STATEMENT OF ADDITIONAL INFORMATION, DATED NOVEMBER 4, 2022
For the Reorganization of the Stance Equity ESG Large Cap Core ETF,
a Series of The RBB Fund, Inc.
Into
the Hennessy Stance ESG Large Cap ETF,
a Series of Hennessy Funds Trust
_________________________________________
This Statement of Additional Information is not a prospectus and should be read in conjunction with the current Proxy Statement/Prospectus dated November 4, 2022, relating to the Special Meeting of Shareholders of the Stance Equity ESG Large Cap Core ETF (the “Target ETF”), a series of The RBB Fund, Inc. (“RBB”), to be held on December 5, 2022, at the offices of RBB at 615 East Michigan Street, Milwaukee, Wisconsin 53202. The purpose of the meeting is to seek shareholder approval of an Agreement and Plan of Reorganization under which the Target ETF would be reorganized into the Hennessy Stance ESG Large Cap ETF (the “Acquiring ETF”), a series of Hennessy Funds Trust. Pursuant to the Agreement and Plan of Reorganization, all of the assets of the Target ETF will be transferred to the Acquiring ETF, in exchange for shares of the Acquiring ETF, which will be distributed pro rata by the Target ETF to its shareholders and the Acquiring ETF will continue the business and assume the Target ETF’s liabilities (other than the excluded liabilities, as defined in the Agreement and Plan of Reorganization)
Shares of the Target ETF are listed on NYSE Arca, Inc. under the ticker symbol STNC. Shares of the Acquiring ETF will be listed on NYSE Arca, Inc.; however, because the Acquiring ETF will commence operations on or after the date of this Statement of Additional Information, it does not yet have a ticker symbol.
Copies of the Proxy Statement/Prospectus, which has been filed with the Securities and Exchange Commission, may be obtained, without charge, by writing to RBB at 615 East Michigan Street, Milwaukee, Wisconsin 53202, by calling the Target ETF at 1-609-731-6256, or over the Internet at www.rbbfund.com.
TABLE OF CONTENTS
INTRODUCTION | 2 |
INCORPORATION BY REFERENCE
| 2 |
| ADDITIONAL INFORMATION ABOUT THE TARGET ETF | 2 |
| ACQUIRING FUND HISTORY AND CLASSIFICATION | 3 |
| 6 |
| EXCHANGE LISTING AND TRADING | 7 |
| INVESTMENT CONSIDERATIONS | 8 |
| TRUSTEES AND OFFICERS | 16 |
| OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS | 23 |
| MANAGEMENT OF THE ACQUIRING ETF | 23 |
| PORTFOLIO TRANSACTIONS | 30 |
| DISCLOSURE OF PORTFOLIO HOLDINGS | 31 |
| PURCHASE AND REDEMPTION OF CREATION UNITS | 33 |
| ABANDONED PROPERTY | 42 |
| VALUATION OF SHARES | 42 |
| CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS | 43 |
ANTI-MONEY LAUNDERING PROGRAM
| 51 |
| OTHER INFORMATION | 52 |
INTRODUCTION
This Statement of Additional Information (this “SAI”) is intended to supplement the information provided in the Proxy Statement/Prospectus dated November 4, 2022 (the “Proxy Statement/Prospectus”), relating to the proposed reorganization (the “Reorganization”) of the Stance Equity ESG Large Cap Core ETF (the “Target ETF”), a series of The RBB Fund, Inc. (“RBB”), into the Hennessy Stance ESG Large Cap ETF (the “Acquiring ETF”), a series of Hennessy Funds Trust. The Proxy Statement/Prospectus has been sent to the shareholders of the Target ETF in connection with the solicitation of proxies to be voted at the special meeting of stockholders of the Target ETF to be held on December 5, 2022.
INCORPORATION BY REFERENCE
The following documents have been filed with the Securities and Exchange Commission (the “SEC”) and are incorporated by reference into this SAI, which means that they are legally considered to be a part of this SAI:
ADDITIONAL INFORMATION ABOUT THE TARGET ETF
ABOUT THE TARGET ETF AND FUND HISTORY
For information about the Target ETF generally and its history, see the Target ETF’s SAI. For information about the Target ETF’s form of organization, see “Fund History” in the Target ETF’s SAI.
DESCRIPTION OF THE TARGET ETF AND ITS INVESTMENTS AND RISKS
For information about the classification, investment objective, investment strategies, investment policies, investment risks, investment restrictions, and portfolio turnover of the Target ETF, see “Investment Policies and Practices,” “Investment Restrictions,” and “Portfolio Holdings Information” in the Target ETF’s SAI.
MANAGEMENT OF THE TARGET ETF
For information regarding the management of the Target ETF, including its share ownership, see “Management of the Company,” “Code of Ethics,” and “Proxy Voting Procedures” in the Target ETF’s SAI.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
For information regarding ownership of shares of the Target ETF, see “Principal Holders” in the Target ETF’s SAI.
INVESTMENT ADVISORY AND OTHER SERVICES AND PORTFOLIO MANAGERS
For information about investment advisory, including portfolio management, and other services with respect to the Target ETF, see “Investment Advisory Agreements,” “Portfolio Managers,” “Underwriter,” and “General Information” in the Target ETF’s SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
For information regarding brokerage allocation practices of the Target ETF, see “Portfolio Transactions and Brokerage” in the Target ETF’s SAI.
CAPITAL STOCK AND OTHER SECURITIES
For information regarding voting rights and other aspects of shares of the Target ETF, see “Additional Information Concerning Company Shares” and “Dividends, Distributions, and Taxes” in the Target ETF’s SAI.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
For information about share purchase, redemption, and pricing of shares of the Target ETF, see “Purchase and Redemption of Creation Units” and “Determination of Net Asset Value” in the Target ETF’s SAI.
TAXATION OF THE TARGET ETF
For information regarding tax matters with respect to the Target ETF, see “Dividends, Distributions, and Taxes” in the Target ETF’s SAI.
UNDERWRITERS
For information regarding the terms of the Target ETF’s distribution arrangement and related matters, see “Underwriter” and “Payments to Financial Intermediaries” in the Target ETF’s SAI.
FINANCIAL STATEMENTS OF THE TARGET ETF
For information regarding the financial statements of the Target ETF, see “Financial Statements” in the Target ETF’s SAI and the Target ETF’s
Annual Report.
ACQUIRING FUND HISTORY AND CLASSIFICATION
Hennessy Funds Trust, a Delaware statutory trust organized on September 17, 1992, is an open‑end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). Hennessy Funds Trust consists of 16 series, exclusive of the
Acquiring ETF, of shares of beneficial interest, having no par value. The series described in this SAI is the Acquiring ETF.
The following funds are also series of Hennessy Funds Trust (together, with the Acquiring ETF, the “Hennessy Funds”):
DOMESTIC EQUITY
| • | Hennessy Cornerstone Growth Fund (the “Cornerstone Growth Fund”) |
| • | Hennessy Focus Fund (the “Focus Fund”) |
| • | Hennessy Cornerstone Mid Cap 30 Fund (the “Cornerstone Mid Cap 30 Fund”) |
| • | Hennessy Cornerstone Large Growth Fund (the “Cornerstone Large Growth Fund”) |
| • | Hennessy Cornerstone Value Fund (the “Cornerstone Value Fund”) |
MULTI‑ASSET
| • | Hennessy Total Return Fund (the “Total Return Fund”) |
| • | Hennessy Equity and Income Fund (the “Equity and Income Fund”) |
| • | Hennessy Balanced Fund (the “Balanced Fund”) |
SECTOR & SPECIALTY
| • | Hennessy Energy Transition Fund (the “Energy Transition Fund”) |
| • | Hennessy Midstream Fund (the “Midstream Fund”) |
| • | Hennessy Gas Utility Fund (the “Gas Utility Fund”) |
| • | Hennessy Small Cap Financial Fund (the “Small Cap Financial Fund”) |
| • | Hennessy Large Cap Financial Fund (the “Large Cap Financial Fund”) |
| • | Hennessy Technology Fund (the “Technology Fund”) |
| • | Hennessy Japan Fund (the “Japan Fund”) |
| • | Hennessy Japan Small Cap Fund (the “Japan Small Cap Fund”). |
Information about the other 16 series of Hennessy Funds Trust is contained in a separate Statement of Additional Information.
The Acquiring ETF will be the accounting and performance information successor to the Target ETF pursuant to the Reorganization. The Target ETF is managed by Red Gate Advisers, LLC (“Red Gate”) and has the same investment objective and investment strategies as the Acquiring ETF. In connection with the Reorganization, shareholders of the Target ETF will receive shares of the Acquiring ETF. Hennessy Advisors, Inc. (“Hennessy Advisors”) has retained Stance Capital, LLC (the “Stance Capital”) and Vident Investment Advisory, LLC (“Vident Investment,” and together with Stance Capital, the “Sub-Advisors”) to serve as sub-advisors to the Acquiring ETF and manage the portfolio of the Acquiring ETF. Stance Capital and Vident Investment also serve as sub-advisors to the Target ETF.
The Acquiring ETF has a diversified portfolio. The Acquiring ETF is an actively-managed exchange-traded fund (“ETF”) that seeks long-term capital appreciation. The Acquiring ETF operates pursuant to an exemptive order from the Securities and Exchange Commission (“SEC”)
issued to the Target ETF on February 26, 2021 (“Order”). In many respects, the Acquiring ETF operates similarly to traditional ETFs. The Acquiring ETF issues and redeems shares on a continuous basis at its net asset value per share (“NAV”) in aggregations of a specified number of shares called “Creation Units.” Creation Units generally are issued in exchange for portfolio securities and an amount of cash. The Acquiring ETF’s shares are listed and traded on NYSE Arca, Inc. (the “Exchange”). Shares of the Acquiring ETF trade in the secondary market at market prices that may differ from the NAV of the Acquiring ETF’s shares. Shares of the Acquiring ETF are not individually redeemable, but are redeemable only in Creation Unit aggregations, also in exchange for portfolio securities and an amount of cash. Shareholders who are not Authorized Participants (as defined herein), therefore, will not be able to purchase or redeem shares directly with or from the Acquiring ETF. Instead, most shareholders who are not Authorized Participants will buy and sell shares in the secondary market through a broker.
The Acquiring ETF also has some novel features that differentiate it from traditional ETFs. Unlike traditional ETFs that publish their portfolio holdings on a daily basis, the Acquiring ETF does not publicly disclose the composition of its portfolio each business day, which may affect the price at which shares of the Acquiring ETF trade in the secondary market. Instead, the Acquiring ETF publishes each business day on its website a portfolio transparency substitute - the “Portfolio Reference Basket” – which is designed to closely track the daily performance of the Acquiring ETF but is not the Acquiring ETF’s actual portfolio (“Actual Portfolio”). The Portfolio Reference Basket is comprised of all of the names of the securities in the Actual Portfolio, and only the securities that are in the Actual Portfolio (unless cash is specified). The Portfolio Reference Basket will have a minimum weightings overlap of 90% with the Actual Portfolio at the beginning of each trading day. The Acquiring ETF also publishes each business day on its website the “Guardrail Amount,” which is the maximum deviation between the weightings of the specific securities in the Portfolio Reference Basket and the weightings of those specific securities in the Actual Portfolio, as well as between the weighting of the respective cash positions. The Guardrail Amount is designed to help investors evaluate the risk of tracking error, which is the difference in the performance of the Portfolio Reference Basket from the performance of the Actual Portfolio. Hennessy Advisors, on behalf of the Acquiring ETF, will enter into a license agreement with Blue Tractor Group, LLC in order to operate the Acquiring ETF under the Portfolio Reference Basket structure.
Under the terms of the Order, the Acquiring ETF’s investments are limited to the following: ETFs, exchange-traded notes, exchange-traded common stocks, exchange-traded preferred stocks, exchange-traded American Depositary Receipts (“ADRs”), exchange-traded real estate investment trusts, exchange-traded commodity pools, exchange-traded metals trusts, exchange-traded currency trusts and exchange-traded futures, in each case that are traded on a U.S. securities exchange; common stocks listed on a foreign exchange that trade on such exchange contemporaneously with the Acquiring ETF’s shares; exchange-traded futures that are traded on a U.S. futures exchange contemporaneously with the Acquiring ETF’s shares; and cash and cash equivalents (which are short-term U.S. Treasury securities, government money market funds, and repurchase agreements). The Acquiring ETF will not purchase any securities that are illiquid investments (as defined in Rule 22e-4(a)(8) of the 1940 Act) at the time of purchase. In addition, pursuant to the Order, the Acquiring ETF will not borrow for investment purposes, hold short positions, or invest in “penny stocks” (as defined in Rule 3a51-1 under the Securities Exchange Act of 1934 (“Exchange Act”)).
The Portfolio Reference Basket also generally constitutes the names and quantities of instruments to be exchanged with the Acquiring ETF for both purchases and redemptions of the Acquiring ETF’s shares.
The publication of the Portfolio Reference Basket is not the same level of transparency as the publication of the full portfolio by a fully transparent active ETF, and could cause the Acquiring ETF’s shares to have wider spreads and larger premiums/discounts than would be seen for a fully transparent active ETF using the same investment strategies. Given that this structure is unlike traditional active ETFs, Hennessy Advisors will monitor on an on-going basis how the Acquiring ETF’s shares trade, including the level of any market price premium or discount to NAV and the bid/ask spreads on market transactions. For at least the first three years after the reorganization of the Acquiring ETF, Hennessy Advisors will promptly call a meeting of the Board of the Trustees of Hennessy Funds Trust (the “Hennessy Funds’ Board of Trustees” or the “Hennessy Board”) (and will present to the Hennessy Funds’ Board of Trustees for its consideration, recommendations for appropriate remedial measures), and the Hennessy Board will promptly meet, if the tracking error (relative to the Actual Portfolio) exceeds 1%, or if, for 30 or more days in any quarter or 15 days in a row, the absolute difference between either the closing price or the mid-point of the highest bid and lowest offer at the time of calculation of the NAV (the “Bid/Ask Price”), on one hand, and NAV, on the other, exceeds 2.00% or the bid/ask spread exceeds 2.00%. In such a circumstance, the Hennessy Board will consider the continuing viability of the Acquiring ETF, whether shareholders are being harmed, and what, if any, action would be appropriate to among other things, narrow the premium/discount or spread, or tracking error, as applicable. The Hennessy Board will then decide whether to take any such action. Potential actions may include, but are not limited to, changing lead market makers, listing the Acquiring ETF on a different exchange, changing the size of Creation Units, changing the Acquiring ETF’s investment objective or strategies, and liquidating the Acquiring ETF.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES. The investment restrictions set forth below are fundamental policies of the Acquiring ETF that cannot be changed without the approval of the holders of the lesser of (i) 67% or more of the Acquiring ETF’s shares present or represented at a meeting of shareholders at which holders of more than 50% of the outstanding shares of the Acquiring ETF are present or represented or (ii) more than 50% of the outstanding shares of the Acquiring ETF. Notwithstanding the investment restrictions provided below, the Acquiring ETF’s investments and operations will be limited by the terms and conditions of the Order. There are no material differences between the fundamental policies of the Acquiring ETF and those of the Target ETF.
1. Senior Securities. The Acquiring ETF may issue senior securities to the extent permitted by the 1940 Act.
2. Borrowing. The Acquiring ETF may borrow money to the extent permitted by the 1940 Act.
3. Underwriting. Except to the extent the Acquiring ETF may be deemed to be an underwriter under the Securities Act of 1933, as amended (the “1933 Act”), when selling portfolio securities or selling its own shares, the Fund may not act as an underwriter.
4. Industry Concentration. The Acquiring ETF may not make an investment in any one industry if such investment would cause the aggregate value of the Acquiring ETF’s investment in such industry to equal or exceed 25% of the Acquiring ETF’s net assets. This policy does not apply to U.S. Treasury securities, which are obligations issued or guaranteed by the U.S. government, and U.S. government agency and instrumentality obligations (collectively with U.S. Treasury securities, “U.S. Government Securities”), certificates of deposit, and bankers’ acceptances.
5. Issuer Concentration. The Acquiring ETF may not purchase the securities of any one issuer (except U.S. Government Securities), if as a result, at the time of purchase, more than 5% of the Acquiring ETF’s total assets would be invested in such issuer or the Fund would own or hold 10% or more of the outstanding voting securities of that issuer, except that up to 25% of the value of the Acquiring ETF’s total assets may be invested without regard to this restriction.
6. Real Estate. The Acquiring ETF may not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (although the Fund may invest in securities or other instruments secured by real estate or securities of companies engaged in the real estate business).
7. Commodities. The Acquiring ETF may not buy or sell commodities and may not purchase or sell commodity contracts, but this does not prevent the Acquiring ETF from purchasing or selling options and futures contracts or from investing in securities or other instruments backed by physical commodities.
8. Loans. The Acquiring ETF may not make loans. This limitation does not apply to (i) securities lending, (ii) repurchase agreements to the extent the entry into a repurchase agreement is deemed to be a loan, and (iii) the purchase of debt securities or other debt instruments.
OTHER INVESTMENT RESTRICTIONS. The following investment restrictions and operating policies of the Acquiring ETF may be changed by the Hennessy Funds’ Board of Trustees without shareholder approval:
1. Illiquid Securities. The Acquiring ETF may not invest in illiquid securities if at the time of acquisition more than 15% of the Acquiring ETF’s net assets would be invested in such securities. Illiquid securities are securities that the Acquiring ETF reasonably expects cannot be sold, disposed of, or reversed in seven calendar days or less under current market conditions without such sale, disposition, or reversal significantly changing the market value of the investment. If the Acquiring ETF exceeds the limitation on illiquid securities other than by a change in market values, the Acquiring ETF must report the condition to the Hennessy Funds’ Board of Trustees and, when required by Rule 22e-4 of the 1940 Act, to the SEC.
Securities that may be resold in accordance with Rule 144A under the 1933 Act (“Rule 144A”), securities offered pursuant to Section 4(2) of the 1933 Act, and securities otherwise subject to restrictions on resale under the 1933 Act are not deemed illiquid solely by reason of being unregistered. Hennessy Advisors determines the liquidity of a particular security based on the trading markets for the specific security and other factors.
EXCHANGE LISTING AND TRADING
Shares of the Acquiring ETF are listed for trading and trade throughout the day on the Exchange.
There can be no assurance that the Acquiring ETF will continue to meet the requirements of the Exchange necessary to maintain the listing of its shares. The Exchange may, but is not required to, remove the Acquiring ETF’s shares from listing if, among other things (i) following the initial 12-month period beginning upon the commencement of trading of the Acquiring ETF, there are fewer than 50 beneficial owners of the Acquiring ETF’s shares; (ii) either the Portfolio Reference Basket or the holdings of the Acquiring ETF’s portfolio are not made available to all market participants at the same time; (iii) the Acquiring ETF has failed to file any filings required by the SEC or the Exchange is aware that the Acquiring ETF is not in compliance with the conditions of any exemptive order or no-action relief granted by the SEC or its staff under the 1940 Act with respect to the Acquiring ETF; (iv) the Exchange’s ongoing listing requirements are not continuously maintained; (v) any of the continuous listing representations for the issue of the shares of the Acquiring ETF are not continuously met; or (vi) such other event shall occur or condition exists that, in the opinion of the Exchange, makes further dealings on the exchange inadvisable. The Exchange will remove the Acquiring ETF’s shares from listing and trading upon termination of the Acquiring ETF.
Hennessy Funds Trust reserves the right to adjust the price levels of the Acquiring ETF’s shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of the Acquiring ETF.
As in the case of other stocks traded on the Exchange, broker’s commissions on transactions will be based on negotiated commission rates at customary levels.
Unlike other actively managed ETFs that publish their portfolio holdings on a daily basis, the Acquiring ETF does not publicly disclose the composition of its portfolio each business day, which may affect the price at which shares of the Acquiring ETF trade in the secondary market. Given the differences between the Acquiring ETF and ETFs that disclose their complete holdings daily, there is a risk that market prices of the Acquiring ETF may vary significantly from NAV, and that the Acquiring ETF’s shares may trade at a wider bid/ask spread – and therefore cost investors more to trade – than shares of traditional ETFs. These risks are heightened during periods of market disruption or volatility. In addition, although the Acquiring ETF seeks to benefit from keeping its portfolio information secret, market participants may attempt to use the Portfolio Reference Basket to identify the Acquiring ETF’s trading strategy. If successful, this could result in such market participants engaging in certain predatory trading practices that may have the potential to harm the Acquiring ETF and its shareholders, such as front running the Acquiring ETF’s trades of portfolio securities.
INVESTMENT CONSIDERATIONS
The Acquiring ETF’s Prospectus describes the principal investment strategies and risks of the Acquiring ETF. This section expands on that discussion and also describes non-principal investment strategies and risks of the Acquiring ETF. With respect to the Acquiring ETF’s investments, unless otherwise noted, if a percentage limitation on investment is adhered to at the time of investment or contract, a subsequent increase or decrease as a result of market movement or redemption will not result in a violation of such investment limitation.
COSTS OF BUYING OR SELLING SHARES RISK. Investors buying or selling shares of the Acquiring ETF in the secondary market will pay brokerage commissions or other charges imposed by brokers, as determined by that broker. Brokerage commissions are often a fixed amount and may be a significant proportional cost for investors seeking to buy or sell relatively small amounts of the Acquiring ETF’s shares. In addition, secondary market investors will also incur the cost of the difference between the price at which an investor is willing to buy the Acquiring ETF’s shares (the “bid” price) and the price at which an investor is willing to sell the Acquiring ETF’s shares (the “ask” price). This difference in bid and ask prices is often referred to as the “spread” or “bid/ask spread.” The bid/ask spread varies over time for shares based on trading volume and market liquidity, and is generally lower if shares have more trading volume and market liquidity and higher if shares have little trading volume and market liquidity. Further, a relatively small investor base in the Acquiring ETF, asset swings in the Acquiring ETF, or increased market volatility may cause increased bid/ask spreads. Due to the costs of buying or selling shares, including bid/ask spreads, frequent trading of shares may significantly reduce investment results and an investment in shares may not be advisable for investors who anticipate regularly making small investments.
DERIVATIVES. The Acquiring ETF may invest in derivatives. Derivatives include instruments and contracts that are based on, and are valued in relation to, one or more underlying securities, financial benchmarks, or indices, such as futures, options, swap agreements, and forward contracts. Derivatives typically have economic leverage inherent in their terms. Such leverage will magnify any losses. Derivatives can be highly volatile, illiquid, and difficult to value, and changes in the value of such instruments held directly or indirectly by the Acquiring ETF may not correlate with the underlying instrument or reference assets, or the Acquiring ETF’s other investments. Although the value of derivatives depend largely upon price movements in the underlying instrument or reference asset, there are additional risks associated with derivatives that are possibly greater than the risks associated with investing directly in the underlying instruments or reference assets, including illiquidity risk, leveraging risk. and counterparty credit risk. A small position in derivatives could have a potentially large impact on the Acquiring ETF’s performance. Trading restrictions or limitations may be imposed by an exchange, and government regulations may restrict trading in derivatives.
EXCLUSION FROM COMMODITY POOL OPERATOR DEFINITION. Hennessy Advisors has claimed an exclusion from the definition of “commodity pool operator” (“CPO”) with respect to the Acquiring ETF under the Commodity Exchange Act (“CEA”) and the rules of the Commodity Futures Trading Commission, a U.S. government agency (the “CFTC”). As a result, Hennessy Advisors is not subject to CFTC registration or regulation as a CPO with respect to the Acquiring ETF. Hennessy Advisors also relies on a related exclusion from the definition of “commodity trading advisor” under the CEA and the rules of the CFTC with respect to the Acquiring ETF.
The terms of the CPO exclusion require the Acquiring ETF, among other things, to adhere to certain limits on its investments in “commodity interests”. Commodity interests include commodity futures, commodity options, and swaps, which in turn include non-deliverable currency forward contracts. Because Hennessy Advisors and the Acquiring ETF intend to comply with the terms of the CPO exclusion, in the future the Acquiring ETF may need to adjust its investment strategies, consistent with its investment goal, to limit its investments in these types of instruments. The Acquiring ETF is not intended as a vehicle for trading in commodity futures, commodity options, or swaps markets. The CFTC has neither reviewed nor approved Hennessy Advisors’ or the Acquiring ETF’s reliance on these exclusions, the Acquiring ETF’s investment strategies, or this SAI.
Generally, the exclusion from CPO regulation on which Hennessy Advisors relies requires the Acquiring ETF to meet one of the following tests for its commodity interest positions, other than positions entered into for bona fide hedging purposes (as defined in the rules of the CFTC): (i) the aggregate initial margin and premiums required to establish the Acquiring ETF’s positions in commodity interests may not exceed 5% of the liquidation value of the Acquiring ETF’s portfolio (after taking into account unrealized profits and unrealized losses on any such positions); or (ii) the aggregate net notional value of the Acquiring ETF’s commodity interest positions, determined at the time the most recent such position was established, may not exceed 100% of the liquidation value of the Acquiring ETF’s portfolio (after taking into account unrealized profits and unrealized losses on any such positions). In addition to meeting one of these trading limitations, the Acquiring ETF may not be marketed as a commodity pool or otherwise as a vehicle for trading in the commodity futures, commodity options, or swaps markets. If, in the future, the Acquiring ETF can no longer satisfy these requirements, Hennessy Advisors may need to withdraw its notice claiming an exclusion from the definition of a CPO. If Hennessy Advisors were required to do that and could not find another exemption, then Hennessy Advisors would be subject to registration and regulation as a CPO with respect to the Acquiring ETF in accordance with CFTC rules that apply to CPOs of registered investment companies. Generally, these rules allow for substituted compliance with CFTC disclosure and shareholder reporting requirements based on Hennessy Advisors’ compliance with comparable SEC requirements. However, in the event Hennessy Advisors had to register as a CPO, the Acquiring ETF might incur additional compliance and other expenses as a result of CFTC regulations governing commodity pools and CPOs.
GLOBAL EVENTS. A rise in protectionist trade policies, slowing global economic growth, risks associated with pandemic and epidemic diseases, the risk of trade disputes, and the possibility of changes to some international trade agreements could affect the economies of many nations, including the United States, in ways that cannot be foreseen at the present time and may negatively impact the markets in which the Acquiring ETF invests. As global systems, economies and financial markets are increasingly interconnected, events that once had only local impact are now more likely to have regional or even global effects. Events that occur in one country, region or financial market will, more frequently, adversely impact issuers in other countries, regions, or markets. These impacts can be exacerbated by failures of governments and societies to adequately respond to an emerging event or threat. Investors will be negatively impacted if the value of their portfolio holdings decreases as a result of such events, if these events adversely impact the operations and effectiveness of Hennessy Advisors or the Sub-Advisors, as applicable, or key service providers or if these events disrupt systems and processes necessary or beneficial to the management of accounts. These events may negatively impact broad segments of businesses and populations and could have a significant and rapid negative impact on the performance of the Acquiring ETF’s
investments, increase the Acquiring ETF’s volatility, or exacerbate pre‑existing risks to the Acquiring ETF.
ILLIQUID AND RESTRICTED SECURITIES. Illiquid securities are those securities that the Acquiring ETF reasonably expects cannot be sold, disposed of, or reversed in seven calendar days or less under current market conditions without such sale, disposition, or reversal significantly changing the market value of the investment. In determining the liquidity of the Acquiring ETF’s investments, Hennessy Advisors may consider various factors, including (i) the frequency of trades and quotations, (ii) the number of dealers and prospective purchasers in the marketplace, (iii) dealer undertakings to make a market, (iv) the nature of the security (including any demand or tender features), and (v) the nature of the marketplace for trades (including the ability to assign or offset the Acquiring ETF’s rights and obligations relating to the investment).
Restricted securities may be sold only in privately negotiated transactions or in public offerings with respect to which a registration statement is in effect under the 1933 Act. Where registration is required, the Acquiring ETF may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Acquiring ETF may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Acquiring ETF might obtain a less favorable price than prevailed when it decided to sell.
A large institutional market has developed for certain securities that are not registered under the 1933 Act, including securities sold in private placements, repurchase agreements, commercial paper, foreign securities, and corporate bonds and notes. These instruments are often restricted securities because the securities are sold in transactions not requiring registration. Institutional investors generally do not seek to sell these instruments to the general public, but instead often depend either on an efficient institutional market in which such unregistered securities can be readily resold or on an issuer’s ability to honor a demand for repayment. Therefore, the fact that there are contractual or legal restrictions on resale to the general public or certain institutions is not dispositive of the liquidity of such investments.
Rule 144A establishes a safe harbor from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities that might develop as a result of Rule 144A could provide both readily ascertainable values for restricted securities and the ability to liquidate an investment to satisfy share redemption orders. Such markets might include automated systems for the trading, clearance, and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the Financial Industry Regulatory Authority. An insufficient number of qualified buyers interested in purchasing Rule 144A-eligible restricted securities held by the Acquiring ETF, however, could affect adversely the marketability of securities of the Acquiring ETF, and the Acquiring ETF might be unable to dispose of such securities promptly or at favorable prices.
The Hennessy Funds’ Board of Trustees has delegated the function of making day‑to‑day determinations of liquidity to Hennessy Advisors pursuant to guidelines approved by the Hennessy Funds’ Board. Hennessy Advisors takes into account a number of factors in reaching liquidity decisions, including, but not limited to, (i) the frequency of trades for the security, (ii) the number of dealers that make quotes for the security, (iii) the number of dealers that have undertaken to make a
market in the security, (iv) the number of other potential purchasers, and (v) the nature of the security and how trading is effected (e.g., the time needed to sell the security, how bids are solicited, and the mechanics of transfer). Hennessy Advisors monitors the liquidity of restricted securities in the Acquiring ETF and reports periodically on such decisions to the Hennessy Funds’ Board.
The Hennessy Board approved a written liquidity risk management program to assess investment liquidity pursuant to Rule 22e-4 of the 1940 Act and designated a committee comprising four members of Hennessy Advisors’ management team to serve as the administrator of the program. No less than annually, the Hennessy Board must review a written report prepared by the administrator that addresses the operation of the liquidity risk management program and assesses its adequacy and effectiveness. Costs associated with complying with Rule 22e-4 of the 1940 Act could impact the Acquiring ETF’s performance and its ability to achieve its investment objective.
INVESTMENT COMPANY SECURITIES. Investment companies, which are professionally managed portfolios, include other open-end investment companies, closed-end investment companies, unit investment trusts, ETFs, and exchange-traded notes (“ETNs”) which may be organized as either open-end investment companies or unit investment trusts.
As a shareholder of another investment company, the Acquiring ETF would bear, along with other shareholders, its pro rata portion of the investment company’s expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that the Acquiring ETF incurs directly in connection with its own operations. Shareholders would also be exposed to the risks associated not only with the investments of the Acquiring ETF but also with the portfolio investments of the underlying investment companies. Other investment companies may have different investment policies than those of the Acquiring ETF. Under certain circumstances, an open-end investment company in which the Acquiring ETF invests may determine to make payment of a redemption by the Acquiring ETF in whole or in part by a distribution in kind of securities from its portfolio instead of in cash. As a result, the Acquiring ETF may hold such securities until the portfolio managers determine it is appropriate to dispose of them. Such disposition imposes additional costs on the Acquiring ETF. Certain types of investment companies, such as closed-end investment companies, issue a fixed number of shares that typically trade on a stock exchange or over-the-counter at a premium or discount to their NAV. Others are continuously offered at NAV but also may be traded on the secondary market.
Investments in closed-end investment companies are subject to various risks, including (i) reliance on management’s ability to meet the closed-end investment company’s investment objective and to manage the closed-end investment company portfolio, (ii) fluctuation in the NAV of closed-end investment company shares compared to the changes in the value of the underlying securities that the closed-end investment company owns, and (iii) bearing a pro rata share of the management fees and expenses of each underlying closed-end investment company, which results in the Acquiring ETF’s shareholders being subject to higher expenses than if such shareholder invested directly in the closed-end investment company.
ETFs are pooled investment vehicles that commonly seek to track the performance of specific indices. ETFs may be organized as open-end investment companies or as unit investment trusts. Their shares are listed on stock exchanges and can be traded throughout the day at market-
determined prices. The price of ETF shares is based on (but not necessarily identical to) the value of the securities held by the ETF. Accordingly, the level of risk involved in the purchase or sale of ETF shares is similar to the risk involved in the purchase or sale of traditional common stock, with the exception that the pricing mechanism for ETF shares is based on a basket of stocks. Disruptions in the markets for the securities underlying ETF shares purchased or sold by the Acquiring ETF could result in losses on such shares. ETFs are subject to the following risks that do not apply to non‑exchange traded funds: (i) in most cases, ETF shares are not individually redeemable, and therefore the liquidity of ETF shares generally depends on the existence of a secondary trading market; (ii) an ETF’s shares may trade at a market price that is above or below such shares’ NAV; (iii) an active trading market for an ETF’s shares may not develop or be maintained; (iv) an ETF may utilize high leverage ratios; or (v) trading of an ETF’s shares may be halted if the listing exchange’s officials deem such action appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
An investment in an ETN involves risks, including possible loss of principal. ETNs are unsecured debt securities issued by a bank that are linked to the total return of a market index. Risks of investing in ETNs also include limited portfolio diversification, uncertain principal payment, and illiquidity. Additionally, the investor fee reduces the amount of return on maturity or at redemption, and as a result, the investor may receive less than the principal amount at maturity or upon redemption, even if the value of the relevant index has increased.
LEGAL AND REGULATORY CHANGE RISK. The regulatory environment for investment companies is evolving, and changes in regulation may adversely affect the value of the Acquiring ETF’s investments and its ability to pursue its trading strategy. In addition, the securities markets are subject to comprehensive statutes and regulations. The SEC and other regulators and self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies. The effect of any future regulatory change on the Acquiring ETF could be substantial and adverse.
LENDING PORTFOLIO SECURITIES. The Acquiring ETF may lend its portfolio securities to brokers, dealers, and financial institutions in an amount not exceeding 33-1/3% of the value of its total assets. These loans will be secured by collateral (consisting of cash, U.S. Government Securities, or irrevocable letters of credit) maintained in an amount equal to at least 100% of the market value, determined daily, of the loaned securities. The Acquiring ETF may, subject to certain notice requirements, at any time call the loan and obtain the return of the securities loaned. The Acquiring ETF will be entitled to payments equal to the interest and dividends on the loaned securities and may receive a premium for lending the securities. The advantage of such loans is that the Acquiring ETF continues to receive the income on the loaned securities while earning interest on the cash amounts deposited as collateral, which will be invested in short-term investments.
A loan may be terminated by the borrower on one business day’s notice, or by Hennessy Funds Trust on two business days’ notice. If the borrower fails to deliver the loaned securities within four days after receipt of notice, Hennessy Funds Trust may use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost exceeding the collateral. As with any extensions of credit, there are risks of delay in recovery and, in some cases,
even loss of rights in the collateral, should the borrower of the securities fail financially. In addition, securities lending involves a form of leverage, and the Acquiring ETF may incur a loss if securities purchased with the collateral from securities loans decline in value or if the income earned does not cover the Acquiring ETF’s transaction costs. However, loans of securities will be made only to companies the Hennessy Funds’ Board of Trustees deems to be creditworthy (such creditworthiness will be monitored on an ongoing basis) and when the income that can be earned from such loans justifies the attendant risks. Upon termination of the loan, the borrower is required to return the securities. Any gain or loss in the market price during the loan period would inure to the Acquiring ETF.
When voting or consent rights that accompany loaned securities pass to the borrower, Hennessy Funds Trust will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect on the investment in such loaned securities. The Acquiring ETF will pay reasonable finder’s, administrative, and custodial fees in connection with loans of securities. The Acquiring ETF may lend foreign securities consistent with the foregoing requirements.
MARKET AND REGULATORY. Events in the financial markets and economy may cause volatility and uncertainty and affect performance. Such adverse effect on performance could include a decline in the value and liquidity of securities held by the Acquiring ETF, unusually high and unanticipated levels of redemptions, an increase in portfolio turnover, a decrease in NAV, and an increase in the Acquiring ETF’s expenses. It may also be unusually difficult to identify both investment risks and opportunities, in which case investment objective may not be met. Market events may affect a single issuer, industry, sector, or the market as a whole. Traditionally liquid investments may experience periods of diminished liquidity. During a general downturn in the financial markets, multiple asset classes may decline in value and the Acquiring ETF may lose value, regardless of the individual results of the securities and other instruments in which the Acquiring ETF invests. It is impossible to predict whether or for how long such market events may continue, particularly if they are unprecedented, unforeseen, or widespread.
Governmental and regulatory actions, including tax law changes, may also impair portfolio management and have unexpected or adverse consequences on particular markets, strategies, or investments. Policy and legislative changes in the United States and in other countries affect many aspects of financial regulation and may contribute to decreased liquidity and increased volatility in the financial markets. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time. In addition, economies and financial markets throughout the world are increasingly interconnected. As a result, whether or not the Acquiring ETF invests in securities of issuers located in, or with significant exposure to, countries experiencing economic and financial difficulties, the value and liquidity of the Acquiring ETF’s investments may decrease.
PRIVACY AND DATA PROTECTION. The Acquiring ETF is subject to a variety of continuously evolving laws and regulations regarding privacy, data protection, and data security, including laws and regulations governing the collection, storage, handling, use, disclosure, transfer, and security of personal data. In light of recent broad-based cybersecurity attacks, legislators and regulators continue to propose and enact new and more robust privacy‑related laws including, but not limited to, the New York State Department of Financial Services Cybersecurity Requirements
for Financial Services Companies, the California Consumer Privacy Act of 2018, and the California Privacy Rights Act of 2020. Any failure by the Acquiring ETF to comply with its privacy policies or applicable privacy‑related laws could result in legal or regulatory proceedings against the Acquiring ETF by governmental authorities, third‑party vendors, or others, which could adversely affect the Acquiring ETF. The interpretation of existing privacy‑related laws and the various regulators’ approaches to their enforcement continue to evolve over time. The Acquiring ETF faces the risk that these laws may be interpreted and applied in conflicting ways in different jurisdictions or in a manner that is not consistent with the Acquiring ETF’s current privacy policies or that regulators may enact new unclear privacy‑related laws.
REAL ESTATE INVESTMENT TRUSTS. Real estate investment trusts (“REITs”) are pooled investment vehicles that manage a portfolio of real estate or real estate-related loans to earn profits for their shareholders. REITs are generally classified as equity REITs, mortgage REITs, or a combination of equity and mortgage REITs. Investing in REITs involves certain unique risks in addition to the risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, and mortgage REITs may be affected by the quality of the borrower on any credit extended. REITs are dependent on management skills, may not be diversified geographically or by property type, and are subject to heavy cash flow dependency, default by borrowers, and self-liquidation. REITs must also meet certain requirements under the Internal Revenue Code of 1986, as amended (the “Code”), to avoid entity-level tax and be eligible to pass through certain tax attributes of their income to shareholders. REITs are consequently subject to the risk of failing to meet these requirements for favorable tax treatment and of failing to maintain their exemptions from registration under the 1940 Act. REITs are also subject to the risks of changes in the Code that could affect their tax status.
REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value of a REIT’s investment in fixed-rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT’s investment in fixed-rate obligations can be expected to decline. In contrast, as interest rates on adjustable-rate mortgage loans are reset periodically, yields on a REIT’s investments in such loans will gradually align themselves to reflect changes in market interest rates, and as a result, the value of such investments will fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed-rate obligations.
The management of a REIT may be subject to conflicts of interest with respect to the operation of the business of the REIT and may be involved in real estate activities competitive with the REIT. REITs may own properties through joint ventures or in other circumstances in which a REIT may not have control over its investments. REITs may use significant amounts of leverage.
REITs often do not provide complete tax information until after the end of the calendar year. Consequently, because of the delay, it may be necessary for the Acquiring ETF, if invested in REITs, to request permission to extend the deadline for issuance of Forms 1099-DIV. Alternatively, amended Forms 1099-DIV may be sent.
REGULATED INVESTMENT COMPANY COMPLIANCE RISK. The Acquiring ETF intends to elect to be, and intends to qualify each year for treatment as, a RIC under Subchapter M of the Code. To maintain the Acquiring ETF’s qualification for federal income tax treatment as a
RIC, the Acquiring ETF must meet certain source-of-income, asset diversification and annual distribution requirements. If for any taxable year the Acquiring ETF fails to qualify for the special federal income tax treatment afforded to RICs, all of the Acquiring ETF’s taxable income will be subject to federal income tax at regular corporate rates (without any deduction for distributions to its shareholders) and its income available for distribution will be reduced. Under certain circumstances, the Acquiring ETF could cure a failure to qualify as a RIC, but in order to do so, the Acquiring ETF could incur significant fund-level taxes and could be forced to dispose of certain assets.
TEMPORARY INVESTMENTS. During periods of adverse market or economic conditions, the Acquiring ETF may temporarily invest all or a substantial portion of its assets in high-quality, fixed-income securities, money market instruments, and shares of money market mutual funds, or it may hold cash. At such times, the Acquiring ETF would not be pursuing its stated investment objective with its usual investment strategies. The Acquiring ETF may also hold these investments for liquidity purposes. Fixed-income securities will be deemed to be of high quality if they are rated “A” or better by S&P or Moody’s or, if unrated, are determined to be of comparable quality by Hennessy Advisors. Money market instruments are high-quality, short-term fixed-income obligations (which generally have remaining maturities of one year or less) and may include U.S. Government Securities, commercial paper, certificates of deposit and banker’s acceptances issued by domestic branches of U.S. banks that are members of the Federal Deposit Insurance Corporation, and repurchase agreements for U.S. Government Securities. In lieu of purchasing money market instruments, the Acquiring ETF may purchase shares of money market mutual funds that invest primarily in U.S. Government Securities and repurchase agreements involving those securities, subject to certain limitations imposed by the 1940 Act. The Acquiring ETF, as an investor in a money market fund, will indirectly bear that fund’s fees and expenses, which will be in addition to the fees and expenses of the Acquiring ETF. Repurchase agreements involve certain risks not associated with direct investments in debt securities.
TYPES OF EQUITY SECURITIES. In addition to common stock, the equity securities that the Acquiring ETF may purchase include securities having equity characteristics, such as rights. Common stock represents an equity or ownership interest in a company. This interest often gives the Acquiring ETF the right to vote on measures affecting the company’s organization and operations. Equity securities have a history of long-term growth in value, but their prices tend to fluctuate in the shorter term. Rights essentially are options to purchase equity securities at specific prices valid for a specific period of time. Their prices do not necessarily move parallel to the prices of the underlying securities. Rights normally have a short duration and are distributed directly by the issuer to its shareholders. Rights have no voting rights, receive no dividends, and have no rights with respect to the assets of the issuer.
TRUSTEES AND OFFICERS
MANAGEMENT INFORMATION
The business and affairs of the Acquiring ETF are managed under the direction of the Hennessy Funds’ Board of Trustees, and the Hennessy Board elects the officers of Hennessy Funds Trust (“Officers”). From time to time, the Hennessy Board also has appointed advisers to the Hennessy Board (“Advisers”) with the intention of having qualified individuals serve in an advisory capacity to garner experience in the fund and asset management industry and be considered as
potential Trustees in the future. There are currently two Advisers, Brian Alexander and Doug Franklin. As Advisers, Mr. Alexander and Mr. Franklin attend meetings of the Board of Trustees and act as non‑voting participants. Information pertaining to the Trustees, Advisers, and the Officers of Hennessy Funds Trust is set forth below. The Trustees and Officers serve until their successors are duly elected and qualified or until their earlier death, resignation, or removal. Unless otherwise indicated, the address of all persons listed below is 7250 Redwood Boulevard, Suite 200, Novato, CA 94945. Each Trustee oversees each of the 16 series of Hennessy Funds Trust and will oversee the Acquiring ETF.
| Name, Age, and Position Held with the Trust | | Start Date
of Service | | Principal Occupation(s)
During Past Five Years | | Other Directorships Held Outside of Fund Complex During Past Five Years |
Disinterested Trustees(1) and Advisers | | |
J. Dennis DeSousa
86
Trustee | | January 1996 | | Mr. DeSousa is a real estate investor. | | None. |
Robert T. Doyle
75
Trustee | | January 1996 | | Mr. Doyle has been the Sheriff of Marin County, California since 1996. | | None. |
Claire Garvie
48
Trustee | | December 2015 as an Adviser to the Board and December 2021 as a Trustee | | Ms. Garvie is a founder of Kiosk and has served as its Chief Operating Officer since 2004. Kiosk is a full‑service marketing agency with offices in the San Francisco Bay Area, Toronto, and Liverpool, UK. | | None. |
Gerald P. Richardson 76
Trustee | | May 2004 | | Mr. Richardson is an independent consultant in the securities industry. | | None. |
Brian Alexander
41
Adviser to the Board | | March 2015 | | Mr. Alexander has worked for the Sutter Health organization since 2011 in various positions. He has served as the Chief Executive Officer of the Sutter Roseville Medical Center since 2018. From 2016 through 2018, he served as the Vice President of Strategy for the Sutter Health Valley Area, which includes 11 hospitals, 13 ambulatory surgery centers, 16,000 employees, and 1,900 physicians. From 2013 through 2016, Mr. Alexander served as Sutter Novato Community Hospital’s Chief Administrative Officer. | | None. |
| Name, Age, and Position Held with the Trust | | Start Date
of Service | | Principal Occupation(s)
During Past Five Years | | Other Directorships Held Outside of Fund Complex During Past Five Years |
Doug Franklin
58
Adviser to the Board | | March 2016 | | Mr. Franklin is a retired insurance industry executive. From 1987 through 2015, he was employed by the Allianz-Fireman’s Fund Insurance Company in various positions, including as its Chief Actuary and Chief Risk Officer. | | None. |
Interested Trustee (2) | | | | | | |
Neil J. Hennessy (3)
66
Chairman of the Board, Chief Market Strategist, Portfolio Manager, and President | | January 1996 as a Trustee and June 2008 as an Officer | | Mr. Hennessy has been employed by Hennessy Advisors, Inc. since 1989 and currently serves as its Chairman and Chief Executive Officer. | | Hennessy Advisors, Inc. |
| Name, Age, and Position Held with the Trust | | Start Date
of Service | | Principal Occupation(s) During Past Five Years |
| Officers | | | | |
Teresa M. Nilsen
56
Executive Vice President and Treasurer | | January 1996 | | Ms. Nilsen has been employed by Hennessy Advisors, Inc. since 1989 and currently serves as its President, Chief Operating Officer, and Secretary. |
Daniel B. Steadman
66
Executive Vice President and Secretary | | March 2000 | | Mr. Steadman has been employed by Hennessy Advisors, Inc. since 2000 and currently serves as its Executive Vice President. |
Brian Carlson
50
Senior Vice President and Head of Distribution | | December 2013 | | Mr. Carlson has been employed by Hennessy Advisors, Inc. since December 2013 and currently serves as its Chief Compliance Officer and Senior Vice President. |
Jennifer Cheskiewicz (4)
45
Senior Vice President and Chief Compliance Officer | | June 2013 | | Ms. Cheskiewicz has been employed by Hennessy Advisors, Inc. as its General Counsel since June 2013. |
David Ellison (5)
64
Senior Vice President and Portfolio Manager | | October 2012 | | Mr. Ellison has been employed by Hennessy Advisors, Inc. since October 2012. He has served as a Portfolio Manager of the Hennessy Large Cap Financial Fund and the Hennessy Small Cap Financial Fund since their inception. Mr. Ellison also served as a Portfolio Manager of the Hennessy Technology Fund from its inception until February 2017. Mr. Ellison served as Director, CIO, and President of FBR Fund Advisers, Inc. from December 1999 to October 2012. |
Ryan Kelley (6)
49 Chief Investment Officer, Senior Vice President, and Portfolio Manager | | March 2013 | | Mr. Kelley has been employed by Hennessy Advisors, Inc. since October 2012. He has served as Chief Investment Officer of the Hennessy Funds since March 2021 and has served as a Portfolio Manager of the Hennessy Gas Utility Fund, the Hennessy Large Cap Financial Fund, and the Hennessy Small Cap Financial Fund since October 2014. Mr. Kelly served as Co‑Portfolio Manager of these same funds from March 2013 through September 2014 and as a Portfolio Analyst for the Hennessy Funds from October 2012 through February 2013. He has also served as a Portfolio Manager of the Hennessy Cornerstone Growth Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Large Growth Fund, and the Hennessy Cornerstone Value Fund since February 2017 and as a Portfolio Manager of the Hennessy Total Return Fund, the Hennessy Balanced Fund, and the Hennessy Technology Fund since May 2018. He previously served as Co‑Portfolio Manager of the Hennessy Technology Fund from February 2017 until May 2018. Mr. Kelley served as Portfolio Manager of FBR Fund Advisers, Inc. from January 2008 to October 2012. |
L. Joshua Wein (6)
49
Vice President and Portfolio Manager | | September 2018 | | Mr. Wein has been employed by Hennessy Advisors, Inc. since 2018. He has served as Portfolio Manager of the Hennessy Cornerstone Growth Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Large Growth Fund, the Hennessy Cornerstone Value Fund, Hennessy Total Return Fund, the Hennessy Balanced Fund, the Hennessy Gas Utility Fund, and the Hennessy Technology Fund since February 2021, and as the Co-Portfolio Manager of these Funds since February 2019. He served as a Senior Analyst of those same Funds from September 2018 through February 2019. He also has served as a Portfolio Manager of the Hennessy Energy Transition Fund and the Hennessy Midstream Fund since January 2022. Mr. Wein served as Director of Alternative Investments and Co‑Portfolio Manager at Sterling Capital Management from 2008 to 2018. |
_______________
| (1) | The Funds have determined that Mr. DeSousa, Mr. Doyle, Ms. Garvie, and Mr. Richardson are not interested persons, as defined in the 1940 Act, of the Investment Manager or of any predecessor investment for purposes of Section 15(f). |
| (2) | Messrs. DeSousa, Doyle, N. Hennessy, and Richardson previously served on the Board of Directors of Hennessy Mutual Funds, Inc. (“HMFI”), The Hennessy Funds, Inc. (“HFI”), and Hennessy SPARX Funds Trust (“HSFT”). Pursuant to an internal reorganization effective as of February 28, 2014, the series of HFMI, HFI, and HSFT were reorganized into corresponding series of Hennessy Funds Trust that mirrored them. Subsequent to the reorganization, HFMI, HFI, and HSFT were dissolved. |
| (3) | Mr. Neil Hennessy is considered an “interested person,” as defined in the 1940 Act, because he is an officer of the Hennessy Funds. |
| (4) | The address of this officer is 4800 Bee Caves Road, Suite 100, Austin, TX 78746. |
| (5) | The address of this officer is 101 Federal Street, Suite 1900, Boston, MA 02110. |
| (6) | The address of this officer is 1340 Environ Way, Suite 305, Chapel Hill, NC 27517. |
Pursuant to the terms of the Management Agreement (as defined below) with Hennessy Funds Trust, Hennessy Advisors, on behalf of the Acquiring ETF, pays the compensation of all Officers (other than all or a portion of the salaries and benefits of the Acquiring ETF’s compliance officers) and Trustees who are affiliated persons of Hennessy Advisors.
TRUSTEE AND ADVISER QUALIFICATIONS
Neil J. Hennessy has been a Trustee and portfolio manager of the Hennessy Funds for many years. His experience and skills as a portfolio manager, as well as his familiarity with the investment strategies utilized by Hennessy Advisors and with the Cornerstone series of the Hennessy Funds’ portfolios, led to the conclusion that he should serve as a Trustee. J. Dennis DeSousa’s experience as a real estate investor has honed his understanding of financial statements and the issues that confront businesses, and his diligent and thoughtful service as a Trustee for over two decades has provided him with a solid understanding of the mutual fund industry. Serving as a sheriff, Robert T. Doyle has honed his organizational and problem solving skills, making him a valuable resource when addressing issues that confront the Hennessy Funds. Further, Mr. Doyle’s diligent and thoughtful service as a Trustee for over two decades has provided him with a detailed understanding of the mutual fund industry. Claire Garvie is the founder and Chief Operations Officer of Kiosk, an internet marketing and services firm, and brings over 20 years of experience leading successful marketing programs for firms like Sony, Delta Airlines, and many others. Kiosk was founded in 2004 with offices in the San Francisco Bay Area, Toronto, and Liverpool, UK. Her vast experience in digital marketing makes her a valuable addition to the Hennessy Funds’ Board of Trustees. As the chief executive officer of a company, Gerald P. Richardson gained familiarity with financial statements and developed a deep understanding of the demands of operating a business and addressing the issues that confront businesses. Further, Mr. Richardson’s experience in the securities industry as a consultant and his diligent and thoughtful service as a Trustee for over 15 years makes him a valuable resource to the Hennessy Board. Mr. DeSousa, Mr. Doyle, Ms. Garvie, and Mr. Richardson take conservative and thoughtful approaches to addressing issues facing the Hennessy Funds. The combination of skills and attributes discussed above led to the conclusion that Mr. DeSousa, Mr. Doyle, Ms. Garvie, and Mr. Richardson should serve as Trustees.
With over 15 years of experience in the complex healthcare industry, Brian Alexander’s leadership roles in various senior positions within the Sutter Health organization have required significant management, administrative, and customer service expertise, which makes him a valuable resource as an Adviser to the Hennessy Board. Doug Franklin was employed by the Allianz-Fireman’s Fund (FFIC) for 28 years, where he rose through the company to senior leadership, including positions as Chief Actuary and Chief Risk Officer before retiring in 2015. His considerable leadership experience and ability to grasp complex issues makes him a valuable resource as an Adviser to the Hennessy Board.
BOARD LEADERSHIP STRUCTURE
The Hennessy Funds’ Board of Trustees has general oversight responsibility with respect to the operation of the Hennessy Funds. The Hennessy Board has engaged Hennessy Advisors to manage the Hennessy Funds and is responsible for overseeing Hennessy Advisors and other service providers to the Hennessy Funds in accordance with the provisions of the 1940 Act and other
applicable laws. The Hennessy Board has established an Audit Committee to assist the Hennessy Board in performing its oversight responsibilities.
Neil J. Hennessy serves as the Chairman of the Hennessy Board. The Hennessy Funds do not have a lead disinterested Trustee. The small size of the Hennessy Funds’ Board of Trustees, consisting of one interested Trustee and four disinterested Trustees, facilitates open discussion and significant involvement by all of the Trustees without the need for a lead disinterested Trustee. Mr. Hennessy’s in-depth knowledge of the Hennessy Funds and their operations enables him to effectively set board agendas and ensure appropriate processes and relationships are established with both Hennessy Advisors and the Hennessy Board, while the business acumen and many years of experience in the mutual fund industry serving as Trustees of the Hennessy Funds of Messrs. DeSousa, Doyle, and Richardson, enables them to effectively and accurately assess the information being provided to the Hennessy Board to ensure that they are appropriately fulfilling their fiduciary duties to the Hennessy Funds and their shareholders. Ms. Garvie was appointed as a Trustee in December 2021 after serving for six years as an Adviser to the Hennessy Board and gaining valuable experience in the mutual fund and asset management industry. In light of these factors, Hennessy Funds Trust has determined that its leadership structure is appropriate.
BOARD OVERSIGHT OF RISK
The Hennessy Funds’ Board of Trustees performs a risk oversight function for the Hennessy Funds directly through its oversight role and indirectly through the Audit Committee, officers of the Hennessy Funds, and service providers to the Hennessy Funds. To effectively perform its risk oversight function, the Hennessy Board performs the following activities, among other things: (i) receives and reviews reports related to the performance and operations of the Hennessy Funds; (ii) reviews and approves, as applicable, the compliance policies and procedures of the Hennessy Funds; (iii) approves the Hennessy Funds’ principal investment policies; (iv) meets with representatives of various service providers, including Hennessy Advisors and the independent registered public accounting firm of the Hennessy Funds, to review and discuss the activities of the Hennessy Funds and to provide direction with respect thereto; and (v) appoints a chief compliance officer of the Hennessy Funds who oversees the implementation and testing of the Hennessy Funds’ compliance program and reports to the Hennessy Board regarding compliance matters for the Hennessy Funds and their service providers.
The Hennessy Funds have an Audit Committee, which is discussed in greater detail below. The Audit Committee plays a significant role in the risk oversight of the Hennessy Funds as they meet annually with the independent registered public accounting firm of the Hennessy Funds (the “Auditor”) to discuss, among other things, financial risk, including internal controls over financial reporting. From time to time upon request, the Audit Committee will meet with the Acquiring ETF’s chief compliance officer and Fund counsel.
BOARD COMMITTEES
The Audit Committee of the Hennessy Funds’ Board of Trustees comprises Messrs. DeSousa, Doyle (Chair), and Richardson. The primary functions of the Audit Committee are to recommend to the Hennessy Board the independent registered public accounting firm to be retained to perform the annual audit, to review the results of the audit, to review the Acquiring
ETF’s internal controls, and to review certain other matters relating to the Acquiring ETF’s independent registered public accounting firm and financial records. Because the Acquiring ETF will commence operations on or following the date of this SAI, the Audit Committee did not meet during the Acquiring ETF’s most recently completed fiscal year with respect to the Acquiring ETF.
In overseeing the Auditor, the Audit Committee (i) reviews the Auditor’s independence from the Hennessy Funds and management, and from Hennessy Advisors, (ii) reviews periodically the level of fees approved for payment to the Auditor and the pre-approved non-audit services it has provided to the Hennessy Funds to ensure their compatibility with the Auditor’s independence, (iii) reviews the Auditor’s performance, qualifications and quality control procedures, (iv) reviews the scope of and overall plans for the annual audit, (v) reviews the Auditor’s performance, qualifications and quality control procedures, (vi) consults with management and the Auditors with respect to the Hennessy Funds’ processes for risk assessment and risk management, (vii) reviews with management the scope and effectiveness of the Hennessy Funds’ disclosure controls and procedures, including for purposes of evaluating the accuracy and fair presentation of the company’s financial statements in connection with certifications made by the chief executive officer and chief financial officer, and (viii) reviews significant legal developments and the Hennessy Funds’ processes for monitoring compliance with law as it relates to the financial statements and related disclosure.
BOARD AND OTHER INTERESTED PERSONS COMPENSATION
Hennessy Funds Trust pays Trustees who are not interested persons of Hennessy Funds Trust (each, a “Disinterested Trustee”) fees for serving as Trustees. During calendar year 2022, each Disinterested Trustee received a fee of $16,000 and each Adviser received a fee of $5,000 for each meeting of the Hennessy Funds’ Board of Trustees attended, in each case allocated equally across all Hennessy Funds. Hennessy Funds Trust may also reimburse Trustees and Advisers for travel expenses incurred in order to attend meetings of the Hennessy Funds’ Board of Trustees.
The table below sets forth the compensation paid by Hennessy Funds Trust to each Trustee for service as a Trustee, to each Adviser for service as an Adviser, and to each officer or affiliated person who is expected to receive aggregate compensation from the Acquiring ETF exceeding $60,000, in each case for the Acquiring ETF’s fiscal year ended October 31, 2022.
| Name of Person | | Aggregate Compensation from Hennessy Funds Trust | | Pension or Retirement Benefits Accrued as Part of Fund Expenses | | Estimated Annual Benefits upon
Retirement | | Total
Compensation
from Hennessy Funds Trust(1) |
| Disinterested Trustees and Advisers | | | | | | |
| J. Dennis DeSousa | | $ 64,000 | | — | | — | | $ 64,000 |
| Robert T. Doyle | | $ 64,000 | | — | | — | | $ 64,000 |
| Claire Garvie | | $ 64,000 | | — | | — | | $ 64,000 |
| Gerald P. Richardson | | $ 64,000 | | — | | — | | $ 64,000 |
| Name of Person | | Aggregate Compensation from Hennessy Funds Trust | | Pension or Retirement Benefits Accrued as Part of Fund Expenses | | Estimated Annual Benefits upon
Retirement | | Total
Compensation
from Hennessy Funds Trust(1) |
| Brian Alexander | | $ 20,000 | | — | | — | | $ 20,000 |
| Doug Franklin | | $ 20,000 | | — | | — | | $ 20,000 |
| Interested Persons (as defined in the 1940 Act) | | | | | | |
| Neil J. Hennessy | | — | | — | | — | | — |
| Jennifer Cheskiewicz | | $ 287,377(2) | | — | | — | | $ 287,377(2) |
_______________
(1) There are currently sixteen other series comprising Hennessy Funds Trust. (2) This amount includes $254,667 in salary and $32,710 in benefits (health and life insurance premiums and payroll expenses). |
Because Hennessy Advisors, the Sub-Advisors, and Fund Services (as defined below) perform substantially all of the services necessary for the operation of the Acquiring ETF, the Acquiring ETF does not require any employees. Other than the Acquiring ETF’s compliance officer, no officer, director, or employee of Hennessy Advisors, any Sub-Advisor, or Fund Services receives any compensation from the Acquiring ETF for acting as a Trustee or Officer.
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
No person or entity “controls” (within the meaning of the 1940 Act) the Acquiring ETF, as the Acquiring ETF will commence operations on or following the date of this SAI. A person or entity that “controls” the Acquiring ETF could have effective voting control over the Acquiring ETF.
As of the date hereof, no person or entities owned beneficially or of record 5% or more of the outstanding shares of the Acquiring ETF, as the Acquiring ETF will commence operations on or following the date of this SAI.
As of the date hereof, the Officers, Trustees, and Advisers of the Hennessy Funds as a group (13 individuals) owned an aggregate of less than 1% of the outstanding shares of the Acquiring ETF, as the Acquiring ETF will commence operations on or following the date of this SAI.
MANAGEMENT OF THE ACQUIRING ETF
THE INVESTMENT MANAGER
The investment manager of the Acquiring ETF is Hennessy Advisors. Hennessy Advisors acts as the investment manager of the Acquiring ETF pursuant to a management agreement with Hennessy Funds Trust (the “Management Agreement”). Hennessy Advisors furnishes continuous investment advisory services and management to the Acquiring ETF. Hennessy Advisors is controlled by Neil J. Hennessy, who currently owns approximately 26.8% of the outstanding voting securities of Hennessy Advisors.
Under the Management Agreement, Hennessy Advisors is entitled to a unitary management fee, computed daily and paid monthly, at the annual rate of 0.95%. Pursuant to the Management Agreement, Hennessy Advisors is responsible for investment management of the Acquiring ETF’s portfolio, subject to general oversight by the Hennessy Funds’ Board of Trustees, and provides the Acquiring ETF with office space. In addition, Hennessy Advisors is obligated to keep certain books and records of the Acquiring ETF. In connection therewith, Hennessy Advisors furnishes the Acquiring ETF with those ordinary clerical and bookkeeping services that are not being furnished by the Acquiring ETF’s custodian, administrator, or transfer agent.
Under the terms of the Management Agreement, Hennessy Advisors bears all expenses incurred in connection with providing services under the Management Agreement. Additionally, for no compensation, Hennessy Advisors pays all other operating expenses of the Acquiring ETF with the exception of the following: (i) the management fees paid to Hennessy Advisors pursuant to the Management Agreement; (ii) distribution fees and expenses paid by the Acquiring ETF under any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act; (iii) interest expenses; (iv) brokerage expenses, trading expenses and other expenses (such as stamp taxes) in connection with the execution of portfolio transactions or in connection with creation or redemption transactions; (v) compensation paid to the Independent Trustees and fees paid to Independent Trustees’ counsel; (vi) tax expenses and governmental fees; and (vii) extraordinary expenses not incurred in the course of ordinary business.
Under the Management Agreement, Hennessy Advisors is not liable for any error of judgment or mistake of law or for any loss suffered by Hennessy Funds Trust or the Acquiring ETF in connection with the performance of the Management Agreement, except a loss resulting from willful misfeasance, bad faith, or gross negligence on the part of Hennessy Advisors in the performance of its duties or from reckless disregard of its duties and obligations thereunder.
The Management Agreement has an initial term of two years and may be renewed from year to year thereafter so long as such continuance is specifically approved at least annually in accordance with the requirements of the 1940 Act. The Management Agreement provides that it will terminate in the event of its assignment (as defined in the 1940 Act). The Management Agreement may be terminated by Hennessy Funds Trust or by Hennessy Advisors upon 60 days’ prior written notice.
Because the Acquiring ETF will commence operations on or following the date of this SAI, there have been no payments by the Acquiring ETF to Hennessy Advisors for advisory services.
SUB-ADVISORS
Hennessy Advisors has delegated the day-to-day management of the portfolio composition of the Acquiring ETF to the Sub-Advisors and has entered into a sub-advisory agreement with each Sub‑Advisor.
Hennessy Advisors employs the Sub‑Advisors and may terminate them subject to prior approval by the Hennessy Funds’ Board of Trustees. Pursuant to the 1940 Act, employing a new sub‑advisor requires prior approval of the Acquiring ETF’s shareholders. Hennessy Funds Trust may request an SEC order exempting the Acquiring ETF from such requirements, but there can be
no assurance that, if requested, such an order would be granted. Selection and retention criteria for a sub-advisor include the following: (i) historical performance records; (ii) consistent performance in the context of the markets; (iii) organizational stability and reputation; (iv) quality and depth of investment personnel; and (v) ability to apply a consistent approach. Different sub‑advisors may not necessarily exhibit all of the criteria to the same degree. The Sub-Advisors are paid by Hennessy Advisors, not by the Acquiring ETF, and each Sub-Advisor’s activities are subject to general supervision by Hennessy Advisors and the Hennessy Funds’ Board of Trustees. Although Hennessy Advisors and the Hennessy Board do not evaluate the investment merits of Stance Capital’s specific securities selections, they do review the performance of Stance Capital relative to the selection criteria.
STANCE CAPITAL, LLC. Hennessy Advisors has delegated the day-to-day management of the portfolio composition of the Acquiring ETF to Stance Capital and has entered into a sub‑advisory agreement with Stance Capital (the “Sub‑Advisory Agreement”). Stance Capital is a Massachusetts limited liability company located at 131 Dartmouth Street, 3rd Floor, Boston, MA 02116 and is controlled by Bill Davis.
Stance Capital makes the investment decisions for the Acquiring ETF and continuously reviews, supervises, and administers a separate investment program. In consideration thereof, the Investment Manager (not the Acquiring ETF) pays Stance Capital monthly at an annual rate of 0.40% of the Acquiring ETF’s average daily net assets up to $125 million, 0.37% of average daily net assets for assets over $125 million and up to $250 million, and 0.35% for average daily net assets in excess of $250 million.
The Sub-Advisory Agreement provides that Stance Capital shall not be protected against any liability to Hennessy Funds Trust or its shareholders by reason of willful misfeasance, bad faith, or gross negligence on its part in the performance of its duties, or from reckless disregard of its obligations or duties thereunder. The Sub‑Advisory Agreement also provides that Stance Capital is free to render similar services to others and to engage in other activities.
The Sub-Advisory Agreement has an initial term of two years and may be renewed from year to year thereafter so long as such continuance is specifically approved at least annually in accordance with the requirements of the 1940 Act. The Sub-Advisory Agreement provides that it will terminate in the event of its assignment (as defined in the 1940 Act). The Sub-Advisory Agreement may be terminated by the Acquiring ETF, Hennessy Advisors, or Stance Capital upon 60 days’ prior written notice.
VIDENT INVESTMENT ADVISORY, LLC. Hennessy Advisors has entered into a sub‑advisory agreement with Vident Investment (the “Vident Sub‑Advisory Agreement”). Vident Investment is a Delaware limited liability company located at 1125 Sanctuary Parkway, Suite 515, Alpharetta, GA 30009 and is a wholly-owned subsidiary of Vident Financial, LLC. Vident Financial, LLC is a wholly-owned subsidiary of the Vident Investors’ Oversight Trust. Vince L. Birley, Brian Shepler, and Mohammad Baki serve as the trustees of the Vident Investors’ Oversight Trust.
Pursuant to the terms of the Vident Sub-Advisory Agreement, Vident Investment is the sub-advisor responsible for selecting broker-dealers to execute purchase and sale transactions for the
Fund, as instructed Stance Capital, subject to the supervision of Hennessy Advisors and the Hennessy Funds’ Board of Trustees. In consideration thereof, the Investment Manager (not the Acquiring ETF) pays Vident monthly at an annual rate of 0.05 % of the Acquiring ETF’s average daily net assets up to $250 million, 0.045% of average daily net assets for assets over $250 million and up to $500 million, and 0.04% for average daily net assets in excess of $500 million. Hennessy Advisors has agreed to pay a minimum sub-advisory fee to Vident Investment of $18,750 on an annual basis.
The Vident Sub-Advisory Agreement provides that Vident Investment shall not be protected against any liability to Hennessy Funds Trust or its shareholders by reason of willful misfeasance, bad faith, or gross negligence on its part in the performance of its duties, or from reckless disregard of its obligations or duties thereunder. The Vident Sub‑Advisory Agreement also provides that Vident Investment is free to render similar services to others and to engage in other activities.
The Vident Sub-Advisory Agreement has an initial term of two years and may be renewed from year to year thereafter so long as such continuance is specifically approved at least annually in accordance with the requirements of the 1940 Act. The Vident Sub-Advisory Agreement provides that it will terminate in the event of its assignment (as defined in the 1940 Act). The Vident Sub-Advisory Agreement may be terminated by the Acquiring ETF, Hennessy Advisors, or Vident Investment upon 60 days’ prior written notice.
Because the Acquiring ETF will commence operations on or following the date of this SAI, there have been no payments by Hennessy Advisors to Stance Capital or Vident Investment for sub‑advisory services.
THE PORTFOLIO MANAGERS
The portfolio managers of the Acquiring ETF with the responsibility for the portfolio composition of the Acquiring ETF and the portfolio managers of the Acquiring ETF with responsibility for selecting broker-dealers to execute purchase and sale transactions may have responsibility for accounts other than the Acquiring ETF. Information regarding the accounts managed by each portfolio manager as of September 30, 2022, other than the Acquired ETF (as the Acquiring ETF has not assets as of the date of this SAI and will acquire the assets of the Acquired ETF), is set forth below.
| | | Number of Other Accounts Managed and Total Assets by Account Type* | | Number of Accounts and Total Assets for Which Advisory Fee Is Performance‑Based* |
Name of
Portfolio Manager | |
Registered Investment Companies | | Other
Pooled Investment Vehicles | |
Other Accounts | |
Registered Investment Companies | | Other Pooled Investment Vehicles | |
Other Accounts |
Bill Davis | | 10 $45,922,856 | | 0 $0 | | 78 $66,060,495 | | 0 $0 | | 0 $0 | | 0 $0 |
Kyle Balkissoon | | 10 $45,922,856 | | 0 $0 | | 78 $66,060,495 | | 0 $0 | | 0 $0 | | 0 $0 |
| | | Number of Other Accounts Managed and Total Assets by Account Type* | | Number of Accounts and Total Assets for Which Advisory Fee Is Performance‑Based* |
Name of
Portfolio Manager | |
Registered Investment Companies | | Other
Pooled Investment Vehicles | |
Other Accounts | |
Registered Investment Companies | | Other Pooled Investment Vehicles | |
Other Accounts |
Rafael Zayas | | 25 $3,419,433,475 | | 25 $665,241,918 | | 0 $0 | | 0 $0 | | 0 $0 | | 0 $0 |
Ryan Dofflemeyer | | 11 $2,562,135,152 | | 23 $305,369,881 | | 1 $25.601,655 | | 0 $0 | | 0 $0 | | 0 $0 |
| * | If an account has a co-portfolio manager, the total number of accounts and assets have been allocated to each respective manager. Therefore, some accounts and assets have been counted twice. |
PORTFOLIO MANAGER COMPENSATION. The below summarizes the compensation received by the portfolio managers as of September 30, 2022. Mr. Davis and Mr. Balkissoon are compensated by Stance Capital with a cash base salary and a discretionary bonus that is based on the individual performance and overall profitability of Stance Capital. Mr. Balkissoon owns equity in Stance Capital and shares in its profits, which is, in part, dependent on the performance of the Acquiring ETF, and therefore in part based on the value of the Acquiring ETF’s net assets and other client accounts he is managing.
Mr. Zayas and Mr. Dofflemeyer are compensated by Vident Investment with a base salary and are eligible to earn discretionary bonuses from time to time. The availability and amount of any bonus will be based on factors such as Vident Investment’s profitability, individual performance, and team contribution. Vident Investment’s profitability is, in part, dependent on the performance of the Acquiring ETF, and therefore in part based on the value of the Acquiring ETF’s net assets and other client accounts it is managing.
MATERIAL CONFLICTS OF INTEREST. The portfolio managers’ management of other accounts may give rise to potential conflicts of interest in connection with their management of the Acquiring ETF’s investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Acquiring ETF. Therefore, a potential conflict of interest may arise as a result of the identical investment objective, whereby a portfolio manager could favor one account over another. Another potential conflict could include the portfolio managers’ knowledge about the size, timing, and possible market impact of Acquiring ETF trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Acquiring ETF. However, each of Stance Capital and Vident Investment has established policies and procedures to ensure that the purchase and sale of securities and other investments among all accounts it manages are fairly and equitably allocated. In accordance with Stance Capital’s trade rotation policy, there will be cases where the Acquiring ETF will trade after other accounts.
Because the Acquiring ETF will commence operations on or following the date of this SAI, no portfolio manager owns shares of the Acquiring ETF.
THE ADMINISTRATOR
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”), 615 East Michigan Street, Milwaukee, Wisconsin 53202, provides administration services to the Acquiring ETF pursuant to a Fund Administration Servicing Agreement with Hennessy Funds Trust (the “Administration Agreement”). The Administration Agreement provides that Fund Services must furnish the Acquiring ETF with various administrative services including, but not limited to, (i) the preparation and coordination of reports to the Hennessy Funds’ Board of Trustees, (ii) preparation and filing of securities and other regulatory filings (including state securities filings), (iii) marketing materials, tax returns, and shareholder reports, (iv) review and payment of Acquiring ETF expenses, (v) monitoring and oversight of the activities of the Acquiring ETF’s other servicing agents (i.e., transfer agent, custodian, accountants, etc.), (vi) maintaining books and records of the Acquiring ETF, and (vii) administering shareholder accounts. Under the Administration Agreement, Fund Services is required to exercise reasonable care and is not liable for any error of judgment or mistake of law or for any loss suffered by the Acquiring ETF in connection with its performance as administrator, except a loss resulting from willful misfeasance, bad faith, or negligence on the part of Fund Services in the performance of its duties under the Administration Agreement. The Administration Agreement remains in effect until terminated by either party. It may be terminated at any time, without the payment of any penalty, by the Hennessy Board upon 90 days’ prior written notice to Fund Services, or by Fund Services upon 90 days’ prior written notice to Hennessy Funds Trust.
For all services provided pursuant to the Administration Agreement, the Fund Accounting Servicing Agreement (see below), the Custodian Agreement (see below), and the Transfer Agent Agreement (see below), Fund Services and its affiliates receive from Hennessy Funds Trust an annual fee, payable monthly, based on the average daily net assets of all Hennessy Funds. Subject to certain fee waivers, the annual fee for the Hennessy Funds complex is equal to 0.12% of the first $2 billion of the average daily net assets of the Hennessy Funds Complex, 0.10% of the next $2 billion of the average daily net assets of the Hennessy Funds complex, 0.06% of the next $2 billion of the average daily net assets of the Hennessy Funds complex, 0.05% of the next $1 billion of the average daily net assets of the Hennessy Funds complex, 0.04% of the next $3 billion of the average daily net assets of the Hennessy Funds complex, and 0.03% of the average daily net assets in excess of $10 billion of the average daily net assets of the Hennessy Funds complex, subject to a minimum annual fee for the Hennessy Funds complex of $600,000.
Because the Acquiring ETF will commence operations on or following the date of this SAI, there have been no payments by the Acquiring ETF to Fund Services for administration services.
ACCOUNTING SERVICES AGREEMENT
Fund Services also provides fund accounting services to the Acquiring ETF pursuant to a Fund Accounting Servicing Agreement with Hennessy Funds Trust (the “Fund Accounting Servicing Agreement”). For its accounting services, Fund Services and its affiliates are entitled to receive annual fees, payable monthly, based on the fee schedule set forth above under “THE ADMINISTRATOR.”
TRANSFER AGENT AND CUSTODIAN
Fund Services provides transfer agency services to Fund pursuant to a Transfer Agent Agreement with Hennessy Funds Trust (the “Transfer Agent Agreement”). Under the Transfer Agent Agreement, Fund Services has agreed to issue and redeem shares of the Acquiring ETF to APs, make dividend and other distributions to shareholders of the Acquiring ETF, respond to correspondence by Acquiring ETF shareholders and others relating to its duties, maintain shareholder accounts, and make periodic reports to the Acquiring ETF.
U.S. Bank, National Association (the “Custodian”), Custody Operations, 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212, serves as custodian for the Acquiring ETF pursuant to a Custodian Agreement with Hennessy Funds Trust (the “Custodian Agreement”). The Custodian and Fund Services are affiliates of each other. Under the Custodian Agreement, the Custodian will be responsible for, among other things, receipt of and disbursement of funds from the Acquiring ETF’s accounts, establishment of segregated accounts as necessary, and transfer, exchange, and delivery of the Acquiring ETF’s portfolio securities.
THE DISTRIBUTOR
Quasar Distributors, LLC (the “Distributor”), 111 East Kilbourn, Suite 2200, Milwaukee, Wisconsin 53202, serves as the distributor for the Acquiring ETF pursuant to a distribution agreement with Hennessy Funds Trust. The Acquiring ETF’s shares are continuously offered for sale by the Distributor only in Creation Units. Each Creation Unit is made up of at least 5,000 shares. The Distributor will not distribute shares in amounts less than a Creation Unit. The Distributor distributes the Acquiring ETF’s shares on a best efforts basis.
CODE OF ETHICS
Hennessy Funds Trust and Hennessy Advisors have each adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act (“Rule 17j-1”). Such Code of Ethics permits Access Persons (as defined in Rule 17j-1) of Hennessy Funds Trust and Hennessy Advisors to invest in securities, including securities that may be purchased or held by the Acquiring ETF, subject to receiving pre-clearance of any personal securities transactions in securities other than direct obligations of the U.S. government, bankers’ acceptances, bank certificates of deposit, commercial paper, and high-quality short term debt instruments, including repurchase agreements, and shares issued by open-end registered investment companies. With certain exceptions, such Code of Ethics generally prohibits the purchase or sale of securities if the Access Person of Hennessy Funds Trust or Hennessy Advisors knows at the time of such purchase or sale that the security is being considered for purchase or sale by the Acquiring ETF or is being purchased or sold by the Acquiring ETF. While the Distributor has adopted a code of ethics that is compliant with Rule 17j-1, the Distributor is not required to adopt a code of ethics pursuant to Rule 17j-1, in reliance on the exemption found in Rule 17j-1(c)(3).
Each of Stance Capital and Vident Investment has adopted a Code of Ethics pursuant to Rule 17j-1 that permits its Access Persons to invest in securities, including securities that may be purchased or held by the Acquiring ETF, subject to following the procedures set forth in their respective personal securities transactions policies.
PROXY VOTING POLICY
Information on how the Acquiring ETF voted proxies during the most recent 12-month period ended June 30 will be available on the Acquiring ETF’s website, without charge, at www.hennessyfunds.com or the website of the SEC at http://www.sec.gov.
The Hennessy Funds’ Board of Trustees has delegated authority for making voting decisions with respect to the portfolio securities of the Acquiring ETF to Stance Capital, subject to the Hennessy Board continuing oversight. It is Stance Capital’s policy to vote all proxies the Acquiring ETF receives in a manner that serves the Acquiring ETF’s best interests. To assist in its responsibility for voting proxies and the overall voting process, Stance Capital has engaged an independent third party proxy voting specialist, Glass Lewis & Co., LLC (“Glass Lewis”). The services provided by Glass Lewis include in-depth research, global issuer analysis, and voting recommendations as well as vote execution, reporting and recordkeeping. The decision by Stance Capital to retain the services of Glass Lewis is based principally on the view that the services that Glass Lewis provides generally will result in proxy voting decisions which serve the best economic interests of the Acquiring ETF’s, as well as limiting conflicts of interest between Stance Capital and the Acquiring ETF. Stance Capital follows the Glass Lewis guidelines that focus on enhanced environmental, social and governance practices.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Hennessy Funds’ Board of Trustees, Vident Investment is responsible for selecting broker-dealers to execute purchase and sale transactions for the Fund, as instructed by Stance Capital. Purchases and sales of securities on a stock exchange are effected through brokers who charge a commission for their services. In the OTC market, securities are generally traded on a “net” basis, with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price, which includes an amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount. Certain money market instruments may be purchased directly from an issuer, in which case no commission or discounts are paid.
Vident Investment may serve as an investment adviser or sub-advisor to other clients, including private investment companies, and Vident Investment may in the future act as an investment adviser or sub-advisor to other registered investment companies. It is Vident Investment’s practice to cause purchase and sale transactions to be allocated among the Acquiring ETF and others whose assets are managed by Vident Investment in such manner as it deems equitable. In making such allocations, the main factors considered are the respective investment objective, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held, and the opinions of the persons responsible for managing the Acquiring ETF and the other client accounts. This procedure may, under certain circumstances, have an adverse effect on the Acquiring ETF.
With respect to purchases and sales of securities, Vident Investment’s primary consideration will be obtaining the most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, Vident Investment will
have the Acquiring ETF pay commissions that are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. Vident Investment believes that a requirement always to seek the lowest commission cost could impede effective management and preclude Vident Investment from obtaining high-quality brokerage and research services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, Vident Investment relies on its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction.
Vident Investment, through a brokerage or an outsourced trading desk, conducts trades on behalf of the Acquiring ETF and effects transactions with brokers and dealers that it believes provide the most favorable prices and are capable of providing efficient executions. Vident Investment may place portfolio transactions with a broker or dealer that furnishes research and other services to Vident Investment and may pay higher commissions to brokers in recognition of research provided (or direct the payment of commissions to such brokers). Such services may include, but are not limited to, any one or more of the following: (1) information as to the availability of securities for purchase or sale, (2) statistical or factual information or opinions pertaining to investments, (3) wire services, (4) and appraisals or evaluations of portfolio securities. The information and services received by Vident Investment from brokers and dealers may be of benefit in the management of accounts of other clients and may not in all cases benefit Hennessy Funds Trust directly. While such services are useful and important in supplementing its own research and facilities, Vident Investment believes the value of such services is not determinable and does not significantly reduce its expenses.
Because the Acquiring ETF will commence operations on or following the date of this SAI, the Acquiring ETF has not paid any portfolio brokerage commissions.
PORTFOLIO TURNOVER
For reporting purposes, the Acquiring ETF’s portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the Acquiring ETF during the fiscal year. In determining such portfolio turnover, securities with maturities at the time of acquisition of one year or less are excluded. Stance Capital will adjust the Acquiring ETF’s assets as it deems advisable, and portfolio turnover is not a limiting factor should Stance Capital deem it advisable for the Acquiring ETF to purchase or sell securities. High portfolio turnover (100% or more) involves correspondingly greater brokerage commissions, other transaction costs, and a possible increase in short-term capital gains or losses. See “VALUATION OF SHARES” and “CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES” below.
Because the Acquiring ETF will commence operations on or following the date of this SAI, there has not been any portfolio turnover.
DISCLOSURE OF PORTFOLIO HOLDINGS
POLICY. The Acquiring ETF’s policy regarding the disclosure of its portfolio holdings is that portfolio holdings information is not released to individual investors, institutional investors,
financial intermediaries, rating and ranking organizations, non‑regulatory agencies, or other persons except that:
(1) On each Business Day, before commencement of trading in shares on the Exchange, the Acquiring ETF will disclose on its website the Acquiring ETF’s Portfolio Reference Basket and Guardrail Amount. The Portfolio Reference Basket published on the Acquiring ETF’s website each Business Day will include the following information for each portfolio holding in the Portfolio Reference Basket: (1) ticker symbol; (2) CUSIP or other identifier; (3) description of holding; (4) quantity of each security or other asset held; and (5) percentage weight of the holding in the Portfolio Reference Basket. The Acquiring ETF will provide a full list of holdings, including its top ten holdings, quarterly on www.hennesssyfunds.com 60 days after the quarter-end.
(2) The Acquiring ETF releases its portfolio holdings information as of each calendar quarter end to various rating and ranking services, including, but not limited to, Morningstar, Lipper, Standard & Poor’s, and Bloomberg. Fund Services releases such information upon the authorization of an executive officer of the Acquiring ETF. Portfolio holdings information the Acquiring ETF is generally released to various rating and ranking services as soon as it becomes available following a calendar quarter end.
(3) By virtue of their duties and responsibilities, the third‑party service providers to the Acquiring ETF generally have regular, daily access to the Acquiring ETF’s portfolio holdings information. The service providers are subject to customary confidentiality agreements regarding the Acquiring ETF’s information and may not release the Acquiring ETF’s portfolio holdings information to anyone without the written authorization of an executive officer of the Acquiring ETF.
(4) For the purposes of trading portfolio securities, Hennessy Advisors may from time to time provide brokers with trade lists that may reflect, in part or in total, the Acquiring ETF’s portfolio holdings. The provision of such trade lists is subject to customary broker confidentiality agreements and trading restrictions.
(5) The Acquiring ETF releases its portfolio holdings information in its annual and semi‑annual reports on Form N‑CSR, on Form N-PORT, on Form 13F, and as requested or required by law to any governing or regulatory agency of the Acquiring ETF.
(6) An executive officer of the Acquiring ETF may, subject to confidentiality agreements and trading restrictions, authorize the release of the Acquiring ETF’s portfolio holdings information for due diligence purposes to an investment adviser that is in merger or acquisition talks with Hennessy Advisors, or to a newly hired investment adviser or sub-advisor.
(7) The Chief Compliance Officer of the Acquiring ETF or an executive officer of Hennessy Advisors may authorize the release of portfolio holding information on an exception basis provided that: (a) such person determines that such a release would be beneficial to the Acquiring ETF’s investors; and (b) the holdings are as of the end of a calendar month.
Under no circumstances may the Acquiring ETF, Hennessy Advisors, or any Trustee, officer, or employee of the Acquiring ETF or Hennessy Advisors receive any compensation for the disclosure of the Acquiring ETF’s portfolio holdings information.
There may be instances where the interests of the Acquiring ETF’s shareholders respecting the disclosure of information about portfolio securities may conflict or appear to conflict with the interests of the Acquiring ETF’s service providers or an affiliated person of the Acquiring ETF (including such affiliated person’s investment adviser or principal underwriter). In such situations, the conflict must be disclosed to the Hennessy Funds’ Board of Trustees, and the Hennessy Funds’ Board of Trustees must be afforded the opportunity to determine whether to allow such disclosure.
PROCEDURE. Each year, an officer of the Acquiring ETF sends a written authorization to U.S. Bank Global Fund Services authorizing it to release the Acquiring ETF’s portfolio holdings information to rating and ranking services in accordance with the policy described above. U.S. Bank Global Fund Services thereafter releases the Acquiring ETF’s portfolio holdings information as of each calendar quarter end to various rating and ranking services in accordance with the policy described above.
PURCHASE AND REDEMPTION OF CREATION UNITS
PURCHASE AND ISSUANCE OF CREATION UNITS. Hennessy Funds Trust issues and sells shares of the Acquiring ETF only: (i) in Creation Units on a continuous basis through the Distributor, without a sales load (but subject to transaction fees), at their NAV next determined after receipt of an order, on any Business Day, in proper form pursuant to the terms of the Authorized Participant Agreement (“Participant Agreement”); or (ii) pursuant to the Dividend Reinvestment Service (defined below). The NAV of the Acquiring ETF’s shares is calculated each business day as of the close of regular trading on the Exchange, generally 4:00 p.m., Eastern Time. The Acquiring ETF will not issue fractional Creation Units. A Business Day is any day on which the Exchange is open for business.
Fund Deposit. The consideration for purchase of a Creation Unit of the Acquiring ETF generally consists of the in-kind deposit of a designated portfolio of securities (the “Deposit Securities”) per each Creation Unit, which typically replicates the Portfolio Reference Basket, plus the Cash Component (defined below), computed as described below. Notwithstanding the foregoing, Hennessy Funds Trust reserves the right to permit or require the substitution of a “cash in lieu” amount (“Deposit Cash”) to be added to the Cash Component to replace any Deposit Security. When accepting purchases of Creation Units for all or a portion of Deposit Cash, the Acquiring ETF may incur additional costs associated with the acquisition of Deposit Securities that would otherwise be provided by an in-kind purchaser. These additional costs associated with the acquisition of Deposit Securities (“Non-Standard Charges”) may be recoverable from the purchaser of creation units. Unless the Acquiring ETF has authorized a custom basket (as defined below), the names and quantities of the instruments that constitute the Deposit Securities will be the same as the Portfolio Reference Basket except to the extent that the Acquiring ETF requires purchases and redemptions to be made entirely or in part on a cash basis.
Pursuant to the Order, the Acquiring ETF may permit or require the Fund Securities to differ from the Portfolio Reference Basket under certain circumstances. In such circumstances, the Fund may use a “custom basket” that includes instruments not in the Portfolio Reference Basket or are included in the Portfolio Reference Basket in different weightings. The Acquiring ETF has adopted policies and procedures in accordance with Rule 6c-11 of the 1940 Act that govern the construction and acceptance of custom baskets. These policies and procedures provide detailed parameters for
the construction and acceptance of custom baskets, including the process for any revisions to, or deviations from, those parameters. A custom basket may only be used when it is in the Acquiring ETF’s best interests to do so, which may include implementing changes in the Acquiring ETF’s portfolio, increasing the Acquiring ETF’s tax efficiency, and for other reasons. When the Acquiring ETF uses a custom basket, the names and/or quantities of the instruments that constitute the Deposit Securities will differ from the Portfolio Reference Basket.
Together, the Deposit Securities or Deposit Cash, as applicable, and the Cash Component constitute the “Fund Deposit,” which represents the minimum initial and subsequent investment amount for a Creation Unit of the Acquiring ETF. The “Cash Component” is an amount equal to the difference between the NAV of the Acquiring ETF’s shares (per Creation Unit) and the market value of the Deposit Securities or Deposit Cash, as applicable. If the Cash Component is a positive number (i.e., the NAV per Creation Unit exceeds the market value of the Deposit Securities or Deposit Cash, as applicable), the Cash Component will be such positive amount. If the Cash Component is a negative number (i.e., the NAV per Creation Unit is less than the market value of the Deposit Securities or Deposit Cash, as applicable), the Cash Component shall be such negative amount and the creator will be entitled to receive cash in an amount equal to the Cash Component. The Cash Component serves the function of compensating for any differences between the NAV per Creation Unit and the market value of the Deposit Securities or Deposit Cash, as applicable. Computation of the Cash Component excludes any stamp duty or other similar fees and expenses payable upon transfer of beneficial ownership of the Deposit Securities, if applicable, which will be the sole responsibility of the Authorized Participant (as defined below).
The Acquiring ETF, through NSCC, make available on each Business Day, immediately prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern time), the list of the names and the required number of shares of each Deposit Security or the required amount of Deposit Cash, as applicable, to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for the Acquiring ETF. Such Fund Deposit is subject to any applicable adjustments as described below, in order to effect purchases of Creation Units of the Acquiring ETF until such time as the next-announced composition of the Deposit Securities or the required amount of Deposit Cash, as applicable, is made available.
The identity and number of shares of the Deposit Securities or the amount of Deposit Cash, as applicable, required for a Fund Deposit for the Acquiring ETF changes from time to time as rebalancing adjustments and corporate action events are reflected by Stance Capital/Vident Investment. The composition of the Deposit Securities will change in response to adjustments to the weighting or composition of the securities constituting the Acquiring ETF’s Portfolio Reference Basket.
Hennessy Funds Trust reserves the right to permit or require the substitution of an amount of cash (i.e., a “cash in lieu” amount) to replace any Deposit Security, which will be added to the Deposit Cash, if applicable, and the Cash Component, including, without limitation, in situations where the Deposit Security: (i) may not be available in sufficient quantity for delivery; (ii) may not be eligible for transfer through the systems of DTC for corporate securities and municipal securities; (iii) may not be eligible for trading by an Authorized Participant (as defined below) or the investor for which it is acting; (iv) would be restricted under the securities laws or where the delivery of the Deposit Security to the Authorized Participant would result in the disposition of the
Deposit Security by the Authorized Participant becoming restricted under the securities laws; or (v) in certain other situations (collectively, “custom orders”).
Cash Purchase Method. Hennessy Funds Trust may at its discretion permit full or partial cash purchases of Creation Units of the Acquiring ETF in instances permitted by the exemptive relief Hennessy Advisors is relying on in offering the Acquiring ETF. When full or partial cash purchases of Creation Units are available or specified for the Acquiring ETF, they will be effected in essentially the same manner as in-kind purchases thereof. In the case of a full or partial cash purchase, the Authorized Participant must pay the cash equivalent of the Deposit Securities it would otherwise be required to provide through an in-kind purchase, plus the same Cash Component required to be paid by an in-kind purchaser together with a Creation Transaction Fee and Non-Standard Charges, as may be applicable.
Procedures for Purchase of Creation Units. To be eligible to place orders with the Distributor to purchase a Creation Unit of the Acquiring ETF, an entity must be (i) a “Participating Party,” i.e., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC (the “Clearing Process”), a clearing agency that is registered with the SEC; or (ii) a DTC Participant. In addition, each Participating Party or DTC Participant (each, an “Authorized Participant” or “AP”) must execute a Participant Agreement that has been agreed to by the Distributor, and that has been accepted by Fund Services and Hennessy Funds Trust, with respect to purchases and redemptions of Creation Units. Each AP will agree, pursuant to the terms of a Participant Agreement, on behalf of itself or any investor on whose behalf it will act, to certain conditions, including that it will pay to Hennessy Funds Trust an amount of cash sufficient to pay the Cash Component together with the Creation Transaction Fee (defined below) and any other applicable fees and taxes. Hennessy Advisors may retain all or a portion of the Transaction Fee to the extent Hennessy Advisors bears the expenses that otherwise would be borne by Hennessy Funds Trust in connection with the purchase of a Creation Unit, which the Transaction Fee is designed to cover.
All orders to purchase shares directly from the Acquiring ETF must be placed for one or more Creation Units in the manner set forth in the Participant Agreement (the “Cut-Off Time”). The date on which an order to purchase Creation Units (or an order to redeem Creation Units, as set forth below) is received and accepted is referred to as the “Order Placement Date.”
An AP may require an investor to make certain representations or enter into agreements with respect to the order (e.g., to provide for payments of cash, when required). Investors should be aware that their particular broker may not have executed a Participant Agreement and that, therefore, orders to purchase shares directly from the Acquiring ETF in Creation Units have to be placed by the investor’s broker through an AP that has executed a Participant Agreement. In such cases there may be additional charges to such investor. At any given time, there may be only a limited number of broker-dealers that have executed a Participant Agreement and only a small number of such Authorized Participants may have international capabilities.
On days when the Exchange closes earlier than normal, the Acquiring ETF may require orders to create Creation Units to be placed earlier in the day. In addition, if a market or markets on which the Acquiring ETF’s investments are primarily traded is closed on any day, the Acquiring ETF will not accept orders on such day. Orders must be transmitted by an AP by telephone or other
transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement and in accordance with the AP Handbook. With respect to the Acquiring ETF, the Distributor will notify the Custodian of such order. The Custodian will then provide such information to the appropriate local sub-custodian(s). Those placing orders through an AP should allow sufficient time to permit proper submission of the purchase order to the Distributor by the Cut-Off Time on the Business Day on which the order is placed. Economic or market disruptions or changes, or telephone or other communication failure may impede the ability to reach the Distributor or an AP.
Fund Deposits must be delivered by an AP through the Federal Reserve System (for cash) or through DTC (for corporate securities), through a subcustody agent (for foreign securities) and/or through such other arrangements allowed by Hennessy Funds Trust or its agents. With respect to foreign Deposit Securities, the Custodian will cause the subcustodian of the Acquiring ETF to maintain an account into which the AP will deliver, on behalf of itself or the party on whose behalf it is acting, such Deposit Securities (or Deposit Cash for all or a part of such securities, as permitted or required), with any appropriate adjustments as advised by Hennessy Funds Trust. Foreign Deposit Securities must be delivered to an account maintained at the applicable local subcustodian. The Fund Deposit transfer must be ordered by the AP in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities or Deposit Cash, as applicable, to the account of the Acquiring ETF or its agents by no later than the Settlement Date. The “Settlement Date” for the Acquiring ETF is generally the third Business Day after the Order Placement Date. All questions as to the number of Deposit Securities or Deposit Cash to be delivered, as applicable, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities or cash, as applicable, will be determined by Hennessy Funds Trust, whose determination will be final and binding. The amount of cash represented by the Cash Component must be transferred directly to the Custodian through the Federal Reserve Bank wire transfer system in a timely manner so as to be received by the Custodian no later than the Settlement Date. If the Cash Component and the Deposit Securities or Deposit Cash, as applicable, are not received in a timely manner by the Settlement Date, the creation order may be cancelled. Upon written notice to the Distributor, such canceled order may be resubmitted the following Business Day using the Fund Deposit as newly constituted to reflect the then current NAV of the Acquiring ETF.
The order will be deemed to be received on the Business Day on which the order is placed provided that the order is placed in proper form prior to the Cut-Off Time and the federal funds in the appropriate amount are deposited by 2:00 p.m., Eastern time, with the Custodian on the Settlement Date. If the order is not placed in proper form as required, or federal funds in the appropriate amount are not received by 2:00 p.m., Eastern time on the Settlement Date, then the order may be deemed to be rejected and the AP will be liable to the Acquiring ETF for losses, if any, resulting therefrom. A creation request is considered to be in “proper form” if all procedures set forth in the Participant Agreement, AP Handbook and this SAI are properly followed.
Issuance of a Creation Unit. Except as provided herein, Creation Units will not be issued until the transfer of good title to Hennessy Funds Trust of the Deposit Securities or payment of Deposit Cash, as applicable, and the payment of the Cash Component have been completed. When the subcustodian has confirmed to the Custodian that the required Deposit Securities (or the cash value thereof) have been delivered to the account of the relevant subcustodian or subcustodians, the Distributor and Hennessy Advisors will be notified of such delivery, and Hennessy Funds Trust will
issue and cause the delivery of the Creation Units. The delivery of Creation Units so created generally will occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor. However, the Acquiring ETF reserves the right to settle Creation Unit transactions on a basis other than the third Business Day following the day on which the purchase order is deemed received by the Distributor in order to accommodate foreign market holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates (that is the last day the holder of a security can sell the security and still receive dividends payable on the security), and in certain other circumstances. The AP will be liable to the Acquiring ETF for losses, if any, resulting from unsettled orders.
Creation Units may be purchased in advance of receipt by Hennessy Funds Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a value greater than the NAV of the shares on the date the order is placed in proper form since in addition to available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) an additional amount of cash equal to a percentage of the market value as set forth in the Participant Agreement, of the undelivered Deposit Securities (the “Additional Cash Deposit”), which will be maintained in a separate non-interest bearing collateral account. An additional amount of cash will be required to be deposited with Hennessy Funds Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with Hennessy Funds Trust in an amount at least equal to the applicable percentage, as set forth in the Participant Agreement, of the daily marked to market value of the missing Deposit Securities. The Participant Agreement will permit Hennessy Funds Trust to buy the missing Deposit Securities at any time. APs will be liable to Hennessy Funds Trust for the costs incurred by Hennessy Funds Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. Hennessy Funds Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian or purchased by Hennessy Funds Trust and deposited into Hennessy Funds Trust. In addition, a Transaction Fee as set forth below under “Creation Transaction Fee” will be charged in all cases, unless otherwise advised by the Acquiring ETF, and Non-Standard Charges may also apply. The delivery of Creation Units so created generally will occur no later than the Settlement Date.
Acceptance of Orders for Creation Units. Hennessy Funds Trust reserves the right to reject an order for Creation Units transmitted to it by the Distributor in respect of the Acquiring ETF for any legally permissible reason, including, but not limited to, the following circumstances: the order is not in proper form; acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; or circumstances outside the control of Hennessy Funds Trust, the Custodian, Fund Services and/or Hennessy Advisors make it for all practical purposes not feasible to process orders for Creation Units. Examples of such circumstances include acts of God; public service or utility problems; market conditions or activities causing trading halts; systems failures involving computer or other information systems; and similar extraordinary events. The Distributor shall notify a prospective creator of a Creation Unit and/or the AP acting on behalf of the creator of a Creation Unit of its rejection of the order of such person. Hennessy Funds Trust, Fund Services, the Custodian, any sub-custodian and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits, and they shall not incur any liability for the failure to
give any such notification. Hennessy Funds Trust, Fund Services, the Custodian and the Distributor will not be liable for the rejection of any purchase order for Creation Units.
All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered will be determined by Hennessy Funds Trust, and Hennessy Funds Trust’s determination will be final and binding.
Creation Transaction Fee. A purchase (i.e., creation) transaction fee is imposed for the transfer and other transaction costs associated with the purchase of Creation Units, and investors will be required to pay a Creation Transaction Fee regardless of the number of Creation Units created in the transaction. The Acquiring ETF may adjust the creation transaction fee from time to time based upon actual experience. In addition, the Acquiring ETF may impose a Non-Standard Charge of up to 2% of the value of the creation transactions for cash creations, non- standard orders, or partial cash purchases for the Acquiring ETF. The Acquiring ETF may adjust the Non-Standard Charge from time to time based upon actual experience. Investors who use the services of an AP, broker or other such intermediary may be charged a fee for such services, which may include an amount for the Creation Transaction Fee and Non-Standard Charges. Investors are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of Hennessy Funds Trust. Hennessy Advisors may retain all or a portion of the Transaction Fee to the extent the Hennessy Advisors bears the expenses that otherwise would be borne by Hennessy Funds Trust in connection with the purchase of a Creation Unit, which the Transaction Fee is designed to cover. The standard Creation Transaction Fee for the Acquiring ETF is $300.
Risks of Purchasing Creation Units. There are certain legal risks unique to investors purchasing Creation Units directly from the Acquiring ETF. Because the Acquiring ETF’s shares may be issued on an ongoing basis, a “distribution” of shares could be occurring at any time. Certain activities that a shareholder performs as a dealer could, depending on the circumstances, result in the shareholder being deemed a participant in the distribution in a manner that could render the shareholder a statutory underwriter and subject to the prospectus delivery and liability provisions of the 1933 Act. For example, a shareholder could be deemed a statutory underwriter if it purchases Creation Units from the Acquiring ETF, breaks them down into the constituent shares, and sells those shares directly to customers, or if a shareholder chooses to couple the creation of a supply of new shares with an active selling effort involving solicitation of secondary-market demand for shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person’s activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause a shareholder to be deemed an underwriter.
Dealers who are not “underwriters” but are participating in a distribution (as opposed to engaging in ordinary secondary-market transactions), and thus dealing with the Acquiring ETF’s shares as part of an “unsold allotment” within the meaning of Section 4(a)(3)(C) of the 1933 Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(a)(3)(C) of the 1933 Act.
REDEMPTION OF CREATION UNITS. The Acquiring ETF’s shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in proper
form by the Acquiring ETF through Fund Services and only on a Business Day. EXCEPT UPON LIQUIDATION OF THE ACQUIRING ETF, HENNESSY FUNDS TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Investors must accumulate enough shares in the secondary market to constitute a Creation Unit in order to have such shares redeemed by Hennessy Funds Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of shares to constitute a redeemable Creation Unit.
With respect to the Acquiring ETF, the Custodian, through the NSCC, makes available immediately prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern time) on each Business Day, the list of the names and share quantities of the Acquiring ETF’s portfolio securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day (“Fund Securities”). Fund Securities received on redemption may not be identical to Deposit Securities.
Redemption proceeds for a Creation Unit are paid either in-kind or in cash, or combination thereof, as determined by Hennessy Funds Trust. With respect to in-kind redemptions of the Acquiring ETF, redemption proceeds for a Creation Unit will consist of Fund Securities -- as announced by the Custodian on the Business Day of the request for redemption received in proper form -- plus cash in an amount equal to the difference between the NAV of the shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Fund Securities (the “Cash Redemption Amount”), less any fixed redemption transaction fee as set forth below and any Non-Standard Charges. If that the Fund Securities have a value greater than the NAV of the shares, a compensating cash payment equal to the differential is required to be made by or through an AP by the redeeming shareholder. Notwithstanding the foregoing, at Hennessy Funds Trust’s discretion, an AP may receive the corresponding cash value of the securities in lieu of the in-kind securities value representing one or more Fund Securities.
Cash Redemption Method. When full or partial cash redemptions of Creation Units are available or specified for the Acquiring ETF, they will be effected in essentially the same manner as in-kind redemptions thereof. In the case of full or partial cash redemptions, the AP will receive the cash equivalent of the Fund Securities it would otherwise receive through an in-kind redemption, plus the same Cash Amount to be paid to an in-kind redeemer. The Acquiring ETF may incur costs such as brokerage costs or taxable gains or losses that the Acquiring ETF might not have incurred if the redemption had been made in-kind. These costs may decrease the Acquiring ETF’s NAV to the extent that the costs are not offset by a transaction fee payable by an authorized participant. Shareholders may be subject to tax on gains they would not otherwise have been subject to and/or at an earlier date than if the Acquiring ETF had effected redemptions wholly on an in- kind basis.
Redemption Transaction Fees. A redemption transaction fee may be imposed for the transfer and other transaction costs associated with the redemption of Creation Units, and APs will be required to pay a Redemption Transaction Fee regardless of the number of Creation Units created in the transaction. The redemption transaction fee is the same no matter how many Creation Units are being redeemed pursuant to any one redemption request. The Acquiring ETF may adjust the redemption transaction fee from time to time based upon actual experience. In addition, the Acquiring ETF may impose a Non-Standard Charge of up to 2% of the value of a redemption
transaction for cash redemptions, non-standard orders, or partial cash redemptions for the Acquiring ETF. Investors who use the services of an Authorized Participant, broker or other such intermediary may be charged a fee for such services which may include an amount for the Redemption Transaction Fees and Non-Standard Charges. Investors are responsible for the costs of transferring the securities constituting the Fund Securities to the account of Hennessy Funds Trust. The Non-Standard Charges are payable to the Acquiring ETF as it incurs costs in connection with the redemption of Creation Units, the receipt of Fund Securities and the Cash Redemption Amount and other transactions costs. The standard Redemption Transaction Fee for the Acquiring ETF is $300.
Procedures for Redemption of Creation Units. Orders to redeem Creation Units must be submitted in proper form to Fund Services prior to the time as set forth in the Participant Agreement. A redemption request is considered to be in “proper form” if (i) an AP has transferred or caused to be transferred to Fund Services the Creation Unit(s) being redeemed through the book- entry system of DTC so as to be effective by the time as set forth in the Participant Agreement and (ii) a request in form satisfactory to Hennessy Funds Trust is received by Fund Services from the AP on behalf of itself or another redeeming investor within the time periods specified in the Participant Agreement. If Fund Services does not receive the investor’s shares through DTC’s facilities by the times and pursuant to the other terms and conditions set forth in the Participant Agreement, the redemption request will be rejected.
The AP must transmit the request for redemption, in the form required by Hennessy Funds Trust, to Fund Services in accordance with procedures set forth in the Authorized Participant Agreement. Investors should be aware that their particular broker may not have executed an Authorized Participant Agreement, and that, therefore, requests to redeem Creation Units may have to be placed by the investor’s broker through an AP which has executed an Authorized Participant Agreement. Investors making a redemption request should be aware that such request must be in the form specified by such AP. Investors making a request to redeem Creation Units should allow sufficient time to permit proper submission of the request by an AP and transfer of the shares to Fund Services; such investors should allow for the additional time that may be required to effect redemptions through their banks, brokers or other financial intermediaries if such intermediaries are not APs.
In connection with taking delivery of shares of Fund Securities upon redemption of Creation Units, a redeeming shareholder or AP acting on behalf of such shareholder must maintain appropriate custody arrangements with a qualified broker-dealer, bank or other custody providers in each jurisdiction in which any of the Fund Securities are customarily traded, to which account such Fund Securities will be delivered. Deliveries of redemption proceeds generally will be made within three business days of the trade date.
Additional Redemption Procedures. In connection with taking delivery of shares of Fund Securities upon redemption of Creation Units, the AP must maintain appropriate custody arrangements with a qualified broker-dealer, bank or other custody providers in each jurisdiction in which any of the Fund Securities are customarily traded, to which account such Fund Securities will be delivered. Deliveries of redemption proceeds generally will be made within three Business Days of the trade date. However, due to the schedule of holidays in certain countries, the different treatment among foreign and U.S. markets of dividend record dates and dividend ex-dates (that is the last date the holder of a security can sell the security and still receive dividends payable on the
security sold), and in certain other circumstances, the delivery of in-kind redemption proceeds may take longer than three Business Days after the day on which the redemption request is received in proper form. If neither the redeeming Shareholder nor the AP acting on behalf of such redeeming Shareholder has appropriate arrangements to take delivery of the Fund Securities in the applicable foreign jurisdiction and it is not possible to make other such arrangements, or if it is not possible to effect deliveries of the Fund Securities in such jurisdiction, Hennessy Funds Trust may, in its discretion, exercise its option to redeem such shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds in cash.
If it is not possible to make other such arrangements, or it is not possible to effect deliveries of the Fund Securities, Hennessy Funds Trust may in its discretion exercise its option to redeem such shares in cash, and the redeeming investor will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash that the Acquiring ETF may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV of its shares based on the NAV of shares of the Acquiring ETF next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset Hennessy Fund Trust’s brokerage and other transaction costs associated with the disposition of Fund Securities). The Acquiring ETF may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities that differs from the exact composition of the Fund Securities but does not differ in NAV.
Redemptions of shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and the Acquiring ETF (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that Hennessy Funds Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An AP or an investor for which it is acting subject to a legal restriction with respect to a particular security included in the Fund Securities applicable to the redemption of Creation Units may be paid an equivalent amount of cash. The AP may request the redeeming investor of the shares to complete an order form or to enter into agreements with respect to such matters as compensating cash payment. Further, an AP that is not a “qualified institutional buyer,” (“QIB”) as such term is defined under Rule 144A, will not be able to receive Fund Securities that are restricted securities eligible for resale under Rule 144A. An AP may be required by Hennessy Funds Trust to provide a written confirmation with respect to QIB status in order to receive Fund Securities.
Because the portfolio securities of the Acquiring ETF may trade on the relevant exchange(s) on days that the Exchange is closed or are otherwise not Business Days for the Acquiring ETF, shareholders may not be able to redeem their shares of the Acquiring ETF, or to purchase or sell shares of the Acquiring ETF on the Exchange, on days when the NAV of the Acquiring ETF could be significantly affecting by events in the relevant foreign markets.
The right of redemption may be suspended or the date of payment postponed with respect to the Acquiring ETF (1) for any period during which the Exchange is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the Exchange is suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of the Acquiring ETF or determination of the NAV of the shares is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
ABANDONED PROPERTY
It is important that the Acquiring ETF maintain a correct address for each investor. An incorrect address may cause an investor’s account statements and other mailings to be returned to the Acquiring ETF. Upon receiving returned mail, the Acquiring ETF will attempt to locate the investor or rightful owner of the account. If the Acquiring ETF is unable to locate the investor, then they determine whether the investor’s account has legally been abandoned. The Acquiring ETF is legally obligated to escheat (or transfer) abandoned property to the appropriate state’s unclaimed property administrator in accordance with statutory requirements. The investor’s last known address of record determines which state has jurisdiction.
Shareholders that reside in the state of Texas may designate a representative to receive escheatment notifications by completing and submitting a designation form that can be found on the website of the Texas Comptroller. While the designated representative does not have any rights to claim or access the shareholder’s account or assets, the escheatment period will cease if the representative communicates knowledge of the shareholder’s location and confirms that the shareholder has not abandoned his or her property. If a shareholder designates a representative to receive escheatment notifications, any escheatment notices will be delivered to both the shareholder and the designated representative. A completed designation form may be mailed to the Acquiring ETF (if shares are held directly with the Acquiring ETF) or to the shareholder’s financial intermediary (if shares are not held directly with the Acquiring ETF).
VALUATION OF SHARES
The NAV for the shares of the Acquiring ETF normally is determined on each day the NYSE is open for trading. The net assets of the Acquiring ETF are valued as of the close of the NYSE (normally 4:00 p.m., Eastern time) on each Business Day.
NAV per share will be computed by dividing (i) the value of the securities held by the Acquiring ETF plus any cash or other assets, less its liabilities, by (ii) the number of outstanding shares of the Acquiring ETF, and adjusting the result to the nearest full cent. Securities listed on the NYSE, NYSE AMEX Equities, or other national exchanges (other than The NASDAQ Stock Market) are valued at the last sale price on the date of valuation, and securities that are traded on The NASDAQ Stock Market are valued at the Nasdaq Official Closing Price on the date of valuation. Bonds and other fixed-income securities are valued using market quotations provided by dealers and also may be valued on the basis of prices provided by pricing services when the Hennessy Funds’ Board of Trustees believes that such prices reflect the fair market value of such securities. If there is no sale in a particular security on such day, the security is valued at the mean between the bid and ask prices. Other securities, to the extent that market quotations are readily available, are valued at market value in accordance with procedures established by the Hennessy Funds’ Board of Trustees. Any other securities and other assets for which market quotations are not readily available are valued in good faith in a manner determined by the Hennessy Funds’ Board of Trustees best to reflect their full value. Short-term instruments (those with remaining maturities of 60 days or less) are valued at amortized cost, which approximates market value.
Fair valuing of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic
securities and other appropriate indicators, such as closing market prices of relevant ADRs or futures contracts. Using fair value pricing means that the Acquiring ETF’s NAV reflects the affected portfolio securities’ value as determined in the judgment of the Hennessy Funds’ Board of Trustees or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different from a security’s most recent closing price and from the prices used by other investment companies to calculate their NAVs.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
IN VIEW OF THE COMPLEXITIES OF U.S. FEDERAL AND OTHER INCOME TAX LAWS APPLICABLE TO REGULATED INVESTMENT COMPANIES, A PROSPECTIVE SHAREHOLDER IS URGED TO CONSULT WITH, AND RELY SOLELY UPON, SUCH INVESTOR’S TAX ADVISERS TO UNDERSTAND FULLY THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES TO SUCH INVESTOR OF AN INVESTMENT BASED ON SUCH INVESTOR’S PARTICULAR FACTS AND CIRCUMSTANCES. THIS SUMMARY IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED AS, LEGAL OR TAX ADVICE.
The following information supplements and should be read in conjunction with the section in the Proxy Statement/Prospectus titled “Taxes, Dividends, and Distributions.” The Proxy Statement/Prospectus generally describes the U.S. federal income tax treatment of distributions by the Acquiring ETF. This section of the SAI provides additional information concerning U.S. federal income taxes. It is based on the Code, applicable U.S. Treasury regulations, judicial authority, and administrative rulings and practice, all as of the date of this SAI and all of which are subject to change, including changes with retroactive effect. Except as specifically set forth below, the following discussion does not address any state, local, or foreign tax matters or any U.S. federal estate or gift tax matters.
A shareholder’s tax treatment may vary depending on the shareholder’s particular situation. This discussion applies only to shareholders holding Shares as capital assets within the meaning of the Code. A shareholder may also be subject to special rules not discussed below if they are a certain kind of shareholder, including, but not limited to, an insurance company, a tax-exempt organization, a private foundation, a financial institution or broker-dealer, a person who is neither a citizen nor resident of the United States or an entity that is not organized under the laws of the United States or political subdivision thereof, a shareholder who holds shares of the Acquiring ETF as part of a hedge, straddle, or conversion transaction, a shareholder who does not hold shares of the Acquiring ETF as a capital asset, or an entity taxable as a partnership for U.S. federal income tax purposes or investors in such an entity.
Hennessy Funds Trust has not requested, and does not plan to request, an advance ruling from the IRS as to the U.S. federal income tax matters described below. The IRS could adopt positions contrary to those discussed below, and such positions could be sustained. In addition, the following discussion and the discussion in the Proxy Statement/Prospectus address only some of the U.S. federal income tax considerations generally affecting investments in the Acquiring ETF. Prospective shareholders are urged to consult their own tax advisers and financial planners regarding the U.S. federal tax consequences of an investment in the Acquiring ETF, the application
of state, local, or foreign laws, and the effect of any possible changes in applicable tax laws on their investment in the Acquiring ETF.
QUALIFCIATIONS AS A REGULATED INVESTMENT COMPANY
It is intended that the Acquiring ETF qualify for treatment as a RIC under Subchapter M of Subtitle A, Chapter 1 of the Code. The Acquiring ETF is treated as a separate entity for U.S. federal income tax purposes, and separately determines its income, gains, losses, and expenses for U.S. federal income tax purposes.
In order to qualify as a RIC under the Code, the Acquiring ETF must, among other things, derive at least 90% of its gross income each taxable year generally from (i) dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and other income attributable to its business of investing in such stock, securities, or foreign currencies (including, but not limited to, gains from options, futures, or forward contracts) and (ii) net income derived from an interest in a qualified publicly traded partnership, as defined in the Code. Future U.S. Treasury regulations may (possibly retroactively) exclude from qualifying income foreign currency gains that are not directly related to the Acquiring ETF’s principal business of investing in stock, securities, options, or futures with respect to stock or securities. In general, for purposes of this 90% gross income requirement, income derived from a partnership, except a qualified publicly traded partnership, is treated as qualifying income only to the extent such income is attributable to items of income of the partnership that would be qualifying income if realized by the RIC.
The Acquiring ETF must also diversify its holdings so that, at the end of each quarter of the Acquiring ETF’s taxable year, (i) at least 50% of the fair market value of its gross assets consists of (a) cash and cash items (including receivables), U.S. Government Securities, and securities of other RICs, and (b) securities of any one issuer (other than those described in clause (a)) to the extent such securities do not exceed 5% of the value of the Acquiring ETF’s total assets and do not exceed 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Acquiring ETF’s total assets consists of the securities of any one issuer (other than those described in clause (i)(b)), the securities of two or more issuers the Acquiring ETF controls and which are engaged in the same, similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships. In addition, for purposes of meeting the diversification requirement of clause (i)(b), the term “outstanding voting securities of such issuer” includes the equity securities of a qualified publicly traded partnership. The qualifying income and diversification requirements applicable to the Acquiring ETF may limit the extent to which it can engage in transactions in options, futures contracts, forward contracts, and swap agreements.
If the Acquiring ETF fails to satisfy any of the qualifying income or diversification requirements in any taxable year, the Acquiring ETF may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirement. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Acquiring ETF corrects the failure within a specified period. If the applicable relief provisions were not available or could not be met, the Acquiring ETF would be taxed in the same manner as an ordinary corporation, which is described below.
In addition, with respect to each taxable year, the Acquiring ETF generally must distribute to its shareholders at least 90% of its investment company taxable income, which generally includes (i) its ordinary income and the excess of any net short-term capital gain over net long‑term capital loss and (ii) at least 90% of its net tax‑exempt interest income earned for the taxable year. If the Acquiring ETF meets all of the RIC qualification requirements, it generally will not be subject to U.S. federal income tax on any of the investment company taxable income and net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) it distributes to its shareholders. For this purpose, the Acquiring ETF generally must make the distributions in the same year that it realizes the income and gain, although in certain circumstances the Acquiring ETF may make the distributions in the following taxable year. Shareholders generally are taxed on any distributions from the Acquiring ETF in the year such distribution is actually distributed. However, if the Acquiring ETF declares a distribution to shareholders of record in October, November, or December of one year and pays the distribution by January 31 of the following year, the Acquiring ETF and its shareholders will be treated as if the Acquiring ETF paid the distribution on December 31 of the first year. The Acquiring ETF intends to distribute its net income and gain in a timely manner to maintain its status as a RIC and eliminate fund-level U.S. federal income taxation of such income and gain. However, no assurance can be given that the Acquiring ETF will not be subject to U.S. federal income taxation.
Moreover, the Acquiring ETF may retain for investment all or a portion of its net capital gain. If the Acquiring ETF retains any net capital gain, it will be subject to a tax at regular corporate rates on the amount retained, but may report the retained amount as undistributed capital gain in a written statement furnished to its shareholders, who would then (i) be required to include in income for U.S. federal income tax purposes, as long-term capital gain, their shares of such undistributed amount, and (ii) be entitled to credit their proportionate shares of the tax paid by the Acquiring ETF on such undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For U.S. federal income tax purposes, the tax basis of shares owned by a shareholder of the Acquiring ETF will be increased by an amount equal to the difference between the amount of undistributed capital gain included in the shareholder’s gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence. The Acquiring ETF is not required to, and there can be no assurance that it will, make this designation if it retains all or a portion of its net capital gain in a taxable year.
If, for any taxable year, the Acquiring ETF fails to qualify as a RIC and is not eligible for relief as described above, it is taxed in the same manner as an ordinary corporation without any deduction for its distributions to shareholders, and all distributions from the Acquiring ETF’s current and accumulated earnings and profits (including any distributions of its net tax-exempt income and net long-term capital gain) to its shareholders will be taxable as dividend income. To requalify as a RIC in a subsequent year, the Acquiring ETF may be required to distribute to its shareholders its earnings and profits attributable to non-RIC years reduced by an interest charge on 50% of such earnings and profits payable by the Acquiring ETF to the IRS. In addition, if the Acquiring ETF initially qualifies as a RIC but subsequently fails to qualify as a RIC for a period greater than two taxable years, the Acquiring ETF generally would be required to recognize and pay taxes on any net unrealized gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if the Acquiring ETF had been liquidated) or, alternatively, to be subject to tax on such unrealized gain recognized for a period of 10 years, in order to requalify as a RIC in a subsequent year.
EQUALIZATION ACCOUNTING
The Acquiring ETF may use the equalization method of accounting to allocate a portion of its earnings and profits (which generally equals the Acquiring ETF’s undistributed investment company taxable income and net capital gain, with certain adjustments) to redemption proceeds. This method permits the Acquiring ETF to achieve more balanced distributions for both continuing and redeeming shareholders. Although using this method generally does not affect the Acquiring ETF’s total returns, it may reduce the amount that the Acquiring ETF would otherwise distribute to continuing shareholders by reducing the effect of redemptions of shares on Acquiring ETF distributions to shareholders. However, the IRS may not have expressly sanctioned the particular equalization methods that may be used by the Acquiring ETF, and thus the Acquiring ETF’s use of these methods may be subject to IRS scrutiny.
CAPITAL LOSS CARRYFORWARDS
The Acquiring ETF may carry forward indefinitely a net capital loss to offset its capital gain. The excess of the Acquiring ETF’s net short-term capital loss over its net long-term capital gain is treated as a short-term capital loss arising on the first day of the Acquiring ETF’s next taxable year, and the excess of the Acquiring ETF’s net long-term capital loss over its net short-term capital gain is treated as a long-term capital loss arising on the first day of the Acquiring ETF’s next taxable year. If future capital gain is offset by capital loss carryforwards, such future capital gain is not subject to fund-level U.S. federal income tax, regardless of whether it is distributed to shareholders. Accordingly, the Acquiring ETF does not expect to distribute any such offsetting capital gain. The Acquiring ETF cannot carry back or carry forward any net operating losses.
EXCISE TAX
If the Acquiring ETF was to fail to distribute by December 31 of each calendar year at least the sum of 98% of its ordinary income for that year (excluding capital gains and losses), 98.2% of its capital gain net income (adjusted for certain net ordinary losses) for the 12-month period ending on October 31 of that year, and any of its ordinary income and capital gain net income from previous years that was not distributed during such years, the Acquiring ETF would be subject to a nondeductible 4% U.S. federal excise tax on the undistributed amounts (other than to the extent of its tax‑exempt interest income, if any). For these purposes, the Acquiring ETF is treated as having distributed any amount on which it is subject to corporate‑level U.S. federal income tax for the taxable year ending within the calendar year. The Acquiring ETF generally intends to distribute, or be deemed to have distributed, substantially all of its ordinary income and capital gain net income, if any, by the end of each calendar year, and thus expects not to be subject to the excise tax. However, no assurance can be given that the Acquiring ETF will not be subject to the excise tax. Moreover, the Acquiring ETF reserves the right to pay an excise tax rather than make an additional distribution when circumstances warrant (for example, the amount of excise tax to be paid by the Acquiring ETF is determined to be de minimis).
TAXATION OF DISTRIBUTIONS
Distributions paid out of the Acquiring ETF’s current and accumulated earnings and profits (as determined at the end of the year), whether paid in cash or reinvested in the Acquiring ETF, generally are deemed to be taxable distributions and must be reported by each shareholder who is
required to file a U.S. federal income tax return. Dividends and other distributions on the Acquiring ETF’s shares generally are subject to U.S. federal income tax as described herein to the extent they do not exceed the Acquiring ETF’s realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder’s investment. Such distributions are likely to occur in respect of shares acquired at a time when the Acquiring ETF’s NAV reflects gains that are either unrealized or realized but not distributed. For U.S. federal income tax purposes, the Acquiring ETF’s earnings and profits, described above, are determined at the end of the Acquiring ETF’s taxable year, and are allocated pro rata to distributions paid over the entire year. Distributions in excess of the Acquiring ETF’s current and accumulated earnings and profits first are treated as a return of capital up to the amount of a shareholder’s tax basis in the shareholder’s shares of the Acquiring ETF and then as capital gain. The Acquiring ETF may make distributions in excess of its earnings and profits, from time to time.
For U.S. federal income tax purposes, distributions of investment income and distributions of gains from the sale of investments that the Acquiring ETF owned for one year or less typically are taxable as ordinary income. Distributions properly reported in writing by the Acquiring ETF as capital gain dividends will be taxable to shareholders as long-term capital gain (to the extent such distributions do not exceed the Acquiring ETF’s net capital gain for the taxable year) regardless of how long a shareholder has held shares of the Acquiring ETF, and such distributions do not qualify as dividends for purposes of the dividends-received deduction or as qualified dividend income. The Acquiring ETF will report capital gain dividends, if any, in a written statement furnished to its shareholders after the close of the Acquiring ETF’s taxable year.
Fluctuations in foreign currency exchange rates may result in foreign exchange gain or loss on transactions in foreign currencies, foreign currency-denominated debt obligations, and certain foreign currency options, futures contracts, and forward contracts. Such gains or losses are generally characterized as ordinary income or loss for tax purposes. The Acquiring ETF must make certain distributions in order to qualify as a RIC, and the timing of and character of transactions such as foreign currency-related gains and losses may result in the fund paying a distribution treated as a return of capital. Such distribution is nontaxable to the extent of the recipient’s basis in its shares.
Some states will not tax distributions made to individual shareholders that are attributable to interest the Acquiring ETF earned on direct obligations of the U.S. government if the Acquiring ETF meets the state’s minimum investment or reporting requirements, if any. Investments in GNMA or FNMA securities, bankers’ acceptances, commercial paper, and repurchase agreements collateralized by U.S. Government Securities generally do not qualify for state tax-free treatment. This exemption may not apply to corporate shareholders.
DIVIDEND REINVESTMENT SERVICE.
The Acquiring ETF will not make the DTC book-entry dividend reinvestment service available for use by beneficial owners for reinvestment of their cash proceeds, but certain individual broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by beneficial owners of the Acquiring ETF through DTC Participants for reinvestment of their dividend distributions. Investors should contact their brokers to ascertain the availability and description of these services. Beneficial owners should be aware that each broker may require
investors to adhere to specific procedures and timetables in order to participate in the dividend reinvestment service and investors should ascertain from their brokers such necessary details. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole shares issued by the Acquiring ETF at NAV. Distributions reinvested in additional shares of the Acquiring ETF will nevertheless be taxable to beneficial owners acquiring such additional shares to the same extent as if such distributions had been received in cash.
COST BASIS REPORTING
In general, the Acquiring ETF must report cost basis information to its shareholders and the IRS for redemptions of covered shares. Shares of the Acquiring ETF purchased on or after January 1, 2012, generally are treated as covered shares, and shares of the Acquiring ETF purchased before January 1, 2012, and shares of the Acquiring ETF without complete cost basis information generally are treated as noncovered shares. Acquiring ETF shareholders should consult their tax advisers to obtain more information about how these cost basis rules apply to them and determine which cost basis method allowed by the IRS is best for them.
TAXATION OF CERTAIN INVESTMENTS
PFICS. Passive foreign investment companies (“PFICs”) are generally defined as foreign corporations with respect to which at least 75% of their gross income for their taxable year is income from passive sources (such as interest, dividends, certain rents and royalties, or capital gains) or at least 50% of their assets on average produce, or are held for the production of, such passive income. If the Acquiring ETF acquires any equity interest in a PFIC, the Acquiring ETF could be subject to U.S. federal income tax and interest charges on excess distributions received from the PFIC or on gain from the sale of such equity interest in the PFIC, even if all income or gain actually received by the Acquiring ETF is timely distributed to its shareholders. Excess distributions will be characterized as ordinary income even though, absent the application of PFIC rules, some excess distributions may have been classified as capital gain.
The Acquiring ETF may not pass through to its shareholders any credit or deduction for taxes and interest charges incurred with respect to PFICs. Elections may be available that would ameliorate these adverse tax consequences, but such elections could require the Acquiring ETF to recognize taxable income or gain without the concurrent receipt of cash. Investments in PFICs could also result in the treatment of associated capital gains as ordinary income. The Acquiring ETF may attempt to limit or manage its holdings in PFICs to minimize its tax liability or maximize their returns from these investments, but there can be no assurance that they would be able to do so. Moreover, because it is not always possible to identify a foreign corporation as a PFIC in advance of acquiring shares in the corporation, the Acquiring ETF may incur the tax and interest charges described above in some instances. Dividends paid by the Acquiring ETF attributable to income and gains derived from PFICs will not be eligible to be treated as qualified dividend income.
U.S. FEDERAL INCOME TAX RATES
Non‑corporate Acquiring ETF shareholders (i.e., individuals, trusts, and estates) are taxed at a maximum rate of 37% on ordinary income and 20% on net capital gain.
In general, qualified dividend income realized by non‑corporate Acquiring ETF shareholders is taxable at the same rate as net capital gain. Qualified dividend income is dividend income attributable to certain U.S. and foreign corporations, as long as certain holding period requirements are met. If less than 95% of the income of the Acquiring ETF is attributable to qualified dividend income, then typically only the portion of the Acquiring ETF’s distributions that is attributable to qualified dividend income and reported in writing as such in a timely manner is treated as qualified dividend income in the hands of individual shareholders. Payments received by the Acquiring ETF from securities lending, repurchase, and other derivative transactions ordinarily do not qualify. The rules attributable to the qualification of Acquiring ETF distributions as qualified dividend income are complex, including the holding period requirements. Individual Acquiring ETF shareholders therefore are urged to consult their own tax advisers and financial planners.
The maximum stated corporate U.S. federal income tax rate applicable to ordinary income and net capital gain is 21%. Actual marginal tax rates may be higher for some shareholders, for example, through reductions in deductions. Distributions from the Acquiring ETF may qualify for the dividends-received deduction applicable to corporate shareholders with respect to certain dividends. Naturally, the amount of tax payable by any taxpayer is affected by a combination of tax laws covering, for example, deductions, credits, deferrals, exemptions, and sources of income.
In addition, non-corporate Acquiring ETF shareholders generally are subject to an additional 3.8% tax on their net investment income, which usually includes taxable distributions received from the Acquiring ETF and taxable gain on the disposition of the Acquiring ETF’s shares if the shareholders meets a taxable income test.
Under the Foreign Account Tax Compliance Act (“FATCA”) U.S. federal income tax withholding at a 30% rate is imposed on dividends and proceeds of redemptions in respect of Shares received by Acquiring ETF shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Acquiring ETF does not pay any additional amounts in respect to any amounts withheld.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Distributions on, and the payment of the proceeds of a disposition of the Shares generally is subject to information reporting if made within the United States or through certain U.S.-related financial intermediaries. Information returns must be filed with the IRS, and copies of information returns may be made available to the tax authorities of the country in which a holder resides or is incorporated under the provisions of a specific treaty or agreement.
The Acquiring ETF generally is required to withhold and remit to the U.S. Treasury, subject to exemptions such as those for certain corporate or foreign shareholders, an amount equal to 24% of all distributions and redemption proceeds (including proceeds from exchanges and in-kind redemptions) paid or credited to the Acquiring ETF shareholder if (i) the shareholder fails to furnish the Acquiring ETF with a correct taxpayer identification number (“TIN”), (ii) the shareholder fails to certify under penalties of perjury that the TIN provided is correct, (iii) the shareholder fails to make certain other certifications, or (iv) the IRS notifies the Acquiring ETF that the shareholder’s TIN is incorrect or that the shareholder is otherwise subject to backup withholding. Backup
withholding is not an additional tax imposed on the shareholder. The shareholder may apply amounts withheld as a credit against the shareholder’s U.S. federal income tax liability and may obtain a refund of any excess amounts withheld as long as the required information is furnished to the IRS. If a shareholder fails to furnish a valid TIN upon request, the shareholder can also be subject to IRS penalties. A shareholder may generally avoid backup withholding by furnishing a properly completed IRS Form W-9. State backup withholding may also be required to be withheld by the Acquiring ETF under certain circumstances.
FOREIGN SHAREHOLDERS
For purposes of this discussion, foreign shareholders include (i) nonresident alien individuals, (ii) foreign trusts (i.e., any trust other than a trust with respect to which a U.S. court is able to exercise primary supervision over administration of that trust and one or more U.S. persons have authority to control substantial decisions of that trust), (iii) foreign estates (i.e., estates whose income is not subject to U.S. tax regardless of source), and (iv) foreign corporations.
Generally, distributions made to foreign shareholders are subject to non-refundable U.S. federal income tax withholding at a 30% rate (or such lower rate provided under an applicable income tax treaty) even if they are funded by income or gains (such as portfolio interest, short-term capital gain, or foreign‑source dividend and interest income) that, if paid to a foreign person directly, would not be subject to such withholding.
Under legislation that has been available from time to time, the Acquiring ETF could report in writing to its shareholders certain distributions made to foreign shareholders that would not be subject to U.S. federal income tax withholding where the distribution is attributable to specific sources (such as portfolio interest and short-term capital gain), certain requirements are met and the Acquiring ETF makes appropriate designations to pay such exempt distributions. Even if the Acquiring ETF realizes income from such sources, no assurance can be made that the Acquiring ETF would meet such requirements or make such designations. Where Shares are held through an intermediary, even if the Acquiring ETF makes the appropriate designation, the intermediary may withhold U.S. federal income tax.
Capital gains dividends and gains recognized by a foreign shareholder on the redemption of Shares generally are not subject to U.S. federal income tax withholding, provided that certain requirements are satisfied.
Under FATCA, a withholding tax of 30% is imposed on dividends on, and the gross proceeds of a disposition of, Shares paid to certain foreign shareholders unless various information reporting requirements are satisfied. Such withholding tax generally applies to non-U.S. financial institutions, which are defined for this purpose as non-U.S. entities that (i) accept deposits in the ordinary course of a banking or similar business, (ii) are engaged in the business of holding financial assets for the account of others, or (iii) are engaged, or hold themselves out as being engaged, primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such assets. Prospective foreign shareholders are encouraged to consult their tax advisers regarding the implications of FATCA on their investment in the Acquiring ETF.
Before investing in the Acquiring ETF’s shares, a prospective foreign shareholder should consult with its own tax advisers, including whether the shareholder’s investment can qualify for benefits under an applicable income tax treaty.
TAX SHELTER REPORTING REGULATIONS
Generally, under U.S. Treasury regulations, if an individual shareholder recognizes a loss of $2 million or more, or if a corporate shareholder recognizes a loss of $10 million or more, with respect to the Acquiring ETF’s shares, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of securities are in many cases exempt from this reporting requirement, but shareholders of a RIC are not exempt under current guidance. Future guidance may extend the current exemption from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their own tax advisers to determine the applicability of these regulations in light of their individual circumstances.
TAX LEGISLATION
Prospective shareholders should recognize that the present U.S. federal income tax treatment of the Acquiring ETF and its shareholders may be modified by legislative, judicial, or administrative actions at any time, which may be retroactive in effect. The rules addressing U.S. federal income taxation are constantly under review by Congress, the IRS, and the U.S. Treasury, and statutory changes, as well as promulgation of new regulations, revisions to existing statutes, and revised interpretations of established concepts, occur frequently. You should consult your advisers concerning the status of legislative proposals that may pertain to holding shares of the Acquiring ETF.
The foregoing summary does not describe fully the income and other tax consequences of an investment in the Acquiring ETF. Acquiring ETF investors are strongly urged to consult with their tax advisers, with specific reference to their own respective situations, regarding the potential tax consequences of an investment in the Acquiring ETF.
ANTI-MONEY LAUNDERING PROGRAM
Hennessy Funds Trust has established an Anti-Money Laundering Compliance Program (the “Program”) as required by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“PATRIOT Act”). To ensure compliance with this law, the Program provides for the development of internal practices, procedures, and controls, designation of anti‑money laundering compliance officers, an ongoing training program, and an independent audit function to determine the effectiveness of the Program.
Procedures to implement the Program include, but are not limited to, determining that the Distributor and Fund Services have established proper anti-money laundering procedures, reporting suspicious or fraudulent activity, and performing a complete and thorough review of all new opening account applications. The Acquiring ETF may not transact business with any person or legal entity whose identity and whose beneficial owners, if applicable, cannot be adequately verified under the provision of the PATRIOT Act.
As a result of the Program, the Acquiring ETF may be required to freeze the account of a shareholder if the shareholder appears to be involved in suspicious activity or if certain account information matches information on government lists of known terrorists or other suspicious persons, or the Acquiring ETF may be required to transfer the account or proceeds of the account to a governmental agency.
OTHER INFORMATION
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Acquiring ETF may pay fees to financial intermediaries, such as brokers or third-party administrators, for non-distribution‑related sub-transfer agency, administrative, sub‑accounting, and other shareholder services. Fees paid pursuant to such agreements are generally based on either (i) a percentage of the average daily net assets of Acquiring ETF shareholders serviced by a financial intermediary or (ii) the number of accounts held by Acquiring ETF shareholders that are serviced by a financial intermediary.
Hennessy Advisors also may pay certain financial intermediaries for certain activities related to the Acquiring ETF. These payments are separate from any fees the Acquiring ETF pays to those financial intermediaries. Any payments made by Hennessy Advisors are made from its own assets and not from the assets of the Acquiring ETF. These payments do not increase the price paid by investors for the purchase of shares of, or the cost of owning, the Acquiring ETF. Hennessy Advisors may pay for financial intermediaries to participate in marketing activities and presentations, educational training programs, activities designed to make registered representatives, other professionals, and individual investors more knowledgeable about the Acquiring ETF, or activities relating to the support of technology platforms and reporting systems. Hennessy Advisors may also make payments to financial intermediaries for certain printing, publishing, and mailing costs associated with the Acquiring ETF. Additionally, Hennessy Advisors may make payments to financial intermediaries that make shares of the Acquiring ETF available to their clients or for otherwise promoting the Acquiring ETF. Payments of this type are sometimes referred to as revenue-sharing payments.
Payments to financial intermediary may be significant to that financial intermediary, and amounts that financial intermediaries pay to an investor’s salesperson or other investment professional may also be significant for the investor’s salesperson or other investment professional. Because a financial intermediary may make decisions about which investment options it recommends or makes available to its clients and what services to provide for various products based on payments it receives or is eligible to receive, these payments create conflicts of interest between the financial intermediary and its clients, and these financial incentives may cause the financial intermediary to recommend the Acquiring ETF over other investments. The same conflict of interest exists with respect to an investor’s salesperson or other investment professional if such individual receives similar payments from a financial intermediary.
The incremental assets purchased by shareholders through financial intermediaries to which Hennessy Advisors makes payments are not as profitable to Hennessy Advisors as those purchased in direct shareholder accounts. A significant majority of shareholders may invest in the Acquiring ETF through such financial intermediaries.
DESCRIPTION OF SHARES
The Acquiring ETF’s authorized capital consists of an unlimited number of shares of beneficial interest, having no par value. Shareholders are entitled to (i) one vote per full share, (ii) such distributions as may be declared by the Hennessy Funds’ Board of Trustees out of funds legally available, and (iii) upon liquidation, to participate ratably in the assets available for distribution. There are no conversion or sinking fund provisions applicable to shares, and the holders have no preemptive rights and may not cumulate their votes in the election of Trustees. Consequently, the holders of more than 50% of shares voting for the election of Trustees can elect all the Trustees, and in such event, the holders of the remaining shares voting for the election of Trustees would be unable to elect any persons as Trustees. As indicated below, Hennessy Funds Trust does not anticipate holding an annual meeting in any year in which the election of Trustees is not required to be acted on by shareholders under the 1940 Act.
When issued for payment as described in the Proxy Statement/Prospectus, shares of the Acquiring ETF will be fully paid and non-assessable.
Pursuant to the Trust Instrument, the Trustees may establish and designate one or more separate and distinct series of shares, each of which would be authorized to issue an unlimited number of shares. Additionally, without obtaining any prior authorization or vote of shareholders, the Trustees may redesignate or reclassify any issued shares of any series. In the event that more than one series is established, each share outstanding, regardless of series, would still entitle its holder to one vote. As a general matter, shares would be voted in the aggregate and not by series, except where class voting would be required by the 1940 Act (e.g., change in investment policy or approval of an investment advisory agreement). All consideration received from the sale of shares of any series, together with all income, earnings, profits and proceeds thereof, would belong to that series and would be charged with the liabilities in respect of that series and of that series’ share of the general liabilities of the Acquiring ETF, as the case may be, in the proportion that the total net assets of the series bear to the total net assets of all series. The NAV of a share of any series would be based on the assets belonging to that series less the liabilities charged to that series, and dividends could be paid on shares of any series only out of lawfully available assets belonging to that series. In the event of liquidation or dissolution of any series, the shareholders would be entitled to the assets belonging to that series.
The Trust Instrument contains an express disclaimer of shareholder liability for Hennessy Funds Trust’s acts or obligations and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by Hennessy Funds Trust or the Trustees. The Trust Instrument provides for indemnification and reimbursement of expenses out of the Acquiring ETF’s property, as applicable, for any shareholder held personally liable for its obligations. The Trust Instrument also provides that Hennessy Funds Trust would, upon request, assume the defense of any claim made against any shareholder for any act or obligation of Hennessy Funds Trust and satisfy any judgment thereon.
The Trust Instrument further provides that the Trustees are not liable for errors of judgment or mistakes of fact or law, but nothing in the Trust Instrument protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of such Trustee’s office.
SHAREHOLDER MEETINGS
Hennessy Funds Trust does not expect to hold an annual meeting of shareholders in any year in which the election of Trustees is not required to be acted on by shareholders under the 1940 Act. At its discretion, the Hennessy Funds’ Board of Trustees may call a special meeting of shareholders to allow shareholders to vote on any matter that the Hennessy Funds’ Board of Trustees deems necessary or advisable.
Hennessy Funds Trust’s Trust Instrument and Bylaws contain procedures for the removal of Trustees by Hennessy Funds Trust’s shareholders. At any duly called meeting of shareholders and at which a quorum is present, the shareholders may, by the affirmative vote of the holders of at least two‑thirds of the outstanding shares, remove any Trustee.
Upon the written request of the holders of shares entitled to not less than 10% of all the votes entitled to be cast at such meeting, the Secretary of Hennessy Funds Trust must promptly call a special meeting of shareholders to vote on the question of removal of any Trustee. Whenever 10 or more shareholders of record who have been such for at least six months preceding the date of application and who hold in the aggregate either shares having a NAV of at least $25,000 or at least 1% of the total outstanding shares, whichever is less, apply to the Secretary in writing stating that they wish to communicate with other shareholders with a view to obtaining signatures to a request for a meeting as described above and accompanied by a form of communication and request which they wish to transmit, the Secretary must, within five business days after such application, either (i) afford to such applicants access to a list of the names and addresses of all shareholders as recorded on the books of Hennessy Funds Trust or (ii) inform such applicants as to the approximate number of shareholders of record and the approximate cost of mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in clause (ii) of the last sentence of the preceding paragraph, the Secretary, upon the written request of such applicants accompanied by a tender of the material to be mailed and of the reasonable expenses of mailing, must, with reasonable promptness, mail such material to all shareholders of record at their addresses as recorded on the books unless, within five business days after such tender, the Secretary mails to such applicants and files with the SEC, together with a copy of the material to be mailed, a written statement signed by at least a majority of the Trustees to the effect that, in their opinion, either such material contains untrue statements of fact, omits to state facts necessary to make the statements contained therein not misleading, or would be in violation of applicable law, and specifying the basis of such opinion.
After opportunity for hearing on the objections specified in the written statement so filed, the SEC may, and if demanded by the Trustees or by such applicants must, enter an order either sustaining one or more of such objections or refusing to sustain any of them. If the SEC enters an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the SEC finds, after notice and opportunity for hearing, that all objections so sustained have been met and enters an order so declaring, the Secretary must mail copies of such material to all shareholders with reasonable promptness after the entry of such order and the renewal of such tender.
Rule 18f-2 under the 1940 Act provides that any matter required under the provisions of the 1940 Act, applicable state law, or otherwise to be submitted to the holders of the outstanding voting securities of an investment company such as Hennessy Funds Trust has not been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each fund affected by such matter. Rule 18f-2 further provides that a fund is deemed affected by a matter unless it is clear that the interests of each fund in the matter are identical or that the matter does not affect any interest of such fund. The rule exempts the selection of independent auditors and the election of Trustees from the separate voting requirements.
REGISTRATION STATEMENT
The Proxy Statement/Prospectus and this SAI do not contain all the information included in the Registration Statement filed with the SEC under the 1933 Act with respect to the securities offered by the Proxy Statement/Prospectus. The general public can review the Registration Statement, including the exhibits filed therewith, on the EDGAR Database on the SEC’s Internet website at http://www.sec.gov. Copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at publicinfo@sec.gov.
Statements contained in the Proxy Statement/Prospectus and this SAI as to the contents of any contract or other document are not complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement of which this SAI and the Proxy Statement/Prospectus form a part, and each such statement is qualified in all respects by such reference.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The law firm of Foley & Lardner LLP, 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202‑5306, will serve as counsel to the Acquiring ETF. Tait, Weller & Baker LLP, Two Liberty Place, 50 South 16th Street, Suite 2900, Philadelphia, Pennsylvania 19102‑2529, will serve as the independent registered public accounting firm to the Acquiring ETF. Tait, Weller & Baker LLP will audit and report on the Acquiring ETF’s annual financial statements, review certain regulatory reports and the Acquiring ETF’s income tax returns, and perform other auditing and tax services when engaged to do so.
FINANCIAL STATEMENTS
Because the Acquiring ETF will commence operations on or following the date of this SAI, financial statements are not available.
SUPPLEMENTAL FINANCIAL INFORMATION
A table showing the fees and expenses of the Target ETF and the fees and expenses of the Acquiring ETF is included in the sub-section entitled “Comparison Fee Tables and Examples” of the Proxy Statement/Prospectus.
The Reorganization will not result in a material change to the Target ETF’s investment portfolio due to the investment restrictions of the Acquiring ETF. In particular, securities held by the Target ETF are eligible to be held by the Acquiring ETF. As a result, a schedule of investments of the Target ETF modified to show the
effects of the applicable Reorganization is not required and is not included. Notwithstanding the foregoing, changes may be made to the Target ETF’s investment portfolio before the Reorganization and to the Acquiring ETF’s investment portfolio following the Reorganization.
There are no material differences in the accounting policies of the Target ETF as compared to those of the Acquiring ETF.
