with the VIP Trust’s independent accountants as necessary to review and approve the arrangements for and scope of the audit and to discuss and consider any matters of concern relating to the VIP Trust’s financial statements and the VIP Trust’s financial reporting and controls; and approves the fees charged by the independent accountants for audit and non-audit services and, to the extent required by applicable law, any non-audit services proposed to be performed for the VIP Trust by the independent accountants. The Audit Committee held ( ) meetings during the fiscal year ended December 31, 2022. Mr. Clement serves as the Chair of the Audit Committee.
The Governance Committee functions to consider the size and structure of the Board and other governance matters; evaluate and nominate candidates for Independent Trustee membership on the Board and for membership on any Board committees; review the compensation arrangements for each of the Independent Trustees; provide oversight and review the compensation arrangements of the VIP Trust’s Chief Compliance Officer (“CCO”); and review the independence of outside counsel to the Independent Trustees. The Governance Committee also assists the Board in selecting, appointing, and evaluating the VIP Trust’s CCO and meets in executive session from time to time with EIM to discuss the CCO’s performance and the effectiveness of the VIP Trust’s compliance program. The Governance Committee may seek to identify candidates for Independent Trustee with the assistance of EIM or another third party service provider or independent contractor or by such other means as the Governance Committee deems appropriate. In connection with its evaluation of candidates, the Governance Committee reviews each candidate’s overall qualifications for Board membership and each candidate’s independence from the VIP Trust’s investment adviser and other principal service providers. Persons selected as nominees for Independent Trustee must not be “interested persons” (as defined in the 1940 Act) of the VIP Trust. The Governance Committee also considers the effect of any relationships beyond those delineated in the 1940 Act that might impair independence. The Governance Committee also may consider such other factors as it may determine to be relevant to fulfilling the role of Trustee. The Governance Committee gives recommendations provided by the VIP Trust’s officers the same consideration as any other candidate. The Governance Committee will not consider nominees recommended by Contractholders. The Governance Committee believes that the current process for selecting nominees is effective in identifying suitable candidates to serve on the
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Board. The Governance Committee periodically reviews the size and composition of the Board to determine whether it may be appropriate to add individuals, including those with different backgrounds or skills from those already on the Board, so that the Board reflects the appropriate balance of experience, skills, attributes and diversity required for the Board as a whole. The Governance Committee held ( ) meetings during the fiscal year ended December 31, 2022. Mr. McMeekin serves as the Chair of the Governance Committee. A copy of the written charter for the Governance Committee is attached to this Proxy Statement/Prospectus as Appendix F.
The Investment Committee functions to assist the Board in its oversight of Acquired Portfolio investment operations and performance. The Investment Committee is primarily responsible for overseeing and guiding the process by which the Board reviews Acquired Portfolio performance and interfacing with personnel at EIM and, in the case of a certain Acquired Portfolio, the Sub-Advisers responsible for portfolio management. In addition, three sub-groups of the Investment Committee, comprised of Independent Trustees, meet individually and engage in extensive discussions, along with management representatives and outside legal counsel, with Sub-Advisers to the sub-advised Acquired Portfolio during in-person or videoconference presentations made throughout the year. The Investment Committee held five (5) meetings during the fiscal year ended December 31, 2022. Messrs. Barnard and Foley and Ms. Stephansen serve as the co-Chairs of the Investment Committee.
During the fiscal year ended December 31, 2022, each current Trustee attended at least 75% of the aggregate of: (i) the total number of Board meetings, and (ii) the total number of meetings held by all committees on which he or she served.
Risk Oversight of the VIP Trust
The management of various risks relating to the administration and operation of the VIP Trust and the Acquired Portfolios is the responsibility of EIM and the other service providers, including (in the case of a certain Acquired Portfolio) any Sub-Advisers, retained by the VIP Trust or EIM, many of whom employ professional personnel who have risk management responsibilities. Consistent with its responsibility for oversight of the VIP Trust and the Acquired Portfolios, the Board, among other things, oversees risk management of each Acquired Portfolio’s investment program and business affairs directly and through the committee structure that it has established. Risks to the Acquired Portfolios include, among others, investment risk, credit risk, liquidity risk, valuation risk, operational risk, litigation risk, regulatory risk, reputational risk, and compliance risk as well as the overall business and disclosure risks relating to the Acquired Portfolios and the VIP Trust and the risk of conflicts of interest affecting EIM (or its affiliates) in managing the Acquired Portfolios. The Board has adopted, and periodically reviews, policies and procedures designed to address these and other risks. Under the overall supervision of the Board, EIM and other service providers to the Acquired Portfolios also have implemented a variety of processes, procedures and controls to address these and other risks. Different processes, procedures and controls are employed with respect to different types of risks. These processes include those that are embedded in the conduct of regular business by the Board and in the responsibilities of officers of the VIP Trust and other service providers. The Board recognizes that not all risks that may affect the Acquired Portfolios can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Acquired Portfolios’ goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness.
The Board oversees risk management activities in part through receipt and review by the Board or its committees of regular and special reports, presentations and other information from officers of the VIP Trust and from other service providers. The Board requires senior officers of the VIP Trust, including the President, Chief Financial Officer, Chief Investment Officer, CCO and Director of Risk, to report to the full Board on a variety of matters at regular and special meetings of the Board, including matters relating to risk management. The Chief Financial Officer also reports regularly to the Board and to its Audit Committee on the VIP Trust’s internal controls and accounting and financial reporting policies and practices. The Board and its Audit Committee also receive regular reports from the VIP Trust’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Board meets with the VIP Trust’s CCO, including meetings in executive session, to discuss issues related to portfolio compliance and, on at least an annual basis, receives a report from the CCO regarding the effectiveness of the VIP Trust’s compliance program. In addition, the Board receives reports from EIM on the investments and securities trading of the Acquired Portfolios, as well as reports from EIM, in its
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capacity as the Acquired Portfolios’ Valuation Designee, regarding the valuation of those investments. Additionally, the Board meets regularly with the VIP Trust’s Director of Risk with respect to EIM’s risk management framework, risk monitoring and reporting. The Board also receives reports from the VIP Trust’s primary service providers on a periodic or regular basis, including (in the case of a certain Acquired Portfolio) the Sub-Advisers to the Acquired Portfolios, as well as the VIP Trust’s custodian, distributor and sub-administrator. The Board also requires EIM to report to the Board on other matters relating to risk management on a regular and as-needed basis. Most of the Acquired Portfolios’ operations are carried out by various service providers; the Board’s oversight of the risk management processes of those service providers, including processes to address business continuity, cybersecurity and other operational issues, is inherently limited.
No director, trustee, member, officer (other than the VIP Trust’s CCO), or employee of EIM or an affiliated company receives any compensation or reimbursement from the VIP Trust for serving as a Trustee or officer of the VIP Trust. Mr. Joenk is an Interested Trustee of the VIP Trust and, therefore, has not been compensated by the VIP Trust for his service as a Trustee.
For services to the VIP Trust, the EQ Trust and 1290 Funds, each Independent Trustee receives an annual retainer of $435,000, payable quarterly, which covers all regular, committee, and special meetings. In addition, the Chairman of the Board receives an annual retainer of $165,000; the Chair of the Audit Committee receives an annual retainer of $40,000; the Chair of the Governance Committee receives an annual retainer of $55,000; and each of the co-Chairs of the Investment Committee receives an annual retainer of $40,000. Independent Trustees also receive reimbursement of reasonable out-of-pocket expenses incurred in connection with serving as an Independent Trustee, including expenses associated with attending Board or Committee meetings. The Independent Trustees are not expected to increase the compensation set forth above as part of this Proposal.
Mses. Haydel and Laughton, each of whom serves as a consultant to the Board effective September 1, 2023, each will be paid $100,000, in two instalments, for her services through December 31, 2023.
Information regarding compensation paid to the Independent Trustees for the most recent fiscal year ended December 31, 2022, is set forth below.
Trustee Compensation Table
for the Fiscal Year Ended December 31, 20221
Trustee | Aggregate Compensation from the VIP Trust | Pension or Retirement Benefits Accrued As Part of Trust Expenses | Estimated Annual Benefits Upon Retirement | Total Compensation from Trust and Fund Complex Paid to Trustees2 | ||||||||||||
Interested Trustees |
| |||||||||||||||
Steven M. Joenk | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Independent Trustees |
| |||||||||||||||
Mark A. Barnard | $ | 57,185 | $ | 0 | $ | 0 | $ | 441,454 | ||||||||
Thomas W. Brock4 | $ | 59,599 | $ | 0 | $ | 0 | $ | 460,000 | ||||||||
Michael B. Clement | $ | 59,599 | $ | 0 | $ | 0 | $ | 460,000 | ||||||||
Donald E. Foley | $ | 59,599 | $ | 0 | $ | 0 | $ | 460,000 | ||||||||
Patricia M. Haverland3 | $ | 47,721 | $ | 0 | $ | 0 | $ | 368,750 | ||||||||
H. Thomas McMeekin | $ | 60,079 | $ | 0 | $ | 0 | $ | 463,750 | ||||||||
Jeffery S. Perry3 | $ | 47,721 | $ | 0 | $ | 0 | $ | 368,750 | ||||||||
Gary S. Schpero | $ | 75,309 | $ | 0 | $ | 0 | $ | 581,250 | ||||||||
Kathleen Stephansen | $ | 54,904 | $ | 0 | $ | 0 | $ | 423,750 |
1 | The compensation reported in this table reflects the compensation arrangements in effect during the fiscal year ended December 31, 2022. |
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2 | The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as a trustee of 125 series of three (3) trusts in the fund complex (i.e., the VIP Trust, the EQ Trust and 1290 Funds). |
3 | Prior to their election to the Boards of Trustees of the VIP Trust, the EQ Trust and 1290 Funds, Ms. Haverland and Mr. Perry served as consultants to the Boards of Trustees from October 1, 2021 to March 31, 2022. The compensation reported in this table for the fiscal year ended December 31, 2022, includes compensation received by Ms. Haverland and Mr. Perry for serving as consultants to the Board during the period January 1, 2022 to March 31, 2022. |
4 | Mr. Brock will retire from the Board of Trustees effective December 31, 2023, and is not standing for re-election. |
Trustee/Nominee Ownership of Acquired Portfolio Shares
The following table sets forth information describing the dollar range of equity securities beneficially owned by each Trustee/Nominee in an Acquired Portfolio and in all series in the aggregate within the same “family of investment companies” overseen and/or to be overseen by the Trustee/Nominee, as of June 30, 2023. The following table also sets forth information describing the dollar range of equity securities beneficially owned by each Trustee/Nominee in all series in the aggregate within the same “fund complex” overseen and/or to be overseen by the Trustee/Nominee, as of June 30, 2023.
The Trustees/Nominees are not permitted to invest directly in shares issued by the Acquired Portfolios because the shares are currently sold only to insurance company separate accounts in connection with Contracts issued by Equitable Financial or other affiliated or unaffiliated insurance companies; to The Equitable 401(k) Plan; and to other tax-qualified retirement plans and other investors eligible under applicable federal tax regulations. Mr. Joenk may own shares of one or more of the Acquired Portfolios indirectly through a Contract.
Dollar Range of Equity Securities in an Acquired Portfolio | Aggregate Dollar Range of Equity Securities in All Portfolios Overseen or to be Overseen by the Nominee in Family of Investment Companies* | Aggregate Dollar Range of Equity Securities in All Portfolios Overseen or to be Overseen by the Nominee in Fund Complex** | ||||||||||
Interested Nominee |
| |||||||||||
Steven M. Joenk | None | E | E | |||||||||
Independent Nominees |
| |||||||||||
Mark A. Barnard | None | A | ||||||||||
Michael B. Clement | None | A | ||||||||||
Donald E. Foley | None | A | ||||||||||
Patricia M. Haverland | None | A | ||||||||||
Marcia Haydel | None | A | ||||||||||
Kimberly Thompson Laughton | None | A | ||||||||||
H. Thomas McMeekin | None | A | ||||||||||
Jeffery S. Perry | None | A | ||||||||||
Gary S. Schpero | None | A | ||||||||||
Kathleen Stephansen | None | A | ||||||||||
Dollar Range of Equity Securities in an Acquired Portfolio | Aggregate Dollar Range of Equity Securities in All Portfolios Overseen by the Trustee in Family of Investment Companies* | Aggregate Dollar Range of Equity Securities in All Portfolios Overseen by the Trustee in Fund Complex** | ||||||||||
Current Independent Trustee Not Nominated for Re-Election |
| |||||||||||
Thomas W. Brock*** | None | A |
* | This column reflects information regarding ownership of equity securities issued by series in the VIP Trust and the EQ Trust, which are part of the same “family of investment companies.” Effective January 1, 2023, 1290 Funds is advised by an affiliate of EIM and is no longer part of the same “family of investment companies” with the VIP Trust and the EQ Trust, both of which are advised by EIM. All three of these registered investment companies are, however, part of the same “fund complex.” |
** | This column reflects information regarding ownership of equity securities issued by series in the VIP Trust, the EQ Trust and 1290 Funds, which are part of the same “fund complex.” |
*** | Mr. Brock will retire from the Board of Trustees effective December 31, 2023, and is not standing for re-election. |
A = None; B = $1 – $10,000; C = $10,001 – $50,000; D = $50,001 – $100,000; E = over $100,000
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[No Trustee/Nominee who is or would be an Independent Trustee, and no member of his or her immediate family, beneficially owns or owns of record securities representing interests in EIM, any Sub-Adviser or distributor of the VIP Trust, or any person controlling, controlled by or under common control with such persons.] For this purpose, “immediate family member” includes the Independent Trustee’s spouse, children residing in the Independent Trustee’s household and dependents of the Trustee.
The following table provides information regarding the officers of the VIP Trust. Each officer was elected by the Board and serves until his or her successor is chosen and qualified or until his or her resignation or removal by the Board. The business address of the VIP Trust’s officers is 1290 Avenue of the Americas, New York, New York 10104.
Name, Address and | Position(s) Held with the VIP Trust* | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Steven M. Joenk (1958) | Trustee and Chief Executive Officer | Trustee from September 2004 to present; Chief Executive Officer from December 2002 to present; and Chairman of the Board from September 2004 through September 2017 | Chairman of the Board and Chief Executive Officer (May 2011 to present) and President (May 2011 to November 2021) of EIM; Chairman of the Board and Chief Executive Officer of Equitable Investment Management, LLC (January 2023 to present); Senior Vice President and Chief Investment Officer of AXA Financial, Inc. (April 2017 to 2019); and Chief Investment Officer (April 2017 to present) and employee (September 1999 to present) of Equitable Financial. | |||
Michal Levy (1979) | President | From February 2023 to present | Director (December 2014 to present), President (December 2021 to present), and Chief Operating Officer (March 2017 to present) of EIM; Executive Vice President and Chief Operating Officer of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (October 2011 to present) of Equitable Financial. | |||
Brian Walsh (1968) | Chief Financial Officer and Treasurer | From June 2007 to present | Director (February 2011 to present) and Senior Vice President (May 2011 to present) of EIM; Senior Vice President of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (February 2003 to present) of Equitable Financial. | |||
Joseph J. Paolo*** (1970) | Chief Compliance Officer, Vice President and Anti-Money Laundering Compliance Officer | Chief Compliance Officer from May 2007 to present, Vice President and Anti-Money Laundering Compliance Officer from November 2005 to present | Chief Compliance Officer (June 2007 to present) and Senior Vice President (May 2011 to present) of EIM; Vice President and Chief Compliance Officer of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (June 2007 to present) of Equitable Financial. |
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Name, Address and | Position(s) Held with the VIP Trust* | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Kenneth Kozlowski (1961) | Senior Vice President and Chief Investment Officer | Vice President from June 2010 to March 2017; Senior Vice President and Chief Investment Officer from March 2017 to present | Executive Vice President and Chief Investment Officer (June 2012 to present) and Director (May 2017 to present) of EIM; Executive Vice President of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (February 2001 to present) of Equitable Financial. | |||
Alwi Chan (1974) | Vice President and Deputy Chief Investment Officer | Vice President from June 2007 to present; Deputy Chief Investment Officer from March 2017 to present | Senior Vice President and Deputy Chief Investment Officer of EIM (June 2012 to present); and employee of Equitable Financial (June 1999 to present). | |||
James Chen (1988) | Vice President and Director of Risk | From August 2022 to present | Vice President of EIM (July 2022 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); employee of Equitable Financial (2015 to present). | |||
James Kelly (1968) | Controller | From June 2007 to present | Vice President of EIM (May 2011 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (September 2008 to present). | |||
Andrew Houston (1990) | Vice President | From September 2022 to present | Vice President of EIM (July 2022 to present), Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (2017 to present). | |||
Miao Hu (1978) | Vice President | From March 2017 to present | Assistant Portfolio Manager (May 2016 to present) and Vice President (June 2016 to present) of EIM; and employee of Equitable Financial (November 2013 to present). | |||
Kevin McCarthy (1983) | Vice President | From September 2019 to present | Assistant Portfolio Manager (December 2018 to present) and Vice President (July 2022) of EIM; and employee of Equitable Financial (August 2015 to present). | |||
Xavier Poutas (1977) | Vice President | From March 2017 to present | Assistant Portfolio Manager (May 2011 to present) and Vice President (June 2016 to present) of EIM; and employee of Equitable Financial (August 2002 to present). | |||
Shane Daly, Esq. (1970) | Chief Legal Officer, Senior Vice President and Secretary | From March 2023 to present | Executive Vice President, Secretary and General Counsel of EIM and Equitable Investment Management, LLC (March 2023 to present); employee of Equitable Financial (2011 to present). | |||
Maureen E. Kane, Esq. (1962) | Vice President and Assistant Secretary | From March 2023 to present | Senior Vice President, Assistant Secretary and Associate General Counsel of EIM and Equitable Investment Management, LLC (March 2023 to present); employee of Equitable Financial (February 2019 to present); and Managing Director and Managing Counsel of The Bank of New York Mellon (July 2014 to February 2019). |
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Name, Address and | Position(s) Held with the VIP Trust* | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Kristina B. Magolis, Esq. (1985) | Vice President and Assistant Secretary | From November 2022 to present | Vice President, Assistant Secretary and Associate General Counsel of EIM (October 2022 to present); Vice President, Assistant Secretary and Associate General Counsel of Equitable Investment Management, LLC (January 2023 to present); employee of Equitable Financial (October 2022 to present); and Vice President, Legal and Compliance, Morgan Stanley Investment Management (August 2017 to September 2022). | |||
Cheryl Cherian (1979) | Vice President and Assistant Secretary | From March 2023 to present | Employee of Equitable Financial (April 2019 to present); and Compliance Associate at Manifold Fund Advisors (November 2016 to March 2018). | |||
Artemis Brannigan (1974) | Vice President | From September 2019 to present | Vice President of EIM (August 2019 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); employee of Equitable Financial (August 2019 to present); and Director of Prudential Financial (January 2016 to July 2019). | |||
Aysha Pride (1988) | Vice President | From August 2022 to present | Vice President of EIM (July 2022 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (2014 to present). | |||
Helen Lai (1973) | Assistant Vice President | From March 2017 to present | Employee of Equitable Financial (March 2013 to present). | |||
Michelle Gallo (1973) | Assistant Controller | From March 2023 to present | Employee of Equitable Financial (July 2013 to present). | |||
Roselle Ibanga (1978) | Assistant Controller | From February 2009 to present | Employee of Equitable Financial (February 2009 to present). | |||
Lisa Perrelli (1974) | Assistant Controller | From February 2009 to present | Employee of Equitable Financial (November 2002 to present). | |||
Jennifer Mastronardi (1985) | Assistant Vice President | From March 2012 to present | Vice President of EIM (April 2015 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (February 2009 to present). | |||
Helen Espaillat (1963) | Assistant Secretary | From March 2017 to present | Assistant Vice President and Assistant Secretary of EIM (March 2015 to present); Assistant Vice President and Assistant Secretary of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (July 2004 to present). | |||
Lorelei Fajardo (1978) | Assistant Secretary | From March 2014 to present | Employee of Equitable Financial (July 2013 to present). | |||
Monica Giron (1976) | Assistant Secretary | From July 2019 to present | Employee of Equitable Financial (June 2019 to present); and Senior Paralegal at Gemini Fund Services (August 2015 to May 2019). |
* | The officers in the table above hold similar positions with other registered investment company in the fund complex. The registered investment companies in the fund complex include the VIP Trust, the EQ Trust, and 1290 Funds. |
** | Each officer is elected on an annual basis. |
*** | During the fiscal year ended December 31, 2022, the three trusts in the fund complex paid $290,000 of the Chief Compliance Officer’s compensation, including $37,842 paid by the VIP Trust. |
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The Board of Trustees has provided for a process by which Contractholders may send communications to the Board. If a Contractholder wishes to send a communication to the Board, or to a specified Trustee, the communication should be submitted in writing to Shane Daly, Secretary of the VIP Trust, 1290 Avenue of the Americas, New York, New York 10104, who will forward such communication to the Trustee(s) as appropriate.
The shareholders of all Acquired Portfolios of the VIP Trust will vote collectively as a single class on Proposal 4. To be elected, persons nominated as Trustees must receive a plurality of the votes cast, which means that the eleven (11) Nominees receiving the highest number of votes cast at the Meeting will be elected, even if they receive approval from less than a majority of the votes cast. The approval of one Nominee is not contingent on the approval of the other Nominees.
The current Trustees of the VIP Trust recommend that shareholders vote “FOR” each Nominee in Proposal 4.
ADDITIONAL INFORMATION ABOUT THE REORGANIZATIONS
Terms of the Reorganization Agreements
The terms and conditions under which each Reorganization would be completed are contained in the Reorganization Agreement. The following is a summary of the material terms of the Reorganization Agreement. For additional information, please refer to the copy of the form of the Reorganization Agreement, which is attached to this Proxy Statement/Prospectus as Appendix A.
Each Reorganization will involve an Acquiring Portfolio’s acquiring all the assets of the corresponding Acquired Portfolio in exchange solely for Acquiring Portfolio Shares and the Acquiring Portfolio’s assumption of all of the Acquired Portfolio’s liabilities. The Reorganization Agreement further provides that, on or as promptly as reasonably practicable after the Closing Date, each Acquired Portfolio will distribute the Acquiring Portfolio Shares it receives in its Reorganization to its shareholders, for the benefit of the Separate Accounts, as applicable, and thus the Contractholders. The account for each shareholder that holds Class A shares of an Acquired Portfolio shall be credited with the number of full and fractional Class IA shares of the corresponding Acquiring Portfolio due that shareholder, the account for each shareholder that holds Class B shares of an Acquired Portfolio shall be credited with the number of full and fractional Class IB shares of the corresponding Acquiring Portfolio due that shareholder, and the account for each shareholder that holds Class K shares of an Acquired Portfolio shall be credited with the number of full and fractional Class K shares of the corresponding Acquiring Portfolio due that shareholder. The number of full and fractional Acquiring Portfolio Shares each shareholder will receive (for the benefit of the Separate Accounts, as applicable) will be equal in net asset value (as determined in accordance with the Trusts’ normal valuation procedures), as of immediately after the close of business (generally 4:00 p.m., Eastern time) on the Closing Date, to the corresponding Acquired Portfolio Shares the shareholder holds at that time. After that distribution to an Acquired Portfolio’s shareholders, the VIP Trust, on behalf of the Acquired Portfolio, will take all necessary steps under its Declaration of Trust and Delaware and any other applicable law to effect a complete termination of the Acquired Portfolio.
The Board of a Portfolio involved in a Reorganization may terminate or delay the Reorganization Agreement with respect to, and abandon or postpone, the Reorganization (or all Reorganizations) at any time prior to the Closing Date, before or after approval by the applicable Acquired Portfolio’s shareholders, if circumstances develop that, in the Board’s opinion, make proceeding with a Reorganization inadvisable for a Portfolio. The consummation of each Reorganization also is subject to various conditions, including approval of the Reorganization by the applicable Acquired Portfolio’s shareholders, completion of all filings with, and receipt of all necessary approvals, if any, from, the SEC, delivery of a legal opinion regarding the federal income tax consequences of the Reorganization (see
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below), and other customary corporate and securities matters. Subject to the satisfaction of those conditions, each Reorganization will take place immediately after the close of business on its Closing Date. If a Reorganization Agreement is not approved by the applicable Acquired Portfolio’s shareholders or a Reorganization is not consummated for any other reason, the Board of the Acquired Portfolio will consider other possible courses of action for the Acquired Portfolio, which may include the continued solicitation of proxies for the Reorganization; continuing to operate the Acquired Portfolio as a stand-alone portfolio; changes to the Acquired Portfolio’s investment objectives, policies and strategies; reorganizing the Acquired Portfolio into other acquiring portfolios; or such other options that the Board deems to be in the best interests of the Acquired Portfolio.
The Board of the VIP Trust, including its Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “1940 Act”)) of the Trust (the “Independent Trustees”), has determined, with respect to each Acquired Portfolio, that the interests of the Acquired Portfolio’s existing shareholders will not be diluted as a result of the Reorganization and that participation in the Reorganization is in the best interests of the Acquired Portfolio. Similarly, the Board of the EQ Trust, including its Independent Trustees, has determined, with respect to each Acquiring Portfolio, that the interests of the Acquiring Portfolio’s existing shareholders will not be diluted as a result of the Reorganization and that participation in the Reorganization is in the best interests of the Acquiring Portfolio.
EIM has agreed to pay expenses of each Reorganization that exceed an Acquired Portfolio’s expense cap set forth in its expense limitation arrangement. The estimated Reorganization expenses (excluding portfolio transaction costs, which (if any) would be incurred by the Portfolio and indirectly by Contractholders both before and after the Reorganization) for each of the following Acquired Portfolios exceed its respective expense cap and are expected to be paid by EIM: EQ/Conservative Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2055 Allocation Portfolio, and EQ/Core Plus Bond Portfolio. The estimated Reorganization expenses (excluding portfolio transaction costs, which (if any) would be incurred by the Portfolio and indirectly by Contractholders both before and after the Reorganization) for each of the following Acquired Portfolios do not exceed its respective expense cap and are expected to be paid by the respective Acquired Portfolio: EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2035 Allocation Portfolio, and Target 2045 Allocation Portfolio.
Approval of the Reorganization Agreement with respect to an Acquired Portfolio will require a majority vote of that Acquired Portfolio’s shareholders. Such majority is defined in the 1940 Act as the lesser of (1) 67% or more of the voting securities of the Acquired Portfolio present at a meeting, if the holders of more than 50% of its outstanding voting securities are present or represented by proxy, or (2) more than 50% of its outstanding voting securities. The consummation of any one Reorganization is not contingent on the consummation of any other Reorganization. Please see “Voting Information” below for more information.
At a meeting of the Board of the VIP Trust held on July 18-19, 2023, EIM recommended that each Acquired Portfolio, each a series of the VIP Trust, be reorganized into a corresponding, newly-created series of the EQ Trust with an identical name, investment objectives and investment policies. In reaching the decision to recommend approval of the Reorganizations, the Board, including the Independent Trustees, determined, with respect to each Acquired Portfolio, that the Reorganization is in the best interests of the Acquired Portfolio and that the interests of the existing shareholders of the Acquired Portfolio will not be diluted as a result of the Reorganization. The Board, including the Independent Trustees, also considered and approved the Reorganization Agreement.
The proposal to reorganize the Acquired Portfolios into substantially identical, newly created series of the EQ Trust was discussed by the Board at multiple meetings. EIM provided an overview of the proposal to the Board at a meeting held on April 19-20, 2023, and the Board of the EQ Trust approved at that joint meeting the establishment and registration of the newly-formed Acquiring Portfolios. The proposal was further discussed by EIM and the Board at the July 18-19, 2023 meeting, and the advisory and service provider agreements for the Acquiring Portfolios were approved by the Board of the EQ Trust at that joint meeting. The Independent Trustees were assisted in their consideration of the Reorganizations by their independent legal counsel.
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In determining whether to approve the Reorganization Agreement with respect to each Acquired Portfolio and recommend its approval to shareholders, the Board of the VIP Trust, including the Independent Trustees, considered the terms and conditions of the Reorganization Agreement and whether the Reorganizations would result in dilution of shareholder interests. The Board, with the advice and assistance of independent legal counsel, inquired into a number of matters and considered the following factors, among others:
• | The Reorganizations are part of an initiative designed to streamline the Equitable mutual fund complex and to promote operating efficiencies. The Reorganizations would combine all of the portfolios that are advised by EIM and offered through variable annuity contracts and variable life insurance policies into a single, larger trust, which is expected to eliminate redundancies associated with maintaining two separate trusts for these portfolios and to reduce the costs of administering and operating the portfolios that comprise the mutual fund complex. |
• | Each Acquiring Portfolio has the same name, investment objective, policies (including fundamental investment policies), principal strategies and principal risks as the corresponding Acquired Portfolio. |
• | The contractual arrangements for each Acquiring Portfolio are substantially identical to those that are currently in place for the corresponding Acquired Portfolio. EIM will continue to advise, and its affiliate Equitable Investment Management, LLC will continue to administer, each Acquiring Portfolio after the Reorganizations. AXA IM, Brandywine Global, and Loomis Sayles will continue to sub-advise the New EQ/Core Plus Bond Portfolio after the applicable Reorganization. |
• | The annual operating expense ratios for the Class IA, Class IB and/or Class K shares, as applicable, of each Acquiring Portfolio, immediately following the Reorganization (and excluding the one-time, non-recurring expenses of the Reorganization), are expected to be the same as those for the corresponding classes of shares of the corresponding Acquired Portfolio for the fiscal year ended December 31, 2022. |
• | Each Acquiring Portfolio is subject to an expense limitation arrangement, and in each case the agreed upon expense limitation for an Acquiring Portfolio’s Class IA, Class IB and/or Class K shares, as applicable, is the same as that for the corresponding Acquired Portfolio’s corresponding classes of shares, but the expense limitation arrangement for each Acquiring Portfolio extends through April 30, 2025, one year beyond that for its corresponding Acquired Portfolio. |
• | The Reorganizations will be submitted to the respective shareholders of the Acquired Portfolios for their approval. |
• | Each Acquiring Portfolio, which will commence operations upon consummation of the Reorganization, will assume and publish the operating history and performance record of the corresponding Acquired Portfolio. |
• | As a result of the Reorganizations, each shareholder of Class A, Class B and/or Class K shares, as applicable, of an Acquired Portfolio will hold, immediately after the Closing Date, Class IA, Class IB and/or Class K shares, as applicable, of the corresponding Acquiring Portfolio having an aggregate net asset value equal to the aggregate net asset value of the Acquired Portfolio’s shares such shareholder held as of the Closing Date. |
• | Each Reorganization will be effected on the basis of the Acquired Portfolio’s net asset value, which will be determined in connection with the Reorganization in accordance with the VIP Trust’s normal valuation procedures, which are identical for both the Acquired Portfolio and the Acquiring Portfolio. |
• | Shareholders and Contractholders will not pay any sales charges in connection with the Reorganizations. |
• | The Reorganizations are not expected to have any adverse tax results for Contractholders, as discussed further below under “Additional Information about the Reorganizations — Federal Income Tax Consequences of the Reorganizations.” Shareholders and Contractholders would not realize any income, gain or loss in connection with the Reorganizations. |
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• | Each Acquired Portfolio and the corresponding Acquiring Portfolio have identical distribution, purchase and redemption procedures and identical exchange rights. |
• | It is expected that the Portfolios will realize efficiencies and savings over time in connection with the Reorganizations and that the proposed transactions will assist in optimizing the structure and operations of the mutual fund complex. |
• | The Board considered the differences between the organizational documents of the Trusts, as discussed further below under “Description of the Securities to be Issued.” The Trustees considered that the EQ Trust Declaration of Trust includes a number of more flexible and modern provisions that reflect certain legal developments, including changes in relevant federal statutes and state laws governing the Trust and court decisions interpreting those laws. The Board determined that shareholders will benefit from the enhanced governance provisions in the EQ Trust Declaration of Trust. Among other things, the Trustees considered that the EQ Trust Declaration of Trust more precisely describes and limits the Trustees’ obligations and thus offers the Trustees and shareholders additional protections arising from that clarity. The Trustees considered that they themselves also would benefit from a more detailed and precise delineation of their duties and obligations. The Trustees considered that the provisions in the EQ Trust Declaration of Trust that impose certain requirements and a detailed process for shareholders to bring derivative actions are designed to avoid the time, expense, distraction, and other harm that can be caused to a Portfolio or its shareholders as a result of spurious shareholder demands and derivative actions, while preserving the potential for well-founded claims to be brought. |
Further, as discussed in the section immediately below entitled “Potential Benefits of the Reorganizations to EIM and its Affiliates,” in considering whether to approve the Reorganizations, the Board recognized the potential benefits to and conflicts of interest of EIM and its affiliates and concluded that the potential benefits of the Reorganizations, including the elimination of certain redundancies associated with maintaining the VIP Trust as a separate legal entity, supported a decision to approve the Reorganizations. The Board also considered that EIM has agreed to pay expenses of each Reorganization that exceed an Acquired Portfolio’s expense cap set forth in its expense limitation arrangement. The Board noted that the estimated Reorganization expenses (excluding any portfolio transaction costs, which are expected to be zero or negligible and which, if any and unless otherwise noted, would be incurred by the Portfolio and indirectly by Contractholders both before and after the Reorganization) for each of the following Acquired Portfolios exceed its respective expense cap and are expected to be paid by EIM: EQ/Conservative Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2055 Allocation Portfolio, and EQ/Core Plus Bond Portfolio. The Board also considered that the estimated Reorganization expenses (excluding any portfolio transaction costs, which are expected to be zero or negligible and which, if any and unless otherwise noted, would be incurred by the Portfolio and indirectly by Contractholders both before and after the Reorganization) for each of the following Acquired Portfolios do not exceed its respective expense cap and are expected to be paid by the respective Acquired Portfolio: EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2035 Allocation Portfolio, and Target 2045 Allocation Portfolio.
In connection with the Board’s consideration of the Reorganizations, the Independent Trustees requested, and EIM provided to the Board, information regarding the factors set forth above as well as other information relating to the Reorganizations. In their deliberations, the Trustees evaluated all information available to them and did not identify any particular information that was all-important or controlling, and the Trustees attributed different weights to the various factors. On the basis of the information provided to it and its evaluation of that information, the Board of the VIP Trust, including the Independent Trustees, voted unanimously to approve the Reorganization Agreement and to recommend that the shareholders of each Acquired Portfolio also approve the Reorganization Agreement.
Potential Benefits of the Reorganizations to EIM and its Affiliates
EIM may realize benefits in connection with the Reorganizations. EIM has proposed, and the Board of each Trust has approved, the Reorganizations, pursuant to which the Portfolios that comprise the VIP Trust will be
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reorganized into newly-formed identical Portfolios of the EQ Trust. These transactions would combine all of the portfolios that are advised by EIM and offered through variable annuity contracts and variable life insurance policies into a single, larger trust, which is expected to eliminate redundancies associated with maintaining two separate trusts for these portfolios and to reduce the costs of administering and operating the portfolios that comprise the mutual fund complex. EIM may realize benefits in connection with the reorganizations that would combine the VIP Trust portfolios and the EQ Trust portfolios into a single trust, such as the potential reduction of internal costs associated with maintaining multiple trusts for the portfolios that it advises. In considering whether to approve the proposed Reorganizations, the Board recognized these potential benefits to and conflicts of interest of EIM and its affiliates and concluded that the potential benefits of the proposed Reorganizations, including the potential for reduced costs for the portfolios over time due to the combination of the VIP Trust and the EQ Trust, supported a decision to approve the Reorganizations.
A Portfolio’s performance may be affected by one or more of the following risks, which are described in detail in Appendix B (“More Information on Strategies and Risk Factors (New EQ Allocation Portfolios and New Target Allocation Portfolios)”) and Appendix C (“More Information on Strategies and Risk Factors (New EQ/Core Plus Bond Portfolio)”). The following tables compare the principal risks of an investment in each Portfolio. The most significant risks as of the date of this Proxy Statement/Prospectus are presented first and indicated with an asterisk (*), followed by additional principal risks in alphabetical order. Explanations of such risks are presented in alphabetical order following the tables.
Each EQ Allocation Portfolio and Target Allocation Portfolio is also subject to the risks associated with the Underlying Portfolios’ investments; please see the “Information Regarding the Underlying Portfolios” in Appendix D for additional information about these risks.
Risks | New EQ/Conservative Allocation Portfolio and EQ/Conservative Allocation Portfolio | New EQ/Conservative- Plus Allocation Portfolio and EQ/Conservative- Plus Allocation Portfolio | New EQ/Moderate Allocation Portfolio and EQ/Moderate Allocation Portfolio | New EQ/Moderate-Plus Allocation Portfolio and EQ/Moderate-Plus Allocation Portfolio | New EQ/Aggressive Allocation Portfolio and EQ/Aggressive Allocation Portfolio | |||||||||||||||
Market Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Asset Allocation Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Interest Rate Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Credit Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Equity Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Volatility Management Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Risks Related to Investments in Underlying Portfolios | X | * | X | * | X | * | X | * | X | * | ||||||||||
Affiliated Portfolio Risk | X | X | X | X | X | |||||||||||||||
Derivatives Risk | X | X | X | X | X | |||||||||||||||
Foreign Securities Risk | X | X | X | X | X | * | ||||||||||||||
Futures Contract Risk | X | X | X | X | X | |||||||||||||||
Investment Grade Securities Risk | X | X | X | X | X | |||||||||||||||
Large-Cap Company Risk | X | X | X | X | X | |||||||||||||||
Leveraging Risk | X | X | X | X | X | |||||||||||||||
Liquidity Risk | X | X | X | X | ||||||||||||||||
Mid-Cap and Small-Cap Company Risk | X | X | X | X | X | |||||||||||||||
Non-Investment Grade Securities Risk | X | X | X | X | X | |||||||||||||||
Portfolio Management Risk | X | X | X | X | X | |||||||||||||||
Redemption Risk | X | X | X | X |
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Risks | New Target 2015 Allocation Portfolio and Target 2015 Allocation Portfolio | New Target 2025 Allocation Portfolio and Target 2025 Allocation Portfolio | New Target 2035 Allocation Portfolio and Target 2035 Allocation Portfolio | New Target 2045 Allocation Portfolio and Target 2045 Allocation Portfolio | New Target 2055 Allocation Portfolio and Target 2055 Allocation Portfolio | |||||||||||||||
Market Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Asset Allocation Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Equity Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Interest Rate Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Credit Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Target Date Risk | X | * | X | * | X | * | X | * | X | * | ||||||||||
Risks Related to Investments in Underlying Portfolios | X | * | X | * | X | * | X | * | X | * | ||||||||||
Affiliated Portfolio Risk | X | X | X | X | X | |||||||||||||||
Derivatives Risk | X | X | X | X | X | |||||||||||||||
Foreign Securities Risk | X | X | X | X | X | |||||||||||||||
Futures Contract Risk | X | X | X | X | X | |||||||||||||||
Investment Grade Securities Risk | X | X | X | X | X | |||||||||||||||
Large-Cap Company Risk | X | X | X | X | X | |||||||||||||||
Leveraging Risk | X | X | X | X | X | |||||||||||||||
Liquidity Risk | X | X | X | |||||||||||||||||
Mid-Cap and Small-Cap Company Risk | X | X | X | X | X | |||||||||||||||
Non-Investment Grade Securities Risk | X | X | X | X | X | |||||||||||||||
Portfolio Management Risk | X | X | X | X | X | |||||||||||||||
Redemption Risk | X | X | X |
Risks | New EQ/Core Plus Bond Portfolio and EQ/Core Plus Bond Portfolio | |||
Market Risk | X | * | ||
Interest Rate Risk | X | * | ||
Credit Risk | X | * | ||
Mortgage-Related and Other Asset-Backed Securities Risk | X | * | ||
Investment Grade Securities Risk | X | * | ||
Non-Investment Grade Securities Risk | X | * | ||
Foreign Securities Risk | X | * | ||
Currency Risk | X | * | ||
Emerging Markets Risk | X | * | ||
European Economic Risk | X | * | ||
U.S. Government Securities Risk | X | * | ||
Portfolio Management Risk | X | * | ||
Cash Management Risk | X | |||
Collateralized Loan Obligations Risk | X | |||
Convertible Securities Risk | X | |||
Derivatives Risk | X | |||
Dollar Roll and Sale-Buyback Transactions | X | |||
Futures Contract Risk | X | |||
Hedging Risk | X | |||
Inflation-Indexed Bonds Risk | X | |||
Leveraging Risk | X | |||
Liquidity Risk | X | |||
Loan Risk | X | |||
Multiple Sub-Adviser Risk | X | |||
Portfolio Turnover Risk | X | |||
Preferred Stock Risk | X | |||
Prepayment Risk and Extension Risk | X | |||
Privately Placed and Other Restricted Securities Risk | X | |||
Redemption Risk | X | |||
Sector Risk | X | |||
Variable and Floating Rate Securities Risk | X | |||
When-Issued and Delayed Delivery Securities and Forward Commitments Risk | X | |||
Zero Coupon and Pay-in-Kind Securities Risk | X |
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Affiliated Portfolio Risk: The Adviser is subject to conflicts of interest in allocating the Portfolio’s assets among the various Underlying Portfolios because the revenue the Adviser and its affiliates receive from some of the Underlying Portfolios is higher than the revenue received from other Underlying Portfolios for the services the Adviser and its affiliates provide. The Portfolio invests in affiliated Underlying Portfolios; unaffiliated Underlying Portfolios generally are not considered for investment.
Asset Allocation Risk: The Portfolio’s investment performance depends upon how its assets are allocated across various asset classes and how its assets are invested within those asset classes. Some asset classes and investments may perform below expectations or the securities markets generally over short and extended periods. The allocation strategies used and the allocation and investment decisions made could cause the Portfolio to lose value and may not produce the desired results.
Cash Management Risk: Upon entering into certain derivatives contracts, such as futures contracts, and to maintain open positions in certain derivatives contracts, the Portfolio may be required to post collateral for the contract, the amount of which may vary. In addition, the Portfolio may maintain cash and cash equivalent positions as part of the Portfolio’s strategy in order to take advantage of investment opportunities as they arise, to manage the Portfolio’s market exposure, and for other portfolio management purposes. As such, the Portfolio may maintain cash balances, which may be significant, with counterparties such as the Trust’s custodian or its affiliates. Maintaining larger cash and cash equivalent positions could negatively affect the Portfolio’s performance due to missed investment opportunities and may also subject the Portfolio to additional risks, such as increased credit risk with respect to the custodian bank holding the assets and the risk that a counterparty may be unable or unwilling, or perceived as unable or unwilling, to honor its obligations.
Collateralized Loan Obligations Risk: Investments in collateralized loan obligations (“CLOs”) involve many of the same risks associated with investments in debt securities and asset-backed securities, including interest rate risk, credit risk, liquidity risk, prepayment and extension risk, and valuation risk. The risks of an investment in a CLO also depend largely on the quality and type of the collateral and the class or “tranche” of the CLO in which the Portfolio invests. Normally, CLOs are privately offered and sold, and thus are not registered under the securities laws. As a result, investments in CLOs may be characterized by the Portfolio as illiquid securities; however, an active dealer market, or other relevant measures of liquidity, may exist for CLOs allowing a CLO potentially to be deemed liquid under the Portfolio’s liquidity policies. Additionally, CLOs carry risks including, but not limited to: (a) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (b) the risk that the collateral securities may decline in value or quality or be downgraded or go into default, particularly during periods of economic downturn; (c) the possibility that the Portfolio may invest in CLOs that are subordinate to other classes; (d) the risk that the manager of the CLOs may perform poorly; and (e) the risk that the complex structure of CLOs may produce disputes with the issuer or unexpected investment results. CLOs also can be difficult to value and may be highly leveraged (which could make them highly volatile), and the use of CLOs may result in losses to the Portfolio.
Convertible Securities Risk: A convertible security is a form of hybrid security; that is, a security with both debt and equity characteristics. The value of a convertible security fluctuates in relation to changes in interest rates and the credit quality of the issuer and also fluctuates in relation to changes in the price of the underlying common stock. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument, which may be less than the current market price of the security. If a convertible security held by the Portfolio is called for redemption, the Portfolio will be required to permit the issuer to redeem the security, convert it into underlying common stock or sell it to a third party. Convertible securities are subject to equity risk, interest rate risk, and credit risk and are often lower-quality securities. Lower quality may lead to greater volatility in the price of a security and may negatively affect a security’s liquidity. Since it derives a portion of its value from the common stock into which it may be converted, a convertible security is also subject to the same types of market and issuer-specific risks that apply to the underlying common stock.
Credit Risk: The Portfolio is subject to the risk that the issuer or guarantor of a fixed income security, or the counterparty to a transaction, is unable or unwilling, or is perceived as unable or unwilling, to make timely
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interest or principal payments or otherwise honor its obligations, or defaults completely, which may cause the Portfolio’s holdings to lose value. The downgrade of a security’s credit rating may decrease its value. Lower credit quality also may lead to greater volatility in the price of a security and may negatively affect a security’s liquidity. The credit quality of a security can deteriorate suddenly and rapidly. The Portfolio may experience a significant or complete loss on a fixed income security or a transaction.
Derivatives Risk: The Portfolio’s investments in derivatives may rise or fall in value more rapidly than other investments and may reduce the Portfolio’s returns and increase the volatility of the Portfolio’s net asset value. Investing in derivatives involves investment techniques and risk analyses different from, and risks in some respects greater than, those associated with investing in more traditional investments, such as stocks and bonds. Derivatives may be leveraged such that a small investment can have a significant impact on the Portfolio’s exposure to stock market values, interest rates, or other investments. As a result, a relatively small price movement in a derivatives contract may cause an immediate and substantial loss, and the Portfolio could lose more than the amount it invested. Some derivatives can have the potential for unlimited losses. In addition, it may be difficult or impossible for the Portfolio to purchase or sell certain derivatives in sufficient amounts to achieve the desired level of exposure, or to terminate or offset existing arrangements, which may result in a loss or may be costly to the Portfolio. Some derivatives are more sensitive to market price fluctuations and to interest rate changes than other investments. Derivatives may not behave as anticipated by the Portfolio, and derivatives strategies that are successful under certain market conditions may be less successful or unsuccessful under other market conditions. The Portfolio also may be exposed to losses if the counterparty in the transaction is unable or unwilling to fulfill its contractual obligation. In certain cases, the Portfolio may be hindered or delayed in exercising remedies against or closing out derivatives with a counterparty, resulting in additional losses. Derivatives also may be subject to the risk of mispricing or improper valuation, and valuation may be more difficult in times of market turmoil. Changes to the regulation of derivatives markets and mutual funds’ use of derivatives may impact the Portfolio’s ability to maintain its investments in derivatives, make derivatives more costly, limit their availability, adversely affect their value or performance, or otherwise disrupt markets.
Dollar Roll and Sale-Buyback Transactions Risk: Dollar roll and sale-buyback transactions may increase the Portfolio’s volatility and may be viewed as a form of leverage. There is also a risk that the counterparty will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the Portfolio.
Equity Risk: In general, the values of stocks and other equity securities fluctuate, and sometimes widely fluctuate, in response to changes in a company’s financial condition as well as general market, economic and political conditions and other factors. The Portfolio may experience a significant or complete loss on its investment in an equity security. In addition, common stock prices may be particularly sensitive to rising interest rates, which increase borrowing costs and the costs of capital.
Foreign Securities Risk: Investments in foreign securities, including depositary receipts, involve risks in addition to those associated with investments in U.S. securities. Foreign markets may be less liquid, more volatile and subject to less government supervision and regulation than U.S. markets, and it may take more time to clear and settle trades involving foreign securities, which could negatively impact the Portfolio’s investments and cause it to lose money. Security values also may be negatively affected by changes in the exchange rates between the U.S. dollar and foreign currencies. Differences between U.S. and foreign legal, political and economic systems, regulatory regimes and market practices, as well as trade barriers and other protectionist trade policies (including those of the United States), governmental instability, war or other political or economic actions, also may adversely impact security values. Foreign securities are also subject to the risks associated with the potential imposition of economic or other sanctions against a particular foreign country, its nationals, businesses or industries. World markets, or those in a particular region, may all react in similar fashion to important economic, political or other developments. Events and evolving conditions in certain economies or markets may alter the risks associated with investments tied to countries or regions that historically were perceived as comparatively stable and make such investments riskier and more volatile. Regardless of where a company is organized or its stock is traded, its performance may be significantly affected by events in regions from which it derives its profits or in which it conducts significant operations.
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Currency Risk: Investments that are denominated in or that provide exposure to foreign currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar. Any such decline may erode or reverse any potential gains from an investment in securities denominated in foreign currency or may widen existing loss. In the case of hedging positions, there is the risk that the U.S. dollar will decline in value relative to the currency being hedged. Currency rates may fluctuate significantly over short periods of time.
Emerging Markets Risk: The risks associated with investments in emerging market countries often are significant, and vary from jurisdiction to jurisdiction and company to company. Investments in emerging market countries are more susceptible to loss than investments in more developed foreign countries and may present market, credit, currency, liquidity, legal, political, technical and other risks different from, or greater than, the risks of investing in more developed foreign countries. Emerging market countries may be more likely to experience rapid and significant adverse developments in their political or economic structures, intervene in financial markets, restrict foreign investments, impose high withholding or other taxes on foreign investments, impose restrictive exchange control regulations, or nationalize or expropriate the assets of private companies, which may have negative impacts on transaction costs, market price, investment returns and the legal rights and remedies available to the Portfolio. In addition, the securities markets of emerging market countries generally are smaller, less liquid and more volatile than those of more developed foreign countries, and emerging market countries often have less uniformity in regulatory, accounting, auditing and financial reporting requirements or standards, which may impact the availability and quality of information about issuers, and less reliable clearance and settlement, registration and custodial procedures. Emerging market countries also may be subject to high inflation and rapid currency devaluations, and currency-hedging techniques may be unavailable in certain emerging market countries. In addition, some emerging market countries may be heavily dependent on international trade, which can materially affect their securities markets. Securities of issuers traded on foreign exchanges may be suspended. The likelihood of such suspensions may be higher for securities of issuers in emerging market countries than in countries with more developed markets.
European Economic Risk: The economies of European Union (“EU”) member countries and their trading partners, as well as the broader global economy, may be adversely affected by changes in the euro’s exchange rate, changes in EU or governmental regulations on trade, geopolitical tensions or conflicts, and the threat of default or an actual default by an EU member country on its sovereign debt, which could negatively impact the Portfolio’s investments and cause it to lose money. Recent events in Europe may continue to impact the economies of every European country and their economic partners. Russia’s military invasion of Ukraine in February 2022, the resulting responses by the United States and other countries, and the potential for wider conflict have had, and could continue to have, severe adverse effects on regional and global economies and could further increase volatility and uncertainty in the financial markets. In addition, until the full economic effects of the United Kingdom’s withdrawal from the EU, commonly referred to as “Brexit,” become clearer, there remains a risk that Brexit may negatively impact the Portfolio’s investments and cause it to lose money. Any further withdrawals from the EU could cause additional market disruption globally.
Futures Contract Risk: The primary risks associated with the use of futures contracts are (a) the imperfect correlation between the change in market value of the instruments held by the Portfolio and the price of the futures contract; (b) liquidity risks, including the possible absence of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses (potentially unlimited) caused by unanticipated market movements; (d) an investment manager’s inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; (e) the possibility that a counterparty, clearing member or clearinghouse will default in the performance of its obligations; (f) if the Portfolio has insufficient cash, it may have to sell securities from its portfolio to meet daily variation margin requirements, and the Portfolio may have to sell securities at a time when it may be disadvantageous to do so; and (g) transaction costs associated with investments in futures contracts may be significant, which could cause or increase losses or reduce gains. Futures contracts are also subject to the same risks as the underlying investments to which they provide exposure. In addition, futures contracts may subject the Portfolio to leveraging risk.
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Hedging Risk: If the Portfolio takes a hedging position (such as long or short positions) in a particular currency, security, or bond market, it will lose money if the currency, security, or bond market appreciates in value, or an expected credit event fails to occur. Any efforts at buying or selling currencies could result in significant losses for the Portfolio.
Inflation-Indexed Bonds Risk: Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to inflation. The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates represent nominal (stated) interest rates reduced by the expected impact of inflation. In general, inflation-indexed bonds, including Treasury inflation-indexed securities, decline in value when real interest rates rise and rise in value when real interest rates decline. In certain interest rate environments, such as when real interest rates are rising faster than nominal interest rates, inflation-indexed bonds may experience greater losses than other fixed income securities with similar durations. Interest payments on inflation-indexed debt securities can be unpredictable and may vary as the principal and/or interest is adjusted for inflation. In periods of deflation, the Portfolio may have no income at all from such investments.
Interest Rate Risk: Changes in interest rates may affect the yield, liquidity and value of investments in income producing or debt securities. Changes in interest rates also may affect the value of other securities. When interest rates rise, the value of the Portfolio’s debt securities generally declines. Conversely, when interest rates decline, the value of the Portfolio’s debt securities generally rises. Typically, the longer the maturity (i.e., the term of a debt security) or duration (i.e., a measure of the sensitivity of a debt security to changes in market interest rates, based on the entire cash flow associated with the security) of a debt security, the greater the effect a change in interest rates could have on the security’s price. Thus, the sensitivity of the Portfolio’s debt securities to interest rate risk will increase the greater the duration of those securities. A significant or rapid rise in interest rates could result in losses to the Portfolio.
Investment Grade Securities Risk: Securities rated in the lower investment grade rating categories (e.g., BBB or Baa) are considered investment grade securities, but may have more risk than higher rated obligations because they are regarded as having only an adequate capacity to pay principal and interest, are considered to lack outstanding investment characteristics, and may possess certain speculative characteristics.
Large-Cap Company Risk: Larger more established companies may be unable to respond quickly to new competitive challenges such as changes in technology and consumer tastes, which may lead to a decline in their market price. Many larger companies also may not be able to attain the high growth rate of successful smaller companies, especially during extended periods of economic expansion.
Leveraging Risk: When the Portfolio leverages its holdings, the value of an investment in the Portfolio will be more volatile and all other risks will tend to be compounded. Investments that create leverage can result in losses to the Portfolio that exceed the amount originally invested and may accelerate the rate of losses (some of which may be sudden or substantial). For certain investments that create leverage, relatively small market fluctuations can result in large changes in the value of such investments. There can be no assurance that the Portfolio’s use of any leverage will be successful.
Liquidity Risk: From time to time, there may be little or no active trading market for a particular investment in which the Portfolio may invest or is invested. In such a market, the value of such an investment and the Portfolio’s share price may fall dramatically. Illiquid investments may be difficult or impossible to sell or purchase at an advantageous time or price or in sufficient amounts to achieve the Portfolio’s desired level of exposure. To meet redemption requests during periods of illiquidity, the Portfolio may be forced to dispose of investments at unfavorable times or prices and/or under unfavorable conditions, which may result in a loss or may be costly to the Portfolio. Investments that are illiquid or that trade in lower volumes may be more difficult to value. The Portfolio also may not receive its proceeds from the sale of certain investments for an extended period of time. Certain investments that were liquid when purchased may later become illiquid, sometimes abruptly, particularly in times of overall economic distress or adverse investor perception. An inability to sell a portfolio position can adversely affect the Portfolio’s value or prevent the Portfolio from being able to take advantage of other investment opportunities. During periods of market stress, an investment or even an entire market segment may become illiquid, sometimes abruptly, which can adversely affect the Portfolio’s ability to
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limit losses. In addition, a reduction in the ability or willingness of dealers and other institutional investors to make a market in certain securities may result in decreased liquidity in certain markets.
Loan Risk: A bank loan represents an interest in a loan or other direct indebtedness that entitles the acquirer of such interest to payments of interest, principal and/or other amounts due under the structure of the loan. Loan interests are subject to liquidity risk, prepayment risk, extension risk, the risk of subordination to other creditors, restrictions on resale, and the lack of a regular trading market and publicly available information. Loan interests may be difficult to value and may have extended trade settlement periods. As a result, the proceeds from the sale of a loan may not be available to make additional investments or to meet redemption obligations until potentially a substantial period after the sale of the loan. The extended trade settlement periods could force the Portfolio to liquidate other securities to meet redemptions and may present a risk that the Portfolio may incur losses in order to timely honor redemptions. There is a risk that the value of any collateral securing a loan in which the Portfolio has an interest may decline and that the collateral may not be sufficient to cover the amount owed on the loan. In the event the borrower defaults, the Portfolio’s access to the collateral may be limited or delayed by bankruptcy or other insolvency laws. Loans may not be considered “securities,” and purchasers, such as the Portfolio, therefore may not have the benefit of the anti-fraud protections of the federal securities laws. To the extent that the Portfolio invests in loan participations and assignments, it is subject to the risk that the financial institution acting as agent for all interests in a loan might fail financially. It is also possible that the Portfolio could be held liable, or may be called upon to fulfill other obligations, as a co-lender.
Market Risk: The Portfolio is subject to the risk that the securities markets will move down, sometimes rapidly and unpredictably, based on overall economic conditions and other factors, which may negatively affect Portfolio performance. Securities markets also may experience long periods of decline in value. The value of a security may decline due to factors that are specifically related to a particular company, as well as general market conditions, such as real or perceived adverse economic or political conditions, inflation rates and/or investor expectations concerning such rates, changes in interest rates, recessions, or adverse investor sentiment generally. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. Changes in the financial condition of a single issuer can impact a market as a whole.
Geopolitical events, including terrorism, tensions, war or other open conflicts between nations, or political or economic dysfunction within some nations that are global economic powers or major producers of oil, may lead to overall instability in world economies and markets generally and have led, and may in the future lead, to increased market volatility and may have adverse long-term effects. World markets, or those in a particular region, may all react in similar fashion to important economic, political or other developments. Events such as environmental and natural disasters or other catastrophes, public health crises (such as epidemics and pandemics), social unrest, and cybersecurity incidents, and governments’ reactions to such events, could cause uncertainty in the markets and may adversely affect the performance of the global economy. Impacts from climate change may include significant risks to global financial assets and economic growth. The extent and duration of such events and resulting market disruptions could be substantial and could magnify the impact of other risks to the Portfolio. The value and liquidity of the Portfolio’s investments may be negatively affected by developments in other countries and regions, whether or not the Portfolio invests in securities of issuers located in or with significant exposure to the countries or regions directly affected.
The U.S. Federal Reserve (“Fed”) has invested or otherwise made available substantial amounts of money to keep credit flowing through short-term money markets and has signaled that it will continue to adjust its operations as appropriate to support short-term money markets. Amid these efforts, concerns about the markets’ dependence on the Fed’s provision of liquidity have grown. Policy changes by the U.S. government and/or the Fed and political and other events within the United States could cause uncertainty in the markets, may affect investor and consumer confidence, and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. A downgrade of the ratings of, or a default on, U.S. government debt obligations, or concerns about the U.S. government’s credit quality in general, could have a substantial negative effect on the U.S. and global economies. High public debt in the United States and other countries creates ongoing systemic and market risks and policymaking uncertainty.
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In addition, markets and market participants are increasingly reliant on information data systems. Inaccurate data, software or other technology malfunctions, programming inaccuracies, unauthorized use or access, and similar circumstances may impair the performance of these systems and may have an adverse impact upon a single issuer, a group of issuers, or the market at large. .
Mid-Cap, Small-Cap and Micro-Cap Company Risk: Mid-cap, small-cap and micro-cap companies carry additional risks because the operating histories of these companies tend to be more limited, their earnings and revenues less predictable (and some companies may be experiencing significant losses), and their share prices more volatile than those of larger, more established companies, all of which can negatively affect their value. In general, these risks are greater for small-cap and micro-cap companies than for mid-cap companies.
Mortgage-Related and Other Asset-Backed Securities Risk: Declines in the credit quality of and defaults by the issuers of mortgage-related and other asset-backed securities or instability in the markets for such securities may decrease the value of such securities, which could result in losses to the Portfolio, and may reduce the liquidity of such securities and make such securities more difficult to purchase or sell at an advantageous time and price. In addition, borrowers may default on the obligations that underlie mortgage-related and other asset-backed securities. The risk of defaults by borrowers generally is greater during times of rising interest rates and/or unemployment rates. The impairment (or loss) of the value of collateral or other assets underlying mortgage-related and other asset-backed securities will result in a reduction in the value of the securities. Certain collateral may be difficult to locate in the event of default, or may be lost, and recoveries of depreciated or damaged collateral may not fully cover payments due on such collateral. Asset-backed securities may not have the benefit of a security interest in collateral comparable to that of mortgage assets, resulting in additional credit risk.
In addition, certain mortgage-related and other asset-backed securities may include securities backed by pools of loans made to “subprime” borrowers or borrowers with blemished credit histories. The risk of defaults by borrowers is generally higher in the case of asset or mortgage pools that include subprime assets or mortgages, and the liquidity and value of subprime mortgages and non-investment grade mortgage-backed securities that are not guaranteed by Ginnie Mae, Fannie Mae, and Freddie Mac could change dramatically over time.
Furthermore, mortgage-related and other asset-backed securities typically provide the issuer with the right to prepay the security prior to maturity. During periods of rising interest rates, the rate of prepayments tends to decrease because borrowers are less likely to prepay debt (such as mortgage debt or automobile loans). Slower than expected payments can extend the average lives of mortgage-related and other asset-backed securities, and this may “lock in” a below market interest rate and increase the security’s duration and interest rate sensitivity, which may increase the volatility of the security’s value and may lead to losses. During periods of falling interest rates, the rate of prepayments tends to increase because borrowers are more likely to pay off debt and refinance at the lower interest rates then available. Unscheduled prepayments shorten the average lives of mortgage-related and other asset-backed securities and may result in the Portfolio’s having to reinvest the proceeds of the prepayments at lower interest rates, thereby reducing the Portfolio’s income.
Multiple Sub-Adviser Risk: To a significant extent, the Portfolio’s performance will depend on the success of the Adviser in allocating the Portfolio’s assets to Sub-Advisers and its selection and oversight of the Sub-Advisers. The Sub-Advisers’ investment strategies may not work together as planned, which could adversely affect the Portfolio’s performance. Because each Sub-Adviser directs the trading for its own portion of the Portfolio, and does not aggregate its transactions with those of the other Sub-Adviser, the Portfolio may incur higher brokerage costs than would be the case if a single Sub-Adviser were managing the entire Portfolio. In addition, while the Adviser seeks to allocate the Portfolio’s assets among the Portfolio’s Sub-Advisers in a manner that it believes is consistent with achieving the Portfolio’s investment objective(s), the Adviser is subject to conflicts of interest in allocating the Portfolio’s assets among Sub-Advisers, including affiliated Sub-Advisers, because the Adviser pays different fees to the Sub-Advisers and due to other factors that could impact the Adviser’s or its affiliates’ revenues and profits.
Non-Investment Grade Securities Risk: Bonds rated below BBB by Standard & Poor’s Global Ratings or Fitch Ratings, Ltd. or below Baa by Moody’s Investors Service, Inc. (or, if unrated, determined by the investment manager to be of comparable quality) are speculative in nature and are subject to additional risk factors
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such as increased possibility of default, illiquidity of the security, and changes in value based on changes in interest rates. Non-investment grade bonds, sometimes referred to as “junk bonds,” are usually issued by companies without long track records of sales and earnings, or by those companies with questionable credit strength. The creditworthiness of issuers of non-investment grade debt securities may be more complex to analyze than that of issuers of investment grade debt securities, and reliance on credit ratings may present additional risks.
Portfolio Management Risk: The Portfolio is subject to the risk that strategies used by an investment manager and its securities selections fail to produce the intended results. An investment manager’s judgments or decisions about the quality, relative yield or value of, or market trends affecting, a particular security or issuer, industry, sector, region or market segment, or about the economy or interest rates, may be incorrect or otherwise may not produce the intended results, which may result in losses to the Portfolio. In addition, many processes used in Portfolio management, including security selection, rely, in whole or in part, on the use of various technologies. The Portfolio may suffer losses if there are imperfections, errors or limitations in the quantitative, analytic or other tools, resources, information and data used, or the analyses employed or relied on, by an investment manager, or if such tools, resources, information or data are used incorrectly, fail to produce the desired results, or otherwise do not work as intended. There can be no assurance that the use of these technologies will result in effective investment decisions for the Portfolio.
Portfolio Turnover Risk: High portfolio turnover (generally, turnover in excess of 100% in any given fiscal year) may result in increased transaction costs to the Portfolio, which may result in higher fund expenses and lower total return.
Preferred Stock Risk: Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. Unlike interest payments on debt securities, dividends on preferred stock are generally payable at the discretion of the issuer’s board of directors. Preferred shareholders may have certain rights if dividends are not paid but generally have no legal recourse against the issuer. Shareholders may suffer a loss of value if dividends are not paid. In certain situations an issuer may call or redeem its preferred stock or convert it to common stock. The market prices of preferred stocks are generally more sensitive to actual or perceived changes in the issuer’s financial condition or prospects than are the prices of debt securities.
Prepayment Risk and Extension Risk: Prepayment risk is the risk that the issuer of a security held by the Portfolio may pay off principal more quickly than originally anticipated. This may occur when interest rates fall. The Portfolio may have to reinvest the proceeds in an investment offering a lower yield, may not benefit from any increase in value that might otherwise result from declining interest rates and may lose any premium it paid to acquire the security. Extension risk is the risk that the issuer of a security held by the Portfolio may pay off principal more slowly than originally anticipated. This may occur when interest rates rise. The Portfolio may be prevented from reinvesting the proceeds it would have received at a given time in an investment offering a higher yield.
Privately Placed and Other Restricted Securities Risk: Restricted securities, which include privately placed securities, are securities that cannot be offered for public resale unless registered under the applicable securities laws or that have a contractual restriction that prohibits or limits their resale. Before they are registered, such securities may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. Difficulty in selling securities may result in a loss or be costly to the Portfolio. Rule 144A is designed to facilitate efficient trading among institutional investors by permitting the sale of certain unregistered securities to qualified institutional buyers. To the extent restricted securities held by the Portfolio qualify under Rule 144A and an institutional market develops for those securities, the Portfolio likely will be able to dispose of the securities without registering them. To the extent that institutional buyers become, for a time, uninterested in purchasing these securities, investing in Rule 144A securities could increase the level of the Portfolio’s illiquidity. The Adviser or Sub-Adviser may determine that certain securities qualified for trading under Rule 144A are liquid. Where registration of a security is required, the Portfolio may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the time the Portfolio desires to sell (and therefore decides to seek registration of) the security, and the time the Portfolio may be permitted to sell the security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Portfolio
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might obtain a less favorable price than prevailed when it desired to sell. The risk that securities may not be sold for the price at which the Portfolio is carrying them is greater with respect to restricted securities than it is with respect to registered securities. The illiquidity of the market, as well as the lack of publicly available information regarding these securities, also may make it difficult to determine a fair value for certain securities for purposes of computing the Portfolio’s net asset value.
Redemption Risk: The Portfolio may experience periods of heavy redemptions that could cause the Portfolio to sell assets at inopportune times or at a loss or depressed value. Redemption risk is heightened during periods of declining or illiquid markets. Heavy redemptions could hurt the Portfolio’s performance.
Market developments and other factors, including a general rise in interest rates, have the potential to cause investors to move out of fixed income securities on a large scale, which may increase redemptions from mutual funds that hold large amounts of fixed income securities. The market-making capacity of dealers has been reduced in recent years, in part as a result of structural changes, such as fewer proprietary trading desks at broker-dealers and increased regulatory capital requirements. In addition, significant securities market disruptions, including related to the coronavirus disease (COVID-19) pandemic, have led to dislocation in the market for a variety of fixed income securities (including, without limitation, commercial paper, corporate debt securities, certificates of deposit, asset-backed debt securities and municipal obligations), which has decreased liquidity and sharply reduced returns in certain cases. Increased redemptions from mutual funds that hold large amounts of fixed income securities, coupled with a reduction in the ability or willingness of dealers and other institutional investors to buy or hold fixed income securities, may result in decreased liquidity and increased volatility in the fixed income markets.
Risks Related to Investments in Underlying Portfolios: The Portfolio’s shareholders will indirectly bear fees and expenses paid by the Underlying Portfolios in which it invests, in addition to the Portfolio’s direct fees and expenses. The cost of investing in the Portfolio, therefore, may be higher than the cost of investing in a mutual fund that invests directly in individual stocks and bonds. The Portfolio’s performance depends upon a favorable allocation by the Adviser among the Underlying Portfolios, as well as the ability of the Underlying Portfolios to generate favorable performance. The Underlying Portfolios’ investment programs may not be complementary, which could adversely affect the Portfolio’s performance. The Portfolio’s net asset value is subject to fluctuations in the net asset values of the Underlying Portfolios in which it invests. The Portfolio is also subject to the risks associated with the securities or other investments in which the Underlying Portfolios invest, and the ability of the Portfolio to meet its investment objective will directly depend on the ability of the Underlying Portfolios to meet their respective investment objectives. The Portfolio and the Underlying Portfolios are subject to certain general investment risks, including market risk, asset class risk, issuer-specific risk, investment style risk, portfolio management risk, and regulatory risk. In addition, to the extent the Portfolio invests in Underlying Portfolios that invest in equity securities, fixed income securities, and/or foreign securities, the Portfolio is subject to the risks associated with investing in such securities. The extent to which the investment performance and risks associated with the Portfolio correlate to those of a particular Underlying Portfolio will depend upon the extent to which the Portfolio’s assets are allocated from time to time for investment in the Underlying Portfolio, which will vary.
Sector Risk: From time to time, based on market or economic conditions, the Portfolio may have significant positions in one or more sectors of the market. To the extent the Portfolio invests more heavily in particular sectors, its performance will be especially sensitive to developments that significantly affect those sectors. Individual sectors may be more volatile, and may perform differently, than the broader market. The industries that constitute a sector may all react in the same way to economic, political or regulatory events.
Short Position Risk: The Portfolio may engage in short sales and may enter into derivative contracts that have a similar economic effect (e.g., taking a short position in a futures contract). The Portfolio will incur a loss as a result of a short position if the price of the asset sold short increases between the date of the short position sale and the date on which an offsetting position is purchased. Short positions may be considered speculative transactions and involve special risks that could cause or increase losses or reduce gains, including greater reliance on the investment adviser’s ability to accurately anticipate the future value of a security or instrument,
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higher transaction costs, and imperfect correlation between the actual and desired level of exposure. Short sales, at least theoretically, present a risk of unlimited loss on an individual security basis, particularly in cases where the Portfolio is unable, for whatever reason, to close out its short position, because the Portfolio may be required to buy the security sold short at a time when the security has appreciated in value, and there is potentially no limit to the amount of such appreciation. In addition, by investing the proceeds received from selling securities short, the Portfolio could be deemed to be employing a form of leverage, in that it amplifies changes in the Portfolio’s net asset value because it increases the Portfolio’s exposure to the market and may increase losses and the volatility of returns. Market or other factors may prevent the Portfolio from closing out a short position at the most desirable time or at a favorable price.
Sovereign Debt Securities Risk: Sovereign debt securities are subject to the risk that a governmental entity may delay or refuse to pay interest or principal on its sovereign debt. 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. Sovereign debt risk is increased for emerging market issuers.
Target Date Risk: The Portfolio does not provide guaranteed income or payouts to an investor at or after the target year. An investment in the Portfolio may decline in value and will not ensure that an investor will have assets sufficient to cover retirement expenses or that an investor will have enough saved to be able to retire in, or within a few years of, the target year identified in the Portfolio’s name. The adequacy of an investor’s account at and after the target year will depend on a variety of factors, including the amount of money invested in the Portfolio, the length of time the investment was held, and the Portfolio’s returns over time.
U.S. Government Securities Risk: Although the Portfolio may hold securities that carry U.S. government guarantees, these guarantees do not extend to shares of the Portfolio itself and do not guarantee the market prices of the securities. Securities issued by the U.S. Treasury or other agencies and instrumentalities of the U.S. government may decline in value as a result of, among other things, changes in interest rates, political events in the United States, international developments, including strained relations with foreign countries, and changes in the credit rating of, or investor perceptions regarding the creditworthiness of, the U.S. government. Furthermore, not all securities issued by the U.S. government and its agencies and instrumentalities are backed by the full faith and credit of the U.S. Treasury. Securities not backed by the full faith and credit of the U.S. Treasury involve greater credit risk than investments in other types of U.S. government securities.
Variable and Floating Rate Securities Risk: The market prices of securities with variable and floating interest rates are generally less sensitive to interest rate changes than are the market prices of securities with fixed interest rates. Variable and floating rate securities may decline in value if market interest rates or interest rates paid by such securities do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Certain types of floating rate securities may be subject to greater liquidity risk than other debt securities.
Volatility Management Risk: The Portfolio may invest from time to time in Underlying Portfolios managed by the Adviser that may employ various volatility management techniques or make strategic adjustments to their asset mix (such as by using futures and options to manage equity exposure). Although these actions are intended to reduce the overall risk of investing in an Underlying Portfolio, they may not work as intended and may result in losses by an Underlying Portfolio, and in turn, the Portfolio, or periods of underperformance, particularly during periods when market values are increasing but market volatility is high or when an Underlying Portfolio has reduced its equity exposure but market changes do not impact equity returns adversely to the extent predicted by the Adviser.
The result of any volatility management strategy will be subject to the Adviser’s ability to correctly assess the degree of correlation between the performance of the relevant market index and the metrics used by the Adviser to measure market volatility. Since the characteristics of many securities change as markets change or time passes, the result of any volatility management strategy also will be subject to the Adviser’s ability to continually
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recalculate, readjust, and execute volatility management techniques in an efficient manner. In addition, market conditions change, sometimes rapidly and unpredictably, and the Adviser may be unable to execute the volatility management strategy in a timely manner or at all.
The Adviser to the Underlying Portfolios uses proprietary modeling tools to implement the volatility management strategy. If the proprietary modeling tools prove to be flawed or for other reasons do not produce the desired results, any decisions based on the modeling tools may expose an Underlying Portfolio, and in turn, the Portfolio, to additional risks and losses. The use of modeling tools has inherent risks, and the success of using a modeling tool depends, among other things, on the accuracy and completeness of the tool’s development, implementation and maintenance; on the tool’s assumptions and methodologies; and on the accuracy and reliability of the inputs and output of the tool. The Adviser from time to time may make changes to its proprietary modeling tools that do not require shareholder notice.
Moreover, volatility management strategies may expose an Underlying Portfolio, and in turn, the Portfolio, to costs, such as increased portfolio transaction costs, which could cause or increase losses or reduce gains. In addition, it is not possible to manage volatility fully or perfectly. Futures contracts and other instruments used in connection with the volatility management strategy are not necessarily held by an Underlying Portfolio to hedge the value of the Underlying Portfolio’s other investments and, as a result, these futures contracts and other instruments may decline in value at the same time as the Underlying Portfolio’s other investments.
Any one or more of these factors may prevent an Underlying Portfolio from achieving the intended volatility management or could cause an Underlying Portfolio, and in turn, the Portfolio, to underperform or experience losses (some of which may be sudden or substantial) or volatility for any particular period that may be higher or lower. In addition, the use of volatility management techniques may not protect against market declines and may limit an Underlying Portfolio’s, and thus the Portfolio’s, participation in market gains, even during periods when the market is rising. Volatility management techniques, when implemented effectively to reduce the overall risk of investing in an Underlying Portfolio, may result in underperformance by an Underlying Portfolio. For example, if an Underlying Portfolio has reduced its overall exposure to equities to avoid losses in certain market environments, the Underlying Portfolio may forgo some of the returns that can be associated with periods of rising equity values. An Underlying Portfolio’s performance, and therefore the Portfolio’s performance, may be lower than similar funds where volatility management techniques are not used.
When-Issued and Delayed Delivery Securities and Forward Commitments Risk: When-issued and delayed delivery securities and forward commitments involve the risk that the security the Portfolio commits to purchase will decline in value prior to its delivery. This risk is in addition to the risk that the Portfolio’s other assets will decline in value. Therefore, these transactions can have a leverage-like effect on the Portfolio and increase the Portfolio’s overall investment exposure. There also is the risk that the security will not be issued or that the other party to the transaction will fail to complete the sale or purchase of the security. If this occurs, the Portfolio may lose the opportunity to purchase or sell the security at the agreed upon price and may forgo any gain in the security’s price.
Zero Coupon and Pay-in-Kind Securities Risk: Zero coupon and pay-in-kind securities are debt securities that do not make periodic cash interest payments. Zero coupon securities are issued at a significant discount from their face value. Zero coupon and pay-in-kind securities tend to be subject to greater fluctuations in market value in response to changing interest rates than securities of comparable maturities that pay interest periodically and in cash.
Federal Income Tax Consequences of the Reorganizations
Each Reorganization is intended to qualify for federal income tax purposes as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”).
As a condition to consummation of each Reorganization, each Trust will receive an opinion from K&L Gates LLP (“Counsel”), with respect to the Reorganization and the Portfolios participating therein and their shareholders, substantially to the effect that, based on the facts and assumptions stated therein and conditioned on
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certain representations of each Trust being true and complete on the Closing Date and consummation of the Reorganization in accordance with the Reorganization Agreement (without the waiver or modification of any terms or conditions thereof and without taking into account any amendment thereof that Counsel has not approved), for federal income tax purposes: (1) the Reorganization will qualify as a “reorganization” (as defined in Section 368(a)(1)(F) of the Code), and each Portfolio will be a “party to a reorganization” (within the meaning of Section 368(b) of the Code); (2) neither Portfolio will recognize any gain or loss on the Reorganization; (3) an Acquired Portfolio shareholder will not recognize any gain or loss on the exchange of its Acquired Portfolio Shares for Acquiring Portfolio Shares; (4) an Acquired Portfolio shareholder’s aggregate tax basis in the Acquiring Portfolio Shares it receives pursuant to the Reorganization will be the same as the aggregate tax basis in its Acquired Portfolio Shares it actually or constructively surrenders in exchange for those Acquiring Portfolio shares, and its holding period for those Acquiring Portfolio shares will include, in each instance, its holding period for those Acquired Portfolio shares, provided the shareholder holds the latter as capital assets on the Closing Date; (5) the Acquiring Portfolio’s tax basis in each asset the Acquired Portfolio transfers to it will be the same as the Acquired Portfolio’s tax basis therein immediately before the Reorganization, and the Acquiring Portfolio’s holding period for each such asset will include the Acquired Portfolio’s holding period therefor (except where the Acquiring Portfolio’s investment activities have the effect of reducing or eliminating an asset’s holding period); and (6) for purposes of Section 381 of the Code, the Acquiring Portfolio will be treated just as its corresponding Acquired Portfolio would have been treated if there had been no Reorganization, with the consequences that (a) the Reorganization will not result in the termination of the Acquired Portfolio’s taxable year, (b) the Acquired Portfolio’s tax attributes enumerated in Section 381(c) of the Code will be taken into account by the Acquiring Portfolio as if there had been no Reorganization, and (c) the part of the Acquired Portfolio’s taxable year before the Reorganization will be included in the Acquiring Portfolio’s taxable year after the Reorganization. Notwithstanding clauses (2) and (3), such opinion may state that no opinion is expressed as to the effect of each Reorganization on the Portfolios participating therein or the participating Acquired Portfolio’s shareholders with respect to any transferred asset as to which any unrealized gain or loss is required to be recognized for federal income tax purposes at the end of a taxable year under a mark-to-market system of accounting.
Contractholders who had premiums or contributions allocated to the investment divisions of the Separate Accounts that are invested in Acquired Portfolio Shares generally will not recognize any gain or loss as a result of a Reorganization. The Trusts will receive an opinion from Counsel that, assuming the variable contracts and the insurance companies issuing them are properly structured under the insurance company provisions of section 817(d) of the Code, and the ownership of shares in the Portfolios and access to the Portfolios satisfy the requirements of Treasury Regulations section 1.817-5(f) and the so-called investor control rules, the Reorganizations will not be taxable events for Contractholders whose contract values are determined by investment in Acquired Portfolio Shares. For purposes of rendering its opinion, Counsel may rely exclusively and without independent verification, as to factual matters, on the statements made in the Reorganization Agreements, this Proxy Statement/Prospectus and related Statement of Additional Information, and on such other written representations as will have been verified as of the Effective Time of each Reorganization.
As described above, each Acquiring Portfolio will succeed to certain tax attributes of its corresponding Acquired Portfolio, including capital loss carryforwards. Each Acquiring Portfolio may carryover and use capital losses of its corresponding Acquired Portfolio following the Reorganization. Although a Reorganization will not result in any limitations on the use of any such attributes, any limitations in effect with respect to an Acquired Portfolio at the time of a Reorganization, resulting from earlier transactions to which Sections 382/383 applied, will remain in effect. Capital losses that are carried forward will retain their character as either short-term or long-term capital losses.
If a Reorganization fails to meet the requirements of Code Section 368(a)(1), a Separate Account that is invested in shares of the Acquired Portfolio involved therein could realize a gain or loss on the transaction equal to the difference between its tax basis in those shares and the fair market value of the Acquiring Portfolio Shares it receives. Contractholders who had premiums or contributions allocated to the investment divisions of such Separate Account, however, will not recognize gain or loss.
The EQ Trust and the VIP Trust have not sought a tax ruling from the Service but instead are acting in reliance on the opinions of Counsel discussed above. Those opinions are not binding on the Service or the courts and
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do not preclude the Service from adopting a contrary position. Contractholders are urged to consult their tax advisers as to the specific consequences to them of the Reorganizations, including the applicability and effect of state, local, foreign and other taxes.
Description of the Securities to Be Issued in the Reorganizations
As shown in the “Summary” above, the shareholders of each Acquired Portfolio will receive Class IA, Class IB, or Class K shares, as applicable, of the corresponding Acquiring Portfolio in accordance with the procedures provided for in the Reorganization Agreement. Each such share will be fully paid and non-assessable by the EQ Trust when issued and will have no preemptive or conversion rights. The EQ Trust currently offers three classes of shares – Class IA, Class IB, and Class K shares. The EQ Trust has adopted, in the manner prescribed under Rule 12b-1 under the 1940 Act, a plan of distribution pertaining to the Class IA and Class IB shares, as applicable, of the Acquiring Portfolio. The maximum distribution and/or service (12b-1) fee for each Acquiring Portfolio’s Class IA and Class IB shares, as applicable, is equal to an annual rate of 0.25% of the average daily net assets attributable to such share class. Because these distribution/service fees are paid out of an Acquiring Portfolio’s assets on an ongoing basis, over time these fees will increase your cost of investing and may cost more than paying other types of charges.
Each Trust is organized as a Delaware statutory trust. As such, each Trust’s operations are governed by its Declaration of Trust and By-laws and applicable Delaware law. The operations of each Trust are also subject to the provisions of the 1940 Act and the rules and regulations thereunder. While the EQ Trust and the VIP Trust are governed by different organizational documents, including separate Declarations of Trust, the rights of shareholders of the Acquiring Portfolios are substantially similar to the rights of shareholders of the Acquired Portfolios. Each Trust’s Declaration of Trust disclaims shareholder liability for acts or obligations of the Trust or its portfolios (e.g., a Portfolio) and provides for indemnification from the portfolio’s property for all losses and expenses of any portfolio shareholder held personally liable for the obligations of the portfolio. Each Trust’s Declaration of Trust provides that the Board may establish portfolios and classes in addition to those currently established and that the Board may determine, in its sole discretion, the rights and preferences, limitations and restrictions, including qualifications for ownership, conversion and exchange features, minimum purchase and account size, expenses and charges, and other features of the portfolios and classes. Under each Trust’s Declaration of Trust, the share of each class of a portfolio represents an identical interest in the portfolio’s investment portfolio and has the same rights, privileges and preferences. Each Declaration of Trust provides that a class may differ, however, with respect to sales charges, if any, distribution and/or service fees, if any, other expenses allocable exclusively to each class, voting rights on matters exclusively affecting that class, and its exchange privilege and/or conversion features, if any. Under each Declaration of Trust, each share of a portfolio is entitled to participate equally in dividends, other distributions and the proceeds of any liquidation of the portfolio. Further, shareholder voting rights under each Declaration of Trust are substantially the same. Each Declaration of Trust provides for shareholder voting as required by the 1940 Act or other applicable laws, but otherwise permits, consistent with Delaware law, actions by the Trustees without seeking the consent of shareholders. Under each Declaration of Trust, shareholders of a portfolio are entitled to one vote for each full share held and fractional votes for fractional shares held. Voting rights are not cumulative and, as a result, the holders of more than 50% of all the shares of the portfolios in a Trust as a group may elect all of the Trustees of the Trust. Each Declaration of Trust provides that shares of a portfolio will be voted in the aggregate, except when a separate vote of the portfolio is required by law or when a matter involves an action that the Board has determined will affect only the interests of one or more portfolio or class. Each Declaration of Trust does not provide for annual meetings of the Trust. Each Declaration of Trust provides that any Trustee may be removed at any meeting of shareholders by a vote of at least two-thirds of the outstanding shares of the Trust. Each Declaration of Trust further provides for shareholder voting with respect to the election or removal of Trustees, amendments to the Declaration of Trust affecting shareholder voting rights, and with respect to such additional matters relating to the Trust as may be required by applicable law, the governing documents, or as the Trustees may consider necessary or desirable.
The primary differences between the Trusts’ Declarations of Trust include the following. The EQ Trust Declaration of Trust includes provisions limiting the scope of the Trustees’ fiduciary duties to the Trust, series or
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shareholders to those imposed by applicable federal law and those included in the Declaration of Trust. The VIP Trust Declaration of Trust does not include this limitation. The EQ Trust Declaration of Trust also states that ownership of shares shall not entitle the shareholders to any rights under any contract or agreement entered into by the Trust or any series, including, without limitation, any third-party beneficiary rights, privileges, claims or remedies. In addition, the EQ Trust Declaration of Trust provides that, prior to bringing a derivative action, a demand by no fewer than three unrelated shareholders must be made on the Trustees. The EQ Trust Declaration of Trust details information, certifications, undertakings and acknowledgements that must be included in the demand. The Trustees are not required to consider a demand that is not submitted in accordance with the requirements contained in the EQ Trust Declaration of Trust. The EQ Trust Declaration of Trust also requires that, in order to bring a derivative action, the complaining shareholders must be joined in the action by shareholders representing, at the time of the alleged wrongdoing, at the time of demand, and at the time the action is commenced, at least 5% of all shares issued or outstanding, or of the portfolios or classes to which such action relates if it does not relate to all portfolios and classes. The EQ Trust Declaration of Trust also provides that no shareholder may bring a direct action claiming injury as a shareholder of any portfolio or class thereof unless the shareholder has suffered an injury distinct from that suffered by shareholders of the portfolio or class, generally. A shareholder bringing a direct claim must be a shareholder of the portfolio or class against which the direct action is brought at the time of the injury complained of, or acquired the shares afterwards by operation of law from a person who was a shareholder at that time. The EQ Trust Declaration of Trust further requires that direct or derivative actions by shareholders against the Trust be brought only in the Court of Chancery of the State of Delaware to the extent there is subject matter jurisdiction in such court for the claims asserted or, if not, then in the Superior Court of the State of Delaware (the “Exclusive Jurisdictions”), and that the right to jury trial be waived to the fullest extent permitted by law. The VIP Trust Declaration of Trust does not include any corresponding provisions relating to derivative actions. The designation of Exclusive Jurisdictions in the EQ Trust Declaration of Trust may make it more expensive for a shareholder to bring a suit than if the shareholder were permitted to select another jurisdiction. Also, the designation of Exclusive Jurisdictions and the waiver of jury trials limit a shareholder’s ability to litigate a claim in the jurisdiction and in a manner that may be more convenient and favorable to the shareholder. The EQ Trust Declaration of Trust further provides that no provision of the Declaration of Trust is effective to waive rights under the 1940 Act, the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. With respect to shareholders’ rights to inspect the books and records of the Trust, the EQ Declaration of Trust provides that no shareholder shall have any right to inspect any books, records or other documents of the Trust or any series that are not publicly available, except (1) as conferred by the Trustees in their sole discretion and (2) that, upon reasonable demand for a purpose reasonably related to the shareholder’s ownership interest in a series and subject to such reasonable standards as may be established by the Trustees, a shareholder may inspect the current list of the name and last known address of each record owner of shares of the series of which the shareholder holds shares. The VIP Trust Declaration of Trust provides that the shareholders shall have such inspection rights as required by applicable law, and the VIP Trust By-laws provide that no shareholder shall have any right to inspect any account or book or document of the Trust except as conferred by law or otherwise by the Trustees or by resolution of the shareholders. In addition, the VIP Trust Declaration of Trust precludes the Trustees from making any changes to outstanding shares that would be materially adverse to shareholders. The EQ Trust Declaration of Trust does not include this limitation.
ADDITIONAL INFORMATION ABOUT THE ACQUIRING PORTFOLIOS
This section provides information about the EQ Trust, the Adviser, and the Sub-Advisers for the Acquiring Portfolios involved in the Reorganizations.
The EQ Trust is organized as a Delaware statutory trust and is registered with the SEC as an open-end management investment company. The EQ Trust’s Board is responsible for the overall management of the EQ Trust
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and its portfolios. The EQ Trust issues shares of beneficial interest that are currently divided among one hundred ten (110) Portfolios, forty-eight (48) of which are authorized to issue Class IA, Class IB and Class K shares, fifty-eight (58) of which are authorized to issue Class IB and Class K shares, and four (4) of which are authorized to issue Class K shares. This Proxy Statement/Prospectus describes the Class IA, Class IB and Class K shares of the New EQ Allocation Portfolios and the New EQ/Core Plus Bond Portfolio, and the Class IB and Class K shares of the New Target Allocation Portfolios.
EIM, 1290 Avenue of the Americas, New York, New York 10104, is the Adviser to each Acquired Portfolio and each Acquiring Portfolio. EIM is registered with the SEC as an investment adviser under the 1940 Act. EIM also is registered with the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator (“CPO”) under the Commodity Exchange Act, as amended, and serves as a CPO with respect to certain portfolios of the Trust; however, EIM currently claims an exclusion (under CFTC Rule 4.5) from registration as a CPO with respect to each Acquired Portfolio and Acquiring Portfolio. Being subject to dual regulation by the SEC and the CFTC may increase compliance costs and may affect Portfolio returns. EIM is a wholly owned subsidiary of Equitable Financial Life Insurance Company (“Equitable Financial”). Equitable Financial is an indirect wholly-owned subsidiary of Equitable Holdings, Inc. (“Equitable Holdings”), which is a publicly-owned company. EIM serves as the investment adviser to mutual funds and other pooled investment vehicles and had approximately $105.0 billion in assets under management as of December 31, 2022. The EQ Trust is part of a fund complex that also includes the VIP Trust, for which the Adviser serves as investment adviser, and 1290 Funds, for which Equitable Investment Management, LLC, an affiliate of the Adviser, serves as investment adviser.
New EQ Allocation Portfolios and New Target Allocation Portfolios
The Adviser has a variety of responsibilities for the general management and administration of the Trust and the day-to-day management of the Acquiring Portfolios. In addition to its managerial responsibilities, the Adviser also is responsible for determining the asset mix and/or asset allocation ranges for the Acquiring Portfolios, as applicable, and ensuring that the allocations are consistent with the guidelines that have been approved by the Board. Within the asset allocation range for the Acquiring Portfolios, the Adviser will periodically establish specific percentage targets for each asset class and asset category and identify the specific Underlying Portfolios to be held by a Portfolio using the Adviser’s proprietary investment process, based on fundamental research regarding the investment characteristics of the asset classes, asset categories and Underlying Portfolios, as well as its outlook for the economy and financial markets. The Adviser also will rebalance each Acquiring Portfolio’s holdings through its selection of Underlying Portfolios as deemed necessary to bring the asset allocation of a Portfolio back into alignment with its asset allocation range.
Kenneth T. Kozlowski, CFP®, CLU, ChFC, Alwi Chan, CFA®, and Xavier Poutas, CFA® are responsible for the day-to-day management of each New EQ Allocation Portfolio. Messrs. Kozlowski, Chan, and Poutas and Miao Hu, CFA® and Kevin McCarthy are responsible for the day-to-day management of each New Target Allocation Portfolio.
Kenneth T. Kozlowski has served as Executive Vice President and Chief Investment Officer of EIM since June 2012 and as Signatory Officer of Equitable Financial since November 2021. He has been an employee of Equitable Financial since 1999.
Alwi Chan has served as Senior Vice President and Deputy Chief Investment Officer of EIM since June 2012. He has been an employee of Equitable Financial since 1999.
Mr. Poutas has served as an Assistant Portfolio Manager of EIM since May 2011, and as a Vice President of EIM since June 2016. He joined EIM in October 2004 as a Fund Administrator and was involved in the implementation of the asset allocation strategy for the funds of funds managed by EIM. He has been an employee of Equitable Financial since August 2002.
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Ms. Hu has served as an Assistant Portfolio Manager of EIM since May 2016 and as a Vice President of EIM since June 2016. She has served as a Director of Portfolio Analytics of EIM since December 2014. She has been an employee of Equitable Financial since November 2013.
Mr. McCarthy has served as an Assistant Portfolio Manager of EIM since December 2018 and as a Vice President of EIM since July 2022. He is a manager of the asset allocation strategy for the funds of funds managed by EIM. He has been an employee of Equitable Financial since August 2015.
Information about the portfolio managers’ compensation, other accounts they manage and their ownership of securities in the Acquiring Portfolios is available in the Statement of Additional Information relating to this Proxy Statement/Prospectus.
The Adviser provides day-to-day management of the Acquiring Portfolios. The Adviser has the ability to hire investment sub-advisers (“Sub-Advisers”) to provide research, stock selection, and trading services for the Portfolios, although the Portfolios do not currently have Sub-Advisers. The Adviser has been granted relief by the SEC to hire, terminate and replace Sub-Advisers to the Portfolios and to amend sub-advisory agreements without obtaining shareholder approval, subject to the approval of the Trust’s Board. In addition, the Adviser has the ability to allocate a Portfolio’s assets to additional Sub-Advisers, subject to approval of the Trust’s Board. The Adviser also has discretion to allocate a Portfolio’s assets among its current Sub-Advisers, if any. If a Sub-Adviser is retained for a Portfolio, the shareholders of the Portfolio would receive notice of such action. However, the Adviser may not enter into a sub-advisory agreement on behalf of a Portfolio with an “affiliated person” of the Adviser (as that term is defined in the Investment Company Act of 1940, as amended (“1940 Act”)) (“Affiliated Sub-Adviser”), such as AllianceBernstein L.P., unless the sub-advisory agreement with the Affiliated Sub-Adviser, including compensation, is also approved by the affected Portfolio’s shareholders. The relief does not extend to any increase in the advisory fee paid by a Portfolio to the Adviser; any such increase would be subject to the approval of the affected Portfolio’s shareholders.
The Underlying Portfolios are managed either by the Adviser or by the Administrator. In its capacity as the adviser for an Underlying Portfolio, the Adviser or the Administrator, as the case may be, may hire Sub-Advisers to provide research, stock selection, and trading services for the Underlying Portfolio, and is responsible for overseeing such Sub-Advisers and for recommending their hiring, termination and replacement to the Underlying Portfolio’s Board of Trustees. The Adviser and the Administrator have been granted relief by the SEC to hire, terminate and replace Sub-Advisers to an Underlying Portfolio and to amend sub-advisory agreements without obtaining shareholder approval, subject to the approval of the Underlying Portfolio’s Board of Trustees. In addition, the Adviser or the Administrator, as the case may be, has the ability to allocate an Underlying Portfolio’s assets to additional Sub-Advisers, subject to approval of the Underlying Portfolio’s Board of Trustees. The Adviser or the Administrator, as the case may be, also has discretion to allocate an Underlying Portfolio’s assets among its current Sub-Advisers, if any. If a new Sub-Adviser is retained for an Underlying Portfolio, the shareholders of the Underlying Portfolio would receive notice of such action. However, the Adviser or the Administrator, as the case may be, may not enter into a sub-advisory agreement on behalf of an Underlying Portfolio with an Affiliated Sub-Adviser, such as AllianceBernstein L.P., unless the sub-advisory agreement with the Affiliated Sub-Adviser, including compensation, is also approved by the affected Underlying Portfolio’s shareholders. The relief does not extend to any increase in the advisory fee paid by an Underlying Portfolio to the Adviser or the Administrator, as the case may be; any such increase would be subject to the approval of the affected Underlying Portfolio’s shareholders.
As noted in the prospectuses for the Underlying Portfolios, the Adviser and, in certain cases, its affiliates, serve as investment adviser, investment sub-adviser and/or administrator for the Underlying Portfolios and earn fees for providing services in these capacities, which are in addition to the fees directly associated with an Acquiring Portfolio. In this connection, the Adviser’s selection of Underlying Portfolios may have a positive or negative impact on its or its affiliates’ revenues and/or profits.
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New EQ/Core Plus Bond Portfolio
The Adviser provides or oversees the provision of all investment advisory, portfolio management, and administrative services to the New EQ/Core Plus Bond Portfolio. The Adviser has supervisory responsibility for the management and investment of the New EQ/Core Plus Bond Portfolio’s assets and develops the investment objectives and investment policies for the Portfolio. The Adviser also has full discretion to make all determinations with respect to the investment of the New EQ/Core Plus Bond Portfolio’s assets that are not then managed by a Sub-Adviser. As further discussed below, the Adviser’s management responsibilities include the selection and monitoring of Sub-Advisers.
The Adviser is responsible for overseeing Sub-Advisers for the New EQ/Core Plus Bond Portfolio and recommending their hiring, termination and replacement to the EQ Trust’s Board. The Adviser selects Sub-Advisers to manage the New EQ/Core Plus Bond Portfolio’s assets by utilizing a due diligence process covering a number of key factors which include, but are not limited to, the Sub-Adviser’s reputation, organizational stability, investment personnel, long-term performance, investment philosophy and style and correlation with other Sub-Advisers retained for other allocated portions of the Portfolio.
The Adviser plays an active role in monitoring the New EQ/Core Plus Bond Portfolio and each Sub-Adviser and uses portfolio analytics systems to strengthen its evaluation of performance, style, risk levels, diversification and other criteria. The Adviser also monitors each Sub-Adviser’s portfolio management team to determine whether its investment activities remain consistent with the New EQ/Core Plus Bond Portfolio’s investment style and objectives.
Beyond performance analysis, the Adviser monitors significant changes that may impact a Sub-Adviser’s overall business. The Adviser monitors continuity in each Sub-Adviser’s operations and changes in investment personnel and senior management. The Adviser performs due diligence reviews with each Sub-Adviser no less frequently than annually.
The Adviser obtains detailed, comprehensive information concerning Portfolio and Sub-Adviser performance and Portfolio operations that is used to supervise and monitor the Sub-Advisers and Portfolio operations. The Adviser has a team responsible for conducting ongoing investment reviews with each Sub-Adviser and for developing the criteria by which performance is measured.
The Adviser selects Sub-Advisers from a pool of candidates, including its affiliates, to manage the New EQ/Core Plus Bond Portfolio. The Adviser may hire, terminate and replace Sub-Advisers and amend sub-advisory agreements subject to the approval of the EQ Trust’s Board. The Adviser also may allocate the New EQ/Core Plus Bond Portfolio’s assets to additional Sub-Advisers subject to the approval of the EQ Trust’s Board and has discretion to allocate the Portfolio’s assets among its current Sub-Advisers. The Adviser recommends Sub-Advisers for the New EQ/Core Plus Bond Portfolio to the EQ Trust’s Board based upon its continuing quantitative and qualitative evaluation of each Sub-Adviser’s skills in managing assets pursuant to specific investment styles and strategies. Short-term investment performance, by itself, is not a significant factor in selecting or terminating a Sub-Adviser, and the Adviser does not expect to recommend frequent changes of Sub-Advisers.
If the Adviser hires, terminates or replaces a Sub-Adviser to the New EQ/Core Plus Bond Portfolio (or a portion thereof) or adjusts the asset allocation among Sub-Advisers to the Portfolio, the Portfolio may experience a period of transition during which the securities held in the Portfolio may be repositioned in connection with the change in Sub-Adviser. The New EQ/Core Plus Bond Portfolio may not pursue its principal investment strategies during such a transition period and may incur increased brokerage commissions and other transaction costs in connection with the change. Generally, transitions may be implemented before or after the effective date of the new Sub-Adviser’s appointment as a sub-adviser to the Portfolio, and may be completed in several days to several weeks, depending on the particular circumstances of the transition. In addition, the past performance of the New EQ/Core Plus Bond Portfolio is not an indication of future performance. This may be particularly true for any Portfolio that has undergone Sub-Adviser changes and/or changes to its investment objectives or policies.
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EIM investment personnel are primarily responsible for the selection, monitoring and oversight of the New EQ/Core Plus Bond Portfolio’s Sub-Advisers:
Kenneth T. Kozlowski, CFP®, ChFC, CLU has served as Executive Vice President and Chief Investment Officer of EIM since June 2012 and as Signatory Officer of Equitable Financial since November 2021. He has been an employee of Equitable Financial since 1999.
Alwi Chan, CFA® has served as Senior Vice President and Deputy Chief Investment Officer of EIM since June 2012. He has been an employee of Equitable Financial since 1999.
Information about the portfolio managers’ compensation, other accounts they manage and their ownership of securities in the New EQ/Core Bond Portfolio is available in the Statement of Additional Information relating to this Proxy Statement/Prospectus.
The Adviser has been granted relief from the SEC that permits the Adviser, subject to the approval of the EQ Trust’s Board, to hire, terminate and replace Sub-Advisers and to amend sub-advisory agreements between the Adviser and the Sub-Advisers without obtaining shareholder approval. If a new Sub-Adviser is retained for the New EQ/Core Plus Bond Portfolio, the shareholders of the Portfolio would receive notice of such action. However, the Adviser may not enter into a sub-advisory agreement with an “affiliated person” of the Adviser (as that term is defined in the 1940 Act) (“Affiliated Sub-Adviser”), such as AllianceBernstein L.P., unless the sub-advisory agreement with the Affiliated Sub-Adviser, including compensation, is also approved by the Portfolio’s shareholders. The relief does not extend to any increase in the advisory fee paid by the Portfolio to the Adviser; any such increase would be subject to the approval of the Portfolio’s shareholders.
Each Acquiring Portfolio will pay a fee to EIM for advisory services. Each Acquiring Portfolio is newly created and has not had any operations to date. The following tables show the contractual rate of the advisory fee (as a percentage of the Portfolio’s average daily net assets) that will be payable by each Acquiring Portfolio, which is the same contractual advisory fee schedule currently in effect for its corresponding Acquired Portfolio.
Acquiring Portfolio | First $1 Billion | Next $1 Billion | Next $3 Billion | Next $4 Billion | Next $3 Billion | Thereafter | ||||||||||||||||||
New EQ/Aggressive Allocation Portfolio | 0.100% | 0.0925% | 0.0900% | 0.0875% | 0.0825% | 0.0800% | ||||||||||||||||||
New EQ/Conservative Allocation Portfolio | 0.100% | 0.0925% | 0.0900% | 0.0875% | 0.0825% | 0.0800% | ||||||||||||||||||
New EQ/Conservative-Plus Allocation Portfolio | 0.100% | 0.0925% | 0.0900% | 0.0875% | 0.0825% | 0.0800% | ||||||||||||||||||
New EQ/Moderate Allocation Portfolio | 0.100% | 0.0925% | 0.0900% | 0.0875% | 0.0825% | 0.0800% | ||||||||||||||||||
New EQ/Moderate-Plus Allocation Portfolio | 0.100% | 0.0925% | 0.0900% | 0.0875% | 0.0825% | 0.0800% | ||||||||||||||||||
Acquiring Portfolio | All Assets | |||||||||||||||||||||||
New Target 2015 Allocation Portfolio | 0.100% | |||||||||||||||||||||||
New Target 2025 Allocation Portfolio | 0.100% | |||||||||||||||||||||||
New Target 2035 Allocation Portfolio | 0.100% | |||||||||||||||||||||||
New Target 2045 Allocation Portfolio | 0.100% | |||||||||||||||||||||||
New Target 2055 Allocation Portfolio | 0.100% |
Acquiring Portfolio | First $750 Million | Next $750 Million | Next $1 Billion | Next $2.5 Billion | Thereafter | |||||||||||||||
New EQ/Core Plus Bond Portfolio | 0.600% | 0.580% | 0.560% | 0.540% | 0.530% |
A discussion of the basis for the decision by the Board of the EQ Trust to approve the investment advisory and, as applicable, sub-advisory agreements with respect to each Acquiring Portfolio will be available in the EQ Trust’s Annual Report to Shareholders for the period ending December 31, 2023.
Each Sub-Adviser to the New EQ/Core Plus Bond Portfolio is paid by the Adviser. Changes to the sub-advisory fees may be negotiated, which could result in an increase or a decrease in the amount of the advisory fee retained by the Adviser, without shareholder approval. However, any amendment to the investment advisory agreement between the Adviser and the Trust that would result in an increase in the advisory fee rate specified in that agreement (i.e., the aggregate advisory fee) charged to the Portfolio will be submitted to shareholders for approval.
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Equitable Investment Management, LLC (the “Administrator”), an affiliate of the Adviser, serves as the administrator of the EQ Trust. The administrative services provided to the EQ Trust by the Administrator include, among others, coordination of the EQ Trust’s audit, financial statements and tax returns; expense management and budgeting; legal administrative services and compliance monitoring; portfolio accounting services, including daily net asset value accounting; operational risk management; and assistance with the administration of the EQ Trust’s proxy voting policies and procedures and anti-money laundering program. For these administrative services, each Acquiring Portfolio pays the Administrator its proportionate share of an asset-based administration fee of 0.140% of the first $60 billion of the aggregate average daily net assets of the Aggregated Portfolios (as defined in the paragraph immediately below); 0.110% of the next $20 billion; 0.0875% of the next $20 billion; 0.0775% of the next $20 billion; 0.0750% of the next $20 billion; and 0.0725% thereafter. The asset-based administration fee is calculated and billed monthly, and each Acquiring Portfolio is subject to a minimum annual fee of $32,500.
For purposes of calculating the asset-based administration fee, the assets of the Acquiring Portfolios are aggregated together and with the assets of the following portfolios, each of which is a series of the EQ Trust and is also managed by EIM: EQ/Global Equity Managed Volatility Portfolio, EQ/International Core Managed Volatility Portfolio, EQ/International Value Managed Volatility Portfolio, EQ/Large Cap Core Managed Volatility Portfolio, EQ/Large Cap Growth Managed Volatility Portfolio, EQ/Large Cap Value Managed Volatility Portfolio, EQ/Mid Cap Value Managed Volatility Portfolio, EQ/AB Small Cap Growth Portfolio, EQ/Franklin Small Cap Value Managed Volatility Portfolio, EQ/Morgan Stanley Small Cap Growth Portfolio, EQ/ClearBridge Select Equity Managed Volatility Portfolio, EQ/Emerging Markets Equity PLUS Portfolio, EQ/Quality Bond PLUS Portfolio, Multimanager Aggressive Equity Portfolio, Multimanager Core Bond Portfolio, Multimanager Technology Portfolio, 1290 VT Small Cap Value Portfolio, 1290 VT Micro Cap Portfolio, 1290 VT High Yield Bond Portfolio, 1290 VT Moderate Growth Allocation Portfolio, EQ/AB Dynamic Aggressive Growth Portfolio, EQ/AB Dynamic Growth Portfolio, EQ/AB Dynamic Moderate Growth Portfolio, EQ/Goldman Sachs Moderate Growth Allocation Portfolio, EQ/Invesco Moderate Allocation Portfolio, EQ/JPMorgan Growth Allocation Portfolio, EQ/Franklin Moderate Allocation Portfolio, EQ/American Century Moderate Growth Allocation Portfolio, EQ/Goldman Sachs Growth Allocation Portfolio, EQ/Invesco Moderate Growth Allocation Portfolio, EQ/Ultra Conservative Strategy Portfolio, EQ/Conservative Strategy Portfolio, EQ/Conservative Growth Strategy Portfolio, EQ/Balanced Strategy Portfolio, EQ/Moderate Growth Strategy Portfolio, EQ/Growth Strategy Portfolio, EQ/Aggressive Growth Strategy Portfolio, EQ/All Asset Growth Allocation Portfolio, Equitable Conservative Growth MF/ETF Portfolio, Equitable Growth MF/ETF Portfolio, Equitable Moderate Growth MF/ETF Portfolio, ATM International Managed Volatility Portfolio, ATM Large Cap Managed Volatility Portfolio, ATM Mid Cap Managed Volatility Portfolio, ATM Small Cap Managed Volatility Portfolio, EQ/2000 Managed Volatility Portfolio, EQ/400 Managed Volatility Portfolio, EQ/500 Managed Volatility Portfolio, and EQ/International Managed Volatility Portfolio (collectively, the “Aggregated Portfolios”).
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In the interest of limiting through April 30, 2025 (unless the Board of Trustees of the EQ Trust consents to an earlier revision or termination of this arrangement) the expenses of each Acquiring Portfolio, the Adviser has entered into an expense limitation agreement with the EQ Trust with respect to each Acquiring Portfolio (the “Expense Limitation Arrangement”). Pursuant to the Expense Limitation Arrangement, the Adviser has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of each Acquiring Portfolio so that the annual operating expenses (including acquired fund fees and expenses) of the Acquiring Portfolio (exclusive of interest, taxes, brokerage commissions, dividend and interest expenses on securities sold short, capitalized expenses, and extraordinary expenses) do not exceed the following annualized rates:
Maximum Annual Operating Expense Limit (% of average daily net assets)* | ||||||||||||
Acquiring Portfolios | Class IA+ | Class IB+ | Class K | |||||||||
New EQ/Conservative Allocation Portfolio | 1.00% | 1.00% | 0.75% | |||||||||
New EQ/Conservative-Plus Allocation Portfolio | 1.10% | 1.10% | 0.85% | |||||||||
New EQ/Moderate Allocation Portfolio | 1.15% | 1.15% | 0.90% | |||||||||
New EQ/Moderate-Plus Allocation Portfolio | 1.20% | 1.20% | 0.95% | |||||||||
New EQ/Aggressive Allocation Portfolio | 1.25% | 1.25% | 1.00% | |||||||||
New Target 2015 Allocation Portfolio | N/A | 1.10% | 0.85% | |||||||||
New Target 2025 Allocation Portfolio | N/A | 1.10% | 0.85% | |||||||||
New Target 2035 Allocation Portfolio | N/A | 1.10% | 0.85% | |||||||||
New Target 2045 Allocation Portfolio | N/A | 1.10% | 0.85% | |||||||||
New Target 2055 Allocation Portfolio | N/A | 1.10% | 0.85% | |||||||||
New EQ/Core Plus Bond Portfolio | 0.93% | 0.93% | 0.68% |
* | For purposes of calculating the maximum annual operating expense limit, acquired fund fees and expenses are included in annual operating expenses. |
+ | Includes amounts payable pursuant to Rule 12b-1 Plan. |
N/A | This class of shares of the Acquiring Portfolio is not registered. |
The Expense Limitation Arrangement may be terminated by EIM at any time after April 30, 2025. The Adviser may be reimbursed the amount of any such payments and waivers (including any such payments or waivers with respect to an Acquired Portfolio prior to the Reorganization) made after June 30, 2020, in the future provided that the payments or waivers are reimbursed within three years of the payment or waiver being made and an Acquiring Portfolio’s expense ratio, after the reimbursement is taken into account, does not exceed the Acquiring Portfolio’s expense cap at the time of the waiver or the Acquiring Portfolio’s expense cap at the time of the reimbursement, whichever is lower. If the actual expense ratio is less than the expense cap and the Adviser has recouped any eligible previous payments made, the Acquiring Portfolio will be charged such lower expenses.
The Sub-Advisers of the New EQ/Core Plus Bond Portfolio
Investments for the New EQ/Core Plus Bond Portfolio are selected by its Sub-Advisers. The following table describes the Portfolio’s Sub-Advisers and portfolio managers and each portfolio manager’s business experience. Information about the portfolio managers’ compensation, other accounts they manage and their ownership of securities of the Portfolio is available in the Statement of Additional Information relating to this Proxy Statement/Prospectus.
Acquiring Portfolio | Sub-Advisers and Portfolio Managers | Business Experience | ||
New EQ/Core Plus Bond Portfolio | AXA Investment Managers US Inc. 100 W. Putnam Avenue 3rd Floor Greenwich, CT 06830
Portfolio Managers Michael Graham Robert Houle | Michael Graham is the Head of U.S. High Yield and a Senior U.S. High Yield Portfolio Manager at AXA IM. Since joining AXA IM in 2007, Mr. Graham has held various leadership roles within the U.S. High Yield team. |
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Acquiring Portfolio | Sub-Advisers and Portfolio Managers | Business Experience | ||
Robert Houle is a Senior U.S. High Yield Portfolio Manager at AXA IM. Prior to joining AXA IM in 2005 as a U.S. high yield analyst, Mr. Houle was a trader at Lehman Brothers. | ||||
Brandywine Global Investment Management, LLC 1735 Market Street Philadelphia, PA 19103
Portfolio Managers Anujeet Sareen Brian Kloss Tracy Chen | Anujeet Sareen is a portfolio manager for Brandywine Global’s global fixed income and related strategies. Prior to joining Brandywine Global in 2016, Mr. Sareen was employed at Wellington Management since 1994 where he served as a managing director of global fixed income and a global macro strategist, as well as Chair of the Currency Strategy Group.
Brian L. Kloss is a portfolio manager and head of high yield for Brandywine Global. Brian joined Brandywine Global in December 2009, bringing with him over 10 years of high yield and distressed debt experience. Previously, Brian was co-portfolio manager at Dreman Value Management, LLC (2007-2009); high yield analyst/trader at Gartmore Global Investments (2002-2007); high yield and equity portfolio manager and general analyst at Penn Capital Management, Ltd. (2000-2002); an analyst with The Concord Advisory Group, Ltd. (1998-2000); and an international tax consultant with Deloitte & Touche LLP (1995-1998). Brian earned his J.D. from Villanova School of Law and graduated summa cum laude with B.S. in Accounting from University of Scranton. He is also a member of the New Jersey and Pennsylvania Bar and is a Pennsylvania Certified Public Accountant.
Tracy Chen is a portfolio manager and head of Structured Credit for Brandywine Global. Tracy is responsible for conducting credit analysis on mortgage-backed securities (MBS) with special emphasis on collateralized mortgage obligations (CMOs), collateralized loan obligations (CLOs) and other structured products. She also monitors and analyzes the investment merits of global corporate debt issues. She joined the firm in August 2008. Prior to joining Brandywine Global, she was with UBS Investment Bank as director of the fixed income valuation group (2006-2008), GMAC Mortgage Group as a mortgage pricing analyst (2003-2006), Deloitte Consulting as a senior corporate strategy consultant (2001-2003), and J&A Securities Ltd. in Shenzhen, China, as an international corporate finance associate (1995-1999). |
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Acquiring Portfolio | Sub-Advisers and Portfolio Managers | Business Experience | ||
Loomis, Sayles & Company, L.P. One Financial Center Boston, MA 02111
Portfolio Managers Christopher T. Harms Clifton V. Rowe Daniel Conklin Ian Anderson Barath Sankaran | Christopher T. Harms is a Vice President of Loomis Sayles, portfolio manager for the Loomis Sayles fixed income group and co-head of the relative return team. He co-manages the Loomis Sayles Limited Term Government & Agency and Intermediate Duration Bond funds, in addition to the Natixis Loomis Sayles Short Duration Income ETF. He also co-manages the Loomis Sayles Core, Intermediate Duration and Short Duration Fixed Income strategies. Mr. Harms joined Loomis Sayles in 2010 and has 42 years of investment industry experience. He earned a BSBA from Villanova University and an MBA from Drexel University.
Clifton V. Rowe is a Vice President of Loomis Sayles and portfolio manager for the Loomis Sayles fixed income team and the mortgage and structured finance team. He co-manages the Loomis Sayles Limited Term Government & Agency and Intermediate Duration Bond funds, in addition to the Natixis Loomis Sayles Short Duration Income ETF. He also co-manages the Loomis Sayles Core, Short Duration Fixed Income, and Intermediate Duration strategies. Mr. Rowe joined Loomis Sayles in 1992 and has 30 years of investment industry experience. He earned a BBA from James Madison University and an MBA from the University of Chicago.
Daniel Conklin is a Vice President of Loomis Sayles and a portfolio manager for the relative return team. He co-manages the Loomis Sayles Intermediate Duration Bond and Limited Term Government & Agency funds, as well as the Natixis Loomis Sayles Short Duration Income ETF. He also co-manages the Loomis Sayles Core Fixed Income, Short Duration Fixed Income and Intermediate Duration Fixed Income strategies. Mr. Conklin joined Loomis Sayles in 2012 and has 12 years of investment industry experience. He earned a BS from the University of Massachusetts, Lowell and an MS in Finance from Northeastern University.
Ian Anderson is the agency MBS strategist for the mortgage and structured finance team at Loomis Sayles where he is responsible for developing agency MBS research and relative value recommendations across all fixed income products. He joined the firm in 2011.
Barath Sankaran, CFA® is a member of the mortgage and structured finance team at Loomis Sayles. He joined the firm in 2009. |
Portfolio Distribution Arrangements
Equitable Distributors, LLC (“Equitable Distributors”) serves as the distributor for the Class IA, Class IB and Class K shares of the EQ Trust. Each class of shares is offered and redeemed at its net asset value without any sales load. Equitable Distributors is an affiliate of EIM. Equitable Distributors is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended, and is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”).
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The EQ Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act for the Trust’s Class IA and Class IB shares (“Distribution Plan”). Under the Distribution Plan, the Class IA and Class IB shares of the EQ Trust are charged a distribution and/or service (12b-1) fee to compensate Equitable Distributors for promoting, selling and servicing shares of the portfolios of the Trust. The distribution and/or service (12b-1) fee may be retained by Equitable Distributors or used to pay financial intermediaries for similar services. The maximum distribution and/or service (12b-1) fee for an Acquiring Portfolio’s Class IA and Class IB shares is equal to an annual rate of 0.25% of the average daily net assets of the Acquiring Portfolio attributable to Class IA and Class IB shares. Because these fees are paid out of an Acquiring Portfolio’s assets on an ongoing basis, over time, the fees for Class IA and Class IB shares will increase your cost of investing and may cost you more than other types of charges.
Equitable Distributors also may receive payments from certain Sub-Advisers of an Acquiring Portfolio or their affiliates to help defray expenses for sales meetings or seminar sponsorships that may relate to the Contracts and/or the Acquiring Portfolio. These sales meetings or seminar sponsorships may provide the Sub-Advisers with increased access to persons involved in the distribution of the Contracts. Equitable Distributors also may receive other marketing support from the Sub-Advisers in connection with the distribution of the Contracts. These payments may provide an incentive to the Adviser in selecting one Sub-Adviser over another or a disincentive for the Adviser to recommend the termination of such Sub-Advisers.
Payments to Broker-Dealers and Other Financial Intermediaries
The Acquiring Portfolios are not sold directly to the general public but instead are offered as underlying investment options for Contracts and to other eligible investors. The Acquiring Portfolios and the Adviser and its affiliates may make payments to sponsoring insurance companies (and their affiliates) or other financial intermediaries for distribution and/or other services. These payments create a conflict of interest by influencing an insurance company or other financial intermediary and your financial adviser to recommend an Acquiring Portfolio over another investment or by influencing an insurance company to include an Acquiring Portfolio as an underlying investment option in the Contract. The prospectus (or other offering document) for your Contract may contain additional information about these payments. Ask your financial adviser or visit your financial intermediary’s website for more information.
The Acquiring Portfolios’ shares are currently sold only to insurance company separate accounts in connection with Contracts issued or to be issued by Equitable Financial or other affiliated or unaffiliated insurance companies and The Equitable 401(k) Plan. The Acquiring Portfolios’ shares also may be sold to other portfolios managed by EIM that currently sell their shares to such accounts and to other investors eligible under applicable federal tax regulations. Class K shares of the Acquiring Portfolios may be sold only to other portfolios of the Trusts and certain group annuity plans.
The Acquiring Portfolios do not have minimum initial or subsequent investment requirements. Shares of the Acquiring Portfolios are redeemable on any business day (normally any day on which the New York Stock Exchange (the “NYSE”) is open) upon receipt of a request. All redemption requests will be processed and payment with respect thereto will normally be made within seven days after tender. Please refer to your Contract prospectus for more information on purchasing and redeeming shares of the Acquiring Portfolios.
All shares are purchased and sold at their net asset value without any sales load. The price at which a purchase or sale is effected is based on the next calculation of net asset value after an order is received and accepted by an Acquiring Portfolio or its designated agent. All redemption requests will be processed and payment with respect thereto will normally be made within seven days after tender. The Acquiring Portfolios typically expect to meet redemption requests by paying out available cash or proceeds from selling portfolio holdings, which may include cash equivalent portfolio holdings. Redemption methods also may include redeeming in kind under
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appropriate circumstances, such as in connection with transactions involving the substitution of shares of one Portfolio (the replacement portfolio) for shares of another Portfolio (the replaced portfolio) held by insurance company separate accounts to fund Contracts.
The Acquiring Portfolios reserve the right to suspend or change the terms of purchasing shares. The EQ Trust may suspend the right of redemption for any period or postpone payment for more than seven days when the NYSE is closed (other than a weekend or holiday) or when trading is restricted by the SEC or the SEC declares that an emergency exists. Redemptions also may be suspended and payments may be postponed for more than seven days during other periods permitted by the SEC. An Acquiring Portfolio may pay the redemption price in whole or part by a distribution in kind of readily marketable securities in lieu of cash or may take up to seven days to pay a redemption request in order to raise capital, when it is detrimental for the Acquiring Portfolio to make cash payments as determined in the sole discretion of EIM.
The EQ Trust, on behalf of each Acquiring Portfolio, believes that it is in the best interests of their long-term investors to discourage frequent purchases, redemptions, exchanges and transfers (referred to collectively as “frequent trading”) of Acquiring Portfolio shares. If you intend to trade frequently and/or use market timing investment strategies, you should not purchase these Acquiring Portfolios.
Frequent trading of Acquiring Portfolio shares, including market timing and other program trading or short-term trading strategies, may be disruptive to the Acquiring Portfolios. Frequent trading may adversely affect Acquiring Portfolio performance and the interests of long-term investors by, among other things, requiring an Acquiring Portfolio to maintain larger amounts of cash or to liquidate portfolio holdings at a disadvantageous time or price. For example, when market timing occurs, an Acquiring Portfolio may have to sell its holdings to have the cash necessary to redeem the market timer’s shares. This can happen when it is not advantageous to sell any securities, so the Acquiring Portfolio’s performance may be hurt. When large dollar amounts are involved, frequent trading can also make it difficult to use long-term investment strategies because an Acquiring Portfolio cannot predict how much cash it will have to invest, and the Acquiring Portfolio’s portfolio management team may have to allocate a significant amount of assets to cash and other short-term investments or sell investments, rather than maintaining investments selected to achieve the Acquiring Portfolio’s investment objective. In addition, frequent trading of Acquiring Portfolio shares may impede efficient portfolio management and impose increased transaction costs, such as brokerage costs, by requiring the portfolio manager to effect more frequent purchases and sales of portfolio securities. Similarly, an Acquiring Portfolio may bear increased administrative costs as a result of the asset level and investment volatility that accompanies patterns of frequent trading.
To the extent that an Acquiring Portfolio (or an Underlying Portfolio in which an Acquiring Portfolio invests) invests a significant portion of its assets in foreign securities, it will tend to be subject to the risks associated with market timing and short-term trading strategies to a greater extent than funds that do not. Securities trading in overseas markets presents time zone arbitrage opportunities when events affecting portfolio securities values occur after the close of the overseas market but prior to the close of the U.S. market. This short-term arbitrage activity can reduce the return received by long-term investors. The Acquiring Portfolios will seek to minimize these opportunities by using fair value pricing, as described in “How Shares are Priced” below.
In addition, to the extent that an Acquiring Portfolio (or an Underlying Portfolio in which an Acquiring Portfolio invests) invests in securities that are, or may be, restricted, unlisted, traded infrequently, thinly traded, or relatively illiquid, it also may be vulnerable to market timing and short-term trading strategies. Traders using such strategies may seek to take advantage of a possible differential between the last available market prices for one or more of those relatively illiquid securities that are used to calculate the value of the Acquiring Portfolio’s shares and the latest indications of market values for those securities. For example, high-yield securities may present opportunities for short-term trading strategies because the market for such securities may be less liquid than the market for higher quality securities, which could result in pricing inefficiencies. One of the objectives of the EQ Trust’s fair value pricing procedures, as described in “How Shares are Priced” below, is to minimize the possibilities of this type of arbitrage; however, there can be no assurance that the EQ Trust’s valuation procedures will be successful in eliminating it.
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The EQ Trust has adopted certain policies and procedures discussed below to discourage what it considers to be frequent trading. For Contractholders who have invested in shares of an Acquiring Portfolio through an insurance company separate account, frequent trading includes frequent transfers between the Portfolios available through the policy or contract. The EQ Trust and the Acquiring Portfolios discourage frequent trading of Acquiring Portfolio shares by Contractholders and will not make special arrangements to accommodate such trading. As a general matter, the EQ Trust and the Acquiring Portfolios reserve the right to reject any transfer request that they believe, in their sole discretion, is disruptive (or potentially disruptive) to the management of the Acquiring Portfolios.
If EIM, on behalf of the EQ Trust, determines that a Contractholder’s transfer patterns are disruptive to the Trust’s portfolios, EIM or an affiliate (including the Administrator) may, among other things, restrict the availability of personal telephone requests, facsimile transmissions, automated telephone services, internet services or any electronic transfer services. The Administrator is generally responsible for monitoring, testing and maintaining compliance policies, procedures and other items for the EQ Trust, and thus assists in monitoring the Trust’s compliance with applicable requirements pursuant to the policies and procedures described below. EIM or an affiliate may also refuse to act on transfer instructions of an agent acting under a power of attorney who is acting on behalf of more than one owner. In making these determinations, EIM or an affiliate may consider the combined transfer activity of Contracts that it believes are under common ownership, control or direction.
The EQ Trust currently considers transfers into and out of (or vice versa) an Acquiring Portfolio within a five-business day period as potentially disruptive trading activity. In order to reduce disruptive trading activity, the EQ Trust monitors the frequency of transfers, including the size of transfers in relation to portfolio assets, in each Acquiring Portfolio. The EQ Trust aggregates inflows and outflows for an Acquiring Portfolio on a daily basis. When a potentially disruptive transfer into or out of an Acquring Portfolio occurs on a day when the Acquiring Portfolio’s net inflows and outflows exceed an established monitoring threshold, EIM or an affiliate sends a letter to the Contractholder explaining that there is a policy against disruptive trading activity and that if such activity continues, EIM or an affiliate may take the actions described above to restrict the availability of voice, fax and automated transaction services. If such Contractholder is identified a second time as engaging in potentially disruptive trading activity, EIM or an affiliate currently will restrict the availability of voice, fax and automated transaction services. EIM or an affiliate currently will apply such action for the remaining life of each affected Contract. Because EIM or an affiliate exercises discretion in determining whether or not to take the actions discussed above, some Contractholders may be treated differently than others, resulting in the risk that some Contractholders may be able to engage in frequent transfer activity while others will bear the effect of the frequent transfer activity. Although Contractholders who have engaged in disruptive trading activity currently receive letters notifying them of EIM’s or an affiliate’s intention to restrict access to communication services, such letters may not continue to be provided in the future.
The policies and procedures described above also apply to retirement plan participants.
The policies and procedures described above do not apply to funds of funds managed by EIM. The EQ Trust generally does not consider trading activity by any funds of funds managed by EIM or trading activity associated with approved asset allocation programs to be disruptive trading activity.
The EQ Trust seeks to apply its policies and procedures to all Contractholders, including Contractholders whose accounts are held through any omnibus accounts, uniformly. It should be recognized, however, that such policies and procedures are subject to limitations:
• | There is no assurance that the methods described above will prevent frequent trading or other trading that may be deemed disruptive. The EQ Trust’s procedures do not eliminate the possibility that frequent trading will occur or that Acquiring Portfolio performance will be affected by such activity. |
• | The design of such policies and procedures involves inherently subjective judgments, which EIM and its affiliates, on behalf of the EQ Trust, seek to make in a fair and reasonable manner consistent with the interests of all Contractholders. |
• | The limits on the ability to monitor potentially disruptive trading mean that some Contractholders may be treated differently than others, resulting in the risk that some Contractholders may be able to engage in frequent trading while others will bear the effect of such trading. |
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Consistent with seeking to discourage potentially disruptive trading, EIM, or an affiliate thereof, or the EQ Trust also may, in its sole discretion and without further notice, change what it considers potentially disruptive trading and its monitoring procedures and thresholds, as well as change its procedures to restrict such trading. You should consult your Contract prospectus for information on other specific limitations on the transfer privilege.
Notwithstanding their efforts, EIM and its affiliates may be unable to detect or deter market timing activity by certain persons, which can lead to disruption of management of, and excess costs to, the Acquiring Portfolios.
“Net asset value” is the price of one share of an Acquiring Portfolio, without a sales charge, and is calculated each business day using the following formula:
Net asset value = | Total market value of securities | + | Cash and other assets | – | Liabilities | |||||
Number of outstanding shares |
The net asset value of Acquiring Portfolio shares is determined according to the following schedule:
• | A share’s net asset value is normally determined each day the New York Stock Exchange (“Exchange”) is open for trading as of 4:00 p.m. Easter Time. In the event of an emergency or other disruption in trading on the Exchange, a share’s price would still normally be determined as of 4:00 p.m. Eastern time. |
• | The price you pay or receive for purchasing or redeeming a share will be based upon the net asset value next calculated after an order is received and accepted by an Acquiring Portfolio or its designated agent. |
• | An Acquiring Portfolio heavily invested (directly or through Underlying Portfolios) in foreign securities may have net asset value changes on days when shares cannot be purchased or sold because foreign securities sometimes trade on days when an Acquiring Portfolio’s shares are not priced. |
Shares of the Underlying Portfolios held by the Acquiring Portfolios are valued at their net asset value. Generally, other portfolio securities and assets held by the Acquiring Portfolios as well as the portfolio securities and assets held by the Underlying Portfolios are valued as follows:
• | Equity securities (including securities issued by ETFs) — last quoted sale price or official closing price or, if there is no sale or official closing price, latest available bid price provided by a pricing service. |
• | Debt securities — valued on the basis of prices provided by an approved pricing service; however, when the prices of the securities cannot be obtained from an approved pricing service, such securities are generally valued at a bid price estimated by a broker. |
• | Convertible bonds and unlisted convertible preferred stocks — valued at prices obtained from a pricing service for such instruments or, if a pricing service price is not available, at bid prices obtained from one or more of the major dealers in such bonds or stocks. Convertible bonds may be matrix-priced based upon the conversion value to the underlying common stocks and market premiums. |
• | Securities traded on foreign exchanges — most recent sales or bid price on the foreign exchange or market, unless a significant event or circumstance occurs after the close of that market or exchange that may materially affect its value. In that case, the security will be valued using fair value methods by the Adviser at the close of regular trading on the Exchange. Foreign currency is converted into U.S. dollar equivalent daily at current exchange rates. |
• | Options — for exchange-traded options, last sales price or, if not available, the bid price. Options not traded on an exchange or not actively traded are valued according to fair value methods. |
• | Futures — last settlement price or, if there is no sale, latest available bid price. |
• | Investment company securities — shares of open-end mutual funds (other than ETFs) held by an Acquiring Portfolio will be valued at the net asset value of the shares of such funds as described in such funds’ prospectuses. |
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• | Repurchase agreements and reverse repurchase agreements — valued at original cost (par) plus accrued interest. Other pricing methods such as amortized cost may be utilized depending on the features of the instrument. |
• | Swaps — centrally cleared swaps are priced using the value determined by the central counterparty at the end of the day, which price may be provided by an approved pricing service. With respect to over-the-counter swaps and centrally cleared swaps where the central counterparty price is unavailable, a price provided by an approved pricing service will be used. |
Pursuant to applicable law, the Board of Trustees of the EQ Trust has designated the Adviser as the Acquiring Portfolios’ valuation designee. As the Acquiring Portfolios’ valuation designee, and subject to the Board’s oversight, the Adviser is responsible for determining in good faith the fair value of Acquiring Portfolio investments for which market quotations are not readily available or are believed by the Adviser to be unreliable. In these circumstances, an Acquiring Portfolio may use a fair value estimate made according to methods the Adviser has approved in the good-faith belief that the resulting valuation will reflect the fair value of the security. For example, a security whose trading has been halted during the trading day may be fair valued based on the available information at the time of the close of the trading market. Similarly, securities for which there is no ready market (e.g., securities of certain small-capitalization issuers, high yield securities, and securities of certain issuers located in emerging markets) also may be fair valued. Some methods for valuing these securities may include: fundamental analysis (earnings multiple, etc.), matrix pricing (a method that takes into consideration the value of other securities with similar characteristics, such as ratings, yield and maturity), discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. In addition, if events or circumstances affecting the values of portfolio securities occur between the closing of their principal markets and the time an Acquiring Portfolio’s net asset value is determined, such as with respect to foreign securities trading on foreign exchanges that may close before the time an Acquiring Portfolio’s net asset value is determined, the Adviser may ascertain a fair value for such securities when it deems that the event or circumstance would materially affect the Acquiring Portfolio’s net asset value. Such events or circumstances may be company specific, such as an earnings report, country or region specific, such as a natural disaster, or global in nature. Such events or circumstances also may include price movements in the U.S. securities markets.
The effect of fair value pricing is that securities may not be priced on the basis of quotations from the primary market in which they are traded, but rather may be priced by a fair valuation method established by the Adviser that relies on other available pricing inputs. As such, fair value pricing is based on subjective judgments and it is possible that the fair valuations reached may differ materially from the value realized on a sale and from the prices used by other registered funds to calculate their net asset values. The fair value pricing policy is intended to assure that an Acquiring Portfolio’s net asset value fairly reflects security values as of the time of pricing. Also, fair value pricing of an Acquiring Portfolio’s portfolio securities can help to protect the Acquiring Portfolio by reducing arbitrage opportunities available to short-term traders, but there is no assurance that fair value pricing will completely prevent dilution of the Acquiring Portfolio’s net asset value by such traders.
Each business day, the Acquiring Portfolios’ net asset values are transmitted electronically to insurance companies that use the portfolios as underlying investment options for Contracts.
Dividends and Other Distributions
Each Acquiring Portfolio generally distributes most or all of its net investment income and net realized gains, if any, annually. Dividends and other distributions by an Acquiring Portfolio are automatically reinvested at net asset value in shares of the distributing class of that Acquiring Portfolio
Federal Income Tax Considerations
Each Acquiring Portfolio currently sells its shares only to insurance company separate accounts, qualified plans and other investors eligible under applicable tax regulations. Accordingly, distributions each Acquiring Portfolio makes of its investment company taxable income and net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) and net gains realized on its shareholders’ redemptions or exchanges
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of Acquiring Portfolio shares generally will not be taxable to its shareholders (or to the holders of underlying Contracts or plan participants or beneficiaries). See the prospectus for your Contract for further tax information.
Each Acquiring Portfolio is treated as a separate corporation and intends to qualify each taxable year to be treated as a “regulated investment company” (a “RIC”), for federal tax purposes. An Acquiring Portfolio will be so treated if it meets specified federal income tax requirements, including requirements regarding types of investments, diversification limits on investments, types of income, and distributions. To comply with all these requirements may, from time to time, necessitate an Acquiring Portfolio’s disposition of one or more investments when it might not otherwise do so.
An Acquiring Portfolio that satisfies the federal tax requirements to be treated as a RIC is not taxed at the entity (Acquiring Portfolio) level to the extent it passes through its net income and net realized gains to its shareholders by making distributions. Although the EQ Trust intends that each Acquiring Portfolio will be operated to have no federal tax liability, if an Acquiring Portfolio does have any federal tax liability, that would hurt its investment performance. Also, to the extent that an Acquiring Portfolio invests in foreign securities or holds foreign currencies, it could be subject to foreign taxes that would reduce its investment performance.
It is important for each Acquiring Portfolio to maintain its RIC status (and to satisfy certain other requirements), because the shareholders of an Acquiring Portfolio that are insurance company separate accounts will then be able to use a “look-through” rule in determining whether those accounts meet the investment diversification rules applicable to them (which differ from those that apply to RICs). If an Acquiring Portfolio failed to meet those diversification rules, owners of non-pension plan Contracts indirectly funded through that Acquiring Portfolio would be taxed immediately on the accumulated investment earnings under their Contracts and would lose any benefit of tax deferral. Therefore, the Adviser and the Administrator of the EQ Trust carefully monitor each Acquiring Portfolio’s compliance with all of the RIC requirements and separate account investment diversification rules.
Contractholders seeking to more fully understand the tax consequences of their investment should consult with their tax advisers or the insurance company that issued their Contract or refer to their Contract prospectus.
A description of the Acquiring Portfolios’ policies and procedures with respect to the disclosure of their portfolio securities holdings is available in the EQ Trust’s Statement of Additional Information.
Each Acquiring Portfolio is newly organized and has no performance history or operations of its own as of the date of this Proxy Statement/Prospectus. After the Reorganizations, which are subject to shareholder approval, each Acquiring Portfolio, as the successor to its corresponding Acquired Portfolio, will assume and publish the operating history and performance record of that Acquired Portfolio, as follows:
Acquiring Portfolio | Acquired Portfolio | |
New EQ/Aggressive Allocation Portfolio | EQ/Aggressive Allocation Portfolio | |
New EQ/Conservative Allocation Portfolio | EQ/Conservative Allocation Portfolio | |
New EQ/Conservative-Plus Allocation Portfolio | EQ/Conservative-Plus Allocation Portfolio | |
New EQ/Moderate Allocation Portfolio | EQ/Moderate Allocation Portfolio | |
New EQ/Moderate-Plus Allocation Portfolio | EQ/Moderate-Plus Allocation Portfolio | |
New Target 2015 Allocation Portfolio | Target 2015 Allocation Portfolio | |
New Target 2025 Allocation Portfolio | Target 2025 Allocation Portfolio | |
New Target 2035 Allocation Portfolio | Target 2035 Allocation Portfolio | |
New Target 2045 Allocation Portfolio | Target 2045 Allocation Portfolio | |
New Target 2055 Allocation Portfolio | Target 2055 Allocation Portfolio | |
New EQ/Core Plus Bond Portfolio | EQ/Core Plus Bond Portfolio |
Financial information for the Acquired Portfolios is included in the current prospectuses for the Acquired Portfolios, which are incorporated by reference into this Proxy Statement/Prospectus, and in the most recent
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Annual Report to Shareholders of the VIP Trust with respect to the Acquired Portfolios for the fiscal year ended December 31, 2022, which is incorporated by reference into this Proxy Statement/Prospectus and into the Statement of Additional Information dated , 2023, relating to this Proxy Statement/Prospectus.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP (“PwC”), 300 Madison Avenue, New York, New York 10017, serves as the VIP Trust’s independent registered public accounting firm. Before PwC is engaged by the VIP Trust to render audit or non-audit services, its engagement is approved by the VIP Trust’s Audit Committee or it is entered into pursuant to pre-approval policies and procedures established by the VIP Trust’s Audit Committee. Representatives of PwC are not expected to attend the Meeting, but will have the opportunity to make a statement if they wish to do so, and will be available should any matter arise requiring their presence. The table below sets forth the fees billed for services rendered by PwC to the VIP Trust for the last two fiscal years.
VIP Trust | Fiscal Year Ended December 31, 2021 | Fiscal Year Ended December 31, 2022 | ||||||
Audit Fees1 | $ | 320,908 | $ | 334,918 | ||||
Audit-Related Fees2 | $ | 67,000 | $ | 0 | ||||
Tax Fees3 | $ | 197,204 | $ | 96,511 | ||||
All Other Fees4 | $ | 0 | $ | 0 | ||||
Non-Audit Fees5 | $ | 0 | $ | 0 |
1 | Reflects aggregate fees billed for the fiscal year for professional services rendered by PwC in connection with the audit or review of the VIP Trust’s financial statements as well as those services provided in connection with statutory and regulatory filings or engagements. |
2 | Reflects aggregate fees billed for the fiscal year for assurance and related services rendered by PwC that were reasonably related to PwC’s audit or review of the VIP Trust’s financial statements. Such services include consultation with management regarding accounting, operational or regulatory implications of proposed or actual transactions affecting the operations of the financial reporting of an Acquired Portfolio. None of these services provided by PwC were approved by the VIP Trust’s Audit Committee pursuant to the “de minimis exception” from the pre-approval requirement set forth in paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
3 | Reflects aggregate fees billed for the fiscal year for professional services rendered by PwC in connection with tax compliance, tax advice and tax planning. Such services include reviewing and signing of federal income tax returns and applicable local and state returns, calculating book/tax differences, calculating and/or reviewing excise tax distributions and returns, and consulting with management regarding tax consequences of proposed or actual transactions, tax planning and compliance issues. None of these services provided by PwC were approved by the VIP Trust’s Audit Committee pursuant to the “de minimis exception” from the pre-approval requirement set forth in paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
4 | Reflects aggregate fees billed for the fiscal year for products and services (other than those previously noted above) provided by PwC. None of these services provided by PwC were approved by the VIP Trust’s Audit Committee pursuant to the “de minimis exception” from the pre-approval requirement set forth in paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
5 | Reflects aggregate fees billed for the fiscal year for non-audit services rendered by PwC to the VIP Trust. |
The VIP Trust’s Audit Committee has adopted policies and procedures relating to pre-approval of services performed by the VIP Trust’s principal accountant. Audit, audit-related and non-audit services (including tax services) provided to the VIP Trust require pre-approval by the Audit Committee. In the event that the estimated fees for such pre-approved audit, audit-related and non-audit services exceed the pre-approved estimated fees for such services, the excess amount must be approved by the Audit Committee or its delegate prior to payment. The VIP Trust’s Audit Committee has considered and determined that the provision of non-audit services that were rendered to EIM (not including any Sub-Adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with EIM that provides ongoing services to the VIP Trust that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
The following information applies to each Acquired Portfolio for which you are entitled to vote.
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Shareholders with amounts invested in shares of one or more of the Acquired Portfolios at the close of business on the Record Date will be entitled to be present and vote for the applicable Acquired Portfolio(s) at the Meeting with respect to their shares as of the Record Date.
Each whole share of an Acquired Portfolio is entitled to one vote as to each matter with respect to which it is entitled to vote, as described above, and each fractional share is entitled to a proportionate fractional vote. Votes cast by proxy or in person by a shareholder at the Meeting will be counted by persons appointed as inspectors of election for the Meeting. The table below shows the number of outstanding shares of the VIP Trust and each class of each Acquired Portfolio as of the Record Date that are entitled to vote at the Meeting. Equitable Financial owned of record a substantial majority of those shares.
VIP Trust/Acquired Portfolios | Total Number | Number of Class A Shares | Number of Class B Shares | Number of Class K Shares | ||||||||||||
VIP Trust | ||||||||||||||||
EQ/Aggressive Allocation Portfolio | ||||||||||||||||
EQ/Conservative Allocation Portfolio | ||||||||||||||||
EQ/Conservative-Plus Allocation Portfolio | ||||||||||||||||
EQ/Moderate Allocation Portfolio | ||||||||||||||||
EQ/Moderate-Plus Allocation Portfolio | ||||||||||||||||
Target 2015 Allocation Portfolio | ||||||||||||||||
Target 2025 Allocation Portfolio | ||||||||||||||||
Target 2035 Allocation Portfolio | ||||||||||||||||
Target 2045 Allocation Portfolio | ||||||||||||||||
Target 2055 Allocation Portfolio | ||||||||||||||||
EQ/Core Plus Bond Portfolio |
All properly executed and unrevoked proxies received in time for the Meeting will be voted as instructed by shareholders. If a shareholder executes a proxy but gives no voting instructions, that shareholder’s shares that are represented by that proxy will be voted “FOR” each applicable Proposal and “FOR” or “AGAINST” any other business which may properly arise at the Meeting, in the proxies’ discretion. Any person giving a proxy has the power to revoke it at any time prior to its exercise by executing a superseding proxy or by submitting a written notice of revocation to the VIP Trust. To be effective, such revocation must be received by the VIP Trust prior to the Meeting. In addition, although mere attendance at the Meeting will not revoke a proxy, a shareholder present at the Meeting may withdraw his or her proxy by voting in person.
Contractholders with amounts allocated to an Acquired Portfolio on the Record Date will be entitled to be present and provide voting instructions for that Acquired Portfolio at the Meeting with respect to shares held indirectly as of the Record Date. Voting instructions may be solicited, and such instructions may be provided, in the same manner as proxies as described herein. An Insurance Company will vote the shares for which it receives timely voting instructions from Contractholders in accordance with those instructions. Shares in each investment division of a Separate Account that is invested in one or more Acquired Portfolios for which an Insurance Company receives a voting instruction card that is signed and timely returned but is not marked to indicate voting instructions will be treated as an instruction to vote the shares “FOR” each applicable Proposal, and the Insurance Company may vote in its discretion with respect to other matters not now known that may be presented at the Meeting. An Insurance Company will vote in its discretion on any proposal to adjourn or postpone the Meeting. Shares in each investment division of a Separate Account that is invested in one or more Acquired Portfolios for which an Insurance Company receives no timely voting instructions from Contractholders, or that are attributable to amounts retained by an Insurance Company and its affiliates as surplus or seed money, will be voted by the applicable Insurance Company either “FOR” or “AGAINST” approval of each applicable Proposal, or as an abstention, in the same proportion as the shares for which Contractholders have provided voting instructions to the Insurance Company. As a result of such proportional voting by an Insurance Company, it is possible that a small number of Contractholders could determine whether a Proposal is approved.
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Voting instructions executed by a Contractholder may be revoked at any time prior to an Insurance Company’s voting the shares represented thereby by the Contractholder providing the Insurance Company with a properly executed written revocation of such voting instructions, or by the Contractholder providing the Insurance Company with properly executed later-dated voting instructions by a voting instruction card, telephone or the Internet. In addition, any Contractholder who attends the Meeting in person may provide voting instructions by a voting instruction card at the Meeting, thereby canceling any voting instruction previously given. Proxies executed by an Insurance Company may be revoked at any time before they are exercised by a written revocation duly received, by properly executing a later-dated proxy or by an Insurance Company representative attending the Meeting and voting in person.
Prompt execution and return of the enclosed voting instruction card(s) is requested. A self-addressed, postage-paid envelope is enclosed for your convenience.
The shareholders of an Acquired Portfolio will vote on the approval of each of Proposals 1.A. through 1.E., 2.A. through 2.E., and 3 with respect to that Acquired Portfolio separately from the shareholders of each other Acquired Portfolio. Approval of the Reorganization Agreement with respect to a Reorganization involving an Acquired Portfolio will require the affirmative vote of the lesser of (1) 67% or more of the voting securities of the Acquired Portfolio present at the Meeting, if the holders of more than 50% of its outstanding voting securities are present or represented by proxy, or (2) more than 50% of its outstanding voting securities. These percentages are required by the 1940 Act. With respect to Proposals 1.A. through 1.E., 2.A. through 2.E., and 3, “voting securities” refers to the shares of an Acquired Portfolio. With respect to Proposals 1.A. through 1.E., 2.A. through 2.E., and 3, the presence, in person or by proxy, of at least one-third of the shares of an Acquired Portfolio entitled to vote at the Meeting will constitute a quorum for the transaction of business, with respect to that Acquired Portfolio, at the Meeting. A quorum will be reached due to Equitable Financial’s direct or indirect ownership of the VIP Trust’s shares, as described below.
The shareholders of all of the Acquired Portfolios will vote collectively as a single class on Proposal 4. To be elected as Trustees under Proposal 4, persons nominated as Trustees must receive a plurality of the votes cast, which means that the eleven (11) Nominees receiving the highest number of votes cast at the Meeting will be elected, even if they receive approval from less than a majority of the votes cast. With respect to Proposal 4, the presence, in person or by proxy, of at least one-third of the shares of the VIP Trust entitled to vote at the Meeting will constitute a quorum for the transaction of business at the Meeting with respect to the VIP Trust. A quorum will be reached due to Equitable Financial’s direct or indirect ownership of the VIP Trust’s shares, as described below. The approval of one Nominee is not contingent on the approval of the other Nominees.
Abstentions are counted as shares present at the Meeting in determining whether a quorum is present but do not count as votes cast for or against a Proposal. Therefore, abstentions will have the same effect as a vote “against” Proposals 1.A. through 1.E., 2.A. through 2.E., and 3 because each of these Proposals requires the affirmative vote of a specified majority of the applicable Acquired Portfolio’s outstanding voting securities. However, abstentions will not have an effect on Proposal 4, which requires a plurality of the votes cast.
The approval of any one Proposal is not contingent on the approval of any other Proposal.
[To the VIP Trust’s knowledge, as of the Record Date, the current Trustees, the Nominees, and the officers of the VIP Trust owned, individually and as a group, less than 1% of the shares of the VIP Trust and each of the Acquired Portfolios.]
Equitable Financial and certain of its affiliates may be deemed to be control persons of the VIP Trust by virtue of their direct or indirect ownership of a substantial majority of the VIP Trust’s shares. Shareholders owning more than 25% of the outstanding shares of the VIP Trust or an Acquired Portfolio may be able to determine the outcome of most issues that are submitted to shareholders for a vote. As of the Record Date, except as set forth in Appendix E, to the VIP Trust’s knowledge, (1) no person, other than the Insurance Companies, owned beneficially or of record more than 5% of any class of the outstanding shares of any of the Acquired Portfolios, and
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(2) no Contractholder owned Contracts entitling such Contractholder to provide voting instructions regarding more than 5% of any class of the outstanding shares of any of the Acquired Portfolios.
Shareholders do not have appraisal or similar rights of dissenters with respect to the Proposals.
Solicitation of Proxies and Voting Instructions
Solicitation of proxies and voting instructions is being made by the VIP Trust primarily by the mailing of this Notice and Proxy Statement/Prospectus with its enclosures on or about September , 2023. The principal solicitation will be by mail, but proxies and voting instructions also may be solicited by telephone, fax, personal interview by directors, officers, employees or agents of EIM or its affiliates, or the VIP Trust or its affiliates, without additional compensation, through the Internet, or other permissible means. Shareholders can vote proxies by mail with the enclosed proxy card(s), or via telephone or the Internet by following the simple instructions on the enclosed proxy card(s). Contractholders can provide voting instructions by mail with the enclosed voting instruction card(s), or via telephone or the Internet by following the simple instructions on the enclosed voting instruction card(s). In lieu of executing a proxy card or voting instruction card, you may attend the Meeting in person.
The cost of the Meeting, including the expenses of printing and mailing the Proxy Statement/Prospectus, the cost of solicitation of proxies and voting instructions and the expenses associated with reimbursing insurance companies or others for their reasonable expenses in forwarding solicitation material to beneficial owners, as well as the legal costs of fund counsel relating thereto and the costs of the VIP Trust’s independent registered public accounting firm related thereto, will be borne by each class of each Acquired Portfolio. The VIP Trust has engaged Computershare to assist in the distribution of proxy materials and the solicitation and tabulation of proxies for the Meeting. Computershare will receive a total fee of approximately $908,000 for its proxy solicitation services. The cost of the Reorganizations is estimated to be $1,900,000 (excluding any portfolio transaction costs). The aforementioned costs (other than legal and accounting costs) will be allocated among the Acquired Portfolios in proportion to their respective numbers of Contractholder accounts; legal costs will be allocated among the Acquired Portfolios in proportion to the average net assets of the Acquired Portfolios; and accounting costs will be allocated among the Acquired Portfolios pro rata (i.e., one-eleventh of the accounting costs will be allocated to each of the eleven Acquired Portfolios). However, the Adviser has agreed to pay expenses relating to each Reorganization that exceed a class’s expense cap. Accordingly, if the current expense ratio of an Acquired Portfolio (or a class thereof) equals or exceeds its expense limit, the Adviser will bear that Acquired Portfolio’s (or class’) expenses associated with the Reorganization. The estimated Reorganization expenses (excluding portfolio transaction costs, which (if any) would be incurred by the Portfolio and indirectly by Contractholders both before and after the Reorganization) for each of the following Acquired Portfolios exceed its (or its class’) expense limit and are expected to be paid by EIM: EQ/Conservative Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2055 Allocation Portfolio, and EQ/Core Plus Bond Portfolio. The estimated Reorganization expenses (excluding portfolio transaction costs, which (if any) would be incurred by the Portfolio and indirectly by Contractholders both before and after the Reorganization) for each of the following Acquired Portfolios do not exceed its respective expense limit and are expected to be paid by the respective Acquired Portfolio: EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2035 Allocation Portfolio, and Target 2045 Allocation Portfolio
The Special Meeting of Shareholders of each Acquired Portfolio is a separate meeting, but these Special Meetings of Shareholders are being held jointly and are referred to herein together as the “Meeting,” and each such Special Meeting of Shareholders has a separate quorum requirement with respect to each Acquired Portfolio. (The shareholders of all of the Acquired Portfolios will vote collectively as a single class on Proposal 4, which has a VIP Trust-wide quorum requirement.) If the quorum necessary to transact business with respect to the VIP Trust or an Acquired Portfolio is not established, or if sufficient votes in favor of a Proposal are not received by the time
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scheduled for the Meeting, the persons named as proxies may propose one or more adjournments or postponements of the Meeting with respect to each applicable Acquired Portfolio to permit further solicitation of proxies. Any adjournment or postponement of the Meeting will require the affirmative vote of a majority of the shares represented in person or by proxy at the session of the Meeting to be adjourned. The persons named as proxies will vote in their discretion on any such adjournment or postponement. In the event of an adjournment, no notice is required other than an announcement at the meeting at which adjournment is taken. A shareholder vote may be taken on one or more of the items in this Proxy Statement/Prospectus prior to such adjournment if sufficient votes have been received and it is otherwise appropriate. The costs of any additional solicitation and any adjourned session will be borne as described above.
Submission of Certain Shareholder Proposals
The VIP Trust is not required to hold regular shareholder meetings and, in order to minimize its costs, does not intend to hold meetings of shareholders unless so required by applicable law, regulation or regulatory policy or if otherwise deemed advisable by the VIP Trust’s management. Therefore, it is not practicable to specify a date by which proposals must be received in order to be incorporated in an upcoming proxy statement for a meeting of shareholders. Shareholders will be given notice of any meeting of shareholders not less than ten (10) days, and not more than ninety (90) days, before the date of the meeting.
The VIP Trust does not know of any matters to be presented at the Meeting other than those described in this Proxy Statement/Prospectus. If other business properly comes before the Meeting, the proxyholders will vote thereon in their discretion and in accordance with their best judgment.
* * * * *
We need your vote. It is important that you execute and return your proxy or voting instruction card(s) promptly.
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INDEX TO APPENDICES TO PROXY STATEMENT/PROSPECTUS
Appendix A | Form of Agreement and Plan of Reorganization and Termination | A-1 | ||||
Appendix B | More Information on Strategies and Risk Factors (New EQ Allocation Portfolios and New Target Allocation Portfolios) | B-1 | ||||
Appendix C | More Information on Strategies and Risk Factors (New EQ/Core Plus Bond Portfolio) | C-1 | ||||
Appendix D | Information Regarding the Underlying Portfolios | D-1 | ||||
Appendix E | Security Ownership Of Certain Beneficial Owners | E-1 | ||||
Appendix F | Governance Committee Charter | F-1 |
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FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION (“Agreement”) is made as of [__________], 2023, between EQ ADVISORS TRUST, a Delaware statutory trust (“EQAT”), on behalf of EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, Target 2055 Allocation Portfolio and EQ/Core Plus Bond Portfolio, each a segregated portfolio of assets (“series”) thereof (each, a “New Portfolio”), and EQ PREMIER VIP TRUST, also a Delaware statutory trust (“VIP”), on behalf of EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, Target 2055 Allocation Portfolio and EQ/Core Plus Bond Portfolio, each a series thereof (each, an “Old Portfolio”). (Each New Portfolio and Old Portfolio is sometimes referred to herein as a “Portfolio,” and each of EQAT and VIP is sometimes referred to herein as an “Investment Company.”) Notwithstanding anything to the contrary contained herein, (1) all agreements, covenants, representations, warranties, actions, and obligations (collectively, “Obligations”) of and by each Portfolio, and of and by each Investment Company, as applicable, on its behalf, shall be the Obligations of that Portfolio only, (2) all rights and benefits created hereunder in favor of a Portfolio shall inure to and be enforceable by the Investment Company of which that Portfolio is a series on that Portfolio’s behalf, and (3) in no event shall any other series of an Investment Company or the assets thereof be held liable with respect to the breach or other default by an obligated Portfolio or Investment Company of its Obligations set forth herein.
Each Investment Company may sell voting shares of beneficial interest in its Portfolios, $0.001 par value per share (“shares”), to (1) separate accounts of Equitable Financial Life Insurance Company (“Equitable”), Equitable Financial Life and Annuity Company, and other affiliated or unaffiliated insurance companies in connection with certain variable annuity certificates and contracts and variable life insurance policies (collectively, “Contracts”) issued thereby and (2) The Equitable 401(k) Plan. Shares in each Portfolio also may be sold to (3) other tax-qualified retirement plans, (4) other portfolios managed by Equitable Investment Management Group, LLC (“EIM”) that currently sell their shares to those accounts and plans, and (5) other investors eligible under applicable Regulations (as defined below). Class K shares are sold only to other series of the Investment Companies and certain group annuity and retirement plans. The Portfolios are underlying investment options for those separate accounts to fund Contracts. Under applicable law, the assets of all those separate accounts (i.e., the shares in the Portfolios) are the property of Equitable, which is the owner of record of those shares, and are held for the benefit of the Contract holders.
The Investment Companies wish to effect eleven (11) separate reorganizations described in section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (“Code”) (all “section” references are to the Code, unless otherwise noted), and intend this Agreement to be, and adopt it as, a “plan of reorganization” (within the meaning of the regulations under the Code (“Regulations”)). Each reorganization will involve an Old Portfolio’s changing its identity — by converting from a series of VIP to a series of EQAT — by (1) transferring all its assets to the New Portfolio (which is being established solely for the purpose of acquiring those assets and continuing the Old Portfolio’s business) listed on Schedule A to this Agreement (“Schedule A”) opposite its name (“corresponding New Portfolio”) in exchange solely for shares in that New Portfolio and that New Portfolio’s assumption of all of the Old Portfolio’s liabilities, (2) distributing those shares pro rata to the Old Portfolio’s shareholders in exchange for their shares therein and in complete liquidation thereof, and (3) terminating the Old Portfolio (all the foregoing transactions involving each Old Portfolio and its corresponding New Portfolio being referred to herein collectively as the “Reorganization”), all on the terms and conditions set forth herein. The consummation of one Reorganization is not contingent on the consummation of any other Reorganization. (For convenience, the balance hereof refers to only a single Reorganization, one Old Portfolio and one New Portfolio, but the terms and conditions hereof shall apply separately to each Reorganization and the Portfolios participating therein.)
A-1
Each Investment Company’s board of trustees (each, a “Board”), in each case including a majority of its members who are not “interested persons” (as that term is defined in the Investment Company Act of 1940, as amended (“1940 Act”)) of either Investment Company (“Non-Interested Persons”), (1) has duly adopted and approved this Agreement and the transactions contemplated hereby and has duly authorized its performance hereof on its Portfolio’s behalf by all necessary Board action and (2) has determined that participation in the Reorganization is in the best interests of its Portfolio and that the interests of the existing shareholders thereof will not be diluted as a result of the Reorganization.
Each Old Portfolio offers two or three classes of shares, designated Class A, Class B, and Class K shares (“Class A Old Portfolio Shares,” “Class B Old Portfolio Shares,” and “Class K Old Portfolio Shares,” respectively, and collectively, “Old Portfolio Shares”) as listed on Schedule A. Each New Portfolio also will offer two or three classes of shares, designated Class IA, Class IB, and Class K shares (“Class IA New Portfolio Shares,” “Class IB New Portfolio Shares,” and “Class K New Portfolio Shares,” respectively, and collectively, “New Portfolio Shares”) as listed on Schedule A. The Portfolios’ similarly designated classes of shares have substantially similar characteristics.
In consideration of the mutual promises contained herein, the parties agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
1.1 Subject to the requisite approval of Old Portfolio’s shareholders and the terms and conditions set forth herein, Old Portfolio shall assign, sell, convey, transfer, and deliver all of its assets described in paragraph 1.2 (“Assets”) to New Portfolio. In exchange therefor, New Portfolio shall:
(a) issue and deliver to Old Portfolio the number of full and fractional (all references herein to “fractional” shares meaning fractions rounded to the eighth decimal place) (1) Class IA New Portfolio Shares equal to the number of full and fractional Class A Old Portfolio Shares then outstanding, (2) Class IB New Portfolio Shares equal to the number of full and fractional Class B Old Portfolio Shares then outstanding, and (3) Class K New Portfolio Shares equal to the number of full and fractional Class K Old Portfolio Shares then outstanding, and
(b) assume all of Old Portfolio’s liabilities described in paragraph 1.3 (“Liabilities”).
Those transactions shall take place at the Closing (as defined in paragraph 2.1).
1.2 The Assets shall consist of all assets and property of every kind and nature — including all cash, cash equivalents, securities, commodities, futures interests, receivables (including interest and dividends receivable), claims and rights of action, rights to register shares under applicable securities laws, goodwill, and books and records — Old Portfolio owns at the Effective Time (as defined in paragraph 2.1) and any deferred and prepaid expenses shown as assets on Old Portfolio’s books at that time; and Old Portfolio has no unamortized or unpaid organizational fees or expenses that have not previously been disclosed in writing to EQAT.
1.3 The Liabilities shall consist of all of Old Portfolio’s liabilities, debts, obligations, and duties of whatever kind or nature existing at the Effective Time, whether absolute, accrued, contingent, or otherwise, whether known or unknown, whether or not arising in the ordinary course of business, whether or not determinable at the Effective Time, and whether or not specifically referred to herein, except Reorganization Expenses (as defined in paragraph 3.3(f)) borne by the New Portfolios and/or EIM pursuant to paragraph 6. Notwithstanding the foregoing, Old Portfolio shall use its best efforts to discharge all its known Liabilities before that time.
1.4 At or before the Closing, New Portfolio shall redeem the Initial Shares (as defined in paragraph 5.5) for the amount at which they are issued pursuant to that paragraph. At the Effective Time (or as soon thereafter as is reasonably practicable), Old Portfolio shall distribute the New Portfolio Shares it receives pursuant to paragraph 1.1(a) to the separate accounts for which Equitable holds Old Portfolio Shares, and Other Shareholders, of record at the Effective Time (each, a “Shareholder”), in proportion to their Old Portfolio Shares then so held and in constructive exchange therefor, and shall completely liquidate. That distribution shall be accomplished by EQAT’s transfer agent’s opening accounts on New Portfolio’s shareholder records in the Shareholders’ names
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and transferring those New Portfolio Shares thereto. Pursuant to that transfer, each Shareholder’s account shall be credited with the number of full and fractional New Portfolio Shares equal to the number of full and fractional Old Portfolio Shares that Shareholder holds at the Effective Time, by class (i.e., the account for each Shareholder that holds Class A Old Portfolio Shares shall be credited with the number of full and fractional Class IA New Portfolio Shares due that Shareholder, the account for each Shareholder that holds Class B Old Portfolio Shares shall be credited with the number of full and fractional Class IB New Portfolio Shares due that Shareholder, and the account for each Shareholder that holds Class K Old Portfolio Shares shall be credited with the number of full and fractional Class K New Portfolio Shares due that Shareholder). The aggregate net asset value (“NAV”) of New Portfolio Shares of each class to be so credited to each Shareholder’s account shall equal the aggregate NAV of the Old Portfolio Shares of the corresponding class that Shareholder holds at the Effective Time. All issued and outstanding Old Portfolio Shares, including any represented by certificates, shall simultaneously be canceled on Old Portfolio’s shareholder records. EQAT shall not issue certificates representing the New Portfolio Shares issued in connection with the Reorganization.
1.5 Any transfer taxes payable on issuance and transfer of New Portfolio Shares in a name other than that of the registered holder on Old Portfolio’s shareholder records of the Old Portfolio Shares actually or constructively exchanged therefor shall be paid by the transferee thereof, as a condition of that issuance and transfer.
1.6 After the Effective Time, Old Portfolio shall not conduct any business except in connection with its termination. As soon as reasonably practicable after distribution of the New Portfolio Shares pursuant to paragraph 1.4, all actions required to terminate Old Portfolio as a series of VIP shall be taken — and in all events Old Portfolio shall have been terminated as such within six months after the Effective Time — and VIP shall make all filings and take all other actions in connection therewith required by applicable law or necessary and proper to effect that termination.
1.7 Any reporting responsibility of Old Portfolio to a public authority, including the responsibility for filing regulatory reports, tax returns, and other documents with the Securities and Exchange Commission (“Commission”), any state securities commission, any federal, state, and local tax authorities, and any other relevant regulatory authority, is and shall remain its responsibility up to and including the date on which it is terminated. After the Effective Time, except as otherwise agreed to by the Investment Companies, VIP shall or shall cause its agents to cooperate with EQAT and its agents in (a) preparing any federal, state, and local tax returns, including any Forms 1099, required to be filed by either Portfolio with respect to the taxable year in which the Closing occurs and for any prior periods or taxable years and (b) duly filing those tax returns and Forms 1099 filed with the appropriate taxing authorities.
2. CLOSING AND EFFECTIVE TIME
2.1 Unless the Investment Companies agree otherwise, all acts necessary to consummate the Reorganization (“Closing”) shall be deemed to occur simultaneously at the close of business (4:00 p.m., Eastern Time) on November [ ], 2023, or a later date as to which they agree (“Effective Time”). The Closing shall be held at the Investment Companies’ offices or at another place as to which they agree.
2.2 VIP shall direct the custodian of Old Portfolio’s assets to deliver to EQAT at the Closing a certificate of an authorized officer (“Certificate”) stating that (a) the Assets it holds will be transferred to New Portfolio at the Effective Time, (b) all necessary taxes in connection with the delivery of the Assets, including all applicable federal and state stock transfer stamps, if any, have been paid or provision for payment has been made, and (c) the information (including adjusted basis and holding period, by lot) concerning the Assets, including all portfolio securities, transferred by Old Portfolio to New Portfolio, as reflected on New Portfolio’s books immediately after the Closing, does or will conform to that information on Old Portfolio’s books immediately before the Closing.
2.3 VIP shall direct its transfer agent to deliver to EQAT at the Closing a Certificate stating that its records contain (a) the name, address, and taxpayer identification number of each Shareholder, (b) the number of full and fractional shares in each outstanding class of Old Portfolio Shares each Shareholder owns, and (c) the dividend reinvestment elections, if any, applicable to each Shareholder, all at the Effective Time.
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2.4 EQAT shall direct its transfer agent to deliver to VIP (a) at the Closing, a confirmation, or other evidence satisfactory to VIP, that the New Portfolio Shares to be issued to Old Portfolio pursuant to paragraph 1.1(a) have been credited to Old Portfolio’s account on New Portfolio’s shareholder records and (b) at or as soon as reasonably practicable after the Closing, a Certificate as to the opening of accounts on those records in the Shareholders’ names.
2.5 Each Investment Company shall deliver to the other at the Closing (a) a Certificate in form and substance satisfactory to the recipient and dated the Effective Time, to the effect that the representations and warranties it made herein are true and correct at the Effective Time except as they may be affected by the transactions contemplated hereby and (b) bills of sale, checks, assignments, share certificates, receipts, and/or other documents the other Investment Company or its counsel reasonably requests.
3. REPRESENTATIONS AND WARRANTIES
3.1 VIP, on Old Portfolio’s behalf, represents and warrants to EQAT, on New Portfolio’s behalf, as follows:
(a) VIP (1) is a statutory trust that is duly organized, validly existing, and in good standing under the laws of the State of Delaware (a “Delaware Statutory Trust”), and its Certificate of Trust has been duly filed in the office of the Secretary of State thereof, (2) is duly registered under the 1940 Act as an open-end management investment company, which registration is in full force and effect, and (3) has the power to own all its properties and assets and to carry on its business as described in its current registration statement on Form N-1A;
(b) Old Portfolio is a duly established and designated series of VIP;
(c) The execution, delivery, and performance hereof have been duly authorized at the date hereof by all necessary action on the part of VIP’s Board, which has made the determinations required by Rule 17a-8(a) under the 1940 Act; and this Agreement constitutes a valid and legally binding obligation of VIP, with respect to Old Portfolio, enforceable in accordance with its terms, except as they may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, receivership, moratorium, and similar laws affecting the rights and remedies of creditors generally and by general principles of equity;
(d) At the Effective Time, VIP, on Old Portfolio’s behalf, will have good and marketable title to the Assets and full right, power, and authority to sell, assign, transfer, and deliver the Assets hereunder free of any liens or other encumbrances (except securities that are subject to “securities loans,” as referred to in section 851(b)(2), or are restricted to resale by their terms); and on delivery and payment for the Assets, EQAT, on New Portfolio’s behalf, will acquire good and marketable title thereto, subject to no restrictions on the full transfer thereof, including restrictions that might arise under the Securities Act of 1933, as amended (“1933 Act”);
(e) VIP, with respect to Old Portfolio, is not currently engaged in, and its execution, delivery, and performance hereof and consummation of the Reorganization will not result in, (1) a conflict with or material violation of any provision of Delaware law, VIP’s Agreement and Declaration of Trust (“VIP Declaration”) or By-Laws, or any agreement, indenture, instrument, contract, lease, or other undertaking (each, an “Undertaking”) to which VIP, with respect to Old Portfolio or on its behalf, is a party or by which it is bound or (2) the acceleration of any obligation, or the imposition of any penalty, under any Undertaking, judgment, or decree to which VIP, with respect to Old Portfolio or on its behalf, is a party or by which it is bound;
(f) At or before the Effective Time, either (a) all material contracts and other commitments of or applicable to Old Portfolio (other than this Agreement and certain investment contracts, including options, futures, forward contracts, and swap agreements) will terminate or (b) provision for discharge, and/or New Portfolio’s assumption, of any liabilities of Old Portfolio thereunder will be made, without either Portfolio’s incurring any penalty with respect thereto and without diminishing or releasing any rights VIP, on Old Portfolio’s behalf, may have had with respect to actions taken or omitted or to be taken by any other party thereto before the Closing;
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(g) No litigation, administrative proceeding, action, or investigation of or before any court, governmental body, or arbitrator is presently pending or, to VIP’s knowledge, threatened against VIP, with respect to Old Portfolio or any of its properties or assets attributable or allocable to Old Portfolio, that, if adversely determined, would materially and adversely affect Old Portfolio’s financial condition or the conduct of its business; and VIP, on Old Portfolio’s behalf, knows of no facts that might form the basis for the institution of any such litigation, proceeding, action, or investigation and is not a party to or subject to the provisions of any order, decree, judgment, or award of any court, governmental body, or arbitrator that materially and adversely affects Old Portfolio’s business or VIP’s ability to consummate the transactions contemplated hereby;
(h) Old Portfolio’s Statement of Assets and Liabilities, Portfolio of Investments, Statement of Operations, and Statement of Changes in Net Assets (each, a “Statement”) at and for the fiscal year (in the case of the last Statement, for the two fiscal years) ended December 31, 2022, have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and are in accordance with generally accepted accounting principles consistently applied in the United States (“GAAP”); those Statements (copies of which VIP has furnished to EQAT) present fairly, in all material respects, Old Portfolio’s financial condition at that date in accordance with GAAP and the results of its operations and changes in its net assets for the period(s) then ended; and, to VIP’s management’s best knowledge and belief, there are no known contingent liabilities of Old Portfolio required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP at that date that are not disclosed therein;
(i) Since December 31, 2022, there has not been any material adverse change in Old Portfolio’s financial condition, assets, liabilities, or business, other than changes occurring in the ordinary course of business, or any incurrence by Old Portfolio of indebtedness maturing more than one year from the date that indebtedness was incurred; for purposes of this representation and warranty, a decline in Old Portfolio’s NAV due to declines in market values of securities Old Portfolio holds, the discharge of Old Portfolio’s liabilities, or the redemption of Old Portfolio Shares by its shareholders will not constitute a material adverse change;
(j) All federal, state, and local tax returns, dividend reporting forms, and other tax-related reports (collectively, “Returns”) of Old Portfolio required by law to have been filed by the Effective Time (including any properly and timely filed extensions of time to file) will have been timely filed and are or will be correct in all material respects, and all federal and other taxes shown as due or required to be shown as due on those Returns will have been paid or provision will have been made for the payment thereof (except for amounts that alone or in the aggregate would not reasonably be expected to have a material adverse effect); to the best of VIP’s knowledge, no such Return is currently under audit and no assessment has been asserted with respect to those Returns; and Old Portfolio (a) is in compliance in all material respects with all applicable Regulations pertaining to (1) the reporting of dividends and other distributions on and redemptions of its shares, (2) withholding in respect thereof, and (3) shareholder basis reporting, (b) has withheld in respect of dividends and other distributions and paid to the proper taxing authorities all taxes required to be withheld, and (c) is not liable for any material penalties that could be imposed thereunder;
(k) Old Portfolio is not classified as a partnership, and instead is classified as an association that is taxable as a corporation, for federal tax purposes and either has elected the latter classification by filing Form 8832 with the Internal Revenue Service (“IRS”) or is a “publicly traded partnership” (as defined in section 7704(b)) that is treated as a corporation; Old Portfolio is an “investment company” (as defined in section 368(a)(2)(F)(iii)) and a “fund” (as defined in section 851(g)(2), eligible for treatment under section 851(g)(1)); Old Portfolio has elected to be a “regulated investment company” under Part I of Subchapter M of Chapter 1 of Subtitle A of the Code (“Subchapter M”) (“RIC”); for each taxable year of its operation (including the taxable year that includes the Effective Time (“current year”)), Old Portfolio has met (and for the current year through the Effective Time will meet) the requirements of Subchapter M for qualification and treatment as a RIC and has been (and for the current year through the Effective Time will be) eligible to and has computed its federal income tax under section 852; and Old Portfolio has no earnings and profits accumulated in any taxable year in which the provisions of Subchapter M did not apply to it;
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(l) All issued and outstanding Old Portfolio Shares are, and at the Effective Time will be, duly and validly issued and outstanding, fully paid, and non-assessable by VIP and have been offered and sold in every state and the District of Columbia in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws; all issued and outstanding Old Portfolio Shares will, at the Effective Time, be held by the persons and in the amounts set forth on Old Portfolio’s shareholder records (as provided in the Certificate to be delivered pursuant to paragraph 2.3); and Old Portfolio does not have outstanding any options, warrants, or other rights to subscribe for or purchase any Old Portfolio Shares, nor are there outstanding any securities convertible into any Old Portfolio Shares;
(m) Old Portfolio incurred the Liabilities, which are associated with the Assets, in the ordinary course of its business;
(n) Old Portfolio is not under the jurisdiction of a court in a “title 11 or similar case” (as defined in section 368(a)(3)(A));
(o) Not more than 25% of the value of Old Portfolio’s total assets (excluding cash, cash items, and Government securities) is invested in the stock and securities of any one issuer, and not more than 50% of the value of those assets is invested in the stock and securities of five or fewer issuers;
(p) On the effective date of the Registration Statement (as defined in paragraph 3.3(a)), at the time of the Shareholders Meeting (as defined in paragraph 4.2), and at the Effective Time, VIP’s current prospectus and statement of additional information (“Pro/SAI”) including Old Portfolio will (1) conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and (2) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;
(q) The information to be furnished by VIP for use in no-action letters, applications for orders, the Registration Statement, and other documents filed or to be filed with any federal, state, or local regulatory authority (including the Financial Industry Regulatory Authority, Inc. (“FINRA”)) that may be necessary in connection with the transactions contemplated hereby will be accurate and complete in all material respects, will comply in all material respects with federal securities laws and other laws and regulations, and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;
(r) The New Portfolio Shares to be delivered to Old Portfolio hereunder are not being acquired for the purpose of making any distribution thereof, other than in accordance with the terms hereof; and
(s) The VIP Declaration permits VIP to vary its shareholders’ investment. VIP does not have a fixed pool of assets — each series thereof (including Old Portfolio) is a managed portfolio of securities, and EIM and each investment sub-adviser thereof have the authority to buy and sell securities for it.
3.2 EQAT, on New Portfolio’s behalf, represents and warrants to VIP, on Old Portfolio’s behalf, as follows:
(a) EQAT (1) is a Delaware Statutory Trust, and its Certificate of Trust has been duly filed in the office of the Secretary of State of Delaware, (2) is duly registered under the 1940 Act as an open-end management investment company, which registration is in full force and effect, and (3) has the power to own all its properties and assets and to carry on its business as described in its current registration statement on Form N-1A;
(b) At the Effective Time, New Portfolio will be a duly established and designated series of EQAT; and New Portfolio has not commenced operations and will not do so until after the Closing;
(c) The execution, delivery, and performance hereof have been duly authorized at the date hereof by all necessary action on the part of EQAT’s Board, which has made the determinations required by Rule
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17a-8(a) under the 1940 Act; and this Agreement constitutes a valid and legally binding obligation of EQAT, with respect to New Portfolio, enforceable in accordance with its terms, except as they may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, receivership, moratorium, and similar laws affecting the rights and remedies of creditors generally and by general principles of equity;
(d) Before the Closing, there will be no (1) issued and outstanding New Portfolio Shares, (2) options, warrants, or other rights to subscribe for or purchase any New Portfolio Shares, (3) securities convertible into any New Portfolio Shares, or (4) other securities issued by New Portfolio, except the Initial Shares;
(e) No consideration other than New Portfolio Shares (and New Portfolio’s assumption of the Liabilities) will be issued in exchange for the Assets in the Reorganization;
(f) EQAT, with respect to New Portfolio, is not currently engaged in, and its execution, delivery, and performance hereof and consummation of the Reorganization will not result in, (1) a conflict with or material violation of any provision of Delaware law, EQAT’s Amended and Restated Declaration of Trust, as amended (“EQAT Declaration”), or By-Laws, or any Undertaking to which EQAT, with respect to New Portfolio or on its behalf, is a party or by which it is bound or (2) the acceleration of any obligation, or the imposition of any penalty, under any Undertaking, judgment, or decree to which EQAT, with respect to New Portfolio or on its behalf, is a party or by which it is bound;
(g) No litigation, administrative proceeding, action, or investigation of or before any court, governmental body, or arbitrator is presently pending or, to EQAT’s knowledge, threatened against EQAT, with respect to New Portfolio or any of its properties or assets attributable or allocable to New Portfolio, that, if adversely determined, would materially and adversely affect New Portfolio’s financial condition or the conduct of its business; and EQAT, on New Portfolio’s behalf, knows of no facts that might form the basis for the institution of any such litigation, proceeding, action, or investigation and is not a party to or subject to the provisions of any order, decree, judgment, or award of any court, governmental body, or arbitrator that materially and adversely affects New Portfolio’s business or EQAT’s ability to consummate the transactions contemplated hereby;
(h) From the time it comes into existence, New Portfolio (1) will not be classified as a partnership, and instead will be classified as an association that is taxable as a corporation, for federal tax purposes (and either has elected the latter classification by filing Form 8832 with the IRS or will be a “publicly traded partnership” (as defined in section 7704(b)) that is treated as a corporation) and (2) will be an “investment company” (as defined in section 368(a)(2)(F)(iii)) and a “fund” (as defined in section 851(g)(2), eligible for treatment under section 851(g)(1)); New Portfolio will file its federal income tax returns on Form 1120-RIC; for the taxable year in which the Reorganization occurs, New Portfolio will meet the requirements of Subchapter M for qualification and treatment as a RIC and will be eligible to and will compute its federal income tax under section 852; and New Portfolio intends to continue to meet all those requirements, and to be eligible to and to so compute its federal income tax, for succeeding taxable years;
(i) New Portfolio is not under the jurisdiction of a court in a “title 11 or similar case” (as defined in section 368(a)(3)(A));
(j) There is no plan or intention for New Portfolio to be terminated, dissolved, or merged into another statutory or business trust or a corporation or any “fund” thereof (as defined in section 851(g)(2)) following the Reorganization;
(k) Assuming the truthfulness and correctness of VIP’s representation and warranty in paragraph 3.1(o), immediately after the Reorganization (1) not more than 25% of the value of New Portfolio’s total assets (excluding cash, cash items, and Government securities) will be invested in the stock and securities of any one issuer and (2) not more than 50% of the value of those assets will be invested in the stock and securities of five or fewer issuers;
(l) The New Portfolio Shares to be issued and delivered to Old Portfolio, for the Shareholders’ accounts, pursuant to the terms hereof, (1) will have been duly authorized by EQAT and duly registered
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under the federal securities laws (and appropriate notices respecting them will have been duly filed under applicable state securities laws) at the Effective Time and (2) when so issued and delivered, will be duly and validly issued and outstanding New Portfolio Shares, fully paid and non-assessable by EQAT;
(m) On the effective date of the Registration Statement, at the time of the Shareholders Meeting, and at the Effective Time, (a) EQAT’s Pro/SAI including New Portfolio will conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and (b) that Pro/SAI and the prospectus included in the Registration Statement will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that the foregoing will not apply to statements in or omissions from that prospectus made in reliance on and in conformity with information furnished by VIP for use therein;
(n) The information to be furnished by EQAT for use in no-action letters, applications for orders, the Registration Statement and other documents filed or to be filed with any federal, state, or local regulatory authority (including FINRA) that may be necessary in connection with the transactions contemplated hereby will be accurate and complete in all material respects, will comply in all material respects with federal securities laws and other laws and regulations, and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and
(o) The EQAT Declaration permits EQAT to vary its shareholders’ investment. EQAT does not have a fixed pool of assets – each series thereof (including New Portfolio after it commences operations) is (or will be) a managed portfolio of securities, and EIM and each investment sub-adviser thereof have (or will have) the authority to buy and sell securities for it.
3.3 Each Investment Company, on its Portfolio’s behalf, represents and warrants to the other Investment Company, on its Portfolio’s behalf, as follows:
(a) No governmental consents, approvals, or authorizations (collectively, “consents”) or filings are required under the 1933 Act, the Securities Exchange Act of 1934, as amended, the 1940 Act, or state securities laws, and no consents or orders of any court are required, for its execution, delivery, and performance hereof on its Portfolio’s behalf, except for (1) EQAT’s filing with the Commission of a registration statement on Form N-14 relating to the New Portfolio Shares issuable hereunder, and any supplement or amendment thereto, including therein a prospectus and proxy statement (“Registration Statement”), and a post-effective amendment to EQAT’s registration statement on Form N-1A and (2) consents, filings, and orders that have been made or received or may be required after the Effective Time;
(b) The fair market value of the New Portfolio Shares each Shareholder receives will be equal to the fair market value of its Old Portfolio Shares it actually or constructively surrenders in exchange therefor;
(c) Old Portfolio’s shareholders will pay their own expenses (such as fees of personal investment or tax advisers for advice regarding the Reorganization), if any, incurred in connection with the Reorganization;
(d) The fair market value and “adjusted basis” (within the meaning of section 1011) of the Assets will equal or exceed the Liabilities to be assumed by New Portfolio and those to which the Assets are subject;
(e) None of the compensation Equitable or any affiliate thereof receives as a service provider to Old Portfolio will be separate consideration for, or allocable to, any of the Old Portfolio Shares that Equitable (on any Shareholder’s behalf) holds; none of the New Portfolio Shares Equitable (on any Shareholder’s behalf) receives in the Reorganization will be separate consideration for, or allocable to, any employment agreement, investment advisory agreement, or other service agreement; and the compensation paid to Equitable or any affiliate thereof will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm’s-length for similar services;
(f) No expenses incurred by Old Portfolio or on its behalf in connection with the Reorganization will be paid or assumed by Equitable, any affiliate thereof (including EIM), or any other third party unless those
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expenses are solely and directly related to the Reorganization (determined in accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B. 187) (“Reorganization Expenses”), and no cash or property other than New Portfolio Shares will be transferred to Old Portfolio or any of its shareholders with the intention that it be used to pay any expenses (even Reorganization Expenses) thereof;
(g) Immediately following consummation of the Reorganization, (1) the Shareholders will own all the New Portfolio Shares and will own those shares solely by reason of their ownership of the Old Portfolio Shares immediately before the Reorganization and (2) New Portfolio will hold the same assets – except for assets used to pay the Portfolios’ expenses incurred in connection with the Reorganization – and be subject to the same liabilities that Old Portfolio held or was subject to immediately before the Reorganization, plus any liabilities for those expenses; and those excepted assets, together with the amount of all redemptions and distributions (other than regular, normal dividends) Old Portfolio makes immediately preceding the Reorganization, will, in the aggregate, constitute less than 1% of its net assets;
(h) There will be no dissenters to the Reorganization under the applicable provisions of Delaware law, and New Portfolio will not pay cash in lieu of fractional New Portfolio Shares in connection with the Reorganization;
(i) The Reorganization is being undertaken for bona fide business purposes (and not a purpose to avoid federal income tax); and
(j) The principal purpose of New Portfolio’s assumption of the Liabilities is not avoidance of federal income tax on the transaction.
4. COVENANTS
4.1 VIP covenants to operate Old Portfolio’s business in the ordinary course between the date hereof and the Closing, it being understood that:
(a) such ordinary course will include declaring and paying customary dividends and other distributions and changes in operations contemplated by Old Portfolio’s normal business activities; and
(b) Old Portfolio will retain exclusive control of the composition of its portfolio until the Closing.
4.2 VIP covenants to call and hold a meeting of Old Portfolio’s shareholders to consider and act on this Agreement and to take all other action necessary to obtain approval of the transactions contemplated hereby (“Shareholder Meeting”).
4.3 VIP covenants that it will assist EQAT in obtaining information EQAT reasonably requests concerning the beneficial ownership of Old Portfolio Shares.
4.4 VIP covenants that it will turn over its books and records regarding Old Portfolio (including all tax books and records and all books and records required to be maintained under the 1940 Act and the rules and regulations thereunder) to EQAT at the Closing.
4.5 Each Investment Company covenants that it will, from time to time, as and when requested by the other Investment Company, execute and deliver or cause to be executed and delivered all assignments and other instruments, and will take or cause to be taken all further action, the other Investment Company deems necessary or desirable in order to vest in, and confirm to, (a) EQAT, on New Portfolio’s behalf, title to and possession of all the Assets, and (b) VIP, on Old Portfolio’s behalf, title to and possession of the New Portfolio Shares to be delivered hereunder, and otherwise to carry out the intent and purpose hereof.
4.6 EQAT covenants to use all reasonable efforts to obtain the consents required by the 1933 Act, the 1940 Act, and applicable state securities laws it deems appropriate to commence and continue New Portfolio’s operations after the Effective Time.
4.7 VIP covenants to distribute all the New Portfolio Shares it receives in the Reorganization to the Shareholders in complete liquidation of Old Portfolio.
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4.8 As promptly as practicable, but in any case within sixty days, after the Effective Time, VIP shall furnish to EQAT, in a form reasonably satisfactory to EQAT, a Certificate stating the earnings and profits of Old Portfolio for federal income tax purposes that will be carried over by New Portfolio as a result of section 381.
4.9 It is the Investment Companies’ intention that the Reorganization will qualify as a reorganization with the meaning of section 368(a)(1)(F). Neither Investment Company shall take any action or cause any action to be taken (including the filing of any tax return) that is inconsistent with that treatment or results in the failure of the Reorganization to qualify as such a reorganization.
4.10 Subject to this Agreement, each Investment Company covenants to take or cause to be taken all actions, and to do or cause to be done all things, reasonably necessary, proper, or advisable to consummate and effectuate the transactions contemplated hereby.
5. CONDITIONS PRECEDENT
Each Investment Company’s obligations hereunder shall be subject to (a) the other Investment Company’s performance of all its obligations to be performed hereunder at or before the Closing, (b) all representations and warranties of the other Investment Company contained herein being true and correct in all material respects at the date hereof and, except as they may be affected by the transactions contemplated hereby, at the Effective Time, with the same force and effect as if made at that time, and (c) the following further conditions that, at or before that time:
5.1 This Agreement and the transactions contemplated hereby shall have been duly adopted and approved by both Boards and by Old Portfolio’s shareholders at the Shareholders Meeting (including any adjournment(s) thereof);
5.2 All necessary filings shall have been made with the Commission and state securities authorities, and no order or directive shall have been received that any other or further action is required to permit the Investment Companies to carry out the transactions contemplated hereby; the Registration Statement shall have become effective under the 1933 Act and no stop orders suspending the effectiveness thereof shall have been issued, and, to each Investment Company’s best knowledge, no investigation or proceeding for that purpose shall have been instituted or shall be pending, threatened, or contemplated under the 1933 Act or the 1940 Act; the Commission shall not have issued an unfavorable report with respect to the Reorganization under section 25(b) of the 1940 Act nor instituted any proceedings seeking to enjoin consummation of the transactions contemplated hereby under section 25(c) of the 1940 Act; and all consents, orders, and permits of federal, state, and local regulatory authorities (including the Commission and state securities authorities) either Investment Company deems necessary to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain same would not involve a risk of a material adverse effect on either Portfolio’s assets or properties, provided that either Investment Company may for itself waive any of those conditions;
5.3 At the Effective Time, no action, suit, or other proceeding shall be pending (or, to either Investment Company’s best knowledge, threatened to be commenced) before any court, governmental agency, or arbitrator in which it is sought to enjoin the performance of, restrain, prohibit, affect the enforceability of, or obtain damages or other relief in connection with, the transactions contemplated hereby;
5.4 The Investment Companies shall have received an opinion of K&L Gates LLP (“Counsel”) as to the federal income tax consequences mentioned below (“Tax Opinion”). In rendering the Tax Opinion, Counsel may rely as to factual matters, exclusively and without independent verification, on the representations and warranties made in this Agreement, which Counsel may treat as representations and warranties made to it (that, notwithstanding paragraph 7, shall survive the Closing), and in separate letters, if Counsel requests, addressed to it (collectively, “Representations”) and the Certificates delivered pursuant to paragraph 2.5(a). The Tax Opinion shall be substantially to the effect that — based on the facts and assumptions stated therein and conditioned on the Representations’ being true and complete at the Effective Time and consummation of the Reorganization in accordance herewith (without the waiver or modification of any terms or conditions hereof and without taking into account any amendment hereof that Counsel has not approved) — for federal income tax purposes:
(a) New Portfolio’s acquisition of the Assets in exchange solely for New Portfolio Shares and its assumption of the Liabilities, followed by Old Portfolio’s distribution of those shares pro rata to the
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Shareholders actually or constructively in exchange for their Old Portfolio Shares and in complete liquidation of Old Portfolio, will qualify as a “reorganization” (as defined in section 368(a)(1)(F)), and each Portfolio will be “a party to a reorganization” (within the meaning of section 368(b));
(b) Old Portfolio will recognize no gain or loss on the transfer of the Assets to New Portfolio in exchange solely for New Portfolio Shares and New Portfolio’s assumption of the Liabilities or on the subsequent distribution of those shares to the Shareholders in exchange for their Old Portfolio Shares;
(c) New Portfolio will recognize no gain or loss on its receipt of the Assets in exchange solely for New Portfolio Shares and its assumption of the Liabilities;
(d) New Portfolio’s basis in each Asset will be the same as Old Portfolio’s basis therein immediately before the Reorganization, and New Portfolio’s holding period for each Asset will include Old Portfolio’s holding period therefor (except where New Portfolio’s investment activities have the effect of reducing or eliminating an Asset’s holding period);
(e) A Shareholder will recognize no gain or loss on the exchange of all its Old Portfolio Shares solely for New Portfolio Shares pursuant to the Reorganization;
(f) A Shareholder’s aggregate basis in the New Portfolio Shares it receives in the Reorganization will be the same as the aggregate basis in its Old Portfolio Shares it actually or constructively surrenders in exchange for those New Portfolio Shares; and its holding period for those New Portfolio Shares will include, in each instance, its holding period for those Old Portfolio Shares, provided the Shareholder holds the latter as capital assets at the Effective Time; and
(g) For purposes of section 381, New Portfolio will be treated just as Old Portfolio would have been treated if there had been no Reorganization. Accordingly, the Reorganization will not result in the termination of Old Portfolio’s taxable year, Old Portfolio’s tax attributes enumerated in section 381(c) will be taken into account by New Portfolio as if there had been no Reorganization, and the part of Old Portfolio’s taxable year before the Reorganization will be included in New Portfolio’s taxable year after the Reorganization.
Notwithstanding subparagraphs (b) and (d), the Tax Opinion may state that no opinion is expressed as to the effect of the Reorganization on Old Portfolio with respect to any Asset as to which any unrealized gain or loss is required to be recognized for federal income tax purposes on the termination or transfer thereof under a mark-to-market system of accounting;
5.5 Before the Closing, EQAT’s Board shall have authorized the issuance of, and EQAT shall have issued, one New Portfolio Share in each class (“Initial Shares”) to Equitable or an affiliate thereof, in consideration of the payment of $10.00 each (or other amount that Board determines), to vote on the investment management and sub-advisory contracts, distribution and service plan, and other agreements and plans referred to in paragraph 5.6 and to take whatever action it may be required to take as New Portfolio’s sole shareholder;
5.6 EQAT, on New Portfolio’s behalf, shall have entered into, or adopted, as appropriate, an investment management contract, a sub-advisory contract, a distribution and service plan pursuant to Rule 12b-1 under the 1940 Act, and other agreements and plans necessary for New Portfolio’s operation as a series of an open-end management investment company. Each such contract, plan, and agreement shall have been approved by EQAT’s Board and, to the extent required by law (as interpreted by Commission staff positions), by its trustees who are Non-Interested Persons thereof and by Equitable or its affiliate as New Portfolio’s sole shareholder;
5.7 EQAT, on New Portfolio’s behalf, shall have executed and delivered at or before the Closing a Certificate confirming that EQAT, on New Portfolio’s behalf, assumes all of the Liabilities; and
5.8 At any time before the Closing, either Investment Company may waive any of the foregoing conditions (except those set forth in paragraphs 5.1 and 5.4) if, in the judgment of its Board, that waiver will not have a material adverse effect on its Portfolio’s shareholders’ interests.
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6. EXPENSES
The expenses of the Reorganizations shall be borne by all the Old Portfolios as described in the Registration Statement, except that (a) no Old Portfolio shall bear any brokerage or similar expenses incurred by or for the benefit of another Portfolio in connection with the Reorganizations, which shall be borne by the Portfolio that directly incurs them, and (b) expenses shall be paid by the Portfolio directly incurring them if and to the extent that the payment thereof by another person would result in that Portfolio’s disqualification as a RIC.
7. ENTIRE AGREEMENT; NO SURVIVAL
Neither Investment Company has made any representation, warranty, or covenant not set forth herein, and this Agreement constitutes the entire agreement between the Investment Companies. The representations, warranties, and covenants contained herein or in any document delivered pursuant hereto or in connection herewith shall not survive the Closing (except to the extent provided in paragraph 5.4).
8. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or before the Closing:
8.1 By either Investment Company (a) in the event of the other Investment Company’s material breach of any representation, warranty, or covenant contained herein to be performed at or before the Closing, (b) if a condition to its obligations has not been met and it reasonably appears that that condition will not or cannot be met, (c) if a governmental body issues an order, decree, or ruling having the effect of permanently enjoining, restraining, or otherwise prohibiting consummation of the Reorganization, or (d) if the Closing has not occurred on or before [ ], 2024, or another date to which the Investment Companies agree; or
8.2 By the Investment Companies’ mutual agreement.
In the event of termination under paragraphs 8.1(c) or (d) or 8.2, neither Investment Company (nor its trustees, officers, or shareholders) shall have any liability to the other Investment Company.
9. AMENDMENTS
The Investment Companies may amend, modify, or supplement this Agreement at any time in any manner they mutually agree on in writing, notwithstanding Old Portfolio’s shareholders’ approval thereof; provided that, following that approval no such amendment, modification, or supplement shall have a material adverse effect on the Shareholders’ interests.
10. MISCELLANEOUS
10.1 This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving effect to principles of conflicts of laws; provided that, in the case of any conflict between those laws and the federal securities laws, the latter shall govern.
10.2 Nothing expressed or implied herein is intended or shall be construed to confer on or give any person, firm, trust, or corporation other than each Investment Company, on its Portfolio’s behalf, and its respective successors and assigns any rights or remedies under or by reason hereof.
10.3 Notice is hereby given that this instrument is executed and delivered on behalf of each Investment Company’s trustees solely in their capacities as trustees, and not individually, and that each Investment Company’s obligations under this instrument are not binding on or enforceable against any of its trustees, officers, shareholders, or series other than its Portfolio but are only binding on and enforceable against its property attributable to and held for the benefit of its Portfolio (“Portfolio’s Property”) and not its property attributable to and held for the benefit of any other series thereof. Each Investment Company, in asserting any rights or claims hereunder on its or its Portfolio’s behalf, shall look only to the other Portfolio’s Property in settlement of those rights or claims and not to the property of any other series of the other Investment Company or to those trustees, officers, or shareholders.
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10.4 Any term or provision hereof that is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of that invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions hereof or affecting the validity or enforceability of any of the terms and provisions hereof in any other jurisdiction.
10.5 This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been executed by each Investment Company and delivered to the other Investment Company. The headings contained herein are for reference purposes only and shall not affect in any way the meaning or interpretation hereof.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed and delivered by its duly authorized officer as of the day and year first written above.
EQ ADVISORS TRUST, on behalf of each New Portfolio | ||
By: |
| |
Name: Title: | Steven M. Joenk Chief Executive Officer | |
EQ PREMIER VIP TRUST, on behalf of each Old Portfolio | ||
By: |
| |
Name: Title: | Brian E. Walsh Chief Financial Officer |
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SCHEDULE A
NEW PORTFOLIOS (series of EQAT) | OLD PORTFOLIOS (series of VIP) | |
EQ/Conservative Allocation Portfolio Class IA, Class IB, Class K | EQ/Conservative Allocation Portfolio Class A, Class B, Class K | |
EQ/Conservative-Plus Allocation Portfolio Class IA, Class IB, Class K | EQ/Conservative-Plus Allocation Portfolio Class A, Class B, Class K | |
EQ/Moderate Allocation Portfolio Class IA, Class IB, Class K | EQ/Moderate Allocation Portfolio Class A, Class B, Class K | |
EQ/Moderate-Plus Allocation Portfolio Class IA, Class IB, Class K | EQ/Moderate-Plus Allocation Portfolio Class A, Class B, Class K | |
EQ/Aggressive Allocation Portfolio Class IA, Class IB, Class K | EQ/Aggressive Allocation Portfolio Class A, Class B, Class K | |
EQ/Core Plus Bond Portfolio Class IA, Class IB, Class K | EQ/Core Plus Bond Portfolio Class A, Class B, Class K | |
Target 2015 Allocation Portfolio Class IB, Class K | Target 2015 Allocation Portfolio Class B, Class K | |
Target 2025 Allocation Portfolio Class IB, Class K | Target 2025 Allocation Portfolio Class B, Class K | |
Target 2035 Allocation Portfolio Class IB, Class K | Target 2035 Allocation Portfolio Class B, Class K | |
Target 2045 Allocation Portfolio Class IB, Class K | Target 2045 Allocation Portfolio Class B, Class K | |
Target 2055 Allocation Portfolio Class IB, Class K | Target 2055 Allocation Portfolio Class B, Class K |
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MORE INFORMATION ON STRATEGIES AND RISK FACTORS
(NEW EQ ALLOCATION PORTFOLIOS AND NEW TARGET ALLOCATION PORTFOLIOS)
The Acquiring Portfolios at a Glance
The New EQ Allocation Portfolios and New Target Allocation Portfolios (each, a “Portfolio”) are designed as a convenient approach to help investors meet retirement and other long-term goals. Investors may choose to invest in one or more of the Portfolios based on their risk tolerance, investment time horizons and personal investment goals.
There are five (5) New EQ Allocation Portfolios and five (5) New Target Allocation Portfolios.
Each New EQ Allocation Portfolio pursues its investment objective by investing in Underlying Portfolios, all of which are managed by EIM or an affiliate of EIM.
The chart below illustrates each New EQ Allocation Portfolio according to its relative emphasis on seeking income and seeking growth of capital:
New EQ Allocation Portfolio | Income | Growth of Capital | ||
New EQ/Conservative Allocation Portfolio | High | Low | ||
New EQ/Conservative-Plus Allocation Portfolio | Medium to High | Low to Medium | ||
New EQ/Moderate Allocation Portfolio | Medium | Medium to High | ||
New EQ/Moderate-Plus Allocation Portfolio | Low | Medium to High | ||
New EQ/Aggressive Allocation Portfolio | Low | High |
Each New Target Allocation Portfolio pursues its investment objective by investing in Underlying Portfolios, all of which are managed by EIM or an affiliate of EIM. Each New Target Allocation Portfolio is managed to target a particular year as the specific year of planned retirement:
New Target Allocation Portfolios
New Target 2015 Allocation Portfolio
New Target 2025 Allocation Portfolio
New Target 2035 Allocation Portfolio
New Target 2045 Allocation Portfolio
New Target 2055 Allocation Portfolio
EIM, under the oversight of the EQ Trust’s Board, has established an asset allocation target for each Portfolio. This target is the approximate percentage of each Portfolio’s assets that is invested in equity securities or fixed income securities (referred to herein as “asset classes”) as represented by the holdings of the Underlying Portfolios in which a Portfolio invests. Subject to this asset allocation target, the Adviser also has established target investment percentages for each asset category in which a New EQ Allocation Portfolio invests. Each target investment percentage is an approximate percentage of a New EQ Allocation Portfolio’s assets that is invested in a particular asset category through investments in Underlying Portfolios whose individual securities holdings fall within such asset category. As used in this Proxy Statement/Prospectus, the term “asset category” refers to specific types of securities within each asset class (i.e., international equities, large-cap equities, small/mid-cap equities, investment grade bond and high yield bond). The asset allocation targets and target investment percentages may be changed without notice or shareholder approval.
The Adviser establishes the asset allocation targets for each asset class and the target investment percentages for each asset category and identifies the specific Underlying Portfolios in which to invest using its proprietary investment process, based on fundamental research regarding the investment characteristics of the asset classes, asset categories and Underlying Portfolios, as well as the Adviser’s outlook for the economy and financial markets. The Adviser may change the asset allocation targets and the target investment percentages and may add new Underlying Portfolios or replace or eliminate existing Underlying Portfolios. The Adviser may sell a Portfolio’s holdings for a variety of reasons, including to invest in another Underlying Portfolio believed to offer
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superior investment opportunities. The following chart describes the current asset allocation targets and target investment percentages among the asset classes and asset categories for the New EQ Allocation Portfolios.
New EQ Allocation Portfolios |
| |||||||||||||||||||
Asset Class | New | New | New | New | New | |||||||||||||||
Percentage of Equity | 20% | 40% | 50% | 70% | 90% | |||||||||||||||
• Foreign | 5% | 10% | 15% | 20% | 25% | |||||||||||||||
• Large Cap | 10% | 20% | 20% | 30% | 40% | |||||||||||||||
• Small/Mid Cap | 5% | 10% | 15% | 20% | 25% | |||||||||||||||
Percentage of Fixed Income* | 80% | 60% | 50% | 30% | 10% | |||||||||||||||
• Investment Grade | 75% | 55% | 45% | 28% | 9% | |||||||||||||||
• High Yield** | 5% | 5% | 5% | 2% | 1% |
* | The target allocation for the investment grade and high yield fixed income asset categories may include securities of both U.S. and foreign issuers. |
** | High yield fixed income assets, including high yield bonds, also are known as “junk bonds.” |
A Portfolio may deviate temporarily from its asset allocation targets and target investment percentages for defensive purposes. A Portfolio can deviate by up to 15% of its target allocation for each asset class and/or asset category. In addition, with respect to the New Target Allocation Portfolios, there may be occasions when those ranges will expand to 20% due to a variety of factors, including appreciation or depreciation of one or more asset classes. A Portfolio may deviate from its asset allocation targets and target investment percentages as a result of appreciation or depreciation of the holdings of the Underlying Portfolios. The Portfolios have adopted certain policies to reduce the likelihood of such an occurrence. First, the Adviser will rebalance a Portfolio’s holdings periodically to bring its asset allocation back into alignment with its asset allocation targets and target investment percentages. Second, the Adviser will not allocate any new investment dollars to any Underlying Portfolio that primarily holds securities of a particular asset class or category whose maximum percentage has been exceeded. Third, the Adviser will allocate new investment dollars on a priority basis to Underlying Portfolios that primarily hold securities of a particular asset class or category whose minimum percentage has not been achieved.
A New EQ Allocation Portfolio may invest in Underlying Portfolios that tactically manage equity exposure. When market volatility is increasing above specific thresholds, such Underlying Portfolios may reduce their equity exposure. During such times, a New EQ Allocation Portfolio’s exposure to equity securities may be significantly less than if it invested in a traditional equity portfolio and the New EQ Allocation Portfolio may deviate significantly from its asset allocation targets. Although a New EQ Allocation Portfolio’s investment in Underlying Portfolios that tactically manage equity exposure is intended to reduce the New EQ Allocation Portfolio’s overall risk, it may result in periods of underperformance, even during periods when the market is rising.
The Portfolios also may, from time to time, hold cash or cash equivalents (instead of being allocated to an Underlying Portfolio) as deemed appropriate by the Adviser and for temporary defensive purposes to respond to adverse market, economic or political conditions. During such times, the Adviser may reduce the equity allocation of a Portfolio as low as zero, although the equity allocation may remain sizable. Should a Portfolio take this action, it may not achieve its investment objective. The Portfolios also may hold U.S. government securities and money market instruments directly for investment or other appropriate purposes.
In order to give you a better understanding of the types of Underlying Portfolios in which the Portfolios currently may invest, the table below lists the Underlying Portfolios, divided by asset category, based on each Underlying Portfolio’s primary securities holdings (as described in its prospectus). Each of the Underlying Portfolios is advised by the Adviser or an affiliate of the Adviser and may be sub-advised by one or more investment sub-advisers, which may include an affiliate of the Adviser. The Adviser’s selection of Underlying Portfolios may have a positive or negative impact on its or its affiliates’ revenues and/or profits. You should be aware that in addition to the fees directly associated with a Portfolio, you will also indirectly bear the fees of the Underlying Portfolios, which include advisory fees paid to the Adviser or an affiliate of the Adviser and administration fees paid to an affiliate of the Adviser and, in certain instances, sub-advisory fees paid by the Adviser to an affiliate. Each of the
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Underlying Portfolios is in the same fund complex as the Portfolios. The Portfolios will purchase Class K shares of the Underlying Portfolios, which are not subject to distribution or service (Rule 12b-1) fees. The Underlying Portfolios in which a Portfolio may invest may be changed from time to time at the discretion of the Adviser without notice or shareholder approval.
New EQ Allocation Portfolios
Investment Grade Bond | Large Cap Equities | Small/Mid Cap Equities | ||
1290 VT DoubleLine Opportunistic Bond Portfolio EQ/AB Short Duration Government Bond Portfolio EQ/Core Bond Index Portfolio EQ/Intermediate Corporate Bond Portfolio EQ/Intermediate Government Bond Portfolio EQ/Money Market Portfolio EQ/PIMCO Global Real Return Portfolio EQ/PIMCO Ultra Short Bond Portfolio EQ/Quality Bond PLUS Portfolio Multimanager Core Bond Portfolio EQ/PIMCO Real Return Portfolio EQ/PIMCO Total Return ESG Portfolio 1290 Diversified Bond Fund* EQ/Core Plus Bond Portfolio EQ/Long-Term Bond Portfolio
High Yield Bond
1290 VT High Yield Bond Portfolio 1290 High Yield Bond Fund* | ATM Large Cap Managed Volatility Portfolio EQ/Large Cap Core Managed Volatility Portfolio EQ/Large Cap Value Managed Volatility Portfolio EQ/Loomis Sayles Growth Portfolio EQ/ClearBridge Select Equity Managed Volatility Portfolio EQ/Value Equity Portfolio 1290 VT Equity Income Portfolio EQ/Capital Group Research Portfolio EQ/Common Stock Index Portfolio EQ/Equity 500 Index Portfolio EQ/Invesco Comstock Portfolio EQ/JPMorgan Value Opportunities Portfolio EQ/Large Cap Growth Index Portfolio EQ/Large Cap Value Index Portfolio EQ/T. Rowe Price Growth Stock Portfolio EQ/ClearBridge Large Cap Growth ESG Portfolio Multimanager Aggressive Equity Portfolio EQ/Franklin Rising Dividends Portfolio EQ/Fidelity Institutional AMSM Large Cap Portfolio 1290 VT Socially Responsible Portfolio | ATM Mid Cap Managed Volatility Portfolio ATM Small Cap Managed Volatility Portfolio EQ/Franklin Small Cap Value Managed Volatility Portfolio 1290 VT Small Cap Value Portfolio 1290 VT Micro Cap Portfolio EQ/Morgan Stanley Small Cap Growth Portfolio EQ/AB Small Cap Growth Portfolio 1290 VT GAMCO Small Company Value Portfolio EQ/Mid Cap Index Portfolio EQ/Janus Enterprise Portfolio EQ/Small Company Index Portfolio EQ/American Century Mid Cap Value Portfolio EQ/Goldman Sachs Mid Cap Value Portfolio EQ/MFS Mid Cap Focused Growth Portfolio 1290 Essex Small Cap Growth Fund* 1290 GAMCO Small/Mid Cap Value Fund*
International/Global Equities
ATM International Managed Volatility Portfolio EQ/Global Equity Managed Volatility Portfolio EQ/International Core Managed Volatility Portfolio EQ/International Value Managed Volatility Portfolio EQ/Lazard Emerging Markets Equity Portfolio EQ/Emerging Markets Equity PLUS Portfolio EQ/International Equity Index Portfolio EQ/MFS International Growth Portfolio EQ/Invesco Global Portfolio EQ/MFS International Intrinsic Value Portfolio 1290 SmartBeta Equity Fund* 1290 VT SmartBeta Equity ESG Portfolio |
* | The Underlying Portfolio is managed by Equitable Investment Management, LLC, an affiliate of the Adviser, and is in the same fund complex as the Portfolios. |
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New Target Allocation Portfolios
Investment Grade Bond | International Equities | Small/Mid Cap Equities | ||
EQ/Core Bond Index Portfolio EQ/Intermediate Corporate Bond Portfolio EQ/PIMCO Global Real Return Portfolio EQ/PIMCO Ultra Short Bond Portfolio EQ/Quality Bond PLUS Portfolio EQ/Core Plus Bond Portfolio 1290 Diversified Bond Fund* EQ/Long-Term Bond Portfolio
High Yield Bond
1290 VT High Yield Bond Portfolio | EQ/Emerging Markets Equity PLUS Portfolio EQ/MFS International Growth Portfolio EQ/International Equity Index Portfolio
Large Cap Equities
EQ/Value Equity Portfolio EQ/Equity 500 Index Portfolio EQ/T. Rowe Price Growth Stock Portfolio Multimanager Aggressive Equity Portfolio | EQ/AB Small Cap Growth Portfolio EQ/American Century Mid Cap Value Portfolio 1290 VT GAMCO Small Company Value Portfolio EQ/Janus Enterprise Portfolio EQ/Small Company Index Portfolio |
* | The Underlying Portfolio is managed by Equitable Investment Management, LLC, an affiliate of the Adviser, and is in the same fund complex as the Portfolios. |
You should note that the Underlying Portfolios managed by the Adviser may already be available directly as an investment option in your Contract and that an investor in any of the Portfolios bears both the expenses of the particular New EQ Allocation Portfolio or New Target Allocation Portfolio, as well as the indirect expenses associated with the Underlying Portfolios. Therefore, an investor may be able to realize lower aggregate expenses by investing directly in the Underlying Portfolios of a New EQ Allocation Portfolio or New Target Allocation Portfolio instead of in the New EQ Allocation Portfolio or New Target Allocation Portfolio itself. However, not all of the Underlying Portfolios of a New EQ Allocation Portfolio or New Target Allocation Portfolio may be available as an investment option in your Contract. In addition, an investor who chooses to invest directly in the Underlying Portfolios would not receive the asset allocation and rebalancing services provided by the Adviser.
More about Investment Strategies
Changes in Investment Objectives and Investment Strategies
As described in this Proxy Statement/Prospectus, each Portfolio has its own investment objective, policies and strategies. There is no assurance that a Portfolio will achieve its investment objective. The investment objective of each Portfolio may be changed without shareholder approval. Except as otherwise noted, the investment policies and strategies of a Portfolio are not fundamental policies and may be changed without a shareholder vote. In addition, to the extent a Portfolio is new or is undergoing a transition (such as a reorganization or rebalancing, or experiences large inflows or outflows) or takes a temporary defensive position, it may not be pursuing its investment objective or executing its principal investment strategies.
Additional Information about the Investment Strategies
The following provides additional information regarding the principal investment strategies of the Portfolios as discussed in “Comparison of Investment Objectives, Policies and Strategies” in the Proxy Statement/Prospectus and provides information regarding additional investment strategies that the Portfolios may employ. The Portfolios also may make other types of investments to the extent permitted by applicable law. For further information about investment strategies, please see the Portfolios’ Statement of Additional Information.
Securities of Other Investment Companies. Each Portfolio invests primarily in Underlying Portfolios. Accordingly, each Portfolio’s performance depends upon a favorable allocation by the Adviser among the
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Underlying Portfolios, as well as the ability of the Underlying Portfolios to generate favorable performance. The Underlying Portfolios are other mutual funds that are managed by the Adviser or an affiliate of the Adviser and sub-advised by one or more investment sub-advisers (“Sub-Adviser”), which may include an affiliate of the Adviser.
Each Portfolio has target investment percentages (an approximate percentage of such Portfolio’s assets invested in a particular asset category — i.e., international equities, large cap equities, small/mid cap equities, investment grade bond and high yield bond — as represented by the primary holdings, as described in the prospectuses, of the Underlying Portfolios).
Generally, a Portfolio’s investments in other investment companies are subject to statutory limitations in the 1940 Act, which prohibit the acquisition of shares of other investment companies in excess of certain limits. However, there are statutory and regulatory exemptions from these restrictions under the 1940 Act on which the Portfolios rely to invest in other investment companies in excess of these limits, subject to certain conditions.
U.S. Government Securities. Each Portfolio may invest in U.S. government securities, which include direct obligations of the U.S. Treasury (such as Treasury bills, notes or bonds) and obligations issued or guaranteed as to principal and interest (but not as to market value) by the U.S. government, its agencies or its instrumentalities. U.S. government securities include mortgage- and asset-backed securities issued or guaranteed by government agencies or government-sponsored enterprises. Other U.S. government securities may be backed by the full faith and credit of the U.S. government or supported primarily or solely by the creditworthiness of the government-related issuer or, in the case of mortgage-backed securities, by pools of assets.
Cash and Short-Term Investments. Each Portfolio may hold cash or invest in short-term paper and other short-term investments (instead of being allocated to an Underlying Portfolio) as deemed appropriate by the Adviser. Short-term paper generally includes any note, draft bill of exchange or banker’s acceptance payable on demand or having a maturity at the time of issuance that does not exceed nine months or any renewal thereof payable on demand or having a maturity that is likewise limited.
Each Portfolio also may invest its uninvested cash in high-quality, short-term debt securities, including repurchase agreements and high-quality money market instruments, and also may invest uninvested cash in money market funds, including money market funds managed by the Adviser. To the extent a Portfolio invests in a money market fund, it generally is not subject to the limits placed on investments in other investment companies by the 1940 Act.
Generally, these securities offer less potential for gains than other types of securities.
Portfolio Turnover. The Portfolios do not restrict the frequency of trading to limit expenses. A Portfolio may engage in active and frequent trading of portfolio securities to achieve its investment objective. A portfolio turnover rate of 100%, for example, is equivalent to a Portfolio buying and selling all of its portfolio securities once during the course of a given fiscal year. High portfolio turnover (generally, turnover in excess of 100% in any given fiscal year) may result in increased transaction costs to a Portfolio, which may result in higher fund expenses and lower total return, and an increase in taxable capital gains distributions to the Portfolio’s shareholders (although tax implications for investments in Contracts typically are deferred during the accumulation phase).
Temporary Defensive Investments. For temporary defensive purposes in response to adverse market, economic, political or other conditions, each Portfolio may invest, without limit, in cash, money market instruments or high quality, short-term debt securities, including repurchase agreements. To the extent a Portfolio is invested in these instruments, the Portfolio will not be pursuing its principal investment strategies and may not achieve its investment objective. In addition, each Portfolio may deviate from its asset allocation targets and target investment percentages for defensive purposes.
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Risks
Risk is the chance that you will lose money on your investment or that it will not earn as much as you expect. In general, the greater the risk, the more money your investment can earn for you and the more you can lose. Like other investment companies, the value of each Portfolio’s shares may be affected by the Portfolio’s investment objective, principal investment strategies and particular risk factors. Each New EQ Allocation Portfolio follows a distinct set of investment strategies. Each New Target Allocation Portfolio follows a similar investment strategy; however, a New Target Allocation Portfolio’s allocation among Underlying Portfolios will vary depending on its retirement date and, therefore, its exposure to risk will vary. Consequently, each Portfolio may be subject to different risks. Some of the risks of investing in the Portfolios are discussed below, including the principal risks of the Portfolios as discussed in “Comparison of Principal Risk Factors” in the Proxy Statement/Prospectus. However, other factors may also affect a Portfolio’s investment results. There is no assurance that a Portfolio will achieve its investment objective or that it will not lose value.
To the extent a Portfolio invests in Underlying Portfolios that invest primarily in certain types of securities or other instruments (such as equity securities and other equity instruments, fixed income securities and other fixed income instruments, and foreign securities), the performance of the Portfolio will be subject to the risks of investing in such securities or other instruments.
The Underlying Portfolios have principal investment strategies that come with inherent risks. Certain Underlying Portfolios may emphasize different market sectors. Some of the risks, including principal risks of investing in the Underlying Portfolios, are discussed below. An Underlying Portfolio may be subject to certain additional risks as discussed in its prospectus. More information about the Underlying Portfolios is available in their respective prospectuses.
In each of the risk categories below, risks are described in alphabetical order and not in order of perceived importance or potential exposure. In this section, the term “Portfolio” may include a New EQ Allocation Portfolio, a New Target Allocation Portfolio, an Underlying Portfolio, or all of the above.
General Risks
Each Portfolio and each of the Underlying Portfolios may be subject to certain general investment risks, as discussed below.
Affiliated Portfolio Risk. In managing a Portfolio that invests in Underlying Portfolios, the Adviser will have the authority to select and substitute the Underlying Portfolios. The Adviser is subject to conflicts of interest in allocating a Portfolio’s assets among the various Underlying Portfolios because the revenue the Adviser and its affiliates receive from some of the Underlying Portfolios is higher than the revenue received from other Underlying Portfolios for the services the Adviser and its affiliates provide.
A Portfolio investing in Underlying Portfolios may from time to time own or control a significant percentage of an Underlying Portfolio’s shares. Accordingly, an Underlying Portfolio is subject to the potential for large-scale inflows and outflows as a result of purchases and redemptions of its shares by such a Portfolio. These inflows and outflows may be frequent and could negatively affect an Underlying Portfolio’s and, in turn, a Portfolio’s net asset value and performance and could cause an Underlying Portfolio to purchase or sell securities at a time when it would not normally do so. It would be particularly disadvantageous for an Underlying Portfolio if it experiences outflows and needs to sell securities at a time of volatility in the markets, when values could be falling. These inflows and outflows also could negatively affect an Underlying Portfolio’s and, in turn, a Portfolio’s ability to meet shareholder redemption requests or could limit an Underlying Portfolio’s and, in turn, a Portfolio’s ability to pay redemption proceeds within the time period stated in its prospectus because of unusual market conditions, an unusually high volume of redemption requests, or other reasons. During periods of declining or illiquid markets, the Adviser also may be subject to conflicts of interest in selecting shares of Underlying Portfolios for redemption and in deciding whether and when to redeem such shares. In addition, these inflows and outflows could increase an Underlying Portfolio’s and, in turn, a Portfolio’s brokerage or other transaction costs, and large-scale outflows could cause an Underlying Portfolio’s and, in turn, a Portfolio’s,
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actual expenses to increase, or could result in an Underlying Portfolio’s current expenses being allocated over a smaller asset base, which, depending on any applicable expense caps, could lead to an increase in the Underlying Portfolio’s and, in turn, a Portfolio’s expense ratio. Consistent with its fiduciary duties, the Adviser seeks to implement each Portfolio’s and each Underlying Portfolio’s investment program in a manner that is in the best interest of that Portfolio and Underlying Portfolio and that is consistent with its investment objective, policies, and strategies.
Asset Allocation Risk. The investment performance of an allocation Portfolio depends upon how its assets are allocated across various asset classes and how its assets are invested within those asset classes. Some asset classes and investments may perform below expectations or the securities markets generally over short and extended periods. The allocation strategies used and the allocation and investment decisions made could cause a Portfolio to lose value, may not produce the desired results, or may cause a Portfolio’s results to lag relevant benchmarks or other portfolios with similar investment objectives. For example, weighting equity securities too heavily during a period of stock market decline may result in a failure to preserve capital. Conversely, weighting debt securities too heavily during a period of stock market appreciation may result in lower total return. In addition, the allocation and investment decisions made may not be timely relative to market, economic or other developments. Moreover, if a Portfolio has set limitations on the amount of assets that normally may be allocated to each asset class, the Portfolio will have less flexibility in its investment strategy than portfolios that are not subject to such limitations.
Cash Management Risk. Upon entering into certain derivatives contracts, such as futures contracts, and to maintain open positions in certain derivatives contracts, a Portfolio may be required to post collateral for the contract, the amount of which may vary. In addition, a Portfolio may maintain cash and cash equivalent positions as part of the Portfolio’s strategy in order to take advantage of investment opportunities as they arise, to manage the Portfolio’s market exposure and for other portfolio management purposes. As such, a Portfolio may maintain cash balances, including foreign currency balances, which may be significant, with counterparties such as the EQ Trust’s custodian or its affiliates. Maintaining larger cash and cash equivalent positions could negatively affect a Portfolio’s performance due to missed investment opportunities and may also subject a Portfolio to additional risks, such as increased credit risk with respect to the custodian bank holding the assets and the risk that a counterparty may be unable or unwilling, or perceived (whether by market participants, ratings agencies, pricing services or otherwise) as unable or unwilling, to honor its obligations, and increased costs, such as any fees imposed for large cash balances.
Concentration Risk. If an Underlying Portfolio concentrates, or invests a higher percentage of its assets, in the securities of a particular issuer or issuers in a particular country, group of countries, region, market, industry, group of industries, sector or asset class, that Underlying Portfolio may be adversely affected by the performance of those securities, may be subject to increased price volatility, and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that issuer or issuers, country, group of countries, region, market, industry, group of industries, sector or asset class.
Counterparty Risk. A Portfolio may sustain a loss as a result of the insolvency or bankruptcy of, or other non-compliance or non-performance by, another party to a transaction.
Cybersecurity and Operational Risk. A Portfolio and its service providers, and shareholders’ ability to transact with a Portfolio, may be negatively impacted due to operational risks arising from, among other problems, human errors, systems and technology disruptions or failures, or cybersecurity incidents. Cybersecurity incidents may allow an unauthorized party to gain access to Portfolio assets, customer data, or proprietary information, or cause a Portfolio or its service providers, as well as securities trading venues and their service providers, to suffer data corruption or lose operational functionality. Cybersecurity incidents can result from deliberate attacks (e.g., malicious software coding, ransomware, or “hacking”) or unintentional events (e.g., inadvertent release of confidential information, including by a Portfolio or its service providers). Recently, geopolitical tensions may have increased the scale and sophistication of deliberate attacks, particularly those from nation-states or from entities with nation-state backing. A cybersecurity incident could, among other things, result in the loss or theft of customer data or funds, customers or employees being unable to access electronic
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systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network system, or remediation costs associated with system repairs. Any of these results could have a substantial adverse impact on a Portfolio and its shareholders.
The occurrence of any of these problems could result in a loss of information, the inability to process Portfolio transactions or calculate a Portfolio’s net asset value, violations of applicable privacy and other laws, regulatory scrutiny, penalties, fines, reputational damage, additional compliance costs or other consequences, any of which could have a material adverse effect on a Portfolio or its shareholders. The Adviser, through its monitoring and oversight of Portfolio service providers, seeks to determine that service providers take appropriate precautions to avoid and mitigate risks that could lead to such problems. However, it is not possible for the Adviser or Portfolio service providers to identify all of the cybersecurity or other operational risks that may affect a Portfolio or to develop processes and controls to completely eliminate or mitigate their occurrence or effects. Technology is continuously changing, and new ways to carry out cyber attacks are always developing.
Among other situations, disruptions (for example, pandemics or health crises) or other developments that cause prolonged periods of remote work or significant employee absences at a Portfolio’s service providers could impact the ability to conduct the Portfolio’s operations. Most issuers in which a Portfolio invests are heavily dependent on computers for data storage and operations and require ready access to the internet to conduct their businesses. Thus, cybersecurity incidents could also affect issuers of securities in which a Portfolio invests, leading to significant loss of value. A Portfolio may incur substantial costs to prevent or address cybersecurity incidents in the future.
Derivatives Risk. A derivative instrument is generally an investment contract the value of which depends upon (or is derived from), in whole or in part, the value of an underlying asset, reference rate, index or event (e.g., stocks, bonds, commodities, currencies, interest rates and market indexes). A Portfolio’s investments in derivatives may rise or fall in value more rapidly than other investments and may reduce the Portfolio’s returns and increase the volatility of the Portfolio’s net asset value. Examples of derivative instruments include, among others, forward contracts, futures contracts, options contracts, options on futures contracts, and swaps. The following provides a more general discussion of important risk factors (e.g., counterparty and credit risk, leveraging risk, liquidity risk, management risk, market and interest rate risk, valuation risk, and other risks) relating to all derivative instruments that a Portfolio may use. A discussion of additional risks associated with particular derivative instruments follows the general discussion, and particular derivative instruments are discussed in more detail under “Additional Investment Strategies and Risks” in the Statement of Additional Information.
Counterparty and Credit Risk: A Portfolio may be exposed to losses if the counterparty in the transaction is unable or unwilling to fulfill its contractual obligation. Counterparty risk may arise because of market activities and developments, the counterparty’s financial condition (including financial difficulties, bankruptcy, or insolvency), or other reasons. To the extent a Portfolio has significant exposure to a single counterparty or small group of counterparties, this risk will be particularly pronounced. In addition, derivatives traded over-the-counter that are uncleared do not benefit from the protections provided by exchanges and central counterparties (derivatives clearing organizations and clearing corporations) in the event that a counterparty is unable or unwilling to fulfill its contractual obligation. Such uncleared over-the-counter derivatives therefore involve greater counterparty and credit risk and may be more difficult to value than exchange-traded derivatives that are cleared by a central counterparty.
Leveraging Risk: Derivatives may be leveraged such that a small investment can have a significant impact on a Portfolio’s exposure to stock market values, interest rates, currency exchange rates or other investments. As a result, a relatively small price movement in a derivatives contract may cause an immediate and substantial loss or gain, and a Portfolio could lose more than the amount it invested. A Portfolio may experience leveraging risk in connection with investments in derivatives because its investments in derivatives may be small relative to the investment exposure assumed, leaving more assets to be invested in other investments. Such investments may have the effect of leveraging a Portfolio because the Portfolio may experience gains or losses not only on its investments in derivatives, but also on the investments purchased with the remainder of the assets. If the value of a Portfolio’s investments in derivatives is increasing, this could be offset by declining values of the Portfolio’s
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other investments. Conversely, it is possible that a rise in the value of a Portfolio’s non-derivative investments could be offset by a decline in the value of the Portfolio’s investments in derivatives. In either scenario, a Portfolio may experience losses. In a market where the value of a Portfolio’s investments in derivatives is declining and the value of its other investments is declining, the Portfolio may experience substantial losses. Some derivatives can have the potential for unlimited losses, regardless of the size of the initial investment.
Liquidity Risk: It may be difficult or impossible for a Portfolio to purchase or sell certain derivatives in sufficient amounts to achieve the desired level of exposure, which may result in a loss or may be costly to the Portfolio. In addition, the possible lack of a liquid secondary market for certain derivatives, and the resulting inability of a Portfolio to sell or otherwise close out a derivatives position, could expose the Portfolio to losses and could make such derivatives more difficult for the Portfolio to value accurately.
Management Risk: Derivative products are highly specialized instruments. Investing in derivatives involves investment techniques and risk analyses different from, and risks in some respects greater than, those associated with investing in more traditional investments, such as stocks and bonds. The use of a derivative requires an understanding not only of the underlying asset, reference rate, index or event, but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions.
Market and Interest Rate Risk: Some derivatives are more sensitive to market price fluctuations and to interest rate changes than other investments. The successful use of derivatives will usually depend on the Adviser’s ability to accurately forecast movements in the market relating to the underlying asset, reference rate, index or event. If the Adviser does not predict correctly the direction of asset prices, interest rates and other economic factors, a Portfolio’s derivatives positions could lose value. Derivatives may not behave as anticipated by a Portfolio, especially in abnormal market conditions. Derivatives strategies that are successful under certain market conditions may be less successful or unsuccessful under other market conditions. While some derivatives strategies can reduce the risk of loss, they can also reduce the opportunity for gain or result in losses by offsetting favorable price movements in other Portfolio investments.
Valuation Risk: Derivatives also may be subject to the risk of mispricing or improper valuation, and valuation may be more difficult in times of market turmoil. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a Portfolio. Changes in the value of a derivative may not correlate perfectly, or at all, with the underlying asset, reference rate or index.
Other Risks: Derivatives also may be subject to risks related to potential operational issues, including documentation issues, settlement issues, systems failures, inadequate controls, and human error, as well as legal risks, such as insufficient documentation, the lack of capacity or authority of a counterparty to execute or settle a transaction, or the legality or enforceability of a contract.
When a derivative is used as a hedge against a position that a Portfolio holds, any loss generated by the derivative should generally be offset by gains on the hedged instrument, and vice versa. While hedging can reduce or eliminate losses, it also can reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the hedged investment, and there can be no assurance that a Portfolio’s hedging transactions will be effective. Also, suitable derivative transactions may not be available in all circumstances, and there can be no assurance that a Portfolio will engage in derivative transactions to reduce exposure to other risks when that might be beneficial or that, if used, such strategies will be successful.
When a Portfolio uses derivatives, it will likely be required to provide margin or collateral; these practices are intended to satisfy contractual undertakings and regulatory requirements and will not prevent the Portfolio from incurring losses on derivatives. The need to provide margin or collateral could limit a Portfolio’s ability to pursue other opportunities as they arise. Derivatives that have margin requirements involve the risk that if a Portfolio has insufficient cash or eligible margin securities to meet daily variation margin requirements, it may have to sell securities or other instruments from its portfolio at a time when it may be disadvantageous to do so. Derivatives also may involve fees, commissions, or other costs that may reduce a Portfolio’s gains or exacerbate its losses from the derivatives.
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The federal income tax treatment of a derivative may not be as favorable as a direct investment in an underlying asset and may adversely affect the timing, character and amount of income a Portfolio realizes from its investments. In addition, certain derivatives are subject to mark-to-market or straddle provisions of the Internal Revenue Code. The federal income tax treatment of certain derivatives, such as swaps, is unsettled and may be subject to future legislation, regulation or administrative pronouncements issued by the Internal Revenue Service.
Legislative and regulatory developments may limit the availability of certain derivatives, may reduce the attractiveness or increase the cost of derivatives, and may otherwise adversely impact the performance and value of derivatives. Legislative and regulatory developments also may change the way in which a Portfolio itself is regulated. Such developments may impact a Portfolio’s ability to invest, or remain invested, in certain derivatives, adversely affect a Portfolio’s ability to achieve its investment objective, and adversely affect a Portfolio’s efficiency in implementing its investment strategies. Complying with new requirements also may increase the cost of a Portfolio’s investments and the cost of implementing a Portfolio’s investment program and related operations, which could adversely affect a Portfolio and its investors.
A discussion of additional risks associated with particular derivative instruments follows:
Forward Contract Risk: There are no limits on daily price fluctuations of forward contracts. Changes in foreign exchange regulations by governmental authorities might limit the trading of forward contracts on currencies. There have been periods during which certain counterparties have refused to continue to quote prices for forward contracts or have quoted prices with an unusually wide spread (i.e., the difference between the price at which the counterparty is prepared to buy and the price at which it is prepared to sell).
Futures Contract Risk: There can be no assurance that a liquid market will exist for any particular futures contract at any particular time. Exchanges may establish daily price fluctuation limits for futures contracts and may halt trading if a contract’s price moves upward or downward more than the limit in a given day. On volatile trading days when the price fluctuation limit is reached or a trading halt is imposed, it may be impossible to enter into new positions or close out existing positions. If the market for a contract is not liquid because of price fluctuation limits or other market conditions, it could prevent prompt liquidation of unfavorable positions, and potentially could require a Portfolio to continue to hold a position until delivery or expiration regardless of changes in its value. As a result, a Portfolio’s access to other assets held to cover its futures positions could also be impaired.
Options Contract Risk: There can be no guarantee that the use of options will increase a Portfolio’s return or income. By writing (selling) a put option, a Portfolio takes on the risk of a decline in the value of the underlying instrument, including the possibility of a loss up to the entire strike price of the option it sells, but without the corresponding opportunity to benefit from a potential increase in the value of the underlying instrument. When a Portfolio writes a put option, it assumes the risk that it must purchase the underlying instrument at a strike price that may be higher than the market price of the instrument. If there is a broad market decline and a Portfolio is not able to close out its written put options, it may result in substantial losses to the Portfolio. By writing (selling) a call option, a Portfolio assumes the risk that it must sell the underlying instrument at a strike price that may be lower than the market price of the instrument. When a Portfolio writes a covered call option, it gives up the opportunity to profit from a price increase in the underlying instrument above the strike price. If a call option that a Portfolio has written is exercised, the Portfolio will experience a gain or loss from the sale of the underlying instrument, depending on the price at which the Portfolio purchased the instrument and the strike price of the option. A Portfolio will receive a premium from writing options, but the premium received may not be sufficient to offset any losses sustained from exercised options. If a call option that a Portfolio has written expires unexercised, the Portfolio will experience a gain in the amount of the premium if received; however, that gain may be offset by a decline in the market value of the underlying instrument during the option period. If an option a Portfolio has purchased is never exercised or closed out, the Portfolio will lose the amount of the premium it paid and the use of those funds.
Swaps Risk: Swap transactions generally do not involve delivery of reference instruments or payment of the notional amount of the contract. Accordingly, the risk of loss with respect to swaps generally is limited to the net amount of payments that a Portfolio is contractually obligated to make or, in the case of the other party to a
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swap defaulting, the net amount of payments that a Portfolio is contractually entitled to receive. As a seller of a credit default swap, a Portfolio effectively adds economic leverage because, in addition to its total net assets, the Portfolio is subject to investment exposure on the entire notional amount of the contract. See “Leveraging Risk” above. Additionally, holding a position in a credit default swap could result in losses if a Portfolio does not correctly evaluate the creditworthiness of the company on which the credit default swap is based. Some swaps are now executed through an organized exchange or regulated facility and cleared through a regulated clearing organization. The absence of an organized exchange or market for certain swap transactions may result in difficulties in trading and valuation, especially in the event of market disruptions. The use of an organized exchange or market for swap transactions is expected to result in swaps being easier to trade or value, but this may not always be the case.
Index Strategy Risk. A Portfolio (or a portion thereof) that employs an index strategy generally invests in all of the securities included in (or “replicates”) an index or invests in a representative sampling of such securities, regardless of market trends, to seek to track the performance of an unmanaged index of securities, whereas an actively managed Portfolio (or portion thereof) typically seeks to outperform a benchmark index. A Portfolio generally will not modify its index strategy to respond to changes in the economy, which means that it may be particularly susceptible to a general decline in the market segment relating to the relevant index. To the extent that the index has a significant weighting in a particular sector, a Portfolio will be subject to the risks associated with that sector and may experience greater performance volatility than a portfolio that seeks to track the performance of an index that is more broadly diversified. In addition, although the index strategy attempts to closely track the relevant index, a Portfolio may not invest in all of the securities in the index. Also, unlike index performance, a Portfolio’s performance will be reduced by its fees and expenses. Cash flow into and out of a Portfolio, portfolio transaction costs, changes in the securities that constitute the index, and the Portfolio’s valuation procedures also may affect the Portfolio’s performance. Therefore, there can be no assurance that the performance of the index strategy will match or achieve a high degree of correlation to that of the relevant index. Tracking error (that is, the divergence, positive or negative, between the performance of a Portfolio and the relevant index) may cause a Portfolio’s performance to be less than expected. To the extent a Portfolio’s investments track the relevant index, the Portfolio may underperform other portfolios that invest more broadly. In addition, errors relating to the index may occur from time to time and may not be identified by the index provider for a period of time, and market disruptions could cause delays in the index’s rebalancing schedule. Such errors and/or market disruptions may result in losses for a Portfolio.
To the extent that the securities of a limited number of companies represent a significant percentage of the relevant index, a Portfolio may be subject to more risk because changes in the value of a single security may have a more significant effect, either positive or negative, on the Portfolio’s net asset value. A Portfolio may experience greater performance volatility than a portfolio that seeks to track the performance of an index that is more broadly diversified.
To the extent that a Portfolio utilizes a representative sampling approach, it may experience greater tracking error than it would if the Portfolio sought to replicate the index. A Portfolio’s use of a representative sampling approach will result in its holding a smaller number of securities than are in the index it seeks to track. As a result, an adverse development with respect to an issuer of securities held by the Portfolio could result in a greater decline in net asset value than would be the case if the Portfolio held all of the securities in the index.
Insurance Fund Risk. The Portfolios are available through Contracts offered by insurance company affiliates of the Adviser, and the Portfolios may be used to fund all or a portion of certain benefits and guarantees available under the Contracts. To the extent the assets in a Portfolio are insufficient to fund those benefits and guarantees, the Adviser’s insurance company affiliates might otherwise be obligated to fulfill them out of their own resources. The Adviser is subject to conflicts of interest in connection with providing advice to, or developing strategies and modeling tools used to manage, a Portfolio (e.g., with respect to the allocation of assets among Underlying Portfolios or between passively and actively managed portions of a Portfolio and the development and implementation of the modeling tools used to manage a Portfolio). The performance of a Portfolio may impact the obligations and financial exposure of the Adviser’s insurance company affiliates under any death benefit, income benefit and other guarantees provided through Contracts that offer the Portfolio as an investment option,
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and the ability of an insurance company affiliate to manage (e.g., through the use of various hedging techniques) the risks associated with these benefits and guarantees. The Adviser’s investment decisions and the design of the Portfolios may be influenced by these factors. For example, the Portfolios or modeling tools and strategies may be managed or designed in a manner (e.g., using more conservative or less volatile investment styles, including volatility management strategies) that could reduce potential losses and/or mitigate financial risks to insurance company affiliates that provide the benefits and guarantees and offer the Portfolios as investment options in their products, and also could facilitate such an insurance company’s ability to provide benefits and guarantees under its Contracts, including by making more predictable the costs of the benefits and guarantees and by reducing the regulatory capital needed to provide them. The financial benefits to the Adviser’s insurance company affiliates may be material. The performance of a Portfolio also may adversely impact the value of Contracts that offer the Portfolio as an investment option and could suppress the value of the benefits and guarantees offered under a Contract. Please refer to your Contract prospectus for more information about any benefits and guarantees offered under the Contract. Consistent with its fiduciary duties, the Adviser seeks to implement each Portfolio’s investment program in a manner that is in the best interests of the Portfolio and that is consistent with the Portfolio’s investment objective, policies and strategies described in detail in this Proxy Statement/Prospectus.
Investment Style Risk. A Portfolio may use a particular style or set of styles — for example, growth or value investing styles — to select investments. Those styles may be out of favor or may not produce the best results over short or longer time periods.
Growth investing generally focuses on companies that, due to their strong earnings and revenue potential, offer above-average prospects for capital growth, with less emphasis on dividend income. Earnings predictability and confidence in earnings forecasts are an important part of the selection process. As a result, the price of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. A Portfolio using this approach generally seeks out companies experiencing some or all of the following: high sales growth, high unit growth, high or improving returns on assets and equity, and a strong balance sheet. Such a Portfolio also prefers companies with a competitive advantage such as unique management, marketing or research and development. Growth investing also is subject to the risk that the stock price of one or more companies will fall or will fail to appreciate as anticipated by the Portfolio, regardless of movements in the securities market. Growth stocks tend to be more volatile than value stocks, so in a declining market their prices may decrease more than value stocks in general. Growth stocks also may increase the volatility of the Portfolio’s share price.
Value investing attempts to identify strong companies selling at a discount from their perceived true worth. A Portfolio using this approach generally selects stocks at prices that, in its view, are temporarily low relative to the company’s earnings, assets, cash flow and dividends. Value investing is subject to the risk that a stock’s full value may never be fully recognized or realized by the market, or its price may go down. In addition, there is the risk that a stock judged to be undervalued may actually have been appropriately priced or overvalued at the time of investment. Value investing generally emphasizes companies that, considering their assets and earnings history, are attractively priced and may provide dividend income.
Issuer-Specific Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the market as a whole. The value of a security may decline for a number of reasons which directly relate to the issuer, such as poor management performance; reduced demand for the issuer’s goods or services; investigations or other controversies related to the issuer; strategic initiatives such as mergers, acquisitions or dispositions and the market response to any such initiatives; and the historical and prospective earnings of the issuer and the value of its assets. Certain unanticipated events, such as litigation or natural disasters, can have a dramatic adverse effect on the value of an issuer’s securities. A change in the financial condition of a single issuer may affect securities markets as a whole.
Large Transaction Risk. A significant percentage of a Portfolio’s shares may be owned or controlled by the Adviser and its affiliates or other large shareholders, including primarily insurance company separate accounts. Accordingly, a Portfolio is subject to the potential for large-scale inflows and outflows as a result of purchases and redemptions of its shares by such shareholders, including in connection with substitution and other
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transactions by affiliates of the Adviser. These inflows and outflows may be frequent and could negatively affect a Portfolio’s net asset value and performance, and could cause a Portfolio to purchase or sell securities at a time when it would not normally do so. It would be particularly disadvantageous for a Portfolio if it experiences outflows and needs to sell securities at a time of volatility in the markets, when values could be falling. These inflows and outflows also could negatively affect a Portfolio’s ability to meet shareholder redemption requests or could limit a Portfolio’s ability to pay redemption proceeds within the time period stated in its prospectus because of unusual market conditions, an unusually high volume of redemption requests, or other reasons. During periods of declining or illiquid markets, the Adviser or its affiliates also may be subject to conflicts of interest in selecting shares of a Portfolio for redemption and in deciding whether and when to redeem such shares. In addition, these inflows and outflows could increase a Portfolio’s brokerage or other transaction costs, and large-scale outflows could cause a Portfolio’s actual expenses to increase, or could result in a Portfolio’s current expenses being allocated over a smaller asset base, which, depending on any applicable expense caps, could lead to an increase in the Portfolio’s expense ratio.
Leveraging Risk. When a Portfolio leverages its holdings, the value of an investment in that Portfolio will be more volatile and all other risks will tend to be compounded. Investments that create leverage can result in losses to a Portfolio that exceed the amount originally invested and may accelerate the rate of losses (some of which may be sudden or substantial). For certain investments that create leverage, or have embedded leverage, relatively small market fluctuations can result in large changes in the value of such investments. In addition, the costs that a Portfolio pays to engage in these practices are additional costs borne by the Portfolio and could reduce or eliminate any net investment profits. Unless the profits from engaging in these practices exceed the costs of engaging in these practices, the use of leverage will diminish the investment performance of a Portfolio compared with what it would have been had the Portfolio not used leverage. There can be no assurance that a Portfolio’s use of any leverage will be successful.
Liquidity Risk. From time to time, there may be little or no active trading market for a particular investment in which a Portfolio may invest or is invested due to a variety of circumstances, including but not limited to deterioration in the financial condition of an issuer or issuers in a particular industry or market segment, periods of economic and market stress, changes in investor perceptions regarding an issuer or industry, periods of market volatility that trigger market circuit breakers that halt trading in securities or close markets entirely, planned market closures, shortened trading hours, extended market holidays, and other reasons. In such a market, the value of such investments and a Portfolio’s share price may fall dramatically. Illiquid investments may be difficult or impossible to sell or purchase at an advantageous time or price or in sufficient amounts to achieve a Portfolio’s desired level of exposure. To meet redemption requests during periods of illiquidity, a Portfolio may be forced to dispose of investments at unfavorable times or prices and/or under unfavorable conditions, which may result in a loss or may be costly to the Portfolio. Judgment plays a greater role in valuing illiquid investments than investments with more active markets, and there is a greater risk that the investments may not be sold for the price at which a Portfolio is carrying them. A Portfolio also may not receive its proceeds from the sale of certain investments for an extended period of time. Certain investments that were liquid when purchased may later become illiquid, sometimes abruptly, particularly in times of overall economic distress or adverse investor perception. In addition, the trading market for certain investments may become illiquid under adverse market or economic conditions independent of any specific adverse changes in the conditions of a particular issuer. An inability to sell a portfolio position can adversely affect a Portfolio’s value or prevent a Portfolio from being able to take advantage of other investment opportunities. Market participants attempting to sell the same or a similar investment at the same time as a Portfolio could decrease the liquidity of such an investment, especially during periods of market stress. During periods of market stress, an investment or even an entire market segment may become illiquid, sometimes abruptly, which can adversely affect a Portfolio’s ability to limit losses. In addition, a reduction in the ability or willingness of dealers and other institutional investors to make a market in certain securities may result in decreased liquidity in certain markets.
The SEC has instituted various requirements for open-end funds, including the Portfolios, to establish, and the Portfolios have established, a program to manage liquidity risks. These requirements are intended to reduce liquidity risk, but they may not work as intended. Analyses, judgments and decisions made in connection with
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administering the liquidity risk management program may be incorrect or otherwise may not produce the desired results. In addition, changes in market conditions, which may occur rapidly and unpredictably, may adversely affect the administration of the program. Changes related to the requirements may increase a Portfolio’s expenses, may negatively affect a Portfolio’s yield and return potential, and may not reduce a Portfolio’s liquidity risk.
Additional legislative or regulatory actions to address perceived liquidity or other issues in markets generally, or in particular markets such as the fixed income securities markets, may alter or impair a Portfolio’s ability to pursue its investment objectives or utilize certain investment strategies and techniques.
Market Risk. A Portfolio is subject to the risk that the securities markets will move down, sometimes rapidly and unpredictably, based on overall economic conditions and other factors, which may negatively affect Portfolio performance. Securities markets also may experience long periods of decline in value. The value of a security may decline due to factors that are specifically related to a particular company, as well as general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic or political conditions, changes in the general outlook for corporate earnings, inflation rates and/or investor expectations concerning such rates, changes in interest rates or currency rates, recessions, global demand for particular products or resources, lack of liquidity in the markets, or adverse investor sentiment generally. In some cases, for example, the stock prices of individual companies have been negatively impacted even though there may be little or no apparent degradation in the financial condition or prospects of the issuers. The value of a security may also decline due to factors that affect a particular industry or industries, such as tariffs, labor shortages or increased production costs and competitive conditions within an industry.
Equity securities generally have greater price volatility than fixed income securities, although under certain market conditions fixed income securities may have comparable or greater price volatility. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. Adverse market conditions may be prolonged and may not have the same impact on all types of securities. Changes in value may be temporary or may last for extended periods. Changes in the financial condition of (or other event affecting) a single issuer can impact a market as a whole. A Portfolio may experience a substantial or complete loss on any individual security. Even when securities markets perform well, there is no assurance that the investments held by a Portfolio will increase in value along with the broader market. Market factors, such as the demand for particular portfolio securities, may cause the price of certain portfolio securities to fall while the prices of other securities rise or remain unchanged. Historical patterns of correlation among asset classes may break down in unanticipated ways during times of high volatility, disrupting investment programs and potentially causing losses. Additionally, market speculation focused on profiting from fluctuations in the value of one or more securities or asset classes over a short period of time may result in large-scale and sudden purchases and sales of those securities or asset classes, which can significantly affect the value of those securities and asset classes as well as the market more broadly in unexpected ways, and cause significant share price volatility and losses for a Portfolio.
Global economies and financial markets are highly interconnected, which increases the possibility that conditions in one country or region or events affecting a single or small number of issuers might adversely impact issuers in a different country or region. World markets, or those in a particular region, may all react in similar fashion to important economic, political or other developments. Events such as environmental, natural or man-made disasters or other catastrophes, public health crises (such as epidemics and pandemics), social unrest, widespread and prolonged power outages, and cybersecurity incidents, and governments’ reactions (or failure to react) to such events, could cause uncertainty in the markets and may adversely affect the performance of the global economy. Geopolitical and other events, including terrorism, tensions, war or other open conflicts between nations, or political or economic dysfunction within some nations that are global economic powers or major producers of oil, may lead to overall instability in world economies and markets generally and have led, and may in the future lead, to increased market volatility and may have adverse long-term effects. As a result, the value and liquidity of a Portfolio’s investments may be negatively affected by developments in other countries and regions, whether or not the Portfolio invests in securities of issuers located in or with significant exposure to the countries or regions directly affected. Events and evolving conditions in certain economies or markets may alter the risks
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associated with investments tied to countries or regions that historically were perceived as comparatively stable and make such investments riskier and more volatile. Moreover, systemic market dislocations of the kind that occurred during the global financial crisis that began in 2008, if repeated, would be highly disruptive to economies and markets, adversely affecting individual companies and industries, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of a Portfolio’s investments.
Impacts from climate change may include significant risks to global financial assets and economic growth. Certain issuers, industries and regions may be adversely affected by the impacts of climate change, including on the demand for and the development of goods and services and related production costs, and the impacts of legislation, regulation and international accords related to climate change, as well as any indirect consequences of regulation or business trends driven by climate change.
In addition, the U.S. Federal Reserve (“Fed”) has invested or otherwise made available substantial amounts of money to keep credit flowing through short-term money markets and has signaled that it will continue to adjust its operations as appropriate to support short-term money markets. Amid these efforts, concerns about the markets’ dependence on the Fed’s provision of liquidity have grown.
Policy changes by the U.S. government and/or the Fed and political and other events within the United States may affect investor and consumer confidence and may increase uncertainty in or impair the operation of the U.S. or other securities markets, perhaps suddenly and to a significant degree.
In addition, markets and market-participants are increasingly reliant on both publicly available and proprietary information data systems. Inaccurate data, software or other technology malfunctions, programming inaccuracies, unauthorized use or access, and similar circumstances may impair the performance of these systems and may have an adverse impact upon a single issuer, a group of issuers, or the market at-large. In certain cases, an exchange or market may close or issue trading halts on either specific securities or even the entire market, which may result in a Portfolio being, among other things, unable to buy or sell certain securities or financial instruments or accurately price its investments.
Multiple Sub-Adviser Risk. The Adviser may allocate a Portfolio’s assets among multiple Sub-Advisers, each of which is responsible for investing its allocated portion of the Portfolio’s assets. To a significant extent, a Portfolio’s performance will depend on the success of the Adviser in allocating the Portfolio’s assets to Sub-Advisers and its selection and oversight of the Sub-Advisers. The Sub-Advisers’ investment strategies may not work together as planned, which could adversely affect a Portfolio’s performance. In addition, because each Sub-Adviser manages its allocated portion of a Portfolio independently from another Sub-Adviser, the same security may be held in different portions of the Portfolio, or may be acquired for one portion of the Portfolio at a time when a Sub-Adviser to another portion deems it appropriate to dispose of the security from that other portion, resulting in higher expenses without accomplishing any net result in the Portfolio’s holdings. Similarly, under some market conditions, one Sub-Adviser may believe that temporary, defensive investments in short-term instruments or cash are appropriate for its allocated portion of the Portfolio when another Sub-Adviser believes continued exposure to the equity or debt markets is appropriate for its allocated portion of the Portfolio. Because each Sub-Adviser directs the trading for its own portion of a Portfolio, and does not aggregate its transactions with those of the other Sub-Adviser, the Portfolio may incur higher brokerage costs than would be the case if a single Sub-Adviser were managing the entire Portfolio. In addition, while the Adviser seeks to allocate a Portfolio’s assets among the Portfolio’s Sub-Advisers in a manner that it believes is consistent with achieving the Portfolio’s investment objective(s), the Adviser is subject to conflicts of interest in allocating the Portfolio’s assets among Sub-Advisers, including affiliated Sub-Advisers, because the Adviser pays different fees to the Sub-Advisers and due to other factors that could impact the Adviser’s or its affiliates’ revenues and profits.
If the Adviser hires, terminates or replaces a Sub-Adviser to a Portfolio or adjusts the asset allocation among Sub- Advisers in the Portfolio, the Portfolio may experience a period of transition during which the securities held in the Portfolio may be repositioned in connection with the change in Sub-Advisers. A Portfolio may not pursue its principal investment strategies during such a transition period and may incur increased brokerage commissions and other transaction costs in connection with the changes.
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New Portfolio Risk. Certain Portfolios may be relatively new and small with limited operating history. A new Portfolio’s performance may not represent how the Portfolio is expected to or may perform in the long-term and a Portfolio may not be successful in implementing its respective investment strategies. Portfolio performance may be lower or higher during this “ramp-up” period, and may also be more volatile, than would be the case after the Portfolio is fully invested. In addition, investment positions may have a disproportionate impact (negative or positive) on performance in new Portfolios. There can be no assurance that such Portfolios will grow to or maintain an economically viable size, which could result in a Portfolio, including a Portfolio offered by this Prospectus, being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders.
Portfolio Management Risk. A Portfolio is subject to the risk that strategies used by an investment manager and its securities selections fail to produce the intended results. An investment manager’s judgments or decisions about the quality, relative yield or value of, or market trends affecting, a particular security or issuer, industry, sector, region or market segment, or about the economy or interest rates, may be incorrect or otherwise may not produce the intended results, which may result in losses to a Portfolio. In addition, many processes used in Portfolio management, including security selection, rely, in whole or in part, on the use of various technologies, some of which are created or maintained by an investment manager or its affiliates and some of which are created or maintained by third parties. A Portfolio may suffer losses if there are imperfections, errors or limitations in the quantitative, analytic or other tools, resources, information and data used, or the analyses employed or relied on, by an investment manager, or if such tools, resources, information or data are used incorrectly, fail to produce the desired results, or otherwise do not work as intended. Imperfections, errors or limitations may go undetected for long periods of time or may never be detected, which could adversely affect decision making for a Portfolio, as well as a Portfolio’s operations or performance, and may result in, among other things, the execution of unanticipated trades, the failure to execute anticipated trades, the failure to properly gather and organize available data and/or the failure to take certain hedging or risk-reducing actions. There can be no assurance that the use of these technologies will result in effective investment decisions for a Portfolio.
Portfolio Turnover Risk. High portfolio turnover (generally, turnover in excess of 100% in any given fiscal year) may result in increased transaction costs to a Portfolio, which may result in higher fund expenses and lower total return. A Portfolio that adopts new investment objectives or policies or portfolio management strategies and/or undergoes a reorganization with another Portfolio may experience substantially increased portfolio turnover due to the differences between the Portfolio’s previous and current investment objectives and policies and portfolio management strategies.
Recent Market Conditions Risk. U.S. and international markets have experienced significant volatility in recent months and years. As a result of such volatility, investment returns may fluctuate significantly. Global economies and financial markets are highly interconnected, which increases the possibility that conditions in one country or region might adversely impact issuers in a different country or region.
Interest rates were unusually low in recent years in the United States and abroad, but the interest rate environment changed dramatically in 2022 as interest rates moved significantly higher. Aggressive stimulus measures in 2020 and 2021, rising demand for goods and services, tight labor markets, and supply chain disruptions contributed to a surge of inflation in many sectors of the U.S. and global economies. Due to concerns regarding high inflation, the U.S. Federal Reserve (“Fed”) and many foreign governments and monetary authorities have raised interest rates and implemented other policy initiatives in an effort to control inflation, and they may continue to do so. It is difficult to predict accurately the pace at which central banks or monetary authorities may increase interest rates or the timing, frequency, or magnitude of any such further increases, and the evaluation of macro-economic and other conditions or events could cause a change in approach in the future. Rising interest rates may present a greater risk than has historically been the case due to the effect of government fiscal and monetary policy initiatives and potential market reaction to those initiatives. As such, fixed-income and related markets may continue to experience heightened levels of interest rate volatility. Inflation risk is the uncertainty over the future real value (after inflation) of an investment. A Portfolio’s investments may not keep pace with inflation, and the value of an investment in a Portfolio may be eroded over time by inflation. Changes in government or central bank policies could negatively affect the value and liquidity of a Portfolio’s investments and cause it to lose money, and there can be no assurance that the initiatives undertaken by governments and central banks will be successful.
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The Fed’s or foreign central banks’ actions may result in an economic slowdown in the United States and abroad. There are concerns that monetary policy may provide less support should economic growth slow. An economic slowdown may negatively affect national and global economies, as well as national and global securities and commodities markets, and may continue for an extended period of time and have unforeseen impacts. Any deterioration in economic fundamentals may increase the risk of default or insolvency of particular issuers, negatively impact market values, cause credit spreads to widen, and reduce bank balance sheets. Any of these could cause an increase in market volatility, reduce liquidity across various markets, or decrease confidence in the markets. Also, regulators have expressed concern that rate increases may cause investors to sell fixed income securities faster than the market can absorb them, contributing to price volatility.
In March 2023, the shutdown of certain financial institutions raised economic concerns over disruption in the U.S. banking system. There can be no certainty that the actions taken by the U.S. government to strengthen public confidence in the U.S. banking system will be effective in mitigating the effects of financial institution failures on the economy and restoring public confidence in the U.S. banking system.
High public debt in the United States and other countries creates ongoing systemic and market risks and policymaking uncertainty, and there has been a significant increase in the amount of debt due to the economic effects of the COVID-19 pandemic and ensuing economic relief and public health measures. Economic, political and other developments may result in a further increase in the amount of public debt, including in the United States. The long-term consequences of high public debt are not known, but high levels of public debt may negatively affect economic conditions and the value of markets, sectors and companies in which a Portfolio invests.
Political and diplomatic events within the United States, including a contentious domestic political environment, changes in political party control of one or more branches of the U.S. government, the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, the threat of a U.S. government shutdown, and disagreements over, or threats not to increase, the U.S. government’s borrowing limit (or “debt ceiling”), as well as political and diplomatic events abroad, may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. A downgrade of the ratings of U.S. government debt obligations, or concerns about the U.S. government’s credit quality in general, could have a substantial negative effect on the U.S. and global economies. Moreover, although the U.S. government has honored its credit obligations, there remains a possibility that the United States could default on its obligations. The consequences of such an unprecedented event are impossible to predict, but it is likely that a default by the United States would be highly disruptive to the U.S. and global securities markets and could significantly impair the value of the Portfolios’ investments.
Russia’s military invasion of Ukraine in February 2022, the resulting responses by the United States and other countries, and the potential for wider conflict have had, and could continue to have, severe adverse effects on regional and global economies and could further increase volatility and uncertainty in the financial markets. The United States and other countries have imposed broad-ranging economic sanctions on Russia and certain Russian individuals, banking entities and corporations as a response to its invasion of Ukraine. The United States and other countries have also imposed economic sanctions on Belarus and may impose sanctions on other countries that provide military or economic support to Russia. These sanctions, as well as any other economic consequences related to the invasion, such as additional sanctions, boycotts or changes in consumer or purchaser preferences or cyberattacks on governments, companies or individuals, may further decrease the value and liquidity of certain Russian securities and securities of issuers in other countries that are subject to economic sanctions related to the invasion. To the extent that a Portfolio has exposure to Russian investments or investments in countries affected by the invasion, the Portfolio’s ability to price, buy, sell, receive or deliver such investments may be impaired. In addition, any exposure that a Portfolio may have to counterparties in Russia or in countries affected by the invasion could negatively impact the Portfolio’s investments. The extent and duration of military actions and the repercussions of such actions (including any retaliatory actions or countermeasures that may be taken by those subject to sanctions) are impossible to predict. These events have resulted in, and could continue to result in, significant market disruptions, including in certain industries or sectors such as the oil and natural gas markets, and may further strain global supply chains and negatively affect inflation and global growth. These and any related events could significantly impact a Portfolio’s performance and the value of an investment in a Portfolio beyond any direct exposure a Portfolio may have to Russian issuers or issuers in other countries affected by the invasion.
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Certain illnesses spread rapidly and have the potential to significantly and adversely affect the global economy and have material adverse impacts on a Portfolio. The impact of the COVID-19 pandemic caused significant volatility and severe losses in global financial markets. The COVID-19 pandemic and efforts to contain its spread resulted, and may continue to result, in significant disruptions to business operations, supply chains and customer activity, higher default rates, widespread business closures and layoffs, travel restrictions and border closings, extended quarantines and stay-at-home orders, event and service cancellations, labor shortages, and significant challenges in healthcare service preparation and delivery, as well as general concern, uncertainty and social unrest. Other outbreaks of infectious diseases or other public health issues that may arise in the future may have similar or worse effects. The impact of any outbreak may last for an extended period of time.
Public health crises caused by outbreaks of infectious diseases or other public health issues, such as the COVID-19 pandemic, may exacerbate other pre-existing economic, political, and social tensions and risks, disrupt market conditions and operations and economies around the world, and negatively affect market performance and the value of investments in individual companies in significant and unforeseen ways. The impact of infectious diseases may be greater in countries that do not move effectively to control them or that have limited access to or popular uptake of vaccines, which may occur because of a lack of health care or economic resources or for political or other reasons.
Additionally, public health crises caused by outbreaks of infectious diseases or other public health issues, such as the COVID-19 pandemic, could impair the information technology and other operational systems upon which the Adviser relies, and could otherwise disrupt the ability of a Portfolio’s service providers to perform essential tasks. Such impacts could impair a Portfolio’s ability to maintain operational standards (including with respect to satisfying redemption requests), disrupt the operations of a Portfolio’s service providers, and negatively impact a Portfolio’s performance.
Slowing global economic growth, the rise in protectionist trade policies, and changes to some major international trade agreements could affect the economies of many countries in ways that cannot necessarily be foreseen at the present time. For example, the full impact of the United Kingdom’s (“UK”) withdrawal from the European Union (the “EU”), commonly referred to as “Brexit,” and the nature of the future relationship between the UK and the EU remain unclear. The effects of Brexit on the UK and EU economies and the broader global economy could be significant, resulting in negative impacts, such as business and trade disruptions, increased volatility and illiquidity, and potentially lower economic growth of markets in the UK, the EU and globally, which could negatively impact the value of a Portfolio’s investments. The United States has developed increasingly strained relations with a number of foreign countries. If relations with certain countries deteriorate, it could adversely affect U.S. issuers as well as non-U.S. issuers that rely on the United States for trade. For example, the United States has imposed tariffs and other trade barriers on Chinese exports, has restricted sales of certain categories of goods to China, and has established barriers to investments in China. In addition, the Chinese government is involved in a longstanding dispute with Taiwan that has included threats of invasion. If relations between the United States and China do not improve or continue to deteriorate, or if China were to attempt unification of Taiwan by coercion or force, economies, markets and individual securities may be severely affected both regionally and globally, and the value of a Portfolio’s investments may go down.
In addition, global climate change may have an adverse effect on property and security values. A rise in sea levels, an increase in powerful storms and/or an increase in flooding could cause coastal properties to lose value or become unmarketable altogether. Economists warn that, unlike previous declines in the real estate market, properties in affected coastal zones may never recover their value. Large wildfires have devastated, and in the future may devastate, entire communities and may be very costly to any business found to be responsible for the fire or conducting operations in affected areas. Regulatory changes and divestment movements in the United States and abroad tied to concerns about climate change could adversely affect the value of certain land and the viability of industries whose activities or products are seen as accelerating climate change. Losses related to climate change could adversely affect corporate borrowers and mortgage lenders, the value of mortgage-backed securities, the bonds of municipalities that depend on tax revenues and tourist dollars generated by such properties, and insurers of the property and/or of corporate, municipal or mortgage-backed securities. Because property and security values are driven largely by buyers’ perceptions, it is difficult to know the time period over which these effects might unfold.
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All of these risks may have a material adverse effect on the performance and financial condition of the companies and other issuers in which a Portfolio invests, and on the overall performance of a Portfolio.
Redemption Risk. A Portfolio may experience periods of heavy redemptions that could cause the Portfolio to sell assets at inopportune times, which could have a negative impact on the Portfolio’s overall liquidity, or at a loss or depressed value. Redemption risk is heightened during periods of declining or illiquid markets. Redemption risk also is greater to the extent that one or more investors control a large percentage of investments in a Portfolio, have short investment horizons, or have unpredictable cash flow needs. Heavy redemptions could hurt a Portfolio’s performance and increase transaction costs.
Market developments and other factors, including a general rise in interest rates, have the potential to cause investors to move out of fixed income securities on a large scale, which may increase redemptions from mutual funds that hold large amounts of fixed income securities. The market-making capacity of dealers has been reduced in recent years, in part as a result of structural changes, such as fewer proprietary trading desks at broker-dealers and increased regulatory capital requirements. In addition, significant securities market disruptions, including related to the COVID-19 pandemic, have led to dislocation in the market for a variety of fixed income securities (including, without limitation, commercial paper, corporate debt securities, certificates of deposit, asset-backed debt securities and municipal obligations), which has decreased liquidity and sharply reduced returns in certain cases. Increased redemptions from mutual funds that hold large amounts of fixed income securities, coupled with a reduction in the ability or willingness of dealers and other institutional investors to buy or hold fixed income securities, may result in decreased liquidity and increased volatility in the fixed income markets.
Regulatory Risk. Each Portfolio is subject to extensive laws and regulations that govern its operations. Each Portfolio is subject to regulation by the Securities and Exchange Commission (“SEC”) and is also subject to regulations imposed by other governmental regulatory authorities and self-regulatory organizations. Similarly, the businesses and other issuers of the securities and other instruments in which a Portfolio invests are also subject to considerable regulation. These laws and regulations are subject to change. Extensive regulation or a change in existing laws or regulations may have unpredictable and unintended effects and may materially impact a Portfolio, a security, business, sector or market. For example, extensive regulation or a change in existing laws or regulations made by the government or a regulatory body may limit or preclude a Portfolio’s ability to achieve its investment objective, impact a Portfolio’s investment policies or strategies, adversely affect a Portfolio’s efficiency in implementing its investment strategies, and/or reduce the attractiveness or increase the cost of an investment, which may, in turn, adversely affect a Portfolio’s performance. A Portfolio also may incur additional costs to comply with any new requirements as well as to monitor for compliance with any new requirements going forward. A Portfolio also may be adversely affected by changes in the interpretation or enforcement of existing laws or regulations.
Repurchase Agreements Risk. Repurchase agreements carry certain risks, including risks that are not associated with direct investments in securities. If a seller under a repurchase agreement were to default on the agreement and be unable to repurchase the security subject to the repurchase agreement, a Portfolio would look to the collateral underlying the seller’s repurchase agreement, including the securities or other obligations subject to the repurchase agreement, for satisfaction of the seller’s obligation to the Portfolio. A Portfolio’s right to liquidate the securities or other obligations subject to the repurchase agreement in the event of a default by the seller could involve certain costs and delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase are less than the repurchase price (e.g., due to transactions costs or a decline in the value of the collateral), the Portfolio could suffer a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller, realization of the collateral may be delayed or limited and a loss may be incurred.
Risk Management. The Adviser and Sub-Advisers undertake certain analyses with the intention of identifying particular types of risks and reducing a Portfolio’s exposure to them. However, risk is an essential part of investing, and the degree of return an investor might expect is often tied to the degree of risk the investor is willing to accept. By its very nature, risk involves exposure to the possibility of adverse events. Accordingly, no risk management program can eliminate a Portfolio’s exposure to such events; at best, it can only reduce the possibility that the Portfolio will be affected by adverse events, and especially those risks that are not intrinsic to
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the Portfolio’s investment program. While the prospectus describes material risk factors associated with a Portfolio’s investment program, there is no assurance that as a particular situation unfolds in the markets, the Adviser or Sub-Advisers will identify all of the risks that might affect the Portfolio, rate their probability or potential magnitude correctly, or be able to take appropriate measures to reduce the Portfolio’s exposure to them. Measures taken with the intention of decreasing exposure to identified risks might have the unintended effect of increasing exposure to other risks.
Risks Related to Investments in Underlying Portfolios. A Portfolio that invests in Underlying Portfolios (i.e., operates under a “fund of funds” arrangement) will indirectly bear fees and expenses paid by those Underlying Portfolios, in addition to the Portfolio’s direct fees and expenses. The cost of investing in the Portfolio, therefore, may be higher than the cost of investing in a mutual fund that invests directly in individual stocks and bonds. The Portfolio’s performance depends upon a favorable allocation by the Adviser among the Underlying Portfolios, as well as the ability of the Underlying Portfolios to generate favorable performance. The Underlying Portfolios’ investment programs may not be complementary, which could adversely affect the Portfolio’s performance. In addition, the Portfolio’s net asset value is subject to fluctuations in the net asset values of the Underlying Portfolios in which it invests. The Portfolio is also subject to the risks associated with the securities or other investments in which the Underlying Portfolios invest, and the ability of the Portfolio to meet its investment objective will directly depend on the ability of the Underlying Portfolios to meet their respective investment objectives. In addition, because each Underlying Portfolio is managed independently, the same security may be held by different Underlying Portfolios, or may be acquired for one portfolio at a time when another portfolio deems it appropriate to dispose of the security, resulting in higher indirect expenses without accomplishing any net investment result. The extent to which the investment performance and risks associated with the Portfolio correlate to those of a particular Underlying Portfolio will depend upon the extent to which the Portfolio’s assets are allocated from time to time for investment in the Underlying Portfolio, which will vary. A Portfolio does not control the investments of the Underlying Portfolios, which may have different investment objectives and may engage in investment strategies that the Portfolio would not engage in directly. The Underlying Portfolios may change their investment objectives or policies without the approval of a Portfolio. If that were to occur, the Portfolio might be forced to sell its investment in an Underlying Portfolio at a time and price that is unfavorable to the Portfolio.
In addition, new regulations relating to “fund of funds” arrangements may impact a Portfolio’s or an Underlying Portfolio’s ability to achieve its investment objective, impact a Portfolio’s or an Underlying Portfolio’s investment policies or strategies, adversely affect a Portfolio’s or an Underlying Portfolio’s efficiency in implementing its investment strategies, increase operating costs, and/or adversely affect a Portfolio’s or an Underlying Portfolio’s performance.
Sector Risk. To the extent a Portfolio invests more heavily in one sector, industry, or sub-sector of the market, its performance will be especially sensitive to developments that significantly affect that sector, industry, or sub-sector. An individual sector, industry, or sub-sector of the market may be more volatile, and may perform differently, than the broader market. The industries that constitute a sector may all react in the same way to economic, political or regulatory events. A Portfolio’s performance could also be affected if the sector, industry, or sub-sector does not perform as expected. Alternatively, the lack of exposure to one or more sectors or industries may adversely affect performance.
Securities Lending Risk. A Portfolio may lend its portfolio securities to brokers, dealers, and other financial institutions to seek income. Generally, any such loan of portfolio securities will be continuously secured by collateral at least equal to the value of the security loaned. Such collateral will be in the form of cash, marketable securities issued or guaranteed by the U.S. government or its agencies, or a standby letter of credit issued by qualified banks. A Portfolio could lose money on its investment of cash collateral. To the extent that portfolio securities acquired with such collateral have decreased in value, it may result in a Portfolio realizing a loss at a time when it would not otherwise do so. As such, securities lending may introduce leverage into a Portfolio. The risks of lending portfolio securities, as with other extensions of secured credit, also consist of possible delay in receiving additional collateral (to cover an increase in the market value of the loaned securities or a decrease in the value of any securities collateral) or in the recovery of the loaned securities or possible loss of rights in the
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collateral should the borrower fail financially. There is a risk that a borrower may default on its obligations to return loaned securities. Securities loans are subject to termination by a Portfolio (lender) or a borrower at any time. If a Portfolio terminates a securities loan, it will forego any income on the loan after the termination. Loans will be made only to firms deemed by the Adviser to be of good standing and approved by the Board and will not be made unless, in the judgment of the Adviser, the consideration to be earned from such loans would justify the risk. In addition, securities on loan may not be voted by a Portfolio, and there is a risk that a Portfolio may not be able to recall loaned securities in sufficient time to vote on material proxy matters.
Short Position Risk. A Portfolio may engage in short sales and may enter into derivative contracts that have a similar economic effect (e.g., taking a short position in a futures contract). A Portfolio will incur a loss as a result of a short position if the price of the asset sold short increases between the date of the short position sale and the date on which an offsetting position is purchased. Short positions may be considered speculative transactions and involve special risks that could cause or increase losses or reduce gains. Short sales involve greater reliance on an investment adviser’s ability to accurately anticipate the future value of a security or instrument, higher transaction costs, and imperfect correlation between the actual and desired level of exposure. Short sales, at least theoretically, present a risk of unlimited loss on an individual security basis, particularly in cases where a Portfolio is unable, for whatever reason, to close out its short position, because the Portfolio may be required to buy the security sold short at a time when the security has appreciated in value, and there is potentially no limit to the amount of such appreciation. Volatility in the market for equity securities, which has been dramatically increased recently for certain stocks, can meaningfully increase the risk of loss associated with short sales. In addition, by investing the proceeds received from selling securities short, a Portfolio could be deemed to be employing a form of leverage, which creates special risks. A Portfolio’s long positions could decline in value at the same time that the value of the short positions increase, thereby increasing the Portfolio’s overall potential for loss more than it would be without the use of leverage. Market or other factors may prevent a Portfolio from closing out a short position at the most desirable time or at a favorable price. In addition, a lender of securities may request, or market conditions may dictate, that securities sold short be returned to the lender on short notice. If this happens, the Portfolio may have to buy the securities sold short at an unfavorable price, which will potentially reduce or eliminate any gain or cause a loss to the Portfolio. When a Portfolio is selling a security short, it must maintain a segregated account of cash or high-grade securities equal to the margin requirement. As a result, a Portfolio may maintain high levels of cash or other liquid assets (such as U.S. Treasury bills, money market accounts, repurchase agreements, certificates of deposit, high quality commercial paper and long equity positions) or may utilize the collateral obtained from securities lending for this cash. The need to maintain cash or other liquid assets in segregated accounts could limit a Portfolio’s ability to pursue other opportunities as they arise.
Sub-Adviser Selection Risk. A Portfolio is subject to the risk that the Adviser’s process for selecting or replacing a Sub-Adviser and its decision to select or replace a Sub-Adviser does not produce the intended results.
In addition, the Adviser is subject to certain conflicts of interest in connection with recommending the appointment and continued service of Sub-Advisers. If the Adviser is affiliated with a Sub-Adviser, the Adviser will benefit not only from the net advisory fee the Adviser retains, but also from the sub-advisory fees paid by the Adviser to the affiliated Sub-Adviser. Since the Adviser pays fees to the Sub-Advisers from the advisory fees that it earns from the Portfolios, any increase or decrease in the sub-advisory fees negotiated with proposed or current Sub-Advisers will result in a corresponding decrease or increase, respectively, in the amount of the advisory fee retained by the Adviser. The Adviser or its affiliates also have distribution relationships with certain Sub-Advisers or their affiliates under which the Sub-Advisers or their affiliates distribute or support the distribution of investment products issued or sold by the Adviser or its affiliates (including those in which the Portfolios serve as investment options), which could financially benefit the Adviser and its affiliates or provide an incentive to the Adviser in selecting one Sub-Adviser over another. In addition, the Adviser’s and/or its affiliates’ other existing or potential business relationships, including with Sub-Advisers and/or their affiliates, or other financial or personal relationships, could influence the Adviser’s selection and retention or termination of Sub-Advisers. When recommending the appointment or continued service of a Sub-Adviser, consistent with its fiduciary duties, the Adviser relies primarily on the qualitative and quantitative factors described in detail in the Proxy Statement/Prospectus.
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Target Date Risk. A New Target Allocation Portfolio does not provide guaranteed income or payouts to an investor at or after the target year. An investment in a New Target Allocation Portfolio may decline in value and will not ensure that an investor will have assets sufficient to cover retirement expenses or that an investor will have enough saved to be able to retire in, or within a few years of, the target year identified in the Portfolio’s name. The adequacy of an investor’s account at and after the target year will depend on a variety of factors, including the amount of money invested in a New Target Allocation Portfolio, the length of time the investment was held, and the New Target Allocation Portfolio’s returns over time.
Tax Risk. A Portfolio is subject to the risk that the tax treatment of swap agreements and other derivative instruments, such as commodity-linked derivative instruments, including commodity index-linked notes and commodity options, futures, and options on futures, may be affected by future regulatory or legislative changes that could affect whether income from such investments is “qualifying income” under Subchapter M of the Internal Revenue Code, or otherwise affect the character, timing and/or amount of a Portfolio’s taxable income or gains and distributions.
Valuation Risk. The price at which a Portfolio sells any particular investment may differ from the Portfolio’s valuation of the investment. Such differences could be significant, particularly for illiquid securities and securities that trade in relatively thin markets and/or markets that experience extreme volatility. If market or other conditions make it difficult to value some investments, SEC rules and applicable accounting protocols may require a Portfolio to value these investments using more subjective methods, such as fair value methodologies. Using fair value methodologies to price investments may result in a value that is different from an investment’s most recent closing price and from the prices used by other mutual funds to calculate their net asset values. An investment’s valuation may differ depending on the method used for determining value. Investors who purchase or redeem Portfolio shares on days when the Portfolio is holding fair-valued securities may receive fewer or more shares, or lower or higher redemption proceeds, than they would have received if the Portfolio had not held fair-valued securities or had used a different valuation methodology. The value of foreign securities, certain futures and fixed income securities, and currencies may be materially affected by events after the close of the markets on which they are traded but before a Portfolio determines its net asset value. A Portfolio may use pricing services to provide values for certain securities, and there is no assurance that a Portfolio will be able to sell an investment at the price provided by such pricing services. Different pricing services use different valuation methodologies, potentially resulting in different values for the same investments. As a result, if a Portfolio were to change pricing services, or if a pricing service were to change its valuation methodology, the value of the Portfolio’s investments could be impacted. A Portfolio’s ability to value its investments in an accurate and timely manner may be impacted by technological issues and/or errors by third party service providers, such as pricing services or accounting agents.
Volatility Management Risk. A Portfolio may invest from time to time in Underlying Portfolios managed by the Adviser that may employ various volatility management techniques or make strategic adjustments to their asset mix (such as by using futures and options to manage equity exposure). Although these actions are intended to reduce the overall risk of investing in an Underlying Portfolio, they may not work as intended and may result in losses by an Underlying Portfolio, and in turn, a Portfolio, or periods of underperformance, particularly during periods when market values are increasing but market volatility is high or when an Underlying Portfolio has reduced its equity exposure but market changes do not impact equity returns adversely to the extent predicted by the Adviser. Volatility is a statistical measure of the magnitude of changes in a portfolio’s returns. A higher volatility level generally indicates higher risk and often results in more frequent and sometimes significant changes in a portfolio’s returns.
The result of any volatility management strategy will be subject to the Adviser’s ability to correctly assess the degree of correlation between the performance of the relevant market index and the metrics used by the Adviser to measure market volatility. Since the characteristics of many securities change as markets change or time passes, the result of any volatility management strategy also will be subject to the Adviser’s ability to continually recalculate, readjust, and execute volatility management techniques in an efficient manner. In addition, market conditions change, sometimes rapidly and unpredictably, and the Adviser may be unable to execute the volatility management strategy in a timely manner or at all.
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The Adviser to the Underlying Portfolios uses proprietary modeling tools to implement the volatility management strategy. If the proprietary modeling tools prove to be flawed or for other reasons do not produce the desired results, any decisions based on the modeling tools may expose an Underlying Portfolio, and in turn, a Portfolio, to additional risks and losses. The use of modeling tools has inherent risks, and the success of using a modeling tool depends, among other things, on the accuracy and completeness of the tool’s development, implementation and maintenance; on the tool’s assumptions and methodologies; and on the accuracy and reliability of the inputs and output of the tool. The Adviser from time to time may make changes to its proprietary modeling tools that do not require shareholder notice.
Moreover, volatility management strategies may expose an Underlying Portfolio, and in turn, a Portfolio, to costs, such as increased portfolio transaction costs, which could cause or increase losses or reduce gains. In addition, it is not possible to manage volatility fully or perfectly. Futures contracts and other instruments used in connection with the volatility management strategy are not necessarily held by an Underlying Portfolio to hedge the value of the Underlying Portfolio’s other investments and, as a result, these futures contracts and other instruments may decline in value at the same time as the Underlying Portfolio’s other investments. When equity exposure is reduced, a lack of correlation between the changes in the value of the futures contracts or other instruments used in connection with the volatility management strategy and the value of an Underlying Portfolio’s other equity investments (if any) being hedged could result in losses.
Any one or more of these factors may prevent an Underlying Portfolio from achieving the intended volatility management or could cause an Underlying Portfolio, and in turn, a Portfolio, to underperform or experience losses (some of which may be sudden or substantial) or volatility for any particular period that may be higher or lower. In addition, the use of volatility management techniques may not protect against market declines and may limit an Underlying Portfolio’s, and thus a Portfolio’s, participation in market gains, even during periods when the market is rising. Volatility management techniques, when implemented effectively to reduce the overall risk of investing in an Underlying Portfolio, may result in underperformance by an Underlying Portfolio. For example, if an Underlying Portfolio has reduced its overall exposure to equities to avoid losses in certain market environments, the Underlying Portfolio may forgo some of the returns that can be associated with periods of rising equity values. An Underlying Portfolio’s performance, and therefore a Portfolio’s performance, may be lower than the performance of similar funds where volatility management techniques are not used. In addition, the Adviser and its insurance company affiliates manage or advise other funds and accounts that engage in and compete for transactions in the same types of securities and instruments (such as futures contracts) as an Underlying Portfolio. Such transactions could affect the prices and availability of the securities and instruments in which an Underlying Portfolio invests, directly or indirectly, and could have an adverse impact on an Underlying Portfolio’s performance, and therefore a Portfolio’s performance. Consistent with its fiduciary duties, the Adviser seeks to implement each Underlying Portfolio’s investment program in a manner that is in the best interests of the Underlying Portfolio and that is consistent with the Underlying Portfolio’s investment objective, policies and strategies.
Risks of Equity Investments
Each Portfolio may invest a portion of its assets in Underlying Portfolios that emphasize investments in equity securities or other equity instruments. Therefore, as an investor in a Portfolio, the return on your investment will be based, to some extent, on the risks and rewards of equity securities and other equity instruments.
In general, the New EQ/Aggressive Allocation Portfolio, New EQ/Moderate-Plus Allocation Portfolio and New EQ/Moderate Allocation Portfolio will be subject to the risks of investing in equity securities to a greater extent than the New EQ/Conservative Allocation Portfolio and New EQ/Conservative-Plus Allocation Portfolios. In general, the New Target Allocation Portfolios with later retirement dates, such as the New Target 2035 Allocation Portfolio, New Target 2045 Allocation Portfolio and New Target 2055 Allocation Portfolio, will be subject to the risks of investing in equity securities to a greater extent than the New Target Allocation Portfolios with earlier retirement dates.
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The risks of investing in equity securities or other equity instruments may include:
Convertible Securities Risk. A convertible security is a form of hybrid security; that is, a security with both debt and equity characteristics. The value of a convertible security fluctuates in relation to changes in interest rates and the credit quality of the issuer and also fluctuates in relation to changes in the price of the underlying common stock. A convertible security tends to perform more like a stock when the underlying stock price is high relative to the conversion price (because more of the security’s value resides in the option to convert) and more like a debt security when the underlying stock price is low relative to the conversion price (because the option to convert is less valuable). Because its value can be influenced by many different factors, a convertible security generally is not as sensitive to interest rate changes as a similar non-convertible debt security, and generally has less potential for gain or loss than the underlying stock. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument, which may be less than the current market price of the security. If a convertible security held by a Portfolio is called for redemption, the Portfolio will be required to permit the issuer to redeem the security, convert it into underlying common stock or sell it to a third party. Investments by a Portfolio in convertible debt securities may not be subject to any ratings restrictions, but a Portfolio’s investment manager will consider ratings, and any changes to ratings, in its determination of whether the Portfolio should invest in and/or continue to hold the securities. Convertible securities are subject to equity risk, interest rate risk, and credit risk and are often lower-quality securities. Lower quality may lead to greater volatility in the price of a security and may negatively affect a security’s liquidity. Since it derives a portion of its value from the common stock into which it may be converted, a convertible security is also subject to the same types of market and issuer-specific risks that apply to the underlying common stock. To the extent a Portfolio invests in convertible securities issued by small- or mid-cap companies, it also will be subject to the risks of investing in these companies. The securities of small- and mid-cap companies are often more volatile and less liquid than the securities of larger companies. Convertible securities are normally “junior” securities, which means an issuer usually must pay interest on its non-convertible debt securities before it can make payments on its convertible securities. If an issuer stops making interest or principal payments, these securities may become worthless and a Portfolio could lose its entire investment. In the event of a liquidation of the issuing company, holders of convertible securities may be paid before the company’s common stock holders but after holders of any senior debt obligations of the company. To the extent a Portfolio invests in securities that may be considered “enhanced” convertible securities, some or all of these risks may be more pronounced.
Dividend Risk. Dividends received on common stocks are not fixed but are paid at the discretion of an issuer’s board of directors. There is no guarantee that the companies in which a Portfolio invests will pay dividends in the future or that dividends, if paid, will remain at current levels or increase over time. Securities that pay dividends may be sensitive to changes in interest rates, and as interest rates rise, the prices of such securities may fall. A sharp rise in interest rates, an economic downturn, or other market or company-specific developments, could result in a company’s decision to decrease or eliminate a dividend.
Equity Risk. In general, the values of stocks and other equity securities fluctuate, and sometimes widely fluctuate, in response to changes in a company’s financial condition as well as general market, economic and political conditions and other factors. Stock markets tend to run in cycles, with periods when stock prices generally go up and periods when stock prices generally go down. However, stock markets also can move up and down rapidly and unpredictably. Equity securities generally have greater price volatility than fixed-income securities. A Portfolio may experience a significant or complete loss on its investment in an equity security. In addition, common stock prices may be particularly sensitive to rising interest rates, which increase borrowing costs and the costs of capital.
Exchange-Traded Funds Risk. A Portfolio’s shareholders will indirectly bear fees and expenses paid by the ETFs in which it invests, in addition to the Portfolio’s direct fees and expenses. The cost of investing in a Portfolio, therefore, may be higher than the cost of investing in a mutual fund that invests directly in individual stocks and bonds. In addition, a Portfolio’s net asset value will be subject to fluctuations in the market values of the ETFs in which it invests. A Portfolio is also subject to the risks associated with the securities or other investments in which the ETFs invest, and the ability of the Portfolio to meet its investment objective will directly depend on the ability of the ETFs to meet their investment objectives. The extent to which the investment
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performance and risks associated with a Portfolio correlate to those of a particular ETF will depend upon the extent to which the Portfolio’s assets are allocated from time to time for investment in the ETF, which will vary. A Portfolio does not control the investments of the ETFs, which may have different investment objectives and may engage in investment strategies that the Portfolio would not engage in directly. The ETFs may change their investment objectives or policies without the approval of a Portfolio. If that were to occur, the Portfolio might be forced to sell its investment in an ETF at a time and price that is unfavorable to the Portfolio.
In addition, many ETFs invest in securities included in, or representative of, underlying indexes regardless of investment merit or market trends and, therefore, these ETFs do not change their investment strategies to respond to changes in the economy, which means that such an ETF may be particularly susceptible to a general decline in the market segment relating to the relevant index. Imperfect correlation between an ETF’s securities and those in the index it seeks to track, rounding of prices, changes to the indices and regulatory policies may cause an ETF’s performance not to match the performance of its index. An ETF’s use of a representative sampling approach will result in its holding a smaller number of securities than are in the index it seeks to track. As a result, an adverse development respecting an issuer of securities held by the ETF could result in a greater decline in net asset value than would be the case if the ETF held all of the securities in the index. To the extent the assets in the ETF are smaller, these risks will be greater. No ETF fully replicates its index, and an ETF may hold securities not included in its index. Therefore, there is a risk that the investment strategy of the ETF manager may not produce the intended results.
Moreover, there is the risk that an ETF may value certain securities at a price higher than the price at which it can sell them. Secondary market trading in shares of ETFs may be halted by a national securities exchange because of market conditions or for other reasons. In addition, trading in these shares is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules. There can be no assurance that the requirements necessary to maintain the listing of the shares will continue to be met or will remain unchanged. In addition, although ETFs are listed for trading on national securities exchanges, certain foreign exchanges and in over-the-counter markets, there can be no assurance that an active trading market for such shares will develop or be maintained, in which case the liquidity and value of a Portfolio’s investment in the ETFs could be substantially and adversely affected. In addition, because ETFs are traded on these exchanges and in these markets, the purchase and sale of their shares involve transaction fees and commissions. The market price of an ETF may be different from the net asset value of such ETF (i.e., an ETF may trade at a discount or premium to its net asset value). The performance of a Portfolio that invests in such an ETF could be adversely impacted.
Financial Services Sector Risk. To the extent a Portfolio invests in the financial services sector, the value of the Portfolio’s shares may be particularly vulnerable to factors affecting that sector, such as the availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, extensive government regulation and price competition. The value of a Portfolio’s shares could experience significantly greater volatility than the value of shares of portfolios investing more broadly.
Focused Portfolio Risk. A Portfolio that employs a strategy of investing in the securities of a limited number of companies may incur more risk because changes in the value of a single security may have a more significant effect, either positive or negative, on the Portfolio’s net asset value. A Portfolio using such a focused investment strategy may experience greater performance volatility than a Portfolio that is more broadly invested.
Initial Public Offering (“IPO”) Risk. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. Prior to an IPO, there is no public market for an issuer’s securities, and there can be no assurance that an active trading market will develop or be sustained following the IPO. In addition, the prices of securities sold in IPOs may be highly volatile. Therefore, a Portfolio may hold IPO shares for a very short period of time. At times, a Portfolio may not be able to invest in securities issued in IPOs, or invest to the extent desired, if, for example, only a small portion of the securities being offered in an IPO are made available to the Portfolio. In addition, under certain market conditions, a relatively small number of companies may issue securities in IPOs. Similarly, as the number of portfolios to which IPO securities are allocated increases, the number of securities allocated to any one portfolio may decrease. To
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the extent a Portfolio with a small asset base invests in IPOs, a significant portion of its returns may be attributable to its investments in IPOs, which have a magnified impact on Portfolios with small asset bases. The impact of IPOs on such a Portfolio’s performance will likely decrease as the Portfolio’s asset size increases, which could reduce the Portfolio’s returns. There is no guarantee that as such a Portfolio’s assets grow it will continue to experience substantially similar performance by investing in profitable IPOs.
Large-Cap Company Risk. Larger more established companies may be unable to respond quickly to new competitive challenges such as changes in technology and consumer tastes, which may lead to a decline in their market price. Many larger companies also may not be able to attain the high growth rate of successful smaller companies, especially during extended periods of economic expansion. Investing more heavily in one market capitalization category (large, medium or small) carries the risk that due to market conditions that category may be out of favor with investors.
Mid-Cap, Small-Cap and Micro-Cap Company Risk. A Portfolio’s investments in mid-, small- and micro-cap companies may involve greater risks than investments in larger, more established issuers because they generally are more vulnerable than larger companies to adverse business or economic developments, which can negatively affect their value. Such companies generally have narrower product lines, more limited financial and management resources and more limited markets for their securities as compared with larger companies. Their securities may be less well-known and trade less frequently and in limited volume compared with the securities of larger, more established companies. As a result, the value of such securities may be more volatile than the value of securities of larger companies, and the Portfolio may experience difficulty in purchasing or selling such securities at the desired time and price or in the desired amount. Mid-, small- and micro-cap companies also are typically subject to greater changes in earnings and business prospects than larger companies. Consequently, the prices of mid-, small- and micro-cap company securities tend to rise and fall in value more frequently than the prices of securities of larger companies. Although investing in mid-, small- and micro-cap companies offers potential for above-average returns, the companies may not succeed and the value of their securities could decline significantly. In general, these risks are greater for small- and micro-cap companies than for mid-cap companies. Investing more heavily in one market capitalization category (large, medium or small) carries the risk that due to market conditions that category may be out of favor with investors.
Preferred Stock Risk. Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. Unlike interest payments on debt securities, dividends on preferred stock are generally payable at the discretion of the issuer’s board of directors. Preferred shareholders may have certain rights if dividends are not paid but generally have no legal recourse against the issuer. Shareholders may suffer a loss of value if dividends are not paid. In certain situations an issuer may call or redeem its preferred stock or convert it to common stock. The market prices of preferred stocks are generally more sensitive to actual or perceived changes in the issuer’s financial condition or prospects than are the prices of debt securities. Preferred stock also may be less liquid than common stock. To the extent that a Portfolio invests a substantial portion of its assets in convertible preferred stocks, declining common stock values may also cause the value of the Portfolio’s investments to decline.
Real Estate Investing Risk. Real estate-related investments may decline in value as a result of factors affecting the overall real estate industry. Real estate is a cyclical business, highly sensitive to supply and demand, general and local economic developments and characterized by intense competition and periodic overbuilding. Real estate income and values also may be greatly affected by demographic trends, such as population shifts or changing tastes and values. For example, the COVID-19 pandemic has impacted certain real estate sectors by accelerating the trend towards online shopping and remote-working environments. Losses may occur from casualty or condemnation, and government actions, such as tax law changes, zoning law changes, regulatory limitations on rents, or environmental regulations, also may have a major impact on real estate. The availability of mortgages and changes in interest rates may also affect real estate values. Changing interest rates and credit quality requirements also will affect the cash flow of real estate companies and their ability to meet capital needs. In addition, global climate change may have an adverse effect on property and security values and may exacerbate the risks of natural disasters.
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Real estate investment trusts (“REITs”) generally invest directly in real estate (equity REITs), in mortgages secured by interests in real estate (mortgage REITs) or in some combination of the two (hybrid REITs). Investing in REITs exposes investors to the risks of owning real estate directly, as well as to risks that relate specifically to the way in which REITs are organized and operated. Equity REITs may be affected by changes in the value of the underlying property owned by the REIT, while mortgage REITs may be affected by the quality of any credit extended. Equity and mortgage REITs are also subject to heavy cash flow dependency, defaults by borrowers, and self-liquidations. The risk of defaults is generally higher in the case of mortgage pools that include subprime mortgages involving borrowers with blemished credit histories. The liquidity and value of subprime mortgages and non-investment grade mortgage-backed securities that are not guaranteed by Ginnie Mae, Fannie Mae, and Freddie Mac could change dramatically over time.
Operating REITs requires specialized management skills, and a Portfolio that invests in REITs indirectly bears REIT management and administration expenses along with the direct expenses of the Portfolio. Individual REITs may own a limited number of properties and may concentrate in a particular region or property type. Domestic REITs also must satisfy specific Internal Revenue Code requirements in order to qualify for the tax-free pass-through of net investment income and net realized gains distributed to shareholders. Failure to meet these requirements may have adverse consequences on an investing Portfolio. Similar treatment may also apply to REIT-like entities under the laws of the countries in which they were formed. In addition, even the larger REITs in the industry tend to be small- to medium-sized companies in relation to the equity markets as a whole. Moreover, shares of REITs may trade less frequently and, therefore, are subject to more erratic price movements than securities of larger issuers.
Special Situations Risk. A Portfolio may seek to benefit from “special situations,” such as acquisitions, mergers, consolidations, bankruptcies, liquidations, reorganizations, restructurings, tender or exchange offers or other unusual events expected to affect a particular issuer. In general, securities of companies which are the subject of a tender or exchange offer or an acquisition, merger, consolidation, bankruptcy, liquidation, reorganization or restructuring proposal sell at a premium to their historic market price immediately prior to the announcement of the transaction. However, it is possible that the value of securities of a company involved in such a transaction will not rise and in fact may fall, in which case a Portfolio would lose money. It is also possible that a Sub-Adviser’s assessment that a particular company is likely to be acquired or acquired during a specific time frame may be incorrect, in which case a Portfolio may not realize any premium on its investment and could lose money if the value of the securities declines during the Portfolio’s holding period. A Portfolio’s return also could be adversely impacted to the extent that a Sub-Adviser’s strategies fail to identify companies for investment by the Portfolio that become the subject of a merger or similar transaction that results in an increase in the value of the securities of those companies. Moreover, publicly announced mergers and similar types of transactions may be renegotiated or terminated, in which case a Portfolio may lose money. In addition, if a transaction takes a longer time to close than a Sub-Adviser originally anticipated, a Portfolio may realize a lower-than-expected rate of return. In some circumstances, the securities purchased may be illiquid making it difficult for the Portfolio to dispose of them at an advantageous price.
Unseasoned Companies Risk. Unseasoned companies are companies that have been in operation for less than three years, including operations of any predecessors. These securities may have limited liquidity and their prices may be very volatile.
Risks of Fixed Income Investments
Each Portfolio may invest a portion of its assets in Underlying Portfolios that invest primarily in debt securities or other debt instruments. Therefore, as an investor in a Portfolio, the return on your investment will be based, to some extent, on the risks and rewards of fixed income securities or bonds or other debt instruments. Examples of bonds include, but are not limited to, corporate debt securities (including notes), mortgage-backed and asset-backed securities, securities issued by the U.S. government and obligations issued by both government agency and private issuers. Bond issuers may be foreign corporations or governments as described in an Underlying Portfolio’s investment strategies. In addition to bonds, debt securities also include money market instruments.
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In general, the New EQ/Conservative Allocation Portfolio, New EQ/Conservative-Plus Allocation Portfolio and New EQ/Moderate Allocation Portfolio will be subject to the risks of investing in fixed income securities to a greater extent than the New EQ/Aggressive Allocation Portfolio and New EQ/Moderate-Plus Allocation Portfolios. In general, the New Target Allocation Portfolios with earlier retirement dates, such as the New Target 2015 Allocation Portfolio and New Target 2025 Allocation Portfolio, will be subject to the risks of investing in fixed income securities to a greater extent than the New Target Allocation Portfolios with later retirement dates.
The risks of investing in fixed income securities or other fixed income instruments may include:
Banking Industry Sector Risk. To the extent a Portfolio invests in the banking industry, it is exposed to the risks generally associated with such industry, including interest rate risk, credit risk and the risk that regulatory or other developments relating to the banking industry may affect its investment. The value of a Portfolio’s shares could experience significantly greater volatility than the value of shares of portfolios investing more broadly.
In March 2023, the shutdown of certain financial institutions raised economic concerns over disruption in the U.S. banking system. There can be no certainty that the actions taken by the U.S. government to strengthen public confidence in the U.S. banking system will be effective in mitigating the effects of financial institution failures on the economy and restoring public confidence in the U.S. banking system.
Collateralized Loan Obligations Risk. Investments in collateralized loan obligations (“CLOs”) involve many of the same risks associated with investments in debt securities and asset-backed securities, including interest rate risk, credit risk, liquidity risk, prepayment and extension risk, and valuation risk. The risks of an investment in a CLO also depend largely on the quality and type of the collateral and the class or “tranche” of the CLO in which a Portfolio invests. An investment in a junior tranche is subject to a greater risk of depreciation or loss than an investment in a more senior tranche. Normally, CLOs are privately offered and sold, and thus are not registered under the securities laws. As a result, investments in CLOs may be characterized by a Portfolio as illiquid securities; however, an active dealer market, or other relevant measures of liquidity, may exist for CLOs allowing a CLO potentially to be deemed liquid under a Portfolio’s liquidity policies. Additionally, CLOs carry risks including, but not limited to: (a) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (b) the risk that the collateral securities may decline in value or quality or be downgraded or go into default, particularly during periods of economic downturn; (c) the possibility that a Portfolio may invest in CLOs that are subordinate to other classes; (d) the risk that the manager of the CLOs may perform poorly; and (e) the risk that the complex structure of CLOs may produce disputes with the issuer or unexpected investment results. CLOs also can be difficult to value and may be highly leveraged (which could make them highly volatile), and the use of CLOs may result in losses to a Portfolio.
Credit Risk. A Portfolio is subject to the risk that the issuer or the guarantor (or other obligor, such as a party providing insurance or other credit enhancement) of a fixed income security, or the counterparty to a derivatives contract, repurchase agreement, loan of portfolio securities or other transaction, is unable or unwilling, or is perceived (whether by market participants, ratings agencies, pricing services or otherwise) as unable or unwilling, to make timely interest and/or principal payments or otherwise honor its obligations, or defaults completely, which may cause the Portfolio’s holdings to lose value. Securities are subject to varying degrees of credit risk, which are often reflected in their credit ratings. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk. Higher credit ratings correspond to lower perceived credit risk, and lower credit ratings correspond to higher perceived credit risk. However, rating agencies may fail to make timely changes to credit ratings in response to subsequent events and a credit rating may become stale in that it fails to reflect changes in an issuer’s financial condition. Credit ratings also may be influenced by conflicts of interest. Credit ratings represent a rating agency’s opinion regarding the quality of a security and are not a guaranty of quality. Credit ratings do not protect against a decline in the value of a security. The downgrade of a security’s credit rating may decrease its value. Lower credit quality also may lead to greater volatility in the price of a security and may negatively affect a security’s liquidity. The credit quality of a security can deteriorate suddenly and rapidly. A Portfolio may experience a significant or complete loss on a fixed income security or a transaction. When a fixed income security is not rated, an investment manager may have to assess the risk of the security itself. In addition, legislation and regulations to reform rating agencies could adversely impact a Portfolio’s investments or investment process.
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Distressed Companies Risk. A Portfolio may invest in distressed debt securities, including loans, bonds and notes, many of which are not publicly traded and may involve a substantial degree of risk. Debt obligations of distressed companies typically are unrated, lower-rated or close to default. Distressed debt securities include securities of companies that are in financial distress and that may be in or about to enter bankruptcy. In certain periods, there may be little or no liquidity in the markets for these securities. In addition, the prices of such securities may be subject to periods of abrupt and erratic market movements and above-average price volatility. It may be difficult to obtain financial information regarding the financial condition of a borrower or issuer, and its financial condition may change rapidly. It may be more difficult to value such securities and the spread between the bid and asked prices of such securities may be greater than expected. A Portfolio may lose a substantial portion or all of its investment in such securities or it may be required to accept cash, securities or other property with a value less than the Portfolio’s original investment. Defaulted debt securities involve risks such as the possibility of complete loss of the investment where the issuer does not restructure to enable it to resume principal and interest payments. If the issuer of a security held by a Portfolio defaults, the Portfolio may experience a significant or complete loss on the security. Securities tend to lose much of their value before the issuer defaults. A Portfolio may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings.
Inflation-Indexed Bonds Risk. Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to inflation. The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates represent nominal (stated) interest rates reduced by the expected impact of inflation. In general, inflation-indexed bonds, including Treasury inflation-indexed securities, decline in value when real interest rates rise and rise in value when real interest rates decline. In certain interest rate environments, such as when real interest rates are rising faster than nominal interest rates, inflation-indexed bonds may experience greater losses than other fixed income securities with similar durations. Interest payments on inflation-linked debt securities can be unpredictable and may vary as the principal and/or interest is adjusted for inflation. In periods of deflation, a Portfolio may have no income at all from such investments. The principal value of an investment in a Portfolio is not protected or otherwise guaranteed by the value of the Portfolio’s investments in inflation-indexed debt securities.
Interest Rate Risk. Changes in interest rates may affect the yield, liquidity and value of investments in income producing or debt securities. Changes in interest rates also may affect the value of other securities. When interest rates rise, the value of a Portfolio’s debt securities generally declines. Conversely, when interest rates decline, the value of a Portfolio’s debt securities generally rises. Typically, the longer the maturity (i.e., the term of a debt security) or duration (i.e., a measure of the sensitivity of a debt security to changes in market interest rates, based on the entire cash flow associated with the security) of a debt security, the greater the effect a change in interest rates could have on the security’s price. For example, if a debt security has a duration of five years and interest rates increase by 1%, the debt security’s price typically would be expected to decline by approximately 5%. Thus, the sensitivity of a Portfolio’s debt securities to interest rate risk will increase the greater the duration of those securities. Greater sensitivity to changes in interest rates may increase the volatility of a debt security’s value and may lead to losses. Interest rate changes can be sudden and unpredictable, and are influenced by a number of factors, including government policy, monetary policy, inflation rates and/or investor expectations concerning such rates, perceptions of risk, and supply and demand of bonds. Changes in government monetary policy, including changes in federal tax policy or changes in a central bank’s implementation of specific policy goals, may have a substantial and immediate impact on interest rates. However, there can be no guarantee that any particular government or central bank policy will be continued, discontinued or changed, or that any such policy will have the desired effect on interest rates. Short-term and long-term interest rates, and interest rates in different countries, do not necessarily move in the same direction or by the same amount.
Interest rates were unusually low in recent years in the United States and abroad; however, due to concerns regarding high inflation in many sectors of the U.S. and global economies, the U.S. Federal Reserve and many foreign governments and monetary authorities have raised interest rates and implemented other policy initiatives in an effort to control inflation, and they may continue to do so. It is difficult to predict accurately the pace at which central banks or monetary authorities may increase interest rates or the timing, frequency, or magnitude of
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any such further increases, and the evaluation of macro-economic and other conditions or events could cause a change in approach in the future. Rising interest rates may present a greater risk than has historically been the case due to the effect of government fiscal and monetary policy initiatives and potential market reaction to those initiatives. As such, fixed-income and related markets may continue to experience heightened levels of interest rate volatility. A significant or rapid rise in interest rates could result in losses, which could be substantial, to a Portfolio.
During periods of very low interest rates, which occur from time to time due to market forces or actions of governments and/or their central banks, a Portfolio may be subject to a greater risk of principal decline from rising interest rates. Certain countries have experienced negative interest rates on certain fixed-income instruments. Very low or negative interest rates may magnify interest rate risk by, among other things, reducing or eliminating interest income and causing declines in the value of investments in income producing or debt securities. Changing interest rates, including rates that fall below zero, may have unpredictable effects on markets, may result in heightened market volatility and may detract from Portfolio performance to the extent a Portfolio is exposed to such interest rates.
Inverse Floaters Risk. Inverse floaters are securities with a floating or variable rate of interest (i.e., the rate of interest varies with changes in specified market rates or indices, such as the prime rate, or at specified intervals). Inverse floaters have interest rates that tend to move in the opposite direction as the specified market rates or indices and may exhibit substantially greater price volatility than fixed rate obligations having similar credit quality, redemption provisions and maturity. Any increase in the reference rate of an inverse floater (as a consequence of an increase in interest rates) causes a drop in the coupon rate, while any drop in the reference rate of an inverse floater causes an increase in the coupon rate. Inverse floaters generally will underperform the market for fixed rate securities in a rising interest rate environment. Inverse floater collateralized mortgage obligations (“CMOs”) exhibit greater price volatility than the majority of mortgage-related securities. In addition, some inverse floater CMOs exhibit extreme sensitivity to changes in prepayments. As a result, the yield to maturity of an inverse floater CMO is sensitive not only to changes in interest rates but also to changes in prepayment rates on the related underlying mortgage assets. Inverse floaters typically involve leverage, which can magnify a Portfolio’s losses; accordingly, the holder of an inverse floater could lose more than its principal investment.
Investment Grade Securities Risk. Debt securities generally are rated by national bond ratings agencies. A Portfolio considers securities to be investment grade if they are rated BBB or higher by S&P or Fitch, or Baa or higher by Moody’s, or, if unrated, determined by the investment manager to be of comparable quality. Securities rated in the lower investment grade rating categories (e.g., BBB or Baa) are considered investment grade securities, but may have more risk than higher rated obligations because they are regarded as having only an adequate capacity to pay principal and interest, are considered to lack outstanding investment characteristics, and may possess certain speculative characteristics.
LIBOR Risk. Many debt securities, derivatives and other financial instruments, including some of the Portfolios’ investments, utilize the London Interbank Offered Rate (or “LIBOR”) as the reference or benchmark rate for variable interest rate calculations. LIBOR is produced daily by averaging the rates reported by a number of banks. LIBOR may be a factor in determining a Portfolio’s payment obligations under a derivative investment, the cost of financing to a Portfolio, or an investment’s value or return to a Portfolio, and may be used in other ways that affect a Portfolio’s investment performance. Most maturities and currencies of LIBOR were phased out at the end of 2021, with the remaining ones to be phased out on June 30, 2023.
The Secured Overnight Financing Rate (“SOFR”) has been selected by a committee established by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to replace LIBOR as a reference or benchmark rate in the United States. Other countries have undertaken similar initiatives to identify replacement reference or benchmark rates in their respective markets. However, there are obstacles to converting certain existing investments and transactions to a new reference or benchmark rate, as well as risks associated with using a new reference or benchmark rate with respect to new investments and transactions. The transition process, or a failure to transition properly, might lead to increased volatility and illiquidity in markets that currently rely on the LIBOR to determine interest rates, a reduction in the values of some LIBOR-based investments, and reduced
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effectiveness of certain hedging strategies, which may adversely affect a Portfolio’s performance or net asset value. While some LIBOR-based instruments may contemplate a scenario where LIBOR becomes unreliable or is no longer available by providing for an alternative rate-setting methodology, not all may have such provisions and there may be significant uncertainty regarding the effectiveness of any such alternative methodologies. Since the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects could occur prior to LIBOR ceasing to be published. In addition, the SOFR or other alternative reference or benchmark rate may be an ineffective substitute with respect to an existing or new investment or transaction, resulting in prolonged adverse market conditions for a Portfolio, which could negatively affect the Portfolio’s performance and/or net asset value.
SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities and has been published by the Federal Reserve Bank of New York since April 2018. The Federal Reserve Bank of New York also has been publishing historical indicative Secured Overnight Financing Rates from 2014. Historical changes or trends in SOFR may not be reliable as indicators of future changes in SOFR. The composition and characteristics of SOFR are not the same as those of LIBOR, and SOFR is fundamentally different from LIBOR because (1) SOFR is a secured rate, while LIBOR is an unsecured rate, and (2) SOFR is an overnight rate, while LIBOR is a forward-looking rate that represents interbank funding over different maturities. As a result, there can be no assurance that SOFR will perform in the same way as LIBOR would have at any time, including, without limitation, as a result of changes in interest and yield rates in the market, market volatility, or global or regional economic, financial, political, regulatory, judicial or other events. In addition, there can be no assurance that “Term SOFR,” which would be available for different maturities, develops and can be implemented under current documentation as a successor to LIBOR or currently-available SOFR methodologies.
Additionally, daily changes in SOFR have, on occasion, been more volatile than daily changes in other benchmark or market rates, such as LIBOR. The return on and value of an investment in notes or other investments linked to SOFR may fluctuate more than the value of investments that are linked to less volatile rates. In addition, the volatility of SOFR has reflected the underlying volatility of the overnight U.S. Treasury repo market. The Federal Reserve Bank of New York has at times conducted operations in the overnight U.S. Treasury repo market in order to help maintain the federal funds rate within a target range. There can be no assurance that the Federal Reserve Bank of New York will continue to conduct such operations in the future, and the duration and extent of any such operations is inherently uncertain. The effect of any such operations, or of the cessation of such operations to the extent they are commenced, is uncertain and could result in losses to a Portfolio.
SOFR is published by the Federal Reserve Bank of New York based on data that it receives from various sources. There can be no guarantee, particularly given its relatively recent introduction, that SOFR will not be discontinued or fundamentally altered in a manner that is materially adverse to the interests of investors in a Portfolio. If the manner in which SOFR is calculated is changed, that change may result in a reduction in the amount of interest payable on a Portfolio’s investments and the trading prices of those investments. In addition, the Federal Reserve Bank of New York may withdraw, modify or amend published SOFR data in its sole discretion and without notice. The interest rate for any interest period typically will not be adjusted for any modifications or amendments to SOFR data that may be published after the interest rate for that interest period has been determined.
Since SOFR is a relatively new reference rate, a Portfolio’s investments in debt securities and other instruments linked to SOFR may not have an established trading market, and an established trading market may never develop or may not be very liquid. Market terms for instruments linked to SOFR, such as the spread over the base rate reflected in interest rate provisions or the manner of compounding the base rate, may evolve over time, and trading prices for such instruments may be lower than those of later-issued SOFR-based debt instruments as a result. Similarly, if SOFR does not prove to be widely used, the trading price of investments linked to SOFR may be lower than those of investments linked to reference rates that are more widely used. A Portfolio may not be able to sell the investments at all or may not be able to sell them at prices that will provide a yield comparable to similar investments that have a developed secondary market, and may consequently suffer from increased pricing volatility and market risk.
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Loan Risk. A bank loan represents an interest in a loan or other direct indebtedness that entitles the acquirer of such interest to payments of interest, principal and/or other amounts due under the structure of the loan. Loan interests are subject to liquidity risk, prepayment risk, extension risk, the risk of subordination to other creditors, restrictions on resale, and the lack of a regular trading market and publicly available information. Loan interests may be difficult to value and may have extended trade settlement periods (bank loans may have trade settlement periods that extend beyond seven days). As a result, the proceeds from the sale of a loan may not be available to make additional investments or to meet redemption obligations until potentially a substantial period after the sale of the loan. The extended trade settlement periods could force a Portfolio to liquidate other securities to meet redemptions and may present a risk that the Portfolio may incur losses in order to timely honor redemptions.
A Portfolio’s investments in loans are subject to the risk that the Portfolio will not receive payment of interest, principal and other amounts due in connection with these investments and will depend primarily on the financial condition of the borrower. Fully secured loans offer a Portfolio more protection than unsecured loans in the event of nonpayment of scheduled interest or principal, although there is no assurance that the liquidation of a secured loan’s collateral would satisfy the borrower’s obligation or that the collateral could be readily liquidated. In addition, a Portfolio’s access to collateral may be limited by bankruptcy or other insolvency laws. In the event of a default, a Portfolio may not recover its principal, may experience a substantial delay in recovering its investment and may not receive interest during the delay. Unsecured loans are subject to a greater risk of default than secured loans, especially during periods of deteriorating economic conditions. Unsecured loans also have a greater risk of nonpayment in the event of a default than secured loans since there is no recourse for the lender to collateral. Loans in which a Portfolio may invest may be made to finance highly leveraged corporate transactions. The highly leveraged capital structure of the borrowers in such transactions may make such loans especially vulnerable to adverse changes in economic or market conditions. In addition, loan interests may be unrated, and a Portfolio’s Sub-Adviser may be required to rely exclusively on its own analysis of the borrower in determining whether to acquire, or to continue to hold, a loan. Loans may not be considered “securities,” and purchasers, such as a Portfolio, therefore may not have the benefit of the anti-fraud protections of the federal securities laws.
Loan agreements, which set forth the terms of a loan and the obligations of the borrower and lender, contain certain covenants that mandate or prohibit certain borrower actions, including financial covenants (or “maintenance covenants”) that dictate certain minimum and maximum financial performance levels. Certain types of loans contain fewer maintenance covenants than traditional loans (or no maintenance covenants at all) and may not include terms that permit the lender to monitor the financial performance of the borrower and declare an event of default if certain criteria are breached. This may hinder a Portfolio’s ability to reprice credit risk associated with the borrower and reduce a Portfolio’s ability to restructure a problematic loan and mitigate potential loss. As a result, a Portfolio’s exposure to losses on these types of loans may be increased, especially during a downturn in the credit cycle.
A Portfolio may acquire a loan interest by obtaining an assignment of all or a portion of the interests in a particular loan that are held by an original lender or a prior assignee. As an assignee, a Portfolio normally will succeed to all rights and obligations of its assignor with respect to the portion of the loan that is being assigned. However, the rights and obligations acquired by the purchaser of a loan assignment may differ from, and be more limited than, those held by the original lenders or the assignor. A Portfolio may also purchase a participation in a loan interest that is held by another party. When a Portfolio’s loan interest is a participation, the Portfolio may have less control over the exercise of remedies than the party selling the participation interest, and the Portfolio normally would not have any direct rights against the borrower. It is possible that a Portfolio could be held liable, or may be called upon to fulfill other obligations, with respect to loans in which it receives an assignment in whole or in part, or in which it owns a participation. The potential for such liability is greater for an assignee than for a participant.
Money Market Risk. Although a money market fund is designed to be a relatively low risk investment, it is not free of risk. Despite the short maturities and high credit quality of a money market fund’s investments, increases in interest rates and deteriorations in the credit quality of the instruments the money market fund has purchased may
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reduce the money market fund’s yield and can cause the price of a money market security to decrease. In addition, a money market fund is subject to the risk that the value of an investment may be eroded over time by inflation. In the event that any money market fund that seeks to maintain a stable $1.00 net asset value fails to maintain a stable net asset value (or if there is a perceived threat that a money market fund is likely to fail to maintain a stable net asset value), money market funds in general could face increased redemption pressures, which could jeopardize the stability of their net asset values. Certain money market funds have in the past failed to maintain stable $1.00 net asset values, and there can be no assurance that such failures and resulting redemption pressures will not occur in the future. A low- or negative-interest rate environment may prevent a money market fund from providing a positive yield, and could negatively impact a money market fund’s ability to maintain a stable $1.00 net asset value per share.
Certain money market funds are institutional money market funds, which means that the net asset value of the fund’s shares will “float”. A money market fund with a floating net asset value does not maintain a stable $1.00 net asset value per share; rather, its net asset value will fluctuate with changes in the values of the securities in which the fund invests. Shares sold utilizing a floating net asset value may be worth more or less than their original purchase price. An institutional money market fund may impose a fee upon the redemption of fund shares or may temporarily suspend the ability to redeem shares if the fund’s liquidity falls below required minimums because of market conditions or other factors.
Money market funds are subject to specific rules that affect the manner in which these funds are structured and operated. These rules are subject to change. A change in these rules may impact a money market fund’s expenses, operations, returns, liquidity and continued viability.
Mortgage-Related and Other Asset-Backed Securities Risk. Investments in mortgage-related and other asset-backed securities are subject to credit risk, liquidity risk, the risk of default, interest rate risk, and prepayment and extension risk, sometimes to a greater extent than various other types of fixed income investments. Declines in the credit quality of and defaults by the issuers of mortgage-related and other asset-backed securities may decrease the value of such securities, which could result in losses to a Portfolio, and may reduce the liquidity of such securities and make such securities more difficult to purchase or sell at an advantageous time and price. In addition, borrowers may default on the obligations that underlie mortgage-related and other asset-backed securities. The risk of defaults by borrowers generally is greater during times of rising interest rates and/or unemployment rates. The impairment (or loss) of the value of collateral or other assets underlying mortgage-related and other asset-backed securities will result in a reduction in the value of the securities. Certain collateral may be difficult to locate in the event of default, or may be lost, and recoveries of depreciated or damaged collateral may not fully cover payments due on such collateral. Asset-backed securities may not have the benefit of a security interest in collateral comparable to that of mortgage assets, resulting in additional credit risk. In addition, even when there is no default or threat of default, instability in the markets for mortgage-related and other asset-backed securities may reduce (at times, significantly) the liquidity of such securities. As a result, the value of such securities may decrease and a Portfolio may incur greater losses on the sale of such securities than under more stable market conditions. Furthermore, instability and illiquidity in the market for lower-rated mortgage-related and other asset-backed securities may affect the overall market for such securities, thereby impacting the liquidity and value of higher-rated securities.
If a Portfolio purchases mortgage-related or other asset-backed securities that are “subordinated” to other interests in the same pool, the Portfolio, as a holder of those securities, may receive payments only after the pool’s obligations to other investors have been satisfied. For example, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may limit substantially the pool’s ability to make payments of principal or interest to the Portfolio as a holder of such subordinated securities, reducing the values of those securities or in some cases rendering them worthless. In addition, certain mortgage-related and other asset-backed securities may include securities backed by pools of loans made to “subprime” borrowers or borrowers with blemished credit histories. The underwriting standards for subprime loans may be lower and more flexible than the standards generally used by lenders for borrowers with non-blemished credit histories with regard to the borrowers’ credit standing and repayment ability. Borrowers who qualify generally have impaired credit histories, which may include a record of major derogatory credit items such as outstanding judgments or prior bankruptcies. In
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addition, they may not have the documentation required to qualify for a standard loan. As a result, the loans in the pool are likely to experience rates of delinquency, foreclosure, and bankruptcy that are higher, and that may be substantially higher, than those experienced by loans underwritten in a more traditional manner. In addition, changes in the values of the assets underlying the loans (if any), as well as changes in interest rates, may have a greater effect on the delinquency, foreclosure, bankruptcy, and loss experience of the loans in the pool than on loans originated in a more traditional manner. The risk of defaults by borrowers is generally higher in the case of asset or mortgage pools that include subprime assets or mortgages, and the liquidity and value of subprime mortgages and non-investment grade mortgage-backed securities that are not guaranteed by Ginnie Mae, Fannie Mae, and Freddie Mac could change dramatically over time.
Payment of interest and repayment of principal, the schedule for which varies based on the terms of the loan, may be largely dependent upon the cash flows generated by the assets backing the securities and, in certain cases, supported by various forms of insurance or guarantees, including letters of credit, surety bonds, or other credit or liquidity enhancements. There can be no assurance that insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Furthermore, mortgage-related and other asset-backed securities typically provide the issuer with the right to prepay the security prior to maturity. During periods of rising interest rates, the rate of prepayments tends to decrease because borrowers are less likely to prepay debt (such as mortgage debt or automobile loans). Slower than expected payments can extend the average lives of mortgage-related and other asset-backed securities, and this may lock in a below market interest rate and increase the security’s duration and interest rate sensitivity, which may increase the volatility of the security’s value and may lead to losses. During periods of falling interest rates, the rate of prepayments tends to increase because borrowers are more likely to pay off debt and refinance at the lower interest rates then available. Unscheduled prepayments shorten the average lives of mortgage-related and other asset-backed securities and may result in the Portfolio’s having to reinvest the proceeds of the prepayments at lower interest rates. Unscheduled prepayments also would limit the potential for capital appreciation on these securities and may make them less effective than other fixed income securities as a means of “locking in” long-term interest rates, thereby reducing the Portfolio’s income. Prepayment rates are difficult to predict, and the potential impact of prepayments on the value of a mortgage-related or other asset-backed security depends on the terms of the instrument and can result in significant volatility.
Privately issued mortgage-related and other asset-backed securities may be subject to heightened liquidity risk. During periods of market stress or high redemptions, a Portfolio may be forced to sell these securities at significantly reduced prices, resulting in losses. Liquid privately issued mortgaged-related and other asset-backed securities can become illiquid during periods of market stress. Privately issued mortgage-related securities are not subject to the same underwriting standards for the underlying mortgages that are applicable to those mortgage-related securities that have U.S. government or government-sponsored enterprise (“GSE”) guarantees. As a result, the mortgage loans underlying privately issued mortgage-related securities may, and frequently do, have less favorable collateral, credit risk, liquidity risk, or other underwriting characteristics than U.S. government or GSE mortgage-related securities.
Mortgage-backed securities issued in the form of collateralized mortgage obligations (“CMOs”) are collateralized by mortgage loans or mortgage pass-through securities. In periods of supply and demand imbalances in the market for CMOs or in periods of sharp interest rate movements, the prices of CMOs may fluctuate to a greater extent than would be expected from interest rate movements alone. CMOs and other mortgage-backed securities may be structured similarly to collateralized debt obligations and may be subject to similar risks.
Non-Investment Grade Securities Risk. Bonds rated below BBB by S&P or Fitch, or below Baa by Moody’s or, if unrated, determined by the investment manager to be of comparable quality, are speculative in nature, involve greater risk of default by the issuing entity and may be subject to greater market fluctuations than higher rated fixed income securities. Non-investment grade bonds, sometimes referred to as “junk bonds,” are usually issued by companies without long track records of sales and earnings, or by those companies with questionable credit strength. The creditworthiness of issuers of non-investment grade debt securities may be more complex to analyze than that of issuers of investment grade debt securities, and the reliance on credit ratings may present additional risks. The retail secondary market for these “junk bonds” may be less liquid than that of higher rated securities and adverse conditions could make it difficult at times to sell certain securities or could result in
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lower prices than those used in calculating a Portfolio’s net asset value. A Portfolio investing in “junk bonds” may also be subject to greater credit risk because it may invest in debt securities issued in connection with corporate restructuring by highly leveraged issuers or in debt securities not current in the payment of interest or principal or in default. If the issuer of a security is in default with respect to interest or principal payments, a Portfolio may lose its entire investment. The credit rating of a below investment grade security does not necessarily address its market value risk and may not reflect its actual credit risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer. Because of the risks involved in investing in below investment grade securities, an investment in a Portfolio that invests substantially in such securities should be considered speculative.
Prepayment Risk and Extension Risk. Prepayment risk is the risk that the issuer of a security held by a Portfolio may pay off principal more quickly than originally anticipated, and the Portfolio may have to reinvest the proceeds in an investment offering a lower yield, may not benefit from any increase in value that might otherwise result from declining interest rates and may lose any premium it paid to acquire the security. Falling interest rates generally result in quicker payoffs as borrowers are motivated to pay off debt and refinance at new lower rates. Extension risk is the risk that the issuer of a security held by a Portfolio may pay off principal more slowly than originally anticipated. Rising interest rates generally result in slower payoffs, which effectively increase the duration of certain debt securities and heighten interest rate risk. Additionally, a Portfolio may be prevented from reinvesting the proceeds it would have received at a given time in an investment offering a higher yield.
Sovereign Debt Securities Risk. Sovereign debt securities are subject to the risk that a governmental entity may delay or refuse to pay interest or repay principal on its sovereign debt for a variety of reasons including, for example, cash flow problems, insufficient foreign currency reserves, political considerations, the size of the governmental entity’s debt position in relation to the economy, or the failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a governmental entity defaults, it may ask for more time in which to pay or for further loans. In addition, there are generally no bankruptcy proceedings similar to those in the United States by which defaulted sovereign debt obligations may be collected and there may be few or no effective legal remedies for collecting on such debt. Sovereign debt risk is increased for emerging market issuers. Certain emerging market or developing countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulties in servicing their sovereign debt on a timely basis, which has led to defaults and the restructuring of certain indebtedness.
U.S. Government Securities Risk. Although a Portfolio may hold securities that carry U.S. government guarantees, these guarantees do not extend to shares of the Portfolio itself and do not guarantee the market prices of the securities. Securities issued by the U.S. Treasury or other agencies and instrumentalities of the U.S. government may decline in value as a result of, among other things, changes in interest rates, political events in the United States, international developments, including strained relations with foreign countries, and changes in the credit rating of, or investor perceptions regarding the creditworthiness of, the U.S. government. Furthermore, not all securities issued by the U.S. government and its agencies and instrumentalities are backed by the full faith and credit of the U.S. Treasury. Some are backed by the issuer’s right to borrow from the U.S. Treasury, while others are backed only by the credit of the issuing agency or instrumentality. Securities not backed by the full faith and credit of the U.S. Treasury involve greater credit risk than investments in other types of U.S. government securities. The maximum potential liability of the issuers of some U.S. government securities may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future. Increases or decreases in the demand for U.S. government securities may occur at any time and may result in increased volatility in the values of those securities.
Variable and Floating Rate Securities Risk. The market prices of securities with variable and floating interest rates are generally less sensitive to interest rate changes than are the market prices of securities with fixed interest rates. Variable and floating rate securities may decline in value if market interest rates or interest rates
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paid by such securities do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Certain types of floating rate securities, such as interests in bank loans, may be subject to greater liquidity risk than other debt securities.
Certain variable and floating rate securities have an interest rate floor feature, which prevents the interest rate payable by the security from dropping below a specified level as compared to a reference interest rate (the “reference rate”). Such a floor protects a Portfolio from losses resulting from a decrease in the reference rate below the specified level. However, if the reference rate is below the floor, there will be a lag between a rise in the reference rate and a rise in the interest rate payable by the security, and a Portfolio may not benefit from increasing interest rates for a significant period of time. Rates on certain variable rate securities typically reset only periodically. As a result, changes in prevailing interest rates, particularly sudden and significant changes, can cause some fluctuations in a Portfolio’s value to the extent that it invests in variable rate securities.
When-Issued and Delayed Delivery Securities and Forward Commitments Risk. When-issued and delayed delivery securities and forward commitments involve the risk that the security a Portfolio commits to purchase will decline in value prior to its delivery. This risk is in addition to the risk that a Portfolio’s other assets will decline in value. Therefore, these transactions can have a leverage-like effect on a Portfolio and increase a Portfolio’s overall investment exposure. There also is the risk that the security will not be issued or that the other party to the transaction will fail to complete the sale or purchase of the security. If this occurs, a Portfolio may lose the opportunity to purchase or sell the security at the agreed upon price and may forgo any gain in the security’s price. These transactions also may cause a Portfolio to liquidate positions when it may not be advantageous to do so, in order to satisfy its purchase obligations.
Zero Coupon and Pay-in-Kind Securities Risk. Zero coupon and pay-in-kind securities are debt securities that do not make periodic cash interest payments. Zero coupon securities are issued at a significant discount from their face value. Zero coupon and pay-in-kind securities tend to be subject to greater fluctuations in market value in response to changing interest rates than securities of comparable maturities that pay interest periodically and in cash. Pay-in-kind securities generally carry higher interest rates compared to debt securities that make cash payments of interest to reflect the increased risks associated with the deferral of interest payments. Pay-in-kind securities also generally involve greater credit risk than coupon bonds because a Portfolio receives no cash payments until the maturity date or a specified cash payment date. Even if accounting conditions are met for accruing income payable at a future date under a pay-in-kind security, the issuer could still default when the collection date occurs at the maturity of or payment date for the security. If the issuer of a pay-in-kind security defaults, a Portfolio may lose its entire investment. Pay-in-kind securities also may be difficult to value accurately because they involve ongoing judgments about the collectability of the deferred payments and the value of any associated collateral.
In addition, current federal income tax law requires the holder of a zero coupon security or certain pay-in-kind securities to accrue income with respect to these securities on a current basis, even though it does not receive that income currently in cash. To maintain its qualification as a regulated investment company under the Internal Revenue Code and avoid federal tax liability at the entity (Portfolio) level, a Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements.
Risks of Foreign Securities Investments
Each Portfolio may invest a varying portion of its assets in Underlying Portfolios that invest primarily in foreign securities or other foreign instruments. Therefore, as an investor in a Portfolio, the return on your investment will be based, to some extent, on the risks and rewards of foreign securities or other foreign instruments.
The risks of investing in foreign securities and other foreign instruments may include:
Foreign Securities Risk. Investments in foreign securities, including depositary receipts, involve risks not associated with, or more prevalent than those that may be associated with, investments in U.S. securities. The
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economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Over a given period of time, foreign securities may underperform U.S. securities — sometimes for years. A Portfolio could also underperform if it invests in countries or regions whose economic performance falls short. Foreign markets may be less liquid, more volatile and subject to less government supervision and regulation than U.S. markets, and it may take more time to clear and settle trades involving foreign securities. Security values also may be negatively affected by changes in the exchange rates between the U.S. dollar and foreign currencies. Differences between U.S. and foreign legal, political and economic systems, regulatory regimes and market practices, as well as trade barriers and other protectionist trade policies (including those of the United States), governmental instability, war or other political or economic actions or factors, also may adversely impact security values. Foreign securities are also subject to the risks associated with the potential imposition of economic or other sanctions against a particular foreign country, its nationals, businesses or industries. The costs of buying and selling foreign securities, including taxes, brokerage and custody costs, generally are higher than the costs of buying and selling domestic securities. World markets, or those in a particular region, may all react in similar fashion to important economic, political or other developments. Events and evolving conditions in certain economies or markets may alter the risks associated with investments tied to countries or regions that historically were perceived as comparatively stable and make such investments riskier and more volatile. In addition, securities issued by U.S. entities with substantial foreign operations or holdings can involve risks relating to conditions in foreign countries. Regardless of where a company is organized or its stock is traded, its performance may be significantly affected by events in regions from which it derives its profits or in which it conducts significant operations.
Currency Risk: Investments in foreign currencies and in securities that trade in, or receive revenues in, or in derivatives that provide exposure to foreign currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar. Any such decline may erode or reverse any potential gains from an investment in securities denominated in foreign currency or may widen existing loss. To the extent a Portfolio invests or hedges based on the perceived relationship between two currencies, there is a risk that the correlation between those currencies may not behave as anticipated. Currency rates may fluctuate significantly over short periods of time and can be affected unpredictably by a number of factors, including changes in interest rates; intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities; investor perception of a country’s economy; or the imposition of currency controls or other political developments in the United States or abroad. Currency exchange rates may fluctuate in response to factors external to a country’s economy, which makes the forecasting of currency market movements extremely difficult. Currency risk may be particularly high to the extent that a Portfolio invests in foreign securities or currencies that are economically tied to emerging market countries.
Depositary Receipts Risk: Investments in depositary receipts (including American Depositary Receipts, European Depositary Receipts and Global Depositary Receipts) involve many of the same risks associated with investing directly in foreign securities, including the economic and political risks associated with the underlying issuer’s country. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts or to pass through to them any voting rights with respect to the deposited securities. A Portfolio may therefore receive less timely information or have less control than if it invested directly in the foreign issuer. Depositary receipts are subject to the risk of fluctuation in the currency exchange rate if, as is often the case, the underlying foreign securities are denominated in foreign currency, and there may be an imperfect correlation between the market value of depositary receipts and the underlying foreign securities. Certain countries may limit the ability to convert a depositary receipt into the underlying foreign security and vice versa, which may cause the securities of the foreign company to trade at a discount or premium to the market price of the related depositary receipts. In some cases, if a Portfolio, as the holder of a depositary receipt, is compelled to convert the depositary receipt into the underlying foreign security but is unable successfully to complete the conversion, the depositary receipt could be rendered worthless and the Portfolio could lose its entire investment.
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Emerging Markets Risk: Emerging market countries generally are located in Asia, the Middle East, Eastern Europe, Central and South America, and Africa. There are greater risks and uncertainties involved in investing in emerging market countries and/or their securities markets, and investments in these countries and/or markets are more susceptible to loss than investments in developed countries and/or markets. Investments in these countries and/or markets may present market, credit, currency, liquidity, legal, political, technical and other risks different from, or greater than, the risks of investing in developed countries. For instance, these countries may be more likely than developed countries to experience rapid and significant adverse developments in their political, economic or social structures or intervene in or manipulate financial markets. Some emerging market countries restrict foreign investments, impose high withholding or other taxes on foreign investments, impose restrictive exchange control regulations, or may nationalize or expropriate the assets of private companies. Therefore, a Portfolio may be limited in its ability to make direct or additional investments in an emerging market country or could lose the entire value of its investment in the affected market. Such restrictions also may have negative impacts on transaction costs, market price, and investment returns. The U.S. government also may impose restrictions on the ability of U.S. investors to hold and/or acquire securities of certain companies in emerging market countries, which may adversely impact a Portfolio.
In addition, companies in emerging market countries may be newly organized, smaller and less seasoned, and the securities markets of emerging market countries generally are smaller, less liquid and more volatile than those of developed countries. Shareholder claims and legal remedies that are common in the United States may be difficult or impossible to pursue in many emerging market countries. In addition, due to jurisdictional limitations, matters of comity and various other factors, U.S. authorities may be limited in their ability to bring enforcement actions against non-U.S. companies and non-U.S. persons in certain emerging market countries. Emerging market countries often have less uniformity in (or may lack) regulatory, accounting, auditing and financial reporting requirements or standards, which may impact the availability and quality of information about issuers; less reliable clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions; and less reliable registration and custodial procedures, which could result in ownership registration being completely lost. There are generally higher commission rates on foreign portfolio transactions, transfer taxes, and higher custodial costs. A Portfolio may not know the identity of trading counterparties, which may increase the possibility of the Portfolio not receiving payment or delivery of securities in a transaction. Emerging market countries also may be subject to high inflation and rapid currency devaluations, and currency-hedging techniques may be unavailable in certain emerging market countries. In addition, some emerging market countries may be heavily dependent on international trade, which can materially affect their securities markets. Certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulties in servicing their sovereign debt on a timely basis, which has led to defaults and the restructuring of certain indebtedness. Investments in frontier markets may be subject to greater levels of these risks than investments in more developed and traditional emerging markets.
Over the last few decades, the Chinese government has undertaken reform of economic and market practices and has expanded the sphere of private ownership in China. However, Chinese markets generally continue to experience inefficiency, volatility and pricing anomalies resulting from governmental influence, a lack of publicly available information and/or political and social instability. Internal social unrest or confrontations with other countries, including military conflicts in response to such events, may also disrupt economic development in China. Reduced spending on Chinese products and services, which may result in substantial price reductions of goods and services and possible failure of individual companies and/or large segments of China’s export industry; institution of additional tariffs or other trade barriers, including as a result of heightened trade or other tensions between China and the United States or other countries; or a downturn in any of the economies of China’s key trading partners, may have an adverse impact on the Chinese economy. China has experienced security concerns, such as terrorism and strained international relations, and China is alleged to have participated in state-sponsored cyberattacks against foreign companies and foreign governments. Actual and threatened responses to such activity, including purchasing restrictions, sanctions, tariffs or cyberattacks on the Chinese government or Chinese companies, may impact China’s economy and Chinese issuers of securities. In the long run, China’s ability to develop and sustain a credible legal, regulatory, monetary, and socioeconomic system could influence the course of outside investment.
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European Economic Risk: The European Union’s (the “EU”) Economic and Monetary Union requires member countries to comply with restrictions on interest rates, deficits, debt levels, and inflation rates, and other factors, each of which may significantly impact every European country and their economic partners. The economies of EU member countries and their trading partners may be adversely affected by changes in the exchange rate of the euro (the common currency of the EU), changes in EU or governmental regulations on trade and other areas, geopolitical tensions or conflicts, and the threat of default or an actual default by an EU member country on its sovereign debt, which could negatively impact a Portfolio’s investments and cause it to lose money. In recent years, the European financial markets have been negatively impacted by concerns relating to rising government debt levels and national unemployment; possible default on or restructuring of sovereign debt in several European countries; and economic downturns. Responses to financial problems by European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. A European country’s default or debt restructuring would adversely affect the holders of the country’s debt and sellers of credit default swaps linked to the country’s creditworthiness and could negatively impact global markets more generally.
Recent events in Europe may adversely affect the euro’s exchange rate and value and may continue to impact the economies of every European country and their economic partners. Russia’s military invasion of Ukraine in February 2022, the resulting responses by the United States and other countries, and the potential for wider conflict have had, and could continue to have, severe adverse effects on regional and global economies and could further increase volatility and uncertainty in the financial markets. For example, exports in Eastern Europe have been disrupted for certain key commodities, pushing commodity prices to record highs, and energy prices in Europe have increased significantly. In addition, uncertainties regarding the viability of the EU have impacted and may continue to impact regional and global markets. Withdrawals from the EU (or the possibility of such withdrawals or the dissolution of the EU) could cause additional and significant market disruption and introduce new legal and regulatory uncertainties. The full impact of the United Kingdom’s (“UK”) withdrawal from the EU, commonly referred to as “Brexit”, and the nature of the future relationship between the UK and the EU remain unclear. The effects of Brexit on the UK and EU economies could be significant, resulting in negative impacts, such as business and trade disruptions, increased volatility and illiquidity, and potentially lower economic growth of markets in the UK and the EU. Until the full economic effects of Brexit become clearer, there remains a risk that Brexit may negatively impact a Portfolio’s investments and cause it to lose money. Further, the national politics of European countries have been unpredictable and subject to influence by disruptive political groups. European governments may be subject to change and European countries may experience social and political unrest. Unanticipated or sudden political or social developments may result in sudden and significant investment losses.
Geographic Focus Risk: To the extent that a Portfolio invests a significant portion of its assets in securities of companies domiciled, or exercising the predominant part of their economic activity, in one country or geographic region, the Portfolio assumes the risk that economic, political, social and environmental conditions in that particular country or region will have a significant impact on the Portfolio’s investment performance and that the Portfolio’s performance will be more volatile than the performance of more geographically diversified portfolios. From time to time, a small number of companies and industries may represent a large portion of the market in a particular country or region, and these companies and industries can be sensitive to adverse economic, political, social, currency, or regulatory developments. In addition, certain areas are prone to natural disasters such as earthquakes, volcanoes, fires, droughts or tsunamis and are economically sensitive to environmental events. The risks associated with investing in a narrowly defined geographic area also are generally more pronounced with respect to investments in emerging market countries.
International Fair Value Pricing Risk: A Portfolio that invests in foreign securities is subject to the risk that its share price may be exposed to arbitrage attempts by investors seeking to capitalize on differences in the values of foreign securities trading on foreign exchanges that may close before the time the Portfolio’s net asset value is determined. If such arbitrage attempts are successful, the Portfolio’s net asset value might be diluted. A Portfolio’s use of fair value pricing in certain circumstances may help deter such arbitrage activities. The effect of such fair value pricing is that foreign securities may not be priced on the basis of quotations
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from the primary foreign securities market in which they are traded, but rather may be priced using more subjective methods, known as fair value pricing. As such, it is possible that fair value may differ materially from the value realized on a sale of a foreign security. It is also possible that the use of fair value pricing will limit a Portfolio’s ability to implement its investment strategy (e.g., reduce the volatility of the Portfolio’s share price) or achieve its investment objective.
Regulatory Risk: Less information may be available about foreign companies. In general, foreign companies are not subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements as are U.S. companies. Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as does the United States and may not have laws to protect investors that are comparable to U.S. securities laws. In addition, some countries may have legal systems that may make it difficult for a Portfolio to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments.
Settlement Risk: Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. 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 U.S. investments. At times, settlements in certain foreign countries have not kept pace with the number of securities transactions. These problems may make it difficult for a Portfolio to carry out transactions. If a Portfolio cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If a Portfolio cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Portfolio could be liable for any losses incurred.
Trade Suspensions Risk: Securities of issuers traded on foreign exchanges may be suspended, either by the issuers themselves, by an exchange, or by governmental authorities. The likelihood of such suspensions may be higher for securities of issuers in emerging or less-developed market countries than in countries with more developed markets. Suspensions may last for significant periods of time, during which trading in the securities and in instruments that reference the securities, such as derivative instruments, may be halted. In the event that a Portfolio holds material positions in such suspended securities or instruments, the Portfolio’s ability to liquidate its positions may be compromised and the Portfolio could incur significant losses. Trade suspensions, or other restrictions on trading, and market closures could lead to affected securities being valued at zero.
Other Investment Risks
The following is a description of certain other investment risks.
Dollar Roll and Sale-Buyback Transactions Risk. Dollar roll and sale-buyback transactions may increase a Portfolio’s volatility and may be viewed as a form of leverage. There is also a risk that the counterparty will be unable or unwilling to complete the transaction as scheduled, which may result in losses to a Portfolio.
Energy Sector Risk. The energy markets have experienced significant volatility in recent periods. The energy sector is cyclical and highly dependent on commodities prices. The market values of companies in the energy sector may fluctuate widely and could be adversely affected by, among other factors, the levels and volatility of global energy prices, commodity price volatility, energy supply and demand, changes in exchange rates and interest rates, imposition of import controls, increased competition, capital expenditures on and the success of exploration and production, depletion of resources, development of alternative energy sources and energy conservation efforts, technological developments, cybersecurity incidents, tax treatment, labor relations, and the economic growth and stability of the key energy-consuming countries. Companies in this sector are subject to substantial government regulation and contractual fixed pricing, which may increase the cost of business and limit these companies’ earnings, and a significant portion of their revenues depends on a relatively small number of customers, including governmental entities and utilities. As a result, governmental budget constraints may have a material adverse effect on the stock prices of companies in this industry. Energy companies may also operate in or engage in transactions involving countries with less developed regulatory regimes or a history of
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expropriation, nationalization or other adverse policies. Energy companies also face a significant risk of liability from accidents resulting in injury or loss of life or property, pollution or other environmental mishaps, equipment malfunctions or mishandling of materials and a risk of loss from terrorism, political strife, natural disasters or other catastrophes. Any such event could result in a material adverse impact to a Portfolio’s holdings and the performance of a Portfolio. In addition, there is growing political pressure to reduce the use of fossil fuels, which could begin to impact the securities of companies in the fossil fuel industry and the prices of related commodities. The value of a Portfolio’s shares could experience significantly greater volatility than the value of shares of portfolios investing more broadly.
ESG Considerations Risk. Consideration of environmental, social and governance (“ESG”) factors in the investment process may limit the types and number of investment opportunities available to a Portfolio, and therefore carries the risk that, under certain market conditions, the Portfolio may underperform funds that do not consider ESG factors or use a different methodology to identify and/or integrate ESG factors. The integration of ESG considerations may affect a Portfolio’s exposure to certain sectors or types of investments and may impact a Portfolio’s relative investment performance depending on whether such sectors or investments are in or out of favor in the market. Furthermore, ESG criteria are not uniformly defined, and a Portfolio’s ESG criteria may differ from those used by other funds. A company’s ESG performance or the Sub-Adviser’s assessment of a company’s ESG performance may change over time, which could cause a Portfolio temporarily to hold securities that do not comply with the Portfolio’s ESG investment principles. Information or data used in evaluating a company, may not be complete, accurate or readily available, which could cause the Sub-Adviser to incorrectly assess a company’s ESG performance. Socially responsible norms differ by region, and an issuer’s ESG practices or the Sub-Adviser’s assessment of an issuer’s ESG practices may change over time. Successful application of a Portfolio’s ESG considerations will depend on the Sub-Adviser’s skill in properly identifying and analyzing material ESG issues, and there can be no assurance that the considerations or techniques employed will be successful. While the Sub-Adviser views ESG considerations as having the potential to contribute to a Portfolio’s long-term performance, there is no guarantee that such results will be achieved. There is also a risk that a Portfolio could have indirect exposure (through, including but not limited to, derivatives and investments in other investment companies) to issuers that do not meet the relevant ESG criteria used by the Portfolio. In addition, investors may differ in their views of what constitutes positive or negative ESG characteristics of a security. ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by the Sub-Adviser or any judgment exercised by the Sub-Adviser will reflect the opinions of any particular investor, and the factors utilized by the Sub-Adviser may differ from (or may be considered to be more or less stringent than) the factors that any particular investor considers relevant in evaluating an issuer’s ESG practices. Further, the regulatory landscape for ESG investing in the United States is evolving, and future rules or regulations may require a Portfolio to change its investment process.
Information Technology Sector Risk. Investment risks associated with investing in the information technology sector include, in addition to other risks, the intense competition to which information technology companies may be subject; the dramatic and often unpredictable changes in growth rates and competition for qualified personnel among information technology companies; effects on profitability from being heavily dependent on patent and intellectual property rights and the loss or impairment of those rights; rapid product obsolescence due to technological developments and frequent new product introduction; general economic conditions; and government regulation. Any of these factors could result in a material adverse impact on a Portfolio’s securities and the performance of a Portfolio.
Municipal Securities Risk. Municipal securities risks include the inability of the issuer to repay the obligation, the relative lack of information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the market for and value of municipal securities.
Privately Placed and Other Restricted Securities Risk. Restricted securities, which include privately placed securities, are securities that cannot be offered for public resale unless registered under the applicable securities laws or that have a contractual restriction that prohibits or limits their resale. Before they are registered, such securities may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. Difficulty in selling securities may result in a loss or be costly to a Portfolio. Rule 144A is designed to
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facilitate efficient trading among institutional investors by permitting the sale of certain unregistered securities to qualified institutional buyers. To the extent restricted securities held by a Portfolio qualify under Rule 144A and an institutional market develops for those securities, the Portfolio likely will be able to dispose of the securities without registering them. To the extent that institutional buyers become, for a time, uninterested in purchasing these securities, investing in Rule 144A securities could increase the level of a Portfolio’s illiquidity. The Adviser or Sub-Adviser may determine that certain securities qualified for trading under Rule 144A are liquid. Where registration of a security is required, a Portfolio may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the time the Portfolio desires to sell (and therefore decides to seek registration of) the security, and the time the Portfolio may be permitted to sell the security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Portfolio might obtain a less favorable price than prevailed when it desired to sell. The risk that securities may not be sold for the price at which a Portfolio is carrying them is greater with respect to restricted securities than it is with respect to registered securities. The illiquidity of the market, as well as the lack of publicly available information regarding these securities, also may make it difficult to determine a fair value for certain securities for purposes of computing a Portfolio’s net asset value.
Quantitative Investing Risk. A portfolio of securities selected using quantitative analysis may underperform the market as a whole or a portfolio of securities selected using a different investment approach, such as fundamental analysis. The factors used in quantitative analysis and the emphasis placed on those factors may not be predictive of a security’s value. In addition, factors that affect a security’s value can change over time and these changes may not be reflected in the quantitative model. The performance of a quantitative model depends upon the quality of its design and effective execution under actual market conditions. Even a well-designed quantitative model cannot be expected to perform well in all market conditions or across all time intervals. Data for some companies, particularly for non-U.S. companies, may be less available and/or less current than data for other companies. There may also be errors in the computer code for the quantitative model or in the model itself, or issues relating to the computer systems used to screen securities. A Portfolio’s securities selection can be adversely affected if it relies on erroneous or outdated data or flawed models or computer systems. As a result, a Portfolio may have a lower return than if the Portfolio were managed using a fundamental analysis or an index-based strategy that did not incorporate quantitative analysis. There can be no assurance that a quantitative model used in managing a Portfolio will perform as anticipated or enable the Portfolio to achieve its investment objective.
Structured Securities Risk. Because structured securities of the type in which a Portfolio may invest typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. A Portfolio may invest in a class of structured securities that is either subordinated or unsubordinated to the right of payment of another class. Subordinated structured securities typically have higher yields and present greater risks than unsubordinated structured securities. Structured securities are typically sold in private placement transactions, and there currently is no active trading market for structured securities. Certain issuers of such structured securities may be deemed to be “investment companies” as defined in the 1940 Act. As a result, a Portfolio’s investment in such securities may be limited by certain investment restrictions contained in the 1940 Act.
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MORE INFORMATION ON STRATEGIES AND RISK FACTORS
(NEW EQ/CORE PLUS BOND PORTFOLIO)
Investment Strategies
Changes in Investment Objective and Principal Investment Strategies
As described in this Proxy Statement/Prospectus, the New EQ/Core Plus Bond Portfolio (the “Portfolio”) has its own investment objective, policies and strategies. There is no assurance that the Portfolio will achieve its investment objective. The investment objective of the Portfolio may be changed without shareholder approval. Except as otherwise noted, the investment policies and strategies of the Portfolio are not fundamental policies and may be changed without a shareholder vote. In addition, to the extent the Portfolio is undergoing a transition (such as a reorganization or rebalancing, or experiences large inflows or outflows) or takes a temporary defensive position, it may not be pursuing its investment objective or executing its principal investment strategies.
80% Policy
The Portfolio has a policy that it will invest at least 80% of its net assets, plus borrowings for investment purposes, in the particular type of investment connoted by its name. This policy is subject to change only upon at least sixty (60) days’ prior notice to shareholders of the Portfolio. To the extent the Portfolio invests in securities of other investment companies or investment vehicles (such as exchange-traded funds), it takes into consideration the investment policies of such investment companies and investment vehicles at the time of investment in determining compliance with its 80% policy. The 80% investment requirement is applied at the time the Portfolio invests its assets. If, subsequent to an investment by the Portfolio, this requirement is no longer met, the Portfolio’s future investments will be made in a manner consistent with bringing the Portfolio into compliance with this requirement. In addition, in appropriate circumstances, synthetic investments may count toward the 80% minimum if they have economic characteristics similar to the other investments included in the 80% policy.
Active Management Strategies
With respect to the Portfolio, which utilizes active management strategies, a Sub-Adviser has complete discretion to select portfolio securities for its portion of the Portfolio’s assets, subject to the Portfolio’s investment objectives, restrictions and policies and other parameters that maybe developed from time to time by the Adviser. In selecting investments, the Sub-Advisers use their proprietary investment strategies, which are summarized above in the section “Comparison of Investment Objectives, Policies and Strategies” in the Proxy Statement/Prospectus. The following is an additional general description of certain common types of active management strategies that may be used by the Sub-Advisers to the Portfolio.
Growth investing generally focuses on companies that, due to their strong earnings and revenue potential, offer above-average prospects for capital growth, with less emphasis on dividend income. Earnings predictability and confidence in earnings forecasts are an important part of the selection process. A Sub-Adviser using this approach generally seeks out companies experiencing some or all of the following: high sales growth, high unit growth, high or improving returns on assets and equity, and a strong balance sheet. Such a Sub-Adviser also generally prefers companies with a competitive advantage such as unique management, marketing or research and development.
Value investing attempts to identify strong companies selling at a discount from their perceived true worth. A Sub-Adviser using this approach generally selects stocks at prices that, in its view, are temporarily low relative to the company’s earnings, assets, cash flow and dividends. Value investing generally emphasizes companies that, considering their assets and earnings history, are attractively priced and may provide dividend income.
Core investing is an investment style that includes both the strategies used when seeking either growth companies (those with strong earnings growth) or value companies (those that may be temporarily out of favor or have earnings or assets not fully reflected in their stock price).
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Fundamental analysis generally involves the analysis of the balance sheet and income statements of a company in order to forecast its future stock price movements. Fundamental analysis considers past records of assets, earnings, sales, products, management and markets in predicting future trends in these indicators of a company’s success or failure. By appraising a company’s prospects, analysts using such an approach assess whether a particular stock or group of stocks is undervalued or overvalued at its current market price.
Additional Information about the Investment Strategies
The following provides additional information regarding the principal investment strategies discussed in “Comparison of Investment Objectives, Policies and Strategies” in the Proxy Statement/Prospectus and provides information regarding additional investment strategies that the Portfolio may employ. The Portfolio also may make other types of investments to the extent permitted by applicable law. For further information about investment strategies, please see the Portfolio’s Statement of Additional Information.
Bank Loans. The Portfolio may invest in bank loans. A bank loan represents an interest in a loan or other direct indebtedness that entitles the acquirer of such interest to payments of interest, principal and/or other amounts due under the structure of the loan. The Portfolio may acquire a bank loan through a participation interest, which gives the Portfolio the right to receive payments of principal, interest and/or other amounts only from the lender selling the participation interest and only when the lender receives the payments from the borrower, or through an assignment in which the Portfolio succeeds to the rights of the assigning lender and becomes a lender under the loan agreement. Bank loans are typically borrowers’ senior debt obligations and, as such, are considered to hold a senior position in the borrower’s capital structure. The senior capital structure position generally gives the holders of bank loans a priority claim on some or all of the borrower’s assets in the event of a default. In many situations, the assets or cash flow of the borrowing corporation, partnership or other business entity may serve as collateral for the bank loan. Bank loans may be issued in connection with acquisitions, refinancings and recapitalizations.
Cash and Short-Term Investments. The Portfolio may hold cash or invest in short-term paper and other short-term investments as deemed appropriate by the Adviser or Sub-Adviser. Short-term paper generally includes any note, draft bill of exchange or banker’s acceptance payable on demand or having a maturity at the time of issuance that does not exceed nine months or any renewal thereof payable on demand or having a maturity that is likewise limited.
The Portfolio also may invest its uninvested cash in high-quality, short-term debt securities, including repurchase agreements and high-quality money market instruments, and also may invest its uninvested cash in money market funds, including money market funds managed by the Adviser. To the extent the Portfolio invests in a money market fund, it generally is not subject to the limits placed on investments in other investment companies by the 1940 Act.
Generally, these securities offer less potential for gains than other types of securities.
Convertible Securities. The Portfolio may invest in convertible securities, including both convertible debt and convertible preferred stock. A convertible security is generally a bond, preferred stock or other security that may be converted within a specified period of time and at a pre-stated price or formula into the common stock of the same or a different issuer. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Convertible securities have unique investment characteristics in that they generally: (1) have higher yields than common stocks, but lower yields than comparable nonconvertible securities; (2) are less subject to fluctuation in value than the underlying stock because they have fixed income characteristics; and (3) provide the potential for capital appreciation if the market price of the underlying common stock increases.
Currency. The Portfolio may enter into foreign currency transactions for hedging and non-hedging purposes on a spot (i.e., cash) basis or through the use of derivatives. A forward foreign currency exchange contract (“forward contract”) is a type of derivative that involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a
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price set at the time of the contract. These contracts are principally traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no margin deposit requirement and no commissions are charged at any stage for trades. Foreign currency transactions may be used to protect the Portfolio’s foreign securities from adverse currency movements relative to the U.S. dollar, as well as to gain exposure to currencies and markets expected to increase or decrease in value relative to other currencies or securities. The value of these foreign currency transactions depends on, and will vary based on fluctuations in, the value of the underlying currency relative to the U.S. dollar.
If a particular currency is expected to decrease in value relative to another currency, the Portfolio may sell the currency expected to decrease and purchase a currency that is expected to increase against the currency sold. The Portfolio’s cross hedging transactions may involve currencies in which the Portfolio’s holdings are denominated. However, the Portfolio is not required to own securities in the particular currency being purchased or sold.
Derivatives. The Portfolio may use “derivative” instruments to hedge its portfolio against market, economic, currency, issuer and other risks, to gain or manage exposure to the markets, sectors and securities in which the Portfolio may invest and to other economic factors that affect the Portfolio’s performance (such as interest rate movements), to increase total return or income, to reduce transaction costs, to manage cash, and for other portfolio management purposes. In general terms, a derivative instrument is an investment contract, the value of which is linked to (or is derived from), in whole or in part, the value of an underlying asset, reference rate or index (e.g., stocks, bonds, commodities, currencies, interest rates and market indexes). Futures and options contracts (including futures and options on individual securities and equity and bond market indexes and options on futures contracts), swaps (including interest rate swaps, total return swaps, currency swaps, credit default swaps and contracts for difference) and forward contracts, and structured securities, including forward currency contracts, are examples of derivatives in which the Portfolio may invest. The Portfolio may maintain a significant percentage of its assets in cash and cash equivalent instruments or other liquid assets, which may serve as margin or collateral for the Portfolio’s obligations under derivative transactions. The Portfolio’s percentage investment limits for derivative investments may be measured based on mark-to-market value rather than the notional value of the derivative instrument. Mark-to-market value is the current market value or fair value reflecting the price at which the derivative could be expected to be liquidated. In contrast, the notional value of a derivative instrument, such as a futures contract, is equal to the contract size (number of units per contract) multiplied by the current (spot) unit price of the reference asset underlying the contract. Therefore, the investment exposure that the Portfolio obtains through a derivative investment measured based on notional value may exceed the mark-to-market value of the derivative investment.
Exchange-Traded Funds (“ETFs”). The Portfolio may invest in ETFs. ETFs are investment companies or other investment vehicles whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market and may be purchased and sold throughout the trading day based on their market price. Generally, an index-based ETF seeks to track a securities index or a basket of securities that an “index provider” (such as Standard & Poor’s, Dow Jones, Russell or Morgan Stanley Capital International) selects as representative of a market, market segment, industry sector, country or geographic region. An index-based ETF generally holds the same stocks or bonds as the index it seeks to track (or it may hold a representative sample of such securities). Accordingly, an index-based ETF is designed so that its performance, before fees and expenses, will correspond with that of the index it seeks to track. ETFs also may be actively managed. By investing in a Portfolio that invests in ETFs, you will indirectly bear fees and expenses charged by the ETFs in which the Portfolio invests in addition to the Portfolio’s direct fees and expenses.
Generally, the Portfolio’s investments in other investment companies are subject to statutory limitations in the Investment Company Act of 1940, as amended (“1940 Act”), including in certain circumstances a prohibition against acquiring shares of another investment company if, immediately after such acquisition, the Portfolio (i) would hold more than 3% of such other investment company’s total outstanding shares, (ii) would have invested more than 5% of its total assets in such other investment company, or (iii) would have invested more than 10% of its total assets in investment companies in the aggregate. However, there are regulatory exemptions from these restrictions under the 1940 Act on which the Portfolio may rely to invest in ETFs in excess of these limits, subject to certain conditions.
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Fixed Income Securities. The Portfolio may invest in short- and long-term fixed income securities in pursuing its investment objective and for other portfolio management purposes, such as to manage cash. Fixed income securities are debt securities such as bonds, notes, debentures and commercial paper. Domestic and foreign governments, banks and companies raise cash by issuing or selling debt securities to investors. Most debt securities pay fixed or adjustable rates of interest at regular intervals until they mature, at which point investors receive their principal back.
Foreign Securities. The Portfolio may invest in foreign securities. Generally, foreign securities are issued by companies organized outside the U.S. or by foreign governments or international organizations, are traded primarily in markets outside the United States, and are denominated in a foreign currency. Foreign securities may include securities of issuers in developing countries or emerging markets. In addition, foreign securities may include depositary receipts of foreign companies. American Depositary Receipts are receipts typically issued by an American bank or trust company that evidence underlying securities issued by a foreign corporation. European Depositary Receipts (issued in Europe) and Global Depositary Receipts (issued throughout the world) each evidence a similar ownership arrangement. Depositary receipts also may be convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted.
Futures. The Portfolio may purchase or sell futures contracts on individual securities or securities indexes. In purchasing a futures contract, the buyer agrees to purchase a specified underlying instrument at a specified future date. In selling a futures contract, the seller agrees to sell a specified underlying instrument at a specified future date. The price at which the purchase and sale will take place is fixed when the buyer and seller enter into the contract. Futures can be held until their delivery dates, or can be closed out before then if a liquid market is available. The value of a futures contract tends to increase and decrease in tandem with the value of its underlying instrument. Therefore, purchasing futures contracts will tend to increase the Portfolio’s exposure to positive and negative price fluctuations in the underlying instrument, much as if it had purchased the underlying instrument directly. When the Portfolio sells a futures contract, by contrast, the value of its futures position will tend to move in a direction contrary to the market. Selling futures contracts, therefore, will tend to offset both positive and negative market price changes, much as if the underlying instrument had been sold. Futures contracts in which the Portfolio may invest are highly standardized contracts that typically trade on futures exchanges.
The use of futures contracts and similar instruments may be deemed to involve the use of leverage because the Portfolio is not required to invest the full market value of the futures contract upon entering into the contract. Instead, the Portfolio, upon entering into a futures contract (and to maintain its open position in a futures contract), is required to post collateral for the contract, known as “initial margin” and “variation margin,” the amount of which may vary but which generally equals a relatively small percentage (e.g., less than 5%) of the value of the contract being traded.
Illiquid Investments. The Portfolio may invest up to 15% of its net assets in illiquid investments. Illiquid investment means any investment the Portfolio reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment.
Inflation-Indexed Bonds. The Portfolio may invest in inflation-indexed bonds. Inflation-indexed bonds (other than municipal inflation-indexed bonds and certain corporate inflation-indexed bonds, which are more fully described below) are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. The U.S. Treasury Department uses the Consumer Price Index for Urban Consumers as the inflation measure for Treasury inflation-indexed bonds. Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation-index, calculated by that government. If the index measuring inflation falls, the principal value of inflation-indexed bonds (other than municipal inflation-indexed bonds and certain corporate inflation-indexed bonds) will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury Department inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
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With regard to municipal inflation-indexed bonds and certain corporate inflation-indexed bonds, the inflation adjustment is reflected in the semi-annual coupon payment. As a result, the principal value of municipal inflation-indexed bonds and such corporate inflation-indexed bonds does not adjust according to the rate of inflation. The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation, real interest rates may rise, leading to a decrease in value of inflation-indexed bonds. Any increase in the principal amount of an inflation-indexed bond is considered ordinary income in the taxable year of the increase to an investing Portfolio, which generally must distribute the amount of that income for federal income tax purposes even though it does not receive the increased principal until maturity.
Because market convention for bonds is to use nominal yields to measure duration, duration for real return bonds, which are based on real yields, are converted to nominal durations through a conversion factor. The resulting nominal duration typically can range from 20% and 90% of the respective real duration. All security holdings will be measured in effective (nominal) duration terms. Similarly, the effective duration of the relevant index (e.g., the Bloomberg World Government Inflation-Linked Index (hedged)) will be calculated using the same conversion factors.
Insured Bank Obligations. The Federal Deposit Insurance Corporation (“FDIC”) insures the deposits of federally insured banks and savings and loan associations (collectively referred to as “banks”) up to $250,000. The Portfolio may purchase bank obligations which are fully insured as to principal by the FDIC. Currently, to remain fully insured as to principal, these investments must be limited to $250,000 per bank; if the principal amount and accrued interest together exceed $250,000, the excess accrued interest will not be insured. Insured bank obligations may have limited marketability. Unless the Board of Trustees determines that a readily available market exists for such obligations, the Portfolio will treat such obligations as subject to the limit for illiquid investments for the Portfolio unless such obligations are payable at principal amount plus accrued interest on demand or within seven days after demand.
Inverse Floaters. The Portfolio may invest in inverse floaters. Inverse floaters are securities that have coupon rates that vary inversely at a multiple of a designated floating rate, such as the Secured Overnight Financing Rate or an alternative reference rate. Any rise in the reference rate of an inverse floater (as a consequence of an increase in interest rates) causes a drop in the coupon rate, while any drop in the reference rate of an inverse floater causes an increase in the coupon rate.
Investment Grade Securities. The Portfolio may invest in investment grade debt securities. Investment grade securities are rated in one of the four highest rating categories by Moody’s, S&P or Fitch, comparably rated by another rating agency or, if unrated, determined by the Adviser or the applicable Sub-Adviser to be of comparable quality.
Mortgage- and Asset-Backed Securities. The Portfolio may invest in mortgage- and asset-backed securities. A mortgage-backed security may be an obligation of the issuer backed by a mortgage or pool of mortgages or a direct interest in an underlying pool of mortgages. Some mortgage-backed securities make payments of both principal and interest at a variety of intervals; others make semiannual interest payments at a predetermined rate and repay principal at maturity (like a typical bond). Mortgage-backed securities are based on different types of mortgages, including those on commercial real estate or residential properties.
Asset-backed securities have structural characteristics similar to mortgage-backed securities. However, the underlying assets are not first lien mortgage loans or interests therein but include assets such as motor vehicle installment sales contracts, other installment sales contracts, home equity loans, leases of various types of real and personal property and receivables from revolving credit (credit card) agreements. Such assets are securitized through the use of trusts or special purpose corporations. Payments or distributions of principal and interest may be guaranteed up to a certain amount and for a certain time period by a letter of credit or pool insurance policy issued by a financial institution unaffiliated with the issuer, or other credit enhancements may be present.
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Non-Investment Grade Securities. The Portfolio may invest in securities rated below investment grade (i.e., BB or lower by S&P or Fitch, Ba or lower by Moody’s or deemed to be of comparable quality by the Adviser or a Sub-Adviser), sometimes referred to as “junk bonds”. Junk bonds are usually issued by companies without long track records of sales and earnings or by those companies with questionable credit strength.
Options. The Portfolio may write and purchase put and call options, including exchange-traded or over-the-counter put and call options on securities indices and put and call options on ETFs tracking certain securities indices, for hedging and non-hedging purposes and for the purpose of achieving its objective. In general, options give the purchaser the right, but not the obligation, to buy or sell in the future an asset at a predetermined price during the term of the option. A securities index option and an ETF option are option contracts whose values are based on the value of a securities index at some future point in time. A securities index fluctuates with changes in the market values of the securities included in the index. The effectiveness of purchasing or writing securities index options will depend upon the extent to which price movements in the Portfolio’s investment portfolio correlate with price movements of the securities index. By writing (selling) a call option, the Portfolio forgoes, in exchange for the premium less the commission, the opportunity to profit during the option period from an increase in the market value of an index above the exercise price. By writing (selling) a put option, the Portfolio, in exchange for the net premium received, accepts the risk of a decline in the market value of the index below the exercise price.
Portfolio Turnover. The Portfolio does not restrict the frequency of trading to limit expenses. The Portfolio may engage in active and frequent trading of portfolio securities to achieve its investment objective. A portfolio turnover rate of 100%, for example, is equivalent to the Portfolio buying and selling all of its portfolio securities once during the course of a given fiscal year. High portfolio turnover (generally, turnover in excess of 100% in any given fiscal year) may result in increased transaction costs to the Portfolio, which may result in higher fund expenses and lower total return, and an increase in taxable capital gains distributions to the Portfolio’s shareholders (although tax implications for investments in Contracts typically are deferred during the accumulation phase).
Preferred Stocks. The Portfolio may invest in preferred stock. Although preferred stocks represent a partial ownership interest in a company, preferred stocks generally do not carry voting rights and have economic characteristics similar to fixed-income securities. Preferred stocks generally are issued with a fixed par value and pay dividends based on a percentage of that par value at a fixed or variable rate. Preferred stocks often have a liquidation value that generally equals the original purchase price of the preferred stock at the date of issuance.
Securities of Other Investment Companies. The Portfolio may invest in the securities of other investment companies to the extent permitted by applicable law. Generally, the Portfolio’s investments in other investment companies are subject to statutory limitations in the 1940 Act, including in certain circumstances a prohibition against acquiring shares of another investment company if, immediately after such acquisition, the Portfolio (i) would hold more than 3% of such other investment company’s total outstanding shares, (ii) would have invested more than 5% of its total assets in such other investment company, or (iii) would have invested more than 10% of its total assets in investment companies in the aggregate. However, there are statutory and regulatory exemptions from these restrictions under the 1940 Act on which the Portfolio may rely to invest in other investment companies in excess of these limits, subject to certain conditions. Other investment companies in which the Portfolio may invest include ETFs, as discussed in “Exchange-Traded Funds (“ETFs”)”.
Short Sales. The Portfolio may engage in short sales and may enter into derivative contracts that have a similar economic effect (e.g., taking a short position in a futures contract). A “short sale” is the sale by the Portfolio of a security that has been borrowed from a third party on the expectation that the market price will drop. If the price of the security drops, the Portfolio will make a profit by purchasing the security in the open market at a price lower than the price at which it sold the security. If the price of the security rises, the Portfolio may have to cover short positions at a higher price than the short sale price, resulting in a loss.
Swaps. The Portfolio may engage in swap transactions. Swap contracts are derivatives in the form of a contract or other similar instrument that is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The payment streams are calculated by reference to a specified security
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or index and agreed upon notional amount. The term “specified index” includes, but is not limited to, currencies, fixed interest rates, prices and total return on interest rate indices, fixed income indices, total return on equity securities, stock indices and commodity indices (as well as amounts derived from arithmetic operations on these indices).
Temporary Defensive Investments. For temporary defensive purposes in response to adverse market, economic, political or other conditions, the Portfolio may invest, without limit, in cash, money market instruments or high quality short-term debt securities, including repurchase agreements. To the extent the Portfolio is invested in these instruments, the Portfolio will not be pursuing its principal investment strategies and may not achieve its investment objective.
U.S. Government Securities. The Portfolio may invest in U.S. government securities, which include direct obligations of the U.S. Treasury (such as Treasury bills, notes or bonds) and obligations issued or guaranteed as to principal and interest (but not as to market value) by the U.S. government, its agencies or its instrumentalities. U.S. government securities include mortgage- and asset-backed securities issued or guaranteed by government agencies or government-sponsored enterprises. Other U.S. government securities may be backed by the full faith and credit of the U.S. government or supported primarily or solely by the creditworthiness of the government-related issuer or, in the case of mortgage-backed securities, by pools of assets.
When-Issued Securities, Delayed Delivery Securities and Forward Commitments. The Portfolio may purchase or sell securities that it is entitled to receive on a when issued basis. The Portfolio may also purchase or sell securities on a delayed delivery basis or through a forward commitment (including on a “TBA” (to be announced) basis). These transactions involve the purchase or sale of securities by the Portfolio at an established price with payment and delivery taking place in the future. The Portfolio enters into these transactions to obtain what is considered an advantageous price to the Portfolio at the time of entering into the transaction.
Zero Coupon and Pay-in-Kind Securities. The Portfolio may invest in zero coupon and pay-in-kind securities. Zero coupon securities are debt securities that do not pay regular interest at regular intervals, but are issued at a discount from face value. The discount approximates the total amount of interest the security will accrue from the date of issuance to maturity. Pay-in-kind securities normally give the issuer an option to pay cash at a coupon payment date or to give the holder of the security a similar security with the same coupon rate and a face value equal to the amount of the coupon payment that would have been made. Convertible securities, corporate debt securities, mortgage- and asset-backed securities, U.S. government securities, foreign securities and other types of debt instruments may be structured as zero coupon pay-in-kind securities.
Risks
Risk is the chance that you will lose money on your investment or that it will not earn as much as you expect. In general, the greater the risk, the more money your investment can earn for you and the more you can lose. Like other investment companies, the value of the Portfolio’s shares may be affected by the Portfolio’s investment objective, principal investment strategies and particular risk factors. Some of the risks of investing in the Portfolio are discussed below, including the principal risks of the Portfolio as discussed in “Comparison of Principal Risk Factors” in the Proxy Statement/Prospectus. However, other factors may also affect the Portfolio’s investment results. There is no assurance that the Portfolio will achieve its investment objective or that it will not lose value.
Principal Investment Risks
As indicated in “Comparison of Principal Risk Factors” in the Proxy Statement/Prospectus, the Portfolio may be subject to the following principal risks. The risks, which are described in alphabetical order and not in order of perceived importance or potential exposure, can negatively affect the Portfolio’s performance.
Cash Management Risk: Upon entering into certain derivatives contracts, such as futures contracts, and to maintain open positions in certain derivatives contracts, the Portfolio may be required to post collateral for the
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contract, the amount of which may vary. In addition, the Portfolio may maintain cash and cash equivalent positions as part of the Portfolio’s strategy in order to take advantage of investment opportunities as they arise, to manage the Portfolio’s market exposure and for other portfolio management purposes. As such, the Portfolio may maintain cash balances, including foreign currency balances, which may be significant, with counterparties such as the Trust’s custodian or its affiliates. Maintaining larger cash and cash equivalent positions could negatively affect the Portfolio’s performance due to missed investment opportunities and may also subject the Portfolio to additional risks, such as increased credit risk with respect to the custodian bank holding the assets and the risk that a counterparty may be unable or unwilling, or perceived (whether by market participants, ratings agencies, pricing services or otherwise) as unable or unwilling, to honor its obligations, and increased costs, such as any fees imposed for large cash balances.
Collateralized Loan Obligations Risk: Investments in collateralized loan obligations (“CLOs”) involve many of the same risks associated with investments in debt securities and asset-backed securities, including interest rate risk, credit risk, liquidity risk, prepayment and extension risk, and valuation risk. The risks of an investment in a CLO also depend largely on the quality and type of the collateral and the class or “tranche” of the CLO in which the Portfolio invests. An investment in a junior tranche is subject to a greater risk of depreciation or loss than an investment in a more senior tranche. Normally, CLOs are privately offered and sold, and thus are not registered under the securities laws. As a result, investments in CLOs may be characterized by the Portfolio as illiquid securities; however, an active dealer market, or other relevant measures of liquidity, may exist for CLOs allowing a CLO potentially to be deemed liquid under the Portfolio’s liquidity policies. Additionally, CLOs carry risks including, but not limited to: (a) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (b) the risk that the collateral securities may decline in value or quality or be downgraded or go into default, particularly during periods of economic downturn; (c) the possibility that the Portfolio may invest in CLOs that are subordinate to other classes; (d) the risk that the manager of the CLOs may perform poorly; and (e) the risk that the complex structure of CLOs may produce disputes with the issuer or unexpected investment results. CLOs also can be difficult to value and may be highly leveraged (which could make them highly volatile), and the use of CLOs may result in losses to the Portfolio.
Convertible Securities Risk: A convertible security is a form of hybrid security; that is, a security with both debt and equity characteristics. The value of a convertible security fluctuates in relation to changes in interest rates and the credit quality of the issuer and also fluctuates in relation to changes in the price of the underlying common stock. A convertible security tends to perform more like a stock when the underlying stock price is high relative to the conversion price (because more of the security’s value resides in the option to convert) and more like a debt security when the underlying stock price is low relative to the conversion price (because the option to convert is less valuable). Because its value can be influenced by many different factors, a convertible security generally is not as sensitive to interest rate changes as a similar non-convertible debt security, and generally has less potential for gain or loss than the underlying stock. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument, which may be less than the current market price of the security. If a convertible security held by the Portfolio is called for redemption, the Portfolio will be required to permit the issuer to redeem the security, convert it into underlying common stock or sell it to a third party. Investments by the Portfolio in convertible debt securities may not be subject to any ratings restrictions, but the Portfolio’s investment manager will consider ratings, and any changes to ratings, in its determination of whether the Portfolio should invest in and/or continue to hold the securities. Convertible securities are subject to equity risk, interest rate risk, and credit risk and are often lower-quality securities. Lower quality may lead to greater volatility in the price of a security and may negatively affect a security’s liquidity. Since it derives a portion of its value from the common stock into which it may be converted, a convertible security is also subject to the same types of market and issuer-specific risks that apply to the underlying common stock. To the extent the Portfolio invests in convertible securities issued by small- or mid-cap companies, it also will be subject to the risks of investing in these companies. The securities of small- and mid-cap companies are often more volatile and less liquid than the securities of larger companies. Convertible securities are normally “junior” securities, which means an issuer usually must pay interest on its non-convertible debt securities before it can make payments on its convertible securities. If an issuer stops making interest or principal payments, these securities may become worthless and the Portfolio could lose its entire
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investment. In the event of a liquidation of the issuing company, holders of convertible securities may be paid before the company’s common stock holders but after holders of any senior debt obligations of the company. To the extent the Portfolio invests in securities that may be considered “enhanced” convertible securities, some or all of these risks may be more pronounced.
Credit Risk: The Portfolio is subject to the risk that the issuer or the guarantor (or other obligor, such as a party providing insurance or other credit enhancement) of a fixed income security, or the counterparty to a derivatives contract, repurchase agreement, loan of portfolio securities or other transaction, is unable or unwilling, or is perceived (whether by market participants, ratings agencies, pricing services or otherwise) as unable or unwilling, to make timely interest and/or principal payments or otherwise honor its obligations, or defaults completely, which may cause the Portfolio’s holdings to lose value. Securities are subject to varying degrees of credit risk, which are often reflected in their credit ratings. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk. Higher credit ratings correspond to lower perceived credit risk, and lower credit ratings correspond to higher perceived credit risk. However, rating agencies may fail to make timely changes to credit ratings in response to subsequent events and a credit rating may become stale in that it fails to reflect changes in an issuer’s financial condition. Credit ratings also may be influenced by conflicts of interest. Credit ratings represent a rating agency’s opinion regarding the quality of a security and are not a guaranty of quality. Credit ratings do not protect against a decline in the value of a security. The downgrade of a security’s credit rating may decrease its value. Lower credit quality also may lead to greater volatility in the price of a security and may negatively affect a security’s liquidity. The credit quality of a security can deteriorate suddenly and rapidly. The Portfolio may experience a significant or complete loss on a fixed income security or a transaction. When a fixed income security is not rated, an investment manager may have to assess the risk of the security itself. In addition, legislation and regulations to reform rating agencies could adversely impact the Portfolio’s investments or investment process.
Derivatives Risk: A derivative instrument is generally an investment contract the value of which depends upon (or is derived from), in whole or in part, the value of an underlying asset, reference rate, index or event (e.g., stocks, bonds, commodities, currencies, interest rates and market indexes). The Portfolio’s investments in derivatives may rise or fall in value more rapidly than other investments and may reduce the Portfolio’s returns and increase the volatility of the Portfolio’s net asset value. Examples of derivative instruments include, among others, forward contracts, futures contracts, options contracts, options on futures contracts, and swaps. Particular derivative instruments that the Portfolio may use are described under “Comparison of Investment Objectives, Policies and Strategies” in this Proxy Statement/Prospectus. The following provides a more general discussion of important risk factors (e.g., counterparty and credit risk, leveraging risk, liquidity risk, management risk, market and interest rate risk, valuation risk, and other risks) relating to all derivative instruments that the Portfolio may use. A discussion of additional risks associated with particular derivative instruments follows the general discussion, and particular derivative instruments are discussed in more detail under “Additional Investment Strategies and Risks” in the Statement of Additional Information.
Counterparty and Credit Risk: The Portfolio may be exposed to losses if the counterparty in the transaction is unable or unwilling to fulfill its contractual obligation. Counterparty risk may arise because of market activities and developments, the counterparty’s financial condition (including financial difficulties, bankruptcy, or insolvency), or other reasons. To the extent the Portfolio has significant exposure to a single counterparty or small group of counterparties, this risk will be particularly pronounced. In addition, derivatives traded over-the-counter that are uncleared do not benefit from the protections provided by exchanges and central counterparties (derivatives clearing organizations and clearing corporations) in the event that a counterparty is unable or unwilling to fulfill its contractual obligation. Such uncleared over-the-counter derivatives therefore involve greater counterparty and credit risk and may be more difficult to value than exchange-traded derivatives that are cleared by a central counterparty.
Leveraging Risk: Derivatives may be leveraged such that a small investment can have a significant impact on the Portfolio’s exposure to stock market values, interest rates, currency exchange rates or other investments. As a result, a relatively small price movement in a derivatives contract may cause an immediate and substantial loss or gain, and the Portfolio could lose more than the amount it invested. The Portfolio may experience
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leveraging risk in connection with investments in derivatives because its investments in derivatives may be small relative to the investment exposure assumed, leaving more assets to be invested in other investments. Such investments may have the effect of leveraging the Portfolio because the Portfolio may experience gains or losses not only on its investments in derivatives, but also on the investments purchased with the remainder of the assets. If the value of the Portfolio’s investments in derivatives is increasing, this could be offset by declining values of the Portfolio’s other investments. Conversely, it is possible that a rise in the value of the Portfolio’s non-derivative investments could be offset by a decline in the value of the Portfolio’s investments in derivatives. In either scenario, the Portfolio may experience losses. In a market where the value of the Portfolio’s investments in derivatives is declining and the value of its other investments is declining, the Portfolio may experience substantial losses. Some derivatives can have the potential for unlimited losses, regardless of the size of the initial investment.
Liquidity Risk: It may be difficult or impossible for the Portfolio to purchase or sell certain derivatives in sufficient amounts to achieve the desired level of exposure, which may result in a loss or may be costly to the Portfolio. In addition, the possible lack of a liquid secondary market for certain derivatives, and the resulting inability of the Portfolio to sell or otherwise close out a derivatives position, could expose the Portfolio to losses and could make such derivatives more difficult for the Portfolio to value accurately.
Management Risk: Derivative products are highly specialized instruments. Investing in derivatives involves investment techniques and risk analyses different from, and risks in some respects greater than, those associated with investing in more traditional investments, such as stocks and bonds. The use of a derivative requires an understanding not only of the underlying asset, reference rate, index or event, but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions.
Market and Interest Rate Risk: Some derivatives are more sensitive to market price fluctuations and to interest rate changes than other investments. The successful use of derivatives will usually depend on the Adviser’s or a Sub-Adviser’s ability to accurately forecast movements in the market relating to the underlying asset, reference rate, index or event. If the Adviser or a Sub-Adviser does not predict correctly the direction of asset prices, interest rates and other economic factors, the Portfolio’s derivatives positions could lose value. Derivatives may not behave as anticipated by the Portfolio, especially in abnormal market conditions. Derivatives strategies that are successful under certain market conditions may be less successful or unsuccessful under other market conditions. While some derivatives strategies can reduce the risk of loss, they can also reduce the opportunity for gain or result in losses by offsetting favorable price movements in other Portfolio investments.
Valuation Risk: Derivatives also may be subject to the risk of mispricing or improper valuation, and valuation may be more difficult in times of market turmoil. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to the Portfolio. Changes in the value of a derivative may not correlate perfectly, or at all, with the underlying asset, reference rate or index.
Other Risks: Derivatives also may be subject to risks related to potential operational issues, including documentation issues, settlement issues, systems failures, inadequate controls, and human error, as well as legal risks, such as insufficient documentation, the lack of capacity or authority of a counterparty to execute or settle a transaction, or the legality or enforceability of a contract.
When a derivative is used as a hedge against a position that the Portfolio holds, any loss generated by the derivative should generally be offset by gains on the hedged instrument, and vice versa. While hedging can reduce or eliminate losses, it also can reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the hedged investment, and there can be no assurance that the Portfolio’s hedging transactions will be effective. Also, suitable derivative transactions may not be available in all circumstances, and there can be no assurance that the Portfolio will engage in derivative transactions to reduce exposure to other risks when that might be beneficial or that, if used, such strategies will be successful.
When the Portfolio uses derivatives, it will likely be required to provide margin or collateral; these practices are intended to satisfy contractual undertakings and regulatory requirements and will not prevent the Portfolio from incurring losses on derivatives. The need to provide margin or collateral could limit the Portfolio’s ability to
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pursue other opportunities as they arise. Derivatives that have margin requirements involve the risk that if the Portfolio has insufficient cash or eligible margin securities to meet daily variation margin requirements, it may have to sell securities or other instruments from its portfolio at a time when it may be disadvantageous to do so. Derivatives also may involve fees, commissions, or other costs that may reduce the Portfolio’s gains or exacerbate its losses from the derivatives.
The federal income tax treatment of a derivative may not be as favorable as a direct investment in an underlying asset and may adversely affect the timing, character and amount of income the Portfolio realizes from its investments. In addition, certain derivatives are subject to mark-to-market or straddle provisions of the Internal Revenue Code. The federal income tax treatment of certain derivatives, such as swaps, is unsettled and may be subject to future legislation, regulation or administrative pronouncements issued by the Internal Revenue Service.
Legislative and regulatory developments may limit the availability of certain derivatives, may reduce the attractiveness or increase the cost of derivatives, and may otherwise adversely impact the performance and value of derivatives. Legislative and regulatory developments also may change the way in which the Portfolio itself is regulated. Such developments may impact the Portfolio’s ability to invest, or remain invested, in certain derivatives, adversely affect the Portfolio’s ability to achieve its investment objective, and adversely affect the Portfolio’s efficiency in implementing its investment strategies. Complying with new requirements also may increase the cost of the Portfolio’s investments and the cost of implementing the Portfolio’s investment program and related operations, which could adversely affect the Portfolio and its investors. For example, the SEC has adopted new requirements and restrictions governing registered funds’ (including the Portfolio’s) use of derivatives (“Rule 18f-4”). The Portfolio has implemented policies and procedures to comply with Rule 18f-4. Rule 18f-4, among other things, requires that the Portfolio establish a derivatives risk management program, comply with certain value-at-risk based leverage limits, appoint a derivatives risk manager, and provide additional disclosure both publicly and to the SEC regarding its derivatives positions. The requirements of Rule 18f-4 are intended to reduce derivatives risk, but they may not work as intended. Analyses, judgments and decisions made in connection with administering the derivatives risk management program may be incorrect or otherwise may not produce the desired results. In addition, changes in market conditions, which may occur rapidly and unpredictably, may adversely affect the administration of the program.
A discussion of additional risks associated with particular derivative instruments follows:
Forward Contract Risk: There are no limits on daily price fluctuations of forward contracts. Changes in foreign exchange regulations by governmental authorities might limit the trading of forward contracts on currencies. There have been periods during which certain counterparties have refused to continue to quote prices for forward contracts or have quoted prices with an unusually wide spread (i.e., the difference between the price at which the counterparty is prepared to buy and the price at which it is prepared to sell).
Futures Contract Risk: There can be no assurance that a liquid market will exist for any particular futures contract at any particular time. Exchanges may establish daily price fluctuation limits for futures contracts and may halt trading if a contract’s price moves upward or downward more than the limit in a given day. On volatile trading days when the price fluctuation limit is reached or a trading halt is imposed, it may be impossible to enter into new positions or close out existing positions. If the market for a contract is not liquid because of price fluctuation limits or other market conditions, it could prevent prompt liquidation of unfavorable positions, and potentially could require the Portfolio to continue to hold a position until delivery or expiration regardless of changes in its value. As a result, the Portfolio’s access to other assets held to cover its futures positions could also be impaired.
Options Contract Risk: There can be no guarantee that the use of options will increase the Portfolio’s return or income. By writing (selling) a put option, the Portfolio takes on the risk of a decline in the value of the underlying instrument, including the possibility of a loss up to the entire strike price of the option it sells, but without the corresponding opportunity to benefit from a potential increase in the value of the underlying instrument. When the Portfolio writes a put option, it assumes the risk that it must purchase the underlying instrument at a strike price that may be higher than the market price of the instrument. If there is a broad market decline and the Portfolio is not able to close out its written put options, it may result in substantial losses to the Portfolio. By
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writing (selling) a call option, the Portfolio assumes the risk that it must sell the underlying instrument at a strike price that may be lower than the market price of the instrument. When the Portfolio writes a covered call option, it gives up the opportunity to profit from a price increase in the underlying instrument above the strike price. If a call option that the Portfolio has written is exercised, the Portfolio will experience a gain or loss from the sale of the underlying instrument, depending on the price at which the Portfolio purchased the instrument and the strike price of the option. The Portfolio will receive a premium from writing options, but the premium received may not be sufficient to offset any losses sustained from exercised options. If a call option that the Portfolio has written expires unexercised, the Portfolio will experience a gain in the amount of the premium if received; however, that gain may be offset by a decline in the market value of the underlying instrument during the option period. If an option the Portfolio has purchased is never exercised or closed out, the Portfolio will lose the amount of the premium it paid and the use of those funds.
Swaps Risk: Swap transactions generally do not involve delivery of reference instruments or payment of the notional amount of the contract. Accordingly, the risk of loss with respect to swaps generally is limited to the net amount of payments that the Portfolio is contractually obligated to make or, in the case of the other party to a swap defaulting, the net amount of payments that the Portfolio is contractually entitled to receive. As a seller of a credit default swap, the Portfolio effectively adds economic leverage because, in addition to its total net assets, the Portfolio is subject to investment exposure on the entire notional amount of the contract. See “Leveraging Risk” above. Additionally, holding a position in a credit default swap could result in losses if the Portfolio does not correctly evaluate the creditworthiness of the company on which the credit default swap is based. Some swaps are now executed through an organized exchange or regulated facility and cleared through a regulated clearing organization. The absence of an organized exchange or market for certain swap transactions may result in difficulties in trading and valuation, especially in the event of market disruptions. The use of an organized exchange or market for swap transactions is expected to result in swaps being easier to trade or value, but this may not always be the case.
Dollar Roll and Sale-Buyback Transactions: Dollar roll and sale-buyback transactions may increase the Portfolio’s volatility and may be viewed as a form of leverage. There is also a risk that the counterparty will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the Portfolio.
Foreign Securities Risk: Investments in foreign securities, including depositary receipts, involve risks not associated with, or more prevalent than those that may be associated with, investments in U.S. securities. The economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Over a given period of time, foreign securities may underperform U.S. securities — sometimes for years. The Portfolio could also underperform if it invests in countries or regions whose economic performance falls short. Foreign markets may be less liquid, more volatile and subject to less government supervision and regulation than U.S. markets, and it may take more time to clear and settle trades involving foreign securities. Security values also may be negatively affected by changes in the exchange rates between the U.S. dollar and foreign currencies. Differences between U.S. and foreign legal, political and economic systems, regulatory regimes and market practices, as well as trade barriers and other protectionist trade policies (including those of the United States), governmental instability, war or other political or economic actions or factors, also may adversely impact security values. Foreign securities are also subject to the risks associated with the potential imposition of economic or other sanctions against a particular foreign country, its nationals, businesses or industries. The costs of buying and selling foreign securities, including taxes, brokerage and custody costs, generally are higher than the costs of buying and selling domestic securities. World markets, or those in a particular region, may all react in similar fashion to important economic, political or other developments. Events and evolving conditions in certain economies or markets may alter the risks associated with investments tied to countries or regions that historically were perceived as comparatively stable and make such investments riskier and more volatile. In addition, securities issued by U.S. entities with substantial foreign operations or holdings can involve risks relating to conditions in foreign countries. Regardless of where a company is organized or its stock is traded, its performance may be significantly affected by events in regions from which it derives its profits or in which it conducts significant operations.
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Currency Risk: Investments in foreign currencies and in securities that trade in, or receive revenues in, or in derivatives that provide exposure to foreign currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar. Any such decline may erode or reverse any potential gains from an investment in securities denominated in foreign currency or may widen existing loss. To the extent the Portfolio invests or hedges based on the perceived relationship between two currencies, there is a risk that the correlation between those currencies may not behave as anticipated. Currency rates may fluctuate significantly over short periods of time and can be affected unpredictably by a number of factors, including changes in interest rates; intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities; investor perception of a country’s economy; or the imposition of currency controls or other political developments in the United States or abroad. Currency exchange rates may fluctuate in response to factors external to a country’s economy, which makes the forecasting of currency market movements extremely difficult. Currency risk may be particularly high to the extent that the Portfolio invests in foreign securities or currencies that are economically tied to emerging market countries.
Depositary Receipts Risk: Investments in depositary receipts (including American Depositary Receipts, European Depositary Receipts and Global Depositary Receipts) involve many of the same risks associated with investing directly in foreign securities, including the economic and political risks associated with the underlying issuer’s country. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts or to pass through to them any voting rights with respect to the deposited securities. The Portfolio may therefore receive less timely information or have less control than if it invested directly in the foreign issuer. Depositary receipts are subject to the risk of fluctuation in the currency exchange rate if, as is often the case, the underlying foreign securities are denominated in foreign currency, and there may be an imperfect correlation between the market value of depositary receipts and the underlying foreign securities. Certain countries may limit the ability to convert a depositary receipt into the underlying foreign security and vice versa, which may cause the securities of the foreign company to trade at a discount or premium to the market price of the related depositary receipts. In some cases, if the Portfolio, as the holder of a depositary receipt, is compelled to convert the depositary receipt into the underlying foreign security but is unable successfully to complete the conversion, the depositary receipt could be rendered worthless and the Portfolio could lose its entire investment.
Emerging Markets Risk: Emerging market countries generally are located in Asia, the Middle East, Eastern Europe, Central and South America, and Africa. There are greater risks and uncertainties involved in investing in emerging market countries and/or their securities markets, and investments in these countries and/or markets are more susceptible to loss than investments in developed countries and/or markets. Investments in these countries and/or markets may present market, credit, currency, liquidity, legal, political, technical and other risks different from, or greater than, the risks of investing in developed countries. For instance, these countries may be more likely than developed countries to experience rapid and significant adverse developments in their political, economic or social structures or intervene in or manipulate financial markets. Some emerging market countries restrict foreign investments, impose high withholding or other taxes on foreign investments, impose restrictive exchange control regulations, or may nationalize or expropriate the assets of private companies. Therefore, the Portfolio may be limited in its ability to make direct or additional investments in an emerging market country or could lose the entire value of its investment in the affected market. Such restrictions also may have negative impacts on transaction costs, market price, and investment returns. The U.S. government also may impose restrictions on the ability of U.S. investors to hold and/or acquire securities of certain companies in emerging market countries, which may adversely impact the Portfolio.
In addition, companies in emerging market countries may be newly organized, smaller and less seasoned, and the securities markets of emerging market countries generally are smaller, less liquid and more volatile than those of developed countries. Shareholder claims and legal remedies that are common in the United States may be difficult or impossible to pursue in many emerging market countries. In addition, due to jurisdictional limitations, matters of comity and various other factors, U.S. authorities may be limited in their ability to bring enforcement actions against non-U.S. companies and non-U.S. persons in certain emerging market countries. Emerging market countries often have less uniformity in (or may lack) regulatory, accounting, auditing and
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financial reporting requirements or standards, which may impact the availability and quality of information about issuers; less reliable clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions; and less reliable registration and custodial procedures, which could result in ownership registration being completely lost. There are generally higher commission rates on foreign portfolio transactions, transfer taxes, and higher custodial costs. The Portfolio may not know the identity of trading counterparties, which may increase the possibility of the Portfolio not receiving payment or delivery of securities in a transaction. Emerging market countries also may be subject to high inflation and rapid currency devaluations, and currency-hedging techniques may be unavailable in certain emerging market countries. In addition, some emerging market countries may be heavily dependent on international trade, which can materially affect their securities markets. Certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulties in servicing their sovereign debt on a timely basis, which has led to defaults and the restructuring of certain indebtedness. Investments in frontier markets may be subject to greater levels of these risks than investments in more developed and traditional emerging markets.
European Economic Risk: The European Union’s (the “EU”) Economic and Monetary Union requires member countries to comply with restrictions on interest rates, deficits, debt levels, and inflation rates, and other factors, each of which may significantly impact every European country and their economic partners. The economies of EU member countries and their trading partners may be adversely affected by changes in the exchange rate of the euro (the common currency of the EU), changes in EU or governmental regulations on trade and other areas, geopolitical tensions or conflicts, and the threat of default or an actual default by an EU member country on its sovereign debt, which could negatively impact the Portfolio’s investments and cause it to lose money. In recent years, the European financial markets have been negatively impacted by concerns relating to rising government debt levels and national unemployment; possible default on or restructuring of sovereign debt in several European countries; and economic downturns. Responses to financial problems by European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. A European country’s default or debt restructuring would adversely affect the holders of the country’s debt and sellers of credit default swaps linked to the country’s creditworthiness and could negatively impact global markets more generally.
Recent events in Europe may adversely affect the euro’s exchange rate and value and may continue to impact the economies of every European country and their economic partners. Russia’s military invasion of Ukraine in February 2022, the resulting responses by the United States and other countries, and the potential for wider conflict have had, and could continue to have, severe adverse effects on regional and global economies and could further increase volatility and uncertainty in the financial markets. For example, exports in Eastern Europe have been disrupted for certain key commodities, pushing commodity prices to record highs, and energy prices in Europe have increased significantly. In addition, uncertainties regarding the viability of the EU have impacted and may continue to impact regional and global markets. Withdrawals from the EU (or the possibility of such withdrawals or the dissolution of the EU) could cause additional and significant market disruption and introduce new legal and regulatory uncertainties. The full impact of the United Kingdom’s (“UK”) withdrawal from the EU, commonly referred to as “Brexit”, and the nature of the future relationship between the UK and the EU remain unclear. The effects of Brexit on the UK and EU economies could be significant, resulting in negative impacts, such as business and trade disruptions, increased volatility and illiquidity, and potentially lower economic growth of markets in the UK and the EU. Until the full economic effects of Brexit become clearer, there remains a risk that Brexit may negatively impact the Portfolio’s investments and cause it to lose money. Further, the national politics of European countries have been unpredictable and subject to influence by disruptive political groups. European governments may be subject to change and European countries may experience social and political unrest. Unanticipated or sudden political or social developments may result in sudden and significant investment losses.
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International Fair Value Pricing Risk: To the extent that the Portfolio invests in foreign securities it is subject to the risk that its share price may be exposed to arbitrage attempts by investors seeking to capitalize on differences in the values of foreign securities trading on foreign exchanges that may close before the time the Portfolio’s net asset value is determined. If such arbitrage attempts are successful, the Portfolio’s net asset value might be diluted. The Portfolio’s use of fair value pricing in certain circumstances may help deter such arbitrage activities. The effect of such fair value pricing is that foreign securities may not be priced on the basis of quotations from the primary foreign securities market in which they are traded, but rather may be priced using more subjective methods, known as fair value pricing. As such, it is possible that fair value may differ materially from the value realized on a sale of a foreign security. It is also possible that the use of fair value pricing will limit the Portfolio’s ability to implement its investment strategy (e.g., reduce the volatility of the Portfolio’s share price) or achieve its investment objective.
Regulatory Risk: Less information may be available about foreign companies. In general, foreign companies are not subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements as are U.S. companies. Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as does the United States and may not have laws to protect investors that are comparable to U.S. securities laws. In addition, some countries may have legal systems that may make it difficult for the Portfolio to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments.
Settlement Risk: Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. 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 U.S. investments. At times, settlements in certain foreign countries have not kept pace with the number of securities transactions. These problems may make it difficult for the Portfolio to carry out transactions. If the Portfolio cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If the Portfolio cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Portfolio could be liable for any losses incurred.
Trade Suspensions Risk: Securities of issuers traded on foreign exchanges may be suspended, either by the issuers themselves, by an exchange, or by governmental authorities. The likelihood of such suspensions may be higher for securities of issuers in emerging or less-developed market countries than in countries with more developed markets. Suspensions may last for significant periods of time, during which trading in the securities and in instruments that reference the securities, such as derivative instruments, may be halted. In the event that the Portfolio holds material positions in such suspended securities or instruments, the Portfolio’s ability to liquidate its positions may be compromised and the Portfolio could incur significant losses. Trade suspensions, or other restrictions on trading, and market closures could lead to affected securities being valued at zero.
Hedging Risk: If the Portfolio takes a hedging position (such as long or short positions) in a particular currency, security, or bond market, it will lose money if the currency, security, or bond market appreciates in value, or an expected credit event fails to occur. Any efforts at buying or selling currencies could result in significant losses for the Portfolio. Further, foreign currency transactions that are intended to hedge the currency risk associated with investing in foreign securities and protect against the risk of loss that would result from a decline in the value of the hedged currency may also limit any potential gain that might result should the value of such currency increase.
Inflation-Indexed Bonds Risk: Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to inflation. The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates represent nominal (stated) interest rates reduced by the expected impact of inflation. In general, inflation-indexed bonds, including Treasury inflation-indexed securities, decline in value when real interest rates rise and rise in value when real interest rates decline. In certain interest rate environments, such as when real interest rates are rising faster than nominal interest rates, inflation-indexed bonds may experience greater losses than other fixed income securities with similar durations. Interest payments
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on inflation-indexed debt securities can be unpredictable and may vary as the principal and/or interest is adjusted for inflation. In periods of deflation, the Portfolio may have no income at all from such investments. The principal value of an investment in the Portfolio is not protected or otherwise guaranteed by the value of the Portfolio’s investments in inflation-indexed debt securities.
Interest Rate Risk: Changes in interest rates may affect the yield, liquidity and value of investments in income producing or debt securities. Changes in interest rates also may affect the value of other securities. When interest rates rise, the value of the Portfolio’s debt securities generally declines. Conversely, when interest rates decline, the value of the Portfolio’s debt securities generally rises. Typically, the longer the maturity (i.e., the term of a debt security) or duration (i.e., a measure of the sensitivity of a debt security to changes in market interest rates, based on the entire cash flow associated with the security) of a debt security, the greater the effect a change in interest rates could have on the security’s price. For example, if a debt security has a duration of five years and interest rates increase by 1%, the debt security’s price typically would be expected to decline by approximately 5%. Thus, the sensitivity of a the Portfolio ‘s debt securities to interest rate risk will increase the greater the duration of those securities. Greater sensitivity to changes in interest rates may increase the volatility of a debt security’s value and may lead to losses. Interest rate changes can be sudden and unpredictable, and are influenced by a number of factors, including government policy, monetary policy, inflation rates and/or investor expectations concerning such rates, perceptions of risk, and supply and demand of bonds. Changes in government monetary policy, including changes in federal tax policy or changes in a central bank’s implementation of specific policy goals, may have a substantial and immediate impact on interest rates. However, there can be no guarantee that any particular government or central bank policy will be continued, discontinued or changed, or that any such policy will have the desired effect on interest rates. Short-term and long-term interest rates, and interest rates in different countries, do not necessarily move in the same direction or by the same amount.
Interest rates were unusually low in recent years in the United States and abroad; however, due to concerns regarding high inflation in many sectors of the U.S. and global economies, the U.S. Federal Reserve and many foreign governments and monetary authorities have raised interest rates and implemented other policy initiatives in an effort to control inflation, and they may continue to do so. It is difficult to predict accurately the pace at which central banks or monetary authorities may increase interest rates or the timing, frequency, or magnitude of any such further increases, and the evaluation of macro-economic and other conditions or events could cause a change in approach in the future. Rising interest rates may present a greater risk than has historically been the case due to the effect of government fiscal and monetary policy initiatives and potential market reaction to those initiatives. As such, fixed-income and related markets may continue to experience heightened levels of interest rate volatility. A significant or rapid rise in interest rates could result in losses, which could be substantial, to the Portfolio.
During periods of very low interest rates, which occur from time to time due to market forces or actions of governments and/or their central banks, the Portfolio may be subject to a greater risk of principal decline from rising interest rates. Certain countries have experienced negative interest rates on certain fixed-income instruments. Very low or negative interest rates may magnify interest rate risk by, among other things, reducing or eliminating interest income and causing declines in the value of investments in income producing or debt securities. Changing interest rates, including rates that fall below zero, may have unpredictable effects on markets, may result in heightened market volatility, and may detract from Portfolio performance to the extent the Portfolio is exposed to such interest rates.
Investment Grade Securities Risk: Debt securities generally are rated by national bond ratings agencies. The Portfolio considers securities to be investment grade if they are rated BBB or higher by S&P or Fitch, or Baa or higher by Moody’s, or, if unrated, determined by the investment manager to be of comparable quality. Securities rated in the lower investment grade rating categories (e.g., BBB or Baa) are considered investment grade securities, but may have more risk than higher rated obligations because they are regarded as having only an adequate capacity to pay principal and interest, are considered to lack outstanding investment characteristics, and may possess certain speculative characteristics.
Leveraging Risk: When the Portfolio leverages its holdings, the value of an investment in that Portfolio will be more volatile and all other risks will tend to be compounded. Investments that create leverage can result
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in losses to the Portfolio that exceed the amount originally invested and may accelerate the rate of losses (some of which may be sudden or substantial). For certain investments that create leverage, or have embedded leverage, relatively small market fluctuations can result in large changes in the value of such investments. In addition, the costs that the Portfolio pays to engage in these practices are additional costs borne by the Portfolio and could reduce or eliminate any net investment profits. Unless the profits from engaging in these practices exceed the costs of engaging in these practices, the use of leverage will diminish the investment performance of the Portfolio compared with what it would have been had the Portfolio not used leverage. There can be no assurance that the Portfolio’s use of any leverage will be successful.
Liquidity Risk: From time to time, there may be little or no active trading market for a particular investment in which the Portfolio may invest or is invested due to a variety of circumstances, including but not limited to deterioration in the financial condition of an issuer or issuers in a particular industry or market segment, periods of economic and market stress, changes in investor perceptions regarding an issuer or industry, periods of market volatility that trigger market circuit breakers that halt trading in securities or close markets entirely, planned market closures, shortened trading hours, extended market holidays, and other reasons. In such a market, the value of such investments and the Portfolio’s share price may fall dramatically. Illiquid investments may be difficult or impossible to sell or purchase at an advantageous time or price or in sufficient amounts to achieve the Portfolio’s desired level of exposure. To meet redemption requests during periods of illiquidity, the Portfolio may be forced to dispose of investments at unfavorable times or prices and/or under unfavorable conditions, which may result in a loss or may be costly to the Portfolio. Judgment plays a greater role in valuing illiquid investments than investments with more active markets, and there is a greater risk that the investments may not be sold for the price at which the Portfolio is carrying them. The Portfolio also may not receive its proceeds from the sale of certain investments for an extended period of time. Certain investments that were liquid when purchased may later become illiquid, sometimes abruptly, particularly in times of overall economic distress or adverse investor perception. In addition, the trading market for certain investments may become illiquid under adverse market or economic conditions independent of any specific adverse changes in the conditions of a particular issuer. An inability to sell a portfolio position can adversely affect the Portfolio’s value or prevent the Portfolio from being able to take advantage of other investment opportunities. Market participants attempting to sell the same or a similar investment at the same time as the Portfolio could decrease the liquidity of such an investment, especially during periods of market stress. During periods of market stress, an investment or even an entire market segment may become illiquid, sometimes abruptly, which can adversely affect the Portfolio’s ability to limit losses. In addition, a reduction in the ability or willingness of dealers and other institutional investors to make a market in certain securities may result in decreased liquidity in certain markets.
The SEC has instituted various requirements for open-end funds, including the Portfolio, to establish, and the Portfolio has established, a program to manage liquidity risks. These requirements are intended to reduce liquidity risk, but they may not work as intended. Analyses, judgments and decisions made in connection with administering the liquidity risk management program may be incorrect or otherwise may not produce the desired results. In addition, changes in market conditions, which may occur rapidly and unpredictably, may adversely affect the administration of the program. Changes related to the requirements may increase the Portfolio’s expenses, may negatively affect the Portfolio’s yield and return potential, and may not reduce the Portfolio’s liquidity risk.
Additional legislative or regulatory actions to address perceived liquidity or other issues in markets generally, or in particular markets such as the fixed income securities markets, may alter or impair the Portfolio’s ability to pursue its investment objectives or utilize certain investment strategies and techniques.
Loan Risk: A bank loan represents an interest in a loan or other direct indebtedness that entitles the acquirer of such interest to payments of interest, principal and/or other amounts due under the structure of the loan. Loan interests are subject to liquidity risk, prepayment risk, extension risk, the risk of subordination to other creditors, restrictions on resale, and the lack of a regular trading market and publicly available information. Loan interests may be difficult to value and may have extended trade settlement periods (bank loans may have trade settlement periods that extend beyond seven days). As a result, the proceeds from the sale of a loan may not be available to make additional investments or to meet redemption obligations until potentially a substantial period after the sale
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of the loan. The extended trade settlement periods could force the Portfolio to liquidate other securities to meet redemptions and may present a risk that the Portfolio may incur losses in order to timely honor redemptions.
The Portfolio’s investments in loans are subject to the risk that the Portfolio will not receive payment of interest, principal and other amounts due in connection with these investments and will depend primarily on the financial condition of the borrower. Fully secured loans offer the Portfolio more protection than unsecured loans in the event of nonpayment of scheduled interest or principal, although there is no assurance that the liquidation of a secured loan’s collateral would satisfy the borrower’s obligation or that the collateral could be readily liquidated. In addition, the Portfolio’s access to collateral may be limited by bankruptcy or other insolvency laws. In the event of a default, the Portfolio may not recover its principal, may experience a substantial delay in recovering its investment and may not receive interest during the delay. Unsecured loans are subject to a greater risk of default than secured loans, especially during periods of deteriorating economic conditions. Unsecured loans also have a greater risk of nonpayment in the event of a default than secured loans since there is no recourse for the lender to collateral. Loans in which the Portfolio may invest may be made to finance highly leveraged corporate transactions. The highly leveraged capital structure of the borrowers in such transactions may make such loans especially vulnerable to adverse changes in economic or market conditions. In addition, loan interests may be unrated, and the Portfolio’s Sub-Adviser may be required to rely exclusively on its own analysis of the borrower in determining whether to acquire, or to continue to hold, a loan. Loans may not be considered “securities,” and purchasers, such as the Portfolio, therefore may not have the benefit of the anti-fraud protections of the federal securities laws.
Loan agreements, which set forth the terms of a loan and the obligations of the borrower and lender, contain certain covenants that mandate or prohibit certain borrower actions, including financial covenants (or “maintenance covenants”) that dictate certain minimum and maximum financial performance levels. Certain types of loans contain fewer maintenance covenants than traditional loans (or no maintenance covenants at all) and may not include terms that permit the lender to monitor the financial performance of the borrower and declare an event of default if certain criteria are breached. This may hinder the Portfolio’s ability to reprice credit risk associated with the borrower and reduce the Portfolio’s ability to restructure a problematic loan and mitigate potential loss. As a result, the Portfolio’s exposure to losses on these types of loans may be increased, especially during a downturn in the credit cycle.
The Portfolio may acquire a loan interest by obtaining an assignment of all or a portion of the interests in a particular loan that are held by an original lender or a prior assignee. As an assignee, the Portfolio normally will succeed to all rights and obligations of its assignor with respect to the portion of the loan that is being assigned. However, the rights and obligations acquired by the purchaser of a loan assignment may differ from, and be more limited than, those held by the original lenders or the assignor. The Portfolio may also purchase a participation in a loan interest that is held by another party. When the Portfolio’s loan interest is a participation, the Portfolio may have less control over the exercise of remedies than the party selling the participation interest, and the Portfolio normally would not have any direct rights against the borrower. It is possible that the Portfolio could be held liable, or may be called upon to fulfill other obligations, with respect to loans in which it receives an assignment in whole or in part, or in which it owns a participation. The potential for such liability is greater for an assignee than for a participant.
Market Risk: The Portfolio is subject to the risk that the securities markets will move down, sometimes rapidly and unpredictably, based on overall economic conditions and other factors, which may negatively affect Portfolio performance. Securities markets also may experience long periods of decline in value. The value of a security may decline due to factors that are specifically related to a particular company, as well as general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic or political conditions, changes in the general outlook for corporate earnings, inflation rates and/or investor expectations concerning such rates, changes in interest rates or currency rates, recessions, global demand for particular products or resources, lack of liquidity in the markets, or adverse investor sentiment generally. In some cases, for example, the stock prices of individual companies have been negatively impacted even though there may be little or no apparent degradation in the financial condition or prospects of the issuers. The value of a security may also decline due to factors that affect a particular industry or industries, such as tariffs, labor shortages or increased production costs and competitive conditions within an industry.
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Equity securities generally have greater price volatility than fixed income securities, although under certain market conditions fixed income securities may have comparable or greater price volatility. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. Adverse market conditions may be prolonged and may not have the same impact on all types of securities. Changes in value may be temporary or may last for extended periods. Changes in the financial condition of (or other event affecting) a single issuer can impact a market as a whole. The Portfolio may experience a substantial or complete loss on any individual security. Even when securities markets perform well, there is no assurance that the investments held by the Portfolio will increase in value along with the broader market. Market factors, such as the demand for particular portfolio securities, may cause the price of certain portfolio securities to fall while the prices of other securities rise or remain unchanged. Historical patterns of correlation among asset classes may break down in unanticipated ways during times of high volatility, disrupting investment programs and potentially causing losses. Additionally, market speculation focused on profiting from fluctuations in the value of one or more securities or asset classes over a short period of time may result in large-scale and sudden purchases and sales of those securities or asset classes, which can significantly affect the value of those securities and asset classes as well as the market more broadly in unexpected ways, and cause significant share price volatility and losses for the Portfolio.
Global economies and financial markets are highly interconnected, which increases the possibility that conditions in one country or region or events affecting a single or small number of issuers might adversely impact issuers in a different country or region. World markets, or those in a particular region, may all react in similar fashion to important economic, political or other developments. Events such as environmental, natural or man-made disasters or other catastrophes, public health crises (such as epidemics and pandemics), social unrest, widespread and prolonged power outages, and cybersecurity incidents, and governments’ reactions (or failure to react) to such events, could cause uncertainty in the markets and may adversely affect the performance of the global economy. Geopolitical and other events, including terrorism, tensions, war or other open conflicts between nations, or political or economic dysfunction within some nations that are global economic powers or major producers of oil, may lead to overall instability in world economies and markets generally and have led, and may in the future lead, to increased market volatility and may have adverse long-term effects. As a result, the value and liquidity of the Portfolio’s investments may be negatively affected by developments in other countries and regions, whether or not the Portfolio invests in securities of issuers located in or with significant exposure to the countries or regions directly affected. Events and evolving conditions in certain economies or markets may alter the risks associated with investments tied to countries or regions that historically were perceived as comparatively stable and make such investments riskier and more volatile. Moreover, systemic market dislocations of the kind that occurred during the global financial crisis that began in 2008, if repeated, would be highly disruptive to economies and markets, adversely affecting individual companies and industries, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Portfolio’s investments.
Impacts from climate change may include significant risks to global financial assets and economic growth. Certain issuers, industries and regions may be adversely affected by the impacts of climate change, including on the demand for and the development of goods and services and related production costs, and the impacts of legislation, regulation and international accords related to climate change, as well as any indirect consequences of regulation or business trends driven by climate change.
In addition, the U.S. Federal Reserve (“Fed”) has invested or otherwise made available substantial amounts of money to keep credit flowing through short-term money markets and has signaled that it will continue to adjust its operations as appropriate to support short-term money markets. Amid these efforts, concerns about the markets’ dependence on the Fed’s provision of liquidity have grown.
Policy changes by the U.S. government and/or the Fed and political and other events within the United States may affect investor and consumer confidence and may increase uncertainty in or impair the operation of the U.S. or other securities markets, perhaps suddenly and to a significant degree.
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In addition, markets and market-participants are increasingly reliant on both publicly available and proprietary information data systems. Inaccurate data, software or other technology malfunctions, programming inaccuracies, unauthorized use or access, and similar circumstances may impair the performance of these systems and may have an adverse impact upon a single issuer, a group of issuers, or the market at-large. In certain cases, an exchange or market may close or issue trading halts on either specific securities or even the entire market, which may result in the Portfolio being, among other things, unable to buy or sell certain securities or financial instruments or accurately price its investments.
Mortgage-Related and Other Asset-Backed Securities Risk: Investments in mortgage-related and other asset-backed securities are subject to credit risk, liquidity risk, the risk of default, interest rate risk, and prepayment and extension risk, sometimes to a greater extent than various other types of fixed income investments. Declines in the credit quality of and defaults by the issuers of mortgage-related and other asset-backed securities may decrease the value of such securities, which could result in losses to the Portfolio, and may reduce the liquidity of such securities and make such securities more difficult to purchase or sell at an advantageous time and price. In addition, borrowers may default on the obligations that underlie mortgage-related and other asset-backed securities. The risk of defaults by borrowers generally is greater during times of rising interest rates and/or unemployment rates. The impairment (or loss) of the value of collateral or other assets underlying mortgage-related and other asset-backed securities will result in a reduction in the value of the securities. Certain collateral may be difficult to locate in the event of default, or may be lost, and recoveries of depreciated or damaged collateral may not fully cover payments due on such collateral. Asset-backed securities may not have the benefit of a security interest in collateral comparable to that of mortgage assets, resulting in additional credit risk. In addition, even when there is no default or threat of default, instability in the markets for mortgage-related and other asset-backed securities may reduce (at times, significantly) the liquidity of such securities. As a result, the value of such securities may decrease and the Portfolio may incur greater losses on the sale of such securities than under more stable market conditions. Furthermore, instability and illiquidity in the market for lower-rated mortgage-related and other asset-backed securities may affect the overall market for such securities, thereby impacting the liquidity and value of higher-rated securities.
If the Portfolio purchases mortgage-related or other asset-backed securities that are “subordinated” to other interests in the same pool, the Portfolio, as a holder of those securities, may receive payments only after the pool’s obligations to other investors have been satisfied. For example, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may limit substantially the pool’s ability to make payments of principal or interest to the Portfolio as a holder of such subordinated securities, reducing the values of those securities or in some cases rendering them worthless. In addition, certain mortgage-related and other asset-backed securities may include securities backed by pools of loans made to “subprime” borrowers or borrowers with blemished credit histories. The underwriting standards for subprime loans may be lower and more flexible than the standards generally used by lenders for borrowers with non-blemished credit histories with regard to the borrowers’ credit standing and repayment ability. Borrowers who qualify generally have impaired credit histories, which may include a record of major derogatory credit items such as outstanding judgments or prior bankruptcies. In addition, they may not have the documentation required to qualify for a standard loan. As a result, the loans in the pool are likely to experience rates of delinquency, foreclosure, and bankruptcy that are higher, and that may be substantially higher, than those experienced by loans underwritten in a more traditional manner. In addition, changes in the values of the assets underlying the loans (if any), as well as changes in interest rates, may have a greater effect on the delinquency, foreclosure, bankruptcy, and loss experience of the loans in the pool than on loans originated in a more traditional manner. The risk of defaults by borrowers is generally higher in the case of asset or mortgage pools that include subprime assets or mortgages, and the liquidity and value of subprime mortgages and non-investment grade mortgage-backed securities that are not guaranteed by Ginnie Mae, Fannie Mae, and Freddie Mac could change dramatically over time.
Payment of interest and repayment of principal, the schedule for which varies based on the terms of the loan, may be largely dependent upon the cash flows generated by the assets backing the securities and, in certain cases, supported by various forms of insurance or guarantees, including letters of credit, surety bonds, or other credit or liquidity enhancements. There can be no assurance that insurers or guarantors can meet their
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obligations under the insurance policies or guarantee arrangements. Furthermore, mortgage-related and other asset-backed securities typically provide the issuer with the right to prepay the security prior to maturity. During periods of rising interest rates, the rate of prepayments tends to decrease because borrowers are less likely to prepay debt (such as mortgage debt or automobile loans). Slower than expected payments can extend the average lives of mortgage-related and other asset-backed securities, and this may lock in a below market interest rate and increase the security’s duration and interest rate sensitivity, which may increase the volatility of the security’s value and may lead to losses. During periods of falling interest rates, the rate of prepayments tends to increase because borrowers are more likely to pay off debt and refinance at the lower interest rates then available. Unscheduled prepayments shorten the average lives of mortgage-related and other asset-backed securities and may result in the Portfolio’s having to reinvest the proceeds of the prepayments at lower interest rates. Unscheduled prepayments also would limit the potential for capital appreciation on these securities and may make them less effective than other fixed income securities as a means of “locking in” long-term interest rates, thereby reducing the Portfolio’s income. Prepayment rates are difficult to predict, and the potential impact of prepayments on the value of a mortgage-related or other asset-backed security depends on the terms of the instrument and can result in significant volatility.
Privately issued mortgage-related and other asset-backed securities may be subject to heightened liquidity risk. During periods of market stress or high redemptions, the Portfolio may be forced to sell these securities at significantly reduced prices, resulting in losses. Liquid privately issued mortgaged-related and other asset-backed securities can become illiquid during periods of market stress. Privately issued mortgage-related securities are not subject to the same underwriting standards for the underlying mortgages that are applicable to those mortgage-related securities that have U.S. government or government-sponsored enterprise (“GSE”) guarantees. As a result, the mortgage loans underlying privately issued mortgage-related securities may, and frequently do, have less favorable collateral, credit risk, liquidity risk, or other underwriting characteristics than U.S. government or GSE mortgage-related securities.
Mortgage-backed securities issued in the form of collateralized mortgage obligations (“CMOs”) are collateralized by mortgage loans or mortgage pass-through securities. In periods of supply and demand imbalances in the market for CMOs or in periods of sharp interest rate movements, the prices of CMOs may fluctuate to a greater extent than would be expected from interest rate movements alone. CMOs and other mortgage-backed securities may be structured similarly to collateralized debt obligations and may be subject to similar risks.
Multiple Sub-Adviser Risk: The Adviser may allocate the Portfolio’s assets among multiple Sub-Advisers, each of which is responsible for investing its allocated portion of the Portfolio’s assets. To a significant extent, the Portfolio’s performance will depend on the success of the Adviser in allocating the Portfolio’s assets to Sub-Advisers and its selection and oversight of the Sub-Advisers. The Sub-Advisers’ investment strategies may not work together as planned, which could adversely affect the Portfolio’s performance. In addition, because each Sub-Adviser manages its allocated portion of the Portfolio independently from another Sub- Adviser, the same security may be held in different portions of the Portfolio, or may be acquired for one portion of the Portfolio at a time when a Sub-Adviser to another portion deems it appropriate to dispose of the security from that other portion, resulting in higher expenses without accomplishing any net result in the Portfolio’s holdings. Similarly, under some market conditions, one Sub-Adviser may believe that temporary, defensive investments in short-term instruments or cash are appropriate for its allocated portion of the Portfolio when another Sub-Adviser believes continued exposure to the equity or debt markets is appropriate for its allocated portion of the Portfolio. Because each Sub-Adviser directs the trading for its own portion of the Portfolio, and does not aggregate its transactions with those of the other Sub-Adviser, the Portfolio may incur higher brokerage costs than would be the case if a single Sub-Adviser were managing the entire Portfolio. In addition, while the Adviser seeks to allocate the Portfolio’s assets among the Portfolio’s Sub-Advisers in a manner that it believes is consistent with achieving the Portfolio’s investment objective(s), the Adviser is subject to conflicts of interest in allocating the Portfolio’s assets among Sub-Advisers, including affiliated Sub-Advisers, because the Adviser pays different fees to the Sub-Advisers and due to other factors that could impact the Adviser’s or its affiliates’ revenues and profits.
If the Adviser hires, terminates or replaces a Sub-Adviser to the Portfolio or adjusts the asset allocation among Sub- Advisers in the Portfolio, the Portfolio may experience a period of transition during which the securities held
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in the Portfolio may be repositioned in connection with the change in Sub-Advisers. The Portfolio may not pursue its principal investment strategies during such a transition period and may incur increased brokerage commissions and other transaction costs in connection with the changes.
Non-Investment Grade Securities Risk: Bonds rated below BBB by S&P or Fitch, or below Baa by Moody’s or, if unrated, determined by the investment manager to be of comparable quality, are speculative in nature, involve greater risk of default by the issuing entity and may be subject to greater market fluctuations than higher rated fixed income securities. Non-investment grade bonds, sometimes referred to as “junk bonds,” are usually issued by companies without long track records of sales and earnings, or by those companies with questionable credit strength. The creditworthiness of issuers of non-investment grade debt securities may be more complex to analyze than that of issuers of investment grade debt securities, and the reliance on credit ratings may present additional risks. The retail secondary market for these “junk bonds” may be less liquid than that of higher rated securities and adverse conditions could make it difficult at times to sell certain securities or could result in lower prices than those used in calculating the Portfolio’s net asset value. A Portfolio investing in “junk bonds” may also be subject to greater credit risk because it may invest in debt securities issued in connection with corporate restructuring by highly leveraged issuers or in debt securities not current in the payment of interest or principal or in default. If the issuer of a security is in default with respect to interest or principal payments, the Portfolio may lose its entire investment. The credit rating of a below investment grade security does not necessarily address its market value risk and may not reflect its actual credit risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer. Because of the risks involved in investing in below investment grade securities, an investment in a Portfolio that invests substantially in such securities should be considered speculative.
Portfolio Management Risk: The Portfolio is subject to the risk that strategies used by an investment manager and its securities selections fail to produce the intended results. An investment manager’s judgments or decisions about the quality, relative yield or value of, or market trends affecting, a particular security or issuer, industry, sector, region or market segment, or about the economy or interest rates, may be incorrect or otherwise may not produce the intended results, which may result in losses to the Portfolio. In addition, many processes used in Portfolio management, including security selection, rely, in whole or in part, on the use of various technologies, some of which are created or maintained by an investment manager or its affiliates and some of which are created or maintained by third parties. The Portfolio may suffer losses if there are imperfections, errors or limitations in the quantitative, analytic or other tools, resources, information and data used, or the analyses employed or relied on, by an investment manager, or if such tools, resources, information or data are used incorrectly, fail to produce the desired results, or otherwise do not work as intended. Imperfections, errors or limitations may go undetected for long periods of time or may never be detected, which could adversely affect decision making for the Portfolio, as well as the Portfolio’s operations or performance, and may result in, among other things, the execution of unanticipated trades, the failure to execute anticipated trades, the failure to properly gather and organize available data and/or the failure to take certain hedging or risk-reducing actions. There can be no assurance that the use of these technologies will result in effective investment decisions for the Portfolio.
Portfolio Turnover Risk: High portfolio turnover (generally, turnover in excess of 100% in any given fiscal year) may result in increased transaction costs to the Portfolio, which may result in higher fund expenses and lower total return. A Portfolio that adopts new investment objectives or policies or portfolio management strategies, has a new or an additional Sub-Adviser, and/or undergoes a reorganization with another Portfolio may experience substantially increased portfolio turnover due to the differences between the Portfolio’s previous and current investment objectives and policies and portfolio management strategies.
Preferred Stock Risk: Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. Unlike interest payments on debt securities, dividends on preferred stock are generally payable at the discretion of the issuer’s board of directors. Preferred shareholders may have certain rights if dividends are not paid but generally have no legal recourse against the issuer. Shareholders may suffer a loss of value if dividends are not paid. In certain situations an issuer may call or redeem its preferred stock or convert it to common stock. The market prices of preferred stocks are generally more sensitive to actual or perceived changes in the issuer’s financial condition or prospects than are the prices of debt securities. Preferred stock also
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may be less liquid than common stock. To the extent that the Portfolio invests a substantial portion of its assets in convertible preferred stocks, declining common stock values may also cause the value of the Portfolio’s investments to decline.
Prepayment Risk and Extension Risk: Prepayment risk is the risk that the issuer of a security held by the Portfolio may pay off principal more quickly than originally anticipated, and the Portfolio may have to reinvest the proceeds in an investment offering a lower yield, may not benefit from any increase in value that might otherwise result from declining interest rates and may lose any premium it paid to acquire the security. Falling interest rates generally result in quicker payoffs as borrowers are motivated to pay off debt and refinance at new lower rates. Extension risk is the risk that the issuer of a security held by the Portfolio may pay off principal more slowly than originally anticipated. Rising interest rates generally result in slower payoffs, which effectively increase the duration of certain debt securities and heighten interest rate risk. Additionally, the Portfolio may be prevented from reinvesting the proceeds it would have received at a given time in an investment offering a higher yield.
Privately Placed and Other Restricted Securities Risk: Restricted securities, which include privately placed securities, are securities that cannot be offered for public resale unless registered under the applicable securities laws or that have a contractual restriction that prohibits or limits their resale. Before they are registered, such securities may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. Difficulty in selling securities may result in a loss or be costly to the Portfolio. Rule 144A is designed to facilitate efficient trading among institutional investors by permitting the sale of certain unregistered securities to qualified institutional buyers. To the extent restricted securities held by the Portfolio qualify under Rule 144A and an institutional market develops for those securities, the Portfolio likely will be able to dispose of the securities without registering them. To the extent that institutional buyers become, for a time, uninterested in purchasing these securities, investing in Rule 144A securities could increase the level of the Portfolio’s illiquidity. The Adviser or Sub-Adviser may determine that certain securities qualified for trading under Rule 144A are liquid. Where registration of a security is required, the Portfolio may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the time the Portfolio desires to sell (and therefore decides to seek registration of) the security, and the time the Portfolio may be permitted to sell the security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Portfolio might obtain a less favorable price than prevailed when it desired to sell. The risk that securities may not be sold for the price at which the Portfolio is carrying them is greater with respect to restricted securities than it is with respect to registered securities. The illiquidity of the market, as well as the lack of publicly available information regarding these securities, also may make it difficult to determine a fair value for certain securities for purposes of computing the Portfolio’s net asset value.
Redemption Risk: The Portfolio may experience periods of heavy redemptions that could cause the Portfolio to sell assets at inopportune times, which could have a negative impact on the Portfolio’s overall liquidity, or at a loss or depressed value. Redemption risk is heightened during periods of declining or illiquid markets. Redemption risk also is greater to the extent that one or more investors control a large percentage of investments in the Portfolio, have short investment horizons, or have unpredictable cash flow needs. Heavy redemptions could hurt the Portfolio’s performance and increase transaction costs.
Market developments and other factors, including a general rise in interest rates, have the potential to cause investors to move out of fixed income securities on a large scale, which may increase redemptions from mutual funds that hold large amounts of fixed income securities. The market-making capacity of dealers has been reduced in recent years, in part as a result of structural changes, such as fewer proprietary trading desks at broker-dealers and increased regulatory capital requirements. In addition, significant securities market disruptions, including related to the COVID-19 pandemic, have led to dislocation in the market for a variety of fixed income securities (including, without limitation, commercial paper, corporate debt securities, certificates of deposit, asset-backed debt securities and municipal obligations), which has decreased liquidity and sharply reduced returns in certain cases. Increased redemptions from mutual funds that hold large amounts of fixed income securities, coupled with a reduction in the ability or willingness of dealers and other institutional investors to buy or hold fixed income securities, may result in decreased liquidity and increased volatility in the fixed income markets.
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Sector Risk: From time to time, based on market or economic conditions, the Portfolio may have significant positions in one or more sectors of the market. To the extent the Portfolio invests more heavily in one sector, industry, or sub-sector of the market, its performance will be especially sensitive to developments that significantly affect that sector, industry, or sub-sector. An individual sector, industry, or sub-sector of the market may be more volatile, and may perform differently, than the broader market. The industries that constitute a sector may all react in the same way to economic, political or regulatory events. The Portfolio’s performance could also be affected if the sector, industry, or sub-sector does not perform as expected. Alternatively, the lack of exposure to one or more sectors or industries may adversely affect performance.
U.S. Government Securities Risk: Although the Portfolio may hold securities that carry U.S. government guarantees, these guarantees do not extend to shares of the Portfolio itself and do not guarantee the market prices of the securities. Securities issued by the U.S. Treasury or other agencies and instrumentalities of the U.S. government may decline in value as a result of, among other things, changes in interest rates, political events in the United States, international developments, including strained relations with foreign countries, and changes in the credit rating of, or investor perceptions regarding the creditworthiness of, the U.S. government. Furthermore, not all securities issued by the U.S. government and its agencies and instrumentalities are backed by the full faith and credit of the U.S. Treasury. Some are backed by the issuer’s right to borrow from the U.S. Treasury, while others are backed only by the credit of the issuing agency or instrumentality. Securities not backed by the full faith and credit of the U.S. Treasury involve greater credit risk than investments in other types of U.S. government securities. The maximum potential liability of the issuers of some U.S. government securities may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future. Increases or decreases in the demand for U.S. government securities may occur at any time and may result in increased volatility in the values of those securities.
Variable and Floating Rate Securities Risk: The market prices of securities with variable and floating interest rates are generally less sensitive to interest rate changes than are the market prices of securities with fixed interest rates. Variable and floating rate securities may decline in value if market interest rates or interest rates paid by such securities do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Certain types of floating rate securities, such as interests in bank loans, may be subject to greater liquidity risk than other debt securities.
Certain variable and floating rate securities have an interest rate floor feature, which prevents the interest rate payable by the security from dropping below a specified level as compared to a reference interest rate (the “reference rate”). Such a floor protects the Portfolio from losses resulting from a decrease in the reference rate below the specified level. However, if the reference rate is below the floor, there will be a lag between a rise in the reference rate and a rise in the interest rate payable by the security, and the Portfolio may not benefit from increasing interest rates for a significant period of time. Rates on certain variable rate securities typically reset only periodically. As a result, changes in prevailing interest rates, particularly sudden and significant changes, can cause some fluctuations in the Portfolio’s value to the extent that it invests in variable rate securities.
When-Issued and Delayed Delivery Securities and Forward Commitments Risk: When-issued and delayed delivery securities and forward commitments involve the risk that the security the Portfolio commits to purchase will decline in value prior to its delivery. This risk is in addition to the risk that the Portfolio’s other assets will decline in value. Therefore, these transactions can have a leverage-like effect on the Portfolio and increase the Portfolio’s overall investment exposure. There also is the risk that the security will not be issued or that the other party to the transaction will fail to complete the sale or purchase of the security. If this occurs, the Portfolio may lose the opportunity to purchase or sell the security at the agreed upon price and may forgo any gain in the security’s price. These transactions also may cause the Portfolio to liquidate positions when it may not be advantageous to do so, in order to satisfy its purchase obligations.
Zero Coupon and Pay-in-Kind Securities Risk: Zero coupon and pay-in-kind securities are debt securities that do not make periodic cash interest payments. Zero coupon securities are issued at a significant discount from their face value. Zero coupon and pay-in-kind securities tend to be subject to greater fluctuations in market value
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in response to changing interest rates than securities of comparable maturities that pay interest periodically and in cash. Pay-in-kind securities generally carry higher interest rates compared to debt securities that make cash payments of interest to reflect the increased risks associated with the deferral of interest payments. Pay-in-kind securities also generally involve greater credit risk than coupon bonds because the Portfolio receives no cash payments until the maturity date or a specified cash payment date. Even if accounting conditions are met for accruing income payable at a future date under a pay-in-kind security, the issuer could still default when the collection date occurs at the maturity of or payment date for the security. If the issuer of a pay-in-kind security defaults, the Portfolio may lose its entire investment. Pay-in-kind securities also may be difficult to value accurately because they involve ongoing judgments about the collectability of the deferred payments and the value of any associated collateral.
In addition, current federal income tax law requires the holder of a zero coupon security or certain pay-in-kind securities to accrue income with respect to these securities on a current basis, even though it does not receive that income currently in cash. To maintain its qualification as a regulated investment company under the Internal Revenue Code and avoid federal tax liability at the entity (Portfolio) level, the Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements.
General Investment Risks
The Portfolio is subject to the following general risks. The risks, which are described in alphabetical order and not in order of perceived importance or potential exposure, can negatively affect the Portfolio’s performance.
Asset Class Risk: The Portfolio is subject to the risk that the returns from the asset classes, or types of securities, in which it invests will underperform the general securities markets or different asset classes. Different asset classes tend to go through cycles of outperformance and underperformance in comparison to each other and to the general securities markets.
Cybersecurity and Operational Risk: The Portfolio and its service providers, and shareholders’ ability to transact with the Portfolio, may be negatively impacted due to operational risks arising from, among other problems, human errors, systems and technology disruptions or failures, or cybersecurity incidents. Cybersecurity incidents may allow an unauthorized party to gain access to Portfolio assets, customer data, or proprietary information, or cause the Portfolio or its service providers, as well as securities trading venues and their service providers, to suffer data corruption or lose operational functionality. Cybersecurity incidents can result from deliberate attacks (e.g., malicious software coding, ransomware, or “hacking”) or unintentional events (e.g., inadvertent release of confidential information, including by the Portfolio or its service providers). Recently, geopolitical tensions may have increased the scale and sophistication of deliberate attacks, particularly those from nation-states or from entities with nation-state backing. A cybersecurity incident could, among other things, result in the loss or theft of customer data or funds, customers or employees being unable to access electronic systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network system, or remediation costs associated with system repairs. Any of these results could have a substantial adverse impact on the Portfolio and its shareholders.
The occurrence of any of these problems could result in a loss of information, the inability to process Portfolio transactions or calculate the Portfolio’s net asset value, violations of applicable privacy and other laws, regulatory scrutiny, penalties, fines, reputational damage, additional compliance costs or other consequences, any of which could have a material adverse effect on the Portfolio or its shareholders. The Adviser, through its monitoring and oversight of Portfolio service providers, seeks to determine that service providers take appropriate precautions to avoid and mitigate risks that could lead to such problems. However, it is not possible for the Adviser or Portfolio service providers to identify all of the cybersecurity or other operational risks that may affect the Portfolio or to develop processes and controls to completely eliminate or mitigate their occurrence or effects. Technology is continuously changing, and new ways to carry out cyber attacks are always developing.
Among other situations, disruptions (for example, pandemics or health crises) or other developments that cause prolonged periods of remote work or significant employee absences at the Portfolio’s service providers
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could impact the ability to conduct the Portfolio’s operations. Most issuers in which the Portfolio invests are heavily dependent on computers for data storage and operations and require ready access to the internet to conduct their businesses. Thus, cybersecurity incidents could also affect issuers of securities in which the Portfolio invests, leading to significant loss of value. The Portfolio may incur substantial costs to prevent or address cybersecurity incidents in the future.
Insurance Fund Risk: The Portfolio is available through Contracts offered by insurance company affiliates of the Adviser, and the Portfolio may be used to fund all or a portion of certain benefits and guarantees available under the Contracts. To the extent the assets in the Portfolio are insufficient to fund those benefits and guarantees, the Adviser’s insurance company affiliates might otherwise be obligated to fulfill them out of their own resources. The Adviser is subject to conflicts of interest in connection with providing advice to, or developing strategies and modeling tools used to manage, the Portfolio. The performance of the Portfolio may impact the obligations and financial exposure of the Adviser’s insurance company affiliates under any death benefit, income benefit and other guarantees provided through Contracts that offer the Portfolio as an investment option, and the ability of an insurance company affiliate to manage (e.g., through the use of various hedging techniques) the risks associated with these benefits and guarantees. The Adviser’s investment decisions and the design of the Portfolio may be influenced by these factors. For example, the Portfolio or modeling tools and strategies may be managed or designed in a manner (e.g., using more conservative or less volatile investment styles, including volatility management strategies) that could reduce potential losses and/or mitigate financial risks to insurance company affiliates that provide the benefits and guarantees and offer the Portfolio as investment options in their products, and also could facilitate such an insurance company’s ability to provide benefits and guarantees under its Contracts, including by making more predictable the costs of the benefits and guarantees and by reducing the regulatory capital needed to provide them. The financial benefits to the Adviser’s insurance company affiliates may be material. The performance of the Portfolio also may adversely impact the value of Contracts that offer the Portfolio as an investment option and could suppress the value of the benefits and guarantees offered under a Contract. Please refer to your Contract prospectus for more information about any benefits and guarantees offered under the Contract. Consistent with its fiduciary duties, the Adviser seeks to implement the Portfolio’s investment program in a manner that is in the best interests of the Portfolio and that is consistent with the Portfolio’s investment objective, policies and strategies described in detail in this Proxy Statement/Prospectus.
Issuer-Specific Risk: The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the market as a whole. The value of a security may decline for a number of reasons which directly relate to the issuer, such as poor management performance; reduced demand for the issuer’s goods or services; investigations or other controversies related to the issuer; strategic initiatives such as mergers, acquisitions or dispositions and the market response to any such initiatives; and the historical and prospective earnings of the issuer and the value of its assets. Certain unanticipated events, such as litigation or natural disasters, can have a dramatic adverse effect on the value of an issuer’s securities. A change in the financial condition of a single issuer may affect securities markets as a whole.
Large Transaction Risk: A significant percentage of the Portfolio’s shares may be owned or controlled by the Adviser and its affiliates, other portfolios advised by the Adviser (including funds of funds), or other large shareholders, including primarily insurance company separate accounts. Accordingly, the Portfolio is subject to the potential for large-scale inflows and outflows as a result of purchases and redemptions of its shares by such shareholders, including in connection with substitution and other transactions by affiliates of the Adviser. These inflows and outflows may be frequent and could negatively affect the Portfolio’s net asset value and performance, and could cause the Portfolio to purchase or sell securities at a time when it would not normally do so. It would be particularly disadvantageous for the Portfolio if it experiences outflows and needs to sell securities at a time of volatility in the markets, when values could be falling. These inflows and outflows also could negatively affect the Portfolio’s ability to meet shareholder redemption requests or could limit the Portfolio’s ability to pay redemption proceeds within the time period stated in its prospectus because of unusual market conditions, an unusually high volume of redemption requests, or other reasons. During periods of declining or illiquid markets, the Adviser or its affiliates also may be subject to conflicts of interest in selecting shares of the Portfolio for redemption and in deciding whether and when to redeem such shares. In addition, these inflows and outflows could
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increase the Portfolio’s brokerage or other transaction costs, and large-scale outflows could cause the Portfolio’s actual expenses to increase, or could result in the Portfolio’s current expenses being allocated over a smaller asset base, which, depending on any applicable expense caps, could lead to an increase in the Portfolio’s expense ratio.
Recent Market Conditions Risk: U.S. and international markets have experienced significant volatility in recent months and years. As a result of such volatility, investment returns may fluctuate significantly. Global economies and financial markets are highly interconnected, which increases the possibility that conditions in one country or region might adversely impact issuers in a different country or region.
Interest rates were unusually low in recent years in the United States and abroad, but the interest rate environment changed dramatically in 2022 as interest rates moved significantly higher. Aggressive stimulus measures in 2020 and 2021, rising demand for goods and services, tight labor markets, and supply chain disruptions contributed to a surge of inflation in many sectors of the U.S. and global economies. Due to concerns regarding high inflation, the U.S. Federal Reserve (“Fed”) and many foreign governments and monetary authorities have raised interest rates and implemented other policy initiatives in an effort to control inflation, and they may continue to do so. It is difficult to predict accurately the pace at which central banks or monetary authorities may increase interest rates or the timing, frequency, or magnitude of any such further increases, and the evaluation of macro-economic and other conditions or events could cause a change in approach in the future. Rising interest rates may present a greater risk than has historically been the case due to the effect of government fiscal and monetary policy initiatives and potential market reaction to those initiatives. As such, fixed-income and related markets may continue to experience heightened levels of interest rate volatility. Inflation risk is the uncertainty over the future real value (after inflation) of an investment. The Portfolio’s investments may not keep pace with inflation, and the value of an investment in the Portfolio may be eroded over time by inflation. Changes in government or central bank policies could negatively affect the value and liquidity of the Portfolio’s investments and cause it to lose money, and there can be no assurance that the initiatives undertaken by governments and central banks will be successful.
The Fed’s or foreign central banks’ actions may result in an economic slowdown in the United States and abroad. There are concerns that monetary policy may provide less support should economic growth slow. An economic slowdown may negatively affect national and global economies, as well as national and global securities and commodities markets, and may continue for an extended period of time and have unforeseen impacts. Any deterioration in economic fundamentals may increase the risk of default or insolvency of particular issuers, negatively impact market values, cause credit spreads to widen, and reduce bank balance sheets. Any of these could cause an increase in market volatility, reduce liquidity across various markets, or decrease confidence in the markets. Also, regulators have expressed concern that rate increases may cause investors to sell fixed income securities faster than the market can absorb them, contributing to price volatility.
In March 2023, the shutdown of certain financial institutions raised economic concerns over disruption in the U.S. banking system. There can be no certainty that the actions taken by the U.S. government to strengthen public confidence in the U.S. banking system will be effective in mitigating the effects of financial institution failures on the economy and restoring public confidence in the U.S. banking system.
High public debt in the United States and other countries creates ongoing systemic and market risks and policymaking uncertainty, and there has been a significant increase in the amount of debt due to the economic effects of the COVID-19 pandemic and ensuing economic relief and public health measures. Economic, political and other developments may result in a further increase in the amount of public debt, including in the United States. The long-term consequences of high public debt are not known, but high levels of public debt may negatively affect economic conditions and the value of markets, sectors and companies in which the Portfolio invests.
Political and diplomatic events within the United States, including a contentious domestic political environment, changes in political party control of one or more branches of the U.S. government, the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, the threat of a U.S. government shutdown, and disagreements over, or threats not to increase, the U.S. government’s borrowing limit (or “debt ceiling”), as well as political and diplomatic events abroad, may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a
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significant degree. A downgrade of the ratings of U.S. government debt obligations, or concerns about the U.S. government’s credit quality in general, could have a substantial negative effect on the U.S. and global economies. Moreover, although the U.S. government has honored its credit obligations, there remains a possibility that the United States could default on its obligations. The consequences of such an unprecedented event are impossible to predict, but it is likely that a default by the United States would be highly disruptive to the U.S. and global securities markets and could significantly impair the value of the Portfolio’s investments.
Russia’s military invasion of Ukraine in February 2022, the resulting responses by the United States and other countries, and the potential for wider conflict have had, and could continue to have, severe adverse effects on regional and global economies and could further increase volatility and uncertainty in the financial markets. The United States and other countries have imposed broad-ranging economic sanctions on Russia and certain Russian individuals, banking entities and corporations as a response to its invasion of Ukraine. The United States and other countries have also imposed economic sanctions on Belarus and may impose sanctions on other countries that provide military or economic support to Russia. These sanctions, as well as any other economic consequences related to the invasion, such as additional sanctions, boycotts or changes in consumer or purchaser preferences or cyberattacks on governments, companies or individuals, may further decrease the value and liquidity of certain Russian securities and securities of issuers in other countries that are subject to economic sanctions related to the invasion. To the extent that the Portfolio has exposure to Russian investments or investments in countries affected by the invasion, the Portfolio’s ability to price, buy, sell, receive or deliver such investments may be impaired. In addition, any exposure that the Portfolio may have to counterparties in Russia or in countries affected by the invasion could negatively impact the Portfolio’s investments. The extent and duration of military actions and the repercussions of such actions (including any retaliatory actions or countermeasures that may be taken by those subject to sanctions) are impossible to predict. These events have resulted in, and could continue to result in, significant market disruptions, including in certain industries or sectors such as the oil and natural gas markets, and may further strain global supply chains and negatively affect inflation and global growth. These and any related events could significantly impact the Portfolio’s performance and the value of an investment in the Portfolio beyond any direct exposure the Portfolio may have to Russian issuers or issuers in other countries affected by the invasion.
Certain illnesses spread rapidly and have the potential to significantly and adversely affect the global economy and have material adverse impacts on the Portfolio. The impact of the COVID-19 pandemic caused significant volatility and severe losses in global financial markets. The COVID-19 pandemic and efforts to contain its spread resulted, and may continue to result, in significant disruptions to business operations, supply chains and customer activity, higher default rates, widespread business closures and layoffs, travel restrictions and border closings, extended quarantines and stay-at-home orders, event and service cancellations, labor shortages, and significant challenges in healthcare service preparation and delivery, as well as general concern, uncertainty and social unrest. Other outbreaks of infectious diseases or other public health issues that may arise in the future may have similar or worse effects. The impact of any outbreak may last for an extended period of time.
Public health crises caused by outbreaks of infectious diseases or other public health issues, such as the COVID-19 pandemic, may exacerbate other pre-existing economic, political, and social tensions and risks, disrupt market conditions and operations and economies around the world, and negatively affect market performance and the value of investments in individual companies in significant and unforeseen ways. The impact of infectious diseases may be greater in countries that do not move effectively to control them or that have limited access to or popular uptake of vaccines, which may occur because of a lack of health care or economic resources or for political or other reasons.
Additionally, public health crises caused by outbreaks of infectious diseases or other public health issues, such as the COVID-19 pandemic, could impair the information technology and other operational systems upon which the Adviser relies, and could otherwise disrupt the ability of the Portfolio’s service providers to perform essential tasks. Such impacts could impair the Portfolio’s ability to maintain operational standards (including with respect to satisfying redemption requests), disrupt the operations of the Portfolio’s service providers, and negatively impact the Portfolio’s performance.
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Slowing global economic growth, the rise in protectionist trade policies, and changes to some major international trade agreements could affect the economies of many countries in ways that cannot necessarily be foreseen at the present time. For example, the full impact of the United Kingdom’s (“UK”) withdrawal from the European Union (the “EU”), commonly referred to as “Brexit,” and the nature of the future relationship between the UK and the EU remain unclear. The effects of Brexit on the UK and EU economies and the broader global economy could be significant, resulting in negative impacts, such as business and trade disruptions, increased volatility and illiquidity, and potentially lower economic growth of markets in the UK, the EU and globally, which could negatively impact the value of the Portfolio’s investments. The United States has developed increasingly strained relations with a number of foreign countries. If relations with certain countries deteriorate, it could adversely affect U.S. issuers as well as non-U.S. issuers that rely on the United States for trade. For example, the United States has imposed tariffs and other trade barriers on Chinese exports, has restricted sales of certain categories of goods to China, and has established barriers to investments in China. In addition, the Chinese government is involved in a longstanding dispute with Taiwan that has included threats of invasion. If relations between the United States and China do not improve or continue to deteriorate, or if China were to attempt unification of Taiwan by coercion or force, economies, markets and individual securities may be severely affected both regionally and globally, and the value of the Portfolio’s investments may go down.
In addition, global climate change may have an adverse effect on property and security values. A rise in sea levels, an increase in powerful storms and/or an increase in flooding could cause coastal properties to lose value or become unmarketable altogether. Economists warn that, unlike previous declines in the real estate market, properties in affected coastal zones may never recover their value. Large wildfires have devastated, and in the future may devastate, entire communities and may be very costly to any business found to be responsible for the fire or conducting operations in affected areas. Regulatory changes and divestment movements in the United States and abroad tied to concerns about climate change could adversely affect the value of certain land and the viability of industries whose activities or products are seen as accelerating climate change. Losses related to climate change could adversely affect corporate borrowers and mortgage lenders, the value of mortgage-backed securities, the bonds of municipalities that depend on tax revenues and tourist dollars generated by such properties, and insurers of the property and/or of corporate, municipal or mortgage-backed securities. Because property and security values are driven largely by buyers’ perceptions, it is difficult to know the time period over which these effects might unfold.
All of these risks may have a material adverse effect on the performance and financial condition of the companies and other issuers in which the Portfolio invests, and on the overall performance of the Portfolio.
Regulatory Risk: The Portfolio is subject to extensive laws and regulations that govern its operations. The Portfolio is subject to regulation by the Securities and Exchange Commission (“SEC”) and is also subject to regulations imposed by other governmental regulatory authorities and self-regulatory organizations. Similarly, the businesses and other issuers of the securities and other instruments in which the Portfolio invests are also subject to considerable regulation. These laws and regulations are subject to change. Extensive regulation or a change in existing laws or regulations may have unpredictable and unintended effects and may materially impact the Portfolio, a security, business, sector or market. For example, extensive regulation or a change in existing laws or regulations made by the government or a regulatory body may limit or preclude the Portfolio’s ability to achieve its investment objective, impact the Portfolio’s investment policies or strategies, adversely affect the Portfolio’s efficiency in implementing its investment strategies, and/or reduce the attractiveness or increase the cost of an investment, which may, in turn, adversely affect the Portfolio’s performance. The Portfolio also may incur additional costs to comply with any new requirements as well as to monitor for compliance with any new requirements going forward. The Portfolio also may be adversely affected by changes in the interpretation or enforcement of existing laws or regulations.
Risk Management: The Adviser and Sub-Advisers undertake certain analyses with the intention of identifying particular types of risks and reducing the Portfolio’s exposure to them. However, risk is an essential part of investing, and the degree of return an investor might expect is often tied to the degree of risk the investor is willing to accept. By its very nature, risk involves exposure to the possibility of adverse events. Accordingly, no risk management program can eliminate the Portfolio’s exposure to such events; at best, it can only reduce the
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possibility that the Portfolio will be affected by adverse events, and especially those risks that are not intrinsic to the Portfolio’s investment program. While the prospectus describes material risk factors associated with the Portfolio’s investment program, there is no assurance that as a particular situation unfolds in the markets, the Adviser or Sub-Advisers will identify all of the risks that might affect the Portfolio, rate their probability or potential magnitude correctly, or be able to take appropriate measures to reduce the Portfolio’s exposure to them. Measures taken with the intention of decreasing exposure to identified risks might have the unintended effect of increasing exposure to other risks.
Sub-Adviser Selection Risk: The Portfolio is subject to the risk that the Adviser’s process for selecting or replacing a Sub-Adviser and its decision to select or replace a Sub-Adviser does not produce the intended results.
In addition, the Adviser is subject to certain conflicts of interest in connection with recommending the appointment and continued service of Sub-Advisers. The Adviser will benefit not only from the net advisory fee the Adviser retains, but also from the sub-advisory fees paid by the Adviser to an affiliated Sub-Adviser, if any. Since the Adviser pays fees to the Sub-Advisers from the advisory fees that it earns from the Portfolio, any increase or decrease in the sub-advisory fees negotiated with proposed or current Sub-Advisers will result in a corresponding decrease or increase, respectively, in the amount of the advisory fee retained by the Adviser. The Adviser or its affiliates also have distribution relationships with certain Sub-Advisers or their affiliates under which the Sub-Advisers or their affiliates distribute or support the distribution of investment products issued or sold by the Adviser or its affiliates (including those in which the Portfolio serves as an investment option), which could financially benefit the Adviser and its affiliates or provide an incentive to the Adviser in selecting one Sub-Adviser over another. In addition, the Adviser’s and/or its affiliates’ other existing or potential business relationships, including with Sub-Advisers and/or their affiliates, or other financial or personal relationships, could influence the Adviser’s selection and retention or termination of Sub-Advisers. When recommending the appointment or continued service of a Sub-Adviser, consistent with its fiduciary duties, the Adviser relies primarily on the qualitative and quantitative factors described in detail in the Proxy Statement/Prospectus.
Valuation Risk: The price at which the Portfolio sells any particular investment may differ from the Portfolio’s valuation of the investment. Such differences could be significant, particularly for illiquid securities and securities that trade in relatively thin markets and/or markets that experience extreme volatility. If market or other conditions make it difficult to value some investments, SEC rules and applicable accounting protocols may require the Portfolio to value these investments using more subjective methods, such as fair value methodologies. Using fair value methodologies to price investments may result in a value that is different from an investment’s most recent closing price and from the prices used by other mutual funds to calculate their net asset values. An investment’s valuation may differ depending on the method used for determining value. Investors who purchase or redeem Portfolio shares on days when the Portfolio is holding fair-valued securities may receive fewer or more shares, or lower or higher redemption proceeds, than they would have received if the Portfolio had not held fair-valued securities or had used a different valuation methodology. The value of foreign securities, certain futures and fixed income securities, and currencies may be materially affected by events after the close of the markets on which they are traded but before the Portfolio determines its net asset value. The Portfolio may use pricing services to provide values for certain securities, and there is no assurance that the Portfolio will be able to sell an investment at the price provided by such pricing services. Different pricing services use different valuation methodologies, potentially resulting in different values for the same investments. As a result, if the Portfolio were to change pricing services, or if a pricing service were to change its valuation methodology, the value of the Portfolio’s investments could be impacted. The Portfolio’s ability to value its investments in an accurate and timely manner may be impacted by technological issues and/or errors by third party service providers, such as pricing services or accounting agents.
Additional Information about Risks
Additional information that may be associated with the Portfolio’s principal risks but that may not be principal to the Portfolio’s investment strategies follows. The risks, which are described in alphabetical order and not in order of perceived importance or potential exposure, can negatively affect the Portfolio’s performance.
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Banking Industry Sector Risk: To the extent the Portfolio invests in the banking industry, it is exposed to the risks generally associated with such industry, including interest rate risk, credit risk and the risk that regulatory or other developments relating to the banking industry may affect its investment. The value of the Portfolio’s shares could experience significantly greater volatility than the value of shares of portfolios investing more broadly.
In March 2023, the shutdown of certain financial institutions raised economic concerns over disruption in the U.S. banking system. There can be no certainty that the actions taken by the U.S. government to strengthen public confidence in the U.S. banking system will be effective in mitigating the effects of financial institution failures on the economy and restoring public confidence in the U.S. banking system.
Counterparty Risk: The Portfolio may sustain a loss as a result of the insolvency or bankruptcy of, or other non-compliance or non-performance by, another party to a transaction.
Exchange-Traded Funds (“ETFs”) Risk: The Portfolio’s shareholders will indirectly bear fees and expenses paid by the ETFs in which it invests, in addition to the Portfolio’s direct fees and expenses. The cost of investing in the Portfolio, therefore, may be higher than the cost of investing in a mutual fund that invests directly in individual stocks and bonds. In addition, the Portfolio’s net asset value will be subject to fluctuations in the market values of the ETFs in which it invests. The Portfolio is also subject to the risks associated with the securities or other investments in which the ETFs invest, and the ability of the Portfolio to meet its investment objective will directly depend on the ability of the ETFs to meet their investment objectives. The extent to which the investment performance and risks associated with the Portfolio correlate to those of a particular ETF will depend upon the extent to which the Portfolio’s assets are allocated from time to time for investment in the ETF, which will vary. The Portfolio does not control the investments of the ETFs, which may have different investment objectives and may engage in investment strategies that the Portfolio would not engage in directly. The ETFs may change their investment objectives or policies without the approval of the Portfolio. If that were to occur, the Portfolio might be forced to sell its investment in an ETF at a time and price that is unfavorable to the Portfolio.
In addition, many ETFs invest in securities included in, or representative of, underlying indexes regardless of investment merit or market trends and, therefore, these ETFs do not change their investment strategies to respond to changes in the economy, which means that such an ETF may be particularly susceptible to a general decline in the market segment relating to the relevant index. Imperfect correlation between an ETF’s securities and those in the index it seeks to track, rounding of prices, changes to the indices and regulatory policies may cause an ETF’s performance not to match the performance of its index. An ETF’s use of a representative sampling approach will result in its holding a smaller number of securities than are in the index it seeks to track. As a result, an adverse development respecting an issuer of securities held by the ETF could result in a greater decline in net asset value than would be the case if the ETF held all of the securities in the index. To the extent the assets in the ETF are smaller, these risks will be greater. No ETF fully replicates its index, and an ETF may hold securities not included in its index. Therefore, there is a risk that the investment strategy of the ETF manager may not produce the intended results.
Moreover, there is the risk that an ETF may value certain securities at a price higher than the price at which it can sell them. Secondary market trading in shares of ETFs may be halted by a national securities exchange because of market conditions or for other reasons. In addition, trading in these shares is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules. There can be no assurance that the requirements necessary to maintain the listing of the shares will continue to be met or will remain unchanged. In addition, although ETFs are listed for trading on national securities exchanges, certain foreign exchanges and in over-the-counter markets, there can be no assurance that an active trading market for such shares will develop or be maintained, in which case the liquidity and value of the Portfolio’s investment in the ETFs could be substantially and adversely affected. In addition, because ETFs are traded on these exchanges and in these markets, the purchase and sale of their shares involve transaction fees and commissions. The market price of an ETF may be different from the net asset value of such ETF (i.e., an ETF may trade at a discount or premium to its net asset value). The performance of a portfolio that invests in such an ETF could be adversely impacted.
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Inverse Floaters Risk: Inverse floaters are securities with a floating or variable rate of interest (i.e., the rate of interest varies with changes in specified market rates or indices, such as the prime rate, or at specified intervals). Inverse floaters have interest rates that tend to move in the opposite direction as the specified market rates or indices and may exhibit substantially greater price volatility than fixed rate obligations having similar credit quality, redemption provisions and maturity. Any increase in the reference rate of an inverse floater (as a consequence of an increase in interest rates) causes a drop in the coupon rate, while any drop in the reference rate of an inverse floater causes an increase in the coupon rate. Inverse floaters generally will underperform the market for fixed rate securities in a rising interest rate environment. Inverse floaters typically involve leverage, which can magnify the Portfolio’s losses; accordingly, the holder of an inverse floater could lose more than its principal investment.
LIBOR Risk: Many debt securities, derivatives and other financial instruments, including some of the Portfolio’s investments, utilize the London Interbank Offered Rate (or “LIBOR”) as the reference or benchmark rate for variable interest rate calculations. LIBOR is produced daily by averaging the rates reported by a number of banks. LIBOR may be a factor in determining the Portfolio’s payment obligations under a derivative investment, the cost of financing to the Portfolio, or an investment’s value or return to the Portfolio, and may be used in other ways that affect the Portfolio’s investment performance. Most maturities and currencies of LIBOR were phased out at the end of 2021, with the remaining ones to be phased out on June 30, 2023.
The Secured Overnight Financing Rate (“SOFR”) has been selected by a committee established by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to replace LIBOR as a reference or benchmark rate in the United States. Other countries have undertaken similar initiatives to identify replacement reference or benchmark rates in their respective markets. However, there are obstacles to converting certain existing investments and transactions to a new reference or benchmark rate, as well as risks associated with using a new reference or benchmark rate with respect to new investments and transactions. The transition process, or a failure to transition properly, might lead to increased volatility and illiquidity in markets that currently rely on the LIBOR to determine interest rates, a reduction in the values of some LIBOR-based investments, and reduced effectiveness of certain hedging strategies, which may adversely affect the Portfolio’s performance or net asset value. While some LIBOR-based instruments may contemplate a scenario where LIBOR becomes unreliable or is no longer available by providing for an alternative rate-setting methodology, not all may have such provisions and there may be significant uncertainty regarding the effectiveness of any such alternative methodologies. Since the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects could occur prior to LIBOR ceasing to be published. In addition, the SOFR or other alternative reference or benchmark rate may be an ineffective substitute with respect to an existing or new investment or transaction, resulting in prolonged adverse market conditions for the Portfolio, which could negatively affect the Portfolio’s performance and/or net asset value.
SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities and has been published by the Federal Reserve Bank of New York since April 2018. The Federal Reserve Bank of New York also has been publishing historical indicative Secured Overnight Financing Rates from 2014. Historical changes or trends in SOFR may not be reliable as indicators of future changes in SOFR. The composition and characteristics of SOFR are not the same as those of LIBOR, and SOFR is fundamentally different from LIBOR because (1) SOFR is a secured rate, while LIBOR is an unsecured rate, and (2) SOFR is an overnight rate, while LIBOR is a forward-looking rate that represents interbank funding over different maturities. As a result, there can be no assurance that SOFR will perform in the same way as LIBOR would have at any time, including, without limitation, as a result of changes in interest and yield rates in the market, market volatility, or global or regional economic, financial, political, regulatory, judicial or other events. In addition, there can be no assurance that “Term SOFR,” which would be available for different maturities, develops and can be implemented under current documentation as a successor to LIBOR or currently-available SOFR methodologies.
Additionally, daily changes in SOFR have, on occasion, been more volatile than daily changes in other benchmark or market rates, such as LIBOR. The return on and value of an investment in notes or other investments linked to SOFR may fluctuate more than the value of investments that are linked to less volatile rates. In addition, the volatility of SOFR has reflected the underlying volatility of the overnight U.S. Treasury repo market. The
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Federal Reserve Bank of New York has at times conducted operations in the overnight U.S. Treasury repo market in order to help maintain the federal funds rate within a target range. There can be no assurance that the Federal Reserve Bank of New York will continue to conduct such operations in the future, and the duration and extent of any such operations is inherently uncertain. The effect of any such operations, or of the cessation of such operations to the extent they are commenced, is uncertain and could result in losses to the Portfolio.
SOFR is published by the Federal Reserve Bank of New York based on data that it receives from various sources. There can be no guarantee, particularly given its relatively recent introduction, that SOFR will not be discontinued or fundamentally altered in a manner that is materially adverse to the interests of investors in the Portfolio. If the manner in which SOFR is calculated is changed, that change may result in a reduction in the amount of interest payable on the Portfolio’s investments and the trading prices of those investments. In addition, the Federal Reserve Bank of New York may withdraw, modify or amend published SOFR data in its sole discretion and without notice. The interest rate for any interest period typically will not be adjusted for any modifications or amendments to SOFR data that may be published after the interest rate for that interest period has been determined.
Since SOFR is a relatively new reference rate, the Portfolio’s investments in debt securities and other instruments linked to SOFR may not have an established trading market, and an established trading market may never develop or may not be very liquid. Market terms for instruments linked to SOFR, such as the spread over the base rate reflected in interest rate provisions or the manner of compounding the base rate, may evolve over time, and trading prices for such instruments may be lower than those of later-issued SOFR-based debt instruments as a result. Similarly, if SOFR does not prove to be widely used, the trading price of investments linked to SOFR may be lower than those of investments linked to reference rates that are more widely used. The Portfolio may not be able to sell the investments at all or may not be able to sell them at prices that will provide a yield comparable to similar investments that have a developed secondary market, and may consequently suffer from increased pricing volatility and market risk.
Municipal Securities Risk: Municipal securities risks include the inability of the issuer to repay the obligation, the relative lack of information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the market for and value of municipal securities.
Repurchase Agreements Risk: Repurchase agreements carry certain risks, including risks that are not associated with direct investments in securities. If a seller under a repurchase agreement were to default on the agreement and be unable to repurchase the security subject to the repurchase agreement, the Portfolio would look to the collateral underlying the seller’s repurchase agreement, including the securities or other obligations subject to the repurchase agreement, for satisfaction of the seller’s obligation to the Portfolio. The Portfolio’s right to liquidate the securities or other obligations subject to the repurchase agreement in the event of a default by the seller could involve certain costs and delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase are less than the repurchase price (e.g., due to transactions costs or a decline in the value of the collateral), the Portfolio could suffer a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller, realization of the collateral may be delayed or limited and a loss may be incurred.
Risks of Investing in Other Investment Companies: A portfolio that invests in other investment companies will indirectly bear fees and expenses paid by those investment companies, in addition to the portfolio’s direct fees and expenses. The cost of investing in the Portfolio, therefore, may be higher than the cost of investing in a mutual fund that invests directly in individual stocks and bonds. In addition, the Portfolio’s net asset value is subject to fluctuations in the net asset values of the other investment companies in which it invests. The Portfolio is also subject to the risks associated with the securities or other investments in which the other investment companies invest, and the ability of the Portfolio to meet its investment objective will depend, to a significant degree, on the ability of the other investment companies to meet their respective investment objectives. The extent to which the investment performance and risks associated with the Portfolio correlate to those of a particular investment company will depend upon the extent to which the Portfolio’s assets are allocated from time to time for investment in the investment company, which will vary. The Portfolio does not control the investments of the other investment companies, which may have different investment objectives and may engage in investment strategies that the Portfolio would not engage in directly. The other investment companies may change their investment objectives or
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policies without the approval of the Portfolio. If that were to occur, the Portfolio might be forced to withdraw its investment from the investment company at a time and price that is unfavorable to the Portfolio.
Short Position Risk: The Portfolio may engage in short sales and may enter into derivative contracts that have a similar economic effect (e.g., taking a short position in a futures contract). The Portfolio will incur a loss as a result of a short position if the price of the asset sold short increases between the date of the short position sale and the date on which an offsetting position is purchased. Short positions may be considered speculative transactions and involve special risks that could cause or increase losses or reduce gains. Short sales involve greater reliance on an investment adviser’s ability to accurately anticipate the future value of a security or instrument, higher transaction costs, and imperfect correlation between the actual and desired level of exposure. Short sales, at least theoretically, present a risk of unlimited loss on an individual security basis, particularly in cases where the Portfolio is unable, for whatever reason, to close out its short position, because the Portfolio may be required to buy the security sold short at a time when the security has appreciated in value, and there is potentially no limit to the amount of such appreciation. Volatility in the market for equity securities, which has been dramatically increased recently for certain stocks, can meaningfully increase the risk of loss associated with short sales. In addition, by investing the proceeds received from selling securities short, the Portfolio could be deemed to be employing a form of leverage, which creates special risks. The Portfolio’s long positions could decline in value at the same time that the value of the short positions increase, thereby increasing the Portfolio’s overall potential for loss more than it would be without the use of leverage. Market or other factors may prevent the Portfolio from closing out a short position at the most desirable time or at a favorable price. In addition, a lender of securities may request, or market conditions may dictate, that securities sold short be returned to the lender on short notice. If this happens, the Portfolio may have to buy the securities sold short at an unfavorable price, which will potentially reduce or eliminate any gain or cause a loss to the Portfolio. When the Portfolio is selling a security short, it must maintain a segregated account of cash or high-grade securities equal to the margin requirement. As a result, the Portfolio may maintain high levels of cash or other liquid assets (such as U.S. Treasury bills, money market accounts, repurchase agreements, certificates of deposit, high quality commercial paper and long equity positions) or may utilize the collateral obtained from securities lending for this cash. The need to maintain cash or other liquid assets in segregated accounts could limit the Portfolio’s ability to pursue other opportunities as they arise.
Sovereign Debt Securities Risk: Sovereign debt securities are subject to the risk that a governmental entity may delay or refuse to pay interest or repay principal on its sovereign debt for a variety of reasons including, for example, cash flow problems, insufficient foreign currency reserves, political considerations, the size of the governmental entity’s debt position in relation to the economy, or the failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a governmental entity defaults, it may ask for more time in which to pay or for further loans. In addition, there are generally no bankruptcy proceedings similar to those in the United States by which defaulted sovereign debt obligations may be collected and there may be few or no effective legal remedies for collecting on such debt. Sovereign debt risk is increased for emerging market issuers. Certain emerging market or developing countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulties in servicing their sovereign debt on a timely basis, which has led to defaults and the restructuring of certain indebtedness.
Structured Securities Risk: Because structured securities of the type in which the Portfolio may invest typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. The Portfolio may invest in a class of structured securities that is either subordinated or unsubordinated to the right of payment of another class. Subordinated structured securities typically have higher yields and present greater risks than unsubordinated structured securities. Structured securities are typically sold in private placement transactions, and there currently is no active trading market for structured securities. Certain issuers of such structured securities may be deemed to be “investment companies” as defined in the 1940 Act. As a result, the Portfolio’s investment in such securities may be limited by certain investment restrictions contained in the 1940 Act.
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Tax Risk: The Portfolio is subject to the risk that the tax treatment of swap agreements and other derivative instruments, such as commodity-linked derivative instruments, including commodity index-linked notes and commodity options, futures, and options on futures, may be affected by future regulatory or legislative changes that could affect whether income from such investments is “qualifying income” under Subchapter M of the Internal Revenue Code, or otherwise affect the character, timing and/or amount of the Portfolio’s taxable income or gains and distributions.
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INFORMATION REGARDING THE UNDERLYING PORTFOLIOS
The following is additional information regarding certain of the Underlying Portfolios. If you would like more information about the Underlying Portfolios, their Prospectuses and Statements of Additional Information are available by contacting your financial professional or by accessing the documents online or contacting the Underlying Portfolios at:
EQ Advisors Trust
1290 Avenue of the Americas
New York, New York 10104
Telephone: 1-877-222-2144
www.equitable-funds.com
1290 Funds
1290 Avenue of the Americas
New York, New York 10104
Telephone: 1-888-310-0416
www.1290Funds.com
Equitable Investment Management Group, LLC (“EIM” or the “Adviser”) may add new Underlying Portfolios or replace existing Underlying Portfolios without notice or shareholder approval. The Adviser’s selection of Underlying Portfolios may have a positive or negative impact on its revenues and/or profits. The information below is derived from disclosures contained in each Underlying Portfolio’s Prospectus.
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
LARGE CAP EQUITIES | ||||||
EQ/Loomis Sayles Growth Portfolio | Seeks to achieve capital appreciation. | Under normal market conditions, the Portfolio will invest primarily in equity securities of large capitalization companies, but the Portfolio may invest in companies of any size. The Portfolio normally invests across a wide range of sectors and industries. The Portfolio may invest up to 25% of its total assets in foreign securities listed on a domestic or foreign securities exchange including American Depositary Receipts or European Depositary Receipts. | • Convertible Securities Risk • Equity Risk • Focused Portfolio Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Portfolio Management Risk • Sector Risk | |||
EQ/Value Equity Portfolio | Seeks to achieve capital appreciation. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities. The Portfolio invests primarily in equity securities that the Sub-Adviser believes are high quality businesses that are undervalued by the market relative to what the Sub-Adviser believes to be their fair value and have a minimum market capitalization of $2 billion. | • Equity Risk • ETFs Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Portfolio Management Risk • Real Estate Investing Risk • Sector Risk |
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Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
1290 VT Equity Income Portfolio | Seeks a combination of growth and income to achieve an above-average and consistent total return. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities. The Portfolio intends to invest primarily in dividend-paying common stocks of U.S. large- capitalization companies. The Portfolio invests primarily in common stocks, but it may also invest in other equity securities that the Sub-Adviser believes provide opportunities for capital growth and income. | • Dividend Risk • Equity Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Mid-Cap Company Risk • Portfolio Management Risk • Sector Risk | |||
EQ/Capital Group Research Portfolio | Seeks to achieve long-term growth of capital. | The Portfolio invests primarily in equity securities of United States issuers and securities whose principal markets are in the United States, including American Depositary Receipts and other United States registered foreign securities. The Portfolio invests primarily in common stocks of companies with a market capitalization greater than $1 billion at the time of purchase. | • Equity Risk • Foreign Securities Risk • Large-Cap Company Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Portfolio Management Risk • Sector Risk | |||
EQ/Invesco Comstock Portfolio | Seeks to achieve capital growth and income. | Under normal market conditions, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in common stocks. The Portfolio may invest in issuers of any capitalization range, however, a substantial number of issuers are large capitalization issuers. The Sub-Adviser emphasizes a value style of investing, seeking well-established, undervalued companies believed by the Sub- Adviser to possess the potential for capital growth and income. | • Derivatives Risk • Equity Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Portfolio Management Risk • Real Estate Investing Risk • Sector Risk | |||
EQ/JPMorgan Value Opportunities Portfolio | Seeks to achieve long-term capital appreciation. | Under normal circumstances, the Portfolio invests at least 80% of its net assets in equity securities of mid- and large-capitalization companies. For this Portfolio, issuers with market capitalization between $2 billion and $5 billion are considered mid-capitalization while those above $5 billion are considered large-capitalization. The Sub-Adviser employs a value-oriented investment approach that seeks to identify attractive companies through fundamental research and discounted cash flow analysis. | • Equity Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Mid-Cap Company Risk • Portfolio Management Risk • Portfolio Turnover Risk • Sector Risk |
D-2
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/T. Rowe Price Growth Stock Portfolio | Seeks to achieve long-term capital appreciation and secondarily, income. | The Portfolio normally invests at least 80% of its net assets, plus borrowings for investment purposes, in common stocks of a diversified group of growth companies. The Portfolio will invest primarily in equity securities of large-cap companies. For this Portfolio, large-cap companies are defined as those companies with market capitalizations larger than the median market cap of companies in the Russell 1000® Growth Index at the time of purchase. The Portfolio may invest up to 30% of its total assets in securities of foreign issuers, including those in emerging markets. | • Equity Risk • Foreign Securities Risk • Information Technology Sector Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Portfolio Management Risk • Sector Risk • Special Situations Risk | |||
EQ/ClearBridge Large Cap Growth ESG Portfolio | Seeks to achieve long-term capital growth. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, if any, in equity securities or other instruments with similar economic characteristics of U.S. companies with large market capitalizations. Large capitalization companies are those companies with market capitalizations similar to companies in the Russell 1000® Index (the “Index”). | • Equity Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Portfolio Management Risk • Sector Risk | |||
ATM Large Cap Managed Volatility Portfolio | The Portfolio seeks to achieve long-term growth of capital with an emphasis on risk- adjusted returns and managing volatility in the Portfolio. | Under normal circumstances, the Portfolio intends to invest at least 80% of its net assets, plus borrowings for investment purposes, in securities of large- capitalization companies (or other financial instruments that derive their value from the securities of such companies). The Portfolio is divided into two portions; one utilizes a passive investment index style focused on equity securities of large-capitalization companies and the other portion utilizes an actively managed futures and options strategy to tactically manage equity exposure in the Portfolio based on the level of volatility in the market. The Portfolio may also invest in ETFs. | • Cash Management Risk • Derivatives Risk • Equity Risk • ETFs Risk • Futures Contract Risk • Index Strategy Risk • Large-Cap Company Risk • Large Shareholder Risk • Leveraging Risk • Market Risk • Portfolio Management Risk • Sector Risk • Short Position Risk • Volatility Management Risk |
D-3
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/Large Cap Core Managed Volatility Portfolio | Seeks to achieve long-term growth of capital with an emphasis on risk- adjusted returns and managing volatility in the Portfolio. | Under normal circumstances, the Portfolio intends to invest at least 80% of its net assets, plus borrowings for investment purposes, in securities of large-cap companies (or other financial instruments that derive their value from the securities of such companies). The Portfolio’s assets normally are allocated among three or more investment managers, each of which manages its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed, one portion seeks to track the performance (before fees and expenses) of a particular index and one portion invests in exchange-traded funds. The Portfolio may invest up to 25% of its assets in derivatives, which will consist primarily of exchange-traded futures and options contracts on securities indices, but the Portfolio also may utilize other types of derivatives. | • Cash Management Risk • Derivatives Risk • Equity Risk • ETFs Risk • Futures Contract Risk • Index Strategy Risk • Large-Cap Company Risk • Leveraging Risk • Market Risk • Multiple Sub-Adviser Risk • Portfolio Management Risk • Sector Risk • Short Position Risk • Volatility Management Risk | |||
EQ/Large Cap Value Managed Volatility Portfolio | Seeks to achieve long-term growth of capital with an emphasis on risk- adjusted returns and managing volatility in the Portfolio. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in securities of large-cap companies (or other financial instruments that derive their value from the securities of such companies). The Portfolio’s assets normally are allocated among two or more investment managers, each of which manages its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed, one portion seeks to track the performance (before fees and expenses) of a particular index; and one portion invests in exchange-traded funds. The Portfolio may invest up to 25% of its assets in derivatives, which will consist primarily of exchange-traded futures and options contracts on securities indices, but the Portfolio also may utilize other types of derivatives. | • Cash Management Risk • Derivatives Risk • Equity Risk • ETFs Risk • Futures Contract Risk • Index Strategy Risk • Investment Style Risk • Large-Cap Company Risk • Leveraging Risk • Market Risk • Multiple Sub-Adviser Risk • Portfolio Management Risk • Real Estate Investing Risk • Sector Risk • Short Position Risk • Volatility Management Risk |
D-4
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/ClearBridge Select Equity Managed Volatility Portfolio | Seeks to achieve capital appreciation, which may occasionally be short- term, with an emphasis on risk- adjusted returns and managing volatility in the Portfolio. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities (or financial instruments that derive their value from such securities). The Portfolio’s assets normally are allocated between two investment managers, each of which will manage its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed (“Active Allocated Portion”) and one portion seeks to track the performance (before fees and expenses) of a particular index (“Index Allocated Portion”). Under normal circumstances, the Active Allocated Portion invests primarily in publicly traded equity and equity- related securities of U.S. and non-U.S. companies or other instruments with similar economic characteristics that the Sub-Adviser believes have strong growth prospects and/or attractive valuations. The Index Allocated Portion seeks to track the performance (before fees and expenses) of the S&P 500 Index. The Portfolio may invest up to 25% of its assets in derivatives, which will consist primarily of exchange-traded futures and options contracts on securities indices, but the Portfolio also may utilize other types of derivatives. | • Cash Management Risk • Credit Risk • Derivatives Risk • Equity Risk • Foreign Securities Risk • Futures Contract Risk • Index Strategy Risk • Interest Rate Risk • Large-Cap Company Risk • Leveraging Risk • Liquidity Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Non-Investment Grade Securities Risk • Portfolio Management Risk • Sector Risk • Short Position Risk • Volatility Management Risk | |||
EQ/Common Stock Index Portfolio | Seeks to achieve a total return before expenses that approximates the total return performance of the Russell 3000® Index (“Russell 3000”), including reinvestment of dividends, at a risk level consistent with that of the Russell 3000. | The Portfolio generally invests at least 80°i of its net assets, plus borrowings for investment purposes, in common stocks of companies represented in the Russell 3000. The Portfolio’s investments are selected by a stratified sampling construction process in which the Sub-Adviser selects a subset of the 3,000 companies in the Russell 3000 based on the Sub-Adviser’s analysis of key risk factors and other characteristics. | • Derivatives Risk • Equity Risk • Index Strategy Risk • Large-Cap Company Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Portfolio Management Risk • Sector Risk | |||
EQ/Equity 500 Index Portfolio | Seeks to achieve a total return before expenses that approximates the total return performance of the Standard & Poor’s 500® Composite Index (“S&P 500 Index”), including reinvestment of dividends, at a risk level consistent with that of the S&P 500 Index. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities in the S&P 500 Index. The Portfolio will seek to hold all 500 securities in the S&P 500 Index in the exact weight each security represents in that index. | • Derivatives Risk • Equity Risk • Index Strategy Risk • Large-Cap Company Risk • Market Risk • Portfolio Management Risk • Sector Risk |
D-5
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/Large Cap Growth Index Portfolio | Seeks to achieve a total return before expenses that approximates the total return performance of the Russell 1000® Growth Index (“Russell 1000 Growth”), including reinvestment of dividends, at a risk level consistent with the Russell 1000 Growth. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities in the Russell 1000 Growth. The Portfolio seeks to hold all securities in the Russell 1000 Growth in the exact weight each security represents in that index. | • Equity Risk • Index Strategy Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Non-Diversification Risk • Portfolio Management Risk • Sector Risk | |||
EQ/Large Cap Value Index Portfolio | Seeks to achieve a total return before expenses that approximates the total return performance of the Russell 1000® Value Index (“Russell 1000 Value”), including reinvestment of dividends, at a risk level consistent with that of the Russell 1000 Value. | The Portfolio normally invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities in the Russell 1000 Value. The Portfolio seeks to hold all securities in the Russell 1000 Value in the exact. weight each represents in the index, although in certain instances a sampling approach may be utilized. | • Equity Risk • Index Strategy Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Portfolio Management Risk • Sector Risk | |||
Multimanager Aggressive Equity Portfolio | Seeks to achieve long-term growth of capital. | Under normal circumstances, the Portfolio intends to invest at least 80% of its net assets, plus borrowings for investment purposes, in equity securities. The Portfolio invests primarily in securities of large capitalization growth companies with market capitalization within the range of the Russell 3000® Growth Index at the time of investment. The Portfolio’s assets generally are allocated by the Adviser among three or more sub-advisers, each of which will manage its portion of the Portfolio using different yet complementary investment strategies; one portion of the Portfolio seeks to track the performance (before fees and expenses) of a particular index and the other portions of the Portfolio are actively managed. | • Equity Risk • Foreign Securities Risk • Index Strategy Risk • Large-Cap Company Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Multiple Sub-Adviser Risk • Portfolio Management Risk • Sector Risk |
D-6
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
1290 VT Socially Responsible Portfolio | Seeks to achieve long-term capital appreciation. | The Portfolio seeks to track the investment results of the MSCI KLD 400 Social Index (the “Underlying Index”), which is a free float-adjusted market capitalization index designed to target U.S. companies that have positive environmental, social and governance (“ESG”) characteristics. As of December 31, 2019, the Underlying Index consisted of 402 companies identified by MSCI Inc. (the “Index Provider” or “MSCI”) from the universe of companies included in the MSCI USA IMI Index, which targets 99°i of the market coverage of stocks that are listed for trading on the New York Stock Exchange and the NASDAQ Stock Market. MSCI analyzes each eligible company’s ESG performance using proprietary ratings covering ESG criteria. | • ESG Considerations Risk • Index Strategy Risk • Equity Risk • Investment Style Risk • Large-Cap Company Risk • Technology Sector • Derivatives Risk • Market Risk • Mid-Cap Company Risk • Portfolio Management Risk • Sector Risk • Small-Cap Company Risk | |||
EQ/Franklin Rising Dividends Portfolio | Seeks to achieve long-term capital appreciation. Preservation of capital, while not a goal, is also an important consideration. | Under normal market conditions, the Portfolio invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of financially sound companies that have paid consistently rising dividends. The Portfolio invests predominantly in equity securities, mostly common stocks. Companies that have paid consistently rising dividends include those companies that currently pay dividends on their common stocks and have maintained or increased their dividend rate during the last four consecutive years. | • Dividend Risk • Equity Risk • Foreign Securities Risk • Large-Cap Company Risk • Market Risk • New Portfolio Risk • Portfolio Management Risk • Sector Risk | |||
EQ/Fidelity InstitutionalAM Large Cap Portfolio | Seeks to achieve long-term capital appreciation. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus any borrowings for investment purposes, in securities of large-cap companies (or other financial instruments that derive their value from the securities of such companies). For purposes of this Portfolio, large-cap companies are those companies with public stock market capitalizations within the range of companies constituting the Standard & Poor’s 500® Composite Stock Index (“S&P 500® Index”) at the time of investment. | • Derivatives Risk • Equity Risk • ETFs Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • New Portfolio Risk • Portfolio Management Risk • Sector Risk |
D-7
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
SMALL/MID CAP EQUITIES | ||||||
EQ/Janus Enterprise Portfolio | Seeks to achieve capital growth. | Under normal market conditions, the Portfolio invests at least 50% of its net assets, plus borrowings for investment purposes, in securities of medium-sized companies (or derivative instruments with similar economic characteristics). The Portfolio primarily invests in equity securities, including common stocks, preferred stocks, and rights and warrants to purchase common stock. For this Portfolio, medium-sized companies are defined as companies with capitalizations at the time of investment within the range of companies included in the Russell MidCap® Growth Index. | • Derivatives Risk • Equity Risk • Foreign Securities Risk • Investment Style Risk • Market Risk • Mid-Cap Company Risk • Portfolio Management Risk • Real Estate Investing Risk • Sector Risk | |||
1290 VT Small Cap Value Portfolio | Seeks to achieve long-term growth of capital. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in securities of companies with small market capitalizations (or other financial instruments that derive their value from the securities of such companies). For purposes of this Portfolio, small market capitalization companies are those companies with market capitalizations within the range of companies in the Russell 2000® Index at the time of investment. The Portfolio’s assets normally are allocated among two or more investment managers, each of which manages its portion of the Portfolio using a different but complementary investment strategy; one portion of the Portfolio is actively managed and one portion seeks to track the performance (before fees and expenses) of a particular index. | • Cash Management Risk • Convertible Securities Risk • Energy Sector Risk • Equity Risk • ETFs Risk • Foreign Securities Risk • Index Strategy Risk • Investment Style Risk • Liquidity Risk • Market Risk • Portfolio Management Risk • Real Estate Investing Risk • Sector Risk • Small-Cap Company Risk • Special Situations Risk | |||
EQ/Morgan Stanley Small Cap Growth Portfolio | Seeks to achieve long-term growth of capital. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in securities of companies with small market capitalizations (or other financial instruments that derive their value from the securities of such companies). For purposes of this Portfolio, small market capitalization companies are those companies that, at the time of purchase, have market capitalizations within the range of companies in the Russell 2000® Index at the time of investment. The Portfolio’s assets normally are allocated among two or more investment managers, each of which manages its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed and one portion seeks to track the performance (before fees and expenses) of a particular index. | • Convertible Securities Risk • Derivatives Risk • Equity Risk • ETFs Risk • Foreign Securities Risk • Index Strategy Risk • Investment Style Risk • Large Shareholder Risk • Market Risk • Portfolio Management Risk • Preferred Stock Risk • Privately Placed and Other Restricted Securities Risk • Sector Risk • Small-Cap Company Risk |
D-8
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/AB Small Cap Growth Portfolio | Seeks to achieve long-term growth of capital. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in securities of small-capitalization companies with market capitalizations within the range of the Russell 2500TM Index at the time of purchase. The Portfolio’s assets normally are allocated between two portions, each of which is managed using a different but complementary investment strategy. One portion is actively managed by a Sub-Adviser (“Active Allocated Portion”) and the other portion seeks to track the performance of a particular index or indices. The Active Allocated Portion invests primarily in U.S. common stocks and other equity type securities issued by small-capitalization companies that the Sub-Adviser believes to have favorable growth prospects. | • Equity Risk • Index Strategy Risk • Investment Style Risk • Market Risk • Portfolio Management Risk • Sector Risk • Small-Cap and Mid-Cap Company Risk • Special Situations Risk | |||
1290 VT GAMCO Small Company Value Portfolio | Seeks to maximize capital appreciation. | Under normal circumstances, the Portfolio intends to invest at least 80% of its net assets, plus borrowings for investment purposes, in stocks of small capitalization companies. For this Portfolio, small capitalization companies are companies with market capitalization of $2.0 billion or less at the time of investment. The Portfolio also may invest in foreign securities. The Sub-Adviser utilizes a value-oriented investment style. | • Equity Risk • Foreign Securities Risk • Investment Style Risk • Market Risk • Mid-Cap Company Risk • Portfolio Management Risk • Sector Risk • Small-Cap Company Risk | |||
1290 Essex Small Cap Growth Fund | Seeks long-term growth of capital. | Under normal circumstances, the Fund invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities of small- and micro-capitalization companies (or other financial instruments that derive their value from the securities of such companies). For the Fund, a company is considered to be a “small-capitalization” company if, at the time of purchase, its market capitalization is less than or equal to the market capitalization of the largest company included within the Russell 2000® Growth Index. The Fund may invest up to 15% of its assets in foreign securities, including securities of companies based in developing countries and depositary receipts of foreign-based companies. | • Market Risk • Equity Risk • Small-Cap and Micro-Cap Company • Risk • Investment Style Risk • Sector Risk • Portfolio Management Risk • New Fund Risk • Convertible Securities Risk • Derivatives Risk • Foreign Securities Risk • Large Transaction Risk • Portfolio Turnover Risk • Preferred Stock Risk • Real Estate Investing Risk |
D-9
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
ATM Mid Cap Managed Volatility Portfolio | The Portfolio seeks to achieve long-term growth of capital with an emphasis on risk- adjusted returns and managing volatility in the Portfolio. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in securities of mid-capitalization companies (or other financial instruments that derive their value from the securities of such companies). The Portfolio is divided into two portions; one utilizes a passive investment index style focused on equity securities of mid-capitalization companies and the other portion utilizes an actively managed futures and options strategy to tactically manage equity exposure in the Portfolio based on the level of volatility in the market. The Portfolio may also invest in ETFs. | • Cash Management Risk • Derivatives Risk • Equity Risk • ETFs Risk • Futures Contract Risk • Index Strategy Risk • Large Shareholder Risk • Leveraging Risk • Market Risk • Mid-Cap Company Risk • Portfolio Management Risk • Sector Risk • Short Position Risk • Volatility Management Risk | |||
ATM Small Cap Managed Volatility Portfolio | The Portfolio seeks to achieve long-term growth of capital with an emphasis on risk- adjusted returns and managing volatility in the Portfolio. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in securities of small-capitalization companies (or other financial instruments that derive their value from the securities of such companies). The Portfolio is divided into two portions; one utilizes a passive investment index style focused on equity securities of small- capitalization companies and the other portion utilizes an actively managed futures and options strategy to tactically manage equity exposure in the Portfolio based on the level of volatility in the market. The Portfolio may also invest in ETFs. | • Cash Management Risk • Derivatives Risk • Equity Risk • ETFs Risk • Futures Contract Risk • Index Strategy Risk • Large Shareholder Risk • Leveraging Risk • Market Risk • Portfolio Management Risk • Sector Risk • Short Position Risk • Small-Cap Company Risk • Volatility Management Risk | |||
EQ/Franklin Small Cap Value Managed Volatility Portfolio | Seeks to achieve long-term total return with an emphasis on risk-adjusted returns and managing volatility in the Portfolio. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in the securities of small-capitalization companies. Small-cap companies are companies with market capitalizations not exceeding either: 1) the highest market capitalization in the Russell 2000® Index; or 2) the 12-month average of the highest market capitalization in the Russell 2000® Index, whichever is greater, at the time of purchase. The Portfolio’s assets normally are allocated between two investment managers, each of which will manage its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed and one portion seeks to track the performance (before fees and expenses) of a particular index. The Portfolio may invest up to 25% of its assets in derivatives, which will consist primarily of exchange-traded futures and options contracts on securities indices, but the Portfolio also may utilize other types of derivatives. | • Cash Management Risk • Derivatives Risk • Equity Risk • Foreign Securities Risk • Futures Contract Risk • Index Strategy Risk • Investment Style Risk • Large Shareholder Risk • Leveraging Risk • Market Risk • Portfolio Management Risk • Real Estate Investing Risk • Sector Risk • Short Position Risk • Small-Cap Company Risk • Volatility Management Risk |
D-10
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/Mid Cap Index Portfolio | Seeks to achieve a total return before expenses that approximates the total return performance of the Standard & Poor’s MidCap 400® Index (“S&P MidCap 400 Index”), including reinvestment of dividends, at a risk level consistent with that of the S&P MidCap 400 Index. | The Sub-Adviser normally invests at least 80% of the Portfolio’s net assets, plus borrowings for investment purposes, in equity securities in the S&P MidCap 400 Index. The Portfolio seeks to hold all securities in the S&P MidCap 400 Index in the exact weight each represents in the S&P MidCap 400 Index, although in certain instances a sampling approach may be utilized. | • Equity Risk • Index Strategy Risk • Market Risk • Mid-Cap Company Risk • Portfolio Management Risk • Sector Risk | |||
EQ/Small Company Index Portfolio | Seeks to replicate as closely as possible (before expenses) the total return of the Russell 2000® Index (“Russell 2000”). | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities of small-cap companies included in the Russell 2000. The Sub-Adviser seeks to match the returns (before expenses) of the Russell 2000. The Portfolio invests in a statistically selected sample of the securities found in the Russell 2000, using a process known as “optimization.” The securities held by the Portfolio are weighted to make the Portfolio’s total investment characteristics similar to those of the Russell 2000 as a whole. | • Equity Risk • Index Strategy Risk • Market Risk • Portfolio Management Risk • Sector Risk • Small-Cap Company Risk | |||
EQ/American Century Mid Cap Value Portfolio | Seeks to achieve long-term capital growth. Income is a secondary objective. | Under normal market conditions, the Portfolio invests at least 80% of its net assets, plus any borrowings for investment purposes, in securities of medium size companies (or financial instruments that derive their value from such securities). For purposes of this Portfolio, the Sub-Adviser considers medium size companies to include those companies whose market capitalizations at the time of purchase are within the capitalization range of the companies in the Russell 3000® Index, excluding the largest 100 such companies. The Sub-Adviser intends to manage the Portfolio so that its weighted capitalization falls within the capitalization range of the companies in the Russell Midcap® Index. | • Mid-Cap Company Risk • Investment Style Risk • Sector Risk • Equity Risk • Foreign Securities Risk • Initial Public Offering (“IPO”) Risk • Market Risk • New Portfolio Risk • Portfolio Management Risk | |||
EQ/Goldman Sachs Mid Cap Value Portfolio | Seeks to achieve long-term capital appreciation. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of mid-cap companies (or other financial instruments that derive their value from the securities of such companies). For purposes of this Portfolio, mid-cap companies are those companies with public stock market capitalizations within the range of companies constituting the Russell Midcap® Value Index at the time of investment. | • Credit Risk • Equity Risk • Foreign Securities Risk • Interest Rate Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • New Portfolio Risk • Portfolio Management Risk • Portfolio Turnover Risk • Real Estate Investing Risk • Sector Risk |
D-11
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/MFS Mid Cap Focused Growth Portfolio | Seeks to provide growth of capital. | Under normal circumstances, the Portfolio will invest at least 80% of its net assets, plus borrowings for investment purposes, in securities of mid-capitalization companies. For purposes of this Portfolio, mid- capitalization companies typically are companies with market capitalizations within the capitalization range of the companies in the Russell Midcap® Growth Index at the time of purchase. | • Mid-Cap Company Risk • Focused Portfolio Risk • Investment Style Risk • Information Technology Sector Risk • Equity Risk • Foreign Securities Risk • Liquidity Risk • Market Risk • Portfolio Management Risk • Portfolio Turnover Risk • Real Estate Investing Risk • Sector Risk | |||
1290 GAMCO Small/Mid Cap Value Fund | Seeks to maximize capital appreciation. | Under normal circumstances, the Fund invests at least 80% of its net assets, plus borrowings for investment purposes, in securities of small and mid-capitalization companies. For the Fund, small capitalization companies generally are companies with a market capitalization less than $3 billion at the time of investment, and mid- capitalization companies generally are companies with a market capitalization between $3 billion and $12 billion at the time of investment. The Fund also may invest up to 20% of its net assets in foreign securities. | • Equity Risk • Mid-Cap and Small-Cap Company Risk • Investment Style Risk • Sector Risk • Foreign Securities Risk • Large Shareholder Risk • Market Risk • Portfolio Management Risk • Preferred Stock Risk | |||
1290 VT Micro Cap Portfolio | Seeks to achieve long-term growth of capital. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in securities of micro-cap companies (or other financial instruments that derive their value from the securities of such companies). For purposes of this Portfolio, micro-cap companies are those companies with market capitalizations that are either under $1 billion or are within the range of companies in the Russell Microcap® Index at the time of purchase. The Portfolio’s assets normally are allocated among two or more investment managers, each of which manages its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed and one portion seeks to track the performance (before fees and expenses) of a particular index. | • Equity Risk • Foreign Securities Risk • Index Strategy Risk • Investment Style Risk • Market Risk • Portfolio Management Risk • Sector Risk • Small-Cap and Micro-Cap Company Risk |
D-12
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
INTERNATIONAL/GLOBAL EQUITIES | ||||||
EQ/Emerging Markets Equity PLUS Portfolio | Seeks to achieve long-term growth of capital. | Under normal circumstances, the Portfolio intends to invest at least 80% of its net assets, plus borrowings for investment purposes, in equity securities of companies located in emerging market countries or other investments that are tied economically to emerging market countries. The Portfolio’s assets normally are allocated among two investment managers, each of which manages its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed (“Active Allocated Portion”), and one portion seeks to track the performance of a particular index (“Index Allocated Portion”). Under normal circumstances, the Active Allocated Portion consists of approximately 25-35% of the Portfolio’s net assets and the Index Allocated Portion consists of approximately 65-75% of the Portfolio’s net assets. | • Cash Management Risk • Derivatives Risk • Emerging Markets Risk • Equity Risk • ETFs Risk • Foreign Securities Risk • Index Strategy Risk • Large-Cap Company Risk • Leveraging Risk • Liquidity Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Portfolio Management Risk | |||
EQ/International Equity Index Portfolio | Seeks to achieve a total return (before expenses) that approximates the total return performance of a composite index comprised of 40% DJ EuroSTOXX 50 Index, 25% FTSE 100 Index, 25% TOPIX Index, and 10% S&P/ASX 200 Index (“composite index”), including reinvestment of dividends, at a risk level consistent with that of the composite index. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities of companies represented in the composite index. The Portfolio uses a strategy that is commonly referred to as an indexing strategy. With respect to investments in companies represented in the FTSE 100 Index, DJ EuroSTOXX 50 Index, and S&P/ASX 200 Index, the Sub-Adviser generally uses a replication technique, although a sampling approach may be used in certain circumstances. With respect to investments in companies represented in the TOPIX Index, the Sub-Adviser selects investments using a stratified sampling construction process in which the Sub-Adviser selects a sub-set of the companies represented in the index based on the Sub-Adviser’s analysis of key risk factors and other characteristics. Such factors include industry weightings, market capitalizations, return variability, and yields. | • Equity Risk • Foreign Securities Risk • Geographic Concentration Risk • Index Strategy Risk • Large-Cap Company Risk • Market Risk • Portfolio Management Risk • Sector Risk |
D-13
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/MFS International Growth Portfolio | Seeks to achieve capital appreciation. | Under normal circumstances, the Portfolio intends to invest at least 80% of its net assets in the equity securities of foreign companies, including emerging markets equity securities. The Portfolio may invest a large percentage of its assets in issuers in a single country, a small number of countries, or a particular geographic region. The Sub-Adviser focuses on investing the Portfolio’s assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (i.e. growth companies). | • Equity Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Large Shareholder Risk • Liquidity Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Portfolio Management Risk • Sector Risk | |||
ATM International Managed Volatility Portfolio | The Portfolio seeks to achieve long-term growth of capital with an emphasis on risk- adjusted returns and managing volatility in the Portfolio. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in foreign equity securities (or other financial instruments that derive their value from the securities of such companies). The Portfolio is divided into two portions; one utilizes a passive investment index style focused on equity securities of foreign companies and the other portion utilizes an actively managed futures and options strategy to tactically manage equity exposure in the Portfolio based on the level of volatility in the market. The Portfolio may also invest in ETFs. | • Cash Management Risk • Derivatives Risk • Equity Risk • ETFs Risk • Foreign Securities Risk • Futures Contract Risk • Index Strategy Risk • Large-Cap Company Risk • Large Shareholder Risk • Leveraging Risk • Market Risk • Portfolio Management Risk • Sector Risk • Short Position Risk • Volatility Management Risk | |||
EQ/Global Equity Managed Volatility Portfolio | Seeks to achieve long-term capital appreciation with an emphasis on risk- adjusted returns and managing volatility in the Portfolio. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities. The Portfolio’s assets normally are allocated between two or more investment managers, each of which will manage its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed and one portion seeks to track the performance (before fees and expenses) of a particular index or indices. The Portfolio may invest up to 25% of its assets in derivatives, which will consist primarily of exchange- traded futures and options contracts on securities indices, but the Portfolio also may utilize other types of derivatives. | • Cash Management Risk • Derivatives Risk • Emerging Markets Risk • Equity Risk • ESG Considerations Risk • Foreign Securities Risk • Futures Contract Risk • Index Strategy Risk • Large-Cap Company Risk • Leveraging Risk • Liquidity Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Multiple Sub-Adviser Risk • Portfolio Management Risk • Sector Risk • Short Position Risk • Volatility Management Risk |
D-14
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/International Core Managed Volatility Portfolio | Seeks to achieve long-term growth of capital with an emphasis on risk- adjusted returns and managing volatility in the Portfolio. | The Portfolio invests primarily in foreign equity securities (or other financial instruments that derive their value from the securities of such companies). The Portfolio’s assets normally are allocated among three or more investment managers, each of which manages its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed, one portion seeks to track the performance (before fees and expenses) of a particular index; and one portion invests in exchange- traded funds. The Portfolio may invest up to 25% of its assets in derivatives, which will consist primarily of foreign currency transactions, exchange- traded futures and options contracts on securities indices, but the Portfolio also may utilize other types of derivatives. | • Cash Management Risk • Derivatives Risk • Equity Risk • ETFs Risk • Foreign Securities Risk • Futures Contract Risk • Geographic Concentration Risk • Index Strategy Risk • Large-Cap Company Risk • Leveraging Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Multiple Sub-Adviser Risk • Portfolio Management Risk • Sector Risk • Short Position Risk • Volatility Management Risk | |||
EQ/International Value Managed Volatility Portfolio | Seeks to provide current income and long-term growth of income, accompanied by growth of capital with an emphasis on risk-adjusted returns and managing volatility in the Portfolio. | Under normal circumstances the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities. The Portfolio’s assets normally are allocated among two investment managers, each of which manages its portion of the Portfolio using a different but complementary investment strategy; one portion is actively managed (“Active Allocated Portion”) and one portion seeks to track the performance of a particular index. The Active Allocated Portion seeks to invest in securities of foreign companies, including companies in emerging market countries that have a market capitalization in excess of $5 billion at the time of purchase. The Portfolio may limit its equity exposure when market volatility increases above specific thresholds, primarily through the use of exchange-traded futures and options contracts on securities indices, but the Portfolio also may utilize other types of derivatives. | • Cash Management Risk • Derivatives Risk • Equity Risk • ETFs Risk • Foreign Securities Risk • Futures Contract Risk • Index Strategy Risk • Investment Style Risk • Large-Cap Company Risk • Leveraging Risk • Market Risk • Portfolio Management Risk • Preferred Stock Risk • Sector Risk • Short Position Risk • Volatility Management Risk |
D-15
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/Lazard Emerging Markets Equity Portfolio | Seeks to achieve long-term capital appreciation. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies whose principal business activities are located in emerging market countries. The Portfolio invests primarily in common stocks of companies that the Sub-Adviser believes are undervalued based on their earnings, cash flow or asset values. In addition to common stocks, such equity securities may include depositary receipts. The Portfolio may invest in securities of companies across the capitalization spectrum, and the market capitalizations of companies in which the Portfolio invests may vary with market conditions. For this Portfolio, emerging market countries include all countries represented by the MSCI Emerging Markets Index, which currently includes: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. | • Emerging Markers Risk • Foreign Securities Risk • Investment Style Risk • Equity Risk • Market Risk • Large-Cap Company Risk • Mid-Cap and Small-Cap Company Risk • New Portfolio Risk • Portfolio Management Risk | |||
EQ/Invesco Global Portfolio | Seeks to achieve capital appreciation. | Under normal circumstances, the Portfolio invests primarily in equity securities of U.S. and foreign companies. The Portfolio can invest without limit in foreign securities, including depositary receipts, and can invest in any country, including countries with developing or emerging markets. The Sub- Adviser primarily looks for quality companies, regardless of domicile, that have sustainable growth. | • Equity Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Portfolio Management Risk • Sector Risk | |||
1290 VT SmartBeta Equity ESG Portfolio | Seeks to achieve long-term capital appreciation. | Under normal market conditions, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities. The Portfolio invests primarily in equity securities of U.S. companies and foreign companies in developed markets. The Portfolio may invest in large, mid and small capitalization companies and will be broadly diversified across companies and industries. Equity securities in which the Portfolio may invest include common stocks, preferred stocks, warrants, American Depositary Receipts and similar instruments. | • Quantitative Investing Risk • Equity Risk • Sector Risk • Foreign Securities Risk • Mid-Cap and Small-Cap Company Risk • ESG Considerations Risk • Investment Strategy Risk • Large-Cap Company Risk. • Large Shareholder Risk • Market Risk • Portfolio Management Risk |
D-16
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
1290 SmartBeta Equity Fund | Seeks to achieve long-term capital appreciation. | Under normal market conditions, the Fund invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities. The Fund invests primarily in equity securities of U.S. companies and foreign companies in developed markets. The Fund may invest in large, mid and small capitalization companies and will be broadly diversified across companies and industries. Equity securities in which the Fund may invest include common stocks, preferred stocks, warrants, American Depositary Receipts and similar instruments. | • Quantitative Investing Risk • Equity Risk • Sector Risk • Foreign Securities Risk • Mid-Cap and Small-Cap Company Risk • ESG Considerations Risk • Investment Strategy Risk • Large-Cap Company Risk. • Large Shareholder Risk • Market Risk • Portfolio Management Risk | |||
EQ/MFS International Intrinsic Value Portfolio | Seeks to achieve capital appreciation. | The Portfolio normally invests its assets primarily in foreign equity securities, including emerging market equity securities. Equity securities include common stocks and other securities that represent an ownership interest (or the right to acquire an ownership interest) in a company or other issuer. An issuer will be considered to be an issuer of a foreign security if the issuer is domiciled, derives a significant portion of its revenues from, or primarily trades in a market located outside of the United States. | • Cash Management Risk • Derivatives Risk • Equity Risk • Foreign Securities Risk • Investment Style Risk • Large-Cap Company Risk • Leveraging Risk • Liquidity Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • New Portfolio Risk • Portfolio Management Risk • Sector Risk |
Fixed Income
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
HIGH YIELD BOND | ||||||
1290 VT High Yield Bond Portfolio | Seeks to maximize current income. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in a broad range of high-yield, below investment-grade bonds. The Portfolio may invest up to 25% of its net assets in debt securities of issuers located outside the United States, including emerging markets issuers and U.S. dollar- denominated securities of non-U.S. issuers. The Portfolio’s assets normally are allocated among two portions, each of which is managed using a different but complementary investment strategy; one portion is actively managed (“Active Allocated Portion”) and the other portion invests in ETFs that are passively managed and that meet the investment objective of the Portfolio (“ETF Allocated Portion”). Under normal circumstances, the Active Allocated Portion consists of approximately 90% of the Portfolio’s net assets and the ETF Allocated Portion consists of approximately 10% of the Portfolio’s net assets. These percentages can deviate from the amounts shown above by up to 15% of the Portfolio’s assets. | • Credit Risk • ETFs Risk • Foreign Securities Risk • Interest Rate Risk • Investment Grade Securities Risk • Large-Cap Company Risk • Leveraging Risk • Liquidity Risk • Loan Risk • Market Risk • Mid-Cap and Small-Cap Company Risk • Mortgage-Related and Other Asset-Backed Securities Risk • Non-Investment Grade Securities Risk • Portfolio Management Risk • Prepayment Risk and • Extension Risk • Privately Placed and Other Restricted Securities Risk • Redemption Risk • Sector Risk • Zero Coupon and Pay-in-Kind Securities Risk |
D-17
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
1290 High Yield Bond Fund | Seeks to maximize current income. | Under normal circumstances, the Fund invests at least 80% of its net assets, plus borrowings for investment purposes, in a broad range of high-yield, below investment-grade bonds. | • Non-Investment Grade Securities Risk • Credit Risk • Liquidity Risk • Sector Risk • Loan Risk • Foreign Securities Risk • Interest Rate Risk • Investment Grade Securities Risk • Large Shareholder Risk. • Leveraging Risk • Market Risk • Portfolio Management Risk • Prepayment Risk and • Extension Risk • Redemption Risk • Zero Coupon and Pay-in-Kind Securities Risk | |||
INVESTMENT GRADE BOND | ||||||
EQ/Money Market Portfolio | Seeks to obtain a high level of current income, preserve its assets and maintain liquidity. | The Portfolio invests 99.5% or more of its total assets in: debt securities issued or guaranteed as to principal or interest by the U.S. government, or by U.S. government agencies or instrumentalities; repurchase agreements that are collateralized fully by cash items or U.S. Treasury and U.S. government securities; and cash. The Portfolio maintains a dollar-weighted average portfolio maturity of 60 days or less, a dollar-weighted average life to maturity of 120 days or less, and uses the amortized cost method of valuation to seek to maintain a stable $1.00 net asset value per share price. | • Credit Risk • Interest Rate Risk • Government Securities Risk • Liquidity Risk • Market Risk • Money Market Risk • Net Asset Value Risk • Portfolio Management Risk • Repurchase Agreement Risk • Risk Associated with Portfolio Holding Cash | |||
EQ/Intermediate Corporate Bond Portfolio | Seeks to achieve a total return before expenses that approximates the total return performance of the Bloomberg U.S. Credit Corporate 5-10 Year Index (“Corporate Bond Index” or “Index”), including reinvestment of dividends, at a risk level consistent with that of the Index. | Under normal market conditions, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in debt securities. In seeking to achieve the Portfolio’s investment objective, the Sub-Adviser generally will employ a stratified sampling approach to build a portfolio whose broad characteristics match those of the Corporate Bond Index, which means that the Portfolio is not required to purchase all of the securities represented in the Index. | • Market Risk • Index Strategy Risk • Credit Risk • Interest Rate Risk • Investment Grade Securities Risk • ETFs Risk • Liquidity Risk • New Portfolio Risk • Non-U.S. Issuer Risk • Portfolio Management Risk • Redemption Risk |
D-18
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/Intermediate Government Bond Portfolio | Seeks to achieve a total return before expenses that approximates the total return performance of the Bloomberg Barclays U.S. Intermediate Government Bond Index (“Intermediate Government Bond Index”), including reinvestment of dividends, at a risk level consistent with that of the Intermediate Government Bond Index. | The Portfolio normally invests at least 80% of its net assets, plus borrowings for investment purposes, in debt securities that are included in the Intermediate Government Bond Index, or other financial instruments that derive their value from those securities. The Intermediate Government Bond Index is an unmanaged index that measures the performance of securities consisting of all U.S. Treasury and agency securities with remaining maturities of from one to ten years and issue amounts of at least $250 million outstanding, which may include zero-coupon securities. The Portfolio may also invest up to 20% of its assets in ETFs that invest in securities included in the Intermediate Government Bond Index. | • Credit Risk • ETFs Risk • Index Strategy risk • Interest Rate Risk • Investment Grade Securities Risk • Government Securities Risk • Market Risk • Portfolio Management Risk • Redemption Risk • Zero Coupon and Pay-in Kind Securities Risk | |||
1290 VT DoubleLine Opportunistic Bond Portfolio | Seeks to maximize current income and total return. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus any borrowings for investment purposes, in fixed income securities. Fixed income securities include, but are not limited to, securities issued or guaranteed by the U.S. government or its agencies, instrumentalities or sponsored corporations; mortgage-backed securities; asset- backed securities; foreign and domestic corporate bonds; floating or variable rate obligations (including inverse floater collateralized mortgage obligations); bank loans; fixed income securities issued by corporations and governments in foreign countries including emerging markets issuers and U.S. dollar-denominated securities or non-U.S. issuers; securities issued by municipalities; collateralized loan obligations and other securities bearing fixed interest rates of any maturity. The Portfolio may invest up to 40% of its assets in below investment grade securities (commonly known as “junk bonds”). | • Collateralized Debt • Obligations Risk • Credit Risk • Distressed Companies Risk • Emerging Markets Risk • Foreign Securities Risk • Geographic Concentration Risk • Government Securities Risk • Interest Rate Risk • Inverse Floaters Risk • Investment Grade Securities Risk • LIBOR Risk • Liquidity Risk • Loan Risk • Market Risk • Mortgage-Related and Other Asset-Backed Securities Risk • Non-Investment Grade Securities Risk • Portfolio Management Risk • Portfolio Turnover Risk • Prepayment Risk and • Extension Risk • Privately Placed and Other Restricted Securities Risk • Redemption Risk • Risks of Investing in Other Investment Companies • Sector Risk • Variable and Floating Rate Securities |
D-19
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/AB Short Duration Government Bond Portfolio | Seeks to achieve a balance of current income and capital appreciation, consistent with a prudent level of risk. | The Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in debt securities issued by the U.S. Government and its agencies and instrumentalities and financial instruments that derive their value from such securities. The Portfolio also may invest up to 10% of its total assets in foreign fixed-income securities in developed or emerging market countries. The Portfolio seeks to maintain an effective duration of up to two years under normal market conditions. | • Credit Risk • Derivatives Risk • Foreign Securities Risk • Futures Contract Risk • Government Securities Risk • Interest Rate Risk • Investment Grade Securities Risk • Leveraging Risk • Market Risk • Mortgage-Related and Other Asset-Backed Securities Risk • Portfolio Management Risk • Prepayment Risk and • Extension Risk • Redemption Risk • Short Position Risk • Zero Coupon and Pay-in-Kind Securities Risk | |||
EQ/Core Bond Index Portfolio | Seeks to achieve a total return before expenses that approximates the total return performance of the Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index (“Intermediate Government/Credit Index”), including reinvestment of dividends, at a risk level consistent with that of the Intermediate Government/Credit Index. | Under normal market conditions, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in securities that are included in the Intermediate Government/Credit Index, which covers the U.S. dollar denominated, investment grade, fixed-rate, taxable bond market, including U.S. Treasury and government-related, corporate, credit and agency fixed-rate debt securities. The Portfolio also may invest up to 40% of its assets in exchange-traded funds that invest in securities included in the Intermediate Government/Credit Index. | • Credit Risk • ETFs Risk • Index Strategy Risk • Interest Rate Risk • Investment Grade Securities Risk • Liquidity Risk • Market Risk • Portfolio Management Risk • Redemption Risk • Government Securities Risk | |||
EQ/Quality Bond PLUS Portfolio | Seeks to achieve high current income consistent with moderate risk to capital. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in debt securities. The Portfolio’s assets normally are allocated among two portions, each of which is managed using a different but complementary investment strategy; one portion is actively managed and one portion seeks to track the performance of a particular index. | • Credit Risk • Derivatives Risk • Foreign Securities Risk • Government Securities Risk • Index Strategy Risk • Interest Rate Risk • Investment Grade Securities Risk • Leveraging Risk • Liquidity Risk • Market Risk • Mortgage-Related and Other Asset-Backed Securities Risk • Multiple Sub-Adviser Risk • Portfolio Management Risk • Portfolio Turnover Risk • Privately Placed and Other Restricted Securities Risk • Prepayment Risk and • Extension Risk • Redemption Risk • When-Issued and Delayed Delivery Securities and Forward Commitments Risk • Zero Coupon and Pay-in-Kind Securities Risk |
D-20
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/Core Plus Bond Portfolio | Seeks to achieve high total return through a combination of current income and capital appreciation. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in a diversified portfolio of U.S. and foreign bonds or other debt securities of varying maturities and other instruments that provide investment exposure to such debt securities, including forwards or derivatives such as options, futures contracts or swap agreements. In addition, the Portfolio’s assets are allocated among three investment sub-advisers, each of which manages its portion of the Portfolio using a different but complementary investment strategy. | • Interest Rate Risk • Credit Risk • Foreign Securities Risk • Mortgage-Related and Other Asset-Backed Securities Risk • Non-Investment Grade Securities Risk • Cash Management Risk • Collateralized Loan • Obligations Risk • Convertible Securities Risk • Derivatives Risk • Dollar Roll and Sale Buyback Transactions Risk • Futures Contract Risk • Government Securities Risk • Hedging Risk • Inflation-Indexed Bonds Risk • Investment Grade Securities Risk • Leveraging Risk • Liquidity Risk • Loan Risk • Market Risk • Multiple Sub-Adviser Risk • Newly Restructured Portfolio Risk • Portfolio Management Risk • Portfolio Turnover Risk • Preferred Stock Risk • Prepayment Risk and • Extension Risk • Privately Placed and Other Restricted Securities Risk • Redemption Risk • Sector Risk • Variable and Floating Rate Securities Risk • When-Issued and Delayed Delivery Securities and Forward Commitments Risk • Zero Coupon and Pay-In-Kind Securities Risk |
D-21
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
Multimanager Core Bond Portfolio | Seeks to achieve a balance of high current income and capital appreciation, consistent with a prudent level of risk. | Under normal circumstances, the Portfolio intends to invest at least 80% of its net assets, plus borrowings for investment purposes, in investment grade bonds. For purposes of this investment policy, a debt security is considered a “bond.” The Portfolio invests primarily in U.S. government and corporate debt securities. The Portfolio’s assets generally are allocated by the Adviser among four or more sub-advisers, each of which will manage its portion of the Portfolio using different yet complementary investment strategies; one portion of the Portfolio seeks to track the performance (before fees and expenses and including reinvestment of coupon payments) of a particular index and the other portions of the Portfolio are actively managed. The Portfolio may invest up to 20% of its net assets in non- investment grade securities (commonly known as “junk bonds”). The Portfolio also may invest in derivatives, which will consist primarily of forward contracts, exchange- traded futures and options contracts on individual securities or securities indices, but the Portfolio also may utilize other types of derivatives. | • Cash Management Risk • Collateralized Debt • Obligations Risk • Credit Risk • Derivatives Risk • Dollar Roll and Sale Buyback Transactions Risk • Foreign Securities Risk • Futures Contract Risk • Government Securities Risk • Index Strategy Risk • Interest Rate Risk • Investment Grade Securities Risk • Large Shareholder Risk • Leveraging Risk • LIBOR Risk • Liquidity Risk • Market Risk • Mortgage-Related and Other Asset-Backed Securities Risk • Multiple Sub-Adviser Risk • Non-Investment Grade • Securities Risk • Portfolio Management Risk • Portfolio Turnover Risk • Prepayment Risk and • Extension Risk • Privately Placed and Other Restricted Securities Risk • Redemption Risk • When-Issued and Delayed Delivery Securities and Forward Commitments Risk • Zero Coupon and Pay-in-Kind Securities Risk |
D-22
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/PIMCO Real Return Portfolio | Seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of an index that tracks the U.S. high yield short term corporate bond market. | Under normal circumstances, the Portfolio invests at least 80% of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies or instrumentalities and corporations, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements. The Portfolio also may invest up to 30% of its total assets in securities denominated in foreign currencies and may invest beyond this limit in U.S. dollar denominated securities of foreign issuers. The Portfolio may invest up to 10% of its total assets in securities and instruments that are economically tied to emerging market countries (this limitation does not apply to investment grade sovereign debt denominated in the local currency with less than one year remaining to maturity, which means the Portfolio may invest, together with any other investments denominated in foreign currencies, up to 30% of its total assets in such instruments). The Portfolio will normally limit its foreign currency exposure (from non-U.S. dollar denominated securities or currencies) to 20% of its total assets. | • Interest Rate Risk • Credit Risk • Derivatives Risk • Inflation-Indexed Bonds Risk • Mortgage-Related and Other Asset-Backed Securities • Government Securities Risk • Short Position Risk • Cash Management Risk • Dollar Roll and Sale-Buyback Transactions. • Equity Risk • Foreign Securities Risk • Investment Grade Securities Risk • Leveraging Risk • LIBOR Risk • Liquidity Risk • Market Risk • New Portfolio Risk • Non-Investment Grade Securities Risk • Portfolio Management Risk • Portfolio Turnover Risk • Preferred Stock • Prepayment Risk and • Extension Risk • Redemption Risk • Sovereign Debt Securities Risk • Variable and Floating Rate Securities Risk • When-Issued and Delayed Delivery Securities and Forward Commitments Risk |
D-23
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
1290 Diversified Bond Fund | Seeks to maximize total return consisting of income and capital appreciation. | Under normal circumstances, the Fund invests at least 80% of its net assets, plus borrowings for investment purposes, in a diversified portfolio of U.S. and foreign bonds or other debt securities of varying maturities and other instruments that provide investment exposure to such debt securities, including forwards or derivatives such as options, futures contracts or swap agreements. The Fund may invest in securities denominated in foreign currencies and in U.S. dollar-denominated securities of foreign issuers, including securities and instruments that are economically tied to emerging market countries. The Fund will normally limit its foreign currency exposure (from non-U.S. dollar-denominated securities or currencies) to 40% of its total assets (this limitation does not apply to investment grade sovereign debt denominated in the local currency with less than 1 year remaining to maturity). | • Credit Risk • Interest Rate Risk • Investment Grade Securities Risk • Non-Investment Grade Securities Risk • Derivatives Risk • Leveraging Risk • Foreign Securities Risk • Hedging Risk • Cash Management Risk • Collateralized Loan • Obligations Risk • Dollar Roll and Sale-Buyback Transactions Risk • Futures Contract Risk • Government Securities Risk • Inflation-Indexed Bonds Risk • Large Shareholder Risk • Liquidity Risk • Loan Risk • Market Risk • Mortgage-Related and Other Asset-Backed Securities Risk • Portfolio Management Risk • Portfolio Turnover Risk • Prepayment Risk and • Extension Risk • Privately Placed and Other Restricted Securities Risk • Redemption Risk • Sector Risk • Variable and Floating Rate Securities • When-Issued and Delayed Delivery Securities and Forward Commitments Risk • Zero Coupon and Pay-in-Kind Securities Risk |
D-24
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/PIMCO Global Real Return | Seeks to achieve maximum real return, consistent with preservation of capital and prudent investment management. | Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in inflation-indexed bonds of varying maturities issued by the U.S. (e.g., Treasury Inflation Protected Securities (“TIPS”)) and non-U.S. governments, their agencies or instrumentalities, and corporations, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements. The Portfolio normally invests a significant portion of its net assets in instruments that are economically tied to foreign (non-U.S.) countries. | • Cash Management Risk • Credit Risk • Derivatives Risk • Dollar Roll and Sale-Buyback Transactions • Equity Risk • Focused Portfolio Risk • Foreign Securities Risk • Government Securities Risk • Inflation-Indexed Bonds Risk • Interest Rate Risk • Investment Grade Securities Risk • Leveraging Risk • Liquidity Risk • Market Risk • Mortgage-Related and Other Asset-Backed Securities Risk • Non-Investment Grade Securities Risk • Portfolio Management Risk • Portfolio Turnover Risk • Preferred Stock Risk • Prepayment Risk and • Extension Risk • Redemption Risk • Short Position Risk • Sovereign Debt Securities Risk • When-Issued and Delayed Delivery Securities and Forward Commitments Risk | |||
EQ/PIMCO Ultra Short Bond Portfolio | Seeks to generate a return in excess of traditional money market products while maintaining an emphasis on preservation of capital and liquidity. | The Portfolio invests at least 80% of its net assets in a diversified portfolio of fixed income instruments of varying maturities, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements. The Portfolio may invest in investment grade U.S. dollar denominated securities of U.S. issuers that are rated Baa or higher by Moody’s Investors Service, Inc. or equivalently rated by Standard & Poor’s Global Ratings or Fitch Ratings Ltd., or, if unrated, determined by the Sub- Adviser to be of comparable quality. The average portfolio duration will vary based on the Sub-Adviser’s forecast for interest rates and will normally not exceed one year, as calculated by the Sub- Adviser. | • Credit Risk • Derivatives Risk • Dollar Roll and Sale-Buyback Transactions Risk • Government Securities Risk • Interest Rate Risk • Investment Grade Securities Risk • Large Shareholder Risk • Leveraging Risk • LIBOR Risk • Liquidity Risk • Loan Risk • Market Risk • Mortgage-Related and Other Asset-Backed Securities Risk • Portfolio Management Risk • Portfolio Turnover Risk • Prepayment Risk and • Extension Risk • Privately Placed and Other Restricted Securities Risk • Redemption Risk • Sector Risk • Variable and Floating Rate Securities Risk |
D-25
Portfolio | Investment Objective | Principal Investment Strategy | Principal Investment Risks | |||
EQ/PIMCO Total Return ESG Portfolio | Seeks to achieve maximum total return, consistent with preservation of capital and prudent investment management. | Under normal circumstances, the Portfolio invests at least 65% of its total assets in a diversified portfolio of Fixed Income Instruments of varying maturities, which may be represented by forwards or derivatives such as options, futures contracts, or swap agreements. “Fixed Income Instruments” include bonds, debt securities and other similar instruments issued by various U.S. and non-U.S. public- or private-sector entities. The Portfolio invests primarily in investment-grade debt securities, but may invest up to 20% of its total assets in high yield securities, also known as “junk bonds,” as rated by Moody’s Investors Service, Inc., Standard & Poor’s Global Rating or Fitch, Inc., or, if unrated, as determined by the Adviser or the Sub-Adviser. The Portfolio also may invest up to 30% of its total assets in securities denominated in foreign currencies and may invest beyond this limit in U.S. dollar-denominated securities of foreign issuers. | • Interest Rate Risk • Credit Risk • Derivatives Risk • Non-Investment Grade Securities Risk • Investment Grade Securities Risk • Foreign Securities Risk • Emerging Markets Risk • Sovereign Debt Securities Risk • Short Position Risk • Cash Management Risk • Convertible Securities Risk • Dollar Roll and Sale-Buyback Transactions Risk • Equity Risk • Leveraging Risk • LIBOR Risk • Liquidity Risk • Market Risk • Mortgage-Related and Other Asset-Backed Securities Risk • New Portfolio Risk • Portfolio Management Risk • Portfolio Turnover Risk • Preferred Stock Risk • Prepayment Risk and Extension Risk • Redemption Risk • When-Issued and Delayed Delivery Securities and Forward Commitments Risk • Variable and Floating Rate Securities Risk | |||
EQ/Long-Term Bond Portfolio | Seeks to achieve a total return before expenses that approximates the total return performance of the Bloomberg U.S. Long Government/Credit Bond Index (“Long Government/Credit Index”), including reinvestment of dividends, at a risk level consistent with that of the Long Government/Credit Index. | Under normal market conditions, the Portfolio invests at least 80% of its net assets, plus borrowings for investment purposes, in debt securities and financial instruments that derive their value from such securities. The Portfolio uses a strategy that is commonly referred to as an index strategy. In seeking to achieve the Portfolio’s investment objective, the Sub-Adviser generally will employ a stratified sampling approach to build a portfolio whose broad characteristics match those of the Long Government/Credit Index, which means that the Portfolio is not required to purchase all of the securities represented in the Index. A stratified sampling approach seeks to match the return and characteristics of a particular index without having to purchase every security in that index by selecting a representative sample of securities for the Portfolio based on the characteristics of the index and the particular securities included therein. With respect to the Long Government/Credit Index, such characteristics may include interest rate sensitivity, credit quality and sector diversification. | • Market Risk • Investment Grade Securities Risk • U.S. Government Securities Risk • Interest Rate Risk • Credit Risk • Index Strategy Risk • Derivatives Risk • Liquidity Risk • New Portfolio Risk • Portfolio Management Risk • Prepayment Risk and Extension Risk • Redemption Risk |
D-26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of July 31, 2023, to the VIP Trust’s knowledge, the following persons owned beneficially or of record 5% or more of the outstanding shares of any class of an Acquired Portfolio. A shareholder who owns beneficially, directly or indirectly, 25% or more of an Acquired Portfolio’s outstanding voting securities may be deemed to “control” (as defined in the 1940 Act) that Acquired Portfolio.
Shareholder’s or Contractholder’s | Shares Beneficially Owned | Percent Beneficial Ownership of Shares of the Acquired Portfolio | Percent Beneficial Ownership of Shares of the Combined Portfolio (assuming the Reorganization occurs) | |||||||||
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E-1
GOVERNANCE COMMITTEE CHARTER
EQ Advisors Trust
EQ Premier VIP Trust
1290 Funds
Governance Committee
Charter
Governance Committee Membership
The Governance Committee (the “Committee) of EQ Advisors Trust, EQ Advisors Trust and 1290 Funds (the “Trusts”) shall be composed entirely of members of the Board of Trustees of the Trust who are not “interested persons” of the Trusts (“Independent Trustees”), as defined in §2(a)(10) of the Investment Company Act of 1940, as amended (“1940 Act”) and the rules thereunder. The Committee shall consist of at least two or more such Independent Trustees.
Purposes of the Committee
The purposes of the Committee are to:
1. | consider the size and structure of the Board, and propose nominations for Independent Trustee membership on the Board and membership on all committees of the Trust; |
2. | review the compensation arrangements for the Independent Trustees of the Trust for service as Board members and committee members; |
3. | to review governance practices, including the annual Board self-assessment, and industry “best practices” for mutual fund board members and make recommendations to the Board; |
4. | provide oversight of the Trust’s Chief Compliance Officer (“CCO”); |
5. | review the independence of counsel to the Independent Trustees of the Trusts. |
Board Nominations and Functions
1. | The Committee shall make nominations for Independent Trustee membership on the Board of Trustees (“Board”) of the Trusts. The Committee shall evaluate candidates’ qualifications for Board membership, and their independence from the Trusts’ investment adviser and other principal service providers. Persons selected must not be “interested persons” of the Fund as that term is defined in the 1940 Act. The Committee shall also consider the effect of any relationships beyond those delineated in the 1940 Act that might impair independence, e.g. business, financial or family relationships with the investment adviser or its affiliates. In determining nominees’ qualifications for Board membership, the Committee may consider such other factors as it may determine to be relevant to fulfilling the role of being a member of the Board. If requested by the Committee, the President, and other officers of the Trust, although not members of the Committee, may have a role in recommending candidates and recruiting them for the Board. The Committee shall give recommendations provided by the President and other officers of the Trust the same consideration as any other candidate. |
2. | The control of the selection and nomination process for additional Independent Trustees shall rest solely with the Committee. The President and other officers of the Trust may provide administrative assistance to the Committee in the selection and nomination process. |
3. | The Committee shall periodically review the size and composition of the Board to determine whether it may be appropriate to add additional individuals, including those with different backgrounds or skills from those already on the Board. |
F-1
Committee Nominations and Functions
1. | The Committee shall make nominations for membership on all committees of the Trust and shall review Board committee assignments as necessary. |
2. | The Committee shall review as necessary the responsibilities of any committees of the Board, whether there is a continuing need for each committee, whether there is a need for additional committees, and whether committees should be combined or reorganized. The Committee shall make recommendations for any such action to the full Board. |
3. | The Committee shall also periodically review and make recommendations to the Board regarding the qualifications for committee membership, the structure and operations of the committees and the authority to delegate to subcommittees or to individual committee members. |
Compensation Arrangements for the Independent Trustees and Committee Members
1. | The Committee shall review, as appropriate, the compensation arrangements of the Independent Trustees of the Trust and each committee to determine whether such compensation is appropriate. |
2. | The Committee, in conjunction with Equitable Investment Management Group, LLC and Equitable Investment Management, LLC (collectively, the “Adviser”) may participate in industry surveys relating to mutual fund directors/trustees compensation and board practices or request that such information be provided to the Committee to carry out this function. |
3. | The Committee shall make recommendations to the Board regarding any modifications to the compensation to be paid to the Independent Trustees and committee members for approval. |
Board Governance Practices
The Committee shall consider such governance practices and industry “best practices” from time to time as it deems appropriate, and in any event shall address the following matters.
1. | Trustee Orientation. The Committee shall oversee the process for orientation of new Independent Trustees, which will be prepared and conducted with the assistance of the Adviser and outside legal counsel. The orientation is intended to familiarize new Independent Trustees with (1) their responsibilities under applicable corporate law and the 1940 Act; (2) the operation of the Trust and its principal service providers; and (3) the industry in which the Trust operates. |
2. | Trustee Education. The Committee shall assist the Board in identifying educational topics of interest to be presented, from time to time, at Board meetings. |
3. | Retirement Age. The Committee shall periodically review the Trust’s “Policy on Retirement of an Independent Trustee” and recommend to the Board, as the Committee determines appropriate any changes to such policy. In addition, the Committee shall review Independent Trustee compliance with the requirement that an Independent Trustee must retire from Board service by December 31 of the year in which he or she reaches the age of 75 years. |
4. | Trustee Independence and Potential Conflicts. The Committee shall review with outside legal counsel any issues relating to the independence of any Trustee. |
5. | Annual Self-Assessment. The Committee shall establish, and review as necessary, the process to conduct the annual self-assessment of the Board and committees of the Trust. |
F-2
Compliance Functions
The Committee shall provide the following:
Oversight of the Trust’s CCO
1. | The Committee shall assist the Board in the selection, appointment, retention and termination of the Trusts’ CCO. After considering such matters as it deems appropriate, including the recommendation of the Adviser, the Committee shall propose to the Board an individual who will serve as the Trusts’ CCO and be responsible for administering the Trusts’ Compliance Program (including any replacement of the CCO). |
2. | The Committee shall review and evaluate the CCO’s qualifications, including, when applicable, consideration of the CCO’s effectiveness in devising, implementing, maintaining and updating the Trust’s Compliance Program and the CCO’s overall performance. |
3. | The Committee shall assist the Board in evaluating and approving the compensation paid to the CCO. The Committee shall meet in executive session from time to time, as it deems appropriate, with the Adviser outside the presence of the CCO to discuss the performance and compensation of the CCO and the effectiveness of the Compliance Program. |
Other Powers and Responsibilities
1. | The Committee shall review the independence of counsel to the Independent Trustees of the Trusts. |
2. | The Committee shall normally meet at least semi-annually and is empowered to hold special meetings as circumstances require. |
3. | The Committee shall review any issue delegated to it by the Independent Trustees or the Board. |
4. | The Committee shall be empowered to investigate and report on any other matter brought to its attention within the scope of its duties. |
5. | The Committee shall have the resources and authority appropriate to discharge its responsibilities, including authority to retain special counsel and other experts or consultants at the expense of the Trusts. |
6. | The Committee shall review this Charter at least annually and recommend any changes to the Board. |
F-3
STATEMENT OF ADDITIONAL INFORMATION
Dated: , 2023
EQ PREMIER VIP TRUST
EQ/Conservative Allocation Portfolio EQ/Conservative-Plus Allocation Portfolio EQ/Moderate Allocation Portfolio EQ/Moderate-Plus Allocation Portfolio EQ/Aggressive Allocation Portfolio | Target 2015 Allocation Portfolio Target 2025 Allocation Portfolio Target 2035 Allocation Portfolio Target 2045 Allocation Portfolio Target 2055 Allocation Portfolio |
EQ/Core Plus Bond Portfolio,
each a series of EQ Premier VIP Trust
(each, an “Acquired Portfolio” and together, the “Acquired Portfolios”)
AND
EQ ADVISORS TRUST
EQ/Conservative Allocation Portfolio EQ/Conservative-Plus Allocation Portfolio EQ/Moderate Allocation Portfolio EQ/Moderate-Plus Allocation Portfolio EQ/Aggressive Allocation Portfolio | Target 2015 Allocation Portfolio Target 2025 Allocation Portfolio Target 2035 Allocation Portfolio Target 2045 Allocation Portfolio Target 2055 Allocation Portfolio |
EQ/Core Plus Bond Portfolio,
each a newly-created series of EQ Advisors Trust
(each, an “Acquiring Portfolio” and together, the “Acquiring Portfolios”)
1290 Avenue of the Americas
New York, New York 10104
(877) 222-2144
Acquisition of the assets and assumption of the liabilities of: | By and in exchange for shares of: | |||
EQ/Conservative Allocation Portfolio, a series of the VIP Trust (“Acquired EQ/Conservative Allocation Portfolio”) | ® | EQ/Conservative Allocation Portfolio, a newly-created series of the EQ Trust | ||
EQ/Conservative-Plus Allocation Portfolio, a series of the VIP Trust (“Acquired EQ/Conservative-Plus Allocation Portfolio”) | ® | EQ/Conservative-Plus Allocation Portfolio, a newly-created series of the EQ Trust | ||
EQ/Moderate Allocation Portfolio, a series of the VIP Trust (“Acquired EQ/Moderate Allocation Portfolio”) | ® | EQ/Moderate Allocation Portfolio, a newly-created series of the EQ Trust | ||
EQ/Moderate-Plus Allocation Portfolio, a series of the VIP Trust (“Acquired EQ/Moderate-Plus Allocation Portfolio”) | ® | EQ/Moderate-Plus Allocation Portfolio, a newly-created series of the EQ Trust | ||
EQ/Aggressive Allocation Portfolio, a series of the VIP Trust (“Acquired EQ/Aggressive Allocation Portfolio”) | ® | EQ/Aggressive Allocation Portfolio, a newly-created series of the EQ Trust | ||
Target 2015 Allocation Portfolio, a series of the VIP Trust (“Acquired Target 2015 Allocation Portfolio”) | ® | Target 2015 Allocation Portfolio, a newly-created series of the EQ Trust | ||
Target 2025 Allocation Portfolio, a series of the VIP Trust (“Acquired Target 2025 Allocation Portfolio”) | ® | Target 2025 Allocation Portfolio, a newly-created series of the EQ Trust |
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Target 2035 Allocation Portfolio, a series of the VIP Trust (“Acquired Target 2035 Allocation Portfolio”) | ® | Target 2035 Allocation Portfolio, a newly-created series of the EQ Trust | ||
Target 2045 Allocation Portfolio, a series of the VIP Trust (“Acquired Target 2045 Allocation Portfolio”) | ® | Target 2045 Allocation Portfolio, a newly-created series of the EQ Trust | ||
Target 2055 Allocation Portfolio, a series of the VIP Trust (“Acquired Target 2055 Allocation Portfolio”) | ® | Target 2055 Allocation Portfolio, a newly-created series of the EQ Trust | ||
EQ/Core Plus Bond Portfolio, a series of the VIP Trust (“Acquired EQ/Core Plus Bond Portfolio”) | ® | EQ/Core Plus Bond Portfolio, a series of the EQ Trust |
This Statement of Additional Information (the “SAI”) relates specifically to the proposed reorganization of each Acquired Portfolio into the corresponding Acquiring Portfolio under which the Acquiring Portfolio would acquire all of the assets of the Acquired Portfolio in exchange solely for shares of the Acquiring Portfolio and that Acquiring Portfolio’s assumption of all of the corresponding Acquired Portfolio’s liabilities (the “Reorganizations”). This SAI is available to owners of and participants in variable life insurance contracts and variable annuity contracts and certificates (the “Contracts”) with amounts allocated to an Acquired Portfolio and to other shareholders of the Acquired Portfolios as of July 31, 2023.
This SAI is not a prospectus. A Combined Proxy Statement and Prospectus dated , 2023, relating to the Reorganizations (the “Proxy Statement/Prospectus”) may be obtained, without charge, by writing to EQ Advisors Trust (the “EQ Trust”) or EQ Premier VIP Trust (the “VIP Trust”) at 1290 Avenue of the Americas, New York, New York 10104 or calling 1-877-222-2144. This SAI should be read in conjunction with the Proxy Statement/Prospectus.
Contents of the SAI
The combined Statement of Additional Information of the VIP Trust dated May 1, 2023, as supplemented, with respect to the Acquired EQ/Conservative Allocation Portfolio, Acquired EQ/Conservative-Plus Allocation Portfolio, Acquired EQ/Moderate Allocation Portfolio, Acquired EQ/Moderate-Plus Allocation Portfolio, and Acquired EQ/Aggressive Allocation Portfolio (together, the “Acquired EQ Allocation Portfolios”), and the Acquired Target 2015 Allocation Portfolio, Acquired Target 2025 Allocation Portfolio, Acquired Target 2035 Allocation Portfolio, Acquired Target 2045 Allocation Portfolio, and Acquired Target 2055 Allocation Portfolio (together, the “Acquired Target Allocation Portfolios”) (File Nos. 333-70754 and 811-10509).
The combined Statement of Additional Information of the EQ Trust with respect to the EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, and Target 2055 Allocation Portfolio.
The Statement of Additional Information of the VIP Trust dated May 1, 2023, as supplemented, with respect to the Acquired EQ/Core Plus Bond Portfolio (File Nos. 333-70754 and 811-10509).
The Statement of Additional Information of the EQ Trust with respect to the EQ/Core Plus Bond Portfolio.
The audited financial statements of the VIP Trust for the fiscal year ended December 31, 2022, including the financial highlights, for the aforementioned Acquired Portfolios (File No. 811-10509).
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Information Incorporated by Reference
This following documents relating to the Acquired Portfolios have been filed with the Securities and Exchange Commission (the “SEC”) and are incorporated by reference into this SAI, which means that they are considered legally to be part of this SAI:
The combined Statement of Additional Information of the VIP Trust dated May 1, 2023, as supplemented, with respect to the Acquired EQ Allocation Portfolios and the Acquired Target Allocation Portfolios is incorporated by reference to Post-Effective Amendment No. 70 to the VIP Trust’s registration statement on Form N-1A (File Nos. 333-70754 and 811-10509) as filed with the SEC on April 26, 2023.
The Statement of Additional Information of the VIP Trust dated May 1, 2023, as supplemented, with respect to the Acquired EQ/Core Plus Bond Portfolio is incorporated by reference to Post-Effective Amendment No. 70 to the VIP Trust’s registration statement on Form N-1A (File Nos. 333-70754 and 811-10509) as filed with the SEC on April 26, 2023.
The audited financial statements of the VIP Trust for the fiscal year ended December 31, 2022, including the financial highlights, for the aforementioned Acquired Portfolios appearing in the VIP Trust’s Annual Report to Shareholders, are incorporated by reference to the VIP Trust’s Form N-CSR (File No. 811-10509) filed with the SEC on March 3, 2023.
Information relating to the Acquiring Portfolios is not incorporated by reference into this SAI. Rather, information relating to the Acquiring Portfolios is contained in this SAI.
Supplemental Financial Information (Unaudited)
A table showing the current fees and expenses of each Acquired Portfolio and the fees and expenses of each corresponding Acquiring Portfolio on a pro forma basis after giving effect to the proposed Reorganization is included in the following sections of the Proxy Statement/Prospectus:
• | With respect to the Reorganization of the Acquired EQ/Conservative Allocation Portfolio, a series of the VIP Trust, merging into the EQ/Conservative Allocation Portfolio, a series of the EQ Trust: “Proposal 1A — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
• | With respect to the Reorganization of the Acquired EQ/Conservative-Plus Allocation Portfolio, a series of the VIP Trust, merging into the EQ/Conservative-Plus Allocation Portfolio, a series of the EQ Trust: “Proposal 1B — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
• | With respect to the Reorganization of the Acquired EQ/Moderate Allocation Portfolio, a series of the VIP Trust, merging into the EQ/Moderate Allocation Portfolio, a series of the EQ Trust: “Proposal 1C — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
• | With respect to the Reorganization of the Acquired EQ/Moderate-Plus Allocation Portfolio, a series of the VIP Trust, merging into the EQ/Moderate-Plus Allocation Portfolio, a series of the EQ Trust: “Proposal 1D — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
• | With respect to the Reorganization of the Acquired EQ/Aggressive Allocation Portfolio, a series of the VIP Trust, merging into the EQ/Aggressive Allocation Portfolio, a series of the EQ Trust: “Proposal 1E — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
• | With respect to the Reorganization of the Acquired Target 2015 Allocation Portfolio, a series of the VIP Trust, merging into the Target 2015 Allocation Portfolio, a series of the EQ Trust: “Proposal 2A — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
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• | With respect to the Reorganization of the Acquired Target 2025 Allocation Portfolio, a series of the VIP Trust, merging into the Target 2025 Allocation Portfolio, a series of the EQ Trust: “Proposal 2B — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
• | With respect to the Reorganization of the Acquired Target 2035 Allocation Portfolio, a series of the VIP Trust, merging into the Target 2035 Allocation Portfolio, a series of the EQ Trust: “Proposal 2C — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
• | With respect to the Reorganization of the Acquired Target 2045 Allocation Portfolio, a series of the VIP Trust, merging into the Target 2045 Allocation Portfolio, a series of the EQ Trust: “Proposal 2D — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
• | With respect to the Reorganization of the Acquired Target 2055 Allocation Portfolio, a series of the VIP Trust, merging into the Target 2055 Allocation Portfolio, a series of the EQ Trust: “Proposal 2E — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
• | With respect to the Reorganization of the Acquired EQ/Core Plus Bond Portfolio, a series of the VIP Trust, merging into the EQ/Core Plus Bond Portfolio, a series of the EQ Trust: “Proposal 3 — Comparative Fee and Expense Tables — Shareholder Fees and Annual Operating Expenses” |
With respect to the Reorganization of each Acquired Portfolio, the Reorganization will not result in a material change to the Acquired Portfolio’s investment portfolio due to the investment restrictions of its corresponding Acquiring Portfolio. Each security held by each Acquired Portfolio is eligible to be held by its corresponding Acquiring Portfolio based on the investment restrictions of the Acquiring Portfolio. Notwithstanding the foregoing, changes may be made to each Acquired Portfolio’s portfolio in advance of the Reorganization and/or its corresponding Acquiring Portfolio’s portfolio following the Reorganization.
There are no material differences in accounting policies of each Acquired Portfolio as compared to those of the corresponding Acquiring Portfolio.
Please note that, currently, a Statement of Additional Information of the VIP Trust, dated May 1, 2023, as supplemented, comprises the Acquired EQ Allocation Portfolios and the Acquired Target Allocation Portfolios, and a separate Statement of Additional Information of the VIP Trust, dated May 1, 2023, as supplemented, comprises the Acquired EQ/Core Plus Bond Portfolio. For this reason, this SAI contains a Statement of Additional Information of the EQ Trust comprising the EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, and Target 2055 Allocation Portfolio, followed by a separate Statement of Additional Information of the EQ Trust comprising the EQ/Core Plus Bond Portfolio.
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EQ/Conservative-Plus Allocation Portfolio
EQ/Moderate Allocation Portfolio
EQ/Moderate-Plus Allocation Portfolio
EQ/Aggressive Allocation Portfolio
Target 2015 Allocation Portfolio
Target 2025 Allocation Portfolio
Target 2035 Allocation Portfolio
Target 2045 Allocation Portfolio
Target 2055 Allocation Portfolio
Page | |
Description of The Trust | |
Trust Investment Policies | |
Investment Strategies and Risks | |
Portfolio Holdings Disclosure Policy | |
Management of the Trust | |
Investment Management and Other Services | |
Brokerage Allocation and Other Strategies | |
Proxy Voting Policies and Procedures | |
Conflicts of Interest | |
Purchase, Redemption And Pricing of Shares | |
Taxation | |
Other Information | |
Other Services | |
Financial Statements | |
Appendix A — Ratings of Corporate Debt Securities | |
Appendix B — Portfolio Manager Information | |
Appendix C — Proxy Voting Policies and Procedures | C-1 |
EQ/Conservative-Plus Allocation Portfolio
EQ/Moderate Allocation Portfolio
EQ/Moderate-Plus Allocation Portfolio
EQ/Aggressive Allocation Portfolio
(collectively, referred to in this SAI as “EQ Allocation Portfolios”)
Target 2015 Allocation Portfolio
Target 2025 Allocation Portfolio
Target 2035 Allocation Portfolio
Target 2045 Allocation Portfolio
Target 2055 Allocation Portfolio
(collectively, referred to in this SAI as “Target Allocation Portfolios”)
Name, Address and Year of Birth | Position(s) Held With the Trust | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee† | Other Directorships Held by Trustee |
Interested Trustee | |||||
Steven M. Joenk* 1290 Avenue of the Americas, New York, NY, 10104 (1958) | Trustee and Chief Executive Officer | Trustee from September 2004 to present; Chief Executive Officer from December 2002 to present; and Chairman of the Board from September 2004 through September 2017 | Chairman of the Board and Chief Executive Officer (May 2011 to present) and President (May 2011 to November 2021) of EIM; Chairman of the Board and Chief Executive Officer of Equitable Investment Management, LLC (January 2023 to present); Senior Vice President and Chief Investment Officer of AXA Financial, Inc. (April 2017 to 2019); and Chief Investment Officer (April 2017 to present) and employee (September 1999 to present) of Equitable Financial. | 125 | None |
Name, Address and Year of Birth | Position(s) Held With the Trust | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee† | Other Directorships Held by Trustee |
Independent Trustees | |||||
Mark A. Barnard c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1949) | Trustee | April 2017 to present | Retired. Previously, Managing Director – Private Investments, Howard Hughes Medical Institute, 2001 to 2016 (and, prior thereto, Director of Private Investments from 1998 to 2001, and Manager of Private Investments from 1995 to 1998). | 125 | None. |
Thomas W. Brock c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1947) | Trustee | January 2016 to present | Retired. Previously, Director, President and Chief Executive Officer of Silver Bay Realty Trust Corp., June 2016 to May 2017 (and, prior thereto, Director and interim President and Chief Executive Officer from January 2016 to June 2016); Chief Executive Officer and Co-Founder of Stone Harbor Investment Partners, 2006 to 2012. | 125 | Liberty All-Star Funds (2) |
Michael B. Clement c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1957) | Trustee | January 2019 to present | Professor of Accounting, University of Texas, from 1997 to 2002 and from 2004 to present (Department of Accounting Chair from 2018 to 2022); Visiting Professor, Harvard Business School, 2023 to present. | 125 | New York Mortgage Trust |
Donald E. Foley c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1951) | Trustee | January 2014 to present | Retired. Previously, Chairman of the Board and Chief Executive Officer, Wilmington Trust Corporation, 2010 to 2011; Senior Vice President, Treasurer and Director of Tax, ITT Corporation, 1996 to 2010. | 125 | BioSig Technologies, Inc.; Wilmington Funds (12) |
Patricia M. Haverland c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1956) | Trustee | April 2022 to present | Retired. Previously, Vice President and Chief Investment Officer North America Pensions, SIEMENS, 2009 to 2018. | 125 | None. |
Name, Address and Year of Birth | Position(s) Held With the Trust | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee† | Other Directorships Held by Trustee |
H. Thomas McMeekin c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1953) | Trustee | January 2014 to present | Managing Partner and Founder, Griffin Investments, LLC, 2000 to present; CEO of Blue Key Services, LLC., 2015 to present; previously, Chief Investment Officer, AIG Life & Retirement and United Guaranty Corporation and Senior Managing Director of AIG Asset Management, 2009 to 2012. | 125 | None. |
Jeffery S. Perry c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1965) | Trustee | April 2022 to present | Founder and Chief Executive Officer, Lead Mandates LLC (business and leadership advisory firm). Retired, Global Client Service Partner, Ernst & Young LLP, 2004 to 2020. | 125 | Fortune Brands Innovations, Inc.; MasterBrand, Inc. |
Gary S. Schpero c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1953) | Chairman of the Board | Independent Trustee, May 2000 to present; Lead Independent Trustee, September 2011 to September 2017; Chairman of the Board, October 2017 to present. | Retired. Prior to January 1, 2000, Partner of Simpson Thacher & Bartlett (law firm) and Managing Partner of the Investment Management and Investment Company Practice Group. | 125 | Blackstone Funds (4) |
Name, Address and Year of Birth | Position(s) Held With the Trust | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee† | Other Directorships Held by Trustee |
Kathleen Stephansen c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1954) | Trustee | January 2019 to present | Senior Economist, Haver Analytics, 2019 to present; Senior Economic Advisor, Boston Consulting Group, 2018 to 2019 and in 2016; Chief Economist, Huawei Technologies USA Inc., 2016 to 2018; various positions at American International Group, including Chief Economist and Senior Managing Director and Senior Investment Strategies and Global Head of Sovereign Research – AIG Asset Management from 2010 to 2016. | 125 | None. |
for the Year Ended December 31, 20221
Trustee | Aggregate Compensation from the Trust | Pension or Retirement Benefits Accrued As Part of Trust Expenses | Estimated Annual Benefits Upon Retirement | Total Compensation from Trust and Fund Complex Paid to Trustees2 |
Interested Trustee | ||||
Steven M. Joenk | $0 | $0 | $0 | $0 |
Independent Trustees | ||||
Mark A. Barnard | $381,044 | $0 | $0 | $441,454 |
Thomas W. Brock | $397,046 | $0 | $0 | $460,000 |
Michael B. Clement | $397,046 | $0 | $0 | $460,000 |
Donald E. Foley | $397,046 | $0 | $0 | $460,000 |
Patricia M. Haverland3 | $318,308 | $0 | $0 | $368,750 |
H. Thomas McMeekin | $400,287 | $0 | $0 | $463,750 |
Jeffery S. Perry3 | $318,308 | $0 | $0 | $368,750 |
Gloria Reeg4 | $196,225 | $0 | $0 | $227,500 |
Gary S. Schpero | $501,701 | $0 | $0 | $581,250 |
Kathleen Stephansen | $365,756 | $0 | $0 | $423,750 |
as of December 31, 2022
Name of Trustee | Dollar Range of Equity Securities in the Portfolios of the Trust | Aggregate Dollar Range of Equity Securities in All Portfolios Overseen in Family of Investment Companies* |
Interested Trustee | ||
Steven M. Joenk | 1290 VT GAMCO Small Company Value Portfolio - E | E |
Independent Trustees | ||
Mark A. Barnard | None | C |
Thomas W. Brock | None | C |
Michael B. Clement | None | D |
Donald E. Foley | None | C |
Patricia M. Haverland | None | D |
H. Thomas McMeekin | None | C |
Jeffery S. Perry | None | B |
Name of Trustee | Dollar Range of Equity Securities in the Portfolios of the Trust | Aggregate Dollar Range of Equity Securities in All Portfolios Overseen in Family of Investment Companies* |
Gary S. Schpero | None | C |
Kathleen Stephansen | None | C |
Name, Year of Birth and Address* | Position(s) Held With the Trust** | Term of Office*** and Length of Time Served | Principal Occupation(s) During Past 5 Years |
Steven M. Joenk (1958) | Trustee and Chief Executive Officer | Trustee from September 2004 to present; Chief Executive Officer from December 2002 to present; and Chairman of the Board from September 2004 through September 2017 | Chairman of the Board and Chief Executive Officer (May 2011 to present) and President (May 2011 to November 2021) of EIM; Chairman of the Board and Chief Executive Officer of Equitable Investment Management, LLC (January 2023 to present); Senior Vice President and Chief Investment Officer of AXA Financial, Inc. (April 2017 to 2019); and Chief Investment Officer (April 2017 to present) and employee (September 1999 to present) of Equitable Financial. |
Michal Levy (1979) | President | From February 2023 to present | Director (December 2014 to present), President (December 2021 to present), and Chief Operating Officer (March 2017 to present) of EIM; Executive Vice President and Chief Operating Officer of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (October 2011 to present) of Equitable Financial. |
Brian Walsh (1968) | Chief Financial Officer and Treasurer | From June 2007 to present | Director (February 2011 to present) and Senior Vice President (May 2011 to present) of EIM; Senior Vice President of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (February 2003 to present) of Equitable Financial. |
Name, Year of Birth and Address* | Position(s) Held With the Trust** | Term of Office*** and Length of Time Served | Principal Occupation(s) During Past 5 Years |
Joseph J. Paolo**** (1970) | Chief Compliance Officer, Vice President and Anti- Money Laundering Compliance Officer | Chief Compliance Officer from May 2007 to present, Vice President and Anti- Money Laundering Compliance Officer from November 2005 to present | Chief Compliance Officer (June 2007 to present) and Senior Vice President (May 2011 to present) of EIM; Vice President and Chief Compliance Officer of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (June 2007 to present) of Equitable Financial. |
Kenneth Kozlowski (1961) | Senior Vice President and Chief Investment Officer | Vice President from June 2010 to June 2016; Senior Vice President and Chief Investment Officer from June 2016 to present | Executive Vice President and Chief Investment Officer (June 2012 to present) and Director (May 2017 to present) of EIM; Executive Vice President of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (February 2001 to present) of Equitable Financial. |
Alwi Chan (1974) | Vice President and Deputy Chief Investment Officer | Vice President from June 2007 to present; Deputy Chief Investment Officer from June 2016 to present | Senior Vice President and Deputy Chief Investment Officer of EIM (June 2012 to present); and employee of Equitable Financial (June 1999 to present). |
James Chen (1988) | Vice President and Director of Risk | From August 2022 to present | Vice President of EIM (July 2022 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); employee of Equitable Financial (2015 to present). |
James Kelly (1968) | Controller | From June 2007 to present | Vice President of EIM (May 2011 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (September 2008 to present). |
Andrew Houston (1990) | Vice President | From September 2022 to present | Vice President of EIM (July 2022 to present), Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (2017 to present). |
Miao Hu (1978) | Vice President | From June 2016 to present | Assistant Portfolio Manager (May 2016 to present) and Vice President (June 2016 to present) of EIM; and employee of Equitable Financial (November 2013 to present). |
Kevin McCarthy (1983) | Vice President | From September 2019 to present | Assistant Portfolio Manager (December 2018 to present) and Vice President (July 2022 to present) of EIM; and employee of Equitable Financial (August 2015 to present). |
Xavier Poutas (1977) | Vice President | From June 2016 to present | Assistant Portfolio Manager (May 2011 to present) and Vice President (June 2016 to present) of EIM; and employee of Equitable Financial (August 2002 to present). |
Name, Year of Birth and Address* | Position(s) Held With the Trust** | Term of Office*** and Length of Time Served | Principal Occupation(s) During Past 5 Years |
Shane Daly (1970) | Chief Legal Officer, Senior Vice President and Secretary | From March 2023 to present | Executive Vice President, Secretary and General Counsel of EIM and Equitable Investment Management, LLC (March 2023 to present); employee of Equitable Financial (2011 to present). |
Maureen E. Kane, Esq. (1962) | Vice President and Assistant Secretary | From March 2023 to present | Senior Vice President, Assistant Secretary and Associate General Counsel of EIM and Equitable Investment Management, LLC (March 2023 to present); employee of Equitable Financial (February 2019 to present); and Managing Director and Managing Counsel of The Bank of New York Mellon (July 2014 to February 2019). |
Kristina B. Magolis, Esq. (1985) | Vice President and Assistant Secretary | From November 2022 to present | Vice President, Assistant Secretary and Associate General Counsel of EIM (October 2022 to present); Vice President, Assistant Secretary and Associate General Counsel of Equitable Investment Management, LLC (January 2023 to present); employee of Equitable Financial (October 2022 to present); and Vice President, Legal and Compliance, Morgan Stanley Investment Management (August 2017 to September 2022). |
Cheryl Cherian (1979) | Vice President and Assistant Secretary | From March 2023 to present | Employee of Equitable Financial (April 2019 to present); and Compliance Associate at Manifold Fund Advisors (November 2016 to March 2018). |
Artemis Brannigan (1974) | Vice President | From September 2019 to present | Vice President of EIM (August 2019 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); employee of Equitable Financial (August 2019 to present); and Director of Prudential Financial (January 2016 to July 2019). |
Aysha Pride (1988) | Vice President | From August 2022 to present | Vice President of EIM (July 2022 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (2014 to present). |
Helen Lai (1973) | Assistant Vice President | From June 2016 to present | Employee of Equitable Financial (March 2013 to present). |
Michelle Gallo (1973) | Assistant Controller | From March 2023 to present | Employee of Equitable Financial (July 2013 to present) |
Roselle Ibanga (1978) | Assistant Controller | From March 2009 to present | Employee of Equitable Financial (February 2009 to present). |
Lisa Perrelli (1974) | Assistant Controller | From March 2009 to present | Employee of Equitable Financial (November 2002 to present). |
Name, Year of Birth and Address* | Position(s) Held With the Trust** | Term of Office*** and Length of Time Served | Principal Occupation(s) During Past 5 Years |
Jennifer Mastronardi (1985) | Assistant Vice President | From March 2012 to present | Vice President of EIM (April 2015 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (February 2009 to present). |
Helen Espaillat (1963) | Assistant Secretary | From March 2009 to present | Assistant Vice President and Assistant Secretary of EIM (March 2015 to present); Assistant Vice President and Assistant Secretary of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (July 2004 to present). |
Lorelei Fajardo (1978) | Assistant Secretary | From June 2016 to present | Employee of Equitable Financial (July 2013 to present). |
Monica Giron (1976) | Assistant Secretary | From July 2019 to present | Employee of Equitable Financial (June 2019 to present); and Senior Paralegal at Gemini Fund Services (August 2015 to May 2019). |
Acquired Portfolios: | Management Fee | Amount of Fees Waived And Other Expenses Assumed by Adviser Pursuant to Expense Limitation Arrangement | Management Fee Paid to Adviser After Fee Waiver |
Acquired EQ/Aggressive Allocation Portfolio | $3,079,324 | $— | $3,079,324 |
Acquired EQ/Conservative Allocation Portfolio | $1,076,949 | $506,575 | $570,374 |
Acquired EQ/Conservative-Plus Allocation Portfolio | $1,180,143 | $— | $1,180,143 |
Acquired EQ/Moderate Allocation Portfolio | $6,459,266 | $— | $6,459,266 |
Acquired EQ/Moderate-Plus Allocation Portfolio | $7,633,217 | $— | $7,633,217 |
Acquired Target 2015 Allocation Portfolio | $44,888 | $118,344 | $— |
Acquired Target 2025 Allocation Portfolio | $170,386 | $35,702 | $134,684 |
Acquired Target 2035 Allocation Portfolio | $160,056 | $8,122 | $151,934 |
Acquired Target 2045 Allocation Portfolio | $129,626 | $16,981 | $112,645 |
Acquired Target 2055 Allocation Portfolio | $36,137 | $83,214 | $— |
Acquired Portfolios: | Management Fee | Amount of Fees Waived And Other Expenses Assumed by Adviser Pursuant to Expense Limitation Arrangement | Management Fee Paid to Adviser After Fee Waiver |
Acquired EQ/Aggressive Allocation Portfolio | $3,667,633 | $— | $3,667,633 |
Acquired EQ/Conservative Allocation Portfolio | $1,088,195 | $282,557 | $805,638 |
Acquired EQ/Conservative-Plus Allocation Portfolio | $1,229,569 | $— | $1,229,569 |
Acquired EQ/Moderate Allocation Portfolio | $6,906,879 | $— | $6,906,879 |
Acquired EQ/Moderate-Plus Allocation Portfolio | $8,577,995 | $— | $8,577,995 |
Acquired Target 2015 Allocation Portfolio | $46,180 | $94,567 | $— |
Acquired Target 2025 Allocation Portfolio | $189,971 | $— | $189,972 |
Acquired Target 2035 Allocation Portfolio | $205,892 | $— | $205,892 |
Acquired Target 2045 Allocation Portfolio | $176,824 | $— | $176,824 |
Acquired Target 2055 Allocation Portfolio | $60,349 | $15,774 | $44,575 |
Acquired Portfolios: | Management Fee | Amount of Fees Waived And Other Expenses Assumed by Adviser Pursuant to Expense Limitation Arrangement | Management Fee Paid to Adviser After Fee Waiver |
Acquired EQ/Aggressive Allocation Portfolio | $3,061,769 | $— | $3,061,769 |
Acquired EQ/Conservative Allocation Portfolio | $897,935 | $305,671 | $592,264 |
Acquired EQ/Conservative-Plus Allocation Portfolio | $1,008,130 | $— | $1,008,130 |
Acquired EQ/Moderate Allocation Portfolio | $5,731,033 | $— | $5,731,033 |
Acquired EQ/Moderate-Plus Allocation Portfolio | $7,065,940 | $— | $7,065,940 |
Acquired Target 2015 Allocation Portfolio | $35,856 | $108,007 | $— |
Acquired Target 2025 Allocation Portfolio | $152,433 | $7,829 | $144,604 |
Acquired Target 2035 Allocation Portfolio | $191,115 | $— | $191,115 |
Acquired Portfolios: | Management Fee | Amount of Fees Waived And Other Expenses Assumed by Adviser Pursuant to Expense Limitation Arrangement | Management Fee Paid to Adviser After Fee Waiver |
Acquired Target 2045 Allocation Portfolio | $170,865 | $— | $170,865 |
Acquired Target 2055 Allocation Portfolio | $66,777 | $20,466 | $46,311 |
Acquired Portfolios: | Administration Fee |
Acquired EQ/Aggressive Allocation Portfolio | $3,911,382 |
Acquired EQ/Conservative Allocation Portfolio | $1,330,601 |
Acquired EQ/Conservative-Plus Allocation Portfolio | $1,457,790 |
Acquired EQ/Moderate Allocation Portfolio | $8,553,629 |
Acquired EQ/Moderate-Plus Allocation Portfolio | $10,210,409 |
Acquired Target 2015 Allocation Portfolio | $55,451 |
Acquired Target 2025 Allocation Portfolio | $210,490 |
Acquired Target 2035 Allocation Portfolio | $197,730 |
Acquired Target 2045 Allocation Portfolio | $160,138 |
Acquired Target 2055 Allocation Portfolio | $44,653 |
Acquired Portfolios: | Administration Fee |
Acquired EQ/Aggressive Allocation Portfolio | $4,498,725 |
Acquired EQ/Conservative Allocation Portfolio | $1,287,726 |
Acquired EQ/Conservative-Plus Allocation Portfolio | $1,454,847 |
Acquired EQ/Moderate Allocation Portfolio | $8,798,567 |
Acquired EQ/Moderate-Plus Allocation Portfolio | $11,069,642 |
Acquired Target 2015 Allocation Portfolio | $54,652 |
Acquired Target 2025 Allocation Portfolio | $224,765 |
Acquired Target 2035 Allocation Portfolio | $243,531 |
Acquired Target 2045 Allocation Portfolio | $209,113 |
Acquired Target 2055 Allocation Portfolio | $71,341 |
Acquired Portfolios: | Administration Fee |
Acquired EQ/Aggressive Allocation Portfolio | $3,912,211 |
Acquired EQ/Conservative Allocation Portfolio | $1,106,684 |
Acquired EQ/Conservative-Plus Allocation Portfolio | $1,242,141 |
Acquired EQ/Moderate Allocation Portfolio | $7,563,209 |
Acquired EQ/Moderate-Plus Allocation Portfolio | $9,440,580 |
Acquired Target 2015 Allocation Portfolio | $44,178 |
Acquired Target 2025 Allocation Portfolio | $187,880 |
Acquired Target 2035 Allocation Portfolio | $235,779 |
Acquired Target 2045 Allocation Portfolio | $210,832 |
Acquired Target 2055 Allocation Portfolio | $82,495 |
Acquired Portfolios: | Class A Fee Paid to Distributor | Class B Fee Paid to Distributor | Total Distribution Fees |
Acquired EQ/Aggressive Allocation Portfolio | $198,992 | $7,658,026 | $7,857,018 |
Acquired EQ/Conservative Allocation Portfolio | $31,951 | $2,193,071 | $2,225,023 |
Acquired EQ/Conservative-Plus Allocation Portfolio | $41,349 | $2,420,721 | $2,462,070 |
Acquired EQ/Moderate Allocation Portfolio | $4,298,125 | $10,374,330 | $14,672,455 |
Acquired EQ/Moderate-Plus Allocation Portfolio | $498,507 | $18,513,141 | $19,011,648 |
Acquired Target Allocation 2015 Portfolio | $— | $48,872 | $48,872 |
Acquired Target Allocation 2025 Portfolio | $— | $298,092 | $298,092 |
Acquired Target Allocation 2035 Portfolio | $— | $423,583 | $423,583 |
Acquired Portfolios: | Class A Fee Paid to Distributor | Class B Fee Paid to Distributor | Total Distribution Fees |
Acquired Target Allocation 2045 Portfolio | $— | $398,313 | $398,313 |
Acquired Target Allocation 2055 Portfolio | $— | $165,988 | $165,988 |
EQ Allocation Portfolios Target Allocation Portfolios Equitable Investment Management Group, LLC (“Adviser”) | ||||||||||||
Presented below for each portfolio manager is the number of other accounts managed by the portfolio manager and the total assets in the accounts managed within each category as of _____, 2023. | Presented below for each of the categories is the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on the performance of the account. | |||||||||||
Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | |||||||
Portfolio Manager | Number of Accounts | Total Assets (Billion) | Number of Accounts | Total Assets (Million) | Number of Accounts | Total Assets | Number of Accounts | Total Assets | Number of Accounts | Total Assets | Number of Accounts | Total Assets |
EQ/Conservative Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
EQ/Conservative-Plus Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
EQ/Moderate Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
EQ/Moderate-Plus Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
EQ/Aggressive Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Target 2015 Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Miao Hu | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Kevin McCarthy | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Target 2025 Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Miao Hu | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Kevin McCarthy | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A |
EQ Allocation Portfolios Target Allocation Portfolios Equitable Investment Management Group, LLC (“Adviser”) | ||||||||||||
Presented below for each portfolio manager is the number of other accounts managed by the portfolio manager and the total assets in the accounts managed within each category as of _____, 2023. | Presented below for each of the categories is the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on the performance of the account. | |||||||||||
Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | |||||||
Portfolio Manager | Number of Accounts | Total Assets (Billion) | Number of Accounts | Total Assets (Million) | Number of Accounts | Total Assets | Number of Accounts | Total Assets | Number of Accounts | Total Assets | Number of Accounts | Total Assets |
Target 2035 Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Miao Hu | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Kevin McCarthy | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Target 2045 Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Miao Hu | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Kevin McCarthy | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Target 2055 Allocation Portfolio | ||||||||||||
Kenneth T. Kozlowski | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Alwi Chan | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Xavier Poutas | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Miao Hu | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A | ||||
Kevin McCarthy | 0 | N/A | 0 | N/A | 0 | N/A | 0 | N/A |
PROXY VOTING POLICIES AND PROCEDURES
EQ ADVISORS TRUST
EQ PREMIER VIP TRUST
1290 FUNDS
(individually, a “Trust” and collectively, the “Trusts”)
I. Trusts’ Policy Statement
Each Trust is firmly committed to ensuring that proxies relating to the Trust’s portfolio securities are voted in the best interest of the Trust. The following policies and procedures have been established to implement each Trust’s proxy voting program (the “Program”).
II. Trusts’ Proxy Voting Program
Equitable Investment Management Group, LLC and Equitable Investment Management, LLC (collectively, “EIM”) serve as the investment advisers to each series of the Trusts (each, a “Portfolio”, and together, the “Portfolios”). Each Trust has delegated proxy voting responsibility with respect to each Portfolio to EIM. EIM, through its Proxy Voting Committee, is responsible for monitoring and administering the Program. Equitable Investment Management, LLC (“Administrator”) serves as the administrator of the Trusts and is generally responsible for monitoring, testing and maintaining compliance policies, procedures and other items for the Trusts, and thus assists in monitoring compliance with applicable requirements pursuant to these Policies and Procedures.
A. | Sub-Advised Portfolios |
EIM is responsible for the selection and ongoing monitoring of investment sub-advisers (the “Sub-Advisers”) who, among other responsibilities, provide portfolio management services including the day-to-day research and stock selection for each sub-advised Portfolio or an allocated portion of a Portfolio (a “Sub-Advised Portfolio”). EIM views proxy voting as a function that is incidental and integral to the portfolio management services provided by Sub-Advisers. Therefore, except as described in Section III below, EIM, in turn, delegates proxy voting responsibility with respect to each Sub-Advised Portfolio to the applicable Sub-Adviser. The primary focus of the Trusts’ Program as it relates to the Sub-Advised Portfolios, therefore, is to seek to ensure that the Sub-Advisers have adequate proxy voting policies and procedures in place and to monitor each Sub-Adviser’s proxy voting. The Sub-Advisers’ proxy voting policies and procedures may be amended from time to time and need not be identical.
B. | “Fund-of-Funds Portfolios” |
EIM provides the day-to-day portfolio management services to certain Portfolios, or an allocated portion of a Portfolio (“Allocated Portion”), each of which seeks to achieve its investment objective by investing in other mutual funds managed by EIM (“Underlying Affiliated Portfolios”), unaffiliated mutual funds (“Underlying Unaffiliated Funds”) or exchange-traded funds (“Underlying ETFs”) (referred to collectively as the “Fund-of-Funds Portfolios”). Accordingly, EIM retains proxy voting responsibility with respect to each Fund-of-Funds Portfolio and votes proxies in accordance with the policies and procedures set forth in Section III below.
III. EIM’s Proxy Voting Policies and Procedures
EIM has a fiduciary duty to vote proxies on behalf of a Portfolio in the best interest of the Portfolio and its shareholders. EIM believes that its proxy voting policies and procedures represent the voting positions most likely to support a Portfolio’s and its shareholders’ best interests across a range of sectors and contexts.
A. | Underlying Affiliated Portfolios. EIM will vote the Fund-of-Funds Portfolios’ or Allocated Portions’ shares in Underlying Affiliated Portfolios either for or against a proposal, or abstain, in the same proportion as the vote of all other securities holders of the applicable Underlying Affiliated Portfolio |
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(whether or not the proposal presents an issue as to which EIM or its affiliates could be deemed to have a conflict of interest). If there are no security holders of an Underlying Affiliated Portfolio except Fund-of-Funds Portfolio, EIM will vote a Fund-of-Funds’ Portfolios’ shares in Underlying Affiliated Portfolio in its discretion, subject to compliance with other provisions of these Procedures, including Section III.E.2. below regarding resolution of potential conflicts of interest regarding a proposal. |
B. | Underlying Unaffiliated Funds, Underlying ETFs and Certain Sub-Advised Portfolios. |
a. | With respect to voting proxies of Underlying Unaffiliated Funds and Underlying ETFs where a Portfolio, and other members of its “advisory group” (as defined in Rule 12d1-4 under the Investment Company Act of 1940) in the aggregate (i) hold more than 25% of the outstanding voting securities of an Underlying Unaffiliated Fund or Unaffiliated ETF aasa result of a decrease in the outstanding voting securities of the acquired fund, or (ii) hold more than 10% of the outstanding voting securities of an Underlying Unaffiliated Fund or Unaffiliated ETF that is a registered closed-end management investment company or business development company, each member of such “advisory group” will vote its securities in the same proportion as the vote of all other holders of such securities; provided, however, that in circumstances where all holders of the outstanding voting securities of the Underlying Unaffiliated Fund or Unaffiliated ETF are required by the rule or otherwise under Section 12(d)(1) to vote such securities in the same proportion as the vote of all other holders of such securities, the Portfolio will seek instructions from its security holders with regard to the voting of all proxies with respect to such Underlying Unaffiliated Fund or Underlying ETF securities and vote such proxies only in accordance with such instructions. |
b. | With respect to voting proxies for Underlying Unaffiliated Funds, Underlying ETFs in all other circumstances, and certain Sub-Advised Portfolios as described in Section III. D below, the following guidelines generally will apply: |
1. | The decision whether, and if so, how to vote a proxy will be made by EIM based on what it determines to be in the best interest of the relevant Portfolio and its shareholders and in accordance with these procedures. |
2. | EIM, with the assistance of Administrator, may enlist the services of an independent proxy voting service to assist with the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process, as further described in Section III.E below. |
3. | EIM’s policy is to vote all proxies, except under circumstances in which EIM has determined that it is consistent with the best interest of the relevant Portfolio and its shareholders not to vote the proxy or to abstain on one or more proposals. Such circumstances may include the following: |
a. | When securities are out on loan, they are transferred into the borrower’s name and are voted by the borrower, at its discretion. In most cases, EIM will not take steps to see that loaned securities are voted. However, if EIM determines that a proxy vote is materially important to the relevant Portfolio, EIM will make a good faith effort to recall the loaned security in order to vote. |
b. | If an issuer is based in a country that requires “share blocking,”1 EIM may determine that the value of exercising the vote is outweighed by the detriment of not being able to sell the shares during the blocking period, in which case EIM may not vote the proxy. |
1 | Shareholders in “share blocking” countries wishing to vote must deposit their shares shortly before the date of the meeting (usually one week) with a designated depositary. During the blocking period shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to clients’ custodian banks. |
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c. | EIM may abstain or vote against ballot issues where EIM has not received sufficient information to make an informed decision. |
1. | EIM will include a description of these procedures in each Trust’s Registration Statement. |
2. | Any potential material conflicts of interest associated with voting proxies will be disclosed and reviewed by the Trusts’ Chief Compliance Officer (“CCO”) or other member of EIM’s and Administrator’s Legal and Compliance Department (“Legal and Compliance”). |
3. | EIM will cast votes in a manner consistent with any applicable rule or regulation of the United States Securities and Exchange Commission (“SEC”). |
C. | Seed Capital Investments. EIM and any affiliate will vote Portfolio shares they own, including through “seed money” investments in a Portfolio, either for or against a proposal, or abstain, in the same proportion as the vote of all other security holders of the Portfolio (whether or not the proposal presents an issue as to which EIM or its affiliates could be deemed to have a conflict of interest), or as otherwise required under applicable law (e.g., as may be required under a “mixed and shared funding” order). If EIM or an affiliate is the sole shareholder of a Portfolio, EIM or the affiliate will vote the Portfolio’s shares that it owns in its discretion. |
D. | Sub-Advised Portfolios; No Delegation. Under certain circumstances EIM may assume responsibility for voting the proxies for shares held by a Sub-Advised Portfolio. For example, if a Sub-Adviser notifies EIM that it is unable or unwilling to assume responsibility for voting a proxy for a Sub-Advised Portfolio (e.g., if voting such proxy presents a potential material conflict of interest for the Sub-Adviser), EIM will vote such proxy in accordance with these procedures. |
E. | EIM and Administrator will be required to maintain proxy voting policies and procedures that satisfy the following elements: |
1. | Written Policies and Procedures: EIM and Administrator must maintain written proxy voting policies and procedures in accordance with applicable laws and regulations and must provide to each Trust copies of such policies and procedures. |
2. | Conflicts of Interest: If EIM or Administrator becomes aware that a proxy voting issue may present a potential material conflict of interest, the issue will be referred to the CCO or other member of Legal and Compliance. If the CCO and/or Legal and Compliance determines that an affiliated person of EIM has a potential material conflict, that affiliated person will not participate in the voting decision. |
• | Potential material conflicts may arise between the interests of a Portfolio and EIM or any of its affiliated persons if, for example, a proxy vote relates to a matter involving issuers in which EIM or its affiliates have a substantial economic interest. Potential conflicts of interest include, but are not limited to: |
• | Portfolio Managers owning shares of Underlying Unaffiliated Funds, ETFs or shares of securities that are also held in the Portfolios of the Trust(s). |
• | Equitable Financial Life Insurance Company (“Equitable”) holding investments in Underlying Unaffiliated Funds or ETFs that are also held in the Portfolios of the Trust(s). It is possible that EIM may vote differently than Equitable. |
3. | Voting Guidelines: EIM, with the assistance of Administrator, may engage an independent proxy voting service to assist with the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process as deemed necessary. Currently, EIM subscribes to the corporate governance and proxy research services of International Shareholder Services (“ISS”), a provider of proxy voting services. ISS provides voting recommendations based on established guidelines and practices. The ISS U.S. Proxy Voting Guidelines (the “ISS Guidelines”) are attached hereto as Appendix A. Based on its review of the |
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ISS Guidelines, EIM has determined generally to instruct ISS to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs and certain Sub-Advised Portfolios as described in Section III.D above consistent with the ISS Guidelines. However, EIM’s use of the ISS Guidelines is not intended to constrain EIM’s consideration of any proxy proposal, and so there may be times when EIM deviates from the ISS Guidelines. EIM reserves the right not to vote in accordance with the ISS recommendation if it determines that it is not in the best interest of a Portfolio and its Shareholders to do so. In addition, if EIM becomes aware of a conflict of interest between ISS and an issuer subject to a proxy vote, EIM will consider the recommendation of the issuer and instruct ISS to vote the proxy based on what EIM believes to be in the best interest of the Portfolio and its shareholders. |
The Proxy Voting Committee, with the assistance of Administrator, will maintain records regarding EIM’s determination generally to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs, and certain Sub-Advised Portfolios as described in Section III.D above consistent with the ISS Guidelines, and that determination will be reviewed periodically.
The following guidelines describe EIM’s general positions on common proxy issues for Underlying Unaffiliated Funds and Underlying ETFs:
• | Election of Directors: EIM generally votes in favor of slates recommended by the board of directors. |
• | Fee Increases: EIM generally votes against proposals to increase fees. |
• | Changes to the investment strategy, investment objective or fundamental investment restrictions, and proposed mergers: EIM generally votes against changes that would impact adversely the allocation model of a Fund-of-Funds Portfolio. |
The EIM and Administrator Compliance Department (“Compliance”) will conduct a due diligence review of any proxy voting service (“Proxy Service”) engaged by EIM or Administrator to assess (1) the adequacy and quality of the Proxy Service’s staffing, personnel and technology, and whether the Proxy Service has the capacity and competence to adequately analyze proxy issues and the ability to make proxy voting recommendations based on materially accurate and complete information; (2) whether the Proxy Service has the ability to execute proxy votes in accordance with EIM’s instructions; (3) whether the Proxy Service has adequately disclosed to EIM the methodologies it uses in formulating its voting recommendations, including its process for obtaining current and accurate information relevant to matters included in its research and on which it makes recommendations, the nature of any third-party information sources that the Proxy Service uses as a basis for its voting recommendations, and how and when the Proxy Service would expect to engage with issuers and third parties; (4) the effectiveness of the Proxy Service’s process for seeking timely input from issuers; and (5) the adequacy of the Proxy Service’s policies and procedures for identifying, disclosing and addressing actual and potential conflicts of interest. EIM or Administrator will require the Proxy Service to update EIM or Administrator, as applicable, on an ongoing basis regarding (1) any business changes relevant to its capacity and competence to provide independent proxy voting advice or carry out voting instructions, (2) any conflicts of interest that may arise with respect to its proxy voting recommendations, and (3) any operational or compliance issues or problems. The due diligence review will be conducted at least annually and may be conducted by on-site visit or written questionnaire. In the event that EIM or Administrator becomes aware of factual errors, incompleteness or methodological weaknesses in the Proxy Service’s analysis, it will assess whether this materially affected the research or recommendations used by EIM and the Proxy Service’s efforts to correct any material deficiencies in its analysis or methodology.
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4. | Record Retention and Inspection: EIM, or Administrator on EIM’s behalf, will maintain all documentation associated with its proxy voting decisions. Compliance is responsible for verifying that such documentation is properly maintained in accordance with the Trusts’ procedures and applicable laws and regulations. |
IV. Due Diligence and Compliance Program
EIM, with the assistance of Administrator, will conduct a due diligence review of each Sub-Adviser’s proxy voting policies and procedures (including any proxy voting guidelines) in connection with the initial selection of the Sub-Adviser to manage a Sub-Advised Portfolio and on at least an annual basis thereafter. As part of its ongoing due diligence and compliance responsibilities, with respect to the Sub-Advised Portfolios, EIM, with the assistance of Administrator, will seek to ensure that each Sub-Adviser maintains proxy voting policies and procedures that are reasonably designed to comply with applicable laws and regulations.
V. Sub-Advisers’ Proxy Voting Policies and Procedures
Each Sub-Adviser will be required to maintain proxy voting policies and procedures in conformance with Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended, and that satisfy the following elements:
A. Written Policies and Procedures: The Sub-Adviser must maintain written proxy voting policies and procedures in accordance with applicable laws and regulations and must provide to the Trusts, EIM, and Administrator, upon request, copies of such policies and procedures.
B. Fiduciary Duty: The Sub-Adviser’s policies and procedures must be reasonably designed to ensure that the Sub-Adviser votes client securities in the best interest of its clients.
C. Conflicts of Interest: The Sub-Adviser’s policies and procedures must include appropriate procedures to identify and resolve as necessary, before voting client proxies, all material proxy-related conflicts of interest between the Sub-Adviser (including its affiliates) and its clients.
D. Voting Guidelines: The Sub-Adviser’s policies and procedures must address with reasonable specificity how the Sub-Adviser will vote proxies, or what factors it will consider, when voting on particular types of matters, e.g., corporate governance proposals, compensation issues and matters involving social or corporate responsibility. The Sub-Adviser’s policies and procedures also should describe the considerations it will take into account if it retains a Proxy Service to assist it in discharging its proxy voting duties and its process for conducting due diligence on, and overseeing, services provided by a Proxy Service.
E. Monitoring Proxy Voting: The Sub-Adviser must have a system and/or process that is reasonably designed to ensure that proxies are voted on behalf of its clients in a timely and efficient manner.
F. Record Retention and Inspection: The Sub-Adviser must have an established system for creating and retaining all appropriate documentation relating to its proxy voting activities as required by applicable laws and regulations. The Sub-Adviser must provide to the Trusts, EIM, and Administrator such information and records with respect to proxies relating to the Trust’s portfolio securities as required by law and as the Trusts, EIM, or Administrator may reasonably request.
VI. Disclosure of Trusts’ Proxy Voting Policies and Procedures and Proxy Voting Record
EIM and Administrator, on behalf of the Trusts, will take reasonable steps as necessary to seek to ensure that the Trusts comply with all applicable laws and regulations relating to disclosure of the Trusts’ proxy voting policies and procedures and proxy voting records. EIM and Administrator (including, at their option, through third-party service providers) will maintain a system that is reasonably designed to ensure that its
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actual proxy voting record and the actual proxy voting record of the Sub-Advisers with respect to the Trusts’ portfolio securities are collected, processed, filed with the SEC and made available to the Trusts’ shareholders as required by applicable laws and regulations.
VII. Proxy Voting Committee
The Proxy Voting Committee is responsible for monitoring and administering the Program. The Proxy Voting Committee is composed of EIM’s and Administrator’ CCO, officers of EIM and Administrator, and/or members of EIM’s or Administrator’s (as applicable) Investment Management Services, Legal and Compliance, , or any combination thereof, who may be advisory members of the Committee. The Proxy Voting Committee holds meetings as needed, but no less frequently than annually.
VIII. Reports to Trusts’ Board of Trustees
EIM, with the assistance of Administrator, will periodically (but no less frequently than annually) report to the Board of Trustees with respect to each Trust’s implementation of the Program, including summary information with respect to: 1) the proxy voting record of the Sub-Advisers with respect to the Sub-Advised Portfolios’ portfolio securities: 2) the proxy voting record of EIM with respect to the Fund-of-Funds Portfolios or Allocated Portions; and 3) the proxy voting record of EIM with respect to the portfolio securities of any Sub-Advised Portfolio for which EIM has assumed proxy voting responsibility. In addition, if a material conflict of interest was reported to the CCO and/or the Legal and Compliance during the previous quarter and it was determined that a material conflict of interest did exist, EIM, with the assistance of Administrator, will report such material conflict of interest to the Board of Trustees at the next quarterly meeting. EIM, with the assistance of Administrator, will also provide the Board of Trustees with any other information requested by the Board.
The CCO’s annual written compliance report to the Board of Trustees will contain a summary of material changes to these policies and procedures during the period covered by the report.
Adopted by EQ Advisors Trust (“EQAT”) Board of Trustees: March 1, 2011
Effective: May 1, 2011
Predecessor Procedures of the Investment Manager Adopted: August 6, 2003
Amended: July 11, 2007
Adopted by 1290 Funds Board of Trustees: June 10, 2014
Effective: June 10, 2014
Adopted by EQ Premier VIP Trust (“VIP”) Board of Trustees: March 17, 2011
Effective: May 1, 2011
Predecessor Procedures of the Investment Manager Adopted: August 6, 2003
Amended: December 10, 2014
Policies of EQAT and 1290 Funds Combined: July 14, 2014
Revised: April 12-13, 2017
Policies of EQAT, VIP and 1290 Funds Combined: July 18-20, 2017
Revised: September 26, 2019
Revised: December 15, 2020
Revised: August 2021
Revised: December 2021
Revised: January 2023
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U N I T E D S T A T E S Proxy Voting Guidelines Benchmark Policy Recommendations Effective for Meetings on or after February 1, 2023 Published December 13, 2022
UNITED STATES Proxy Voting Guidelines |
TABLE OF CONTENTS
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Voting on Director Nominees in Uncontested Elections | 14 | |||||
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Management Proposals to Ratify Existing Charter or Bylaw Provisions | 24 | |||||
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Director and Officer Indemnification, Liability Protection, and Exculpation | 29 | |||||
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Majority of Independent Directors/Establishment of Independent Committees | 31 | |||||
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Shareholder Engagement Policy (Shareholder Advisory Committee) | 32 | |||||
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Advance Notice Requirements for Shareholder Proposals/Nominations | 34 | |||||
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Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy | 37 | |||||
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Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs) | 38 | |||||
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Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions | 39 | |||||
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Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S. | 46 | |||||
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Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs) | 50 | |||||
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Special Purpose Acquisition Corporations (SPACs) — Proposals for Extensions | 54 | |||||
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Advisory Votes on Executive Compensation — Management Proposals (Say-on-Pay) | 56 | |||||
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Reports on Potentially Controversial Business/Financial Practices | 78 | |||||
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation | 78 | |||||
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Gender Identity, Sexual Orientation, and Domestic Partner Benefits | 83 | |||||
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General Environmental Proposals and Community Impact Assessments | 84 | |||||
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Human Rights, Human Capital Management, and International Operations | 87 | |||||
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Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes | 91 | |||||
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Changing a Fundamental Restriction to a Nonfundamental Restriction | 92 | |||||
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Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval | 94 | |||||
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UNITED STATES Proxy Voting Guidelines |
The U.S. research team provides proxy analyses and voting recommendations for the common shareholder meetings of U.S. — incorporated companies that are publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are held in our institutional investor clients’ portfolios. Coverage generally includes corporate actions for common equity holders, such as written consents and bankruptcies. ISS’ U.S. coverage includes investment companies (including open-end funds, closed-end funds, exchange-traded funds, and unit investment trusts), limited partnerships (“LPs”), master limited partnerships (“MLPs”), limited liability companies (“LLCs”), and business development companies. ISS reviews its universe of coverage on an annual basis, and the coverage is subject to change based on client need and industry trends.
Foreign-incorporated companies
In addition to U.S. — incorporated, U.S. — listed companies, ISS’ U.S. policies are applied to certain foreign-incorporated company analyses. Like the SEC, ISS distinguishes two types of companies that list but are not incorporated in the U.S.:
• | U.S. Domestic Issuers — which have a majority of outstanding shares held in the U.S. and meet other criteria, as determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies (e.g. they are required to file DEF14A proxy statements) — are generally covered under standard U.S. policy guidelines. |
• | Foreign Private Issuers (FPIs) — which are allowed to take exemptions from most disclosure requirements (e.g., they are allowed to file 6-K for their proxy materials) and U.S. listing standards — are generally covered under a combination of policy guidelines: |
• | FPI Guidelines (see the Americas Regional Proxy Voting Guidelines), may apply to companies incorporated in governance havens, and apply certain minimum independence and disclosure standards in the evaluation of key proxy ballot items, such as the election of directors; and/or |
• | Guidelines for the market that is responsible for, or most relevant to, the item on the ballot. |
U.S. incorporated companies listed only on non-U.S. exchanges are generally covered under the ISS guidelines for the market on which they are traded.
An FPI is generally covered under ISS’ approach to FPIs outlined above, even if such FPI voluntarily files a proxy statement and/or other filing normally required of a U.S. Domestic Issuer, so long as the company retains its FPI status.
In all cases — including with respect to other companies with cross-market features that may lead to ballot items related to multiple markets — items that are on the ballot solely due to the requirements of another market (listing, incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” primary market coverage.
1. | Board of Directors |
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
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Independence: Boards should be sufficiently independent from management (and significant shareholders) to ensure that they are able and motivated to effectively supervise management’s performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of directors.
Composition: Companies should ensure that directors add value to the board through their specific skills and expertise and by having sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence, while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.
Responsiveness: Directors should respond to investor input, such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority of shares are tendered.
Accountability: Boards should be sufficiently accountable to shareholders, including through transparency of the company’s governance practices and regular board elections, by the provision of sufficient information for shareholders to be able to assess directors and board composition, and through the ability of shareholders to remove directors.
General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1 considered on case-by-case basis): |
Vote against2 or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per ISS’ Classification of Directors) when:
• | Independent directors comprise 50 percent or less of the board; |
• | The non-independent director serves on the audit, compensation, or nominating committee; |
• | The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or |
• | The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee. |
1 | A “new nominee” is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question. |
2 | In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company. |
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ISS Classification of Directors — U.S.
1. | Executive Director |
1.1. | Current officer1 of the company or one of its affiliates2. |
2. | Non-Independent Non-Executive Director |
Board Identification
2.1. | Director identified as not independent by the board. |
Controlling/Significant Shareholder
2.2. | Beneficial owner of more than 50 percent of the company’s voting power (this may be aggregated if voting power is distributed among more than one member of a group). |
Current Employment at Company or Related Company
2.3. | Non-officer employee of the firm (including employee representatives). |
2.4. | Officer1, former officer, or general or limited partner of a joint venture or partnership with the company. |
Former Employment
2.5. | Former CEO of the company.3,4 |
2.6. | Former non-CEO officer1 of the company or an affiliate2 within the past five years. |
2.7. | Former officer1 of an acquired company within the past five years.4 |
2.8. | Officer1 of a former parent or predecessor firm at the time the company was sold or split off within the past five years. |
2.9. | Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an assessment of the interim officer’s employment agreement will be made.5 |
Family Members
2.10. | Immediate family member6 of a current or former officer1 of the company or its affiliates2 within the last five years. |
2.11. | Immediate family member6 of a current employee of company or its affiliates2 where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role). |
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Professional, Transactional, and Charitable Relationships
2.12. | Director who (or whose immediate family member6) currently provides professional services7 in excess of $10,000 per year to: the company, an affiliate2, or an individual officer of the company or an affiliate; or who is (or whose immediate family member6 is) a partner, employee, or controlling shareholder of an organization which provides the services. |
2.13. | Director who (or whose immediate family member6) currently has any material transactional relationship8 with the company or its affiliates2; or who is (or whose immediate family member6 is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship8 (excluding investments in the company through a private placement). |
2.14. | Director who (or whose immediate family member6) is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or endowments8 from the company or its affiliates2. |
Other Relationships
2.15. | Party to a voting agreement9 to vote in line with management on proposals being brought to shareholder vote. |
2.16. | Has (or an immediate family member6 has) an interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee.10 |
2.17. | Founder11 of the company but not currently an employee. |
2.18. | Director with pay comparable to Named Executive Officers. |
2.19. | Any material12 relationship with the company. |
3. | Independent Director |
3.1. | No material12 connection to the company other than a board seat. |
Footnotes:
1. The definition of officer will generally follow that of a “Section 16 officer” (officers subject to Section 16 of the Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving as an officer due to statutory requirements (e.g. corporate secretary) will generally be classified as a Non-Independent Non-Executive Director under “Any material relationship with the company.” However, if the company provides explicit disclosure that the director is not receiving additional compensation exceeding $10,000 per year for serving in that capacity, then the director will be classified as an Independent Director.
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2. “Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate.
3. Includes any former CEO of the company prior to the company’s initial public offering (IPO).
4. When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, ISS will generally classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the existence of any other conflicting relationships or related party transactions.
5. ISS will look at the terms of the interim officer’s employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also consider if a formal search process was under way for a full-time officer at the time.
6. “Immediate family member” follows the SEC’s definition of such and covers spouses, parents, children, step-parents, stepchildren, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or significant shareholder of the company.
7. Professional services can be characterized as advisory in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include but are not limited to the following: investment banking/financial advisory services, commercial banking (beyond deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing services, legal services, property management services, realtor services, lobbying services, executive search services, and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit services, IT tech support services, educational services, and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to the associated materiality test) rather than a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory.
8. A material transactional relationship, including grants to non-profit organizations, exists if the company makes annual payments to, or receives annual payments from, another entity, exceeding the greater of: $200,000 or 5 percent of the recipient’s gross revenues, for a company that follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows neither of the preceding standards, ISS will apply the NASDAQ-based materiality test. (The recipient is the party receiving the financial proceeds from the transaction).
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9. Dissident directors who are parties to a voting agreement pursuant to a settlement or similar arrangement may be classified as Independent Directors if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’ interests: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions.
10. Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).
11. The operating involvement of the founder with the company will be considered; if the founder was never employed by the company, ISS may deem him or her an Independent Director.
12. For purposes of ISS’s director independence classification, “material” will be defined as a standard of relationship (financial, personal, or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
Attendance at Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
• | Medical issues/illness; |
• | Family emergencies; and |
• | Missing only one meeting (when the total of all meetings is three or fewer). |
In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote against or withhold from appropriate members of the nominating/governance committees or the full board.
If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
Overboarded Directors: Generally vote against or withhold from individual directors who:
• | Sit on more than five public company boards; or |
3 | Nominees who served for only part of the fiscal year are generally exempted from the attendance policy. |
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• | Are CEOs of public companies who sit on the boards of more than two public companies besides their own — withhold only at their outside boards4. |
Gender Diversity: Generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the company’s board. An exception will be made if there was at least one woman on the board at the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.
Racial and/or Ethnic Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members5. An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
Vote case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
• | The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are: |
• | Disclosed outreach efforts by the board to shareholders in the wake of the vote; |
• | Rationale provided in the proxy statement for the level of implementation; |
• | The subject matter of the proposal; |
• | The level of support for and opposition to the resolution in past meetings; |
• | Actions taken by the board in response to the majority vote and its engagement with shareholders; |
• | The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and |
• | Other factors as appropriate. |
• | The board failed to act on takeover offers where the majority of shares are tendered; |
4 | Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships. |
5 | Aggregate diversity statistics provided by the board will only be considered if specific to racial and/or ethnic diversity. |
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• | At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote. |
Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
• | The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be considered are: |
• | The company’s response, including: |
• | Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated); |
• | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
• | Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
• | Other recent compensation actions taken by the company; |
• | Whether the issues raised are recurring or isolated; |
• | The company’s ownership structure; and |
• | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
• | The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the plurality of votes cast. |
PROBLEMATIC TAKEOVER DEFENSES, CAPITAL STRUCTURE,AND GOVERNANCE STRUCTURE
Poison Pills: Generally vote against or withhold from all nominees (except new nominees1, who should be considered case-by-case) if:
• | The company has a poison pill with a deadhand or slowhand feature6; |
• | The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or lowering the trigger, without shareholder approval; or |
• | The company has a long-term poison pill (with a term of over one year) that was not approved by the public shareholders7. |
6 | If a short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder vote, ISS will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption. |
7 | Approval prior to, or in connection, with a company’s becoming publicly-traded, or in connection with a de-SPAC transaction, is insufficient. |
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Vote case-by-case on nominees if the board adopts an initial short-term pill6 (with a term of one year or less) without shareholder approval, taking into consideration:
• | The disclosed rationale for the adoption; |
• | The trigger; |
• | The company’s market capitalization (including absolute level and sudden changes); |
• | A commitment to put any renewal to a shareholder vote; and |
• | Other factors as relevant. |
Unequal Voting Rights: Generally vote withhold or against directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights8.
Exceptions to this policy will generally be limited to:
• | Newly-public companies9 with a sunset provision of no more than seven years from the date of going public; |
• | Limited Partnerships and the Operating Partnership (OP) unit structure of REITs; |
• | Situations where the super-voting shares represent less than 5% of total voting power and therefore considered to be de minimis; or |
• | The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular binding vote on whether the capital structure should be maintained. |
Classified Board Structure: The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.
Problematic Governance Structure: For companies that hold or held their first annual meeting9 of public shareholders after Feb. 1, 2015, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:
• | Supermajority vote requirements to amend the bylaws or charter; |
8 | This generally includes classes of common stock that have additional votes per share than other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”). |
9 | Includes companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct listings, and those who complete a traditional initial public offering. |
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• | A classified board structure; or |
• | Other egregious provisions. |
A provision which specifies that the problematic structure(s) will be sunset within seven years of the date of going public will be considered a mitigating factor.
Unless the adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.
Unilateral Bylaw/Charter Amendments: Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if the board amends the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors:
• | The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification; |
• | Disclosure by the company of any significant engagement with shareholders regarding the amendment; |
• | The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the bylaws/charter; |
• | The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions; |
• | The company’s ownership structure; |
• | The company’s existing governance provisions; |
• | The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and |
• | Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders. |
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees1, who should be considered case-by-case) if the directors:
• | Classified the board; |
• | Adopted supermajority vote requirements to amend the bylaws or charter; |
• | Eliminated shareholders’ ability to amend bylaws; |
• | Adopted a fee-shifting provision; or |
• | Adopted another provision deemed egregious. |
Restricting Binding Shareholder Proposals: Generally vote against or withhold from the members of the governance committee if:
• | The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include but are not limited to: outright prohibition on the |
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submission of binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis. |
Submission of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Generally continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Director Performance Evaluation: The board lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not limited to:
• | A classified board structure; |
• | A supermajority vote requirement; |
• | Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections; |
• | The inability of shareholders to call special meetings; |
• | The inability of shareholders to act by written consent; |
• | A multi-class capital structure; and/or |
• | A non-shareholder-approved poison pill. |
Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
• | The presence of a shareholder proposal addressing the same issue on the same ballot; |
• | The board’s rationale for seeking ratification; |
• | Disclosure of actions to be taken by the board should the ratification proposal fail; |
• | Disclosure of shareholder engagement regarding the board’s ratification request; |
• | The level of impairment to shareholders’ rights caused by the existing provision; |
• | The history of management and shareholder proposals on the provision at the company’s past meetings; |
• | Whether the current provision was adopted in response to the shareholder proposal; |
• | The company’s ownership structure; and |
• | Previous use of ratification proposals to exclude shareholder proposals. |
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Problematic Audit-Related Practices
Generally vote against or withhold from the members of the Audit Committee if:
• | The non-audit fees paid to the auditor are excessive; |
• | The company receives an adverse opinion on the company’s financial statements from its auditor; or |
• | There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. |
Vote case-by-case on members of the Audit Committee and potentially the full board if:
• | Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted. |
Problematic Compensation Practices
In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:
• | There is an unmitigated misalignment between CEO pay and company performance (pay for performance); |
• | The company maintains significant problematic pay practices; or |
• | The board exhibits a significant level of poor communication and responsiveness to shareholders. |
Generally vote against or withhold from the Compensation Committee chair, other committee members, or potentially the full board if:
• | The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared frequency of say on pay; or |
• | The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions. |
Generally vote against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.
Problematic Pledging of Company Stock: Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of pledged company stock by executives or directors raises concerns. The following factors will be considered:
• | The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity; |
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• | The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume; |
• | Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time; |
• | Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and |
• | Any other relevant factors. |
For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain10, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.
Minimum steps to understand and mitigate those risks are considered to be the following. Both minimum criteria will be required to be in alignment with the policy :
• | Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), including: |
• | Board governance measures; |
• | Corporate strategy; |
• | Risk management analyses; and |
• | Metrics and targets. |
• | Appropriate GHG emissions reduction targets. |
At this time, “appropriate GHG emissions reductions targets” will be medium-term GHG reduction targets or Net Zero-by-2050 GHG reduction targets for a company’s operations (Scope 1) and electricity use (Scope 2). Targets should cover the vast majority of the company’s direct emissions.
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
• | Material failures of governance, stewardship, risk oversight11, or fiduciary responsibilities at the company; |
10 | Companies defined as “significant GHG emitters” will be those on the current Climate Action 100+ Focus Group list. |
11 | Examples of failure of risk oversight include but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant adverse legal judgments or settlement; or hedging of company stock. |
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• | Failure to replace management as appropriate; or |
• | Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company. |
Voting on Director Nominees in Contested Elections
General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information. |
General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors: |
• | Long-term financial performance of the company relative to its industry; |
• | Management’s track record; |
• | Background to the contested election; |
• | Nominee qualifications and any compensatory arrangements; |
• | Strategic plan of dissident slate and quality of the critique against management; |
• | Likelihood that the proposed goals and objectives can be achieved (both slates); and |
• | Stock ownership positions. |
In the case of candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).
Adopt Anti-Hedging/Pledging/Speculative Investments Policy
General Recommendation: Generally vote for proposals seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding responsible use of company stock will be considered. |
Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed.
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General Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits, considering: |
• | The rationale provided for adoption of the term/tenure limit; |
• | The robustness of the company’s board evaluation process; |
• | Whether the limit is of sufficient length to allow for a broad range of director tenures; |
• | Whether the limit would disadvantage independent directors compared to non-independent directors; and |
• | Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner. |
Vote case-by-case on shareholder proposals asking for the company to adopt director term/tenure limits, considering:
• | The scope of the shareholder proposal; and |
• | Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment. |
General Recommendation: Generally vote against management and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits. |
General Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size. |
Vote against proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
General Recommendation: Vote against proposals to classify (stagger) the board. |
Vote for proposals to repeal classified boards and to elect all directors annually.
General Recommendation: Generally vote for proposals seeking disclosure on a CEO succession planning policy, considering, at a minimum, the following factors: |
• | The reasonableness/scope of the request; and |
• | The company’s existing disclosure on its current CEO succession planning process. |
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General Recommendation: Generally vote against management proposals to eliminate cumulate voting, and for shareholder proposals to restore or provide for cumulative voting, unless: |
• | The company has proxy access12, thereby allowing shareholders to nominate directors to the company’s ballot; and |
• | The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections. |
Vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).
Director and Officer Indemnification, Liability Protection, and Exculpation
General Recommendation: Vote case-by-case on proposals on director and officer indemnification, liability protection, and exculpation13. |
Consider the stated rationale for the proposed change. Also consider, among other factors, the extent to which the proposal would:
• | Eliminate directors’ and officers’ liability for monetary damages for violating the duty of care. |
• | Eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalty. |
• | Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than mere carelessness. |
• | Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify. |
Vote for those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if both of the following apply:
• | If the individual was found to have acted in good faith and in a manner that the individual reasonably believed was in the best interests of the company; and |
If only the individual’s legal expenses would be covered.
12 | A proxy access right that meets the recommended guidelines. |
13 | Indemnification: the condition of being secured against loss or damage. Limited liability: a person’s financial liability is limited to a fixed sum, or personal financial assets are not at risk if the individual loses a lawsuit that results in financial award/damages to the plaintiff. Exculpation: to eliminate or limit the personal liability of a director or officer to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director or officer. |
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Establish/Amend Nominee Qualifications
General Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the criteria and the degree to which they may preclude dissident nominees from joining the board. |
Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
• | The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative to that of its peers; |
• | The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is sought; |
• | The company’s disclosure and performance relating to the issue for which board oversight is sought and any significant related controversies; and |
• | The scope and structure of the proposal. |
Establish Other Board Committee Proposals
General Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered: |
• | Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is sought; |
• | Level of disclosure regarding the issue for which board oversight is sought; |
• | Company performance related to the issue for which board oversight is sought; |
• | Board committee structure compared to that of other companies in its industry sector; and |
• | The scope and structure of the proposal. |
Filling Vacancies/Removal of Directors
General Recommendation: Vote against proposals that provide that directors may be removed only for cause. |
Vote for proposals to restore shareholders’ ability to remove directors with or without cause.
Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.
Vote for proposals that permit shareholders to elect directors to fill board vacancies.
General Recommendation: Generally vote for shareholder proposals requiring that the board chair position be filled by an independent director, taking into consideration the following: |
• | The scope and rationale of the proposal; |
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• | The company’s current board leadership structure; |
• | The company’s governance structure and practices; |
• | Company performance; and |
• | Any other relevant factors that may be applicable. |
The following factors will increase the likelihood of a “for” recommendation:
• | A majority non-independent board and/or the presence of non-independent directors on key board committees; |
• | A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role; |
• | The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair; |
• | Evidence that the board has failed to oversee and address material risks facing the company; |
• | A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or |
• | Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests. |
Majority of Independent Directors/Establishment of Independent Committees
General Recommendation: Vote for shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS’ definition of Independent Director (See ISS’ Classification of Directors.) |
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
General Recommendation: Generally vote for management proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included. |
Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
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General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions: |
• | Ownership threshold: maximum requirement not more than three percent (3%) of the voting power; |
• | Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group; |
• | Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; |
• | Cap: cap on nominees of generally twenty-five percent (25%) of the board. |
Review for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are more restrictive than these guidelines.
Require More Nominees than Open Seats
General Recommendation: Vote against shareholder proposals that would require a company to nominate more candidates than the number of open board seats. |
Shareholder Engagement Policy (Shareholder Advisory Committee)
General Recommendation: Generally vote for shareholder proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate: |
• | Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board; |
• | Effectively disclosed information with respect to this structure to its shareholders; |
• | Company has not ignored majority-supported shareholder proposals, or a majority withhold vote on a director nominee; and |
• | The company has an independent chair or a lead director, according to ISS’ definition. This individual must be made available for periodic consultation and direct communication with major shareholders. |
2. | Audit-Related |
Auditor Indemnification and Limitation of Liability
General Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to: |
• | The terms of the auditor agreement — the degree to which these agreements impact shareholders’ rights; |
• | The motivation and rationale for establishing the agreements; |
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• | The quality of the company’s disclosure; and |
• | The company’s historical practices in the audit area. |
Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
General Recommendation: Vote for proposals to ratify auditors unless any of the following apply: |
• | An auditor has a financial interest in or association with the company, and is therefore not independent; |
• | There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company’s financial position; |
• | Poor accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP; or |
• | Fees for non-audit services (“Other” fees) are excessive. |
Non-audit fees are excessive if:
• | Non-audit (“other”) fees > audit fees + audit-related fees + tax compliance/preparation fees |
Tax compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other” fees.
In circumstances where “Other” fees include fees related to significant one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
Shareholder Proposals Limiting Non-Audit Services
General Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services. |
Shareholder Proposals on Audit Firm Rotation
General Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account: |
• | The tenure of the audit firm; |
• | The length of rotation specified in the proposal; |
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• | Any significant audit-related issues at the company; |
• | The number of Audit Committee meetings held each year; |
• | The number of financial experts serving on the committee; and |
• | Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price. |
3. | Shareholder Rights & Defenses |
Advance Notice Requirements for Shareholder Proposals/Nominations
General Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review. |
To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a 90-120-day window). The submittal window is the period under which shareholders must file their proposals/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
General Recommendation: Vote against proposals giving the board exclusive authority to amend the bylaws. |
Vote case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into account the following:
• | Any impediments to shareholders’ ability to amend the bylaws (i.e. supermajority voting requirements); |
• | The company’s ownership structure and historical voting turnout; |
• | Whether the board could amend bylaws adopted by shareholders; and |
• | Whether shareholders would retain the ability to ratify any board-initiated amendments. |
Control Share Acquisition Provisions
General Recommendation: Vote for proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders. |
Vote against proposals to amend the charter to include control share acquisition provisions.
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Vote for proposals to restore voting rights to the control shares.
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Control Share Cash-Out Provisions
General Recommendation: Vote for proposals to opt out of control share cash-out statutes. |
Control share cash-out statutes give dissident shareholders the right to “cash-out” of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
General Recommendation: Vote for proposals to opt out of state disgorgement provisions. |
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company’s stock to disgorge, or pay back, to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.
General Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price. |
Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
General Recommendation: Vote for proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company. |
General Recommendation: Vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments. |
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Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Federal Forum Selection Provisions
Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal securities law.
General Recommendation: Generally vote for federal forum selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders. |
Vote against provisions that restrict the forum to a particular federal district court; unilateral adoption (without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
General Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the state of Delaware as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders. |
For states other than Delaware, vote case-by-case on exclusive forum provisions, taking into consideration:
• | The company’s stated rationale for adopting such a provision; |
• | Disclosure of past harm from duplicative shareholder lawsuits in more than one forum; |
• | The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and the definition of key terms; and |
• | Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections. |
Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that specify a particular local court within the state;
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unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.
General Recommendation: Generally vote against provisions that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful). |
Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments policy.
Net Operating Loss (NOL) Protective Amendments
General Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of protecting a company’s net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of three years and the exhaustion of the NOL. |
Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the NOL:
• | The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder); |
• | The value of the NOLs; |
• | Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon exhaustion or expiration of the NOL); |
• | The company’s existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and |
• | Any other factors that may be applicable. |
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
General Recommendation: Vote for shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if either: |
• | Shareholders have approved the adoption of the plan; or |
• | The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay in adoption that |
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would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate. |
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add the caveat that a vote within 12 months would be considered sufficient implementation.
Management Proposals to Ratify a Poison Pill
General Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes: |
• | No lower than a 20 percent trigger, flip-in or flip-over; |
• | A term of no more than three years; |
• | No deadhand, slowhand, no-hand, or similar feature that limits the ability of a future board to redeem the pill; |
• | Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill. |
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
General Recommendation: Vote against proposals to adopt a poison pill for the stated purpose of protecting a company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL. |
Vote case-by-case on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
• | The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent); |
• | The value of the NOLs; |
• | Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs); |
• | The company’s existing governance structure, including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and |
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• | Any other factors that may be applicable. |
Proxy Voting Disclosure, Confidentiality, and Tabulation
General Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company’s vote-counting methodology. |
While a variety of factors may be considered in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
• | The scope and structure of the proposal; |
• | The company’s stated confidential voting policy (or other relevant policies) and whether it ensures a “level playing field” by providing shareholder proponents with equal access to vote information prior to the annual meeting; |
• | The company’s vote standard for management and shareholder proposals and whether it ensures consistency and fairness in the proxy voting process and maintains the integrity of vote results; |
• | Whether the company’s disclosure regarding its vote counting method and other relevant voting policies with respect to management and shareholder proposals are consistent and clear; |
• | Any recent controversies or concerns related to the company’s proxy voting mechanics; |
• | Any unintended consequences resulting from implementation of the proposal; and |
• | Any other factors that may be relevant. |
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
General Recommendation: Generally vote against management proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best practice. |
In addition, voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
• | The presence of a shareholder proposal addressing the same issue on the same ballot; |
• | The board’s rationale for seeking ratification; |
• | Disclosure of actions to be taken by the board should the ratification proposal fail; |
• | Disclosure of shareholder engagement regarding the board’s ratification request; |
• | The level of impairment to shareholders’ rights caused by the existing provision; |
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• | The history of management and shareholder proposals on the provision at the company’s past meetings; |
• | Whether the current provision was adopted in response to the shareholder proposal; |
• | The company’s ownership structure; and |
• | Previous use of ratification proposals to exclude shareholder proposals. |
Reimbursing Proxy Solicitation Expenses
General Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses. |
When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with the election.
Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one or more candidates in a contested election where the following apply:
• | The election of fewer than 50 percent of the directors to be elected is contested in the election; |
• | One or more of the dissident’s candidates is elected; |
• | Shareholders are not permitted to cumulate their votes for directors; and |
• | The election occurred, and the expenses were incurred, after the adoption of this bylaw. |
General Recommendation: Management or shareholder proposals to change a company’s state of incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance concerns including the following: |
• | Reasons for reincorporation; |
• | Comparison of company’s governance practices and provisions prior to and following the reincorporation; and |
• | Comparison of corporation laws of original state and destination state. |
Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.
Shareholder Ability to Act by Written Consent
General Recommendation: Generally vote against management and shareholder proposals to restrict or prohibit shareholders’ ability to act by written consent. |
Generally vote for management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
• | Shareholders’ current right to act by written consent; |
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• | The consent threshold; |
• | The inclusion of exclusionary or prohibitive language; |
• | Investor ownership structure; and |
• | Shareholder support of, and management’s response to, previous shareholder proposals. |
Vote case-by-case on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:
• | An unfettered14 right for shareholders to call special meetings at a 10 percent threshold; |
• | A majority vote standard in uncontested director elections; |
• | No non-shareholder-approved pill; and |
• | An annually elected board. |
Shareholder Ability to Call Special Meetings
General Recommendation: Vote against management or shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings. |
Generally vote for management or shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:
• | Shareholders’ current right to call special meetings; |
• | Minimum ownership threshold necessary to call special meetings (10 percent preferred); |
• | The inclusion of exclusionary or prohibitive language; |
• | Investor ownership structure; and |
• | Shareholder support of, and management’s response to, previous shareholder proposals. |
General Recommendation: Vote against proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination. |
General Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and anti-greenmail provisions). |
14 | “Unfettered” means no restrictions on agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting. |
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Supermajority Vote Requirements
General Recommendation: Vote against proposals to require a supermajority shareholder vote. |
Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for companies with shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:
• | Ownership structure; |
• | Quorum requirements; and |
• | Vote requirements. |
General Recommendation: Generally vote for management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only15 meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting. |
Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:
• | Scope and rationale of the proposal; and |
• | Concerns identified with the company’s prior meeting practices. |
4. | Capital/Restructuring |
Adjustments to Par Value of Common Stock
General Recommendation: Vote for management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action. |
Vote for management proposals to eliminate par value.
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes: |
• | If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares. |
15 | Virtual-only shareholder meeting” refers to a meeting of shareholders that is held exclusively using technology without a corresponding in-person meeting. |
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• | If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares. |
• | If share usage is greater than current authorized shares, vote for an increase of up to the current share usage. |
• | In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
• | The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights to other share classes; |
• | On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization; |
• | The company has a non-shareholder approved poison pill (including an NOL pill); or |
• | The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
• | In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern; |
• | The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or |
• | A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
• | twice the amount needed to support the transactions on the ballot, and |
• | the allowable increase as calculated for general issuances above. |
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General Recommendation: Generally vote against proposals to create a new class of common stock unless: |
• | The company discloses a compelling rationale for the dual-class capital structure, such as: |
• | The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as a going concern; or |
• | The new class of shares will be transitory; |
• | The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term and long term; and |
• | The new class is not designed to preserve or increase the voting power of an insider or significant shareholder. |
Issue Stock for Use with Rights Plan
General Recommendation: Vote against proposals that increase authorized common stock for the explicit purpose of implementing a non-shareholder-approved shareholder rights plan (poison pill). |
General Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into consideration: |
• | The size of the company; |
• | The shareholder base; and |
• | The liquidity of the stock. |
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes: |
• | If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares. |
• | If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares. |
• | If share usage is greater than current authorized shares, vote for an increase of up to the current share usage. |
• | In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization. |
• | If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a specific use for the shares. |
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Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
• | If the shares requested are blank check preferred shares that can be used for antitakeover purposes;16 |
• | The company seeks to increase a class of non-convertible preferred shares entitled to more than one vote per share on matters that do not solely affect the rights of preferred stockholders “supervoting shares”); |
• | The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number of common shares into which they are convertible (“supervoting shares”) on matters that do not solely affect the rights of preferred stockholders; |
• | The stated intent of the increase in the general authorization is to allow the company to increase an existing designated class of supervoting preferred shares; |
• | On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization; |
• | The company has a non-shareholder approved poison pill (including an NOL pill); or |
• | The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
• | In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern; |
• | The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or |
• | A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with |
16 | To be acceptable, appropriate disclosure would be needed that the shares are “declawed”: i.e., representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights plan. |
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transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of: |
• | twice the amount needed to support the transactions on the ballot, and |
• | the allowable increase as calculated for general issuances above. |
General Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into account the following: |
• | More simplified capital structure; |
• | Enhanced liquidity; |
• | Fairness of conversion terms; |
• | Impact on voting power and dividends; |
• | Reasons for the reclassification; |
• | Conflicts of interest; and |
• | Other alternatives considered. |
General Recommendation: Vote for management proposals to implement a reverse stock split if: |
• | The number of authorized shares will be proportionately reduced; or |
• | The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy. |
Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:
• | Stock exchange notification to the company of a potential delisting; |
• | Disclosure of substantial doubt about the company’s ability to continue as a going concern without additional financing; |
• | The company’s rationale; or |
• | Other factors as applicable. |
Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S.
General Recommendation: For U.S. domestic issuers incorporated outside the U.S. and listed solely on a U.S. exchange, generally vote for resolutions to authorize the issuance of common shares up to 20 percent of currently issued common share capital, where not tied to a specific transaction or financing proposal. |
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For pre-revenue or other early-stage companies that are heavily reliant on periodic equity financing, generally vote for resolutions to authorize the issuance of common shares up to 50 percent of currently issued common share capital. The burden of proof will be on the company to establish that it has a need for the higher limit.
Renewal of such mandates should be sought at each year’s annual meeting.
Vote case-by-case on share issuances for a specific transaction or financing proposal.
General Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding: |
• | Greenmail; |
• | The use of buybacks to inappropriately manipulate incentive compensation metrics; |
• | Threats to the company’s long-term viability; or |
• | Other company-specific factors as warranted. |
Vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
General Recommendation: Generally vote against shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks. |
Stock Distributions: Splits and Dividends
General Recommendation: Generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy. |
General Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as: |
• | Adverse governance changes; |
• | Excessive increases in authorized capital stock; |
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• | Unfair method of distribution; |
• | Diminution of voting rights; |
• | Adverse conversion features; |
• | Negative impact on stock option plans; and |
• | Alternatives such as spin-off. |
General Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal. |
General Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors: |
• | Purchase price; |
• | Fairness opinion; |
• | Financial and strategic benefits; |
• | How the deal was negotiated; |
• | Conflicts of interest; |
• | Other alternatives for the business; |
• | Non-completion risk. |
General Recommendation: Vote case-by-case on asset sales, considering the following factors: |
• | Impact on the balance sheet/working capital; |
• | Potential elimination of diseconomies; |
• | Anticipated financial and operating benefits; |
• | Anticipated use of funds; |
• | Value received for the asset; |
• | Fairness opinion; |
• | How the deal was negotiated; |
• | Conflicts of interest. |
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General Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals. |
General Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest. |
Vote for the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans
General Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating: |
• | Dilution to existing shareholders’ positions; |
• | Terms of the offer — discount/premium in purchase price to investor, including any fairness opinion; termination penalties; exit strategy; |
• | Financial issues — company’s financial situation; degree of need for capital; use of proceeds; effect of the financing on the company’s cost of capital; |
• | Management’s efforts to pursue other alternatives; |
• | Control issues — change in management; change in control, guaranteed board and committee seats; standstill provisions; voting agreements; veto power over certain corporate actions; and |
• | Conflict of interest — arm’s length transaction, managerial incentives. |
Vote for the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
General Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into consideration the following: |
• | The reasons for the change; |
• | Any financial or tax benefits; |
• | Regulatory benefits; |
• | Increases in capital structure; and |
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• | Changes to the articles of incorporation or bylaws of the company. |
Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include either of the following:
• | Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or |
• | Adverse changes in shareholder rights. |
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
General Recommendation: Vote case-by-case on going private transactions, taking into account the following: |
• | Offer price/premium; |
• | Fairness opinion; |
• | How the deal was negotiated; |
• | Conflicts of interest; |
• | Other alternatives/offers considered; and |
• | Non-completion risk. |
Vote case-by-case on going dark transactions, determining whether the transaction enhances shareholder value by taking into consideration:
• | Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock); |
• | Balanced interests of continuing vs. cashed-out shareholders, taking into account the following: |
• | Are all shareholders able to participate in the transaction? |
• | Will there be a liquid market for remaining shareholders following the transaction? |
• | Does the company have strong corporate governance? |
• | Will insiders reap the gains of control following the proposed transaction? |
• | Does the state of incorporation have laws requiring continued reporting that may benefit shareholders? |
General Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following: |
• | Percentage of assets/business contributed; |
• | Percentage ownership; |
• | Financial and strategic benefits; |
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• | Governance structure; |
• | Conflicts of interest; |
• | Other alternatives; and |
• | Non-completion risk. |
General Recommendation: Vote case-by-case on liquidations, taking into account the following: |
• | Management’s efforts to pursue other alternatives; |
• | Appraisal value of assets; and |
• | The compensation plan for executives managing the liquidation. |
Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including: |
• | Valuation — Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale. |
• | Market reaction — How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal. |
• | Strategic rationale — Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
• | Negotiations and process — Were the terms of the transaction negotiated at arm’s-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation “wins” can also signify the deal makers’ competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. |
• | Conflicts of interest — Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the “ISS Transaction Summary” section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists. |
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• | Governance — Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
Private Placements/Warrants/Convertible Debentures
General Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration: |
• | Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event to trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to trigger the dilutive event. |
• | Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features, termination penalties, exit strategy): |
• | The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement. |
• | When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry, and anticipation of future performance. |
• | Financial issues: |
• | The company’s financial condition; |
• | Degree of need for capital; |
• | Use of proceeds; |
• | Effect of the financing on the company’s cost of capital; |
• | Current and proposed cash burn rate; |
• | Going concern viability and the state of the capital and credit markets. |
• | Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger, or sale of part or all of the company. |
• | Control issues: |
• | Change in management; |
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• | Change in control; |
• | Guaranteed board and committee seats; |
• | Standstill provisions; |
• | Voting agreements; |
• | Veto power over certain corporate actions; and |
• | Minority versus majority ownership and corresponding minority discount or majority control premium. |
• | Conflicts of interest: |
• | Conflicts of interest should be viewed from the perspective of the company and the investor. |
• | Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder interests? |
• | Market reaction: |
• | The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
Vote for the private placement, or for the issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan (Bankruptcy)
General Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to: |
• | Estimated value and financial prospects of the reorganized company; |
• | Percentage ownership of current shareholders in the reorganized company; |
• | Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an Official Equity Committee); |
• | The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s); |
• | Existence of a superior alternative to the plan of reorganization; and |
• | Governance of the reorganized company. |
Special Purpose Acquisition Corporations (SPACs)
General Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following: |
• | Valuation — Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and the financials on the target may be limited. Compare the |
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conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target if it is a private entity. |
• | Market reaction — How has the market responded to the proposed deal? A negative market reaction may be a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
• | Deal timing — A main driver for most transactions is that the SPAC charter typically requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date. |
• | Negotiations and process — What was the process undertaken to identify potential target companies within specified industry or location specified in charter? Consider the background of the sponsors. |
• | Conflicts of interest — How are sponsors benefiting from the transaction compared to IPO shareholders? Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter requires that the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within the 18-24-month timeframe. |
• | Voting agreements — Are the sponsors entering into enter into any voting agreements/tender offers with shareholders who are likely to vote against the proposed merger or exercise conversion rights? |
• | Governance — What is the impact of having the SPAC CEO or founder on key committees following the proposed merger? |
Special Purpose Acquisition Corporations (SPACs) — Proposals for Extensions
General Recommendation: Vote case-by-case on SPAC extension proposals taking into account the length of the requested extension, the status of any pending transaction(s) or progression of the acquisition process, any added incentive for non-redeeming shareholders, and any prior extension requests. |
• | Length of request: Typically, extension requests range from two to six months, depending on the progression of the SPAC’s acquistion process. |
• | Pending transaction(s) or progression of the acquisition process: Sometimes an intial business combination was already put to a shareholder vote, but, for varying reasons, the transaction could not be consummated by the termination date and the SPAC is requesting an extension. Other times, the SPAC has entered into a definitive transaction agreement, but needs additional time to consummate or hold the shareholder meeting. |
• | Added incentive for non-redeeming shareholders: Sometimes the SPAC sponsor (or other insiders) will contribute, typically as a loan to the company, additional funds that will be added |
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to the redemption value of each public share as long as such shares are not redeemed in connection with the extension request. The purpose of the “equity kicker” is to incentivize shareholders to hold their shares through the end of the requested extension or until the time the transaction is put to a shareholder vote, rather than electing redeemption at the extension proposal meeting. |
• | Prior extension requests: Some SPACs request additional time beyond the extension period sought in prior extension requests. |
General Recommendation: Vote case-by-case on spin-offs, considering: |
• | Tax and regulatory advantages; |
• | Planned use of the sale proceeds; |
• | Valuation of spinoff; |
• | Fairness opinion; |
• | Benefits to the parent company; |
• | Conflicts of interest; |
• | Managerial incentives; |
• | Corporate governance changes; |
• | Changes in the capital structure. |
Value Maximization Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by: |
• | Hiring a financial advisor to explore strategic alternatives; |
• | Selling the company; or |
• | Liquidating the company and distributing the proceeds to shareholders. |
These proposals should be evaluated based on the following factors:
• | Prolonged poor performance with no turnaround in sight; |
• | Signs of entrenched board and management (such as the adoption of takeover defenses); |
• | Strategic plan in place for improving value; |
• | Likelihood of receiving reasonable value in a sale or dissolution; and |
• | The company actively exploring its strategic options, including retaining a financial advisor. |
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5. | Compensation |
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
1. | Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; |
2. | Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation; |
3. | Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); |
4. | Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; |
5. | Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices. |
Advisory Votes on Executive Compensation — Management Proposals (Say-on-Pay)
General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation. |
Vote against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”) if:
• | There is an unmitigated misalignment between CEO pay and company performance (pay for performance); |
• | The company maintains significant problematic pay practices; |
• | The board exhibits a significant level of poor communication and responsiveness to shareholders. |
Vote against or withhold from the members of the Compensation Committee and potentially the full board if:
• | There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof; |
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• | The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast; |
• | The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or |
• | The situation is egregious. |
Primary Evaluation Factors for Executive Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the S&P1500, Russell 3000, or Russell 3000E Indices17, this analysis considers the following:
1. | Peer Group18 Alignment: |
• | The degree of alignment between the company’s annualized TSR rank and the CEO’s annualized total pay rank within a peer group, each measured over a three-year period. |
• | The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year period. |
• | The multiple of the CEO’s total pay relative to the peer group median in the most recent fiscal year. |
2. | Absolute Alignment19 — the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years — i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period. |
If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our analysis may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
• | The ratio of performance- to time-based incentive awards; |
• | The overall ratio of performance-based compensation to fixed or discretionary pay; |
• | The rigor of performance goals; |
• | The complexity and risks around pay program design; |
17 | The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities. |
18 | The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company’s selected peers’ GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of the company’s market cap. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant. |
19 | Only Russell 3000 Index companies are subject to the Absolute Alignment analysis. |
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• | The transparency and clarity of disclosure; |
• | The company’s peer group benchmarking practices; |
• | Financial/operational results, both absolute and relative to peers; |
• | Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards); |
• | Realizable pay20 compared to grant pay; and |
• | Any other factors deemed relevant. |
Problematic pay elements are generally evaluated case-by-case considering the context of a company’s overall pay program and demonstrated pay-for-performance philosophy. The focus is on executive compensation practices that contravene the global pay principles, including:
• | Problematic practices related to non-performance-based compensation elements; |
• | Incentives that may motivate excessive risk-taking or present a windfall risk; and |
• | Pay decisions that circumvent pay-for-performance, such as options backdating or waiving performance requirements. |
The list of examples below highlights certain problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
• | Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options); |
• | Extraordinary perquisites or tax gross-ups; |
• | New or materially amended agreements that provide for: |
• | Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent bonus); |
• | CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or “modified single” triggers) or in connection with a problematic Good Reason definition; |
• | CIC excise tax gross-up entitlements (including “modified” gross-ups); |
• | Multi-year guaranteed awards that are not at risk due to rigorous performance conditions; |
• | Liberal CIC definition combined with any single-trigger CIC benefits; |
• | Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI’s executives is not possible; |
• | Severance payments made when the termination is not clearly disclosed as involuntary (for example, a termination without cause or resignation for good reason); |
20 | ISS research reports include realizable pay for S&P1500 companies. |
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• | Any other provision or practice deemed to be egregious and present a significant risk to investors. |
The above examples are not an exhaustive list. Please refer to ISS’ U.S. Compensation Policies FAQ document for additional detail on specific pay practices that have been identified as problematic and may lead to negative vote recommendations.
Options Backdating
The following factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
• | Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes; |
• | Duration of options backdating; |
• | Size of restatement due to options backdating; |
• | Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and |
• | Adoption of a grant policy that prohibits backdating and creates a fixed grant schedule or window period for equity grants in the future. |
Compensation Committee Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
• | Failure to respond to majority-supported shareholder proposals on executive pay topics; or |
• | Failure to adequately respond to the company’s previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account: |
• | Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated); |
• | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
• | Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
• | Other recent compensation actions taken by the company; |
• | Whether the issues raised are recurring or isolated; |
• | The company’s ownership structure; and |
• | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
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Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)
General Recommendation: Vote for annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs. |
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
General Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of existing change-in-control arrangements maintained with named executive officers but also considering new or extended arrangements. |
Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude, and/or timing of issue(s):
• | Single- or modified-single-trigger cash severance; |
• | Single-trigger acceleration of unvested equity awards; |
• | Full acceleration of equity awards granted shortly before the change in control; |
• | Acceleration of performance awards above the target level of performance without compelling rationale; |
• | Excessive cash severance (generally >3x base salary and bonus); |
• | Excise tax gross-ups triggered and payable; |
• | Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or |
• | Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or |
• | The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. |
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.
In cases where the golden parachute vote is incorporated into a company’s advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
Please refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
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General Recommendation: Vote case-by-case on certain equity-based compensation plans21 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an “Equity Plan Scorecard” (EPSC) approach with three pillars: |
• | Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) in relation to peers and considering both: |
• | SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and |
• | SVT based only on new shares requested plus shares remaining for future grants. |
• | Plan Features: |
• | Quality of disclosure around vesting upon a change in control (CIC); |
• | Discretionary vesting authority; |
• | Liberal share recycling on various award types; |
• | Lack of minimum vesting period for grants made under the plan; |
• | Dividends payable prior to award vesting. |
• | Grant Practices: |
• | The company’s three-year burn rate relative to its industry/market cap peers; |
• | Vesting requirements in CEO’s recent equity grants (3-year look-back); |
• | The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years); |
• | The proportion of the CEO’s most recent equity grants/awards subject to performance conditions; |
• | Whether the company maintains a sufficient claw-back policy; |
• | Whether the company maintains sufficient post-exercise/vesting share-holding requirements. |
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’ interests, or if any of the following egregious factors (“overriding factors”) apply:
• | Awards may vest in connection with a liberal change-of-control definition; |
21 | Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case. |
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• | The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it — for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing — for non-listed companies); |
• | The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; |
• | The plan is excessively dilutive to shareholders’ holdings; |
• | The plan contains an evergreen (automatic share replenishment) feature; or |
• | Any other plan features are determined to have a significant negative impact on shareholder interests. |
Further Information on certain EPSC Factors:
Shareholder Value Transfer (SVT)
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans, and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types of awards (for example, full-value awards), the assumption is made that all awards to be granted will be the most expensive types.
For proposals that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size, and cash compensation into the industry cap equations to arrive at the company’s benchmark.22
Three-Year Value-Adjusted Burn Rate
A “Value-Adjusted Burn Rate” is used for stock plan evaluations. Value-Adjusted Burn Rate benchmarks are calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company’s GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year’s burn-rate benchmark.
22 | For plans evaluated under the Equity Plan Scorecard policy, the company’s SVT benchmark is considered along with other factors. |
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The Value-Adjusted Burn Rate is calculated as follows:
Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted average common shares * stock price).
Liberal Change in Control Definition
Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal definition of change in control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a “potential” takeover, shareholder approval of a merger or other transactions, or similar language.
Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without prior shareholder approval. “Repricing” typically includes the ability to do any of the following:
• | Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs; |
• | Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise price of the original options or SARs; |
• | Cancel underwater options in exchange for stock awards; or |
• | Provide cash buyouts of underwater options. |
While the above cover most types of repricing, ISS may view other provisions as akin to repricing depending on the facts and circumstances.
Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by ISS), without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote against plans that do not expressly prohibit repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.
Problematic Pay Practices or Significant Pay-for-Performance Disconnect
If the equity plan on the ballot is a vehicle for problematic pay practices, vote against the plan.
ISS may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment. Considerations in voting against the equity plan may include, but are not limited to:
• | Severity of the pay-for-performance misalignment; |
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• | Whether problematic equity grant practices are driving the misalignment; and/or |
• | Whether equity plan awards have been heavily concentrated to the CEO and/or the other NEOs. |
Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
General Recommendation: Vote case-by-case on amendments to cash and equity incentive plans. |
Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
• | Addresses administrative features only; or |
• | Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of independent directors, per ISS’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time for any reason (including after the company’s initial public offering), or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below). |
Vote against proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
• | Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of independent directors, per ISS’ Classification of Directors. |
Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company’s IPO and/or proposals that bundle material amendment(s) other than those for Section 162(m) purposes.
Vote case-by-case on all other proposals to amend equity incentive plans, considering the following:
• | If the proposal requests additional shares and/or the amendments include a term extension or addition of full value awards as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments. |
• | If the plan is being presented to shareholders for the first time (including after the company’s IPO), whether or not additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments. |
• | If there is no request for additional shares and the amendments do not include a term extension or addition of full value awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown only for informational purposes. |
In the first two case-by-case evaluation scenarios, the EPSC evaluation/score is the more heavily weighted consideration.
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Specific Treatment of Certain Award Types in Equity Plan Evaluations
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should be captured.
Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
General Recommendation: Vote for proposals to implement a 401(k) savings plan for employees. |
Employee Stock Ownership Plans (ESOPs)
General Recommendation: Vote for proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares). |
Employee Stock Purchase Plans — Qualified Plans
General Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply: |
• | Purchase price is at least 85 percent of fair market value; |
• | Offering period is 27 months or less; and |
• | The number of shares allocated to the plan is 10 percent or less of the outstanding shares. |
Vote against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.
Employee Stock Purchase Plans — Non-Qualified Plans
General Recommendation: Vote case-by-case on nonqualified employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features: |
• | Broad-based participation; |
• | Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary; |
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• | Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20 percent from market value; and |
• | No discount on the stock price on the date of purchase when there is a company matching contribution. |
Vote against nonqualified employee stock purchase plans when the plan features do not meet all of the above criteria. If the matching contribution or effective discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of the assessment.
Option Exchange Programs/Repricing Options
General Recommendation: Vote case-by-case on management proposals seeking approval to exchange/reprice options taking into consideration: |
• | Historic trading patterns — the stock price should not be so volatile that the options are likely to be back “in-the-money” over the near term; |
• | Rationale for the re-pricing — was the stock price decline beyond management’s control?; |
• | Is this a value-for-value exchange?; |
• | Are surrendered stock options added back to the plan reserve?; |
• | Timing — repricing should occur at least one year out from any precipitous drop in company’s stock price; |
• | Option vesting — does the new option vest immediately or is there a black-out period?; |
• | Term of the option — the term should remain the same as that of the replaced option; |
• | Exercise price — should be set at fair market or a premium to market; |
• | Participants — executive officers and directors must be excluded. |
If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company’s total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the company’s stock price demonstrates poor timing and warrants additional scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder vote.
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General Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock. |
Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
General Recommendation: One-time Transfers: Vote against or withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval. |
Vote case-by-case on one-time transfers. Vote for if:
• | Executive officers and non-employee directors are excluded from participating; |
• | Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and |
• | There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants. |
Additionally, management should provide a clear explanation of why options are being transferred to a third-party institution and whether the events leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure, and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
• | Eligibility; |
• | Vesting; |
• | Bid-price; |
• | Term of options; |
• | Cost of the program and impact of the TSOs on company’s total option expense; and |
• | Option repricing policy. |
Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.
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Shareholder Ratification of Director Pay Programs
General Recommendation: Vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors: |
• | If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and |
• | An assessment of the following qualitative factors: |
• | The relative magnitude of director compensation as compared to companies of a similar profile; |
• | The presence of problematic pay practices relating to director compensation; |
• | Director stock ownership guidelines and holding requirements; |
• | Equity award vesting schedules; |
• | The mix of cash and equity-based compensation; |
• | Meaningful limits on director compensation; |
• | The availability of retirement benefits or perquisites; and |
• | The quality of disclosure surrounding director compensation. |
Equity Plans for Non-Employee Directors
General Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on: |
• | The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; |
• | The company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and |
• | The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk). |
On occasion, non-employee director stock plans will exceed the plan cost or burn-rate benchmarks when combined with employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative factors:
• | The relative magnitude of director compensation as compared to companies of a similar profile; |
• | The presence of problematic pay practices relating to director compensation; |
• | Director stock ownership guidelines and holding requirements; |
• | Equity award vesting schedules; |
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• | The mix of cash and equity-based compensation; |
• | Meaningful limits on director compensation; |
• | The availability of retirement benefits or perquisites; and |
• | The quality of disclosure surrounding director compensation. |
Non-Employee Director Retirement Plans
General Recommendation: Vote against retirement plans for non-employee directors. Vote for shareholder proposals to eliminate retirement plans for non-employee directors. |
Shareholder Proposals on Compensation
Bonus Banking/Bonus Banking “Plus”
General Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the named executive officers or a wider group of employees), taking into account the following factors: |
• | The company’s past practices regarding equity and cash compensation; |
• | Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at least 50 percent for full tenure); and |
• | Whether the company has a rigorous claw-back policy in place. |
Compensation Consultants — Disclosure of Board or Company’s Utilization
General Recommendation: Generally vote for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid. |
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
General Recommendation: Generally vote for shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company. |
Generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation (such as types of compensation elements or specific metrics) to be used for executive or directors.
Generally vote against shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Vote case-by-case on all other shareholder proposals regarding executive and director pay, taking into account relevant factors, including but not limited to: company performance, pay level and design versus peers, history of compensation concerns or pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.
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Golden Coffins/Executive Death Benefits
General Recommendation: Generally vote for proposals calling for companies to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based employee population is eligible. |
Hold Equity Past Retirement or for a Significant Period of Time
General Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors will be taken into account: |
• | The percentage/ratio of net shares required to be retained; |
• | The time period required to retain the shares; |
• | Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements; |
• | Whether the company has any other policies aimed at mitigating risk taking by executives; |
• | Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s existing requirements; and |
• | Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus. |
General Recommendation: Vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The following factors will be considered: |
• | The company’s current level of disclosure of its executive compensation setting process, including how the company considers pay disparity; |
• | If any problematic pay practices or pay-for-performance concerns have been identified at the company; and |
• | The level of shareholder support for the company’s pay programs. |
Generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio in a specific way to set or limit executive pay.
Pay for Performance/Performance-Based Awards
General Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be |
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performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps: |
• | First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent options or restricted stock, indexed options, or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards. |
• | Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test. |
In general, vote for the shareholder proposal if the company does not meet both of the above two steps.
General Recommendation: Vote case-by-case on shareholder proposals that request the board establish a pay-for-superior performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles: |
• | Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group median; |
• | Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested, equity awards; |
• | Provide the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan; |
• | Establish performance targets for each plan financial metric relative to the performance of the company’s peer companies; |
• | Limit payment under the annual and performance-vested long-term incentive components of the plan to when the company’s performance on its selected financial performance metrics exceeds peer group median performance. |
Consider the following factors in evaluating this proposal:
• | What aspects of the company’s annual and long-term equity incentive programs are performance driven? |
• | If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group? |
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• | Can shareholders assess the correlation between pay and performance based on the current disclosure? |
• | What type of industry and stage of business cycle does the company belong to? |
Pre-Arranged Trading Plans (10b5-1 Plans)
General Recommendation: Generally vote for shareholder proposals calling for the addition of certain safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include: |
• | Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K; |
• | Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary circumstances, as determined by the board; |
• | Request that a certain number of days that must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan; |
• | Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan; |
• | An executive may not trade in company stock outside the 10b5-1 Plan; |
• | Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive. |
Prohibit Outside CEOs from Serving on Compensation Committees
General Recommendation: Generally vote against proposals seeking a policy to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee. |
Recoupment of Incentive or Stock Compensation in Specified Circumstances
General Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company’s financial position or reputation, or if the senior executive failed to manage or monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies that permit recoupment in cases where an executive’s fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant financial restatements. Misconduct, negligence, or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact. |
In considering whether to support such shareholder proposals, ISS will take into consideration the following factors:
• | If the company has adopted a formal recoupment policy; |
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• | The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock compensation; |
• | Whether the company has chronic restatement history or material financial problems; |
• | Whether the company’s policy substantially addresses the concerns raised by the proponent; |
• | Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; or |
• | Any other relevant factors. |
Severance Agreements for Executives/Golden Parachutes
General Recommendation: Vote for shareholder proposals requiring that golden parachutes or executive severance agreements be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts. |
Vote case-by-case on proposals to ratify or cancel golden parachutes. An acceptable parachute should include, but is not limited to, the following:
• | The triggering mechanism should be beyond the control of management; |
• | The amount should not exceed three times base amount (defined as the average annual taxable W-2 compensation during the five years prior to the year in which the change of control occurs); |
• | Change-in-control payments should be double-triggered, i.e., (1) after a change in control has taken place, and (2) termination of the executive as a result of the change in control. Change in control is defined as a change in the company ownership structure. |
Share Buyback Impact on Incentive Program Metrics
General Recommendation: Vote case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following factors: |
• | The frequency and timing of the company’s share buybacks; |
• | The use of per-share metrics in incentive plans; |
• | The effect of recent buybacks on incentive metric results and payouts; and |
• | Whether there is any indication of metric result manipulation. |
Supplemental Executive Retirement Plans (SERPs)
General Recommendation: Generally vote for shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans. |
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Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.
General Recommendation: Generally vote for proposals calling for companies to adopt a policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax equalization policy. |
Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
General Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of employment prior to severance payment and/or eliminating accelerated vesting of unvested equity. |
The following factors will be considered:
• | The company’s current treatment of equity upon employment termination and/or in change-in-control situations (i.e., vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.); |
• | Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements. |
Generally vote for proposals seeking a policy that prohibits automatic acceleration of the vesting of equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of any related performance goals between the award date and the change in control).
6. | Routine/Miscellaneous |
General Recommendation: Generally vote against proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal. |
Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against proposals if the wording is too vague or if the proposal includes “other business.”
General Recommendation: Vote case-by-case on proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding, taking into consideration: |
• | The new quorum threshold requested; |
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• | The rationale presented for the reduction; |
• | The market capitalization of the company (size, inclusion in indices); |
• | The company’s ownership structure; |
• | Previous voter turnout or attempts to achieve quorum; |
• | Any provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve sufficiently; and |
• | Other factors as appropriate. |
In general, a quorum threshold kept as close to a majority of shares outstanding as is achievable is preferred.
Vote case-by-case on directors who unilaterally lower the quorum requirements below a majority of the shares outstanding, taking into consideration the factors listed above.
General Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections). |
General Recommendation: Vote for proposals to change the corporate name unless there is compelling evidence that the change would adversely impact shareholder value. |
Change Date, Time, or Location of Annual Meeting
General Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is unreasonable. |
Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling or location is unreasonable.
General Recommendation: Vote against proposals to approve other business when it appears as a voting item. |
7. | Social and Environmental Issues |
Global Approach — E&S Shareholder Proposals
ISS applies a common approach globally to evaluating social and environmental proposals which cover a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
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General Recommendation: Generally vote case-by-case, examining primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors will be considered: |
• | If the issues presented in the proposal are being appropriately or effectively dealt with through legislation or government regulation; |
• | If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal; |
• | Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive; |
• | The company’s approach compared with any industry standard practices for addressing the issue(s) raised by the proposal; |
• | Whether there are significant controversies, fines, penalties, or litigation associated with the company’s practices related to the issue(s) raised in the proposal; |
• | If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources; and |
• | If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage. |
General Recommendation: Generally vote against proposals seeking a company’s endorsement of principles that support a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue that is beyond its own control and may limit its flexibility with respect to future developments. Management and the board should be afforded the flexibility to make decisions on specific public policy positions based on their own assessment of the most beneficial strategies for the company. |
General Recommendation: Generally vote for proposals seeking a report on a company’s animal welfare standards, or animal welfare-related risks, unless: |
• | The company has already published a set of animal welfare standards and monitors compliance; |
• | The company’s standards are comparable to industry peers; and |
• | There are no recent significant fines, litigation, or controversies related to the company’s and/or its suppliers’ treatment of animals. |
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General Recommendation: Generally vote against proposals to phase out the use of animals in product testing, unless: |
• | The company is conducting animal testing programs that are unnecessary or not required by regulation; |
• | The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or |
• | There are recent, significant fines or litigation related to the company’s treatment of animals. |
General Recommendation: Generally vote against proposals requesting the implementation of Controlled Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard. |
Vote case-by-case on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at the company.
Genetically Modified Ingredients
General Recommendation: Generally vote against proposals requesting that a company voluntarily label genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities. |
Vote case-by-case on proposals asking for a report on the feasibility of labeling products containing GE ingredients, taking into account:
• | The potential impact of such labeling on the company’s business; |
• | The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure compares with industry peer disclosure; and |
• | Company’s current disclosure on the feasibility of GE product labeling. |
Generally vote against proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators and the scientific community.
Generally vote against proposals to eliminate GE ingredients from the company’s products, or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current regulations.
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Reports on Potentially Controversial Business/Financial Practices
General Recommendation: Vote case-by-case on requests for reports on a company’s potentially controversial business or financial practices or products, taking into account: |
• | Whether the company has adequately disclosed mechanisms in place to prevent abuses; |
• | Whether the company has adequately disclosed the financial risks of the products/practices in question; |
• | Whether the company has been subject to violations of related laws or serious controversies; and |
• | Peer companies’ policies/practices in this area. |
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation
General Recommendation: Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices. |
Vote case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
• | The potential for reputational, market, and regulatory risk exposure; |
• | Existing disclosure of relevant policies; |
• | Deviation from established industry norms; |
• | Relevant company initiatives to provide research and/or products to disadvantaged consumers; |
• | Whether the proposal focuses on specific products or geographic regions; |
• | The potential burden and scope of the requested report; |
• | Recent significant controversies, litigation, or fines at the company. |
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
Product Safety and Toxic/Hazardous Materials
General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain, unless: |
• | The company already discloses similar information through existing reports such as a supplier code of conduct and/or a sustainability report; |
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• | The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; and |
• | The company has not been recently involved in relevant significant controversies, fines, or litigation. |
Vote case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:
• | The company’s current level of disclosure regarding its product safety policies, initiatives, and oversight mechanisms; |
• | Current regulations in the markets in which the company operates; and |
• | Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company. |
Generally vote against resolutions requiring that a company reformulate its products.
General Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products, considering: |
• | Recent related fines, controversies, or significant litigation; |
• | Whether the company complies with relevant laws and regulations on the marketing of tobacco; |
• | Whether the company’s advertising restrictions deviate from those of industry peers; |
• | Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and |
• | Whether restrictions on marketing to youth extend to foreign countries. |
Vote case-by-case on proposals regarding second-hand smoke, considering;
• | Whether the company complies with all laws and regulations; |
• | The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and |
• | The risk of any health-related liabilities. |
Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
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Say on Climate (SoC) Management Proposals
General Recommendation: Vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action plan23, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following: |
• | The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other market standards; |
• | Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3); |
• | The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions (Scopes 1, 2, and 3 if relevant); |
• | Whether the company has sought and received third-party approval that its targets are science-based; |
• | Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050; |
• | Whether the company discloses a commitment to report on the implementation of its plan in subsequent years; |
• | Whether the company’s climate data has received third-party assurance; |
• | Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy; |
• | Whether there are specific industry decarbonization challenges; and |
• | The company’s related commitment, disclosure, and performance compared to its industry peers. |
Say on Climate (SoC) Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following: |
• | The completeness and rigor of the company’s climate-related disclosure; |
• | The company’s actual GHG emissions performance; |
• | Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and |
23 | Variations of this request also include climate transition related ambitions, or commitment to reporting on the implementation of a climate plan. |
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• | Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive. |
Climate Change/Greenhouse Gas (GHG) Emissions
General Recommendation: Generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks, considering: |
• | Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
• | The company’s level of disclosure compared to industry peers; and |
• | Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate change-related performance. |
Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:
• | The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
• | The company’s level of disclosure is comparable to that of industry peers; and |
• | There are no significant, controversies, fines, penalties, or litigation associated with the company’s GHG emissions. |
Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
• | Whether the company provides disclosure of year-over-year GHG emissions performance data; |
• | Whether company disclosure lags behind industry peers; |
• | The company’s actual GHG emissions performance; |
• | The company’s current GHG emission policies, oversight mechanisms, and related initiatives; and |
• | Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions. |
General Recommendation: Generally vote for proposals requesting that a company report on its energy efficiency policies, unless: |
• | The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or |
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• | The proponent requests adoption of specific energy efficiency goals within specific timelines. |
General Recommendation: Generally vote for requests for reports on the feasibility of developing renewable energy resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business. |
Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s evaluation of the feasibility and financial impact that such programs may have on the company.
Generally vote against proposals that call for the adoption of renewable energy goals, taking into account:
• | The scope and structure of the proposal; |
• | The company’s current level of disclosure on renewable energy use and GHG emissions; and |
• | The company’s disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate climate change risks. |
General Recommendation: Generally vote for requests for reports on a company’s efforts to diversify the board, unless: |
• | The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and |
• | The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company. |
Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
• | The degree of existing gender and racial minority diversity on the company’s board and among its executive officers; |
• | The level of gender and racial minority representation that exists at the company’s industry peers; |
• | The company’s established process for addressing gender and racial minority board representation; |
• | Whether the proposal includes an overly prescriptive request to amend nominating committee charter language; |
• | The independence of the company’s nominating committee; |
• | Whether the company uses an outside search firm to identify potential director nominees; and |
• | Whether the company has had recent controversies, fines, or litigation regarding equal employment practices. |
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General Recommendation: Generally vote for proposals requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data, unless: |
• | The company publicly discloses equal opportunity policies and initiatives in a comprehensive manner; |
• | The company already publicly discloses comprehensive workforce diversity data; and |
• | The company has no recent significant EEO-related violations or litigation. |
Generally vote against proposals seeking information on the diversity efforts of suppliers and service providers. Such requests may pose a significant burden on the company.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
General Recommendation: Generally vote for proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome. |
Generally vote against proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions regarding benefits should be left to the discretion of the company.
Gender, Race/Ethnicity Pay Gap
General Recommendation: Vote case-by-case on requests for reports on a company’s pay data by gender or race/ ethnicity, or a report on a company’s policies and goals to reduce any gender or race/ethnicity pay gaps, taking into account: |
• | The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy on fair and equitable compensation practices; |
• | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race, or ethnicity pay gap issues; |
• | The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry peers; and |
• | Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities. |
Racial Equity and/or Civil Rights Audit Guidelines
General Recommendation: Vote case-by-case on proposals asking a company to conduct an independent racial equity and/or civil rights audit, taking into account: |
• | The company’s established process or framework for addressing racial inequity and discrimination internally; |
• | Whether the company adequately discloses workforce diversity and inclusion metrics and goals; |
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• | Whether the company has issued a public statement related to its racial justice efforts in recent years, or has committed to internal policy review; |
• | Whether the company has engaged with impacted communities, stakeholders, and civil rights experts; |
• | The company’s track record in recent years of racial justice measures and outreach externally; and |
• | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial inequity or discrimination. |
Environment and Sustainability
General Recommendation: Vote case-by-case on requests for workplace safety reports, including reports on accident risk reduction efforts, taking into account: |
• | The company’s current level of disclosure of its workplace health and safety performance data, health and safety management policies, initiatives, and oversight mechanisms; |
• | The nature of the company’s business, specifically regarding company and employee exposure to health and safety risks; |
• | Recent significant controversies, fines, or violations related to workplace health and safety; and |
• | The company’s workplace health and safety performance relative to industry peers. |
Vote case-by-case on resolutions requesting that a company report on safety and/or security risks associated with its operations and/or facilities, considering:
• | The company’s compliance with applicable regulations and guidelines; |
• | The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring; and |
• | The existence of recent, significant violations, fines, or controversy regarding the safety and security of the company’s operations and/or facilities. |
General Environmental Proposals and Community Impact Assessments
General Recommendation: Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental impact of company operations, considering: |
• | Current disclosure of applicable policies and risk assessment report(s) and risk management procedures; |
• | The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations; |
• | The nature, purpose, and scope of the company’s operations in the specific region(s); |
• | The degree to which company policies and procedures are consistent with industry norms; and |
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• | The scope of the resolution. |
General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations, considering: |
• | The company’s current level of disclosure of relevant policies and oversight mechanisms; |
• | The company’s current level of such disclosure relative to its industry peers; |
• | Potential relevant local, state, or national regulatory developments; and |
• | Controversies, fines, or litigation related to the company’s hydraulic fracturing operations. |
General Recommendation: Generally vote for requests for reports on potential environmental damage as a result of company operations in protected regions, unless: |
• | Operations in the specified regions are not permitted by current laws or regulations; |
• | The company does not currently have operations or plans to develop operations in these protected regions; or |
• | The company’s disclosure of its operations and environmental policies in these regions is comparable to industry peers. |
General Recommendation: Vote case-by-case on proposals to report on an existing recycling program, or adopt a new recycling program, taking into account: |
• | The nature of the company’s business; |
• | The current level of disclosure of the company’s existing related programs; |
• | The timetable and methods of program implementation prescribed by the proposal; |
• | The company’s ability to address the issues raised in the proposal; and |
• | How the company’s recycling programs compare to similar programs of its industry peers. |
General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless: |
• | The company already discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or |
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• | The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame. |
General Recommendation: Vote case-by-case on proposals requesting a company report on, or adopt a new policy on, water-related risks and concerns, taking into account: |
• | The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics; |
• | Whether or not the company’s existing water-related policies and practices are consistent with relevant internationally recognized standards and national/local regulations; |
• | The potential financial impact or risk to the company associated with water-related concerns or issues; and |
• | Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers. |
General Recommendation: Vote against proposals restricting a company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are in the best interests of the company. |
Data Security, Privacy, and Internet Issues
General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and management policies and procedures, considering: |
• | The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech, information access and management, and Internet censorship; |
• | Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of information on the Internet; |
• | The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other telecommunications; |
• | Applicable market-specific laws or regulations that may be imposed on the company; and |
• | Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship. |
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ESG Compensation-Related Proposals
General Recommendation: Vote case-by-case on proposals seeking a report or additional disclosure on the company’s approach, policies, and practices on incorporating environmental and social criteria into its executive compensation strategy, considering: |
• | The scope and prescriptive nature of the proposal; |
• | The company’s current level of disclosure regarding its environmental and social performance and governance; |
• | The degree to which the board or compensation committee already discloses information on whether it has considered related E&S criteria; and |
• | Whether the company has significant controversies or regulatory violations regarding social or environmental issues. |
Human Rights, Human Capital Management, and International Operations
General Recommendation: Generally vote for proposals requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed. |
Vote case-by-case on proposals to implement company or company supplier labor and/or human rights standards and policies, considering:
• | The degree to which existing relevant policies and practices are disclosed; |
• | Whether or not existing relevant policies are consistent with internationally recognized standards; |
• | Whether company facilities and those of its suppliers are monitored and how; |
• | Company participation in fair labor organizations or other internationally recognized human rights initiatives; |
• | Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse; |
• | Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers; |
• | The scope of the request; and |
• | Deviation from industry sector peer company standards and practices. |
Vote case-by-case on proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering:
• | The degree to which existing relevant policies and practices are disclosed, including information on the implementation of these policies and any related oversight mechanisms; |
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• | The company’s industry and whether the company or its suppliers operate in countries or areas where there is a history of human rights concerns; |
• | Recent significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and whether the company has taken remedial steps; and |
• | Whether the proposal is unduly burdensome or overly prescriptive. |
General Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory arbitration on employment-related claims, taking into account: |
• | The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace claims; |
• | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of mandatory arbitration agreements on workplace claims; and |
• | The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements compared to its peers. |
Operations in High-Risk Markets
General Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk” markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account: |
• | The nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption; |
• | Current disclosure of applicable risk assessment(s) and risk management procedures; |
• | Compliance with U.S. sanctions and laws; |
• | Consideration of other international policies, standards, and laws; and |
• | Whether the company has been recently involved in recent, significant controversies, fines, or litigation related to its operations in “high-risk” markets. |
General Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated with outsourcing/plant closures, considering: |
• | Controversies surrounding operations in the relevant market(s); |
• | The value of the requested report to shareholders; |
• | The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and |
• | The company’s existing human rights standards relative to industry peers. |
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General Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace sexual harassment, taking into account: |
• | The company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment; |
• | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual harassment issues; and |
• | The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers. |
General Recommendation: Vote against reports on foreign military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales. |
Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses, and withdrawal from these contracts could have a negative impact on the company’s business.
General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering: |
• | The company’s current disclosure of relevant lobbying policies, and management and board oversight; |
• | The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and |
• | Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities. |
General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering: |
• | The company’s policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes; |
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• | The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and |
• | Recent significant controversies, fines, or litigation related to the company’s political contributions or political activities. |
Vote against proposals barring a company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote against proposals to publish in newspapers and other media a company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Political Expenditures and Lobbying Congruency
General Recommendation: Generally vote case-by-case on proposals requesting greater disclosure of a company’s alignment of political contributions, lobbying, and electioneering spending with a company’s publicly stated values and policies, considering: |
• | The company’s policies, management, board oversight, governance processes, and level of disclosure related to direct political contributions, lobbying activities, and payments to trade associations, political action committees, or other groups that may be used for political purposes; |
• | The company’s disclosure regarding: the reasons for its support of candidates for public offices; the reasons for support of and participation in trade associations or other groups that may make political contributions; and other political activities; |
• | Any incongruencies identified between a company’s direct and indirect political expenditures and its publicly stated values and priorities. |
• | Recent significant controversies related to the company’s direct and indirect lobbying, political contributions, or political activities. |
Generally vote case-by-case on proposals requesting comparison of a company’s political spending to objectives that can mitigate material risks for the company, such as limiting global warming.
General Recommendation: Generally vote against proposals asking a company to affirm political nonpartisanship in the workplace, so long as: |
• | There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions or trade association spending; and |
• | The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibit coercion. |
Vote against proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a
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bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.
8. | Mutual Fund Proxies |
General Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee. |
Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
General Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote. |
Converting Closed-end Fund to Open-end Fund
General Recommendation: Vote case-by-case on conversion proposals, considering the following factors: |
• | Past performance as a closed-end fund; |
• | Market in which the fund invests; |
• | Measures taken by the board to address the discount; and |
• | Past shareholder activism, board activity, and votes on related proposals. |
General Recommendation: Vote case-by-case on proxy contests, considering the following factors: |
• | Past performance relative to its peers; |
• | Market in which the fund invests; |
• | Measures taken by the board to address the issues; |
• | Past shareholder activism, board activity, and votes on related proposals; |
• | Strategy of the incumbents versus the dissidents; |
• | Independence of directors; |
• | Experience and skills of director candidates; |
• | Governance profile of the company; |
• | Evidence of management entrenchment. |
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Investment Advisory Agreements
General Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors: |
• | Proposed and current fee schedules; |
• | Fund category/investment objective; |
• | Performance benchmarks; |
• | Share price performance as compared with peers; |
• | Resulting fees relative to peers; |
• | Assignments (where the advisor undergoes a change of control). |
Approving New Classes or Series of Shares
General Recommendation: Vote for the establishment of new classes or series of shares. |
General Recommendation: Vote case-by-case on the authorization for or increase in preferred shares, considering the following factors: |
• | Stated specific financing purpose; |
• | Possible dilution for common shares; |
• | Whether the shares can be used for antitakeover purposes. |
General Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors: |
• | Potential competitiveness; |
• | Regulatory developments; |
• | Current and potential returns; and |
• | Current and potential risk. |
Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
General Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors: |
• | The fund’s target investments; |
• | The reasons given by the fund for the change; and |
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• | The projected impact of the change on the portfolio. |
Change Fundamental Investment Objective to Nonfundamental
General Recommendation: Vote against proposals to change a fund’s fundamental investment objective to non-fundamental. |
General Recommendation: Vote case-by-case on name change proposals, considering the following factors: |
• | Political/economic changes in the target market; |
• | Consolidation in the target market; and |
• | Current asset composition. |
Change in Fund’s Subclassification
General Recommendation: Vote case-by-case on changes in a fund’s sub-classification, considering the following factors: |
• | Potential competitiveness; |
• | Current and potential returns; |
• | Risk of concentration; |
• | Consolidation in target industry. |
Business Development Companies — Authorization to Sell Shares of Common Stock at a Price below Net Asset Value
General Recommendation: Vote for proposals authorizing the board to issue shares below Net Asset Value (NAV) if: |
• | The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders approve the underlying proposal, as required under the Investment Company Act of 1940; |
• | The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and |
• | The company has demonstrated responsible past use of share issuances by either: |
• | Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or |
• | Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts to NAV and economic dilution to existing non-participating shareholders. |
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Disposition of Assets/Termination/Liquidation
General Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the following factors: |
• | Strategies employed to salvage the company; |
• | The fund’s past performance; |
• | The terms of the liquidation. |
Changes to the Charter Document
General Recommendation: Vote case-by-case on changes to the charter document, considering the following factors: |
• | The degree of change implied by the proposal; |
• | The efficiencies that could result; |
• | The state of incorporation; |
• | Regulatory standards and implications. |
Vote against any of the following changes:
• | Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series; |
• | Removal of shareholder approval requirement for amendments to the new declaration of trust; |
• | Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act; |
• | Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund’s shares; |
• | Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements; |
• | Removal of shareholder approval requirement to change the domicile of the fund. |
Changing the Domicile of a Fund
General Recommendation: Vote case-by-case on re-incorporations, considering the following factors: |
• | Regulations of both states; |
• | Required fundamental policies of both states; |
• | The increased flexibility available. |
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
General Recommendation: Vote against proposals authorizing the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser. |
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General Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors: |
• | Fees charged to comparably sized funds with similar objectives; |
• | The proposed distributor’s reputation and past performance; |
• | The competitiveness of the fund in the industry; |
• | The terms of the agreement. |
General Recommendation: Vote for the establishment of a master-feeder structure. |
General Recommendation: Vote case-by-case on merger proposals, considering the following factors: |
• | Resulting fee structure; |
• | Performance of both funds; |
• | Continuity of management personnel; |
• | Changes in corporate governance and their impact on shareholder rights. |
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
General Recommendation: Generally vote against shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. |
Reimburse Shareholder for Expenses Incurred
General Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the reimbursement of the proxy solicitation expenses. |
Terminate the Investment Advisor
General Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the following factors: |
• | Performance of the fund’s Net Asset Value (NAV); |
• | The fund’s history of shareholder relations; |
• | The performance of other funds under the advisor’s management. |
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EQUITABLE INVESTMENT MANAGEMENT GROUP, LLC
EQUITABLE INVESTMENT MANAGEMENT, LLC
PROXY VOTING POLICIES AND PROCEDURES
I. | OVERVIEW |
In accordance with Rule 206(4)-6 of the Investment Advisers Act of 1940, as amended, Equitable Investment Management Group, LLC and Equitable Investment Management, LLC (together “EIM”) have adopted the Proxy Voting Policies and Procedures set forth below (the “Policies and Procedures”). EIM serve as the investment adviser to each series (each, a “Portfolio” and together, the “Portfolios”) of EQ Advisors Trust (“EQAT”), EQ Premier VIP Trust (“VIP”) and 1290 Funds (each, a “Trust” and together, the “Trusts”). Equitable Investment Management Group, LLC serves as the investment advisor to EQAT and VIP and Equitable Investment Management, LLC serves as the investment adviser to the 1290 Funds. Each Trust has delegated proxy voting responsibility with respect to each Portfolio to EIM. Equitable Investment Management, LLC (the “Administrator”) serves as the Administrator for all the Trusts. The Administrator is generally responsible for monitoring, testing and maintaining compliance policies, procedures and other items for the Trusts, and thus assists in monitoring the Trusts’ compliance with these Policies and Procedures. These Policies and Procedures have been designed to ensure that proxies relating to each Trust’s portfolio securities are voted in the best interest of the Trust.
II. | TRUSTS’ PROXY VOTING PROGRAM |
EIM has established a Proxy Voting Committee that is responsible for monitoring and administering the Trusts’ proxy voting program (the “Program”), as described below. The Administrator, as the administrator, assists with the administration of the Program. The Proxy Voting Committee is composed of EIM’s and the Administrator’s Chief Compliance Officer (“CCO”), officers of EIM and the Administrator, and/or members of EIM’s or the Administrator’s (as applicable) Investment Management Services, Legal Departments and Compliance Departments, or any combination thereof, who may be advisory members of the Committee. The Proxy Voting Committee holds meetings as needed, but no less frequently than annually.
A. | Sub-Advised Portfolios. EIM is responsible for the selection and ongoing monitoring of investment sub-advisers (the “Sub-Advisers”) who, among other responsibilities, provide portfolio management services including day-to-day research and stock selection for a Portfolio or an allocated portion of a Portfolio (a “Sub-Advised Portfolio”). EIM views proxy voting as a function that is incidental and integral to the portfolio management services provided by Sub-Advisers. Therefore, except as described in Section III below, EIM, in turn, delegates proxy voting responsibility with respect to each Sub-Advised Portfolio to the applicable Sub-Adviser. |
B. | “Fund-of-Funds” Portfolios. EIM provides the day-to-day portfolio management services to certain Portfolios or an allocated portion of a Portfolio (“Allocated Portion”), each of which seeks to achieve its investment objective by investing in other mutual funds managed by EIM (“Underlying Affiliated Portfolios”), unaffiliated mutual funds (“Underlying Unaffiliated Funds”) or exchange-traded funds (“Underlying ETFs”) (referred to collectively as the “Fund-of-Funds Portfolios”). Accordingly, EIM retains proxy voting responsibility with respect to each Fund-of-Funds Portfolio and votes proxies in accordance with the Policies and Procedures set forth in Section III below. |
III. | PROXY VOTING POLICIES AND PROCEDURES |
It is EIM’s policy to vote proxies on behalf of a Portfolio in the best interest of the Portfolio and its shareholders. EIM believes that these Policies and Procedures represent the voting positions most likely to support a Portfolio’s and its shareholders’ best interests across a range of sectors and contexts.
A. | Underlying Affiliated Portfolios. EIM will vote the Fund-of-Funds Portfolios’ or Allocated Portions’ shares in Underlying Affiliated Portfolios either for or against a proposal, or abstain, in the same proportion as the vote of all other securities holders of the applicable Underlying Affiliated Portfolio (whether or not the proposal presents an issue as to which EIM or its affiliates could be deemed to |
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have a conflict of interest). If there are no security holders of an Underlying Affiliated Portfolio except Fund-of-Funds Portfolio, EIM will vote a Fund-of-Funds’ Portfolios’ shares in Underlying Affiliated Portfolio in its discretion, subject to compliance with other provisions of these Procedures, including Section III.E.2. below regarding resolution of potential conflicts of interest regarding a proposal. |
B. | Underlying Unaffiliated Funds, Underlying ETFs and Certain Sub-Advised Portfolios. |
a. | With respect to voting proxies of Underlying Unaffiliated Funds and Underlying ETFs where a Portfolio, and other members of its “advisory group” (as defined in Rule 12d1-4 under the Investment Company Act of 1940) in the aggregate (i) hold more than 25% of the outstanding voting securities of an Underlying Unaffiliated Fund or Unaffiliated ETF as a result of a decrease in the outstanding voting securities of the acquired fund, or (ii) hold more than 10% of the outstanding voting securities of an Underlying Unaffiliated Fund or Unaffiliated ETF that is a registered closed-end management investment company or business development company, each member of such “advisory group” will vote its securities in the same proportion as the vote of all other holders of such securities; provided, however, that in circumstances where all holders of the outstanding voting securities of the Underlying Affiliated Fund or Unaffiliated ETF are required by the rule or otherwise under Section 12(d)(1) to vote such securities in the same proportion as the vote of all other holders of such securities, the Portfolio will seek instructions from its security holders with regard to the voting of all proxies with respect to such Underlying Unaffiliated Fund or Underlying ETF securities and vote such proxies in accordance with such instructions. |
b. | With respect to voting proxies for Underlying Unaffiliated Funds, Underlying ETFs, and certain Sub-Advised Portfolios in all other circumstances as described in Section III.D below, the following guidelines generally will apply: |
1. | The decision whether, and if so, how to vote a proxy will be made by EIM based on what it determines to be in the best interest of the relevant Portfolio and its shareholders and in accordance with these procedures. |
2. | EIM, with the assistance of Administrator, may enlist the services of an independent proxy voting service to assist with the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process, as further described in Section III.E below. |
3. | EIM’s policy is to vote all proxies, except under circumstances in which EIM has determined that it is consistent with the best interest of the relevant Portfolio and its shareholders not to vote the proxy or to abstain on one or more proposals. Such circumstances may include the following: |
1. | EIM’s policy is to vote all proxies, except under circumstances in which EIM has determined that it is consistent with the best interest of the relevant Portfolio and its shareholders not to vote the proxy or to abstain on one or more proposals. Such circumstances may include the following: |
a. | When securities are out on loan, they are transferred into the borrower’s name and are voted by the borrower, at its discretion. In most cases, EIM will not take steps to see that loaned securities are voted. However, if EIM determines that a proxy vote is materially important to the relevant Portfolio, EIM will make a good faith effort to recall the loaned security in order to vote. |
b. | If an issuer is based in a country that requires “share blocking”1, EIM may determine that the value of exercising the vote is outweighed by the detriment of not being able to sell the shares during the blocking period, in which case EIM may not vote the proxy. |
1 | Shareholders in “share blocking” countries wishing to vote must deposit their shares shortly before the date of the meeting (usually one week) with a designated depositary. During the blocking period shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to clients’ custodian banks. |
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c. | EIM may abstain or vote against ballot issues where EIM has not received sufficient information to make an informed decision. |
2. | EIM, or the Administrator on EIM’s behalf, provides clients with a copy of these procedures upon request and a description of these procedures is included in EIM’s Form ADV, Part II. |
3. | Any potential material conflicts of interest associated with voting proxies will be disclosed and reviewed by the Trusts’ CCO or other member of EIM’s and the Administrator Legal Department (“Legal”) and Compliance Department (“Compliance”). |
4. | EIM will cast votes in a manner consistent with any applicable rule or regulation of the United States Securities and Exchange Commission (“SEC”). |
C. | Seed Capital Investments. EIM and any affiliate will vote Portfolio shares they own, including through “seed money” investments in a Portfolio, either for or against a proposal, or abstain, in the same proportion as the vote of all other security holders of the Portfolio (whether or not the proposal presents an issue as to which EIM or its affiliates could be deemed to have a conflict of interest), or as otherwise required under applicable law (e.g., as may be required under a “mixed and shared funding” order). If EIM or an affiliate is the sole shareholder of a Portfolio, EIM or the affiliate will vote the Portfolio’s shares that it owns in its discretion. |
D. | Sub-Advised Portfolios; No Delegation. Under certain circumstances EIM may assume responsibility for voting the proxies for shares held by a Sub-Advised Portfolio. For example, if a Sub-Adviser notifies EIM that it is unable or unwilling to assume responsibility for voting a proxy for a Sub-Advised Portfolio (e.g., if voting such proxy presents a potential material conflict of interest for the Sub-Adviser), EIM will vote such proxy in accordance with these procedures. |
E. | Record Retention and Inspection. EIM and the Administrator will maintain all documentation associated with EIM’s proxy voting decisions. EIM and the Administrator Compliance is responsible for verifying that such documentation is properly maintained in accordance with its procedures and applicable laws and regulations. |
IV. | CONFLICTS OF INTEREST |
If EIM or the Administrator becomes aware that a proxy voting issue may present a potential material conflict of interest, the issue will be referred to the CCO or other member of Legal and Compliance Department. If the CCO and/or the Legal and Compliance Department determines that an affiliated person of EIM has a potential material conflict, that affiliated person will not participate in the voting decision.
Potential material conflicts may arise between the interests of a Portfolio and EIM or any of its affiliated persons if, for example, a proxy vote relates to a matter involving issuers in which EIM or its affiliates have a substantial economic interest. Potential conflicts of interest include, but are not limited to:
• | Portfolio Managers owning shares of Underlying Unaffiliated Funds, ETFs or shares of securities that are also held in the Portfolios of the Trust(s). |
• | Equitable Financial Life Insurance Company (“Equitable”) holding investments in Underlying Unaffiliated Funds or ETFs that are also held in the Portfolios of the Trust(s). |
V. | PROXY VOTING SERVICES |
EIM, with the assistance of the Administrator, may engage an independent proxy voting service to assist with the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process as deemed necessary. Currently, EIM subscribes to the corporate governance and proxy research services of International Shareholder Services (ISS), a provider of proxy voting services. ISS provides
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voting recommendations based on established guidelines and practices. The ISS U.S. Proxy Voting Guidelines (the “ISS Guidelines”) are attached hereto as Appendix A. Based on its review of the ISS Guidelines, EIM has determined generally to instruct ISS to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs and certain Sub-Advised Portfolios as described in Section III.C above consistent with the ISS Guidelines. However, EIM’s use of the ISS Guidelines is not intended to constrain EIM’s consideration of any proxy proposal, and so there may be times when EIM deviates from the ISS Guidelines. EIM reserves the right not to vote in accordance with the ISS recommendation if it determines that it is not in the best interest of a Portfolio and its Shareholders to do so. In addition, if EIM becomes aware of a conflict of interest between ISS and an issuer subject to a proxy vote, EIM will consider the recommendation of the issuer and instruct ISS to vote the proxy based on what EIM believes to be in the best interest of the Portfolio and its shareholders.
The Proxy Voting Committee, with the assistance of the Administrator, will maintain records regarding EIM’s determination generally to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs, and certain Sub-Advised Portfolios as described in Section III.D above consistent with the ISS Guidelines, and that determination will be reviewed periodically.
The following guidelines describe EIM’s general positions on common proxy issues for Underlying Unaffiliated Funds and Underlying ETFs:
• | Election of Directors: EIM generally votes in favor of slates recommended by the board of directors. |
• | Fee Increases: EIM generally votes against proposals to increase fees. |
• | Changes to the investment strategy, investment objective or fundamental investment restrictions, and proposed mergers: EIM generally votes against changes that would impact adversely the allocation model of a Fund-of-Funds Portfolio. |
Legal and Compliance will conduct a due diligence review of any proxy voting service (“Proxy Service”) to assess (1) the adequacy and quality of the Proxy Service’s staffing, personnel and technology, and whether the Proxy Service has the capacity and competence to adequately analyze proxy issues and the ability to make proxy voting recommendations based on materially accurate and complete information; (2) whether the Proxy Service has the ability to execute proxy votes in accordance with EIM’s instructions; (3) whether the Proxy Service has adequately disclosed to EIM the methodologies it uses in formulating its voting recommendations, including its process for obtaining current and accurate information relevant to matters included in its research and on which it makes recommendations, the nature of any third-party information sources that the Proxy Service uses as a basis for its voting recommendations, and how and when the Proxy Service would expect to engage with issuers and third parties; (4) the effectiveness of the Proxy Service’s process for seeking timely input from issuers; and (5) the adequacy of the Proxy Service’s policies and procedures for identifying, disclosing and addressing actual and potential conflicts of interest. EIM or the Administrator will require the Proxy Service to update them on an ongoing basis regarding (1) any business changes relevant to its capacity and competence to provide independent proxy voting advice or carry out voting instructions, (2) any conflicts of interest that may arise with respect to its proxy voting recommendations, and (3) any operational or compliance issues or problems. The due diligence review will be conducted at least annually and may be conducted by on-site visit or written questionnaire. In the event that EIM or the Administrator becomes aware of factual errors, incompleteness or methodological weaknesses in the Proxy Service’s analysis, it will assess whether this materially affected the research or recommendations used by EIM and the Proxy Service’s efforts to correct any material deficiencies in its analysis or methodology.
VI. | SUB-ADVISERS’ PROXY VOTING POLICIES AND PROCEDURES |
Each Sub-Adviser will be required to maintain proxy voting policies and procedures in conformance with Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended, and that satisfy the following elements:
A. | Written Policies and Procedures: The Sub-Adviser must maintain written proxy voting policies and procedures in accordance with applicable laws and regulations and must provide to the Trusts, EIM, and the Administrator, upon request, copies of such policies and procedures. |
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B. | Fiduciary Duty: The Sub-Adviser’s policies and procedures must be reasonably designed to ensure that the Sub-Adviser votes client securities in the best interest of its clients. |
C. | Conflicts of Interest: The Sub-Adviser’s policies and procedures must include appropriate procedures to identify and resolve as necessary, before voting client proxies, all material proxy-related conflicts of interest between the Sub-Adviser (including its affiliates) and its clients. |
D. | Voting Guidelines: The Sub-Adviser’s policies and procedures must address with reasonable specificity how the Sub-Adviser will vote proxies, or what factors it will consider, when voting on particular types of matters, e.g., corporate governance proposals, compensation issues and matters involving social or corporate responsibility. The Sub-Adviser’s policies and procedures also should describe the considerations it will take into account if it retains a Proxy Service to assist it in discharging its proxy voting duties and its process for conducting due diligence on, and overseeing, services provided by a Proxy Service. |
E. | Monitoring Proxy Voting: The Sub-Adviser must have a system and/or process that is reasonably designed to ensure that proxies are voted on behalf of its clients in a timely and efficient manner. |
F. | Record Retention and Inspection: The Sub-Adviser must have an established system for creating and retaining all appropriate documentation relating to its proxy voting activities as required by applicable laws and regulations. The Sub-Adviser must provide to the Trusts, EIM, and the Administrator such information and records with respect to proxies relating to the Trust’s portfolio securities as required by law and as the Trusts, EIM, or the Administrator may reasonably request. |
EIM, with assistance from the Administrator, will conduct a due diligence review of each Sub-Adviser’s proxy voting policies and procedures (including any proxy voting guidelines) in connection with the initial selection of the Sub-Adviser to manage a Sub-Advised Portfolio and on at least an annual basis thereafter. The Sub-Advisers’ proxy voting policies and procedures may be amended from time to time and need not be identical. As part of its ongoing due diligence and compliance responsibilities, EIM will seek to ensure that each Sub-Adviser maintains proxy voting policies and procedures that are reasonably designed to comply with applicable laws and regulations.
VII. | DISCLOSURE OF TRUSTS’ PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD |
EIM and the Administrator, on behalf of the Trusts, will take reasonable steps as necessary to seek to ensure that the Trusts comply with all applicable laws and regulations relating to disclosure of the Trusts’ proxy voting policies and procedures and proxy voting records. EIM and the Administrator (including, at their option, through third-party service providers) will maintain a system that is reasonably designed to ensure that EIM’s actual proxy voting record and the actual proxy voting record of the Sub-Advisers with respect to the Trusts’ portfolio securities are collected, processed, filed with the SEC and made available to the Trusts’ shareholders as required by applicable laws and regulations.
Amended: September 12, 2019
Amended: December 10, 2014
Amended: July 11, 2007
Adopted: August 6, 2003
Amended: December 15, 2020
Amended: August 2021
Amended: December 2021
Amended: January 2023
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Page | |
Description of The Trust | |
Trust Investment Policies | |
Investment Strategies and Risks | |
Portfolio Holdings Disclosure Policy | |
Management of the Trust | |
Investment Management and Other Services | |
Brokerage Allocation and Other Strategies | |
Proxy Voting Policies and Procedures | |
Conflicts of Interest | |
Purchase, Redemption And Pricing of Shares | |
Taxation | |
Other Information | |
Other Services | |
Financial Statements | |
Appendix A — Ratings of Corporate Debt Securities | |
Appendix B — Portfolio Manager Information | |
Appendix C — Proxy Voting Policies and Procedures | C-1 |
Name, Address and Year of Birth | Position(s) Held With the Trust | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee† | Other Directorships Held by Trustee |
Interested Trustee | |||||
Steven M. Joenk* 1290 Avenue of the Americas, New York, NY, 10104 (1958) | Trustee and Chief Executive Officer | Trustee from September 2004 to present; Chief Executive Officer from December 2002 to present; and Chairman of the Board from September 2004 through September 2017 | Chairman of the Board and Chief Executive Officer (May 2011 to present) and President (May 2011 to November 2021) of EIM; Chairman of the Board and Chief Executive Officer of Equitable Investment Management, LLC (January 2023 to present); Senior Vice President and Chief Investment Officer of AXA Financial, Inc. (April 2017 to 2019); and Chief Investment Officer (April 2017 to present) and employee (September 1999 to present) of Equitable Financial. | 125 | None |
Independent Trustees | |||||
Mark A. Barnard c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1949) | Trustee | April 2017 to present | Retired. Previously, Managing Director – Private Investments, Howard Hughes Medical Institute, 2001 to 2016 (and, prior thereto, Director of Private Investments from 1998 to 2001, and Manager of Private Investments from 1995 to 1998). | 125 | None. |
Thomas W. Brock c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1947) | Trustee | January 2016 to present | Retired. Previously, Director, President and Chief Executive Officer of Silver Bay Realty Trust Corp., June 2016 to May 2017 (and, prior thereto, Director and interim President and Chief Executive Officer from January 2016 to June 2016); Chief Executive Officer and Co-Founder of Stone Harbor Investment Partners, 2006 to 2012. | 125 | Liberty All-Star Funds (2) |
Name, Address and Year of Birth | Position(s) Held With the Trust | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee† | Other Directorships Held by Trustee |
Michael B. Clement c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1957) | Trustee | January 2019 to present | Professor of Accounting, University of Texas, from 1997 to 2002 and from 2004 to present (Department of Accounting Chair from 2018 to 2022); Visiting Professor, Harvard Business School, 2023 to present. | 125 | New York Mortgage Trust |
Donald E. Foley c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1951) | Trustee | January 2014 to present | Retired. Previously, Chairman of the Board and Chief Executive Officer, Wilmington Trust Corporation, 2010 to 2011; Senior Vice President, Treasurer and Director of Tax, ITT Corporation, 1996 to 2010. | 125 | BioSig Technologies, Inc.; Wilmington Funds (12) |
Patricia M. Haverland c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1956) | Trustee | April 2022 to present | Retired. Previously, Vice President and Chief Investment Officer North America Pensions, SIEMENS, 2009 to 2018. | 125 | None. |
H. Thomas McMeekin c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1953) | Trustee | January 2014 to present | Managing Partner and Founder, Griffin Investments, LLC, 2000 to present; CEO of Blue Key Services, LLC., 2015 to present; previously, Chief Investment Officer, AIG Life & Retirement and United Guaranty Corporation and Senior Managing Director of AIG Asset Management, 2009 to 2012. | 125 | None. |
Jeffery S. Perry c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1965) | Trustee | April 2022 to present | Founder and Chief Executive Officer, Lead Mandates LLC (business and leadership advisory firm). Retired, Global Client Service Partner, Ernst & Young LLP, 2004 to 2020. | 125 | Fortune Brands Innovations, Inc.; MasterBrand, Inc. |
Name, Address and Year of Birth | Position(s) Held With the Trust | Term of Office** and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee† | Other Directorships Held by Trustee |
Gary S. Schpero c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1953) | Chairman of the Board | Independent Trustee, May 2000 to present; Lead Independent Trustee, September 2011 to September 2017; Chairman of the Board, October 2017 to present. | Retired. Prior to January 1, 2000, Partner of Simpson Thacher & Bartlett (law firm) and Managing Partner of the Investment Management and Investment Company Practice Group. | 125 | Blackstone Funds (4) |
Kathleen Stephansen c/o EQ Advisors Trust 1290 Avenue of the Americas New York, NY 10104 (1954) | Trustee | January 2019 to present | Senior Economist, Haver Analytics, 2019 to present; Senior Economic Advisor, Boston Consulting Group, 2018 to 2019 and in 2016; Chief Economist, Huawei Technologies USA Inc., 2016 to 2018; various positions at American International Group, including Chief Economist and Senior Managing Director and Senior Investment Strategies and Global Head of Sovereign Research – AIG Asset Management from 2010 to 2016. | 125 | None. |
for the Year Ended December 31, 20221
Trustee | Aggregate Compensation from the Trust | Pension or Retirement Benefits Accrued As Part of Trust Expenses | Estimated Annual Benefits Upon Retirement | Total Compensation from Trust and Fund Complex Paid to Trustees2 |
Interested Trustee | ||||
Steven M. Joenk | $0 | $0 | $0 | $0 |
Independent Trustees | ||||
Mark A. Barnard | $381,044 | $0 | $0 | $441,454 |
Thomas W. Brock | $397,046 | $0 | $0 | $460,000 |
Michael B. Clement | $397,046 | $0 | $0 | $460,000 |
Donald E. Foley | $397,046 | $0 | $0 | $460,000 |
Patricia M. Haverland3 | $318,308 | $0 | $0 | $368,750 |
H. Thomas McMeekin | $400,287 | $0 | $0 | $463,750 |
Jeffery S. Perry3 | $318,308 | $0 | $0 | $368,750 |
Gloria Reeg4 | $196,225 | $0 | $0 | $227,500 |
Gary S. Schpero | $501,701 | $0 | $0 | $581,250 |
Kathleen Stephansen | $365,756 | $0 | $0 | $423,750 |
as of December 31, 2022
Name of Trustee | Dollar Range of Equity Securities in the Portfolios of the Trust | Aggregate Dollar Range of Equity Securities in All Portfolios Overseen in Family of Investment Companies* |
Interested Trustee | ||
Steven M. Joenk | 1290 VT GAMCO Small Company Value Portfolio - E | E |
Independent Trustees | ||
Mark A. Barnard | None | C |
Thomas W. Brock | None | C |
Michael B. Clement | None | D |
Donald E. Foley | None | C |
Patricia M. Haverland | None | D |
H. Thomas McMeekin | None | C |
Jeffery S. Perry | None | B |
Gary S. Schpero | None | C |
Name of Trustee | Dollar Range of Equity Securities in the Portfolios of the Trust | Aggregate Dollar Range of Equity Securities in All Portfolios Overseen in Family of Investment Companies* |
Kathleen Stephansen | None | C |
Name, Year of Birth and Address* | Position(s) Held With the Trust** | Term of Office*** and Length of Time Served | Principal Occupation(s) During Past 5 Years |
Steven M. Joenk (1958) | Trustee and Chief Executive Officer | Trustee from September 2004 to present; Chief Executive Officer from December 2002 to present; and Chairman of the Board from September 2004 through September 2017 | Chairman of the Board and Chief Executive Officer (May 2011 to present) and President (May 2011 to November 2021) of EIM; Chairman of the Board and Chief Executive Officer of Equitable Investment Management, LLC (January 2023 to present); Senior Vice President and Chief Investment Officer of AXA Financial, Inc. (April 2017 to 2019); and Chief Investment Officer (April 2017 to present) and employee (September 1999 to present) of Equitable Financial. |
Michal Levy (1979) | President | From February 2023 to present | Director (December 2014 to present), President (December 2021 to present), and Chief Operating Officer (March 2017 to present) of EIM; Executive Vice President and Chief Operating Officer of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (October 2011 to present) of Equitable Financial. |
Brian Walsh (1968) | Chief Financial Officer and Treasurer | From June 2007 to present | Director (February 2011 to present) and Senior Vice President (May 2011 to present) of EIM; Senior Vice President of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (February 2003 to present) of Equitable Financial. |
Name, Year of Birth and Address* | Position(s) Held With the Trust** | Term of Office*** and Length of Time Served | Principal Occupation(s) During Past 5 Years |
Joseph J. Paolo**** (1970) | Chief Compliance Officer, Vice President and Anti- Money Laundering Compliance Officer | Chief Compliance Officer from May 2007 to present, Vice President and Anti- Money Laundering Compliance Officer from November 2005 to present | Chief Compliance Officer (June 2007 to present) and Senior Vice President (May 2011 to present) of EIM; Vice President and Chief Compliance Officer of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (June 2007 to present) of Equitable Financial. |
Kenneth Kozlowski (1961) | Senior Vice President and Chief Investment Officer | Vice President from June 2010 to June 2016; Senior Vice President and Chief Investment Officer from June 2016 to present | Executive Vice President and Chief Investment Officer (June 2012 to present) and Director (May 2017 to present) of EIM; Executive Vice President of Equitable Investment Management, LLC (January 2023 to present); and Signatory Officer (November 2021 to present) and employee (February 2001 to present) of Equitable Financial. |
Alwi Chan (1974) | Vice President and Deputy Chief Investment Officer | Vice President from June 2007 to present; Deputy Chief Investment Officer from June 2016 to present | Senior Vice President and Deputy Chief Investment Officer of EIM (June 2012 to present); and employee of Equitable Financial (June 1999 to present). |
James Chen (1988) | Vice President and Director of Risk | From August 2022 to present | Vice President of EIM (July 2022 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); employee of Equitable Financial (2015 to present). |
James Kelly (1968) | Controller | From June 2007 to present | Vice President of EIM (May 2011 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (September 2008 to present). |
Andrew Houston (1990) | Vice President | From September 2022 to present | Vice President of EIM (July 2022 to present), Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (2017 to present). |
Miao Hu (1978) | Vice President | From June 2016 to present | Assistant Portfolio Manager (May 2016 to present) and Vice President (June 2016 to present) of EIM; and employee of Equitable Financial (November 2013 to present). |
Kevin McCarthy (1983) | Vice President | From September 2019 to present | Assistant Portfolio Manager (December 2018 to present) and Vice President (July 2022 to present) of EIM; and employee of Equitable Financial (August 2015 to present). |
Xavier Poutas (1977) | Vice President | From June 2016 to present | Assistant Portfolio Manager (May 2011 to present) and Vice President (June 2016 to present) of EIM; and employee of Equitable Financial (August 2002 to present). |
Name, Year of Birth and Address* | Position(s) Held With the Trust** | Term of Office*** and Length of Time Served | Principal Occupation(s) During Past 5 Years |
Shane Daly (1970) | Chief Legal Officer, Senior Vice President and Secretary | From March 2023 to present | Executive Vice President, Secretary and General Counsel of EIM and Equitable Investment Management, LLC (March 2023 to present); employee of Equitable Financial (2011 to present). |
Maureen E. Kane, Esq. (1962) | Vice President and Assistant Secretary | From March 2023 to present | Senior Vice President, Assistant Secretary and Associate General Counsel of EIM and Equitable Investment Management, LLC (March 2023 to present); employee of Equitable Financial (February 2019 to present); and Managing Director and Managing Counsel of The Bank of New York Mellon (July 2014 to February 2019). |
Kristina B. Magolis, Esq. (1985) | Vice President and Assistant Secretary | From November 2022 to present | Vice President, Assistant Secretary and Associate General Counsel of EIM (October 2022 to present); Vice President, Assistant Secretary and Associate General Counsel of Equitable Investment Management, LLC (January 2023 to present); employee of Equitable Financial (October 2022 to present); and Vice President, Legal and Compliance, Morgan Stanley Investment Management (August 2017 to September 2022). |
Cheryl Cherian (1979) | Vice President and Assistant Secretary | From March 2023 to present | Employee of Equitable Financial (April 2019 to present); and Compliance Associate at Manifold Fund Advisors (November 2016 to March 2018). |
Artemis Brannigan (1974) | Vice President | From September 2019 to present | Vice President of EIM (August 2019 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); employee of Equitable Financial (August 2019 to present); and Director of Prudential Financial (January 2016 to July 2019). |
Aysha Pride (1988) | Vice President | From August 2022 to present | Vice President of EIM (July 2022 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (2014 to present). |
Helen Lai (1973) | Assistant Vice President | From June 2016 to present | Employee of Equitable Financial (March 2013 to present). |
Michelle Gallo (1973) | Assistant Controller | From March 2023 to present | Employee of Equitable Financial (July 2013 to present) |
Roselle Ibanga (1978) | Assistant Controller | From March 2009 to present | Employee of Equitable Financial (February 2009 to present). |
Lisa Perrelli (1974) | Assistant Controller | From March 2009 to present | Employee of Equitable Financial (November 2002 to present). |
Name, Year of Birth and Address* | Position(s) Held With the Trust** | Term of Office*** and Length of Time Served | Principal Occupation(s) During Past 5 Years |
Jennifer Mastronardi (1985) | Assistant Vice President | From March 2012 to present | Vice President of EIM (April 2015 to present); Vice President of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (February 2009 to present). |
Helen Espaillat (1963) | Assistant Secretary | From March 2009 to present | Assistant Vice President and Assistant Secretary of EIM (March 2015 to present); Assistant Vice President and Assistant Secretary of Equitable Investment Management, LLC (January 2023 to present); and employee of Equitable Financial (July 2004 to present). |
Lorelei Fajardo (1978) | Assistant Secretary | From June 2016 to present | Employee of Equitable Financial (July 2013 to present). |
Monica Giron (1976) | Assistant Secretary | From July 2019 to present | Employee of Equitable Financial (June 2019 to present); and Senior Paralegal at Gemini Fund Services (August 2015 to May 2019). |
Acquired Portfolio: | Management Fee | Amount of Fees Waived And Other Expenses Assumed by Adviser Pursuant to Expense Limitation Arrangement | Voluntary Fee Waiver | Management Fee Paid to Adviser After Fee Waiver |
Acquired EQ/Core Plus Bond Portfolio | $832,209 | $449,819 | $— | $382,390 |
Acquired Portfolio: | Management Fee | Amount of Fees Waived And Other Expenses Assumed by Adviser Pursuant to Expense Limitation Arrangement | Voluntary Fee Waiver | Management Fee Paid to Adviser After Fee Waiver |
Acquired EQ/Core Plus Bond Portfolio | $3,411,178 | $454,052 | $— | $2,957,126 |
Acquired Portfolio: | Management Fee | Amount of Fees Waived And Other Expenses Assumed by Adviser Pursuant to Expense Limitation Arrangement | Voluntary Fee Waiver | Management Fee Paid to Adviser After Fee Waiver |
Acquired EQ/Core Plus Bond Portfolio | $4,173,844 | $650,219 | $— | $3,523,625 |
Name and Control Persons of the Sub-Adviser |
AXA IM is an indirect wholly-owned subsidiary of AXA Investment Managers, S.A., which is a wholly-owned subsidiary of AXA Group. |
Brandywine Global is a wholly-owned, but independently operated, subsidiary of Legg Mason, Inc. Legg Mason, Inc. is a wholly-owned subsidiary of Franklin Resources, Inc., a publicly owned company engaged in the financial services industry. |
Loomis Sayles is a Delaware limited partnership. Loomis Sayles' general partner, Loomis, Sayles & Company, Inc., is directly owned by Natixis Investment Managers, LLC (“Natixis LLC”). Natixis LLC is indirect subsidiary of Natixis Investment Managers, an international asset management group based in Paris, France, that is in turn owned by Natixis, a French investment banking and financial services firm. Natixis is wholly-owned by BPCE, France's second largest banking group. BPCE is owned by banks comprising two autonomous and complementary retail banking networks consisting of Caisse d'Epargne regional savings banks and the Banque Populaire regional cooperative banks. |
Acquired Portfolio: | Administration Fee |
Acquired EQ/Core Plus Bond Portfolio | $225,331 |
Acquired Portfolio: | Administration Fee |
Acquired EQ/Core Plus Bond Portfolio | $670,625 |
Acquired Portfolio: | Administration Fee |
Acquired EQ/Core Plus Bond Portfolio | $858,731 |
Acquired Portfolio: | Class A Fee Paid to Distributor | Class B Fee Paid to Distributor | Total Distribution Fees |
Acquired EQ/Core Plus Bond Portfolio | $348,713 | $256,651 | $605,365 |
Acquired Portfolio: | Broker or Dealer (or Parent Company) | Type of Security | Value (000) |
Acquired EQ/Core Plus Bond Portfolio | Barclays Capital, Inc. | D | $1,607 |
BMO Capital Markets Corp. | D | $881 | |
BofA Securities, Inc. | D | $8,508 | |
Citigroup Global Markets Inc. | D | $3,283 | |
Deutsche Bank Securities Inc. | D | $1,009 | |
Goldman Sachs & Co. LLC | D | $858 | |
HSBC Securities (USA) Inc. | D | $1,714 | |
J.P. Morgan Securities LLC | D | $6,548 | |
Morgan Stanley & Co. LLC | D | $1,884 |
Equitable Investment Management Group, LLC (“Adviser”) | ||||||||||||
Presented below for each portfolio manager is the number of other accounts managed by the portfolio manager and the total assets in the accounts managed within each category as of _____, 2023. | Presented below for each of the categories is the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on the performance of the account. | |||||||||||
Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | |||||||
Portfolio Manager | Number of Accounts | Total Assets (Billion) | Number of Accounts | Total Assets (Million) | Number of Accounts | Total Assets | Number of Accounts | Total Assets | Number of Accounts | Total Assets | Number of Accounts | Total Assets |
EQ/Core Plus Bond Portfolio | ||||||||||||
Kenneth T. Kozlowski | ||||||||||||
Alwi Chan |
EQ/Core Plus Bond Portfolio | |||||||
Portfolio Manager | None | $1- $10,000 | $10,001- $50,000 | $50,001- $100,000 | $100,001- $500,000 | $500,001- $1,-00,000 | over $1,000,000 |
Kenneth T. Kozlowski | X | ||||||
Alwi Chan | X |
AXA Investment Managers US Inc. (“AXA IM” or “Sub-Adviser”) | ||||||||||||
Presented below for each portfolio manager is the number of other accounts managed by the portfolio manager and the total assets in the accounts managed within each category as of ______, 2023. | Presented below for each of the categories is the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on the performance of the account. | |||||||||||
Portfolio Manager | Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | ||||||
Number of Accounts | Total Assets (Millions) | Number of Accounts | Total Assets (Billions) | Number of Accounts | Total Assets (Billions) | Number of Accounts | Total Assets | Number of Accounts | Total Assets (Millions) | Number of Accounts | Total Assets | |
EQ/Core Plus Bond Portfolio | ||||||||||||
Michael Graham | ||||||||||||
Robert Houle |
Portfolio Manager | None | $1- $10,000 | $10,001- $50,000 | $50,001- $100,000 | $100,001- $500,000 | $500,001- $1,000,000 | Over $1,000,000 |
EQ/Core Plus Bond Portfolio | |||||||
Michael Graham | X | ||||||
Robert Houle | X |
Brandywine Global Investment Management, LLC (“Brandywine Global”) | ||||||||||||
Presented below for each portfolio manager is the number of other accounts managed by the portfolio manager and the total assets in the accounts managed within each category as of ______, 2023. | Presented below for each of the categories is the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on the performance of the account. | |||||||||||
Portfolio Manager | Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | ||||||
Number of Accounts | Total Assets (Millions) | Number of Accounts | Total Assets (Millions) | Number of Accounts | Total Assets (Millions) | Number of Accounts | Total Assets (Millions) | Number of Accounts | Total Assets (Millions) | Number of Accounts | Total Assets (Millions) | |
EQ/Core Plus Bond Portfolio | ||||||||||||
Anujeet Sareen | ||||||||||||
Brian Kloss | ||||||||||||
Tracy Chen |
Portfolio Manager | None | $1- $10,000 | $10,001- $50,000 | $50,001- $100,000 | $100,001- $500,000 | $500,001- $1,000,000 | Over $1,000,000 |
EQ/Core Plus Bond Portfolio | |||||||
Anujeet Sareen | X | ||||||
Brian Kloss | X | ||||||
Tracy Chen | X |
Loomis, Sayles & Company, L.P. (“Loomis Sayles” or “Sub-Adviser”) | ||||||||||||
Presented below for each portfolio manager is the number of other accounts managed by the portfolio manager and the total assets in the accounts managed within each category as of ______, 2023 | Presented below for each of the categories is the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on the performance of the account. | |||||||||||
Portfolio Manager | Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | Registered Investment Companies | Other Pooled Investment Vehicles | Other Accounts | ||||||
Number of Accounts | Total Assets (Billions) | Number of Accounts | Total Assets (Billions) | Number of Accounts | Total Assets (Billions) | Number of Accounts | Total Assets | Number of Accounts | Total Assets | Number of Accounts | Total Assets (Billions) | |
EQ/Core Plus Bond Portfolio | ||||||||||||
Daniel Conklin | ||||||||||||
Christopher T. Harms | ||||||||||||
Clifton V. Rowe | ||||||||||||
Ian Anderson | ||||||||||||
Barath Sankaran |
Portfolio Manager | None | $1- $10,000 | $10,001- $50,000 | $50,001- $100,000 | $100,001- $500,000 | $500,001- $1,000,000 | Over $1,000,000 |
EQ/Core Plus Bond Portfolio | |||||||
Daniel Conklin | X | ||||||
Christopher T. Harms | X | ||||||
Clifton V. Rowe | X | ||||||
Ian Anderson | X | ||||||
Barath Sankaran | X |
PROXY VOTING POLICIES AND PROCEDURES
EQ ADVISORS TRUST
EQ PREMIER VIP TRUST
1290 FUNDS
(individually, a “Trust” and collectively, the “Trusts”)
I. Trusts’ Policy Statement
Each Trust is firmly committed to ensuring that proxies relating to the Trust’s portfolio securities are voted in the best interest of the Trust. The following policies and procedures have been established to implement each Trust’s proxy voting program (the “Program”).
II. Trusts’ Proxy Voting Program
Equitable Investment Management Group, LLC and Equitable Investment Management, LLC (collectively, “EIM”) serve as the investment advisers to each series of the Trusts (each, a “Portfolio”, and together, the “Portfolios”). Each Trust has delegated proxy voting responsibility with respect to each Portfolio to EIM. EIM, through its Proxy Voting Committee, is responsible for monitoring and administering the Program. Equitable Investment Management, LLC (“Administrator”) serves as the administrator of the Trusts and is generally responsible for monitoring, testing and maintaining compliance policies, procedures and other items for the Trusts, and thus assists in monitoring compliance with applicable requirements pursuant to these Policies and Procedures.
A. | Sub-Advised Portfolios |
EIM is responsible for the selection and ongoing monitoring of investment sub-advisers (the “Sub-Advisers”) who, among other responsibilities, provide portfolio management services including the day-to-day research and stock selection for each sub-advised Portfolio or an allocated portion of a Portfolio (a “Sub-Advised Portfolio”). EIM views proxy voting as a function that is incidental and integral to the portfolio management services provided by Sub-Advisers. Therefore, except as described in Section III below, EIM, in turn, delegates proxy voting responsibility with respect to each Sub-Advised Portfolio to the applicable Sub-Adviser. The primary focus of the Trusts’ Program as it relates to the Sub-Advised Portfolios, therefore, is to seek to ensure that the Sub-Advisers have adequate proxy voting policies and procedures in place and to monitor each Sub-Adviser’s proxy voting. The Sub-Advisers’ proxy voting policies and procedures may be amended from time to time and need not be identical.
B. | “Fund-of-Funds Portfolios” |
EIM provides the day-to-day portfolio management services to certain Portfolios, or an allocated portion of a Portfolio (“Allocated Portion”), each of which seeks to achieve its investment objective by investing in other mutual funds managed by EIM (“Underlying Affiliated Portfolios”), unaffiliated mutual funds (“Underlying Unaffiliated Funds”) or exchange-traded funds (“Underlying ETFs”) (referred to collectively as the “Fund-of-Funds Portfolios”). Accordingly, EIM retains proxy voting responsibility with respect to each Fund-of-Funds Portfolio and votes proxies in accordance with the policies and procedures set forth in Section III below.
III. EIM’s Proxy Voting Policies and Procedures
EIM has a fiduciary duty to vote proxies on behalf of a Portfolio in the best interest of the Portfolio and its shareholders. EIM believes that its proxy voting policies and procedures represent the voting positions most likely to support a Portfolio’s and its shareholders’ best interests across a range of sectors and contexts.
A. | Underlying Affiliated Portfolios. EIM will vote the Fund-of-Funds Portfolios’ or Allocated Portions’ shares in Underlying Affiliated Portfolios either for or against a proposal, or abstain, in the same proportion as the vote of all other securities holders of the applicable Underlying Affiliated Portfolio |
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(whether or not the proposal presents an issue as to which EIM or its affiliates could be deemed to have a conflict of interest). If there are no security holders of an Underlying Affiliated Portfolio except Fund-of-Funds Portfolio, EIM will vote a Fund-of-Funds’ Portfolios’ shares in Underlying Affiliated Portfolio in its discretion, subject to compliance with other provisions of these Procedures, including Section III.E.2. below regarding resolution of potential conflicts of interest regarding a proposal. |
B. | Underlying Unaffiliated Funds, Underlying ETFs and Certain Sub-Advised Portfolios. |
a. | With respect to voting proxies of Underlying Unaffiliated Funds and Underlying ETFs where a Portfolio, and other members of its “advisory group” (as defined in Rule 12d1-4 under the Investment Company Act of 1940) in the aggregate (i) hold more than 25% of the outstanding voting securities of an Underlying Unaffiliated Fund or Unaffiliated ETF aasa result of a decrease in the outstanding voting securities of the acquired fund, or (ii) hold more than 10% of the outstanding voting securities of an Underlying Unaffiliated Fund or Unaffiliated ETF that is a registered closed-end management investment company or business development company, each member of such “advisory group” will vote its securities in the same proportion as the vote of all other holders of such securities; provided, however, that in circumstances where all holders of the outstanding voting securities of the Underlying Unaffiliated Fund or Unaffiliated ETF are required by the rule or otherwise under Section 12(d)(1) to vote such securities in the same proportion as the vote of all other holders of such securities, the Portfolio will seek instructions from its security holders with regard to the voting of all proxies with respect to such Underlying Unaffiliated Fund or Underlying ETF securities and vote such proxies only in accordance with such instructions. |
b. | With respect to voting proxies for Underlying Unaffiliated Funds, Underlying ETFs in all other circumstances, and certain Sub-Advised Portfolios as described in Section III. D below, the following guidelines generally will apply: |
1. | The decision whether, and if so, how to vote a proxy will be made by EIM based on what it determines to be in the best interest of the relevant Portfolio and its shareholders and in accordance with these procedures. |
2. | EIM, with the assistance of Administrator, may enlist the services of an independent proxy voting service to assist with the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process, as further described in Section III.E below. |
3. | EIM’s policy is to vote all proxies, except under circumstances in which EIM has determined that it is consistent with the best interest of the relevant Portfolio and its shareholders not to vote the proxy or to abstain on one or more proposals. Such circumstances may include the following: |
a. | When securities are out on loan, they are transferred into the borrower’s name and are voted by the borrower, at its discretion. In most cases, EIM will not take steps to see that loaned securities are voted. However, if EIM determines that a proxy vote is materially important to the relevant Portfolio, EIM will make a good faith effort to recall the loaned security in order to vote. |
b. | If an issuer is based in a country that requires “share blocking,”1 EIM may determine that the value of exercising the vote is outweighed by the detriment of not being able to sell the shares during the blocking period, in which case EIM may not vote the proxy. |
1 | Shareholders in “share blocking” countries wishing to vote must deposit their shares shortly before the date of the meeting (usually one week) with a designated depositary. During the blocking period shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to clients’ custodian banks. |
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c. | EIM may abstain or vote against ballot issues where EIM has not received sufficient information to make an informed decision. |
1. | EIM will include a description of these procedures in each Trust’s Registration Statement. |
2. | Any potential material conflicts of interest associated with voting proxies will be disclosed and reviewed by the Trusts’ Chief Compliance Officer (“CCO”) or other member of EIM’s and Administrator’s Legal and Compliance Department (“Legal and Compliance”). |
3. | EIM will cast votes in a manner consistent with any applicable rule or regulation of the United States Securities and Exchange Commission (“SEC”). |
C. | Seed Capital Investments. EIM and any affiliate will vote Portfolio shares they own, including through “seed money” investments in a Portfolio, either for or against a proposal, or abstain, in the same proportion as the vote of all other security holders of the Portfolio (whether or not the proposal presents an issue as to which EIM or its affiliates could be deemed to have a conflict of interest), or as otherwise required under applicable law (e.g., as may be required under a “mixed and shared funding” order). If EIM or an affiliate is the sole shareholder of a Portfolio, EIM or the affiliate will vote the Portfolio’s shares that it owns in its discretion. |
D. | Sub-Advised Portfolios; No Delegation. Under certain circumstances EIM may assume responsibility for voting the proxies for shares held by a Sub-Advised Portfolio. For example, if a Sub-Adviser notifies EIM that it is unable or unwilling to assume responsibility for voting a proxy for a Sub-Advised Portfolio (e.g., if voting such proxy presents a potential material conflict of interest for the Sub-Adviser), EIM will vote such proxy in accordance with these procedures. |
E. | EIM and Administrator will be required to maintain proxy voting policies and procedures that satisfy the following elements: |
1. | Written Policies and Procedures: EIM and Administrator must maintain written proxy voting policies and procedures in accordance with applicable laws and regulations and must provide to each Trust copies of such policies and procedures. |
2. | Conflicts of Interest: If EIM or Administrator becomes aware that a proxy voting issue may present a potential material conflict of interest, the issue will be referred to the CCO or other member of Legal and Compliance. If the CCO and/or Legal and Compliance determines that an affiliated person of EIM has a potential material conflict, that affiliated person will not participate in the voting decision. |
• | Potential material conflicts may arise between the interests of a Portfolio and EIM or any of its affiliated persons if, for example, a proxy vote relates to a matter involving issuers in which EIM or its affiliates have a substantial economic interest. Potential conflicts of interest include, but are not limited to: |
• | Portfolio Managers owning shares of Underlying Unaffiliated Funds, ETFs or shares of securities that are also held in the Portfolios of the Trust(s). |
• | Equitable Financial Life Insurance Company (“Equitable”) holding investments in Underlying Unaffiliated Funds or ETFs that are also held in the Portfolios of the Trust(s). It is possible that EIM may vote differently than Equitable. |
3. | Voting Guidelines: EIM, with the assistance of Administrator, may engage an independent proxy voting service to assist with the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process as deemed necessary. Currently, EIM subscribes to the corporate governance and proxy research services of International Shareholder Services (“ISS”), a provider of proxy voting services. ISS provides voting recommendations based on established guidelines and practices. The ISS U.S. Proxy Voting Guidelines (the “ISS Guidelines”) are attached hereto as Appendix A. Based on its review of the |
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ISS Guidelines, EIM has determined generally to instruct ISS to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs and certain Sub-Advised Portfolios as described in Section III.D above consistent with the ISS Guidelines. However, EIM’s use of the ISS Guidelines is not intended to constrain EIM’s consideration of any proxy proposal, and so there may be times when EIM deviates from the ISS Guidelines. EIM reserves the right not to vote in accordance with the ISS recommendation if it determines that it is not in the best interest of a Portfolio and its Shareholders to do so. In addition, if EIM becomes aware of a conflict of interest between ISS and an issuer subject to a proxy vote, EIM will consider the recommendation of the issuer and instruct ISS to vote the proxy based on what EIM believes to be in the best interest of the Portfolio and its shareholders. |
The Proxy Voting Committee, with the assistance of Administrator, will maintain records regarding EIM’s determination generally to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs, and certain Sub-Advised Portfolios as described in Section III.D above consistent with the ISS Guidelines, and that determination will be reviewed periodically.
The following guidelines describe EIM’s general positions on common proxy issues for Underlying Unaffiliated Funds and Underlying ETFs:
• | Election of Directors: EIM generally votes in favor of slates recommended by the board of directors. |
• | Fee Increases: EIM generally votes against proposals to increase fees. |
• | Changes to the investment strategy, investment objective or fundamental investment restrictions, and proposed mergers: EIM generally votes against changes that would impact adversely the allocation model of a Fund-of-Funds Portfolio. |
The EIM and Administrator Compliance Department (“Compliance”) will conduct a due diligence review of any proxy voting service (“Proxy Service”) engaged by EIM or Administrator to assess (1) the adequacy and quality of the Proxy Service’s staffing, personnel and technology, and whether the Proxy Service has the capacity and competence to adequately analyze proxy issues and the ability to make proxy voting recommendations based on materially accurate and complete information; (2) whether the Proxy Service has the ability to execute proxy votes in accordance with EIM’s instructions; (3) whether the Proxy Service has adequately disclosed to EIM the methodologies it uses in formulating its voting recommendations, including its process for obtaining current and accurate information relevant to matters included in its research and on which it makes recommendations, the nature of any third-party information sources that the Proxy Service uses as a basis for its voting recommendations, and how and when the Proxy Service would expect to engage with issuers and third parties; (4) the effectiveness of the Proxy Service’s process for seeking timely input from issuers; and (5) the adequacy of the Proxy Service’s policies and procedures for identifying, disclosing and addressing actual and potential conflicts of interest. EIM or Administrator will require the Proxy Service to update EIM or Administrator, as applicable, on an ongoing basis regarding (1) any business changes relevant to its capacity and competence to provide independent proxy voting advice or carry out voting instructions, (2) any conflicts of interest that may arise with respect to its proxy voting recommendations, and (3) any operational or compliance issues or problems. The due diligence review will be conducted at least annually and may be conducted by on-site visit or written questionnaire. In the event that EIM or Administrator becomes aware of factual errors, incompleteness or methodological weaknesses in the Proxy Service’s analysis, it will assess whether this materially affected the research or recommendations used by EIM and the Proxy Service’s efforts to correct any material deficiencies in its analysis or methodology.
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4. | Record Retention and Inspection: EIM, or Administrator on EIM’s behalf, will maintain all documentation associated with its proxy voting decisions. Compliance is responsible for verifying that such documentation is properly maintained in accordance with the Trusts’ procedures and applicable laws and regulations. |
IV. Due Diligence and Compliance Program
EIM, with the assistance of Administrator, will conduct a due diligence review of each Sub-Adviser’s proxy voting policies and procedures (including any proxy voting guidelines) in connection with the initial selection of the Sub-Adviser to manage a Sub-Advised Portfolio and on at least an annual basis thereafter. As part of its ongoing due diligence and compliance responsibilities, with respect to the Sub-Advised Portfolios, EIM, with the assistance of Administrator, will seek to ensure that each Sub-Adviser maintains proxy voting policies and procedures that are reasonably designed to comply with applicable laws and regulations.
V. Sub-Advisers’ Proxy Voting Policies and Procedures
Each Sub-Adviser will be required to maintain proxy voting policies and procedures in conformance with Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended, and that satisfy the following elements:
A. Written Policies and Procedures: The Sub-Adviser must maintain written proxy voting policies and procedures in accordance with applicable laws and regulations and must provide to the Trusts, EIM, and Administrator, upon request, copies of such policies and procedures.
B. Fiduciary Duty: The Sub-Adviser’s policies and procedures must be reasonably designed to ensure that the Sub-Adviser votes client securities in the best interest of its clients.
C. Conflicts of Interest: The Sub-Adviser’s policies and procedures must include appropriate procedures to identify and resolve as necessary, before voting client proxies, all material proxy-related conflicts of interest between the Sub-Adviser (including its affiliates) and its clients.
D. Voting Guidelines: The Sub-Adviser’s policies and procedures must address with reasonable specificity how the Sub-Adviser will vote proxies, or what factors it will consider, when voting on particular types of matters, e.g., corporate governance proposals, compensation issues and matters involving social or corporate responsibility. The Sub-Adviser’s policies and procedures also should describe the considerations it will take into account if it retains a Proxy Service to assist it in discharging its proxy voting duties and its process for conducting due diligence on, and overseeing, services provided by a Proxy Service.
E. Monitoring Proxy Voting: The Sub-Adviser must have a system and/or process that is reasonably designed to ensure that proxies are voted on behalf of its clients in a timely and efficient manner.
F. Record Retention and Inspection: The Sub-Adviser must have an established system for creating and retaining all appropriate documentation relating to its proxy voting activities as required by applicable laws and regulations. The Sub-Adviser must provide to the Trusts, EIM, and Administrator such information and records with respect to proxies relating to the Trust’s portfolio securities as required by law and as the Trusts, EIM, or Administrator may reasonably request.
VI. Disclosure of Trusts’ Proxy Voting Policies and Procedures and Proxy Voting Record
EIM and Administrator, on behalf of the Trusts, will take reasonable steps as necessary to seek to ensure that the Trusts comply with all applicable laws and regulations relating to disclosure of the Trusts’ proxy voting policies and procedures and proxy voting records. EIM and Administrator (including, at their option, through third-party service providers) will maintain a system that is reasonably designed to ensure that its
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actual proxy voting record and the actual proxy voting record of the Sub-Advisers with respect to the Trusts’ portfolio securities are collected, processed, filed with the SEC and made available to the Trusts’ shareholders as required by applicable laws and regulations.
VII. Proxy Voting Committee
The Proxy Voting Committee is responsible for monitoring and administering the Program. The Proxy Voting Committee is composed of EIM’s and Administrator’ CCO, officers of EIM and Administrator, and/or members of EIM’s or Administrator’s (as applicable) Investment Management Services, Legal and Compliance, , or any combination thereof, who may be advisory members of the Committee. The Proxy Voting Committee holds meetings as needed, but no less frequently than annually.
VIII. Reports to Trusts’ Board of Trustees
EIM, with the assistance of Administrator, will periodically (but no less frequently than annually) report to the Board of Trustees with respect to each Trust’s implementation of the Program, including summary information with respect to: 1) the proxy voting record of the Sub-Advisers with respect to the Sub-Advised Portfolios’ portfolio securities: 2) the proxy voting record of EIM with respect to the Fund-of-Funds Portfolios or Allocated Portions; and 3) the proxy voting record of EIM with respect to the portfolio securities of any Sub-Advised Portfolio for which EIM has assumed proxy voting responsibility. In addition, if a material conflict of interest was reported to the CCO and/or the Legal and Compliance during the previous quarter and it was determined that a material conflict of interest did exist, EIM, with the assistance of Administrator, will report such material conflict of interest to the Board of Trustees at the next quarterly meeting. EIM, with the assistance of Administrator, will also provide the Board of Trustees with any other information requested by the Board.
The CCO’s annual written compliance report to the Board of Trustees will contain a summary of material changes to these policies and procedures during the period covered by the report.
Adopted by EQ Advisors Trust (“EQAT”) Board of Trustees: March 1, 2011
Effective: May 1, 2011
Predecessor Procedures of the Investment Manager Adopted: August 6, 2003
Amended: July 11, 2007
Adopted by 1290 Funds Board of Trustees: June 10, 2014
Effective: June 10, 2014
Adopted by EQ Premier VIP Trust (“VIP”) Board of Trustees: March 17, 2011
Effective: May 1, 2011
Predecessor Procedures of the Investment Manager Adopted: August 6, 2003
Amended: December 10, 2014
Policies of EQAT and 1290 Funds Combined: July 14, 2014
Revised: April 12-13, 2017
Policies of EQAT, VIP and 1290 Funds Combined: July 18-20, 2017
Revised: September 26, 2019
Revised: December 15, 2020
Revised: August 2021
Revised: December 2021
Revised: January 2023
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U N I T E D S T A T E S Proxy Voting Guidelines Benchmark Policy Recommendations Effective for Meetings on or after February 1, 2023 Published December 13, 2022
UNITED STATES Proxy Voting Guidelines |
TABLE OF CONTENTS
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Voting on Director Nominees in Uncontested Elections | 14 | |||||
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Management Proposals to Ratify Existing Charter or Bylaw Provisions | 24 | |||||
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Director and Officer Indemnification, Liability Protection, and Exculpation | 29 | |||||
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Majority of Independent Directors/Establishment of Independent Committees | 31 | |||||
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Shareholder Engagement Policy (Shareholder Advisory Committee) | 32 | |||||
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Advance Notice Requirements for Shareholder Proposals/Nominations | 34 | |||||
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Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy | 37 | |||||
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Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs) | 38 | |||||
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Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions | 39 | |||||
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Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S. | 46 | |||||
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Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs) | 50 | |||||
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Special Purpose Acquisition Corporations (SPACs) — Proposals for Extensions | 54 | |||||
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Advisory Votes on Executive Compensation — Management Proposals (Say-on-Pay) | 56 | |||||
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Reports on Potentially Controversial Business/Financial Practices | 78 | |||||
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation | 78 | |||||
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Gender Identity, Sexual Orientation, and Domestic Partner Benefits | 83 | |||||
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General Environmental Proposals and Community Impact Assessments | 84 | |||||
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Human Rights, Human Capital Management, and International Operations | 87 | |||||
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Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes | 91 | |||||
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Changing a Fundamental Restriction to a Nonfundamental Restriction | 92 | |||||
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Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval | 94 | |||||
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The U.S. research team provides proxy analyses and voting recommendations for the common shareholder meetings of U.S. — incorporated companies that are publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are held in our institutional investor clients’ portfolios. Coverage generally includes corporate actions for common equity holders, such as written consents and bankruptcies. ISS’ U.S. coverage includes investment companies (including open-end funds, closed-end funds, exchange-traded funds, and unit investment trusts), limited partnerships (“LPs”), master limited partnerships (“MLPs”), limited liability companies (“LLCs”), and business development companies. ISS reviews its universe of coverage on an annual basis, and the coverage is subject to change based on client need and industry trends.
Foreign-incorporated companies
In addition to U.S. — incorporated, U.S. — listed companies, ISS’ U.S. policies are applied to certain foreign-incorporated company analyses. Like the SEC, ISS distinguishes two types of companies that list but are not incorporated in the U.S.:
• | U.S. Domestic Issuers — which have a majority of outstanding shares held in the U.S. and meet other criteria, as determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies (e.g. they are required to file DEF14A proxy statements) — are generally covered under standard U.S. policy guidelines. |
• | Foreign Private Issuers (FPIs) — which are allowed to take exemptions from most disclosure requirements (e.g., they are allowed to file 6-K for their proxy materials) and U.S. listing standards — are generally covered under a combination of policy guidelines: |
• | FPI Guidelines (see the Americas Regional Proxy Voting Guidelines), may apply to companies incorporated in governance havens, and apply certain minimum independence and disclosure standards in the evaluation of key proxy ballot items, such as the election of directors; and/or |
• | Guidelines for the market that is responsible for, or most relevant to, the item on the ballot. |
U.S. incorporated companies listed only on non-U.S. exchanges are generally covered under the ISS guidelines for the market on which they are traded.
An FPI is generally covered under ISS’ approach to FPIs outlined above, even if such FPI voluntarily files a proxy statement and/or other filing normally required of a U.S. Domestic Issuer, so long as the company retains its FPI status.
In all cases — including with respect to other companies with cross-market features that may lead to ballot items related to multiple markets — items that are on the ballot solely due to the requirements of another market (listing, incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” primary market coverage.
1. | Board of Directors |
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
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Independence: Boards should be sufficiently independent from management (and significant shareholders) to ensure that they are able and motivated to effectively supervise management’s performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of directors.
Composition: Companies should ensure that directors add value to the board through their specific skills and expertise and by having sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence, while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.
Responsiveness: Directors should respond to investor input, such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority of shares are tendered.
Accountability: Boards should be sufficiently accountable to shareholders, including through transparency of the company’s governance practices and regular board elections, by the provision of sufficient information for shareholders to be able to assess directors and board composition, and through the ability of shareholders to remove directors.
General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1 considered on case-by-case basis): |
Vote against2 or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per ISS’ Classification of Directors) when:
• | Independent directors comprise 50 percent or less of the board; |
• | The non-independent director serves on the audit, compensation, or nominating committee; |
• | The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or |
• | The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee. |
1 | A “new nominee” is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question. |
2 | In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company. |
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ISS Classification of Directors — U.S.
1. | Executive Director |
1.1. | Current officer1 of the company or one of its affiliates2. |
2. | Non-Independent Non-Executive Director |
Board Identification
2.1. | Director identified as not independent by the board. |
Controlling/Significant Shareholder
2.2. | Beneficial owner of more than 50 percent of the company’s voting power (this may be aggregated if voting power is distributed among more than one member of a group). |
Current Employment at Company or Related Company
2.3. | Non-officer employee of the firm (including employee representatives). |
2.4. | Officer1, former officer, or general or limited partner of a joint venture or partnership with the company. |
Former Employment
2.5. | Former CEO of the company.3,4 |
2.6. | Former non-CEO officer1 of the company or an affiliate2 within the past five years. |
2.7. | Former officer1 of an acquired company within the past five years.4 |
2.8. | Officer1 of a former parent or predecessor firm at the time the company was sold or split off within the past five years. |
2.9. | Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an assessment of the interim officer’s employment agreement will be made.5 |
Family Members
2.10. | Immediate family member6 of a current or former officer1 of the company or its affiliates2 within the last five years. |
2.11. | Immediate family member6 of a current employee of company or its affiliates2 where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role). |
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Professional, Transactional, and Charitable Relationships
2.12. | Director who (or whose immediate family member6) currently provides professional services7 in excess of $10,000 per year to: the company, an affiliate2, or an individual officer of the company or an affiliate; or who is (or whose immediate family member6 is) a partner, employee, or controlling shareholder of an organization which provides the services. |
2.13. | Director who (or whose immediate family member6) currently has any material transactional relationship8 with the company or its affiliates2; or who is (or whose immediate family member6 is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship8 (excluding investments in the company through a private placement). |
2.14. | Director who (or whose immediate family member6) is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or endowments8 from the company or its affiliates2. |
Other Relationships
2.15. | Party to a voting agreement9 to vote in line with management on proposals being brought to shareholder vote. |
2.16. | Has (or an immediate family member6 has) an interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee.10 |
2.17. | Founder11 of the company but not currently an employee. |
2.18. | Director with pay comparable to Named Executive Officers. |
2.19. | Any material12 relationship with the company. |
3. | Independent Director |
3.1. | No material12 connection to the company other than a board seat. |
Footnotes:
1. The definition of officer will generally follow that of a “Section 16 officer” (officers subject to Section 16 of the Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving as an officer due to statutory requirements (e.g. corporate secretary) will generally be classified as a Non-Independent Non-Executive Director under “Any material relationship with the company.” However, if the company provides explicit disclosure that the director is not receiving additional compensation exceeding $10,000 per year for serving in that capacity, then the director will be classified as an Independent Director.
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2. “Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate.
3. Includes any former CEO of the company prior to the company’s initial public offering (IPO).
4. When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, ISS will generally classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the existence of any other conflicting relationships or related party transactions.
5. ISS will look at the terms of the interim officer’s employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also consider if a formal search process was under way for a full-time officer at the time.
6. “Immediate family member” follows the SEC’s definition of such and covers spouses, parents, children, step-parents, stepchildren, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or significant shareholder of the company.
7. Professional services can be characterized as advisory in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include but are not limited to the following: investment banking/financial advisory services, commercial banking (beyond deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing services, legal services, property management services, realtor services, lobbying services, executive search services, and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit services, IT tech support services, educational services, and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to the associated materiality test) rather than a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory.
8. A material transactional relationship, including grants to non-profit organizations, exists if the company makes annual payments to, or receives annual payments from, another entity, exceeding the greater of: $200,000 or 5 percent of the recipient’s gross revenues, for a company that follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows neither of the preceding standards, ISS will apply the NASDAQ-based materiality test. (The recipient is the party receiving the financial proceeds from the transaction).
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9. Dissident directors who are parties to a voting agreement pursuant to a settlement or similar arrangement may be classified as Independent Directors if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’ interests: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions.
10. Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).
11. The operating involvement of the founder with the company will be considered; if the founder was never employed by the company, ISS may deem him or her an Independent Director.
12. For purposes of ISS’s director independence classification, “material” will be defined as a standard of relationship (financial, personal, or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
Attendance at Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
• | Medical issues/illness; |
• | Family emergencies; and |
• | Missing only one meeting (when the total of all meetings is three or fewer). |
In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote against or withhold from appropriate members of the nominating/governance committees or the full board.
If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
Overboarded Directors: Generally vote against or withhold from individual directors who:
• | Sit on more than five public company boards; or |
3 | Nominees who served for only part of the fiscal year are generally exempted from the attendance policy. |
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• | Are CEOs of public companies who sit on the boards of more than two public companies besides their own — withhold only at their outside boards4. |
Gender Diversity: Generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the company’s board. An exception will be made if there was at least one woman on the board at the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.
Racial and/or Ethnic Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members5. An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
Vote case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
• | The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are: |
• | Disclosed outreach efforts by the board to shareholders in the wake of the vote; |
• | Rationale provided in the proxy statement for the level of implementation; |
• | The subject matter of the proposal; |
• | The level of support for and opposition to the resolution in past meetings; |
• | Actions taken by the board in response to the majority vote and its engagement with shareholders; |
• | The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and |
• | Other factors as appropriate. |
• | The board failed to act on takeover offers where the majority of shares are tendered; |
4 | Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships. |
5 | Aggregate diversity statistics provided by the board will only be considered if specific to racial and/or ethnic diversity. |
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• | At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote. |
Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
• | The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be considered are: |
• | The company’s response, including: |
• | Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated); |
• | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
• | Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
• | Other recent compensation actions taken by the company; |
• | Whether the issues raised are recurring or isolated; |
• | The company’s ownership structure; and |
• | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
• | The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the plurality of votes cast. |
PROBLEMATIC TAKEOVER DEFENSES, CAPITAL STRUCTURE,AND GOVERNANCE STRUCTURE
Poison Pills: Generally vote against or withhold from all nominees (except new nominees1, who should be considered case-by-case) if:
• | The company has a poison pill with a deadhand or slowhand feature6; |
• | The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or lowering the trigger, without shareholder approval; or |
• | The company has a long-term poison pill (with a term of over one year) that was not approved by the public shareholders7. |
6 | If a short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder vote, ISS will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption. |
7 | Approval prior to, or in connection, with a company’s becoming publicly-traded, or in connection with a de-SPAC transaction, is insufficient. |
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Vote case-by-case on nominees if the board adopts an initial short-term pill6 (with a term of one year or less) without shareholder approval, taking into consideration:
• | The disclosed rationale for the adoption; |
• | The trigger; |
• | The company’s market capitalization (including absolute level and sudden changes); |
• | A commitment to put any renewal to a shareholder vote; and |
• | Other factors as relevant. |
Unequal Voting Rights: Generally vote withhold or against directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights8.
Exceptions to this policy will generally be limited to:
• | Newly-public companies9 with a sunset provision of no more than seven years from the date of going public; |
• | Limited Partnerships and the Operating Partnership (OP) unit structure of REITs; |
• | Situations where the super-voting shares represent less than 5% of total voting power and therefore considered to be de minimis; or |
• | The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular binding vote on whether the capital structure should be maintained. |
Classified Board Structure: The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.
Problematic Governance Structure: For companies that hold or held their first annual meeting9 of public shareholders after Feb. 1, 2015, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:
• | Supermajority vote requirements to amend the bylaws or charter; |
8 | This generally includes classes of common stock that have additional votes per share than other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”). |
9 | Includes companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct listings, and those who complete a traditional initial public offering. |
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• | A classified board structure; or |
• | Other egregious provisions. |
A provision which specifies that the problematic structure(s) will be sunset within seven years of the date of going public will be considered a mitigating factor.
Unless the adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.
Unilateral Bylaw/Charter Amendments: Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if the board amends the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors:
• | The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification; |
• | Disclosure by the company of any significant engagement with shareholders regarding the amendment; |
• | The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the bylaws/charter; |
• | The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions; |
• | The company’s ownership structure; |
• | The company’s existing governance provisions; |
• | The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and |
• | Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders. |
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees1, who should be considered case-by-case) if the directors:
• | Classified the board; |
• | Adopted supermajority vote requirements to amend the bylaws or charter; |
• | Eliminated shareholders’ ability to amend bylaws; |
• | Adopted a fee-shifting provision; or |
• | Adopted another provision deemed egregious. |
Restricting Binding Shareholder Proposals: Generally vote against or withhold from the members of the governance committee if:
• | The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include but are not limited to: outright prohibition on the |
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submission of binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis. |
Submission of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Generally continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Director Performance Evaluation: The board lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not limited to:
• | A classified board structure; |
• | A supermajority vote requirement; |
• | Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections; |
• | The inability of shareholders to call special meetings; |
• | The inability of shareholders to act by written consent; |
• | A multi-class capital structure; and/or |
• | A non-shareholder-approved poison pill. |
Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
• | The presence of a shareholder proposal addressing the same issue on the same ballot; |
• | The board’s rationale for seeking ratification; |
• | Disclosure of actions to be taken by the board should the ratification proposal fail; |
• | Disclosure of shareholder engagement regarding the board’s ratification request; |
• | The level of impairment to shareholders’ rights caused by the existing provision; |
• | The history of management and shareholder proposals on the provision at the company’s past meetings; |
• | Whether the current provision was adopted in response to the shareholder proposal; |
• | The company’s ownership structure; and |
• | Previous use of ratification proposals to exclude shareholder proposals. |
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Problematic Audit-Related Practices
Generally vote against or withhold from the members of the Audit Committee if:
• | The non-audit fees paid to the auditor are excessive; |
• | The company receives an adverse opinion on the company’s financial statements from its auditor; or |
• | There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. |
Vote case-by-case on members of the Audit Committee and potentially the full board if:
• | Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted. |
Problematic Compensation Practices
In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:
• | There is an unmitigated misalignment between CEO pay and company performance (pay for performance); |
• | The company maintains significant problematic pay practices; or |
• | The board exhibits a significant level of poor communication and responsiveness to shareholders. |
Generally vote against or withhold from the Compensation Committee chair, other committee members, or potentially the full board if:
• | The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared frequency of say on pay; or |
• | The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions. |
Generally vote against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.
Problematic Pledging of Company Stock: Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of pledged company stock by executives or directors raises concerns. The following factors will be considered:
• | The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity; |
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• | The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume; |
• | Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time; |
• | Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and |
• | Any other relevant factors. |
For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain10, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.
Minimum steps to understand and mitigate those risks are considered to be the following. Both minimum criteria will be required to be in alignment with the policy :
• | Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), including: |
• | Board governance measures; |
• | Corporate strategy; |
• | Risk management analyses; and |
• | Metrics and targets. |
• | Appropriate GHG emissions reduction targets. |
At this time, “appropriate GHG emissions reductions targets” will be medium-term GHG reduction targets or Net Zero-by-2050 GHG reduction targets for a company’s operations (Scope 1) and electricity use (Scope 2). Targets should cover the vast majority of the company’s direct emissions.
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
• | Material failures of governance, stewardship, risk oversight11, or fiduciary responsibilities at the company; |
10 | Companies defined as “significant GHG emitters” will be those on the current Climate Action 100+ Focus Group list. |
11 | Examples of failure of risk oversight include but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant adverse legal judgments or settlement; or hedging of company stock. |
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• | Failure to replace management as appropriate; or |
• | Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company. |
Voting on Director Nominees in Contested Elections
General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information. |
General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors: |
• | Long-term financial performance of the company relative to its industry; |
• | Management’s track record; |
• | Background to the contested election; |
• | Nominee qualifications and any compensatory arrangements; |
• | Strategic plan of dissident slate and quality of the critique against management; |
• | Likelihood that the proposed goals and objectives can be achieved (both slates); and |
• | Stock ownership positions. |
In the case of candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).
Adopt Anti-Hedging/Pledging/Speculative Investments Policy
General Recommendation: Generally vote for proposals seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding responsible use of company stock will be considered. |
Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed.
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General Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits, considering: |
• | The rationale provided for adoption of the term/tenure limit; |
• | The robustness of the company’s board evaluation process; |
• | Whether the limit is of sufficient length to allow for a broad range of director tenures; |
• | Whether the limit would disadvantage independent directors compared to non-independent directors; and |
• | Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner. |
Vote case-by-case on shareholder proposals asking for the company to adopt director term/tenure limits, considering:
• | The scope of the shareholder proposal; and |
• | Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment. |
General Recommendation: Generally vote against management and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits. |
General Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size. |
Vote against proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
General Recommendation: Vote against proposals to classify (stagger) the board. |
Vote for proposals to repeal classified boards and to elect all directors annually.
General Recommendation: Generally vote for proposals seeking disclosure on a CEO succession planning policy, considering, at a minimum, the following factors: |
• | The reasonableness/scope of the request; and |
• | The company’s existing disclosure on its current CEO succession planning process. |
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General Recommendation: Generally vote against management proposals to eliminate cumulate voting, and for shareholder proposals to restore or provide for cumulative voting, unless: |
• | The company has proxy access12, thereby allowing shareholders to nominate directors to the company’s ballot; and |
• | The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections. |
Vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).
Director and Officer Indemnification, Liability Protection, and Exculpation
General Recommendation: Vote case-by-case on proposals on director and officer indemnification, liability protection, and exculpation13. |
Consider the stated rationale for the proposed change. Also consider, among other factors, the extent to which the proposal would:
• | Eliminate directors’ and officers’ liability for monetary damages for violating the duty of care. |
• | Eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalty. |
• | Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than mere carelessness. |
• | Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify. |
Vote for those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if both of the following apply:
• | If the individual was found to have acted in good faith and in a manner that the individual reasonably believed was in the best interests of the company; and |
If only the individual’s legal expenses would be covered.
12 | A proxy access right that meets the recommended guidelines. |
13 | Indemnification: the condition of being secured against loss or damage. Limited liability: a person’s financial liability is limited to a fixed sum, or personal financial assets are not at risk if the individual loses a lawsuit that results in financial award/damages to the plaintiff. Exculpation: to eliminate or limit the personal liability of a director or officer to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director or officer. |
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Establish/Amend Nominee Qualifications
General Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the criteria and the degree to which they may preclude dissident nominees from joining the board. |
Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
• | The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative to that of its peers; |
• | The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is sought; |
• | The company’s disclosure and performance relating to the issue for which board oversight is sought and any significant related controversies; and |
• | The scope and structure of the proposal. |
Establish Other Board Committee Proposals
General Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered: |
• | Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is sought; |
• | Level of disclosure regarding the issue for which board oversight is sought; |
• | Company performance related to the issue for which board oversight is sought; |
• | Board committee structure compared to that of other companies in its industry sector; and |
• | The scope and structure of the proposal. |
Filling Vacancies/Removal of Directors
General Recommendation: Vote against proposals that provide that directors may be removed only for cause. |
Vote for proposals to restore shareholders’ ability to remove directors with or without cause.
Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.
Vote for proposals that permit shareholders to elect directors to fill board vacancies.
General Recommendation: Generally vote for shareholder proposals requiring that the board chair position be filled by an independent director, taking into consideration the following: |
• | The scope and rationale of the proposal; |
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• | The company’s current board leadership structure; |
• | The company’s governance structure and practices; |
• | Company performance; and |
• | Any other relevant factors that may be applicable. |
The following factors will increase the likelihood of a “for” recommendation:
• | A majority non-independent board and/or the presence of non-independent directors on key board committees; |
• | A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role; |
• | The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair; |
• | Evidence that the board has failed to oversee and address material risks facing the company; |
• | A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or |
• | Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests. |
Majority of Independent Directors/Establishment of Independent Committees
General Recommendation: Vote for shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS’ definition of Independent Director (See ISS’ Classification of Directors.) |
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
General Recommendation: Generally vote for management proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included. |
Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
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General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions: |
• | Ownership threshold: maximum requirement not more than three percent (3%) of the voting power; |
• | Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group; |
• | Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; |
• | Cap: cap on nominees of generally twenty-five percent (25%) of the board. |
Review for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are more restrictive than these guidelines.
Require More Nominees than Open Seats
General Recommendation: Vote against shareholder proposals that would require a company to nominate more candidates than the number of open board seats. |
Shareholder Engagement Policy (Shareholder Advisory Committee)
General Recommendation: Generally vote for shareholder proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate: |
• | Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board; |
• | Effectively disclosed information with respect to this structure to its shareholders; |
• | Company has not ignored majority-supported shareholder proposals, or a majority withhold vote on a director nominee; and |
• | The company has an independent chair or a lead director, according to ISS’ definition. This individual must be made available for periodic consultation and direct communication with major shareholders. |
2. | Audit-Related |
Auditor Indemnification and Limitation of Liability
General Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to: |
• | The terms of the auditor agreement — the degree to which these agreements impact shareholders’ rights; |
• | The motivation and rationale for establishing the agreements; |
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• | The quality of the company’s disclosure; and |
• | The company’s historical practices in the audit area. |
Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
General Recommendation: Vote for proposals to ratify auditors unless any of the following apply: |
• | An auditor has a financial interest in or association with the company, and is therefore not independent; |
• | There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company’s financial position; |
• | Poor accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP; or |
• | Fees for non-audit services (“Other” fees) are excessive. |
Non-audit fees are excessive if:
• | Non-audit (“other”) fees > audit fees + audit-related fees + tax compliance/preparation fees |
Tax compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other” fees.
In circumstances where “Other” fees include fees related to significant one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
Shareholder Proposals Limiting Non-Audit Services
General Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services. |
Shareholder Proposals on Audit Firm Rotation
General Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account: |
• | The tenure of the audit firm; |
• | The length of rotation specified in the proposal; |
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• | Any significant audit-related issues at the company; |
• | The number of Audit Committee meetings held each year; |
• | The number of financial experts serving on the committee; and |
• | Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price. |
3. | Shareholder Rights & Defenses |
Advance Notice Requirements for Shareholder Proposals/Nominations
General Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review. |
To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a 90-120-day window). The submittal window is the period under which shareholders must file their proposals/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
General Recommendation: Vote against proposals giving the board exclusive authority to amend the bylaws. |
Vote case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into account the following:
• | Any impediments to shareholders’ ability to amend the bylaws (i.e. supermajority voting requirements); |
• | The company’s ownership structure and historical voting turnout; |
• | Whether the board could amend bylaws adopted by shareholders; and |
• | Whether shareholders would retain the ability to ratify any board-initiated amendments. |
Control Share Acquisition Provisions
General Recommendation: Vote for proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders. |
Vote against proposals to amend the charter to include control share acquisition provisions.
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Vote for proposals to restore voting rights to the control shares.
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Control Share Cash-Out Provisions
General Recommendation: Vote for proposals to opt out of control share cash-out statutes. |
Control share cash-out statutes give dissident shareholders the right to “cash-out” of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
General Recommendation: Vote for proposals to opt out of state disgorgement provisions. |
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company’s stock to disgorge, or pay back, to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.
General Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price. |
Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
General Recommendation: Vote for proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company. |
General Recommendation: Vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments. |
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Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Federal Forum Selection Provisions
Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal securities law.
General Recommendation: Generally vote for federal forum selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders. |
Vote against provisions that restrict the forum to a particular federal district court; unilateral adoption (without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
General Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the state of Delaware as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders. |
For states other than Delaware, vote case-by-case on exclusive forum provisions, taking into consideration:
• | The company’s stated rationale for adopting such a provision; |
• | Disclosure of past harm from duplicative shareholder lawsuits in more than one forum; |
• | The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and the definition of key terms; and |
• | Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections. |
Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that specify a particular local court within the state;
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unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.
General Recommendation: Generally vote against provisions that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful). |
Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments policy.
Net Operating Loss (NOL) Protective Amendments
General Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of protecting a company’s net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of three years and the exhaustion of the NOL. |
Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the NOL:
• | The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder); |
• | The value of the NOLs; |
• | Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon exhaustion or expiration of the NOL); |
• | The company’s existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and |
• | Any other factors that may be applicable. |
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
General Recommendation: Vote for shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if either: |
• | Shareholders have approved the adoption of the plan; or |
• | The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay in adoption that |
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would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate. |
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add the caveat that a vote within 12 months would be considered sufficient implementation.
Management Proposals to Ratify a Poison Pill
General Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes: |
• | No lower than a 20 percent trigger, flip-in or flip-over; |
• | A term of no more than three years; |
• | No deadhand, slowhand, no-hand, or similar feature that limits the ability of a future board to redeem the pill; |
• | Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill. |
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
General Recommendation: Vote against proposals to adopt a poison pill for the stated purpose of protecting a company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL. |
Vote case-by-case on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
• | The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent); |
• | The value of the NOLs; |
• | Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs); |
• | The company’s existing governance structure, including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and |
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• | Any other factors that may be applicable. |
Proxy Voting Disclosure, Confidentiality, and Tabulation
General Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company’s vote-counting methodology. |
While a variety of factors may be considered in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
• | The scope and structure of the proposal; |
• | The company’s stated confidential voting policy (or other relevant policies) and whether it ensures a “level playing field” by providing shareholder proponents with equal access to vote information prior to the annual meeting; |
• | The company’s vote standard for management and shareholder proposals and whether it ensures consistency and fairness in the proxy voting process and maintains the integrity of vote results; |
• | Whether the company’s disclosure regarding its vote counting method and other relevant voting policies with respect to management and shareholder proposals are consistent and clear; |
• | Any recent controversies or concerns related to the company’s proxy voting mechanics; |
• | Any unintended consequences resulting from implementation of the proposal; and |
• | Any other factors that may be relevant. |
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
General Recommendation: Generally vote against management proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best practice. |
In addition, voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
• | The presence of a shareholder proposal addressing the same issue on the same ballot; |
• | The board’s rationale for seeking ratification; |
• | Disclosure of actions to be taken by the board should the ratification proposal fail; |
• | Disclosure of shareholder engagement regarding the board’s ratification request; |
• | The level of impairment to shareholders’ rights caused by the existing provision; |
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• | The history of management and shareholder proposals on the provision at the company’s past meetings; |
• | Whether the current provision was adopted in response to the shareholder proposal; |
• | The company’s ownership structure; and |
• | Previous use of ratification proposals to exclude shareholder proposals. |
Reimbursing Proxy Solicitation Expenses
General Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses. |
When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with the election.
Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one or more candidates in a contested election where the following apply:
• | The election of fewer than 50 percent of the directors to be elected is contested in the election; |
• | One or more of the dissident’s candidates is elected; |
• | Shareholders are not permitted to cumulate their votes for directors; and |
• | The election occurred, and the expenses were incurred, after the adoption of this bylaw. |
General Recommendation: Management or shareholder proposals to change a company’s state of incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance concerns including the following: |
• | Reasons for reincorporation; |
• | Comparison of company’s governance practices and provisions prior to and following the reincorporation; and |
• | Comparison of corporation laws of original state and destination state. |
Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.
Shareholder Ability to Act by Written Consent
General Recommendation: Generally vote against management and shareholder proposals to restrict or prohibit shareholders’ ability to act by written consent. |
Generally vote for management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
• | Shareholders’ current right to act by written consent; |
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• | The consent threshold; |
• | The inclusion of exclusionary or prohibitive language; |
• | Investor ownership structure; and |
• | Shareholder support of, and management’s response to, previous shareholder proposals. |
Vote case-by-case on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:
• | An unfettered14 right for shareholders to call special meetings at a 10 percent threshold; |
• | A majority vote standard in uncontested director elections; |
• | No non-shareholder-approved pill; and |
• | An annually elected board. |
Shareholder Ability to Call Special Meetings
General Recommendation: Vote against management or shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings. |
Generally vote for management or shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:
• | Shareholders’ current right to call special meetings; |
• | Minimum ownership threshold necessary to call special meetings (10 percent preferred); |
• | The inclusion of exclusionary or prohibitive language; |
• | Investor ownership structure; and |
• | Shareholder support of, and management’s response to, previous shareholder proposals. |
General Recommendation: Vote against proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination. |
General Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and anti-greenmail provisions). |
14 | “Unfettered” means no restrictions on agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting. |
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Supermajority Vote Requirements
General Recommendation: Vote against proposals to require a supermajority shareholder vote. |
Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for companies with shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:
• | Ownership structure; |
• | Quorum requirements; and |
• | Vote requirements. |
General Recommendation: Generally vote for management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only15 meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting. |
Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:
• | Scope and rationale of the proposal; and |
• | Concerns identified with the company’s prior meeting practices. |
4. | Capital/Restructuring |
Adjustments to Par Value of Common Stock
General Recommendation: Vote for management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action. |
Vote for management proposals to eliminate par value.
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes: |
• | If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares. |
15 | Virtual-only shareholder meeting” refers to a meeting of shareholders that is held exclusively using technology without a corresponding in-person meeting. |
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• | If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares. |
• | If share usage is greater than current authorized shares, vote for an increase of up to the current share usage. |
• | In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
• | The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights to other share classes; |
• | On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization; |
• | The company has a non-shareholder approved poison pill (including an NOL pill); or |
• | The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
• | In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern; |
• | The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or |
• | A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
• | twice the amount needed to support the transactions on the ballot, and |
• | the allowable increase as calculated for general issuances above. |
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General Recommendation: Generally vote against proposals to create a new class of common stock unless: |
• | The company discloses a compelling rationale for the dual-class capital structure, such as: |
• | The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as a going concern; or |
• | The new class of shares will be transitory; |
• | The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term and long term; and |
• | The new class is not designed to preserve or increase the voting power of an insider or significant shareholder. |
Issue Stock for Use with Rights Plan
General Recommendation: Vote against proposals that increase authorized common stock for the explicit purpose of implementing a non-shareholder-approved shareholder rights plan (poison pill). |
General Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into consideration: |
• | The size of the company; |
• | The shareholder base; and |
• | The liquidity of the stock. |
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes: |
• | If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares. |
• | If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares. |
• | If share usage is greater than current authorized shares, vote for an increase of up to the current share usage. |
• | In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization. |
• | If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a specific use for the shares. |
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Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
• | If the shares requested are blank check preferred shares that can be used for antitakeover purposes;16 |
• | The company seeks to increase a class of non-convertible preferred shares entitled to more than one vote per share on matters that do not solely affect the rights of preferred stockholders “supervoting shares”); |
• | The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number of common shares into which they are convertible (“supervoting shares”) on matters that do not solely affect the rights of preferred stockholders; |
• | The stated intent of the increase in the general authorization is to allow the company to increase an existing designated class of supervoting preferred shares; |
• | On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization; |
• | The company has a non-shareholder approved poison pill (including an NOL pill); or |
• | The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
• | In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern; |
• | The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or |
• | A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with |
16 | To be acceptable, appropriate disclosure would be needed that the shares are “declawed”: i.e., representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights plan. |
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transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of: |
• | twice the amount needed to support the transactions on the ballot, and |
• | the allowable increase as calculated for general issuances above. |
General Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into account the following: |
• | More simplified capital structure; |
• | Enhanced liquidity; |
• | Fairness of conversion terms; |
• | Impact on voting power and dividends; |
• | Reasons for the reclassification; |
• | Conflicts of interest; and |
• | Other alternatives considered. |
General Recommendation: Vote for management proposals to implement a reverse stock split if: |
• | The number of authorized shares will be proportionately reduced; or |
• | The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy. |
Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:
• | Stock exchange notification to the company of a potential delisting; |
• | Disclosure of substantial doubt about the company’s ability to continue as a going concern without additional financing; |
• | The company’s rationale; or |
• | Other factors as applicable. |
Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S.
General Recommendation: For U.S. domestic issuers incorporated outside the U.S. and listed solely on a U.S. exchange, generally vote for resolutions to authorize the issuance of common shares up to 20 percent of currently issued common share capital, where not tied to a specific transaction or financing proposal. |
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For pre-revenue or other early-stage companies that are heavily reliant on periodic equity financing, generally vote for resolutions to authorize the issuance of common shares up to 50 percent of currently issued common share capital. The burden of proof will be on the company to establish that it has a need for the higher limit.
Renewal of such mandates should be sought at each year’s annual meeting.
Vote case-by-case on share issuances for a specific transaction or financing proposal.
General Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding: |
• | Greenmail; |
• | The use of buybacks to inappropriately manipulate incentive compensation metrics; |
• | Threats to the company’s long-term viability; or |
• | Other company-specific factors as warranted. |
Vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
General Recommendation: Generally vote against shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks. |
Stock Distributions: Splits and Dividends
General Recommendation: Generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy. |
General Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as: |
• | Adverse governance changes; |
• | Excessive increases in authorized capital stock; |
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• | Unfair method of distribution; |
• | Diminution of voting rights; |
• | Adverse conversion features; |
• | Negative impact on stock option plans; and |
• | Alternatives such as spin-off. |
General Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal. |
General Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors: |
• | Purchase price; |
• | Fairness opinion; |
• | Financial and strategic benefits; |
• | How the deal was negotiated; |
• | Conflicts of interest; |
• | Other alternatives for the business; |
• | Non-completion risk. |
General Recommendation: Vote case-by-case on asset sales, considering the following factors: |
• | Impact on the balance sheet/working capital; |
• | Potential elimination of diseconomies; |
• | Anticipated financial and operating benefits; |
• | Anticipated use of funds; |
• | Value received for the asset; |
• | Fairness opinion; |
• | How the deal was negotiated; |
• | Conflicts of interest. |
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General Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals. |
General Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest. |
Vote for the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans
General Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating: |
• | Dilution to existing shareholders’ positions; |
• | Terms of the offer — discount/premium in purchase price to investor, including any fairness opinion; termination penalties; exit strategy; |
• | Financial issues — company’s financial situation; degree of need for capital; use of proceeds; effect of the financing on the company’s cost of capital; |
• | Management’s efforts to pursue other alternatives; |
• | Control issues — change in management; change in control, guaranteed board and committee seats; standstill provisions; voting agreements; veto power over certain corporate actions; and |
• | Conflict of interest — arm’s length transaction, managerial incentives. |
Vote for the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
General Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into consideration the following: |
• | The reasons for the change; |
• | Any financial or tax benefits; |
• | Regulatory benefits; |
• | Increases in capital structure; and |
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• | Changes to the articles of incorporation or bylaws of the company. |
Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include either of the following:
• | Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or |
• | Adverse changes in shareholder rights. |
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
General Recommendation: Vote case-by-case on going private transactions, taking into account the following: |
• | Offer price/premium; |
• | Fairness opinion; |
• | How the deal was negotiated; |
• | Conflicts of interest; |
• | Other alternatives/offers considered; and |
• | Non-completion risk. |
Vote case-by-case on going dark transactions, determining whether the transaction enhances shareholder value by taking into consideration:
• | Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock); |
• | Balanced interests of continuing vs. cashed-out shareholders, taking into account the following: |
• | Are all shareholders able to participate in the transaction? |
• | Will there be a liquid market for remaining shareholders following the transaction? |
• | Does the company have strong corporate governance? |
• | Will insiders reap the gains of control following the proposed transaction? |
• | Does the state of incorporation have laws requiring continued reporting that may benefit shareholders? |
General Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following: |
• | Percentage of assets/business contributed; |
• | Percentage ownership; |
• | Financial and strategic benefits; |
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• | Governance structure; |
• | Conflicts of interest; |
• | Other alternatives; and |
• | Non-completion risk. |
General Recommendation: Vote case-by-case on liquidations, taking into account the following: |
• | Management’s efforts to pursue other alternatives; |
• | Appraisal value of assets; and |
• | The compensation plan for executives managing the liquidation. |
Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including: |
• | Valuation — Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale. |
• | Market reaction — How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal. |
• | Strategic rationale — Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
• | Negotiations and process — Were the terms of the transaction negotiated at arm’s-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation “wins” can also signify the deal makers’ competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. |
• | Conflicts of interest — Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the “ISS Transaction Summary” section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists. |
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• | Governance — Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
Private Placements/Warrants/Convertible Debentures
General Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration: |
• | Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event to trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to trigger the dilutive event. |
• | Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features, termination penalties, exit strategy): |
• | The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement. |
• | When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry, and anticipation of future performance. |
• | Financial issues: |
• | The company’s financial condition; |
• | Degree of need for capital; |
• | Use of proceeds; |
• | Effect of the financing on the company’s cost of capital; |
• | Current and proposed cash burn rate; |
• | Going concern viability and the state of the capital and credit markets. |
• | Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger, or sale of part or all of the company. |
• | Control issues: |
• | Change in management; |
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• | Change in control; |
• | Guaranteed board and committee seats; |
• | Standstill provisions; |
• | Voting agreements; |
• | Veto power over certain corporate actions; and |
• | Minority versus majority ownership and corresponding minority discount or majority control premium. |
• | Conflicts of interest: |
• | Conflicts of interest should be viewed from the perspective of the company and the investor. |
• | Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder interests? |
• | Market reaction: |
• | The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
Vote for the private placement, or for the issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan (Bankruptcy)
General Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to: |
• | Estimated value and financial prospects of the reorganized company; |
• | Percentage ownership of current shareholders in the reorganized company; |
• | Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an Official Equity Committee); |
• | The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s); |
• | Existence of a superior alternative to the plan of reorganization; and |
• | Governance of the reorganized company. |
Special Purpose Acquisition Corporations (SPACs)
General Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following: |
• | Valuation — Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and the financials on the target may be limited. Compare the |
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conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target if it is a private entity. |
• | Market reaction — How has the market responded to the proposed deal? A negative market reaction may be a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
• | Deal timing — A main driver for most transactions is that the SPAC charter typically requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date. |
• | Negotiations and process — What was the process undertaken to identify potential target companies within specified industry or location specified in charter? Consider the background of the sponsors. |
• | Conflicts of interest — How are sponsors benefiting from the transaction compared to IPO shareholders? Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter requires that the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within the 18-24-month timeframe. |
• | Voting agreements — Are the sponsors entering into enter into any voting agreements/tender offers with shareholders who are likely to vote against the proposed merger or exercise conversion rights? |
• | Governance — What is the impact of having the SPAC CEO or founder on key committees following the proposed merger? |
Special Purpose Acquisition Corporations (SPACs) — Proposals for Extensions
General Recommendation: Vote case-by-case on SPAC extension proposals taking into account the length of the requested extension, the status of any pending transaction(s) or progression of the acquisition process, any added incentive for non-redeeming shareholders, and any prior extension requests. |
• | Length of request: Typically, extension requests range from two to six months, depending on the progression of the SPAC’s acquistion process. |
• | Pending transaction(s) or progression of the acquisition process: Sometimes an intial business combination was already put to a shareholder vote, but, for varying reasons, the transaction could not be consummated by the termination date and the SPAC is requesting an extension. Other times, the SPAC has entered into a definitive transaction agreement, but needs additional time to consummate or hold the shareholder meeting. |
• | Added incentive for non-redeeming shareholders: Sometimes the SPAC sponsor (or other insiders) will contribute, typically as a loan to the company, additional funds that will be added |
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to the redemption value of each public share as long as such shares are not redeemed in connection with the extension request. The purpose of the “equity kicker” is to incentivize shareholders to hold their shares through the end of the requested extension or until the time the transaction is put to a shareholder vote, rather than electing redeemption at the extension proposal meeting. |
• | Prior extension requests: Some SPACs request additional time beyond the extension period sought in prior extension requests. |
General Recommendation: Vote case-by-case on spin-offs, considering: |
• | Tax and regulatory advantages; |
• | Planned use of the sale proceeds; |
• | Valuation of spinoff; |
• | Fairness opinion; |
• | Benefits to the parent company; |
• | Conflicts of interest; |
• | Managerial incentives; |
• | Corporate governance changes; |
• | Changes in the capital structure. |
Value Maximization Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by: |
• | Hiring a financial advisor to explore strategic alternatives; |
• | Selling the company; or |
• | Liquidating the company and distributing the proceeds to shareholders. |
These proposals should be evaluated based on the following factors:
• | Prolonged poor performance with no turnaround in sight; |
• | Signs of entrenched board and management (such as the adoption of takeover defenses); |
• | Strategic plan in place for improving value; |
• | Likelihood of receiving reasonable value in a sale or dissolution; and |
• | The company actively exploring its strategic options, including retaining a financial advisor. |
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5. | Compensation |
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
1. | Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; |
2. | Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation; |
3. | Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); |
4. | Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; |
5. | Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices. |
Advisory Votes on Executive Compensation — Management Proposals (Say-on-Pay)
General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation. |
Vote against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”) if:
• | There is an unmitigated misalignment between CEO pay and company performance (pay for performance); |
• | The company maintains significant problematic pay practices; |
• | The board exhibits a significant level of poor communication and responsiveness to shareholders. |
Vote against or withhold from the members of the Compensation Committee and potentially the full board if:
• | There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof; |
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• | The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast; |
• | The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or |
• | The situation is egregious. |
Primary Evaluation Factors for Executive Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the S&P1500, Russell 3000, or Russell 3000E Indices17, this analysis considers the following:
1. | Peer Group18 Alignment: |
• | The degree of alignment between the company’s annualized TSR rank and the CEO’s annualized total pay rank within a peer group, each measured over a three-year period. |
• | The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year period. |
• | The multiple of the CEO’s total pay relative to the peer group median in the most recent fiscal year. |
2. | Absolute Alignment19 — the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years — i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period. |
If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our analysis may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
• | The ratio of performance- to time-based incentive awards; |
• | The overall ratio of performance-based compensation to fixed or discretionary pay; |
• | The rigor of performance goals; |
• | The complexity and risks around pay program design; |
17 | The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities. |
18 | The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company’s selected peers’ GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of the company’s market cap. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant. |
19 | Only Russell 3000 Index companies are subject to the Absolute Alignment analysis. |
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• | The transparency and clarity of disclosure; |
• | The company’s peer group benchmarking practices; |
• | Financial/operational results, both absolute and relative to peers; |
• | Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards); |
• | Realizable pay20 compared to grant pay; and |
• | Any other factors deemed relevant. |
Problematic pay elements are generally evaluated case-by-case considering the context of a company’s overall pay program and demonstrated pay-for-performance philosophy. The focus is on executive compensation practices that contravene the global pay principles, including:
• | Problematic practices related to non-performance-based compensation elements; |
• | Incentives that may motivate excessive risk-taking or present a windfall risk; and |
• | Pay decisions that circumvent pay-for-performance, such as options backdating or waiving performance requirements. |
The list of examples below highlights certain problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
• | Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options); |
• | Extraordinary perquisites or tax gross-ups; |
• | New or materially amended agreements that provide for: |
• | Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent bonus); |
• | CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or “modified single” triggers) or in connection with a problematic Good Reason definition; |
• | CIC excise tax gross-up entitlements (including “modified” gross-ups); |
• | Multi-year guaranteed awards that are not at risk due to rigorous performance conditions; |
• | Liberal CIC definition combined with any single-trigger CIC benefits; |
• | Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI’s executives is not possible; |
• | Severance payments made when the termination is not clearly disclosed as involuntary (for example, a termination without cause or resignation for good reason); |
20 | ISS research reports include realizable pay for S&P1500 companies. |
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• | Any other provision or practice deemed to be egregious and present a significant risk to investors. |
The above examples are not an exhaustive list. Please refer to ISS’ U.S. Compensation Policies FAQ document for additional detail on specific pay practices that have been identified as problematic and may lead to negative vote recommendations.
Options Backdating
The following factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
• | Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes; |
• | Duration of options backdating; |
• | Size of restatement due to options backdating; |
• | Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and |
• | Adoption of a grant policy that prohibits backdating and creates a fixed grant schedule or window period for equity grants in the future. |
Compensation Committee Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
• | Failure to respond to majority-supported shareholder proposals on executive pay topics; or |
• | Failure to adequately respond to the company’s previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account: |
• | Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated); |
• | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
• | Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
• | Other recent compensation actions taken by the company; |
• | Whether the issues raised are recurring or isolated; |
• | The company’s ownership structure; and |
• | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
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Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)
General Recommendation: Vote for annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs. |
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
General Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of existing change-in-control arrangements maintained with named executive officers but also considering new or extended arrangements. |
Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude, and/or timing of issue(s):
• | Single- or modified-single-trigger cash severance; |
• | Single-trigger acceleration of unvested equity awards; |
• | Full acceleration of equity awards granted shortly before the change in control; |
• | Acceleration of performance awards above the target level of performance without compelling rationale; |
• | Excessive cash severance (generally >3x base salary and bonus); |
• | Excise tax gross-ups triggered and payable; |
• | Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or |
• | Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or |
• | The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. |
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.
In cases where the golden parachute vote is incorporated into a company’s advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
Please refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
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General Recommendation: Vote case-by-case on certain equity-based compensation plans21 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an “Equity Plan Scorecard” (EPSC) approach with three pillars: |
• | Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) in relation to peers and considering both: |
• | SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and |
• | SVT based only on new shares requested plus shares remaining for future grants. |
• | Plan Features: |
• | Quality of disclosure around vesting upon a change in control (CIC); |
• | Discretionary vesting authority; |
• | Liberal share recycling on various award types; |
• | Lack of minimum vesting period for grants made under the plan; |
• | Dividends payable prior to award vesting. |
• | Grant Practices: |
• | The company’s three-year burn rate relative to its industry/market cap peers; |
• | Vesting requirements in CEO’s recent equity grants (3-year look-back); |
• | The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years); |
• | The proportion of the CEO’s most recent equity grants/awards subject to performance conditions; |
• | Whether the company maintains a sufficient claw-back policy; |
• | Whether the company maintains sufficient post-exercise/vesting share-holding requirements. |
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’ interests, or if any of the following egregious factors (“overriding factors”) apply:
• | Awards may vest in connection with a liberal change-of-control definition; |
21 | Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case. |
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• | The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it — for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing — for non-listed companies); |
• | The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; |
• | The plan is excessively dilutive to shareholders’ holdings; |
• | The plan contains an evergreen (automatic share replenishment) feature; or |
• | Any other plan features are determined to have a significant negative impact on shareholder interests. |
Further Information on certain EPSC Factors:
Shareholder Value Transfer (SVT)
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans, and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types of awards (for example, full-value awards), the assumption is made that all awards to be granted will be the most expensive types.
For proposals that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size, and cash compensation into the industry cap equations to arrive at the company’s benchmark.22
Three-Year Value-Adjusted Burn Rate
A “Value-Adjusted Burn Rate” is used for stock plan evaluations. Value-Adjusted Burn Rate benchmarks are calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company’s GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year’s burn-rate benchmark.
22 | For plans evaluated under the Equity Plan Scorecard policy, the company’s SVT benchmark is considered along with other factors. |
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The Value-Adjusted Burn Rate is calculated as follows:
Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted average common shares * stock price).
Liberal Change in Control Definition
Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal definition of change in control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a “potential” takeover, shareholder approval of a merger or other transactions, or similar language.
Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without prior shareholder approval. “Repricing” typically includes the ability to do any of the following:
• | Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs; |
• | Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise price of the original options or SARs; |
• | Cancel underwater options in exchange for stock awards; or |
• | Provide cash buyouts of underwater options. |
While the above cover most types of repricing, ISS may view other provisions as akin to repricing depending on the facts and circumstances.
Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by ISS), without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote against plans that do not expressly prohibit repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.
Problematic Pay Practices or Significant Pay-for-Performance Disconnect
If the equity plan on the ballot is a vehicle for problematic pay practices, vote against the plan.
ISS may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment. Considerations in voting against the equity plan may include, but are not limited to:
• | Severity of the pay-for-performance misalignment; |
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• | Whether problematic equity grant practices are driving the misalignment; and/or |
• | Whether equity plan awards have been heavily concentrated to the CEO and/or the other NEOs. |
Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
General Recommendation: Vote case-by-case on amendments to cash and equity incentive plans. |
Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
• | Addresses administrative features only; or |
• | Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of independent directors, per ISS’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time for any reason (including after the company’s initial public offering), or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below). |
Vote against proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
• | Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of independent directors, per ISS’ Classification of Directors. |
Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company’s IPO and/or proposals that bundle material amendment(s) other than those for Section 162(m) purposes.
Vote case-by-case on all other proposals to amend equity incentive plans, considering the following:
• | If the proposal requests additional shares and/or the amendments include a term extension or addition of full value awards as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments. |
• | If the plan is being presented to shareholders for the first time (including after the company’s IPO), whether or not additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments. |
• | If there is no request for additional shares and the amendments do not include a term extension or addition of full value awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown only for informational purposes. |
In the first two case-by-case evaluation scenarios, the EPSC evaluation/score is the more heavily weighted consideration.
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Specific Treatment of Certain Award Types in Equity Plan Evaluations
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should be captured.
Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
General Recommendation: Vote for proposals to implement a 401(k) savings plan for employees. |
Employee Stock Ownership Plans (ESOPs)
General Recommendation: Vote for proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares). |
Employee Stock Purchase Plans — Qualified Plans
General Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply: |
• | Purchase price is at least 85 percent of fair market value; |
• | Offering period is 27 months or less; and |
• | The number of shares allocated to the plan is 10 percent or less of the outstanding shares. |
Vote against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.
Employee Stock Purchase Plans — Non-Qualified Plans
General Recommendation: Vote case-by-case on nonqualified employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features: |
• | Broad-based participation; |
• | Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary; |
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• | Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20 percent from market value; and |
• | No discount on the stock price on the date of purchase when there is a company matching contribution. |
Vote against nonqualified employee stock purchase plans when the plan features do not meet all of the above criteria. If the matching contribution or effective discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of the assessment.
Option Exchange Programs/Repricing Options
General Recommendation: Vote case-by-case on management proposals seeking approval to exchange/reprice options taking into consideration: |
• | Historic trading patterns — the stock price should not be so volatile that the options are likely to be back “in-the-money” over the near term; |
• | Rationale for the re-pricing — was the stock price decline beyond management’s control?; |
• | Is this a value-for-value exchange?; |
• | Are surrendered stock options added back to the plan reserve?; |
• | Timing — repricing should occur at least one year out from any precipitous drop in company’s stock price; |
• | Option vesting — does the new option vest immediately or is there a black-out period?; |
• | Term of the option — the term should remain the same as that of the replaced option; |
• | Exercise price — should be set at fair market or a premium to market; |
• | Participants — executive officers and directors must be excluded. |
If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company’s total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the company’s stock price demonstrates poor timing and warrants additional scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder vote.
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General Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock. |
Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
General Recommendation: One-time Transfers: Vote against or withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval. |
Vote case-by-case on one-time transfers. Vote for if:
• | Executive officers and non-employee directors are excluded from participating; |
• | Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and |
• | There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants. |
Additionally, management should provide a clear explanation of why options are being transferred to a third-party institution and whether the events leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure, and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
• | Eligibility; |
• | Vesting; |
• | Bid-price; |
• | Term of options; |
• | Cost of the program and impact of the TSOs on company’s total option expense; and |
• | Option repricing policy. |
Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.
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Shareholder Ratification of Director Pay Programs
General Recommendation: Vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors: |
• | If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and |
• | An assessment of the following qualitative factors: |
• | The relative magnitude of director compensation as compared to companies of a similar profile; |
• | The presence of problematic pay practices relating to director compensation; |
• | Director stock ownership guidelines and holding requirements; |
• | Equity award vesting schedules; |
• | The mix of cash and equity-based compensation; |
• | Meaningful limits on director compensation; |
• | The availability of retirement benefits or perquisites; and |
• | The quality of disclosure surrounding director compensation. |
Equity Plans for Non-Employee Directors
General Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on: |
• | The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; |
• | The company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and |
• | The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk). |
On occasion, non-employee director stock plans will exceed the plan cost or burn-rate benchmarks when combined with employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative factors:
• | The relative magnitude of director compensation as compared to companies of a similar profile; |
• | The presence of problematic pay practices relating to director compensation; |
• | Director stock ownership guidelines and holding requirements; |
• | Equity award vesting schedules; |
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• | The mix of cash and equity-based compensation; |
• | Meaningful limits on director compensation; |
• | The availability of retirement benefits or perquisites; and |
• | The quality of disclosure surrounding director compensation. |
Non-Employee Director Retirement Plans
General Recommendation: Vote against retirement plans for non-employee directors. Vote for shareholder proposals to eliminate retirement plans for non-employee directors. |
Shareholder Proposals on Compensation
Bonus Banking/Bonus Banking “Plus”
General Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the named executive officers or a wider group of employees), taking into account the following factors: |
• | The company’s past practices regarding equity and cash compensation; |
• | Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at least 50 percent for full tenure); and |
• | Whether the company has a rigorous claw-back policy in place. |
Compensation Consultants — Disclosure of Board or Company’s Utilization
General Recommendation: Generally vote for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid. |
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
General Recommendation: Generally vote for shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company. |
Generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation (such as types of compensation elements or specific metrics) to be used for executive or directors.
Generally vote against shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Vote case-by-case on all other shareholder proposals regarding executive and director pay, taking into account relevant factors, including but not limited to: company performance, pay level and design versus peers, history of compensation concerns or pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.
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Golden Coffins/Executive Death Benefits
General Recommendation: Generally vote for proposals calling for companies to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based employee population is eligible. |
Hold Equity Past Retirement or for a Significant Period of Time
General Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors will be taken into account: |
• | The percentage/ratio of net shares required to be retained; |
• | The time period required to retain the shares; |
• | Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements; |
• | Whether the company has any other policies aimed at mitigating risk taking by executives; |
• | Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s existing requirements; and |
• | Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus. |
General Recommendation: Vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The following factors will be considered: |
• | The company’s current level of disclosure of its executive compensation setting process, including how the company considers pay disparity; |
• | If any problematic pay practices or pay-for-performance concerns have been identified at the company; and |
• | The level of shareholder support for the company’s pay programs. |
Generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio in a specific way to set or limit executive pay.
Pay for Performance/Performance-Based Awards
General Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be |
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performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps: |
• | First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent options or restricted stock, indexed options, or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards. |
• | Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test. |
In general, vote for the shareholder proposal if the company does not meet both of the above two steps.
General Recommendation: Vote case-by-case on shareholder proposals that request the board establish a pay-for-superior performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles: |
• | Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group median; |
• | Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested, equity awards; |
• | Provide the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan; |
• | Establish performance targets for each plan financial metric relative to the performance of the company’s peer companies; |
• | Limit payment under the annual and performance-vested long-term incentive components of the plan to when the company’s performance on its selected financial performance metrics exceeds peer group median performance. |
Consider the following factors in evaluating this proposal:
• | What aspects of the company’s annual and long-term equity incentive programs are performance driven? |
• | If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group? |
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• | Can shareholders assess the correlation between pay and performance based on the current disclosure? |
• | What type of industry and stage of business cycle does the company belong to? |
Pre-Arranged Trading Plans (10b5-1 Plans)
General Recommendation: Generally vote for shareholder proposals calling for the addition of certain safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include: |
• | Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K; |
• | Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary circumstances, as determined by the board; |
• | Request that a certain number of days that must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan; |
• | Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan; |
• | An executive may not trade in company stock outside the 10b5-1 Plan; |
• | Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive. |
Prohibit Outside CEOs from Serving on Compensation Committees
General Recommendation: Generally vote against proposals seeking a policy to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee. |
Recoupment of Incentive or Stock Compensation in Specified Circumstances
General Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company’s financial position or reputation, or if the senior executive failed to manage or monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies that permit recoupment in cases where an executive’s fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant financial restatements. Misconduct, negligence, or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact. |
In considering whether to support such shareholder proposals, ISS will take into consideration the following factors:
• | If the company has adopted a formal recoupment policy; |
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• | The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock compensation; |
• | Whether the company has chronic restatement history or material financial problems; |
• | Whether the company’s policy substantially addresses the concerns raised by the proponent; |
• | Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; or |
• | Any other relevant factors. |
Severance Agreements for Executives/Golden Parachutes
General Recommendation: Vote for shareholder proposals requiring that golden parachutes or executive severance agreements be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts. |
Vote case-by-case on proposals to ratify or cancel golden parachutes. An acceptable parachute should include, but is not limited to, the following:
• | The triggering mechanism should be beyond the control of management; |
• | The amount should not exceed three times base amount (defined as the average annual taxable W-2 compensation during the five years prior to the year in which the change of control occurs); |
• | Change-in-control payments should be double-triggered, i.e., (1) after a change in control has taken place, and (2) termination of the executive as a result of the change in control. Change in control is defined as a change in the company ownership structure. |
Share Buyback Impact on Incentive Program Metrics
General Recommendation: Vote case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following factors: |
• | The frequency and timing of the company’s share buybacks; |
• | The use of per-share metrics in incentive plans; |
• | The effect of recent buybacks on incentive metric results and payouts; and |
• | Whether there is any indication of metric result manipulation. |
Supplemental Executive Retirement Plans (SERPs)
General Recommendation: Generally vote for shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans. |
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Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.
General Recommendation: Generally vote for proposals calling for companies to adopt a policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax equalization policy. |
Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
General Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of employment prior to severance payment and/or eliminating accelerated vesting of unvested equity. |
The following factors will be considered:
• | The company’s current treatment of equity upon employment termination and/or in change-in-control situations (i.e., vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.); |
• | Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements. |
Generally vote for proposals seeking a policy that prohibits automatic acceleration of the vesting of equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of any related performance goals between the award date and the change in control).
6. | Routine/Miscellaneous |
General Recommendation: Generally vote against proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal. |
Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against proposals if the wording is too vague or if the proposal includes “other business.”
General Recommendation: Vote case-by-case on proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding, taking into consideration: |
• | The new quorum threshold requested; |
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• | The rationale presented for the reduction; |
• | The market capitalization of the company (size, inclusion in indices); |
• | The company’s ownership structure; |
• | Previous voter turnout or attempts to achieve quorum; |
• | Any provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve sufficiently; and |
• | Other factors as appropriate. |
In general, a quorum threshold kept as close to a majority of shares outstanding as is achievable is preferred.
Vote case-by-case on directors who unilaterally lower the quorum requirements below a majority of the shares outstanding, taking into consideration the factors listed above.
General Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections). |
General Recommendation: Vote for proposals to change the corporate name unless there is compelling evidence that the change would adversely impact shareholder value. |
Change Date, Time, or Location of Annual Meeting
General Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is unreasonable. |
Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling or location is unreasonable.
General Recommendation: Vote against proposals to approve other business when it appears as a voting item. |
7. | Social and Environmental Issues |
Global Approach — E&S Shareholder Proposals
ISS applies a common approach globally to evaluating social and environmental proposals which cover a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
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General Recommendation: Generally vote case-by-case, examining primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors will be considered: |
• | If the issues presented in the proposal are being appropriately or effectively dealt with through legislation or government regulation; |
• | If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal; |
• | Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive; |
• | The company’s approach compared with any industry standard practices for addressing the issue(s) raised by the proposal; |
• | Whether there are significant controversies, fines, penalties, or litigation associated with the company’s practices related to the issue(s) raised in the proposal; |
• | If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources; and |
• | If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage. |
General Recommendation: Generally vote against proposals seeking a company’s endorsement of principles that support a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue that is beyond its own control and may limit its flexibility with respect to future developments. Management and the board should be afforded the flexibility to make decisions on specific public policy positions based on their own assessment of the most beneficial strategies for the company. |
General Recommendation: Generally vote for proposals seeking a report on a company’s animal welfare standards, or animal welfare-related risks, unless: |
• | The company has already published a set of animal welfare standards and monitors compliance; |
• | The company’s standards are comparable to industry peers; and |
• | There are no recent significant fines, litigation, or controversies related to the company’s and/or its suppliers’ treatment of animals. |
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General Recommendation: Generally vote against proposals to phase out the use of animals in product testing, unless: |
• | The company is conducting animal testing programs that are unnecessary or not required by regulation; |
• | The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or |
• | There are recent, significant fines or litigation related to the company’s treatment of animals. |
General Recommendation: Generally vote against proposals requesting the implementation of Controlled Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard. |
Vote case-by-case on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at the company.
Genetically Modified Ingredients
General Recommendation: Generally vote against proposals requesting that a company voluntarily label genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities. |
Vote case-by-case on proposals asking for a report on the feasibility of labeling products containing GE ingredients, taking into account:
• | The potential impact of such labeling on the company’s business; |
• | The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure compares with industry peer disclosure; and |
• | Company’s current disclosure on the feasibility of GE product labeling. |
Generally vote against proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators and the scientific community.
Generally vote against proposals to eliminate GE ingredients from the company’s products, or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current regulations.
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Reports on Potentially Controversial Business/Financial Practices
General Recommendation: Vote case-by-case on requests for reports on a company’s potentially controversial business or financial practices or products, taking into account: |
• | Whether the company has adequately disclosed mechanisms in place to prevent abuses; |
• | Whether the company has adequately disclosed the financial risks of the products/practices in question; |
• | Whether the company has been subject to violations of related laws or serious controversies; and |
• | Peer companies’ policies/practices in this area. |
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation
General Recommendation: Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices. |
Vote case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
• | The potential for reputational, market, and regulatory risk exposure; |
• | Existing disclosure of relevant policies; |
• | Deviation from established industry norms; |
• | Relevant company initiatives to provide research and/or products to disadvantaged consumers; |
• | Whether the proposal focuses on specific products or geographic regions; |
• | The potential burden and scope of the requested report; |
• | Recent significant controversies, litigation, or fines at the company. |
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
Product Safety and Toxic/Hazardous Materials
General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain, unless: |
• | The company already discloses similar information through existing reports such as a supplier code of conduct and/or a sustainability report; |
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• | The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; and |
• | The company has not been recently involved in relevant significant controversies, fines, or litigation. |
Vote case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:
• | The company’s current level of disclosure regarding its product safety policies, initiatives, and oversight mechanisms; |
• | Current regulations in the markets in which the company operates; and |
• | Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company. |
Generally vote against resolutions requiring that a company reformulate its products.
General Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products, considering: |
• | Recent related fines, controversies, or significant litigation; |
• | Whether the company complies with relevant laws and regulations on the marketing of tobacco; |
• | Whether the company’s advertising restrictions deviate from those of industry peers; |
• | Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and |
• | Whether restrictions on marketing to youth extend to foreign countries. |
Vote case-by-case on proposals regarding second-hand smoke, considering;
• | Whether the company complies with all laws and regulations; |
• | The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and |
• | The risk of any health-related liabilities. |
Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
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Say on Climate (SoC) Management Proposals
General Recommendation: Vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action plan23, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following: |
• | The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other market standards; |
• | Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3); |
• | The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions (Scopes 1, 2, and 3 if relevant); |
• | Whether the company has sought and received third-party approval that its targets are science-based; |
• | Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050; |
• | Whether the company discloses a commitment to report on the implementation of its plan in subsequent years; |
• | Whether the company’s climate data has received third-party assurance; |
• | Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy; |
• | Whether there are specific industry decarbonization challenges; and |
• | The company’s related commitment, disclosure, and performance compared to its industry peers. |
Say on Climate (SoC) Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following: |
• | The completeness and rigor of the company’s climate-related disclosure; |
• | The company’s actual GHG emissions performance; |
• | Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and |
23 | Variations of this request also include climate transition related ambitions, or commitment to reporting on the implementation of a climate plan. |
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• | Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive. |
Climate Change/Greenhouse Gas (GHG) Emissions
General Recommendation: Generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks, considering: |
• | Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
• | The company’s level of disclosure compared to industry peers; and |
• | Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate change-related performance. |
Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:
• | The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
• | The company’s level of disclosure is comparable to that of industry peers; and |
• | There are no significant, controversies, fines, penalties, or litigation associated with the company’s GHG emissions. |
Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
• | Whether the company provides disclosure of year-over-year GHG emissions performance data; |
• | Whether company disclosure lags behind industry peers; |
• | The company’s actual GHG emissions performance; |
• | The company’s current GHG emission policies, oversight mechanisms, and related initiatives; and |
• | Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions. |
General Recommendation: Generally vote for proposals requesting that a company report on its energy efficiency policies, unless: |
• | The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or |
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• | The proponent requests adoption of specific energy efficiency goals within specific timelines. |
General Recommendation: Generally vote for requests for reports on the feasibility of developing renewable energy resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business. |
Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s evaluation of the feasibility and financial impact that such programs may have on the company.
Generally vote against proposals that call for the adoption of renewable energy goals, taking into account:
• | The scope and structure of the proposal; |
• | The company’s current level of disclosure on renewable energy use and GHG emissions; and |
• | The company’s disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate climate change risks. |
General Recommendation: Generally vote for requests for reports on a company’s efforts to diversify the board, unless: |
• | The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and |
• | The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company. |
Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
• | The degree of existing gender and racial minority diversity on the company’s board and among its executive officers; |
• | The level of gender and racial minority representation that exists at the company’s industry peers; |
• | The company’s established process for addressing gender and racial minority board representation; |
• | Whether the proposal includes an overly prescriptive request to amend nominating committee charter language; |
• | The independence of the company’s nominating committee; |
• | Whether the company uses an outside search firm to identify potential director nominees; and |
• | Whether the company has had recent controversies, fines, or litigation regarding equal employment practices. |
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General Recommendation: Generally vote for proposals requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data, unless: |
• | The company publicly discloses equal opportunity policies and initiatives in a comprehensive manner; |
• | The company already publicly discloses comprehensive workforce diversity data; and |
• | The company has no recent significant EEO-related violations or litigation. |
Generally vote against proposals seeking information on the diversity efforts of suppliers and service providers. Such requests may pose a significant burden on the company.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
General Recommendation: Generally vote for proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome. |
Generally vote against proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions regarding benefits should be left to the discretion of the company.
Gender, Race/Ethnicity Pay Gap
General Recommendation: Vote case-by-case on requests for reports on a company’s pay data by gender or race/ ethnicity, or a report on a company’s policies and goals to reduce any gender or race/ethnicity pay gaps, taking into account: |
• | The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy on fair and equitable compensation practices; |
• | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race, or ethnicity pay gap issues; |
• | The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry peers; and |
• | Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities. |
Racial Equity and/or Civil Rights Audit Guidelines
General Recommendation: Vote case-by-case on proposals asking a company to conduct an independent racial equity and/or civil rights audit, taking into account: |
• | The company’s established process or framework for addressing racial inequity and discrimination internally; |
• | Whether the company adequately discloses workforce diversity and inclusion metrics and goals; |
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• | Whether the company has issued a public statement related to its racial justice efforts in recent years, or has committed to internal policy review; |
• | Whether the company has engaged with impacted communities, stakeholders, and civil rights experts; |
• | The company’s track record in recent years of racial justice measures and outreach externally; and |
• | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial inequity or discrimination. |
Environment and Sustainability
General Recommendation: Vote case-by-case on requests for workplace safety reports, including reports on accident risk reduction efforts, taking into account: |
• | The company’s current level of disclosure of its workplace health and safety performance data, health and safety management policies, initiatives, and oversight mechanisms; |
• | The nature of the company’s business, specifically regarding company and employee exposure to health and safety risks; |
• | Recent significant controversies, fines, or violations related to workplace health and safety; and |
• | The company’s workplace health and safety performance relative to industry peers. |
Vote case-by-case on resolutions requesting that a company report on safety and/or security risks associated with its operations and/or facilities, considering:
• | The company’s compliance with applicable regulations and guidelines; |
• | The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring; and |
• | The existence of recent, significant violations, fines, or controversy regarding the safety and security of the company’s operations and/or facilities. |
General Environmental Proposals and Community Impact Assessments
General Recommendation: Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental impact of company operations, considering: |
• | Current disclosure of applicable policies and risk assessment report(s) and risk management procedures; |
• | The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations; |
• | The nature, purpose, and scope of the company’s operations in the specific region(s); |
• | The degree to which company policies and procedures are consistent with industry norms; and |
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• | The scope of the resolution. |
General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations, considering: |
• | The company’s current level of disclosure of relevant policies and oversight mechanisms; |
• | The company’s current level of such disclosure relative to its industry peers; |
• | Potential relevant local, state, or national regulatory developments; and |
• | Controversies, fines, or litigation related to the company’s hydraulic fracturing operations. |
General Recommendation: Generally vote for requests for reports on potential environmental damage as a result of company operations in protected regions, unless: |
• | Operations in the specified regions are not permitted by current laws or regulations; |
• | The company does not currently have operations or plans to develop operations in these protected regions; or |
• | The company’s disclosure of its operations and environmental policies in these regions is comparable to industry peers. |
General Recommendation: Vote case-by-case on proposals to report on an existing recycling program, or adopt a new recycling program, taking into account: |
• | The nature of the company’s business; |
• | The current level of disclosure of the company’s existing related programs; |
• | The timetable and methods of program implementation prescribed by the proposal; |
• | The company’s ability to address the issues raised in the proposal; and |
• | How the company’s recycling programs compare to similar programs of its industry peers. |
General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless: |
• | The company already discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or |
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• | The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame. |
General Recommendation: Vote case-by-case on proposals requesting a company report on, or adopt a new policy on, water-related risks and concerns, taking into account: |
• | The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics; |
• | Whether or not the company’s existing water-related policies and practices are consistent with relevant internationally recognized standards and national/local regulations; |
• | The potential financial impact or risk to the company associated with water-related concerns or issues; and |
• | Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers. |
General Recommendation: Vote against proposals restricting a company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are in the best interests of the company. |
Data Security, Privacy, and Internet Issues
General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and management policies and procedures, considering: |
• | The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech, information access and management, and Internet censorship; |
• | Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of information on the Internet; |
• | The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other telecommunications; |
• | Applicable market-specific laws or regulations that may be imposed on the company; and |
• | Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship. |
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ESG Compensation-Related Proposals
General Recommendation: Vote case-by-case on proposals seeking a report or additional disclosure on the company’s approach, policies, and practices on incorporating environmental and social criteria into its executive compensation strategy, considering: |
• | The scope and prescriptive nature of the proposal; |
• | The company’s current level of disclosure regarding its environmental and social performance and governance; |
• | The degree to which the board or compensation committee already discloses information on whether it has considered related E&S criteria; and |
• | Whether the company has significant controversies or regulatory violations regarding social or environmental issues. |
Human Rights, Human Capital Management, and International Operations
General Recommendation: Generally vote for proposals requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed. |
Vote case-by-case on proposals to implement company or company supplier labor and/or human rights standards and policies, considering:
• | The degree to which existing relevant policies and practices are disclosed; |
• | Whether or not existing relevant policies are consistent with internationally recognized standards; |
• | Whether company facilities and those of its suppliers are monitored and how; |
• | Company participation in fair labor organizations or other internationally recognized human rights initiatives; |
• | Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse; |
• | Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers; |
• | The scope of the request; and |
• | Deviation from industry sector peer company standards and practices. |
Vote case-by-case on proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering:
• | The degree to which existing relevant policies and practices are disclosed, including information on the implementation of these policies and any related oversight mechanisms; |
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• | The company’s industry and whether the company or its suppliers operate in countries or areas where there is a history of human rights concerns; |
• | Recent significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and whether the company has taken remedial steps; and |
• | Whether the proposal is unduly burdensome or overly prescriptive. |
General Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory arbitration on employment-related claims, taking into account: |
• | The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace claims; |
• | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of mandatory arbitration agreements on workplace claims; and |
• | The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements compared to its peers. |
Operations in High-Risk Markets
General Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk” markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account: |
• | The nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption; |
• | Current disclosure of applicable risk assessment(s) and risk management procedures; |
• | Compliance with U.S. sanctions and laws; |
• | Consideration of other international policies, standards, and laws; and |
• | Whether the company has been recently involved in recent, significant controversies, fines, or litigation related to its operations in “high-risk” markets. |
General Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated with outsourcing/plant closures, considering: |
• | Controversies surrounding operations in the relevant market(s); |
• | The value of the requested report to shareholders; |
• | The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and |
• | The company’s existing human rights standards relative to industry peers. |
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General Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace sexual harassment, taking into account: |
• | The company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment; |
• | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual harassment issues; and |
• | The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers. |
General Recommendation: Vote against reports on foreign military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales. |
Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses, and withdrawal from these contracts could have a negative impact on the company’s business.
General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering: |
• | The company’s current disclosure of relevant lobbying policies, and management and board oversight; |
• | The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and |
• | Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities. |
General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering: |
• | The company’s policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes; |
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• | The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and |
• | Recent significant controversies, fines, or litigation related to the company’s political contributions or political activities. |
Vote against proposals barring a company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote against proposals to publish in newspapers and other media a company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Political Expenditures and Lobbying Congruency
General Recommendation: Generally vote case-by-case on proposals requesting greater disclosure of a company’s alignment of political contributions, lobbying, and electioneering spending with a company’s publicly stated values and policies, considering: |
• | The company’s policies, management, board oversight, governance processes, and level of disclosure related to direct political contributions, lobbying activities, and payments to trade associations, political action committees, or other groups that may be used for political purposes; |
• | The company’s disclosure regarding: the reasons for its support of candidates for public offices; the reasons for support of and participation in trade associations or other groups that may make political contributions; and other political activities; |
• | Any incongruencies identified between a company’s direct and indirect political expenditures and its publicly stated values and priorities. |
• | Recent significant controversies related to the company’s direct and indirect lobbying, political contributions, or political activities. |
Generally vote case-by-case on proposals requesting comparison of a company’s political spending to objectives that can mitigate material risks for the company, such as limiting global warming.
General Recommendation: Generally vote against proposals asking a company to affirm political nonpartisanship in the workplace, so long as: |
• | There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions or trade association spending; and |
• | The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibit coercion. |
Vote against proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a
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bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.
8. | Mutual Fund Proxies |
General Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee. |
Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
General Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote. |
Converting Closed-end Fund to Open-end Fund
General Recommendation: Vote case-by-case on conversion proposals, considering the following factors: |
• | Past performance as a closed-end fund; |
• | Market in which the fund invests; |
• | Measures taken by the board to address the discount; and |
• | Past shareholder activism, board activity, and votes on related proposals. |
General Recommendation: Vote case-by-case on proxy contests, considering the following factors: |
• | Past performance relative to its peers; |
• | Market in which the fund invests; |
• | Measures taken by the board to address the issues; |
• | Past shareholder activism, board activity, and votes on related proposals; |
• | Strategy of the incumbents versus the dissidents; |
• | Independence of directors; |
• | Experience and skills of director candidates; |
• | Governance profile of the company; |
• | Evidence of management entrenchment. |
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Investment Advisory Agreements
General Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors: |
• | Proposed and current fee schedules; |
• | Fund category/investment objective; |
• | Performance benchmarks; |
• | Share price performance as compared with peers; |
• | Resulting fees relative to peers; |
• | Assignments (where the advisor undergoes a change of control). |
Approving New Classes or Series of Shares
General Recommendation: Vote for the establishment of new classes or series of shares. |
General Recommendation: Vote case-by-case on the authorization for or increase in preferred shares, considering the following factors: |
• | Stated specific financing purpose; |
• | Possible dilution for common shares; |
• | Whether the shares can be used for antitakeover purposes. |
General Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors: |
• | Potential competitiveness; |
• | Regulatory developments; |
• | Current and potential returns; and |
• | Current and potential risk. |
Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
General Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors: |
• | The fund’s target investments; |
• | The reasons given by the fund for the change; and |
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• | The projected impact of the change on the portfolio. |
Change Fundamental Investment Objective to Nonfundamental
General Recommendation: Vote against proposals to change a fund’s fundamental investment objective to non-fundamental. |
General Recommendation: Vote case-by-case on name change proposals, considering the following factors: |
• | Political/economic changes in the target market; |
• | Consolidation in the target market; and |
• | Current asset composition. |
Change in Fund’s Subclassification
General Recommendation: Vote case-by-case on changes in a fund’s sub-classification, considering the following factors: |
• | Potential competitiveness; |
• | Current and potential returns; |
• | Risk of concentration; |
• | Consolidation in target industry. |
Business Development Companies — Authorization to Sell Shares of Common Stock at a Price below Net Asset Value
General Recommendation: Vote for proposals authorizing the board to issue shares below Net Asset Value (NAV) if: |
• | The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders approve the underlying proposal, as required under the Investment Company Act of 1940; |
• | The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and |
• | The company has demonstrated responsible past use of share issuances by either: |
• | Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or |
• | Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts to NAV and economic dilution to existing non-participating shareholders. |
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Disposition of Assets/Termination/Liquidation
General Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the following factors: |
• | Strategies employed to salvage the company; |
• | The fund’s past performance; |
• | The terms of the liquidation. |
Changes to the Charter Document
General Recommendation: Vote case-by-case on changes to the charter document, considering the following factors: |
• | The degree of change implied by the proposal; |
• | The efficiencies that could result; |
• | The state of incorporation; |
• | Regulatory standards and implications. |
Vote against any of the following changes:
• | Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series; |
• | Removal of shareholder approval requirement for amendments to the new declaration of trust; |
• | Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act; |
• | Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund’s shares; |
• | Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements; |
• | Removal of shareholder approval requirement to change the domicile of the fund. |
Changing the Domicile of a Fund
General Recommendation: Vote case-by-case on re-incorporations, considering the following factors: |
• | Regulations of both states; |
• | Required fundamental policies of both states; |
• | The increased flexibility available. |
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
General Recommendation: Vote against proposals authorizing the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser. |
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General Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors: |
• | Fees charged to comparably sized funds with similar objectives; |
• | The proposed distributor’s reputation and past performance; |
• | The competitiveness of the fund in the industry; |
• | The terms of the agreement. |
General Recommendation: Vote for the establishment of a master-feeder structure. |
General Recommendation: Vote case-by-case on merger proposals, considering the following factors: |
• | Resulting fee structure; |
• | Performance of both funds; |
• | Continuity of management personnel; |
• | Changes in corporate governance and their impact on shareholder rights. |
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
General Recommendation: Generally vote against shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. |
Reimburse Shareholder for Expenses Incurred
General Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the reimbursement of the proxy solicitation expenses. |
Terminate the Investment Advisor
General Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the following factors: |
• | Performance of the fund’s Net Asset Value (NAV); |
• | The fund’s history of shareholder relations; |
• | The performance of other funds under the advisor’s management. |
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EQUITABLE INVESTMENT MANAGEMENT GROUP, LLC
EQUITABLE INVESTMENT MANAGEMENT, LLC
PROXY VOTING POLICIES AND PROCEDURES
I. | OVERVIEW |
In accordance with Rule 206(4)-6 of the Investment Advisers Act of 1940, as amended, Equitable Investment Management Group, LLC and Equitable Investment Management, LLC (together “EIM”) have adopted the Proxy Voting Policies and Procedures set forth below (the “Policies and Procedures”). EIM serve as the investment adviser to each series (each, a “Portfolio” and together, the “Portfolios”) of EQ Advisors Trust (“EQAT”), EQ Premier VIP Trust (“VIP”) and 1290 Funds (each, a “Trust” and together, the “Trusts”). Equitable Investment Management Group, LLC serves as the investment advisor to EQAT and VIP and Equitable Investment Management, LLC serves as the investment adviser to the 1290 Funds. Each Trust has delegated proxy voting responsibility with respect to each Portfolio to EIM. Equitable Investment Management, LLC (the “Administrator”) serves as the Administrator for all the Trusts. The Administrator is generally responsible for monitoring, testing and maintaining compliance policies, procedures and other items for the Trusts, and thus assists in monitoring the Trusts’ compliance with these Policies and Procedures. These Policies and Procedures have been designed to ensure that proxies relating to each Trust’s portfolio securities are voted in the best interest of the Trust.
II. | TRUSTS’ PROXY VOTING PROGRAM |
EIM has established a Proxy Voting Committee that is responsible for monitoring and administering the Trusts’ proxy voting program (the “Program”), as described below. The Administrator, as the administrator, assists with the administration of the Program. The Proxy Voting Committee is composed of EIM’s and the Administrator’s Chief Compliance Officer (“CCO”), officers of EIM and the Administrator, and/or members of EIM’s or the Administrator’s (as applicable) Investment Management Services, Legal Departments and Compliance Departments, or any combination thereof, who may be advisory members of the Committee. The Proxy Voting Committee holds meetings as needed, but no less frequently than annually.
A. | Sub-Advised Portfolios. EIM is responsible for the selection and ongoing monitoring of investment sub-advisers (the “Sub-Advisers”) who, among other responsibilities, provide portfolio management services including day-to-day research and stock selection for a Portfolio or an allocated portion of a Portfolio (a “Sub-Advised Portfolio”). EIM views proxy voting as a function that is incidental and integral to the portfolio management services provided by Sub-Advisers. Therefore, except as described in Section III below, EIM, in turn, delegates proxy voting responsibility with respect to each Sub-Advised Portfolio to the applicable Sub-Adviser. |
B. | “Fund-of-Funds” Portfolios. EIM provides the day-to-day portfolio management services to certain Portfolios or an allocated portion of a Portfolio (“Allocated Portion”), each of which seeks to achieve its investment objective by investing in other mutual funds managed by EIM (“Underlying Affiliated Portfolios”), unaffiliated mutual funds (“Underlying Unaffiliated Funds”) or exchange-traded funds (“Underlying ETFs”) (referred to collectively as the “Fund-of-Funds Portfolios”). Accordingly, EIM retains proxy voting responsibility with respect to each Fund-of-Funds Portfolio and votes proxies in accordance with the Policies and Procedures set forth in Section III below. |
III. | PROXY VOTING POLICIES AND PROCEDURES |
It is EIM’s policy to vote proxies on behalf of a Portfolio in the best interest of the Portfolio and its shareholders. EIM believes that these Policies and Procedures represent the voting positions most likely to support a Portfolio’s and its shareholders’ best interests across a range of sectors and contexts.
A. | Underlying Affiliated Portfolios. EIM will vote the Fund-of-Funds Portfolios’ or Allocated Portions’ shares in Underlying Affiliated Portfolios either for or against a proposal, or abstain, in the same proportion as the vote of all other securities holders of the applicable Underlying Affiliated Portfolio (whether or not the proposal presents an issue as to which EIM or its affiliates could be deemed to |
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have a conflict of interest). If there are no security holders of an Underlying Affiliated Portfolio except Fund-of-Funds Portfolio, EIM will vote a Fund-of-Funds’ Portfolios’ shares in Underlying Affiliated Portfolio in its discretion, subject to compliance with other provisions of these Procedures, including Section III.E.2. below regarding resolution of potential conflicts of interest regarding a proposal. |
B. | Underlying Unaffiliated Funds, Underlying ETFs and Certain Sub-Advised Portfolios. |
a. | With respect to voting proxies of Underlying Unaffiliated Funds and Underlying ETFs where a Portfolio, and other members of its “advisory group” (as defined in Rule 12d1-4 under the Investment Company Act of 1940) in the aggregate (i) hold more than 25% of the outstanding voting securities of an Underlying Unaffiliated Fund or Unaffiliated ETF as a result of a decrease in the outstanding voting securities of the acquired fund, or (ii) hold more than 10% of the outstanding voting securities of an Underlying Unaffiliated Fund or Unaffiliated ETF that is a registered closed-end management investment company or business development company, each member of such “advisory group” will vote its securities in the same proportion as the vote of all other holders of such securities; provided, however, that in circumstances where all holders of the outstanding voting securities of the Underlying Affiliated Fund or Unaffiliated ETF are required by the rule or otherwise under Section 12(d)(1) to vote such securities in the same proportion as the vote of all other holders of such securities, the Portfolio will seek instructions from its security holders with regard to the voting of all proxies with respect to such Underlying Unaffiliated Fund or Underlying ETF securities and vote such proxies in accordance with such instructions. |
b. | With respect to voting proxies for Underlying Unaffiliated Funds, Underlying ETFs, and certain Sub-Advised Portfolios in all other circumstances as described in Section III.D below, the following guidelines generally will apply: |
1. | The decision whether, and if so, how to vote a proxy will be made by EIM based on what it determines to be in the best interest of the relevant Portfolio and its shareholders and in accordance with these procedures. |
2. | EIM, with the assistance of Administrator, may enlist the services of an independent proxy voting service to assist with the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process, as further described in Section III.E below. |
3. | EIM’s policy is to vote all proxies, except under circumstances in which EIM has determined that it is consistent with the best interest of the relevant Portfolio and its shareholders not to vote the proxy or to abstain on one or more proposals. Such circumstances may include the following: |
1. | EIM’s policy is to vote all proxies, except under circumstances in which EIM has determined that it is consistent with the best interest of the relevant Portfolio and its shareholders not to vote the proxy or to abstain on one or more proposals. Such circumstances may include the following: |
a. | When securities are out on loan, they are transferred into the borrower’s name and are voted by the borrower, at its discretion. In most cases, EIM will not take steps to see that loaned securities are voted. However, if EIM determines that a proxy vote is materially important to the relevant Portfolio, EIM will make a good faith effort to recall the loaned security in order to vote. |
b. | If an issuer is based in a country that requires “share blocking”1, EIM may determine that the value of exercising the vote is outweighed by the detriment of not being able to sell the shares during the blocking period, in which case EIM may not vote the proxy. |
1 | Shareholders in “share blocking” countries wishing to vote must deposit their shares shortly before the date of the meeting (usually one week) with a designated depositary. During the blocking period shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to clients’ custodian banks. |
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c. | EIM may abstain or vote against ballot issues where EIM has not received sufficient information to make an informed decision. |
2. | EIM, or the Administrator on EIM’s behalf, provides clients with a copy of these procedures upon request and a description of these procedures is included in EIM’s Form ADV, Part II. |
3. | Any potential material conflicts of interest associated with voting proxies will be disclosed and reviewed by the Trusts’ CCO or other member of EIM’s and the Administrator Legal Department (“Legal”) and Compliance Department (“Compliance”). |
4. | EIM will cast votes in a manner consistent with any applicable rule or regulation of the United States Securities and Exchange Commission (“SEC”). |
C. | Seed Capital Investments. EIM and any affiliate will vote Portfolio shares they own, including through “seed money” investments in a Portfolio, either for or against a proposal, or abstain, in the same proportion as the vote of all other security holders of the Portfolio (whether or not the proposal presents an issue as to which EIM or its affiliates could be deemed to have a conflict of interest), or as otherwise required under applicable law (e.g., as may be required under a “mixed and shared funding” order). If EIM or an affiliate is the sole shareholder of a Portfolio, EIM or the affiliate will vote the Portfolio’s shares that it owns in its discretion. |
D. | Sub-Advised Portfolios; No Delegation. Under certain circumstances EIM may assume responsibility for voting the proxies for shares held by a Sub-Advised Portfolio. For example, if a Sub-Adviser notifies EIM that it is unable or unwilling to assume responsibility for voting a proxy for a Sub-Advised Portfolio (e.g., if voting such proxy presents a potential material conflict of interest for the Sub-Adviser), EIM will vote such proxy in accordance with these procedures. |
E. | Record Retention and Inspection. EIM and the Administrator will maintain all documentation associated with EIM’s proxy voting decisions. EIM and the Administrator Compliance is responsible for verifying that such documentation is properly maintained in accordance with its procedures and applicable laws and regulations. |
IV. | CONFLICTS OF INTEREST |
If EIM or the Administrator becomes aware that a proxy voting issue may present a potential material conflict of interest, the issue will be referred to the CCO or other member of Legal and Compliance Department. If the CCO and/or the Legal and Compliance Department determines that an affiliated person of EIM has a potential material conflict, that affiliated person will not participate in the voting decision.
Potential material conflicts may arise between the interests of a Portfolio and EIM or any of its affiliated persons if, for example, a proxy vote relates to a matter involving issuers in which EIM or its affiliates have a substantial economic interest. Potential conflicts of interest include, but are not limited to:
• | Portfolio Managers owning shares of Underlying Unaffiliated Funds, ETFs or shares of securities that are also held in the Portfolios of the Trust(s). |
• | Equitable Financial Life Insurance Company (“Equitable”) holding investments in Underlying Unaffiliated Funds or ETFs that are also held in the Portfolios of the Trust(s). |
V. | PROXY VOTING SERVICES |
EIM, with the assistance of the Administrator, may engage an independent proxy voting service to assist with the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process as deemed necessary. Currently, EIM subscribes to the corporate governance and proxy research services of International Shareholder Services (ISS), a provider of proxy voting services. ISS provides
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voting recommendations based on established guidelines and practices. The ISS U.S. Proxy Voting Guidelines (the “ISS Guidelines”) are attached hereto as Appendix A. Based on its review of the ISS Guidelines, EIM has determined generally to instruct ISS to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs and certain Sub-Advised Portfolios as described in Section III.C above consistent with the ISS Guidelines. However, EIM’s use of the ISS Guidelines is not intended to constrain EIM’s consideration of any proxy proposal, and so there may be times when EIM deviates from the ISS Guidelines. EIM reserves the right not to vote in accordance with the ISS recommendation if it determines that it is not in the best interest of a Portfolio and its Shareholders to do so. In addition, if EIM becomes aware of a conflict of interest between ISS and an issuer subject to a proxy vote, EIM will consider the recommendation of the issuer and instruct ISS to vote the proxy based on what EIM believes to be in the best interest of the Portfolio and its shareholders.
The Proxy Voting Committee, with the assistance of the Administrator, will maintain records regarding EIM’s determination generally to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs, and certain Sub-Advised Portfolios as described in Section III.D above consistent with the ISS Guidelines, and that determination will be reviewed periodically.
The following guidelines describe EIM’s general positions on common proxy issues for Underlying Unaffiliated Funds and Underlying ETFs:
• | Election of Directors: EIM generally votes in favor of slates recommended by the board of directors. |
• | Fee Increases: EIM generally votes against proposals to increase fees. |
• | Changes to the investment strategy, investment objective or fundamental investment restrictions, and proposed mergers: EIM generally votes against changes that would impact adversely the allocation model of a Fund-of-Funds Portfolio. |
Legal and Compliance will conduct a due diligence review of any proxy voting service (“Proxy Service”) to assess (1) the adequacy and quality of the Proxy Service’s staffing, personnel and technology, and whether the Proxy Service has the capacity and competence to adequately analyze proxy issues and the ability to make proxy voting recommendations based on materially accurate and complete information; (2) whether the Proxy Service has the ability to execute proxy votes in accordance with EIM’s instructions; (3) whether the Proxy Service has adequately disclosed to EIM the methodologies it uses in formulating its voting recommendations, including its process for obtaining current and accurate information relevant to matters included in its research and on which it makes recommendations, the nature of any third-party information sources that the Proxy Service uses as a basis for its voting recommendations, and how and when the Proxy Service would expect to engage with issuers and third parties; (4) the effectiveness of the Proxy Service’s process for seeking timely input from issuers; and (5) the adequacy of the Proxy Service’s policies and procedures for identifying, disclosing and addressing actual and potential conflicts of interest. EIM or the Administrator will require the Proxy Service to update them on an ongoing basis regarding (1) any business changes relevant to its capacity and competence to provide independent proxy voting advice or carry out voting instructions, (2) any conflicts of interest that may arise with respect to its proxy voting recommendations, and (3) any operational or compliance issues or problems. The due diligence review will be conducted at least annually and may be conducted by on-site visit or written questionnaire. In the event that EIM or the Administrator becomes aware of factual errors, incompleteness or methodological weaknesses in the Proxy Service’s analysis, it will assess whether this materially affected the research or recommendations used by EIM and the Proxy Service’s efforts to correct any material deficiencies in its analysis or methodology.
VI. | SUB-ADVISERS’ PROXY VOTING POLICIES AND PROCEDURES |
Each Sub-Adviser will be required to maintain proxy voting policies and procedures in conformance with Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended, and that satisfy the following elements:
A. | Written Policies and Procedures: The Sub-Adviser must maintain written proxy voting policies and procedures in accordance with applicable laws and regulations and must provide to the Trusts, EIM, and the Administrator, upon request, copies of such policies and procedures. |
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B. | Fiduciary Duty: The Sub-Adviser’s policies and procedures must be reasonably designed to ensure that the Sub-Adviser votes client securities in the best interest of its clients. |
C. | Conflicts of Interest: The Sub-Adviser’s policies and procedures must include appropriate procedures to identify and resolve as necessary, before voting client proxies, all material proxy-related conflicts of interest between the Sub-Adviser (including its affiliates) and its clients. |
D. | Voting Guidelines: The Sub-Adviser’s policies and procedures must address with reasonable specificity how the Sub-Adviser will vote proxies, or what factors it will consider, when voting on particular types of matters, e.g., corporate governance proposals, compensation issues and matters involving social or corporate responsibility. The Sub-Adviser’s policies and procedures also should describe the considerations it will take into account if it retains a Proxy Service to assist it in discharging its proxy voting duties and its process for conducting due diligence on, and overseeing, services provided by a Proxy Service. |
E. | Monitoring Proxy Voting: The Sub-Adviser must have a system and/or process that is reasonably designed to ensure that proxies are voted on behalf of its clients in a timely and efficient manner. |
F. | Record Retention and Inspection: The Sub-Adviser must have an established system for creating and retaining all appropriate documentation relating to its proxy voting activities as required by applicable laws and regulations. The Sub-Adviser must provide to the Trusts, EIM, and the Administrator such information and records with respect to proxies relating to the Trust’s portfolio securities as required by law and as the Trusts, EIM, or the Administrator may reasonably request. |
EIM, with assistance from the Administrator, will conduct a due diligence review of each Sub-Adviser’s proxy voting policies and procedures (including any proxy voting guidelines) in connection with the initial selection of the Sub-Adviser to manage a Sub-Advised Portfolio and on at least an annual basis thereafter. The Sub-Advisers’ proxy voting policies and procedures may be amended from time to time and need not be identical. As part of its ongoing due diligence and compliance responsibilities, EIM will seek to ensure that each Sub-Adviser maintains proxy voting policies and procedures that are reasonably designed to comply with applicable laws and regulations.
VII. | DISCLOSURE OF TRUSTS’ PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD |
EIM and the Administrator, on behalf of the Trusts, will take reasonable steps as necessary to seek to ensure that the Trusts comply with all applicable laws and regulations relating to disclosure of the Trusts’ proxy voting policies and procedures and proxy voting records. EIM and the Administrator (including, at their option, through third-party service providers) will maintain a system that is reasonably designed to ensure that EIM’s actual proxy voting record and the actual proxy voting record of the Sub-Advisers with respect to the Trusts’ portfolio securities are collected, processed, filed with the SEC and made available to the Trusts’ shareholders as required by applicable laws and regulations.
Amended: September 12, 2019
Amended: December 10, 2014
Amended: July 11, 2007
Adopted: August 6, 2003
Amended: December 15, 2020
Amended: August 2021
Amended: December 2021
Amended: January 2023
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Proxy Voting
I. | Client Accounts for which Brandywine Global Votes Proxies |
Brandywine Global shall vote proxies for each client account for which the client:
A. | has specifically authorized Brandywine Global to vote proxies in the applicable investment management agreement or other written instrument; or |
B. | without specifically authorizing Brandywine Global to vote proxies, has granted general investment discretion to Brandywine Global in the applicable investment management agreement. |
Also, Brandywine Global shall vote proxies for any employee benefit plan client subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), unless the investment management agreement specifically reserves the responsibility for voting proxies to the plan trustees or other named fiduciary.
At or prior to inception of each client account, Brandywine Global shall determine whether it has proxy voting authority over such account.
II. | General Principles |
In exercising discretion to vote proxies for securities held in client accounts, Brandywine Global is guided by general fiduciary principles. Brandywine Global’s goal in voting proxies is to act prudently and solely in the best economic interest of its clients for which it is voting proxies. In furtherance of such goal, Brandywine Global will vote proxies in a manner that Brandywine Global believes will be consistent with efforts to maximize shareholder values.
Brandywine Global does not exercise its proxy voting discretion to further policy, political or other issues that have no connection to enhancing the economic value of the client’s investment, but will consider environmental, social, and governance issues that may impact the value of the investment, either through introducing opportunity or by creating risk to the value.
III. | How Brandywine Global Votes Proxies |
Appendix A sets forth general guidelines considered by Brandywine Global and its portfolio management teams in voting common proxy items.
In the case of a proxy issue for which there is a stated position set forth in Appendix A, Brandywine Global generally votes in accordance with the stated position. In the case of a proxy issue for which there is a list of factors set forth in Appendix A that Brandywine Global considers in voting on such issue, Brandywine Global considers those factors and votes on a case-by-case basis in accordance with the general principles described in Section II. In the case of a proxy issue for which there is no stated position or list of factors set forth in Appendix A that Brandywine Global considers in voting on such issue, Brandywine Global votes on a case-by-case basis in accordance with the general principles described in Section II.
The general guidelines set forth in Appendix A are not binding on Brandywine Global and its portfolio management teams, but rather are intended to provide an analytical framework for the review and assessment of common proxy issues. Such guidelines can always be superseded by a portfolio management team based on the team’s assessment of the proxy issue and determination that a vote that is contrary to such general guidelines is in the best economic interests of the client accounts for which the team is responsible. Different portfolio management teams may vote differently on the same issue based on their respective assessments of the proxy issue and determinations as to what is in the best economic interests of client accounts for which they are responsible.
In the case of Taft-Hartley clients, Brandywine Global will comply with a client direction to vote proxies in accordance with Glass Lewis & Co. PVS Proxy Voting Guidelines, which Glass Lewis & Co. represents to be fully consistent with AFL-CIO guidelines.
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IV. | Use of an Independent Proxy Service Firm |
Brandywine Global may contract with an independent proxy service firm to provide Brandywine Global with information and/or recommendations with regard to proxy votes. Any such information and/or recommendations will be made available to Brandywine Global’s portfolio management teams, but Brandywine Global and its portfolio management teams are not required to follow any recommendation furnished by such service provider. The use of an independent proxy service firm to provide proxy voting information and/or recommendations does not relieve Brandywine Global of its responsibility for any proxy votes.
With respect to any independent proxy service firm engaged by Brandywine Global to provide Brandywine Global with information and/or recommendations with regard to proxy votes, Brandywine Global’s Proxy Administrator shall periodically review and assess such firm’s policies, procedures and practices including those with respect to the disclosure and handling of conflicts of interest.
V. | Conflict of Interest Procedures |
In furtherance of Brandywine Global’s goal to vote proxies in the best interests of clients, Brandywine Global follows procedures designed to identify and address material conflicts that may arise between the interests of Brandywine Global and its employees and those of its clients before voting proxies on behalf of such clients. Conflicts of interest may arise both at the firm level and as a result of an employee’s personal relationships or circumstances.
A. | Procedures for Identifying Conflicts of Interest |
Brandywine Global relies on the procedures set forth below to seek to identify conflicts of interest with respect to proxy voting.
1. Brandywine Global’s Compliance Department annually requires each Brandywine Global employee to complete a questionnaire designed to elicit information that may reveal potential conflicts between the employee’s interests and those of Brandywine Global clients.
2. Brandywine Global treats client and wrap sponsor relationships as creating a material conflict of interest for Brandywine Global in voting proxies with respect to securities issued by such client or its known affiliates.
3. As a general matter, Brandywine Global takes the position that relationships between a non-Brandywine Global Franklin Resources business unit and an issuer (e.g., investment management relationship between an issuer and a non-Brandywine Global Franklin Resources-owned asset manager) do not present a conflict of interest for Brandywine Global in voting proxies with respect to such issuer because Brandywine Global operates as an independent business unit from other Franklin Resources business units and because of the existence of informational barriers between Brandywine Global and certain other Franklin Resources business units.
B. | Procedures for Assessing Materiality of Conflicts of Interest |
1. All potential conflicts of interest identified pursuant to the procedures outlined in Section V.A.1. must be brought to the attention of the Investment Committee for resolution.
2. The Investment Committee shall determine whether a conflict of interest is material. A conflict of interest shall be considered material to the extent that it is determined that such conflict is likely to influence, or appear to influence, Brandywine Global’s decision-making in voting the proxy. All materiality determinations will be based on an assessment of the particular facts and circumstances. A written record of all materiality determinations made by the Investment Committee shall be maintained.
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3. If it is determined by the Investment Committee that a conflict of interest is not material, Brandywine Global may vote proxies following normal processes notwithstanding the existence of the conflict.
C. | Procedures for Addressing Material Conflicts of Interest |
1. With the exception of those material conflicts identified in A.2. which will be voted in accordance with paragraph C.1.b., if it is determined by the Investment Committee that a conflict of interest is material, the Investment Committee shall determine an appropriate method or combination of methods to resolve such conflict of interest before the proxy affected by the conflict of interest is voted by Brandywine Global. Such determination shall be based on the particular facts and circumstances, including the importance of the proxy issue, the nature of the conflict of interest, etc. Such methods may include:
a. | confirming that the proxy will be voted in accordance with a stated position or positions set forth in Appendix A; |
b. | confirming that the proxy will be voted in accordance with the recommendations of an independent proxy service firm retained by Brandywine Global; |
c. | in the case of a conflict of interest resulting from a particular employee’s personal relationships or circumstances, removing such employee from the decision-making process with respect to such proxy vote; |
d. | disclosing the conflict to clients and obtaining their consent before voting; |
e. | suggesting to clients that they engage another party to vote the proxy on their behalf; or |
f. | such other method as is deemed appropriate given the particular facts and circumstances, including the importance of the proxy issue, the nature of the conflict of interest, etc. |
2. A written record of the method used to resolve a material conflict of interest shall be maintained.
VI. | Other Considerations |
In certain situations, Brandywine Global may decide not to vote proxies on behalf of a client account for which it has discretionary voting authority because Brandywine Global believes that the expected benefit to the client account of voting shares is outweighed by countervailing considerations (excluding the existence of a potential conflict of interest). Examples of situations in which Brandywine Global may determine not to vote proxies are set forth below.
A. | Share Blocking |
Proxy voting in certain countries requires “share blocking.” This means that shareholders wishing to vote their proxies must deposit their shares shortly before the date of the meeting (e.g. one week) with a designated depositary. During the blocking period, shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares have been returned to client accounts by the designated depositary. In deciding whether to vote shares subject to share blocking, Brandywine Global will consider and weigh, based on the particular facts and circumstances, the expected benefit to client accounts of voting in relation to the potential detriment to clients of not being able to sell such shares during the applicable period.
B. | Securities on Loan |
Certain clients of Brandywine Global, such as an institutional client or a registered investment company for which Brandywine Global acts as a sub-adviser, may engage in securities lending with respect to the securities in their accounts. Brandywine Global typically does not direct or oversee such securities
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lending activities. To the extent feasible and practical under the circumstances, Brandywine Global may request that the client recall shares that are on loan so that such shares can be voted if Brandywine Global believes that the expected benefit to the client of voting such shares outweighs the detriment to the client of recalling such shares (e.g., foregone income). The ability to timely recall shares for proxy voting purposes typically is not entirely within the control of Brandywine Global and requires the cooperation of the client and its other service providers. Under certain circumstances, the recall of shares in time for such shares to be voted may not be possible due to applicable proxy voting record dates and administrative considerations.
VII. | Proxy Voting-Related Disclosures |
A. | Proxy Voting Independence and Intent |
Brandywine Global exercises its proxy voting authority independently of other Franklin Resources-owned asset managers. Brandywine Global and its employees shall not consult with or enter into any formal or informal agreements with Brandywine Global’s ultimate parent, Franklin Resources, Inc., any other Franklin Resources business unit, or any of their respective officers, directors or employees, regarding the voting of any securities by Brandywine Global on behalf of its clients.
Brandywine Global and its employees must not disclose to any person outside of Brandywine Global, including without limitation another investment management firm (affiliated or unaffiliated) or the issuer of securities that are the subject of the proxy vote, how Brandywine Global intends to vote a proxy without prior approval from Brandywine Global’s Chief Compliance Officer.
If a Brandywine Global employee receives a request to disclose Brandywine Global’s proxy voting intentions to, or is otherwise contacted by, another person outside of Brandywine Global (including an employee of another Franklin Resources business unit) in connection with an upcoming proxy voting matter, the employee should immediately notify Brandywine Global’s Chief Compliance Officer.
If a Brandywine Global portfolio manager wants to take a public stance with regards to a proxy, the portfolio manager must consult with and obtain the approval of Brandywine Global’s Chief Compliance Officer before making or issuing a public statement.
B. | Disclosure of Proxy Votes and Policy and Procedures |
Upon Brandywine Global’s receipt of any oral or written client request for information on how Brandywine Global voted proxies for that client’s account, Brandywine Global must promptly provide the client with such requested information in writing.
Brandywine Global must deliver to each client, for which it has proxy voting authority, no later than the time it accepts such authority, a written summary of this Proxy Voting policy and procedures. This summary must include information on how clients may obtain information about how Brandywine Global has voted proxies for their accounts and must also state that a copy of Brandywine Global’s Proxy Voting policy and procedures is available upon request.
Brandywine Global must create and maintain a record of each written client request for proxy voting information. Such record must be created promptly after receipt of the request and must include the date the request was received, the content of the request, and the date of Brandywine Global’s response. Brandywine Global must also maintain copies of written client requests and copies of all responses to such requests.
C. | Delegation of Duties |
Brandywine Global may delegate to non-investment personnel the responsibility to vote proxies in accordance with the guidelines set forth in Appendix A. Such delegation of duties will only be made to employees deemed to be reasonably capable of performing this function in a satisfactory manner.
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VIII. | Shareholder Activism and Certain Non-Proxy Voting Matters |
In no event shall Brandywine Global’s possession of proxy voting authority obligate it to undertake any shareholder activism on behalf of a client. Brandywine Global may undertake such activism in connection with a proxy or otherwise if and to the extent that Brandywine Global determines that doing so is consistent with applicable general fiduciary principles, provided Brandywine Global has first obtained its Chief Compliance Officer’s approval of the proposed activism.
Absent a specific contrary written agreement with a client, Brandywine Global does not (1) render any advice to, or take any action on behalf of, clients with respect to any legal proceedings, including bankruptcies and shareholder litigation, to which any securities or other investments held in client account, or the issuers thereof, become subject, or (2) initiate or pursue legal proceedings, including without limitation shareholder litigation, on behalf of clients with respect to transactions or securities or other investments held in client accounts, or the issuers thereof. Except as otherwise agreed to in writing with a particular client, the right to take any action with respect to any legal proceeding, including without limitation bankruptcies and shareholder litigation, and the right to initiate or pursue any legal proceedings, including without limitation shareholder litigation, with respect to transactions or securities or other investments held in a client account is expressly reserved to the client.
IX. | Recordkeeping |
In addition to all other records required by this Policy and Procedures, Brandywine Global shall maintain the following records relating to proxy voting:
A. | a copy of this Policy and Procedures, including any and all amendments that may be adopted; |
B. | a copy of each proxy statement that Brandywine Global receives regarding client securities; |
C. | a record of each vote cast by Brandywine Global on behalf of a client; |
D. | documentation relating to the identification and resolution of conflicts of interest; |
E. | any documents created by Brandywine Global that were material to a proxy voting decision or that memorialized the basis for that decision; |
F. | a copy of each written client request for information on how Brandywine Global voted proxies on behalf of the client, and a copy of any written response by Brandywine Global to any (written or oral) client request for information on how Brandywine Global voted proxies on behalf of the requesting client; and |
G. | records showing whether or not Brandywine Global has proxy voting authority for each client account. |
All required records shall be maintained and preserved in an easily accessible place for a period of not less than six years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of Brandywine Global. Brandywine Global also shall maintain a copy of any proxy voting policies and procedures that were in effect at any time within the last five years.
To the extent that Brandywine Global is authorized to vote proxies for a United States registered investment company, Brandywine Global shall maintain such records as are necessary to allow such fund to comply with its recordkeeping, reporting and disclosure obligations under applicable laws, rules and regulations.
In lieu of keeping copies of proxy statements, Brandywine Global may rely on proxy statements filed on the EDGAR system as well as on third party records of proxy statements if the third party provides an undertaking to provide copies of such proxy statements promptly upon request. Brandywine Global may rely on a third party to make and retain, on Brandywine Global’s behalf, records of votes cast by Brandywine Global on behalf of clients if the third party provides an undertaking to provide a copy of such records promptly upon request.
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Appendix A
Proxy Voting Guidelines
Brandywine Global Diversified Portfolio Management Team
Proxy Voting Guidelines
Below are proxy voting guidelines that Brandywine Global’s Diversified Portfolio Management Team generally follows when voting proxies for securities held in client accounts. The Team may decide to deviate from these guidelines with respect to any one or more particular proxy votes, subject in all cases to the Team’s duty to act solely in the best interest of their client accounts holding the applicable security.
I. | Compensation |
A. | We vote for non-employee director stock options, unless we consider the number of shares available for issue excessive. We may consider current and past stock option grants in determining whether the cumulative dilution is excessive. |
B. | We vote for employee stock purchase programs. Normally, these programs allow all employees to purchase company stock at a price equal to 85% of current market price. Usually, we will still vote for these employee programs even if we vote against a non-employee or executive-only stock purchase program because of excessive dilution. |
C. | We vote for compensation plans that are tied to the company achieving set profitability hurdles. Plans are structured this way to comply with IRS laws allowing for deductibility of management compensation exceeding $1 million. |
D. | We vote against attempts to re-price options. Also, we vote against the re-election of incumbent Directors in the event of such a re-pricing proposal. |
E. | We vote against attempts to increase incentive stock options available for issuance when the shares underlying such options would exceed 10% of the company’s outstanding shares. |
F. | We vote against stock option plans allowing for stock options with exercise prices less than 100% of the stock’s price at the time of the option grant. |
G. | We vote against stock option plans allowing for very large allocations to a single individual because we generally believe that stock option plans should provide for widespread employee participation. |
H. | We vote against proposals to authorize or approve loans to company executives or Board members for personal reasons or for the purpose of enabling such persons to purchase company shares. |
II. | Governance |
A. | We vote for proposals to separate the Chief Executive Officer and Chairman of the Board positions. |
B. | We vote against “catch-all” authorizations permitting proxy holders to conduct unspecified business that arises during shareholder meetings. |
III. | Anti-Takeover |
We vote against anti-takeover measures, including without limitation:
A. | Staggered Boards of Directors (for example, where 1/3 of a company’s Board is elected each year rather than the entire Board each year). |
B. | Super-Majority Voting Measures (for example, requiring a greater than 50% vote to approve takeovers or make certain changes). |
C. | Poison Pills, which are special stock rights that go into effect upon a takeover offer or an outsider acquiring more than a specified percentage of a company’s outstanding shares. |
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IV. | Capital Structure |
We vote against attempts to increase authorized shares by more than twice the number of outstanding shares unless there is a specific purpose for such increase given, such as a pending stock split or a corporate purchase using shares, and we determine that increasing authorized shares for such purpose is appropriate. Generally, we believe it is better to use shares to pay for acquisitions when they are trading at higher values than when they are trading at or near historical lows. The dilution effect is less.
V. | Business Management |
We generally prefer not to dictate to companies on matters of business strategy, believing that as long as the company is operating responsibly it is management’s role to make these decisions. Business strategy includes management of environmental and social practices, as they have the potential to pose significant financial, legal, and reputational risk if not appropriately governed. In cases where we feel management has not taken sufficient efforts to address material environmental or social risk, we may choose to support shareholder proposals aimed at enhancing shareholder value or risk mitigation in alignment with our fiduciary principles.
Brandywine Global Fundamental Equities Portfolio Management Team
Proxy Voting Guidelines
Below are proxy voting guidelines that Brandywine Global’s Fundamental Equities Portfolio Management Team generally follows when voting proxies for securities held in client accounts. The Team may decide to deviate from these guidelines with respect to any one or more particular proxy votes, subject in all cases to the Team’s duty to act solely in the best interest of their client accounts holding the applicable security.
I. | Compensation |
A. | We vote for non-employee director stock options, unless we consider the number of shares available for issue excessive. |
B. | We vote for employee stock purchase programs. Normally, these programs allow all employees to purchase company stock at a price equal to 85% of current market price. Usually, we will still vote for these employee programs even if we vote against a non-employee or executive-only stock purchase program because of excessive dilution. |
C. | We vote for measures that give shareholders a vote on executive compensation. |
D. | We vote for compensation plans that are tied to the company achieving set profitability hurdles. This is to comply with IRS laws to allow for deductibility of management compensation exceeding $1 million. |
E. | We vote against any attempt to re-price options. Also, we vote against the re- election of incumbent Directors in the event of such a re-pricing proposal. |
F. | We vote against attempts to increase incentive stock options when we determine they are excessive, either in total or for one individual. |
G. | We vote against stock option plans allowing for stock options with exercise prices less than 100% of the stock’s price at the time of the option grant. |
II. | Governance |
A. | We vote for cumulative shareholder voting. |
B. | We vote against “catch-all” authorizations permitting proxy holders to conduct unspecified business that arises during shareholder meetings. |
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C. | We vote against related-party transactions involving directors, senior members of company management or other company insiders. |
III. | Anti-Takeover |
We vote against anti-takeover measures:
A. | Staggered Boards of Directors (for example, where 1/3 of a company’s Board is elected each year rather than the entire Board each year). |
B. | Super-Majority Voting Measures (for example, requiring a greater than 50% vote to approve takeovers or make certain changes). |
C. | Poison Pills, which are special stock rights that go into effect upon a takeover offer or an outsider acquiring more than a specified percentage of a company’s outstanding shares. |
D. | Change-of-Control Contracts, which grant benefits to company personnel (typically members of senior company management) in the event the company is acquired or is otherwise subject to a change of control. |
IV. | Capital Structure |
We vote against attempts to increase authorized shares by more than twice the number of outstanding shares unless there is a specific purpose for such increase given, such as a pending stock split or a corporate purchase using shares, and we determine that increasing authorized shares for such purpose is appropriate. Generally, we believe it is better to use shares to pay for acquisitions when they are trading at higher values than when they are trading at or near historical lows. The dilution effect is less.
V. | Business Management |
We generally prefer not to dictate to companies on matters of business strategy, believing that as long as the company is operating responsibly, it is management’s role to make these decisions. Business strategy includes management of environmental and social practices, as they have the potential to pose significant financial, legal, and reputational risk if not appropriately governed. In cases where we feel management has not taken sufficient efforts to address material environmental or social risk, we may choose to support shareholder proposals aimed at enhancing shareholder value or risk mitigation in alignment with our fiduciary principles
Brandywine Global Fixed Income Portfolio Management Team
Proxy Voting Guidelines
Below are proxy voting guidelines that Brandywine Global Fixed Income Portfolio Management Team generally follows when voting proxies for securities held in client accounts. The Team may decide to deviate from these guidelines with respect to any one or more particular proxy votes, subject in all cases to the Team’s duty to act solely in the best interest of their client accounts holding the applicable security.
I. | Compensation |
A. | We vote for non-employee director stock options, unless we consider the number of shares available for issue excessive. |
B. | We vote for employee stock purchase programs. Normally, these programs allow all employees to purchase company stock at a price equal to 85% of current market price. Usually, we will still vote for these employee programs even if we vote against a non-employee or executive-only stock purchase program because of excessive dilution. |
C. | We vote for measures that give shareholders a vote on executive compensation. |
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D. | We vote for compensation plans that are tied to the company achieving set profitability hurdles. This is to comply with IRS laws to allow for deductibility of management compensation exceeding $1 million. |
E. | We vote against any attempt to re-price options. Also, we vote against the re- election of incumbent Directors in the event of such a re-pricing proposal. |
F. | We vote against attempts to increase incentive stock options when we determine they are excessive, either in total or for one individual. |
G. | We vote against stock option plans allowing for stock options with exercise prices less than 100% of the stock’s price at the time of the option grant. |
II. | Governance |
A. | We vote for cumulative shareholder voting. |
B. | We vote against “catch-all” authorizations permitting proxy holders to conduct unspecified business that arises during shareholder meetings. |
III. | Anti-Takeover |
We vote against anti-takeover measures, including without limitation:
A. | Staggered Boards of Directors (for example, where 1/3 of a company’s Board is elected each year rather than the entire Board each year). |
B. | Super-Majority Voting Measures (for example, requiring a greater than 50% vote to approve takeovers or make certain changes). |
C. | Poison Pills, which are special stock rights that go into effect upon a takeover offer or an outsider acquiring more than a specified percentage of a company’s outstanding shares. |
IV. | Capital Structure |
We vote against attempts to increase authorized shares by more than twice the number of outstanding shares unless there is a specific purpose for such increase given, such as a pending stock split or a corporate purchase using shares, and we determine that increasing authorized shares for such purpose is appropriate. Generally, we believe it is better to use shares to pay for acquisitions when they are trading at higher values than when they are trading at or near historical lows. The dilution effect is less.
V. | Business Management |
We generally prefer not to dictate to companies on matters of business strategy, believing that as long as the company is operating responsibly it is management’s role to make these decisions. Business strategy includes management of environmental and social practices, as they have the potential to pose significant financial, legal, and reputational risk if not appropriately governed. In cases where we feel management has not taken sufficient efforts to address material environmental or social risk, we may choose to support shareholder proposals aimed at enhancing shareholder value or risk mitigation in alignment with our fiduciary principles.
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Proxy Voting Policies and Procedures
1. | GENERAL |
A. | Introduction. |
Loomis, Sayles & Company, L.P. (“Loomis Sayles”) will vote proxies of the securities held in its clients’ portfolios on behalf of each client that has delegated proxy voting authority to Loomis Sayles as investment adviser. Loomis Sayles has adopted and implemented these policies and procedures (“Proxy Voting Procedures”) to ensure that, where it has voting authority, proxy matters are handled in the best interests of clients, in accordance with Loomis Sayles’ fiduciary duty, and all applicable law and regulations. The Proxy Voting Procedures, as implemented by the Loomis Sayles Proxy Committee (as described below), are intended to support good corporate governance, including those corporate practices that address environmental and social issues (“ESG Matters”), in all cases with the objective of protecting shareholder interests and maximizing shareholder value.
Loomis Sayles uses the services of third parties (each a “Proxy Voting Service” and collectively the “Proxy Voting Services”), to provide research, analysis and voting recommendations and to administer the process of voting proxies for those clients for which Loomis Sayles has voting authority. Any reference in these Proxy Voting Procedures to a “Proxy Voting Service” is a reference either to the Proxy Voting Service that provides research, analysis and voting recommendations to Loomis Sayles or to the Proxy Voting Service that administers the process of voting proxies for Loomis Sayles or to both, as the context may require. Loomis Sayles will generally follow its express policy with input from the Proxy Voting Service that provides research, analysis and voting recommendations to Loomis Sayles unless the Proxy Committee determines that the client’s best interests are served by voting otherwise.
B. | General Guidelines. |
The following guidelines will apply when voting proxies on behalf of accounts for which Loomis Sayles has voting authority.
1. | Client’s Best Interests. The Proxy Voting Procedures are designed and implemented in a way that is reasonably expected to ensure that proxy matters are conducted in the best interests of clients. When considering the best interests of clients, Loomis Sayles has determined that this means the best investment interest of its clients as shareholders of the issuer. To protect its clients’ best interests, Loomis Sayles has integrated the consideration of ESG Matters into its investment process. The Proxy Voting Procedures are intended to reflect the impact of these factors in cases where they are material to the growth and sustainability of an issuer. Loomis Sayles has established its Proxy Voting Procedures to assist it in making its proxy voting decisions with a view toward enhancing the value of its clients’ interests in an issuer over the period during which it expects its clients to hold their investments. Loomis Sayles will vote against proposals that it believes could adversely impact the current or future market value of the issuer’s securities during the expected holding period. Loomis Sayles also believes that protecting the best interests of clients requires the consideration of potential material impacts of proxy proposals associated with ESG Matters. |
For the avoidance of doubt, and notwithstanding any other provisions of these Proxy Voting Procedures, in all instances in which Loomis Sayles votes proxies on behalf of clients that are employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), Loomis Sayles (a) will act solely in accordance with the economic interest of the plan and its participants and beneficiaries, and (b) will not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any other objective, or promote benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries.
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Proxy Voting Policies and Procedures
2. | Client Proxy Voting Policies. Rather than delegating proxy voting authority to Loomis Sayles, a client may (a) retain the authority to vote proxies on securities in its account; (b) delegate voting authority to another party; or (c) instruct Loomis Sayles to vote proxies according to a policy that differs from the Proxy Voting Procedures. Loomis Sayles will honor any of these instructions if the instruction is agreed to in writing by Loomis Sayles in its investment management agreement with the client. If Loomis Sayles incurs additional costs or expenses in following any such instruction, it may request payment for such additional costs or expenses from the client. |
3. | Stated Policies. In the interest of consistency in voting proxies on behalf of its clients where appropriate, Loomis Sayles has adopted policies that identify issues where Loomis Sayles will (a) generally vote in favor of a proposal; (b) generally vote against a proposal; (c) generally vote as recommended by the Proxy Voting Service; and (d) specifically consider its vote for or against a proposal. However, these policies are guidelines and each vote may be cast differently than the stated policy, taking into consideration all relevant facts and circumstances at the time of the vote. In certain cases where the recommendation of the Proxy Voting Service and the recommendation of the issuer’s management are the same, the vote will generally be cast as recommended and will not be reviewed on a case-by-case basis by the Proxy Committee. In cases where the portfolio manager of an account that holds voting securities of an issuer or the analyst covering the issuer or its securities recommends a vote, the proposal(s) will be voted according to these recommendations after a review for any potential conflicts of interest is conducted and will not be reviewed on a case-by-case basis by the Proxy Committee. There may be situations where Loomis Sayles casts split votes despite the stated policies. For example, Loomis Sayles may cast a split vote when different clients may be invested in strategies with different investment objectives, or when different clients may have different economic interests in the outcome of a particular proposal. Loomis Sayles also may cast a split vote on a particular proposal when its investment teams have differing views regarding the impact of the proposal on their clients’ investment interests. |
4. | Abstentions and Other Exceptions. Loomis Sayles’ general policy is to vote rather than abstain from voting on issues presented, unless the Proxy Committee determines, pursuant to its best judgment, that the client’s best interests require abstention. However, in the following circumstances Loomis Sayles may not vote a client’s proxy: |
• | The Proxy Committee has concluded that voting would have no meaningful, identifiable economic benefit to the client as a shareholder, such as when the security is no longer held in the client’s portfolio or when the value of the portfolio holding is insignificant. |
• | The Proxy Committee has concluded that the costs of or disadvantages resulting from voting outweigh the economic benefits of voting. For example, in some non-US jurisdictions, the sale of securities voted may be legally or practically prohibited or subject to some restrictions for some period of time, usually between the record and meeting dates (“share blocking”). Loomis Sayles believes that the loss of investment flexibility resulting from share blocking generally outweighs the benefit to be gained by voting. Information about share blocking is often incomplete or contradictory. Loomis Sayles relies on the client’s custodian and on its Proxy Voting Service to identify share blocking jurisdictions. To the extent such information is wrong, Loomis Sayles could fail to vote shares that could have been voted without loss of investment flexibility, or could vote shares and then be prevented from engaging in a potentially beneficial portfolio transaction. |
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Proxy Voting Policies and Procedures
• | Administrative requirements for voting proxies in certain foreign jurisdictions (which may be imposed a single time or may be periodic), such as providing a power of attorney to the client’s local sub-custodian, cannot be fulfilled due to timing of the requirement, or the costs required to fulfill the administrative requirements appear to outweigh the benefits to the client of voting the proxy. |
• | The client, as of the record date, has loaned the securities to which the proxy relates and Loomis Sayles has concluded that it is not in the best interest of the client to recall the loan or is unable to recall the loan in order to vote the securities1. |
• | The client so directs Loomis Sayles. |
The Proxy Committee will generally vote against, rather than abstain from voting on, ballot issues where the issuer does not provide sufficient information to make an informed decision. In addition, there may be instances where Loomis Sayles is not able to vote proxies on a client’s behalf, such as when ballot delivery instructions have not been processed by a client’s custodian, when the Proxy Voting Service has not received a ballot for a client’s account (e.g., in cases where the client’s shares have been loaned to a third party), when proxy materials are not available in English, and under other circumstances beyond Loomis Sayles’ control.
5. | Oversight. All issues presented for shareholder vote are subject to the oversight of the Proxy Committee, either directly or by application of this policy. All non-routine issues will generally be considered directly by the Proxy Committee and, when necessary, the investment professionals responsible for an account holding the security, and will be voted in the best investment interests of the client. All routine “for” and “against” issues will be voted according to this policy unless special factors require that they be considered by the Proxy Committee and, when necessary, the investment professionals responsible for an account holding the security. |
6. | Availability of Procedures. Loomis Sayles publishes these Proxy Voting Procedures, as updated from time to time, on its public website, www.loomissayles.com, and includes a description of its Proxy Voting Procedures in Part 2A of its Form ADV. Upon request, Loomis Sayles also provides clients with a copy of its Proxy Voting Procedures. |
7. | Disclosure of Vote. Loomis Sayles makes certain disclosures regarding its voting of proxies in the aggregate (not specific as to clients) on its website, www.loomissayles.com. For mutual funds that it manages, Loomis Sayles is required by law to make certain disclosures regarding its voting of proxies annually. This information is also available on the Loomis Sayles website. Additionally, Loomis Sayles will, upon request by a client, provide information about how each proxy was voted with respect to the securities in that client’s account. Loomis Sayles’ policy is not to disclose a client’s proxy voting records to third parties except as required by applicable law and regulations. |
1 | Loomis Sayles does not engage in securities lending. However, some clients do opt to lend securities, availing themselves of their custodians’ services. |
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Proxy Voting Policies and Procedures
C. | Proxy Committee. |
1. | Proxy Committee. Loomis Sayles has established a Proxy Committee. The Proxy Committee is composed of senior representatives from firm investment teams and members of the Legal and Compliance Department, and other employees of Loomis Sayles as needed. In the event that any member is unable to participate in a meeting of the Proxy Committee, he or she may designate another individual to act on his or her behalf. A vacancy in the Proxy Committee is filled by the prior member’s successor in position at Loomis Sayles or a person of equivalent experience. Each portfolio manager of an account that holds voting securities of an issuer or the analyst covering the issuer or its securities may be an ad hoc member of the Proxy Committee in connection with voting proxies of that issuer. Voting determinations made by the Proxy Committee generally will be memorialized electronically (e.g., by email). |
2. | Duties. The Proxy Committee’s specific responsibilities include the following: |
a. | developing, authorizing, implementing and updating the Proxy Voting Procedures, including: |
(i) annually reviewing the Proxy Voting Procedures to ensure consistency with internal policies and regulatory agency policies, including determining the continuing adequacy of the Proxy Voting Procedures to confirm that they have been formulated reasonably and implemented effectively, including whether they continue to be reasonably designed to ensure that proxy votes are cast in clients’ best interest,
(ii) annually reviewing existing voting guidelines and developing of additional voting guidelines to assist in the review of proxy proposals, and
(iii) annually reviewing the proxy voting process and addressing any general issues that relate to proxy voting;
b. | overseeing the proxy voting process, including: |
(i) overseeing the vote on proposals according to the predetermined policies in the voting guidelines,
(ii) directing the vote on proposals where there is reason not to vote according to the predetermined policies in the voting guidelines or where proposals require special consideration,
(iii) consulting with the portfolio managers and analysts for the accounts holding the security when necessary or appropriate, and
(iv) periodically sampling or engaging an outside party to sample proxy votes to ensure they comply with the Proxy Voting Procedures and are cast in accordance with the clients’ best interests;
c. | engaging and overseeing third-party vendors that materially assist Loomis Sayles with respect to proxy voting, such as the Proxy Voting Services, including: |
(i) determining and periodically reassessing whether, as relevant, the Proxy Voting Service has the capacity and competency to adequately analyze proxy issues by considering:
(a) the adequacy and quality of the Proxy Voting Service’s staffing, personnel and technology,
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Proxy Voting Policies and Procedures
(b) whether the Proxy Voting Service has adequately disclosed its methodologies in formulating voting recommendations, such that Loomis Sayles can understand the factors underlying the Proxy Voting Service’s voting recommendations,
(c) the robustness of the Proxy Voting Service’s policies and procedures regarding its ability to ensure that its recommendations are based on current, materially complete and accurate information, and
(d) the Proxy Voting Service’s policies and procedures regarding how it identifies and addresses conflicts of interest, including whether the Proxy Voting Service’s policies and procedures provide for adequate disclosure of its actual and potential conflicts of interest with respect to the services it provides to Loomis Sayles.
(ii) providing ongoing oversight of the Proxy Voting Services to ensure that proxies continue to be voted in the best interests of clients and in accordance with these Proxy Voting Procedures and the determinations and directions of the Proxy Committee,
(iii) receiving and reviewing updates from the Proxy Voting Services regarding relevant business changes or changes to the Proxy Voting Services’ conflict policies and procedures, and
(iv) in the event that the Proxy Committee becomes aware that a recommendation of the Proxy Voting Service was based on a material factual error (including materially inaccurate or incomplete information): investigating the error, considering the nature of the error and the related recommendation, and determining whether the Proxy Voting Service has taken reasonable steps to reduce the likelihood of similar errors in the future; and
d. | further developing and/or modifying these Proxy Voting Procedures as otherwise appropriate or necessary. |
3. | Standards. |
a. | When determining the vote of any proposal for which it has responsibility, the Proxy Committee shall vote in the client’s best interests as described in section 1(B)(1) above. In the event a client believes that its other interests require a different vote, Loomis Sayles shall vote as the client instructs if the instructions are provided as required in section 1(B)(2) above. |
b. | When determining the vote on any proposal, the Proxy Committee shall not consider any benefit to Loomis Sayles, any of its affiliates, any of its or their clients or service providers, other than benefits to the owner of the securities to be voted. |
c. | If Loomis Sayles becomes aware of additional information relevant to the voting of a shareholder meeting after a vote has been entered but before the applicable voting deadline has passed, it will consider whether or not such information impacts the vote determination entered, and if necessary, use reasonable efforts to change the vote instruction. |
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Proxy Voting Policies and Procedures
D. | Conflicts of Interest. |
Loomis Sayles has established policies and procedures to ensure that proxy votes are voted in its clients’ best interests and are not affected by any possible conflicts of interest. First, except in certain limited instances, Loomis Sayles votes in accordance with its pre-determined policies set forth in these Proxy Voting Procedures. Second, where these Proxy Voting Procedures allow for discretion, Loomis Sayles will generally consider the recommendations of the Proxy Voting Service in making its voting decisions. However, if the Proxy Committee determines that the Proxy Voting Service’s recommendation is not in the best interests of the firm’s clients, then the Proxy Committee may use its discretion to vote against the Proxy Voting Service’s recommendation, but only after taking the following steps: (1) conducting a review for any material conflict of interest Loomis Sayles may have, and (2) if any material conflict is found to exist, excluding anyone at Loomis Sayles who is subject to that conflict of interest from participating in the voting decision in any way. However, if deemed necessary or appropriate by the Proxy Committee after full disclosure of any conflict, that person may provide information, opinions or recommendations on any proposal to the Proxy Committee. In such event, prior to directing any vote, the Proxy Committee will make reasonable efforts to obtain and consider information, opinions and recommendations from or about the opposing position.
E. | Recordkeeping. |
Loomis Sayles or the Proxy Voting Service will maintain records of proxies voted pursuant to Rule 204-2 under the Advisers Act. The records include: (1) a copy of its Proxy Voting Procedures; (2) proxy statements received regarding client securities; (3) a record of each vote cast; (4) a copy of any document created by Loomis Sayles that is material to making a decision how to vote proxies on behalf of a client or that memorializes the basis for that decision; and (5) each written client request for proxy voting records and Loomis Sayles’ written response to any (written or oral) client request for such records.
Proxy voting books and records are maintained in an easily accessible place for a period of five years, the first two in an appropriate office of Loomis Sayles.
2. | PROXY VOTING |
A. | Introduction |
Loomis Sayles has established certain specific guidelines intended to achieve the objective of the Proxy Voting Procedures: to support good corporate governance, including ESG Matters, in all cases with the objective of protecting shareholder interests and maximizing shareholder value.
B. | Board of Directors |
Loomis Sayles believes that an issuer’s independent, qualified board of directors is the foundation of good corporate governance. Loomis Sayles supports proxy proposals that reflect the prudent exercise of the board’s obligation to provide leadership and guidance to management in fulfilling its obligations to its shareholders. As an example, it may be prudent not to disqualify a director from serving on a board if they participated in affiliated transactions if all measures of independence and good corporate governance were met.
Annual Election of Directors: Vote for proposals to repeal classified boards and to elect all directors annually.
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Proxy Voting Policies and Procedures
Chairman and CEO are Separate Positions: Vote for proposals that require the positions of chairman and CEO to be held by different persons.
Director and Officer Indemnification and Liability Protection:
A. | Vote against proposals concerning director and officer indemnification and liability protection that limit or eliminate entirely director and officer liability for monetary damages for violating the duty of care, or that would expand coverage beyond legal expenses to acts such as gross negligence that are more serious violations of fiduciary obligations than mere carelessness. |
B. | Vote for only those proposals that provide such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if (i) the director or officer was found to have acted in good faith and in a manner that the director or officer reasonably believed was in the best interests of the company, and (ii) if the director’s or officer’s legal expenses only would be covered. |
Director Nominees in Contested Elections: Votes in a contested election of directors or a “vote no” campaign must be evaluated on a case-by-case basis, considering the following factors: (1) long-term financial performance of the issuer relative to its industry; management’s track record; (2) background to the proxy contest; qualifications of director nominees (both slates); (3) evaluation of what each side is offering shareholders as well as the likelihood that the proposed objectives and goals can be met; and (4) stock ownership positions.
Director Nominees in Uncontested Elections:
A. | Vote for proposals involving routine matters such as election of directors, provided that at least two-thirds of the directors would be independent, as determined by the Proxy Voting Service, and affiliated or inside nominees do not serve on any key board committee, defined as the Audit, Compensation, Nominating and/or Governance Committees. |
B. | Vote against nominees that are CFOs of the subject company. Generally, vote against nominees that the Proxy Voting Service has identified as not acting in the best interests of shareholders (e.g., due to over-boarding, risk management failures, a lack of diversity, etc.). Vote against nominees that have attended less than 75% of board and committee meetings, unless a reasonable cause (e.g., health or family emergency) for the absence is noted and accepted by the Proxy Voting Service and the board. Vote against affiliated or inside nominees who serve on a key board committee (as defined above). Vote against affiliated and inside nominees if less than two-thirds of the board would be independent. Vote against Governance or Nominating Committee members if both the following are true: a) there is no independent lead or presiding director; and b) the position of CEO and chairman are not held by separate individuals. Generally, vote against Audit Committee members if auditor ratification is not proposed, except in cases involving: (i) investment company board members, who are not required to submit auditor ratification for shareholder approval pursuant to Investment Company Act of 1940 rules; or (ii) any other issuer that is not required by law or regulation to submit a proposal ratifying the auditor selection. Vote against Compensation Committee members when Loomis Sayles or the Proxy Voting Service recommends a vote against the issuer’s “say on pay” advisory vote. |
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Proxy Voting Policies and Procedures
C. | Generally, vote against all members of a board committee and not just the chairman or a representative thereof in situations where the Proxy Voting Service finds that the board committee has not acted in the best interests of shareholders. |
D. | Vote as recommended by the Proxy Voting Service when directors are being elected as a slate and not individually. |
E. | When electing directors for any foreign-domiciled issuer to which the Proxy Voting Service believes it is reasonable to apply U.S. governance standards, we generally will vote in accordance with our policies set forth in (A) through (D) above. When electing directors for any other foreign-domiciled issuers, a recommendation of the Proxy Voting Service will generally be followed in lieu of the above stipulations. |
Independent Audit, Compensation and Nominating and/or Governance Committees: Vote for proposals requesting that the board Audit, Compensation and/or Nominating and/or Governance Committees include independent directors exclusively.
Independent Board Chairman:
A. | Vote for shareholder proposals that generally request the board to adopt a policy requiring its chairman to be “independent” (based on some reasonable definition of that term) with respect to any issuer whose enterprise value is, according to the Proxy Voting Service, greater than or equal to $10 billion. |
B. | Vote such proposals on a case-by-case basis when, according to the Proxy Voting Service, the issuer’s enterprise value is less than $10 billion. |
Multiple Directorships: Generally vote against a director nominee who serves as an executive officer of any public company while serving on more than two total public company boards and any other director nominee who serves on more than five total public company boards, unless a convincing argument to vote for that nominee is made by the Proxy Voting Service, in which case, the recommendation of the Proxy Voting Service will generally be followed.
Staggered Director Elections: Vote against proposals to classify or stagger the board.
Stock Ownership Requirements: Generally vote against shareholder proposals requiring directors to own a minimum amount of company stock in order to qualify as a director, or to remain on the board.
Term of Office: Vote against shareholder proposals to limit the tenure of outside directors.
C. | Ratification of Auditor |
Loomis Sayles generally supports proposals for the selection or ratification of independent auditors, subject to consideration of various factors such as independence and reasonableness of fees.
A. | Generally vote for proposals to ratify auditors. |
B. | Vote against ratification of auditors where an auditor has a financial interest in or association with the company, and is therefore not independent; or there is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company’s financial position. |
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C. | In general, if non-audit fees amount to 35% or more of total fees paid to a company’s auditor we will vote against ratification and against the members of the Audit Committee unless the Proxy Voting Service states that the fees were disclosed and determined to be reasonable. In such instances, the recommendation of the Proxy Voting service will generally be followed. |
D. | Vote against ratification of auditors and vote against members of the Audit Committee where it is known that an auditor has negotiated an alternative dispute resolution procedure. |
E. | Vote against ratification of auditors if the Proxy Voting Service indicates that a vote for the ratification of auditors it is not in the best long term interest of shareholders. |
D. | Remuneration and Benefits |
Loomis Sayles believes that an issuer’s compensation and benefit plans must be designed to ensure the alignment of executives’ and employees’ interests with those of its shareholders.
401(k) Employee Benefit Plans: Vote for proposals to implement a 401(k) savings plan for employees.
Compensation Plans: Proposals with respect to compensation plans generally will be voted as recommended by the Proxy Voting Service.
Compensation in the Event of a Change in Control: Votes on proposals regarding executive compensation in the event of a change in control of the issuer will be considered on a case-by-case basis.
Director Related Compensation: Vote proposals relating to director compensation, that are required by and comply with applicable laws (domestic or foreign) or listing requirements governing the issuer, as recommended by the Proxy Voting Service.
Employee Stock Ownership Plans (“ESOPs”): Vote for proposals that request shareholder approval in order to implement an ESOP or to increase authorized shares for existing ESOPs, except in cases when the number of shares allocated to the ESOP is “excessive” (i.e., generally greater than five percent of outstanding shares), in which case the recommendation of the Proxy Voting Service will generally be followed.
Golden Coffins: Review on a case-by-case basis all proposals relating to the obligation of an issuer to provide remuneration or awards to survivors of executives payable upon such executive’s death.
Golden and Tin Parachutes:
A. | Vote for shareholder proposals to have golden (top management) and tin (all employees) parachutes submitted for shareholder ratification. |
B. | Review on a case-by-case basis all proposals to ratify or cancel golden or tin parachutes. |
OBRA (Omnibus Budget Reconciliation Act)-Related Compensation Proposals:
A. | Vote for proposals to amend shareholder-approved plans to include administrative features or place a cap on the annual grants any one participant may receive to comply with the provisions of Section 162(m) of OBRA. |
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B. | Vote for amendments to add performance goals to existing compensation plans to comply with the provisions of Section 162(m) of OBRA. |
C. | Vote for cash or cash-and-stock bonus plans to exempt the compensation from taxes under the provisions of Section 162(m) of OBRA. |
D. | Votes on amendments to existing plans to increase shares reserved and to qualify the plan for favorable tax treatment under the provisions of Section 162(m) should be evaluated on a case-by-case basis. |
Shareholder Proposals to Limit Executive and Director Pay Including Executive Compensation Advisory Resolutions (“Say on Pay”):
A. | Generally, vote for shareholder proposals that seek additional disclosure of executive and director pay information. |
B. | Review on a case-by-case basis (1) all shareholder proposals that seek to limit executive and director pay and (2) all advisory resolutions on executive pay other than shareholder resolutions to permit such advisory resolutions. |
C. | Vote against proposals to link all executive or director variable compensation to performance goals. |
D. | Vote for an annual review of executive compensation. |
E. | Non-binding advisory votes on executive compensation will be voted as recommended by the Proxy Voting Service. |
F. | For foreign domiciled issuers where a non-binding advisory vote on executive compensation is proposed concurrently with a binding vote on executive compensation, and the recommendation of the Proxy Voting Service is the same for each proposal, a vote will be entered as recommended by the Proxy Voting Service. |
Share Retention by Executives: Generally vote against shareholder proposals requiring executives to retain shares of the issuer for fixed periods unless the board and the Proxy Voting Service recommend voting in favor of the proposal.
Stock Option Plans: A recommendation of the Proxy Voting Service will generally be followed using the following as a guide:
A. | Vote against stock option plans which expressly permit repricing of underwater options. |
B. | Vote against proposals to make all stock options performance based. |
C. | Vote against stock option plans that could result in an earnings dilution above the company specific cap considered by the Proxy Voting Service. |
D. | Vote for proposals that request expensing of stock options. |
E. | Capital Structure Management Issues |
Adjustments to Par Value of Common Stock: Vote for management proposals to reduce the par value of common stock.
Loomis, Sayles & Company, L.P. March 2022 All Rights Reserved | C-121 |
Proxy Voting Policies and Procedures
Authority to Issue Shares: Vote for proposals by boards to authorize the issuance of shares (with or without preemptive rights) to the extent the size of the proposed issuance in proportion to the issuer’s issued ordinary share capital is consistent with industry standards and the recommendations of the issuer’s board and the Proxy Voting Service are in agreement. Proposals that do not meet the above criteria will be reviewed on a case-by-case basis.
Blank Check Preferred Authorization:
A. | Vote for proposals to create blank check preferred stock in cases when the company expressly states that the stock will not be used as a takeover defense or carry superior voting rights, and expressly states conversion, dividend, distribution and other rights. |
B. | Vote for shareholder proposals to have blank check preferred stock placements, other than those shares issued for the purpose of raising capital or making acquisitions in the normal course of business, submitted for shareholder ratification. |
C. | Review proposals to increase the number of authorized blank check preferred shares on a case-by-case basis. |
Common Stock Authorization: Vote against proposed common stock authorizations that increase the existing authorization by more than 100% unless a clear need for the excess shares is presented by the company. A recommendation of the Proxy Voting Service will generally be followed.
Greenshoe Options (French issuers only): Vote for proposals by boards of French issuers in favor of greenshoe options that grant the issuer the flexibility to increase an over-subscribed securities issuance by up to 15% so long as such increase takes place on the same terms and within thirty days of the initial issuance, provided that the recommendation of the issuer’s board and the Proxy Voting Service are in agreement. Proposals that do not meet the above criteria will be reviewed on a case-by-case basis.
Reverse Stock Splits: Vote for management proposals to reduce the number of outstanding shares available through a reverse stock split.
Share Cancellation Programs: Vote for management proposals to reduce share capital by means of cancelling outstanding shares held in the issuer’s treasury.
Share Repurchase Programs: Vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms.
Stock Distributions, Splits and Dividends: Generally vote for management proposals to increase common share authorization, provided that the increase in authorized shares following the split or dividend is not greater than 100 percent of existing authorized shares.
Loomis, Sayles & Company, L.P. March 2022 All Rights Reserved | C-122 |
Proxy Voting Policies and Procedures
F. | Mergers, Asset Sales and Other Special Transactions |
Proposals for transactions that have the potential to affect the ownership interests and/or voting rights of the issuer’s shareholders, such as mergers, asset sales and corporate or debt restructuring, will be considered on a case-by-case basis, based on (1) whether the best economic result is being created for shareholders, (2) what changes in corporate governance will occur, (3) what impact they will have on shareholder rights, (4) whether the proposed transaction has strategic merit for the issuer, and (5) other factors as noted in each section below, if any.
Asset Sales: Votes on asset sales will be determined on a case-by-case basis after considering the impact on the balance sheet/working capital, value received for the asset, and potential elimination of inefficiencies.
Conversion of Debt Instruments: Votes on the conversion of debt instruments will be considered on a case-by-case basis after the recommendation of the relevant Loomis Sayles equity or fixed income analyst is obtained.
Corporate Restructuring: Votes on corporate restructuring proposals, including minority squeeze-outs, leveraged buyouts, spin-offs, liquidations, and asset sales will be considered on a case-by-case basis.
Debt Restructurings: Review on a case-by-case basis proposals to increase common and/or preferred shares and to issue shares as part of a debt-restructuring plan. Consider the following issues:
A. | Dilution — How much will ownership interest of existing shareholders be reduced, and how extreme will dilution to any future earnings be? |
B. | Change in Control — Will the transaction result in a change in control of the company? |
C. | Bankruptcy — Loomis Sayles’ Corporate Actions Department is responsible for consents related to bankruptcies and debt holder consents related to restructurings. |
D. | Potential Conflicts of Interest — For example, clients may own securities at different levels of the capital structure; in such cases, Loomis Sayles will exercise voting or consent rights for each such client based on that client’s best interests, which may differ from the interests of other clients. |
Delisting a Security: Proposals to delist a security from an exchange will be evaluated on a case-by-case basis.
Fair Price Provisions:
A. | Vote for fair price proposals, as long as the shareholder vote requirement embedded in the provision is no more than a majority of disinterested shares. |
B. | Vote for shareholder proposals to lower the shareholder vote requirement in existing fair price provisions. |
Greenmail:
A. | Vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments. |
Loomis, Sayles & Company, L.P. March 2022 All Rights Reserved | C-123 |
Proxy Voting Policies and Procedures
B. | Review anti-greenmail proposals on a case-by-case basis when they are bundled with other charter or bylaw amendments. |
C. | Vote for proposals to eliminate an anti-greenmail bylaw if the recommendations of management and the Proxy Voting Service are in agreement. If they are not in agreement, review and vote such proposals on a case-by-case basis. |
Liquidations: Proposals on liquidations will be voted on a case-by-case basis after reviewing relevant factors including but not necessarily limited to management’s efforts to pursue other alternatives, the appraisal value of assets, and the compensation plan for executives managing the liquidation.
Mergers and Acquisitions: Votes on mergers and acquisitions should be considered on a case-by-case basis, generally taking into account relevant factors including but not necessarily limited to: anticipated financial and operating benefits; offer price (cost vs. premium); prospects of the combined companies; how the deal was negotiated; golden parachutes; financial benefits to current management; and changes in corporate governance and their impact on shareholder rights.
Poison Pills:
A. | Vote for shareholder proposals that ask a company to submit its poison pill for shareholder ratification. |
B. | Review on a case-by-case basis shareholder proposals to redeem a company’s poison pill. |
C. | Review on a case-by-case basis management proposals to ratify a poison pill. |
Reincorporation Provisions: Proposals to change a company’s domicile will be evaluated on a case-by-case basis.
Right to Adjourn: Vote for the right to adjourn in conjunction with a vote for a merger or acquisition or other proposal, and vote against the right to adjourn in conjunction with a vote against a merger or acquisition or other proposal.
Spin-offs: Votes on spin-offs will be considered on a case-by-case basis depending on relevant factors including but not necessarily limited to the tax and regulatory advantages, planned use of sale proceeds, market focus, and managerial incentives.
Tender Offer Defenses: Proposals concerning tender offer defenses will be evaluated on a case-by-case basis.
G. | Shareholder Rights |
Loomis Sayles believes that issuers have a fundamental obligation to protect the rights of their shareholders. Pursuant to its fiduciary duty to vote shares in the best interests of its clients, Loomis Sayles considers proposals relating to shareholder rights based on whether and how they affect and protect those rights.
Appraisal Rights: Vote for proposals to restore, or provide shareholders with, rights of appraisal.
Loomis, Sayles & Company, L.P. March 2022 All Rights Reserved | C-124 |
Proxy Voting Policies and Procedures
Bundled Proposals: Review on a case-by-case basis bundled or “conditioned” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals.
Confidential Voting: Vote for shareholder proposals that request corporations to adopt confidential voting, use independent tabulators and use independent inspectors of election as long as the proposals include clauses for proxy contests as follows: in the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents do not agree, the confidential voting policy is waived. Vote for management proposals to adopt confidential voting.
Counting Abstentions: Votes on proposals regarding counting abstentions when calculating vote proposal outcomes will be considered on a case-by-case basis.
Cumulative Voting: Vote for proposals to permit cumulative voting, except where the issuer already has in place a policy of majority voting.
Equal Access: Vote for shareholder proposals that would allow significant company shareholders equal access to management’s proxy material in order to evaluate and propose voting recommendations on proxy proposals and director nominees, and in order to nominate their own candidates to the board.
Exclusive Forum Provisions: Vote against proposals mandating an exclusive forum for any shareholder lawsuits. Vote against the members of the issuer’s Governance Committee in the event of a proposal mandating an exclusive forum without shareholder approval.
Independent Proxy: Vote for proposals to elect an independent proxy to serve as a voting proxy at shareholder meetings.
Majority Voting: Vote for proposals to permit majority rather than plurality or cumulative voting for the election of directors/trustees.
Preemptive Rights: Votes with respect to preemptive rights generally will be voted as recommended by the Proxy Voting Service subject to the Common Stock Authorization requirements above.
Proxy Access: A recommendation of the Proxy Voting Service will generally be followed with regard to proposals intended to grant shareholders the right to place nominees for director on the issuer’s proxy ballot (“Proxy Access”). Vote for such proposals when they require the nominating shareholder(s) to hold, in aggregate, at least 3% of the voting shares of the issuer for at least three years, and be allowed to nominate up to 25% of the nominees. All other proposals relating to Proxy Access will be reviewed on a case-by-case basis.
Shareholder Ability to Alter the Size of the Board:
A. | Vote for proposals that seek to fix the size of the board. |
B. | Vote against proposals that give management the ability to alter the size of the board without shareholder approval. |
Loomis, Sayles & Company, L.P. March 2022 All Rights Reserved | C-125 |
Proxy Voting Policies and Procedures
Shareholder Ability to Remove Directors:
A. | Vote against proposals that provide that directors may be removed only for cause. |
B. | Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies. |
C. | Vote for proposals to restore shareholder ability to remove directors with or without cause and proposals that permit shareholders to elect directors to fill board vacancies. |
Shareholder Advisory Committees: Proposals to establish a shareholder advisory committee will be reviewed on a case-by-case basis.
Shareholder Rights Regarding Special Meetings:
A. | Vote for proposals that set a threshold of 10% of the outstanding voting stock as a minimum percentage allowable to call a special meeting of shareholders. Vote against proposals that increase or decrease the threshold from 10%. |
B. | Vote against proposals to restrict or prohibit shareholder ability to call special meetings. |
Supermajority Shareholder Voting Requirements: Vote for all proposals to replace supermajority shareholder voting requirements with simple majority shareholder voting requirements, subject to applicable laws and regulations. Vote against management proposals to require a supermajority shareholder vote to approve charter and bylaw amendments.
Unequal Voting Rights:
A. | Vote against dual class exchange offers and dual class recapitalizations. |
B. | Vote on a case-by-case basis on proposals to eliminate an existing dual class voting structure. |
Written Consent: Vote for proposals regarding the right to act by written consent when the Proxy Voting Service recommends a vote for the proposal. Proposals regarding the right to act by written consent where the Proxy Voting Service recommends a vote against will be sent to the Proxy Committee for determination. Generally vote against proposals to restrict or prohibit shareholder ability to take action by written consent.
H. | Environmental and Social Matters |
Loomis Sayles has a fiduciary duty to act in the best interests of its clients.
Loomis Sayles believes good corporate governance, including those practices that address ESG Matters, is essential to the effective management of a company’s financial, litigation and reputation risk, the maximization of its long-term economic performance and sustainability, and the protection of its shareholders’ best interests, including the maximization of shareholder value.
Loomis, Sayles & Company, L.P. March 2022 All Rights Reserved | C-126 |
Proxy Voting Policies and Procedures
Proposals on environmental and social matters cover a wide range of issues, including environmental and energy practices and their impacts, labor matters, diversity and human rights. These proposals may be voted as recommended by the Proxy Voting Service or may, in the determination of the Proxy Committee, be reviewed on a case-by-case basis if the Proxy Committee believes that a particular proposal (i) could have a material impact on an industry or the growth and sustainability of an issuer; (ii) is appropriate for the issuer and the cost to implement would not be excessive; (iii) is appropriate for the issuer in light of various factors such as reputational damage or litigation risk; or (iv) is otherwise appropriate for the issuer.
Loomis Sayles will consider whether such proposals are likely to enhance the value of the client’s investments after taking into account the costs involved, pursuant to its fiduciary duty to its clients.
Climate Reporting: Generally vote for proposals requesting the issuer produce a report, at reasonable expense, on the issuer’s climate policies. A recommendation against such proposals by the Proxy Voting Service will be considered by the Proxy Committee.
Workplace Diversity Reporting: Generally vote for proposals requesting the issuer produce a report, at reasonable expense, on the issuer’s workforce diversity or equity policies and/or performance. A recommendation against such proposals by the Proxy Voting Service will be considered by the Proxy Committee.
I. | General Corporate Governance |
Loomis Sayles has a fiduciary duty to its clients with regard to proxy voting matters, including routine proposals that do not present controversial issues. The impact of proxy proposals on its clients’ rights as shareholders must be evaluated along with their potential economic benefits.
Changing Corporate Name: Vote for management proposals to change the corporate name.
Charitable and Political Contributions and Lobbying Expenditures: Votes on proposals regarding charitable contributions, political contributions, and lobbying expenditures, should be considered on a case-by-case basis. Proposals of UK issuers concerning political contributions will be voted for if the issuer states that (a) it does not intend to make any political donations or incur any expenditures in respect to any political party in the EU; and (b) the proposal is submitted to ensure that the issuer does not inadvertently breach the Political Parties, Elections and Referendums Act 2000 and sections 366 and 367 of the Companies Act 2006.
Delivery of Electronic Proxy Materials: Vote for proposals to allow electronic delivery of proxy materials to shareholders.
Disclosure of Prior Government Service: Review on a case-by-case basis all proposals to disclose a list of employees previously employed in a governmental capacity.
Financial Statements: Generally, proposals to accept and/or approve the delivery of audited financial statements shall be voted as recommended by the Proxy Voting Service. In certain non-US jurisdictions where local regulations and/or market practices do not require the release of audited financial statements in advance of custodian vote deadlines (e.g., Korea), and the Proxy Voting Service has not identified any issues with the company’s past financial statements or the audit procedures used, then Loomis Sayles shall vote for such proposals.
Loomis, Sayles & Company, L.P. March 2022 All Rights Reserved | C-127 |
Proxy Voting Policies and Procedures
Non-Material Miscellaneous Bookkeeping Proposals: A recommendation of the Proxy Voting Service will generally be followed regarding miscellaneous bookkeeping proposals of a non-material nature.
Ratification of Board and/or Management Acts: Generally, proposals concerning the ratification or approval of the acts of the board of directors and/or management of the issuer for the past fiscal year shall be voted as recommended by the Proxy Voting Service.
Reimbursement of Proxy Contest Defenses: Generally, proposals concerning all proxy contest defense cost reimbursements should be evaluated on a case-by-case basis.
Reimbursement of Proxy Solicitation Expenses: Proposals to provide reimbursement for dissidents waging a proxy contest should be evaluated on a case-by-case basis.
State Takeover Statutes: Review on a case-by-case basis proposals to opt in or out of state takeover statutes (including control share acquisition statutes, control share cash-out statutes, freeze out provisions, fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, anti-greenmail provisions, and disgorgement provisions).
Technical Amendments to By-Laws: A recommendation of the Proxy Voting Service will generally be followed regarding technical or housekeeping amendments to by-laws or articles designed to bring the by-laws or articles into line with current regulations and/or laws.
Transaction of Other Business: Vote against proposals asking for authority to transact open-ended other business without any information provided by the issuer at the time of voting.
Transition Manager Ballots: Any ballot received by Loomis Sayles for a security that was held for a client by a Transition Manager prior to Loomis Sayles’ management of the client’s holdings will be considered on a case-by case basis by the Proxy Committee (without the input of any Loomis Sayles analyst or portfolio manager) if such security is no longer held in the client’s account with Loomis Sayles.
J. | Investment Company Matters |
Election of Investment Company Trustees: Vote for nominees who oversee fewer than 60 investment company portfolios. Vote against nominees who oversee 60 or more investment company portfolios that invest in substantially different asset classes (e.g., if the applicable portfolios include both fixed income funds and equity funds). Vote on a case-by-case basis for or against nominees who oversee 60 or more investment company portfolios that invest in substantially similar asset classes (e.g., if the applicable portfolios include only fixed income funds or only equity funds). These policies will be followed with respect to funds advised by Loomis Sayles and its affiliates, as well as funds for which Loomis Sayles acts as subadviser and other third parties.
Mutual Fund Distribution Agreements: Votes on mutual fund distribution agreements should be evaluated on a case-by-case basis.
Loomis, Sayles & Company, L.P. March 2022 All Rights Reserved | C-128 |
Proxy Voting Policies and Procedures
Investment Company Fundamental Investment Restrictions: Votes on amendments to an investment company’s fundamental investment restrictions should be evaluated on a case-by-case basis.
Investment Company Investment Advisory Agreements: Votes on investment company investment advisory agreements should be evaluated on a case-by-case basis.
Loomis, Sayles & Company, L.P. March 2022 All Rights Reserved | C-129 |
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(1)(a) | |
(1)(b)(i) | |
(1)(b)(ii) | |
(2) | |
(3) | None. |
(4) | Form of Agreement and Plan of Reorganization and Termination between EQ Advisors Trust, on behalf of EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, Target 2055 Allocation Portfolio and EQ/Core Plus Bond Portfolio, and EQ Premier VIP Trust, on behalf of EQ/Conservative Allocation Portfolio, EQ/Conservative-Plus Allocation Portfolio, EQ/Moderate Allocation Portfolio, EQ/Moderate-Plus Allocation Portfolio, EQ/Aggressive Allocation Portfolio, Target 2015 Allocation Portfolio, Target 2025 Allocation Portfolio, Target 2035 Allocation Portfolio, Target 2045 Allocation Portfolio, Target 2055 Allocation Portfolio and EQ/Core Plus Bond Portfolio. (filed herewith as Appendix A to the Combined Proxy Statement and Prospectus) |
(5) | None, other than provisions contained in Exhibits (1)(a) and (2). |
(6) | Investment Advisory Contracts |
(6)(a)(i) | |
(6)(a)(ii) | |
(6)(a)(iii) | |
(6)(a)(iv) | |
(6)(a)(v) | |
(6)(a)(vi) | |
(6)(a)(vii) | |
(6)(a)(viii) | |
(6)(a)(ix) | |
(6)(a)(x) | |
(6)(a)(xi) | |
(6)(a)(xii) | |
(6)(b)(i) | |
(6)(b)(ii) |
(6)(b)(iii) | |
(6)(b)(iv) | |
(6)(b)(v) | |
(6)(b)(vi) | |
(6)(b)(vii) | |
(6)(c)(i) | |
(6)(c)(ii) | |
(6)(c)(iii) | |
(6)(c)(iv) | |
(6)(d) | |
(7) | Underwriting Contracts |
(7)(a)(i) | |
(7)(a)(ii) | |
(7)(a)(iii) | |
(7)(a)(iv) | |
(7)(a)(v) | |
(7)(a)(vi) | |
(7)(a)(vii) | |
(7)(a)(viii) | |
(7)(a)(ix) | |
(7)(b)(i) | |
(7)(b)(ii) | |
(7)(b)(iii) | |
(7)(b)(iv) |
(7)(b)(v) | |
(7)(b)(vi) | |
(7)(b)(vii) | |
(7)(b)(viii) | |
(7)(b)(ix) | |
(7)(c)(i) | |
(7)(c)(ii) | |
(7)(c)(iii) | |
(7)(c)(iv) | |
(8) | |
(9) | Custodian Agreements |
(9)(a)(i) | |
(9)(a)(ii) | |
(9)(a)(iii) | |
(9)(a)(iv) | |
(9)(a)(v) | |
(9)(a)(vi) | |
(9)(a)(vii) | |
(9)(a)(viii) | |
(9)(a)(ix) | |
(9)(a)(x) | |
(9)(a)(xi) | |
(9)(a)(xii) | |
(9)(a)(xiii) |
(9)(a)(xiv) | |
(9)(a)(xv) | |
(9)(a)(xvi) | |
(9)(a)(xvii) | |
(9)(a)(xviii) | |
(9)(a)(xix) | |
(9)(a)(xx) | |
(9)(a)(xxi) | |
(9)(a)(xxii) | |
(9)(a)(xxiii) | |
(9)(a)(xxiv) | |
(9)(a)(xxv) | |
(9)(a)(xxvi) | |
(9)(a)(xxvii) | |
(9)(a)(xxviii) | |
(9)(a)(xxvix) | |
(9)(a)(xxx) | |
(9)(a)(xxxi) | |
(9)(a)(xxxii) | |
(9)(a)(xxxiii) | |
(9)(a)(xxxiv) | |
(9)(a)(xxxv) | |
(9)(a)(xxxvi) |
(9)(a)(xxxvii) | |
(9)(a)(xxxviii) | |
(9)(a)(xxxix) | |
(9)(a)(xl) | |
(9)(a)(xli) | |
(9)(a)(xlii) | |
(9)(a)(xliii) | |
(9)(a)(xliv) | |
(9)(a)(xlv) | |
(10) | Distribution Plan and Multiple Share Class Plan |
(10)(a)(i) | |
(10)(a)(ii) | |
(10)(a)(iii) | |
(11) | |
(12) | |
(13) | Other Material Contracts |
(13)(a)(i) | |
(13)(a)(ii) | |
(13)(a)(iii) | |
(13)(b)(i) | |
(13)(b)(ii) | |
(13)(b)(iii) | |
(13)(c)(i) | |
(13)(c)(ii) | |
(13)(c)(iii) |
(13)(c)(iv) | |
(13)(c)(v) | |
(13)(c)(vi) | |
(13)(c)(vii) | |
(13)(c)(viii) | |
(13)(c)(ix) | |
(13)(c)(x) | |
(13)(c)(xi) | |
(13)(c)(xii) | |
(13)(c)(xiii) | |
(13)(c)(xiv) | |
(13)(c)(xv) | |
(13)(c)(xvi) | |
(13)(c)(xvii) | |
(13)(c)(xviii) | |
(13)(c)(xix) | |
(13)(c)(xx) | |
(13)(c)(xxi) | |
(13)(c)(xxii) | |
(13)(d)(i) | |
(13)(d)(ii) | |
(13)(d)(iii) | |
(13)(d)(iv) |
(13)(d)(v) | |
(13)(d)(vi) | |
(13)(d)(vii) | |
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(13)(d)(ix) | |
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(13)(d)(xii) | |
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(13)(d)(xiv) | |
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(13)(d)(xvi) | |
(13)(d)(xvii) | |
(13)(d)(xviii) | |
(13)(d)(xix) | |
(13)(d)(xx) | |
(13)(d)(xxi) | |
(13)(d)(xxii) | |
(13)(d)(xxiii) | |
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(13)(e)(iv) |
(13)(e)(v) | |
(13)(e)(vi) | |
(13)(e)(vii) | |
(13)(e)(viii) | |
(14) | |
(15) | Not applicable. |
(16) | |
(17) |
EQ ADVISORS TRUST | |
By: | /s/ Steven M. Joenk |
Name: | Steven M. Joenk |
Title: | Trustee and Chief Executive Officer |
Signature | Title | Date |
/s/ Steven M. Joenk | Trustee and Chief Executive Officer | July 20, 2023 |
Steven M. Joenk | ||
/s/ Gary S. Schpero* | Trustee and Chairman of the Board | July 20, 2023 |
Gary S. Schpero | ||
/s/ Donald E. Foley* | Trustee | July 20, 2023 |
Donald E. Foley | ||
/s/ H. Thomas McMeekin* | Trustee | July 20, 2023 |
H. Thomas McMeekin | ||
/s/ Thomas W. Brock* | Trustee | July 20, 2023 |
Thomas W. Brock | ||
/s/ Mark A. Barnard* | Trustee | July 20, 2023 |
Mark A. Barnard | ||
/s/ Michael Clement* | Trustee | July 20, 2023 |
Michael Clement | ||
/s/ Kathleen Stephansen* | Trustee | July 20, 2023 |
Kathleen Stephansen | ||
/s/ Patricia M. Haverland* | Trustee | July 20, 2023 |
Patricia M. Haverland | ||
/s/ Jeffery S. Perry* | Trustee | July 20, 2023 |
Jeffery S. Perry | ||
/s/ Brian Walsh* | Treasurer and Chief Financial Officer (Chief Accounting Officer) | July 20, 2023 |
Brian Walsh |
* By: | /s/ Steven M. Joenk |
Steven M. Joenk (Attorney-in-Fact) |