COMPASS EMP FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014 (Unaudited)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Compass EMP Funds Trust (the "Trust"), was organized as a Delaware business trust on April 11, 2012. The Trust is registered as an open-end management investment company under the Investment Company Act of 1940, as amended, ("1940 Act"). The Trust currently consists of twenty-one series. These financial statements include five ETF funds in the series (each a "Fund" and collectively, the "Funds"). The Funds are registered as diversified. The Funds’ investment manager is Compass Efficient Model Portfolios, LLC, also known as Compass Advisory Group (the "Manager" or "Compass").
The following Funds commenced operations on July 1, 2014 and their objectives are as follows:
| Compass EMP U.S. 500 Volatility Weighted Index ETF – seeks to match the performance of the CEMP U.S. Large Cap 500 Volatility Weighted Index before fees and expenses. |
| Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF– seeks to match the performance of the CEMP U.S. Large Cap 500 Long/Cash Volatility Weighted Index before fees and expenses. |
Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF – seeks to match the performance of the CEMP U.S. Large Cap High Dividend 100 Long/Cash Volatility Weighted Index before fees and expenses.
The following Funds commenced operations on August 1, 2014 and their objectives are as follows:
| Compass EMP U.S. Discovery 500 Volatility Weighted Index ETF – seeks to match the performance of the CEMP U.S. Small Cap 500 Long/Cash Volatility Weighted Index before fees and expenses. |
The following Funds commenced operations on September 30, 2014 and their objectives are as follows:
Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF – seeks to match the performance of the CEMP International 500 Long/Cash Volatility Weighted Index before fees and expenses.
Shares of the Funds are listed and traded on NASDAQ. The Funds will issue and redeem shares of a Fund (“Shares”) at net asset value ("NAV") only in aggregations of 50,000 Shares (each a "Creation Unit"). The Funds will issue and redeem Creation Units principally in exchange for a basket of securities included in the respective Fund’s underlying Index (the "Deposit Securities"), together with the deposit of a specified cash payment (the "Cash Component"), plus a transaction fee. Shares will trade on the Exchange at market prices that may be below, at, or above NAV. Shares of a Fund may only be purchased or redeemed by certain financial institutions (“Authorized Participants”). An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation or (ii) a DTC participant and, in each case, must have executed a Participant Agreement with the Distributor. Most retail investors do not qualify as Authorized Participants nor have the resources to buy and sell whole Creation Units. Therefore, they are unable to purchase or redeem the shares directly from a Fund. In addition, shares may be issued in advance of receipt of Deposit Securities subject to various conditions, including a requirement to maintain on deposit with the Trust cash equal to up to 105% of the market value of the missing Deposit Securities. In each instance of such cash creations or redemptions, transaction fees may be imposed and may be higher than the transaction fees associated with in-kind creations or redemptions.
Each Fund may issue an unlimited number of shares of beneficial interest, with no par value. Shares of each Fund have equal rights and privileges.
The following is a summary of significant accounting policies consistently followed by the Funds and are in accordance with accounting principles generally accepted in the United States of America ("GAAP").
a) Security Valuation - The net asset values per share of the Funds are determined as of the close of regular trading on the New York Stock Exchange ("NYSE") (normally 4:00 p.m., Eastern Time) on each day when the NYSE is open for trading. Securities for which market quotations are available are valued as follows: (a) each listed security is valued at its closing price obtained from the respective primary exchange on which the security is listed, or, if there were no sales on that day, at its last reported current mean price; (b) each unlisted security is valued at the last current bid price obtained from the NASDAQ System; (c) United States Government and Agency obligations are valued based upon bid quotations from the Federal Reserve Bank for identical or similar obligations; (d) short-term money market instruments (such as certificates of deposit, bankers’ acceptances and commercial paper) are most often valued by bid quotations or by reference to bid quotations of available yields for similar instruments of issuers with similar credit ratings. All these prices are obtained from services, which collect and disseminate such market prices. Bid quotations for short-term money market instruments reported by such a service are the bid quotations reported to it by the major dealers. Short-term securities with remaining maturities of sixty days or less for which market quotations and information pricing services are not readily available are valued either at amortized cost or at original cost plus accrued interest, both of which approximate current value. When approved by the Trustees, certain securities may be valued on the basis of valuations provided by an independent pricing service when such prices the Trustees believe reflect the fair value of such securities. In the absence of an ascertainable market value, or if an event occurs after the close of trading on the domestic or foreign exchange or market on which the security is principally traded (prior to the time the NAV is calculated) that materially affects fair value, assets are valued at their fair value as determined by the Manager using methods and procedures reviewed and approved by the Trustees. Options contracts listed on a securities exchange or board of trade for which market quotations are readily available shall be valued at the last quoted sales price or, in the absence of a sale, at the mean between the current bid and ask prices on the day of valuation.
In accordance with the Trust’s good faith pricing guidelines, the Manager is required to consider all appropriate factors relevant to the value of securities for which it has determined other pricing sources are not available or reliable. No single standard for determining fair value exists, since fair value depends upon the circumstances of each individual case. As a general principle, the current fair value of securities being valued by the Manager would appear to be the amount which the owner might reasonably expect to receive for them upon their current sale. Methods which are in accord with this principle may, for example, be based on (i) a multiple of earnings; (ii) a discount from market of a similar freely traded security (including a derivative security or a basket of securities traded on other markets, exchanges or among dealers); or (iii) yield to maturity with respect to debt issues, or a combination of these and other methods.
Trading in securities on Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business on each business day in New York (i.e., a day on which the NYSE is open). In addition, Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York. Furthermore, trading takes place in Japanese markets on certain Saturdays in various foreign markets on days, which are not business days in New York, and on which a Fund's net asset value is not calculated. Each Fund calculates net asset value per share, and therefore effects sales, redemptions and repurchases of its shares, as of the close of regular trading on the NYSE once on each day on which the NYSE is open. Such calculation may not take place contemporaneously with the determination of the prices of the majority of the portfolio securities used in such calculation. Futures are valued at the settlement price established each day by the board of exchange on which they are traded. The daily settlement prices for financial futures are provided by an independent source. On days when there is excessive volume or market volatility, the settlement price may not be available at the time at which a Fund calculates its NAV. On such days, the best available price (which is typically the last sales price) may be used to value the Fund’s futures position, in which case the Fund will not consider any difference between the eventual settlement price and the best available price used to be a basis for determining that an incorrect NAV calculation has occurred.
Other securities and assets for which market quotations are not readily available or for which valuation cannot be provided are valued as determined in good faith in accordance with procedures approved by the Board of Trustees of the Trust.
In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Funds disclose fair value of their investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Accordingly, the fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under GAAP are described below:
Level 1 - quoted prices in active markets for identical securities
Level 2 - other significant observable inputs (including quoted prices for similar securities and identical securities in inactive markets, interest rates, amortized cost, credit risk, etc.)
Level 3 - significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the valuation inputs, representing 100% of the Funds’ investments, used to value the Funds’ assets and liabilities as of December 31, 2014:
Compass EMP U.S. 500 Volatility Weighted Index ETF
| | | | | |
| Assets | Level 1 | Level 2 | Level 3 | Total |
| Common Stocks * | $ 7,205,542 | $ - | $ - | 7,205,542 |
| Closed End Fund | 22,861 | - | - | 22,861 |
| Money Market Fund | 66,916 | - | - | 66,916 |
| Total | $ 7,295,319 | $ - | $ - | $ 7,295,319 |
| Other Financial Instruments^ | | | | |
| Futures | $1,645 | - | - | $1,645 |
Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF
| | | | | |
| Assets | Level 1 | Level 2 | Level 3 | Total |
| Common Stocks * | $54,029,741 | $ - | $ - | $ 54,029,741 |
| Closed End Fund | 171,515 | - | - | 171,515 |
| Money Market Fund | 365,303 | - | - | 365,303 |
| Total | $ 54,566,559 | $ - | $ - | $ 54,566,559 |
| Other Financial Instruments^ | | | | |
| Futures | $3,465 | - | - | $3,465 |
Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF
| | | | | |
| Assets | Level 1 | Level 2 | Level 3 | Total |
| Common Stock s* | $ 52,159,835 | $ - | $ - | $ 52,159,835 |
| Closed End Funds | 697,060 | - | - | 697,060 |
| Money Market Funds | 234,928 | - | - | 234,928 |
| Total | $ 53,091,823 | $ - | $ - | $ 53,091,823 |
| Other Financial Instruments^ | | | | |
| Futures | $2,020 | - | - | $2,020 |
Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Index ETF
| | | | | |
| Assets | Level 1 | Level 2 | Level 3 | Total |
| Common Stocks * | $ 13,026,324 | $ - | $ - | $ 13,026,324 |
| Closed End Funds | 104,890 | - | - | 104,890 |
| Money Market Funds | 152,550 | - | - | 152,550 |
| Total | $ 13,283,764 | $ - | $ - | $ 13,283764 |
| Other Financial Instruments^ | | | | |
| Futures | $2,216 | - | - | $2,216 |
Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF
| | | | | |
| Assets | Level 1 | Level 2 | Level 3 | Total |
| Common Stocks * | $ 6,692,609 | $ - | $ - | $6,692,609 |
| Rights * | - | - | 118 | 118 |
| Money Market Funds | 164,544 | - | - | 164,544 |
| Total | $ 6,857,153 | $ - | $ 118 | $ 6,857,271 |
| Other Financial Instruments^ | | | | |
| Futures | ($2,898) | - | - | ($2,898) |
*Please refer to the Schedules of Investments for industry classifications.
^ Other Financial instruments are derivative instruments not reflected in the Schedule of Investments, such as futures. These instruments are reflected at the unrealized appreciation (depreciation) on the instrument.
There were no transfers into or out of Level 1, 2, or 3 during the current period presented. It is the Funds’ policy to record transfers into or out of Fair Value Levels at the end of the period.
b) Financial Futures Contracts – Each Fund may invest in futures contracts to hedge or manage risks associated with the Funds’ securities investments or to gain exposure to certain asset classes or markets. As required by the 1940 Act, the Funds may purchase or sell futures contracts only if the Funds’ liabilities for the futures position are “covered” by an offsetting position in a futures contract or by the Funds segregating liquid assets equal to the Funds’ liabilities on the futures contract. Upon entering into a financial futures contract, a Fund is required to pledge to the broker an amount of cash, U.S. government securities or other assets, equal to a certain percentage of the contract amount (initial margin deposit). Subsequent payments, known as "variation margin," are made or received by the Funds on a daily basis. The Funds record an unrealized gain or loss by marking each futures contract to market on a daily basis. A realized gain or loss is recorded when the contract is closed. Should market conditions move unexpectedly, the Funds may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates and the underlying assets. Futures contracts may have off-balance sheet risk. Off-balance sheet risk exists when the maximum potential loss on a particular financial instrument is greater than the value of such financial instrument, as reflected in the Statements of Assets and Liabilities.
Positions in futures contracts may be closed out only on an exchange that provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close a futures position. In the event of adverse price movements, the Funds may be required to make cash payments to maintain their required margin. In such situations, if the Funds had insufficient cash, they might have to sell portfolio securities to meet margin requirements at a time when it would be disadvantageous to do so. In addition, the Funds might be required to make delivery of the underlying instruments of futures contracts they hold. The inability to close positions in futures could also have an adverse impact on the Funds’ ability to hedge or manage risks effectively.
Successful use of futures by the Funds is also subject to the Manager’s ability to predict movements correctly in the direction of the market. There is typically an imperfect correlation between movements in the price of the future and movements in the price of the assets that are the subject of the hedge. In addition, the price of futures may not correlate perfectly with movement in the cash market due to certain market distortions. Due to the possibility of price distortion in the futures market and because of the imperfect correlation between the movements in the cash market and movements in the price of futures, a correct forecast of general market trends or interest rate movements by the Manager may still not result in a successful hedging transaction over a short time frame.
The trading of futures contracts is also subject to the risk of trading halts, suspension, exchange or clearing house equipment failures, government intervention, insolvency of a commodities or brokerage firm or clearing house or other disruption of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments.
The Funds will purchase or sell futures contracts in accordance with the Commodity Futures Trading Commission (“CFTC”) regulations.
GAAP requires disclosures about the Funds’ derivative and hedging activities, including how such activities are accounted for and their effect on the Funds’ financial position, performance and cash flows.
Derivatives Disclosure -
Fair Values of Derivative Instruments in the Funds* as of December 31, 2014:
| Compass EMP U.S. 500 Volatility Weighted Index ETF | |
| | Asset Derivatives | | Liability Derivatives | |
| | Balance Sheet Location | | Value | | Balance Sheet Location | | Value | |
| Equity Contracts – Futures* | Unrealized appreciation on futures contracts | | $ | -- | | Unrealized appreciation on futures contracts | | $ | 1,645 | |
| Total | | | $ | -- | | | | $ | 1,645 | |
*Includes cumulative appreciation/depreciation as reported on Schedule of Investments. | |
Amount of Realized Gain on Derivatives Recognized in Income | | | Change in Unrealized Appreciation on Derivatives Recognized in Income | |
| | | Futures Contracts | | | | | Futures Contracts | |
| Equity Contracts | | $ | 7,734 | | | Equity Contracts | | $ | 1,645 | |
| Total | | $ | 7,734 | | | Total | | $ | 1,645 | |
| | | | | | | | | | | |
| Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF | |
| | Asset Derivatives | | Liability Derivatives | |
| | Balance Sheet Location | | Value | | Balance Sheet Location | | Value | |
| Equity Contracts – Futures* | Unrealized appreciation on futures contracts | | $ | -- | | Unrealized appreciation on futures contracts | | $ | 3,465 | |
| Total | | | $ | -- | | | | $ | 3,465 | |
*Includes cumulative appreciation/depreciation as reported on Schedule of Investments. | |
Amount of Realized Gain on Derivatives Recognized in Income | | | Change in Unrealized Appreciation on Derivatives Recognized in Income | |
| | | Futures Contracts | | | | | Futures Contracts | |
| Equity Contracts | | $ | 11,123 | | | Equity Contracts | | $ | 3,465 | |
| Total | | $ | 11,123 | | | Total | | $ | 3,465 | |
| Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF | |
| | Asset Derivatives | | Liability Derivatives | |
| | Balance Sheet Location | | Value | | Balance Sheet Location | | Value | |
| Equity Contracts – Futures* | Unrealized appreciation on futures contracts | | $ | -- | | Unrealized appreciation on futures contracts | | $ | 2,020 | |
| Total | | | $ | -- | | | | $ | 2,020 | |
*Includes cumulative appreciation/depreciation as reported on Schedule of Investments. | |
Amount of Realized Gain on Derivatives Recognized in Income | | | Change in Unrealized Appreciation on Derivatives Recognized in Income | |
| | | Futures Contracts | | | | | Futures Contracts | |
| Equity Contracts | | $ | 9,362 | | | Equity Contracts | | $ | 2,020 | |
| Total | | $ | 9,362 | | | Total | | $ | 2,020 | |
| Compass EMP U.S. Discovery 500 Enhanced VolatilityWeighted Index ETF | |
| | Asset Derivatives | | Liability Derivatives | |
| | Balance Sheet Location | | Value | | Balance Sheet Location | | Value | |
| Equity Contracts – Futures* | Unrealized appreciation on futures contracts | | $ | -- | | Unrealized appreciation on futures contracts | | $ | 2,216 | |
| Total | | | $ | -- | | | | $ | 2,216 | |
*Includes cumulative appreciation/depreciation as reported on Schedule of Investments. | |
Amount of Realized Gain on Derivatives Recognized in Income | | | Change in Unrealized Appreciation on Derivatives Recognized in Income | |
| | | Futures Contracts | | | | | Futures Contracts | |
| Equity Contracts | | $ | 16,048 | | | Equity Contracts | | $ | 2,216 | |
| Total | | $ | 16,048 | | | Total | | $ | 2,216 | |
| Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF | |
| | Asset Derivatives | | Liability Derivatives | |
| | Balance Sheet Location | | Value | | Balance Sheet Location | | Value | |
| Equity Contracts – Futures* | Unrealized depreciation on futures contracts | | $ | -- | | Unrealized depreciation on futures contracts | | $ | (2,898) | |
| Total | | | $ | -- | | | | $ | (2,898) | |
*Includes cumulative appreciation/depreciation as reported on Schedule of Investments. | |
Amount of Realized Gain on Derivatives Recognized in Income | | | Change in Unrealized Depreciation on Derivatives Recognized in Income | |
| | | Futures Contracts | | | | | Futures Contracts | |
| Equity Contracts | | $ | 3,606 | | | Equity Contracts | | $ | (2,898) | |
| Total | | $ | 3.606 | | | Total | | $ | (2,898) | |
| Offsetting of Financial Assets and Derivatives Assets | | | | |
| | | | | | | |
| The Funds are subject to various Master Netting Arrangements, which govern the terms of certain transactions with select counterparties. The Master Netting Arrangements allow the Funds to close out and net total exposure to a counterparty in the event of a default with respect to all the transactions governed under a single agreement with a counterparty. The Master Netting Arrangements also specify collateral posting arrangements at pre-arranged exposure levels. Under the Master Netting Arrangements, collateral is routinely transferred if the total net exposure to certain transactions (net of existing collateral already in place) governed under the relevant Master Netting Arrangement with a counterparty in a given account exceeds a specified threshold depending on the counterparty and the type of Master Netting Arrangement. |
| | | | | | | |
| The table below, as of December 31, 2014, discloses both gross information and net information about instruments and transactions eligible for offset in the Statements of Assets and Liabilities’ and instruments and transactions that are subject to an agreement similar to a master netting agreement as well as amounts related to collateral held at clearing brokers and counterparties. |
| Compass EMP U.S. 500 Volatility Weighted Index | | | | |
| Assets | | | | Gross Amounts not offset in the Statement of Assets and Liabilities | |
| | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Assets and Liabilities | Net Amounts Presented in the Statement of Assets and Liabilities | Financial Instruments | Collateral Received | Net Amount |
| Description / Counterparty | | | | | |
| Futures | | | | | | |
| Collins & Company LLC | $1,645 | $- | $ 1,645 | $ - | $ - | $1,645 |
| | | | | | | |
| Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF | | | | |
| Assets | | | | Gross Amounts not offset in the Statement of Assets and Liabilities | |
| | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Assets and Liabilities | Net Amounts Presented in the Statement of Assets and Liabilities | Financial Instruments | Collateral Received | Net Amount |
| Description / Counterparty | | | | | |
| Futures | | | | | | |
| Collins & Company LLC | $3,465 | $ - | $ 3,465 | $ - | $ - | $3,465 |
| | | | | | | |
| Compass EMP U.S. EQ Income 100 Enhanced Volatilty Weighted Index ETF | | | |
| Assets | | | | Gross Amounts not offset in the Statement of Assets and Liabilities | |
| | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Assets and Liabilities | Net Amounts Presented in the Statement of Assets and Liabilities | Financial Instruments | Collateral Received | Net Amount |
| Description / Counterparty | | | | | |
| Futures | | | | | | |
| Collins & Company LLC | $2,020 | $ - | $ 2,020 | $ - | $ - | $ 2,020 |
| | | | | | | |
| Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Index ETF | | | |
| Assets | | | | Gross Amounts not offset in the Statement of Assets and Liabilities | |
| | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Assets and Liabilities | Net Amounts Presented in the Statement of Assets and Liabilities | Financial Instruments | Collateral Received | Net Amount |
| Description / Counterparty | | | | | |
| Futures | | | | | | |
| Collins & Company LLC | $ 2,216 | $- | $ 2,216 | $ - | $ - | $ 2,216 |
| | | | | | | |
| Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF | | | |
| Liabilities | | | | Gross Amounts not offset in the Statement of Assets and Liabilities | |
| | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Statement of Assets and Liabilities | Net Amounts Presented in the Statement of Assets and Liabilities | Financial Instruments | Collateral Pledged | Net Amount |
| Description / Counterparty | | | | | |
| Futures | | | | | | |
| Collins & Company LLC | $ 2,898 | $ - | $ 2,898 | $(2,898) | $ - | $ - |
| | | | | | | |
| | | | | | | |
| In some instances, the collateral amounts disclosed in the tables were adjusted due to the requirement to limit the collateral amounts to avoid the effect of overcollateralization. Actual collateral received/pledged may be more than the amounts disclosed herein. |
c) Federal Income Tax - The Funds comply with the requirements of subchapter M of the Internal Revenue Code of 1986, as amended, necessary to qualify as regulated investment companies and distribute substantially all net taxable investment income and net realized gains to shareholders in a manner which results in no tax cost to the Funds. Therefore, no federal income tax provision is required. As of and during the period ended December 31, 2014, the Funds did not have any tax positions that did not meet the “more-likely-than-not” threshold of being sustained by the applicable tax authority. As of and during the period ended December 31, 2014, the Funds did not have liabilities for any unrecognized tax benefits. The Funds recognized interest and penalties, if any, related to unrecognized tax benefits on uncertain tax positions as income tax expense in the Statements of Operations. During the period ended December 31, 2014, the Funds did not incur any interest or penalties. The Funds are subject to examination by U.S. taxing authorities for the tax periods since each Fund’s commencement of operations.
d) Distribution to Shareholders - Distributions to shareholders, which are determined in accordance with income tax regulations and may differ from GAAP, are recorded on the ex-dividend date.
e) Other - Investment and shareholder transactions are recorded on trade date. The Funds determine the gain or loss realized from the investment transactions by comparing the original cost of the security lot sold with the net sales proceeds. Dividend income is recognized on the ex-dividend date or as soon as information is available to the Funds and interest income is recognized on an accrual basis. Discounts and premiums on debt securities are accreted or amortized over their respective lives using the effective interest method. The Funds do not isolate the portion of the results of operations for realized gain and losses resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Unrealized gains and losses resulting from changes in foreign exchange rates on investments are not isolated from changes in the valuation of securities
f) Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
g) Commitments and Contingencies - In the normal course of business, the Trust may enter into contracts that contain a variety of representations and warranties and provide general indemnifications. The Funds’ maximum exposure under these arrangements is dependent on future claims that may be made against the Funds and, therefore, cannot be estimated; however, management considers the risk of loss from such claims to be remote.
h) Subsequent Events - Subsequent events after the date of the Statement of Assets and Liabilities have been evaluated through the date the financial statements were issued. Management has concluded that there is no impact requiring adjustment or disclosure in the financial statements other than the following:
On November 26, 2014, Compass entered into a definitive agreement with Victory Capital Management Inc. (“Victory”) to sell certain assets and certain liabilities of Compass to Victory (the “Acquisition”). As a result of the Acquisition, Victory will acquire substantially all of the assets of Compass that relate to its provision of investment management or investment advisory services to the Funds, including the books and records relating to the Funds and the investment performance of the portfolio management team of the Funds. The closing of the Acquisition is expected to occur in the first half of 2015 or as soon as practical thereafter (the “Closing”), provided all of the conditions to the Closing are met. The Acquisition will cause the investment advisory agreement between Compass and the Trust, on behalf of the Funds to automatically terminate as required by law. On January 29, 2015, the Board met to consider the approval of a new investment advisory agreement (the “New Advisory Agreement”) between the Trust, on behalf of the Funds, and Victory. The New Advisory Agreement is substantially similar in all material respects to the current advisory agreement with Compass. The effective date of the New Advisory Agreement with respect to the Funds will be the later of the date shareholders of the Funds approve the New Advisory Agreement, or upon the closing of the Acquisition.
i) Recent Accounting Pronouncement - In June 2014, the Financial Accounting Standard Board issued ASU No. 2014-11 “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU No. 2014-11 makes limited changes to the accounting for repurchase agreements, clarifies when repurchase agreements and securities lending transactions should be accounted for as secured borrowings, and requires additional disclosures regarding these types of transactions. The guidance is effective for fiscal years beginning on or after December 15, 2014, and for interim periods within those fiscal years. Management is currently evaluating the impact these changes will have on the Funds’ financial statement disclosures.
| (2) INVESTMENT TRANSACTIONS |
For the period ended December 31, 2014, aggregate purchases and proceeds from sales of investment securities (excluding short-term investments and in-kind transactions) for the Funds were as follows:
| | | | | | |
| Fund | | Purchases | | Sales |
| Compass EMP U.S. 500 Volatility Weighted Index ETF | | $ 300,851 | | $ 445,391 |
| Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF | | 6,602,969 | | 1,998,291 |
| Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF | | 4,860,596 | | 1,042,739 |
| Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Index ETF | | 1,767,522 | | 561,263 |
| Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF | | 7,835 | | 15,212 |
For the period ended December 31, 2014, in-kind transactions associated with creations and redemptions for the Funds were as follows:
| | | | | | |
| Fund | | Purchases | | Sales |
| Compass EMP U.S. 500 Volatility Weighted Index ETF | | $ 7,803,783 | | $ 732,184 |
| Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF | | 52,299,029 | | 4,650,359 |
| Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF | | 50,934,836 | | 3,998,348 |
| Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Index ETF | | 12,327,269 | | 1,206,403 |
| Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF | | 6,782,938 | | 0 |
(3) MANAGEMENT AGREEMENT AND OTHER RELATED PARTY TRANSACTIONS
Compass acts as investment manager for the Funds pursuant to the terms of the Management Agreement (the "Management Agreement"). Under the terms of the Management Agreement, the Manager manages the investment operations of the Funds in accordance with the Funds’ investment policies and restrictions. The Manager provides the Funds with investment advice and supervision and furnishes an investment program for the Funds. For its investment management services, the Funds pay to the Manager, as of the last day of each month, an annualized fee equal to 0.50% of average net assets of the U.S. 500 Volatility Weighted Index ETF, 0.60% of average net assets of the of the U.S. Enhanced Volatility Weighted Index ETF, U.S. Discovery 500 Enhanced Volatility Weighted Index ETF, and U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF, and 0.70% of the of average net assets of the Developed 500 Enhanced Volatility Weighted Index ETF, with such fees to be computed daily based upon daily average net assets of the Funds. The Manager pays expenses incurred by it in connection with acting as investment manager to the Funds other than costs (including taxes and brokerage commissions, borrowing costs, costs of investing in underlying funds and extraordinary expenses, if any) of securities purchased for the Funds and certain other expenses paid by the Funds (as detailed in the Management Agreement). The Manager pays for all employees, office space and facilities required by it to provide services under the Management Agreement, with the exception of specific items of expense (as detailed in the Management Agreement). For the period ended December 31, 2014, management fees incurred by the Funds as well as amounts due to or from the Manager at December 31, 2014 were as follows:
| | | | | |
| Fund | | Management Fees | | Due To/(From) Manager at December 31, 2014 |
| Compass EMP U.S. 500 Volatility Weighted Index ETF | | $ 16,768 | | ($7,394) |
| Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF | | 95,087 | | 19,598 |
| Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF | | 78,884 | | 20,016 |
| Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Index ETF | | 21,910 | | (1,801) |
| Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF | | 6,399 | | (8,659) |
The Manager and the Funds have entered into an Expense Limitation Agreement under which the Manager has contractually agreed to waive fees and/or reimburse expenses but only to the extent necessary to maintain total annual operating expenses (exclusive of any taxes, interest, brokerage commissions, acquired fund fees and expenses, 12b-1 distribution and/or servicing fees and extraordinary expenses, such as litigation or reorganization costs, but inclusive of organizational costs and offering costs) at 0.58% of average net assets of the U.S. 500 Volatility Weighted Index ETF, 0.68% of average net assets of the of the U.S. Enhanced Volatility Weighted Index ETF, U.S. Discovery 500 Enhanced Volatility Weighted Index ETF, and U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF, and 0.78% of the of average net assets of the Developed 500 Enhanced Volatility Weighted Index ETF, through October 31, 2015. Each waiver or reimbursement by the Manager is subject to repayment by the Funds within the three fiscal years following the fiscal year in which that particular expense is incurred, if the Funds are able to make the repayment without exceeding the expense limitation in effect at that time and the repayment is approved by the Board of Trustees.
For the period ended December 31, 2014, the Manager waived management fees and reimbursed expenses as follows:
Fund | | Management Fees Waived / Expense Reimbursed | |
| Compass EMP U.S. 500 Volatility Weighted Index ETF | | ( $ 62,066) | |
| Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF | | (50,065) | |
| Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF | | (44,704) | |
| Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Index ETF | | (42,343) | |
| Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF | | (33,043) | |
As of December 31, 2014, the Manager may recapture a portion of the waived and/or reimbursed amounts no later than the dates as stated below:
| Fund | | June 30, 2017 |
| Compass EMP U.S. 500 Volatility Weighted Index ETF | | $ 62,066 |
| Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF | | 50,065 |
| Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF | | 44,704 |
| Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Index ETF | | 42,343 |
| Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF | | 33,043 |
