1933 ACT FILE NO.: 333-199229
1940 ACT FILE NO.: 811-21056
CIK NO.: 1617491
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
AMENDMENT NO. 1
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
A. Exact name of trust: ADVISORS DISCIPLINED TRUST 1368
B. Name of depositor: ADVISORS ASSET MANAGEMENT, INC.
C. Complete address of depositor's principal executive offices:
18925 Base Camp Road
Monument, Colorado 80132
D. Name and complete address of agent for service:
WITH A COPY TO:
SCOTT COLYER SCOTT R. ANDERSON
Advisors Asset Management, Inc. Chapman and Cutler LLP
18925 Base Camp Road 111 West Monroe Street
Monument, Colorado 80132 Chicago, Illinois 60603-4080
E. Title of securities being registered: Units of undivided beneficial
interest in the trust
F. Approximate date of proposed public offering:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT
[ ] Check box if it is proposed that this filing will become effective
on ____________, 2014 at _____ pursuant to Rule 487.
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The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
The information in this prospectus is not complete and may be changed. No one
may sell units of the trust until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell units and is not soliciting an offer to buy units in any state
where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS DATED OCTOBER 24, 2014
SUBJECT TO COMPLETION
VALUE ARCHITECTS BALANCED FLEX CORE PORTFOLIO, SERIES 2014-1
(ADVISORS DISCIPLINED TRUST 1368)
A portfolio seeking
above average
total return
PROSPECTUS
____________, 2014
[LOGO] As with any investment, the Securities
and Exchange Commission has not approved
AAM or disapproved of these securities or
passed upon the adequacy or accuracy of
ADVISORS this prospectus. Any contrary
ASSET MANAGEMENT representation is a criminal offense.
------------------
INVESTMENT SUMMARY
------------------
INVESTMENT OBJECTIVE
The trust seeks to provide above average total return. There is no assurance
the trust will achieve its objective.
PRINCIPAL INVESTMENT STRATEGY
The trust seeks to achieve its objective by investing in a diversified
portfolio of publicly traded common and preferred securities of operating
companies and shares of closed-end investment companies (known as "closed-end
funds" and referred to herein as the "funds") selected by Value Architects Asset
Management LLC (the "Portfolio Consultant"). The Portfolio Consultant sought to
identify securities for the portfolio with historical, fundamental profitability
metrics generally superior to industry peers.
For the funds portion of the portfolio, the Portfolio Consultant selected
funds with policies to invest primarily in fixed income securities of U.S.
and/or foreign issuers. Certain funds may invest in securities of issuers in
emerging markets and/or high yield, high risk bonds ("junk" bonds).
Approximately ______% of the portfolio consists of funds classified as "non-
diversified" under the Investment Company Act of 1940. These funds have the
ability to invest more than 5% of their assets in securities of a single issuer,
which could reduce diversification.
The trust's portfolio is characterized as a CORE portfolio by the Portfolio
Consultant. CORE portfolios are defined by the Portfolio Consultant as balanced
or equity-focused portfolios with investments in companies in multiple industry
sectors.
PRINCIPAL RISKS
As with all investments, you can lose money by investing in this trust. The
trust also might not perform as well as you expect. This can happen for reasons
such as these:
* SECURITY PRICES WILL FLUCTUATE. The value of your investment may fall over
time.
* AN ISSUER MAY BE UNABLE TO MAKE INCOME AND/OR PRINCIPAL PAYMENTS, OR DECLARE
DIVIDENDS, IN THE FUTURE. This may reduce the level of income the trust
receives which would reduce your income and cause the value of your units
to fall.
* THE FINANCIAL CONDITION OF AN ISSUER MAY WORSEN OR ITS CREDIT RATINGS MAY
DROP, RESULTING IN A REDUCTION IN THE VALUE OF YOUR UNITS. This may occur
at any point in time, including during the primary offering period.
* THE VALUE OF CERTAIN SECURITIES WILL GENERALLY FALL IF INTEREST RATES, IN
GENERAL, RISE. No one can predict whether interest rates will rise or fall
in the future.
* THE TRUST INVESTS IN SHARES OF CLOSED-END FUNDS. CLOSED-END FUNDS TEND TO
TRADE AT A DISCOUNT FROM THEIR NET ASSET VALUE AND ARE SUBJECT TO RISKS
RELATED TO FACTORS SUCH AS THE MANAGER'S ABILITY TO ACHIEVE A FUND'S
OBJECTIVE, MARKET CONDITIONS AFFECTING A FUND'S INVESTMENTS AND USE OF
LEVERAGE. The trust and the underlying funds have management and operating
expenses. You will bear not only your share of the trust's expenses, but
also the expenses of the underlying funds. By investing in funds, the
trust incurs greater expenses than you would incur if you invested directly
in the funds.
* THE TRUST WILL RECEIVE EARLY RETURNS OF PRINCIPAL IF SECURITIES ARE CALLED OR
SOLD BEFORE THE TRUST TERMINATION. If this happens your income will
decline and you may not be able to reinvest the money you receive at as
high a yield.
2 Investment Summary
* THE TRUST AND/OR THE UNDERLYING FUNDS MAY INVEST SIGNIFICANTLY IN STOCKS OF
SMALL AND MID-SIZE COMPANIES. These stocks are often more volatile and
have lower trading volumes than stocks of larger companies. Small and mid-
size companies may have limited products or financial resources, management
inexperience and less publicly available information.
* THE TRUST AND/OR THE UNDERLYING FUNDS MAY INVEST IN UNRATED SECURITIES OR
SECURITIES RATED BELOW INVESTMENT GRADE AND ARE CONSIDERED TO BE "JUNK"
SECURITIES. These securities are considered to be speculative and are
subject to greater market and credit risks. Accordingly, the risk of
default is higher than investment grade securities. In addition, these
securities may be more sensitive to interest rate changes and may be more
likely to make early returns of principal.
* SECURITIES OF FOREIGN ISSUERS HELD BY THE UNDERLYING FUNDS IN THE TRUST
PRESENT RISKS BEYOND THOSE OF U.S. ISSUERS. These risks may include market
and political factors related to the issuer's foreign market, international
trade conditions, the global and country-specific political environment,
less regulation, smaller or less liquid markets, increased volatility,
differing accounting practices and changes in the value of foreign
currencies.
* WE<F1>* DO NOT ACTIVELY MANAGE THE PORTFOLIO. While the closed-end funds
have managed portfolios, except in limited circumstances, the trust will
hold, and continue to buy, shares of the same funds even if their market
value declines.
--------------------
<F1>* "AAM," "we" and related terms mean Advisors Asset Management, Inc., the
trust sponsor, unless the context clearly suggests otherwise.
Investment Summary 3
WHO SHOULD INVEST
You should consider this investment if you want:
* to own a defined portfolio of securities seeking above average return.
* to diversify your overall portfolio with investments in various types of
securities.
* the potential to receive above average total return.
You should not consider this investment if you:
* are uncomfortable with the risks of an unmanaged investment in the
securities held by the trust.
* are uncomfortable with the trust's investment strategy.
* seek aggressive growth without current income.
* seek capital preservation as a primary objective.
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ESSENTIAL INFORMATION
---------------------
UNIT PRICE AT INCEPTION $10.0000
INCEPTION DATE ____________, 2014
TERMINATION DATE ____________, ____
ESTIMATED NET ANNUAL DISTRIBUTIONS
First year* $______ per unit
Second year* $______ per unit
DISTRIBUTION DATES 25th day of each month
RECORD DATES 10th day of each month
CUSIP NUMBERS
Standard Accounts
Cash distributions _________
Reinvest distributions _________
Fee Based Accounts
Cash distributions _________
Reinvest distributions _________
TICKER SYMBOL ______
MINIMUM INVESTMENT $1,000/100 units
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<FN>
* As of ____________, 2014 and may vary thereafter.
</FN>
FEES AND EXPENSES
The amounts below are estimates of the direct and indirect expenses that you
may incur based on a $10 unit price. Actual expenses may vary.
AS A % AMOUNT
OF $1,000 PER 100
SALES FEE INVESTED UNITS
------------------------
Initial sales fee 1.00% $10.00
Deferred sales fee 2.45 24.50
Creation & development fee 0.50 5.00
------- -------
Maximum sales fee 3.95% $39.50
======= =======
ORGANIZATION COSTS 0.38% $3.80
======= =======
AS A % AMOUNT
ANNUAL OF NET PER 100
OPERATING EXPENSES ASSETS UNITS
------------------------
Trustee fee & expenses _.__% $_____
Supervisory, evaluation
and administration fees _.__ _____
Closed-end fund expenses _.__ _____
------- -------
Total _.__% $_____
======= =======
The initial sales fee is the difference between the total sales fee (maximum
of 3.95% of the unit offering price) and the sum of the remaining deferred sales
fee and the total creation and development fee. The deferred sales fee is fixed
at $0.245 per unit and is paid in three monthly installments beginning
____________, ____. The creation and development fee is fixed at $0.05 per
unit and is paid at the end of the initial offering period (anticipated to be
six months). The trust will indirectly bear the management and operating
expenses of the underlying closed-end funds. While the trust will not pay these
expenses directly out of its assets, these expenses are shown in the trust's
annual operating expenses above to illustrate the impact of these expenses.
EXAMPLE
This example helps you compare the cost of this trust with other unit trusts
and mutual funds. In the example we assume that the expenses do not change and
that the trust's annual return is 5%. Your actual returns and expenses will
vary. Based on these assumptions, you would pay these expenses for every
$10,000 you invest in the trust:
1 year $_____
2 years (life of trust) $_____
These amounts are the same regardless of whether you sell your investment at
the end of a period or continue to hold your investment.
4 Investment Summary
VALUE ARCHITECTS BALANCED FLEX CORE PORTFOLIO, SERIES 2014-1
(ADVISORS DISCIPLINED TRUST 1368)
PORTFOLIO
AS OF THE TRUST INCEPTION DATE, ____________, 2014
PERCENTAGE OF
NUMBER AGGREGATE MARKET COST OF
OF TICKER OFFERING VALUE PER SECURITIES
SHARES SYMBOL ISSUER(1) PRICE SHARE(1) TO TRUST(2)
---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK -- ______%
(continued)
Investment Summary 5
VALUE ARCHITECTS BALANCED FLEX CORE PORTFOLIO, SERIES 2014-1
(ADVISORS DISCIPLINED TRUST 1368)
PORTFOLIO (CONTINUED)
AS OF THE TRUST INCEPTION DATE, ____________, 2014
PERCENTAGE OF COST OF
NUMBER AGGREGATE MARKET SECURITIES
OF OFFERING REDEMPTION VALUE PER TO
SHARES ISSUER(5) PRICE PROVISIONS(6) SHARE(1) TRUST(1)(2)
------------------------------------------------------------------------------------------------------------------------------------
PREFERRED SECURITIES -- ______%
(continued)
6 Investment Summary
VALUE ARCHITECTS BALANCED FLEX CORE PORTFOLIO, SERIES 2014-1
(ADVISORS DISCIPLINED TRUST 1368)
PORTFOLIO (CONTINUED)
AS OF THE TRUST INCEPTION DATE, ____________, 2014
PERCENTAGE OF
NUMBER AGGREGATE MARKET COST OF
OF TICKER OFFERING VALUE PER SECURITIES
SHARES SYMBOL ISSUER(1) PRICE SHARE(1) TO TRUST(2)
---------------------------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT COMPANIES -- ______%
CLOSED-END FUNDS - ______%
--------- ----------
100.00% $_______
========= ==========
<FN>
Notes to Portfolio
(1) Securities are represented by contracts to purchase such securities. The
value of each security is based on the most recent closing sale price of
each security as of the close of regular trading on the New York Stock
Exchange on the business day prior to the trust's inception date. In
accordance with Accounting Standards Codification 820, "Fair Value
Measurements", the trust's investments are classified as Level 1, which
refers to security prices determined using quoted prices in active markets
for identical securities.
(2) The cost of the securities to the sponsor and the sponsor's profit or
(loss) (which is the difference between the cost of the securities to the
sponsor and the cost of the securities to the trust) are $__________ and
$__________, respectively.
(3) This is a non-income producing security.
(4) This is a security issued by a foreign company that trades on a U.S.
securities exchange.
Common Stock and Preferred Securities comprise approximately ______% of the
investments of the trust, broken down by country of organization as set
forth below:
(5) Shown under this heading is the stated dividend rate of each of the
securities, expressed as an annual dollar amount or as a percentage of par
or stated value. Each security was originally issued with a par or stated
value per share equal to $25. Securities are represented by contracts to
purchase securities.
(6) The securities are first redeemable on such date and at such price as
listed above. Optional redemption provisions, which may be exercised in
whole or in part, are at prices of par or stated value. Optional
redemption provisions generally will occur at times when the redeemed
securities have an offering side evaluation which represents a premium over
par or stated value. To the extent that the securities were acquired at a
price higher than the redemption price, this will represent a loss of
capital when compared with the public offering price of the units when
acquired. Distributions to unitholders will generally be reduced by the
amount of the dividends which otherwise would have been paid with respect
to redeemed securities, and any principal amount received on such
redemption after satisfying any redemption requests for units received by
the trust will be distributed to unitholders. Certain of the securities
have provisions which would allow for their redemption prior to the
earliest stated call date pursuant to the occurrence of certain
extraordinary events.
(7) The security has a "make whole" call option and may be redeemable in whole
or in part at the option of the issuer at a redemption price generally
equal to the greater of (i) 100% of the aggregate principal amount of the
security or (ii) the sum of the present values of the remaining scheduled
payments of principal and interest thereon, discounted to the date of
redemption on a periodic basis at a set premium to the then current
applicable Treasury Rate plus accrued and unpaid interest on the principal
amount being redeemed to the date of redemption.
(8) The Portfolio Consultant and/or its principals and/or their households have
holdings in this company (unaudited).
(9) Clients of the Portfolio Consultant have holdings in this company
(unaudited).
</FN>
Investment Summary 7
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UNDERSTANDING YOUR INVESTMENT
-----------------------------
HOW TO BUY UNITS
You can buy units of the trust on any business day the New York Stock
Exchange is open by contacting your financial professional. Unit prices are
available daily on the Internet at WWW.AAMLIVE.COM. The public offering price
of units includes:
* the net asset value per unit plus
* organization costs plus
* the sales fee.
The "net asset value per unit" is the value of the securities, cash and other
assets in the trust reduced by the liabilities of the trust divided by the total
units outstanding. We often refer to the public offering price of units as the
"offer price" or "purchase price." The offer price will be effective for all
orders received prior to the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. Eastern time). If we receive your order prior to
the close of regular trading on the New York Stock Exchange or authorized
financial professionals receive your order prior to that time and properly
transmit the order to us by the time that we designate, then you will receive
the price computed on the date of receipt. If we receive your order after the
close of regular trading on the New York Stock Exchange, if authorized financial
professionals receive your order after that time or if orders are received by
such persons and are not transmitted to us by the time that we designate, then
you will receive the price computed on the date of the next determined offer
price provided that your order is received in a timely manner on that date. It
is the responsibility of the authorized financial professional to transmit the
orders that they receive to us in a timely manner. Certain broker-dealers may
charge a transaction or other fee for processing unit purchase orders.
VALUE OF THE SECURITIES. We determine the value of the securities as of the
close of regular trading on the New York Stock Exchange on each day that
exchange is open. We generally determine the value of securities using the last
sale price for securities traded on a national securities exchange. For this
purpose, the trustee provides us closing prices from a reporting service
approved by us. In some cases we will price a security based on its fair value
after considering appropriate factors relevant to the value of the security. We
will only do this if a security is not principally traded on a national
securities exchange or if the market quotes are unavailable or inappropriate.
We determined the initial prices of the securities shown under "Portfolio" in
this prospectus as described above at the close of regular trading on the New
York Stock Exchange on the business day before the date of this prospectus. On
the first day we sell units we will compute the unit price as of the close of
regular trading on the New York Stock Exchange or the time the registration
statement filed with the Securities and Exchange Commission becomes effective,
if later.
ORGANIZATION COSTS. During the initial offering period, part of the value of
the units represents an amount that will pay the costs of creating your trust.
These costs include the costs of preparing the registration statement and legal
documents, federal and state registration fees, the Portfolio Consultant's
selection fee, the initial fees and expenses of the trustee and the initial
audit. Your trust will sell securities to reimburse us for these costs at the
end of the initial offering period or after six months, if earlier. The value
of your units will decline when the trust pays these costs.
8 Understanding Your Investment
TRANSACTIONAL SALES FEE. You pay a fee in connection with purchasing units.
We refer to this fee as the "transactional sales fee." The transactional sales
fee has both an initial and a deferred component and equals 3.45% of the public
offering price per unit based on a $10 public offering price per unit. This
percentage amount of the transactional sales fee is based on the unit price on
the trust's inception date. The transactional sales fee equals the difference
between the total sales fee and the creation and development fee. As a result,
the percentage and dollar amount of the transactional sales fee will vary as the
public offering price per unit varies. The transactional sales fee does not
include the creation and development fee which is described under "Expenses."
The maximum sales fee equals 3.95% of the public offering price per unit at
the time of purchase. You pay the initial sales fee at the time you buy units.
The initial sales fee is the difference between the total sales fee percentage
(maximum of 3.95% of the public offering price per unit) and the sum of the
remaining fixed dollar deferred sales fee and the total fixed dollar creation
and development fee. The initial sales fee will be approximately 1.00% of the
public offering price per unit depending on the public offering price per unit.
The deferred sales fee is fixed at $0.245 per unit. Your trust pays the
deferred sales fee in equal monthly installments as described on page 4. If you
redeem or sell your units prior to collection of the total deferred sales fee,
you will pay any remaining deferred sales fee upon redemption or sale of your
units.
If you purchase units after the last deferred sales fee payment has been
assessed, the secondary market sales fee is equal to 3.95% of the public
offering price and does not include deferred payments.
MINIMUM PURCHASE. The minimum amount you can purchase of the trust appears
on page 4 under "Essential Information", but such amounts may vary depending on
your selling firm.
REDUCING YOUR SALES FEE. We offer a variety of ways for you to reduce the
fee you pay. It is your financial professional's responsibility to alert us of
any discount when you order units. Except as expressly provided herein, you may
not combine discounts. Since the deferred sales fee and the creation and
development fee are fixed dollar amounts per unit, your trust must charge these
fees per unit regardless of any discounts. However, if you are eligible to
receive a discount such that your total sales fee is less than the fixed dollar
amounts of the deferred sales fee and the creation and development fee, we will
credit you the difference between your total sales fee and these fixed dollar
fees at the time you buy units.
Large Purchases. You can reduce your sales fee by increasing the size of
your investment:
IF YOU PURCHASE: YOUR FEE WILL BE:
------------------------------------------
Less than $50,000 3.95%
$50,000 - $99,999 3.70
$100,000 - $249,999 3.45
$250,000 - $499,999 3.10
$500,000 - $999,999 2.95
$1,000,000 or more 2.45
We apply these fees as a percent of the public offering price per unit at the
time of purchase. The breakpoints will be adjusted to take into consideration
purchase orders stated in dollars which cannot be completely fulfilled due to
the requirements that only whole units be issued.
You aggregate initial offering period unit orders submitted by the same
person for units of
Understanding Your Investment 9
any of the trusts we sponsor on any single day from any one broker-dealer to
qualify for a purchase level. If you purchase initial offering period units
that qualify for the fee account or rollover/exchange discount described below
and also purchase additional initial offering period units on a single day from
the same broker-dealer that do not qualify for the fee account or
rollover/exchange discount, you aggregate all initial offering period units
purchased for purposes of determining the applicable breakpoint level in the
table above on the additional units, but such additional units will not qualify
for the fee account or rollover/exchange discount described below. Secondary
market unit purchases are not aggregated with initial offering period unit
purchases for purposes of determining the applicable breakpoint level. You can
also include these orders as your own for purposes of this aggregation:
* orders submitted by your spouse or children (including step-children)
under 21 years of age living in the same household and
* orders submitted by your trust estate or fiduciary accounts.
The discounts described above apply only to initial offering period
purchases.
Fee Accounts. Investors may purchase units through registered investment
advisers, certified financial planners or registered broker-dealers who in each
case either charge investor accounts ("Fee Accounts") periodic fees for
brokerage services, financial planning, investment advisory or asset management
services, or provide such services in connection with an investment account for
which a comprehensive "wrap fee" charge ("Wrap Fee") is imposed. You should
consult your financial advisor to determine whether you can benefit from these
accounts. To purchase units in these Fee Accounts, your financial advisor must
purchase units designated with one of the Fee Account CUSIP numbers, if
available. Please contact your financial advisor for more information. If
units of the trust are purchased for a Fee Account and the units are subject to
a Wrap Fee in such Fee Account (i.e., the trust is "Wrap Fee Eligible") then
investors may be eligible to purchase units of the trust in these Fee Accounts
that are not subject to the transactional sales fee but will be subject to the
creation and development fee that is retained by the sponsor. For example, this
table illustrates the sales fee you will pay as a percentage of the initial $10
public offering price per unit (the percentage will vary with the unit price).
Initial sales fee 0.00%
Deferred sales fee 0.00%
-------
Transactional sales fee 0.00%
=======
Creation and development fee 0.50%
-------
Total sales fee 0.50%
=======
This discount applies only during the initial offering period. Certain Fee
Account investors may be assessed transaction or other fees on the purchase
and/or redemption of units by their broker-dealer or other processing
organizations for providing certain transaction or account activities. We
reserve the right to limit or deny purchases of units in Fee Accounts by
investors or selling firms whose frequent trading activity is determined to be
detrimental to the trust.
Employees. We waive the transactional sales fee for purchases made by
officers, directors and employees (and immediate family members) of the sponsor
and its affiliates. These purchases are not subject to the transactional sales
fee but will be subject to the creation and development fee. We also waive a
portion of the sales fee for purchases made by officers, directors and employees
(and immediate family members) of selling firms.
10 Understanding Your Investment
These purchases are made at the public offering price per unit less the
applicable regular dealer concession. Immediate family members for the purposes
of this section include your spouse, children (including step-children) under
the age of 21 living in the same household, and parents (including step-
parents). These discounts apply to initial offering period and secondary market
purchases. All employee discounts are subject to the policies of the related
selling firm, including but not limited to, householding policies or
limitations. Only officers, directors and employees (and their immediate family
members) of selling firms that allow such persons to participate in this
employee discount program are eligible for the discount.
Rollover/Exchange Option. We waive a portion of the sales fee on units of
the trust offered in this prospectus if you buy your units with redemption or
termination proceeds from any unit investment trusts (regardless of sponsor).
The discounted public offering price per unit for these transactions is equal to
the regular public offering price per unit less 1.00%. However, if you invest
redemption or termination proceeds of $500,000 or more in units of the trust,
the maximum sales fee on your units will be limited to the maximum sales fee for
the applicable amount invested in the table under "Large Purchases" above. To
qualify for this discount, the termination or redemption proceeds used to
purchase units of the trust offered in this prospectus must be derived from a
transaction that occurred within 30 calendar days of your purchase of units of
the trust offered in this prospectus. In addition, the discount will only be
available for investors that utilize the same broker-dealer (or a different
broker-dealer with appropriate notification) for both the unit purchase and the
transaction resulting in the receipt of the termination or redemption proceeds
used for the unit purchase. You may be required to provide appropriate
documentation or other information to your broker-dealer to evidence your
eligibility for this sales fee discount.
Please note that if you purchase units of the trust in this manner using
redemption proceeds from trusts which assess the amount of any remaining
deferred sales fee at redemption, you should be aware that any deferred sales
fee remaining on these units will be deducted from those redemption proceeds.
These discounts apply only to initial offering period purchases.
Dividend Reinvestment Plan. We do not charge any sales fee when you reinvest
distributions from your trust into additional units of the trust. This sales
fee discount applies to initial offering period and secondary market purchases.
Since the deferred sales fee and the creation and development fee are fixed
dollar amounts per unit, your trust must charge these fees per unit regardless
of this discount. If you elect the distribution reinvestment plan, we will
credit you with additional units with a dollar value sufficient to cover the
amount of any remaining deferred sales fee or creation and development fee that
will be collected on such units at the time of reinvestment. The dollar value
of these units will fluctuate over time.
RETIREMENT ACCOUNTS. The portfolio may be suitable for purchase in tax-
advantaged retirement accounts. You should contact your financial professional
about the accounts offered and any additional fees imposed.
HOW TO SELL YOUR UNITS
You can sell or redeem your units on any business day the New York Stock
Exchange is open by contacting your financial professional. Unit prices are
available daily on the Internet at WWW.AAMLIVE.COM or through your financial
professional. The sale and redemption price of
Understanding Your Investment 11
units is equal to the net asset value per unit, provided that you will not pay
any remaining creation and development fee or organization costs if you sell or
redeem units during the initial offering period. The sale and redemption price
is sometimes referred to as the "liquidation price." You pay any remaining
deferred sales fee when you sell or redeem your units. Certain broker-dealers
may charge a transaction fee for processing unit redemption or sale requests.
SELLING UNITS. We may maintain a secondary market for units. This means
that if you want to sell your units, we may buy them at the current net asset
value, provided that you will not pay any remaining creation and development fee
or organization costs if you redeem units during the initial offering period.
We may then resell the units to other investors at the public offering price or
redeem them for the redemption price. Our secondary market repurchase price is
the same as the redemption price. Certain broker-dealers might also maintain a
secondary market in units. You should contact your financial professional for
current repurchase prices to determine the best price available. We may
discontinue our secondary market at any time without notice. Even if we do not
make a market, you will be able to redeem your units with the trustee on any
business day for the current redemption price.
REDEEMING UNITS. You may also redeem your units directly with the trustee,
The Bank of New York Mellon, on any day the New York Stock Exchange is open.
The redemption price that you will receive for units is equal to the net asset
value per unit, provided that you will not pay any remaining creation and
development fee or organization costs if you redeem units during the initial
offering period. You will pay any remaining deferred sales fee at the time you
redeem units. You will receive the net asset value for a particular day if the
trustee receives your completed redemption request prior to the close of regular
trading on the New York Stock Exchange. Redemption requests received by
authorized financial professionals prior to the close of regular trading on the
New York Stock Exchange that are properly transmitted to the trustee by the time
designated by the trustee, are priced based on the date of receipt. Redemption
requests received by the trustee after the close of regular trading on the New
York Stock Exchange, redemption requests received by authorized financial
professionals after that time or redemption requests received by such persons
that are not transmitted to the trustee until after the time designated by the
trustee, are priced based on the date of the next determined redemption price
provided they are received in a timely manner by the trustee on such date. It
is the responsibility of authorized financial professionals to transmit
redemption requests received by them to the trustee so they will be received in
a timely manner. If your request is not received in a timely manner or is
incomplete in any way, you will receive the next net asset value computed after
the trustee receives your completed request.
If you redeem your units, the trustee will generally send you a payment for
your units no later than seven days after it receives all necessary
documentation (this will usually only take three business days). The only time
the trustee can delay your payment is if the New York Stock Exchange is closed
(other than weekends or holidays), the Securities and Exchange Commission
determines that trading on that exchange is restricted or an emergency exists
making sale or evaluation of the securities not reasonably practicable, and for
any other period that the Securities and Exchange Commission permits.
You can request an in-kind distribution of the securities underlying your
units if you tender at
12 Understanding Your Investment
least 2,500 units for redemption (or such other amount as required by your
financial professional's firm). This option is generally available only for
securities traded and held in the United States. The trustee will make any in-
kind distribution of securities by distributing applicable securities in book
entry form to the account of your financial professional at Depository Trust
Company. You will receive whole shares of the applicable securities and cash
equal to any fractional shares. You may not request this option in the last 30
days of your trust's life. We may discontinue this option upon sixty days
notice.
EXCHANGE OPTION. You may be able to exchange your units for units of our
unit trusts at a reduced sales fee. You can contact your financial professional
for more information about trusts currently available for exchanges. Before you
exchange units, you should read the prospectus carefully and understand the
risks and fees. You should then discuss this option with your financial
professional to determine whether your investment goals have changed, whether
current trusts suit you and to discuss tax consequences. We may discontinue
this option at any time upon sixty days notice.
DISTRIBUTIONS
MONTHLY DISTRIBUTIONS. Your trust generally pays distributions of its net
investment income (pro-rated on an annual basis) along with any excess capital
on each monthly distribution date to unitholders of record on the preceding
record date. The record and distribution dates are shown under "Essential
Information" in the "Investment Summary" section of this prospectus. In some
cases, your trust might pay a special distribution if it holds an excessive
amount of cash pending distribution. For example, this could happen as a result
of a merger or similar transaction involving a company whose stock is in your
portfolio. The trust will also generally make required distributions or
distributions to avoid imposition of tax at the end of each year because it is
structured as a "regulated investment company" for federal tax purposes. The
amount of your distributions will vary from time to time as companies change
their dividends or trust expenses change.
The closed-end funds in the trust's portfolio generally make dividend
payments on a monthly basis. Different funds pay dividends at different times
during a month. When the trust receives dividends from a fund, the trustee
credits the dividends to the trust's accounts. In an effort to make relatively
regular income distributions, the trust's monthly income distribution is equal
to one-twelfth of the estimated net annual dividends to be received by the trust
after deduction of trust operating expenses. Because the trust does not
necessarily receive dividends from the underlying funds at a constant rate
throughout the year, the trust's income distributions to unitholders may be more
or less than the amount credited to the trust accounts as of the record date.
For the purpose of minimizing fluctuation in income distributions, the trustee
is authorized to advance such amounts as may be necessary to provide income
distributions of approximately equal amounts. The trustee will be reimbursed,
without interest, for any such advances from available income received by the
trust on the ensuing record date.
ESTIMATED ANNUAL DISTRIBUTIONS. The estimated net annual distributions are
shown under "Essential Information" in the "Investment Summary" section of this
prospectus. We generally base the estimate of the dividends the trust will
receive from the closed-end funds by annualizing the most recent dividends
declared by the closed-end funds. We generally base the estimate of the income
the trust may receive from operating companies by annualizing the most recent
Understanding Your Investment 13
ordinary dividend declared by an issuer (or adding the most recent interim and
final dividends declared for certain foreign issuers) or on scheduled income
payments. However, dividend conventions for certain companies and/or certain
countries differ from those in the United States and in certain instances,
dividends paid or declared over several years or other periods were used to
estimate annual distributions. Due to this and various other factors, actual
dividends received by the trust will most likely differ from the most recent
annualized dividends or scheduled income payments. The actual net annual
distributions you will receive will vary with changes in the trust's fees and
expenses, in dividends received and with the sale of securities. The estimated
net annual distributions for subsequent years are expected to be less than
estimated distributions for the first year because a portion of the securities
included in the trust portfolio will be sold during the first year to pay for
organization costs, creation and development fee and the deferred sales fee.
REPORTS. The trustee or your financial professional will make available to
you a statement showing income and other receipts of your trust for each
distribution. Each year the trustee will also provide an annual report on your
trust's activity and certain tax information. You can request copies of
security evaluations to enable you to complete your tax forms and audited
financial statements for your trust, if available.
INVESTMENT RISKS
All investments involve risk. This section describes the main risks that can
impact the value of the securities in your portfolio. You should understand
these risks before you invest. If the value of the securities falls, the value
of your units will also fall. We cannot guarantee that your trust will achieve
its objective or that your investment return will be positive over any period.
MARKET RISK is the risk that the value of the securities in your trust will
fluctuate. This could cause the value of your units to fall below your original
purchase price. Market value fluctuates in response to various factors. These
can include changes in interest rates, inflation, the financial condition of a
security's issuer, perceptions of the issuer, or ratings on a security. Even
though we supervise your portfolio, you should remember that we do not manage
your portfolio. Your trust will not sell a security solely because the market
value falls as is possible in a managed fund.
SELECTION RISK. Selection risk is the risk that the securities selected for
inclusion by the trust or by a fund's management will underperform the markets,
relevant indices or the securities selected by other funds with similar
investment objectives and investment strategies. This means you may lose money
or earn less money than other comparable investments.
EQUITY SECURITIES. The trust and/or certain funds held by the trust may
invest in securities representing equity ownership of a company. Investments in
such securities are exposed to risks associated with the companies issuing the
securities, the sectors and geographic locations they are involved in and the
markets that such securities are traded on among other risks as described
herein.
FIXED INCOME SECURITIES. The trust and/or certain funds held by the trust
may invest in fixed income securities and similar securities. Fixed income
securities involve certain unique risks such as credit risk and interest rate
risk among other things as described in greater detail below.
14 Understanding Your Investment
PREFERRED SECURITIES. The trust and/or certain funds held by the trust may
invest in preferred securities including preferred stocks, trust preferred
securities or other similar securities. Preferred stocks are unique securities
that combine some of the characteristics of both common stocks and bonds.
Preferred stocks generally pay a fixed rate of return and are sold on the basis
of current yield, like bonds. However, because they are equity securities,
preferred stocks provide equity ownership of a company and the income is paid in
the form of dividends. Preferred stocks typically have a yield advantage over
common stocks as well as comparably-rated fixed income investments. Preferred
stocks are typically subordinated to bonds and other debt instruments in a
company's capital structure, in terms of priority to corporate income, and
therefore will be subject to greater credit risk than those debt instruments.
Trust preferred securities are limited-life preferred securities typically
issued by corporations, generally in the form of interest-bearing notes or
preferred securities, or by an affiliated business trust of a corporation,
generally in the form of beneficial interests in subordinated debentures or
similarly structured securities. Distribution payments of the trust preferred
securities generally coincide with interest payments on the underlying
obligations. Trust preferred securities generally have a yield advantage over
traditional preferred stocks, but unlike preferred stocks, in some cases
distributions are treated as interest rather than dividends for federal income
tax purposes and therefore, are not eligible for the dividends-received
deduction. Trust preferred securities prices fluctuate for several reasons
including changes in investors' perception of the financial condition of an
issuer or the general condition of the market for trust preferred securities, or
when political or economic events affecting the issuers occur. Trust preferred
securities are also sensitive to interest rate fluctuations, as the cost of
capital rises and borrowing costs increase in a rising interest rate environment
and the risk that a trust preferred security may be called for redemption in a
falling interest rate environment. Trust preferred securities are also subject
to unique risks which include the fact that dividend payments will only be paid
if interest payments on the underlying obligations are made, which interest
payments are dependent on the financial condition of the issuer and may be
deferred for up to 20 consecutive quarters. During any deferral period,
investors are generally taxed as if they had received current income. In such a
case, an investor will have income taxes due prior to receiving cash
distributions to pay such taxes. In addition, the underlying obligations, and
thus the trust preferred securities, may be prepaid after a stated call date or
as a result of certain tax or regulatory events. Preferred securities are
typically subordinated to bonds and other debt instruments in a company's
capital structure, in terms of priority to corporate income, and therefore will
be subject to greater credit risk than those debt instruments.
DIVIDEND PAYMENT RISK is the risk that an issuer of a security is unwilling
or unable to pay income on a security. Stocks represent ownership interests in
the issuers and are not obligations of the issuers. Common stockholders have a
right to receive dividends only after the company has provided for payment of
its creditors, bondholders and preferred stockholders. Common stocks do not
assure dividend payments. Dividends are paid only when declared by an issuer's
board of directors and the amount of any dividend may vary over time.
CREDIT RISK is the risk that a borrower is unable to meet its obligation to
pay principal or interest on a security held by the trust and/or a fund. This
could cause the value of your units to fall and may reduce the level of
distributions by the issuers of the securities in the trust's portfolio, which
would reduce your income.
Understanding Your Investment 15
INTEREST RATE RISK is the risk that the value of fixed income securities and
similar securities held by the trust and/or a fund will fall if interest rates
increase. Bonds and other fixed income securities typically fall in value when
interest rates rise and rise in value when interest rates fall. Securities with
longer periods before maturity are often more sensitive to interest rate
changes.
CLOSED-END FUNDS. Your portfolio invests in shares of closed-end investment
companies. Closed-end funds are subject to various risks, including but not
limited to management's ability to meet the closed-end fund's investment
objective including when the underlying securities are redeemed or sold, risks
associated with the use of leverage and borrowing and risks associated with
shares of the fund trading at a discount or premium to the fund's net asset
value. You should understand the section titled "Closed-End Funds" before you
invest.
NON-DIVERSIFICATION RISK. Certain funds held by the trust may be classified
as "non-diversified". Such funds may be more exposed to the risks associated
with and developments affecting an individual issuer, industry and/or asset
class than a fund that invests more widely.
BUSINESS DEVELOPMENT COMPANY RISK. Certain funds held by the trust may
invest in business development companies ("BDCs"). BDCs are closed-end
investment companies that have elected to be treated as business development
companies under the Investment Company Act of 1940. BDCs are required to hold
at least 70% of their investments in eligible assets which include, among other
things, (i) securities of eligible portfolio companies (generally, domestic
companies that are not investment companies and that cannot have a class of
securities listed on a national securities exchange or have securities that are
marginable that are purchased from that company in a private transaction), (ii)
securities received by the BDC in connection with its ownership of securities of
eligible portfolio companies, or (iii) cash, cash items, government securities,
or high quality debt securities maturing one year or less from the time of
investment. BDCs' ability to grow and their overall financial condition is
impacted significantly by their ability to raise capital. In addition to
raising capital through the issuance of common stock, BDCs may engage in
borrowing. This may involve using revolving credit facilities, the
securitization of loans through separate wholly-owned subsidiaries and issuing
of debt and preferred securities. BDCs are less restricted than other closed-
end funds as to the amount of debt they can have outstanding. These borrowings,
also known as leverage, magnify the potential for gain or loss on amounts
invested and, accordingly, the risks associated with investing in BDC
securities. While the value of a BDC's assets increases, leveraging would cause
the net value per share of BDC common stock to increase more sharply than it
would have had such BDC not leveraged. However, if the value of a BDC's assets
decreases, leveraging would cause net asset value to decline more sharply than
it otherwise would have had such BDC not leveraged. In addition to decreasing
the value of a BDC's common stock, it could also adversely impact a BDC's
ability to make dividend payments. A BDC's credit rating may change over time
which could adversely affect their ability to obtain additional credit and/or
increase the cost of such borrowing. Agreements governing BDC's credit
facilities and related funding and service agreements may contain various
covenants that limit the BDC's discretion in operating its business along with
other limitations. Any defaults may restrict the BDC's ability to manage assets
securing related assets which may adversely impact the BDC's liquidity and
operations. BDCs may
16 Understanding Your Investment
enter into hedging transaction and utilize derivative instruments such as
forward contracts, options and swaps. Unanticipated movements and improper
correlation of hedging instruments may prevent a BDC from hedging against
exposure to risk of loss. BDCs may issue options, warrants, and rights to
convert to voting securities to its officers, employees and board members. Any
issuance of derivative securities requires the approval of the company's board
of directors and authorization by the company's shareholders. A BDC may operate
a profit-sharing plan for its employees, subject to certain restrictions.
BDC investments are frequently not publicly traded and, as a result, there is
uncertainty as to the value and liquidity of those investments. BDCs may use
independent valuation firms to value their investments and such valuations may
be uncertain, be based on estimates and/or differ materially from that which
would have been used if a ready market for those investments existed. The value
of a BDC could be adversely affected if its determinations regarding the fair
value of investments was materially higher than the value realized upon sale of
such investments. Due to the relative illiquidity of certain BDC investments,
if a BDC is required to liquidate all or a portion of its portfolio quickly, it
may realize significantly less than the value at which such investments are
recorded. Further restrictions may exist on the ability to liquidate certain
assets to the extent that subsidiaries or related parties have material non-
public information regarding such assets. BDCs are required to make available
significant managerial assistance to their portfolio companies. Significant
managerial assistance refers to any arrangement whereby a BDC provides
significant guidance and counsel concerning the management, operations, or
business objectives and policies of a portfolio company. Examples of such
activities include arranging financing, managing relationships with financing
sources, recruiting management personnel, and evaluating acquisition and
divestiture opportunities. BDCs are frequently externally managed by an
investment adviser which may also provide this external managerial assistance to
portfolio companies. Such investment adviser's liability may be limited under
their investment advisory agreement which may lead such investment adviser to
act in a riskier manner than it would were it investing for its own account.
Such investment advisers may be entitled to incentive compensation which may
cause such adviser to make more speculative and riskier investments than it
would if investing for its own account. Such compensation may be due even in
the case of declines to the value of a BDC's investments.
BDCs frequently have high expenses which may include, but are not limited to,
the payment of management fees, administration expenses, taxes, interest payable
on debt, governmental charges, independent director fees and expenses, valuation
expenses, and fees payable to third parties relating to or associated with
making investments. The trust will indirectly bear these expenses. These
expenses may fluctuate significantly over time. If a BDC fails to maintain its
status as a BDC it may be regulated as a closed-end fund which would subject
such BDC to additional regulatory restrictions and significantly decrease its
operating flexibility. In addition, such failure could trigger an event of
default under certain outstanding indebtedness which could have a material
adverse impact on its business.
INVESTMENT IN OTHER INVESTMENT COMPANIES. As with other investments,
investments in other investment companies are subject to market and selection
risk. In addition, when the trust acquires shares of investment companies
shareholders bear both their proportionate share of fees
Understanding Your Investment 17
and expenses in the trust and, indirectly, the expenses of the underlying
investment companies. Investment companies' expenses are subject to the risk of
fluctuation including in response to fluctuation in a fund's assets.
Accordingly, a fund's actual expenses may vary from what is indicated at the
time of investment by the trust. There are certain regulatory limitations on
the ability of the trust to hold other investment companies which may impact the
trust's ability to invest certain funds, may impact the weighting of a fund in
the trust's portfolio and may impact the trust's ability to issue additional
units in the future.
CONCENTRATION RISK is the risk that the value of your trust is more
susceptible to fluctuations based on factors that impact a particular sector
because the exposure to such sectors through the securities held by the trust or
through the securities in the funds held by the trust are concentrated within a
particular sector.
FOREIGN SECURITIES RISK. Because the trust and certain funds held by the
trust may invest in securities of foreign companies, the trust involves
additional risks that differ from an investment with exposure exclusively to
domestic securities. These risks include the risk of losses due to future
political and economic developments, international trade conditions, foreign
withholding taxes and restrictions on foreign investments and exchange of
securities. They also involve the risk that information about the securities is
not publicly available or is inaccurate due to the absence of uniform accounting
and financial reporting standards. In addition, some foreign securities markets
are less liquid than U.S. markets. This could cause the trust or the funds to
buy stocks at a higher price or sell stocks at a lower price than would be the
case in a highly liquid market. Foreign securities markets are often more
volatile and involve higher trading costs than U.S. markets, and foreign
companies, securities markets and brokers are also often not subject to the same
level of supervision and regulation as in the U.S. The purchase and sale of the
foreign securities may occur in foreign securities markets. Certain of the
factors stated above may make it impossible to buy or sell them in a timely
manner. Custody of certain of the securities held by the trust or the funds may
be maintained by a global custody and clearing institution. Settlement and
clearance procedures in certain foreign markets differ significantly from those
in the United States. Foreign settlement and clearance procedures and trade
regulations also may involve certain risks (such as delays in payment for or
delivery of securities) not typically associated with the settlement of U.S.
investments. The laws of certain countries limit the trust's or a fund's
ability to recover its assets if a foreign bank, depository or issuer of a
security, or any of their agents, goes bankrupt. The increased expense of
investing in foreign markets may reduce the amount the trust or a fund can earn
on its investments and typically results in a higher operating expense ratio for
a trust or a fund investing only in domestic securities.
CURRENCY RISK. Because securities of foreign issuers not listed on a U.S.
securities exchange generally pay income and trade in foreign currencies, the
U.S. dollar value of these securities and income will vary with fluctuations in
foreign exchange rates. Most foreign currencies have fluctuated widely in value
against the U.S. dollar for various economic and political reasons. Generally,
when the U.S. dollar rises in value against a foreign currency, a security
denominated in that currency loses value because the currency is worth fewer
U.S. dollars. Conversely, when the U.S. dollar decreases in value against a
foreign currency, a security denominated in that currency gains value because
the currency is worth more
18 Understanding Your Investment
U.S. dollars. This risk, generally known as "currency risk," means that a
strong U.S. dollar will reduce returns for U.S. investors while a weak U.S.
dollar will increase those returns.
DEPOSITARY RECEIPTS RISK. Certain stocks held by the trust and/or the closed-
end funds may be held in the form of depositary receipts. Depositary receipts
represent receipts for foreign common stock deposited with a custodian (which
may include the trustee of your trust). Depositary receipts generally involve
the same types of risks as foreign common stock held directly. Some depositary
receipts may experience less liquidity than the underlying common stocks traded
in their home market. Certain depositary receipts are unsponsored (i.e. issued
without the participation or involvement of the issuer of the underlying
security). The issuers of unsponsored depositary receipts are not obligated to
disclose information that may be considered material in the U.S. Therefore,
there may be less information available regarding these issuers and, as a
result, there may not be a correlation between certain information impacting a
security and the market value of the depositary receipts.
EMERGING MARKETS. The trust and/or certain funds held by the trust may
invest in certain securities issued by entities located in emerging markets.
Emerging markets are generally defined as countries in the initial states of
their industrialization cycles with low per capita income. The markets of
emerging markets countries are generally more volatile than the markets of
developed countries with more mature economies. All of the risks of investing
in foreign securities described above are heightened by investing in emerging
markets countries.
SUPRANATIONAL ENTITIES' SECURITIES. Certain funds held by the trust may
invest in obligations issued by supranational entities such as the International
Bank for Reconstruction and Development (the World Bank). The government
members, or "stockholders," usually make initial capital contributions to
supranational entities and in many cases are committed to make additional
capital contributions if a supranational entity is unable to repay its
borrowings. There is no guarantee that one or more stockholders of a
supranational entity will continue to make any necessary additional capital
contributions. If such contributions are not made, the entity may be unable to
pay interest or repay principal on its debt securities, and a fund may lose
money on such investments.
SMALL AND MID-SIZE COMPANIES. The trust and/or certain funds held by the
trust may invest in stocks issued by small and mid-size companies. The share
prices of these companies are often more volatile than those of larger companies
as a result of several factors common to many such issuers, including limited
trading volumes, products or financial resources, management inexperience and
less publicly available information. In particular, companies with smaller
capitalizations may be less financially secure, depend on a smaller number of
key personnel and generally be subject to more unpredictable price changes than
larger, more established companies and the markets as a whole. Smaller
capitalization and emerging growth companies may be particularly sensitive to
changes in interest rates, borrowing costs and earnings.
BOND QUALITY RISK is the risk that a bond will fall in value if a rating
agency decreases or withdraws the bond's rating.
PREPAYMENT RISK. When interest rates fall, among other factors, the issuer
of a security may prepay their obligations earlier than expected.
Understanding Your Investment 19
Such amounts will result in early distributions to the trust and/or the funds
and such funds may be unable to reinvest such amounts at the yields originally
invested which could adversely impact the funds and the trust. Certain
securities held by the trust and/or the funds include call provisions which
expose such funds and the trust to call risk. Call risk is the risk that the
issuer prepays or "calls" a security before its stated maturity. An issuer
might call a security if interest rates, in general fall and the security pays a
higher interest rate or if it no longer needs the money for the original
purpose. If an issuer calls a security, the trust and/or a fund holding such
security will receive principal but future interest distributions will fall.
Such fund might not be able to reinvest this principal at as high a yield. A
security's call price could be less than the price paid for the security and
could be below the security's par value. Certain securities may also be subject
to extraordinary optional or mandatory redemptions if certain events occur, such
as certain changes in tax laws, the substantial damage or destruction by fire or
other casualty of the project for which the proceeds of the securities were
used, and various other events.
EXTENSION RISK. When interest rates rise, among other factors, issues of a
security may pay off obligations more slowly than expected causing the value of
such obligations to fall.
MARKET DISCOUNT. Certain funds held by the trust may invest in bonds whose
current market values were below the principal value on the purchase date. A
primary reason for the market value of such bonds being less than the principal
value is that the interest rate of such bonds is at a lower rate than the
current market interest rates for comparable bonds. Bonds selling at market
discounts tend to increase in market value as they approach maturity.
PREMIUM BONDS. Certain funds held by the trust may invest in bonds whose
current market values were above the principal value on the purchase date. A
primary reason for the market value of such bonds being higher than the
principal value is that the interest rate of such bonds is at a higher rate than
the current market interest rates for comparable bonds. The current returns of
bonds trading at a market premium are initially higher than the current returns
of comparable bonds issued at currently prevailing interest rates because
premium bonds tend to decrease in market value as they approach maturity when
the principal value becomes payable. Because part of the purchase price is
effectively returned not at maturity but through current income payments, early
redemption of a premium bond at par or any other amount below the purchase price
will result in a reduction in yield. Redemption pursuant to call provisions
generally will, and redemption pursuant to sinking fund provisions may occur at
times when the bonds have a market value that represents a premium over par or,
for original issue discount securities, a premium over the accreted value.
MUNICIPAL BONDS. Certain funds held by the trust may invest in municipal
bonds. Municipal bonds are debt obligations issued by states or by political
subdivisions or authorities of states. Municipal bonds are typically designated
as general obligation bonds, which are general obligations of a governmental
entity that are backed by the taxing power of such entity, or revenue bonds,
which are payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. Municipal bonds are long-term
fixed rate debt obligations that generally decline in value with increases in
interest rates, when an issuer's financial condition worsens or when the rating
on a bond is decreased. Many municipal bonds may be called or redeemed prior to
their stated maturity, an event which is more
20 Understanding Your Investment
likely to occur when interest rates fall. In such an occurrence, a fund may not
be able to reinvest the money it receives in other bonds that have as high a
yield or as long a maturity. Many municipal bonds are subject to continuing
requirements as to the actual use of the bond proceeds or manner of operation of
the project financed from bond proceeds that may affect the exemption of
interest on such bonds from federal income taxation. The market for municipal
bonds is generally less liquid than for other securities and therefore the price
of municipal bonds may be more volatile and subject to greater price
fluctuations than securities with greater liquidity. In addition, an issuer's
ability to make income distributions generally depends on several factors
including the financial condition of the issuer and general economic conditions.
Any of these factors may negatively impact the price of municipal bonds held by
a fund and would therefore impact the price of both the fund shares and the
trust units.
SOVEREIGN DEBT. Certain funds held by the trust may invest in sovereign
debt. Sovereign debt instruments are subject to the risk that a governmental
entity may delay or refuse to pay interest or repay principal on its sovereign
debt, due, for example, to cash flow problems, insufficient foreign currency
reserves, political considerations, the relative size of the governmental
entity's debt position in relation to the economy or the failure to put in place
required economic reforms. If a governmental entity defaults, it may ask for
more time in which to pay or for further loans. There is no legal process for
collecting sovereign debt that a government does not pay nor are there
bankruptcy proceedings through which all or part of the sovereign debt that a
governmental entity has not repaid may be collected.
U.S. GOVERNMENT OBLIGATIONS RISK. Certain funds held by the trust may invest
in obligations of the U.S. Government. Obligations of U.S. Government agencies,
authorities, instrumentalities and sponsored enterprises have historically
involved little risk of loss of principal if held to maturity. However, not all
U.S. Government securities are backed by the full faith and credit of the United
States. Obligations of certain agencies, authorities, instrumentalities and
sponsored enterprises of the U.S. Government are backed by the full faith and
credit of the United States (e.g., the Government National Mortgage
Association); other obligations are backed by the right of the issuer to borrow
from the U.S. Treasury (e.g., the Federal Home Loan Banks) and others are
supported by the discretionary authority of the U.S. Government to purchase an
agency's obligations. Still others are backed only by the credit of the agency,
authority, instrumentality or sponsored enterprise issuing the obligation. No
assurance can be given that the U.S. Government would provide financial support
to any of these entities if it is not obligated to do so by law.
U.S. TREASURY OBLIGATIONS. Certain funds held by the trust may invest in
U.S. Treasury obligations. U.S. Treasury obligations are direct obligations of
the United States which are backed by the full faith and credit of the United
States. The value of U.S. Treasury obligations will be adversely affected by
decreases in bond prices and increases in interest rates.
HIGH YIELD OR "JUNK" SECURITIES. The trust and/or certain funds held by the
trust may invest in high yield securities or unrated securities. High yield,
high risk securities are subject to greater market fluctuations and risk of loss
than securities with higher investment ratings. The value of these securities
will decline significantly with increases in interest rates, not only because
increases in rates generally decrease values, but also because increased rates
may indicate an economic slowdown. An
Understanding Your Investment 21
economic slowdown, or a reduction in an issuer's creditworthiness, may result in
the issuer being unable to maintain earnings at a level sufficient to maintain
interest and principal payments. High yield or "junk" securities, the generic
names for securities rated below "BBB" by Standard & Poor's or "Baa" by Moody's,
are frequently issued by corporations in the growth stage of their development
or by established companies who are highly leveraged or whose operations or
industries are depressed. Securities rated below BBB or Baa are considered
speculative as these ratings indicate a quality of less than investment grade.
Because high yield securities are generally subordinated obligations and are
perceived by investors to be riskier than higher rated securities, their prices
tend to fluctuate more than higher rated securities and are affected by short-
term credit developments to a greater degree. The market for high-yield
securities is smaller and less liquid than that for investment grade securities.
High yield securities are generally not listed on a national securities exchange
but trade in the over-the-counter markets. Due to the smaller, less liquid
market for high yield securities, the bid-offer spread on such securities is
generally greater than it is for investment grade securities and the purchase or
sale of such securities may take longer to complete.
SENIOR LOANS. The trust and/or certain funds held by the trust may invest in
senior loans and similar transactions. Senior loans are issued by banks, other
financial institutions and other investors to corporations, partnerships,
limited liability companies and other entities to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, debt refinancings
and, to a lesser extent, for general operating and other purposes. An
investment by the trust and/or the funds in senior loans and similar
transactions involves risk that the borrowers under such transactions may
default on their obligations to pay principal or interest when due. Although
senior loans may be secured by specific collateral, there can be no assurance
that liquidation of collateral would satisfy the borrower's obligation in the
event of non-payment or that such collateral could be readily liquidated.
Senior loans are typically structured as floating rate instruments in which the
interest rate payable on the obligation fluctuates with interest rate changes.
As a result, the yield on an investment in senior loans will generally decline
in a falling interest rate environment and increase in a rising interest rate
environment. Senior loans are generally below investment grade quality and may
be unrated at the time of investment; are generally not registered with the SEC
or state securities commissions; and are generally not listed on any securities
exchange. In addition, the amount of public information available on senior
loans is generally less extensive than that available for other types of
securities.
CONVERTIBLE SECURITIES. Certain funds held by the trust may invest in
convertible securities. Convertible securities generally offer lower interest
or dividend yields than non-convertible fixed-income securities of similar
credit quality because of the potential for capital appreciation. The market
values of convertible securities tend to decline as interest rates increase and,
conversely, to increase as interest rates decline. However, a convertible
security's market value also tends to reflect the market price of the common
stock of the issuing company, particularly when that stock price is greater than
the convertible security's "conversion price." The conversion price is defined
as the predetermined price or exchange ratio at which the convertible security
can be converted or exchanged for the underlying common stock. As the market
price of the underlying common stock declines below the conversion price, the
price of the convertible security tends to be increasingly influenced more by
the yield of
22 Understanding Your Investment
the convertible security. Thus, it may not decline in price to the same extent
as the underlying common stock. In the event of a liquidation of the issuing
company, holders of convertible securities would be paid before that company's
common stockholders. Consequently, an issuer's convertible securities generally
entail less risk than its common stock. However, convertible securities fall
below debt obligations of the same issuer in order of preference or priority in
the event of a liquidation and are typically unrated or rated lower than such
debt obligations.
Mandatory convertible securities are distinguished as a subset of convertible
securities because the conversion is not optional and the conversion price at
maturity is based solely upon the market price of the underlying common stock,
which may be significantly less than par or the price (above or below par) paid.
For these reasons, the risks associated with investing in mandatory convertible
securities most closely resemble the risks inherent in common stocks. Mandatory
convertible securities customarily pay a higher coupon yield to compensate for
the potential risk of additional price volatility and loss upon conversion.
Because the market price of a mandatory convertible security increasingly
corresponds to the market price of its underlying common stock, as the
convertible security approaches its conversion date, there can be no assurance
that the higher coupon will compensate for a potential loss.
FLOATING RATE INSTRUMENTS. Certain funds held by the trust may invest in
floating rate securities. A floating rate security is an instrument in which
the interest rate payable on the obligation fluctuates on a periodic basis based
upon changes in a benchmark, often related to interest rates. As a result, the
yield on such a security will generally decline with negative changes to the
benchmark, causing the trust to experience a reduction in the income it receives
from such securities. A sudden and significant increase in the applicable
benchmark may increase the risk of payment defaults and cause a decline in the
value of the security.
ASSET-BACKED SECURITIES. Certain funds held by the trust may invest in asset-
backed securities ("ABS"). ABS are securities backed by pools of loans or other
receivables. ABS are created from many types of assets, including auto loans,
credit card receivables, home equity loans, and student loans. ABS are issued
through special purpose vehicles that are bankruptcy remote from the issuer of
the collateral. The credit quality of an ABS transaction depends on the
performance of the underlying assets. To protect ABS investors from the
possibility that some borrowers could miss payments or even default on their
loans, ABS include various forms of credit enhancement. Some ABS, particularly
home equity loan transactions, are subject to interest rate risk and prepayment
risk. A change in interest rates can affect the pace of payments on the
underlying loans, which in turn, affects total return on the securities. ABS
also carry credit or default risk. If many borrowers on the underlying loans
default, losses could exceed the credit enhancement level and result in losses
to investors in an ABS transaction. Finally, ABS have structure risk due to a
unique characteristic known as early amortization, or early payout, risk. Built
into the structure of most ABS are triggers for early payout, designed to
protect investors from losses. These triggers are unique to each transaction
and can include: a big rise in defaults on the underlying loans, a sharp drop in
the credit enhancement level, or even the bankruptcy of the originator. Once
early amortization begins, all incoming loan payments (after expenses are paid)
are used to pay investors as quickly as possible based upon a predetermined
priority of payment.
Understanding Your Investment 23
MORTGAGE-BACKED SECURITIES. Certain funds held by the trust may invest in
mortgage-backed securities. Mortgage-backed securities are a type of ABS
representing direct or indirect participations in, or are secured by and payable
from, mortgage loans secured by real property and can include single- and multi-
class pass-through securities and collateralized mortgage obligations.
Mortgage-backed securities are based on different types of mortgages, including
those on commercial real estate or residential properties. These securities
often have stated maturities of up to thirty years when they are issued,
depending upon the length of the mortgages underlying the securities. In
practice, however, unscheduled or early payments of principal and interest on
the underlying mortgages may make the securities' effective maturity shorter
than this. Rising interest rates tend to extend the duration of mortgage-backed
securities, making them more sensitive to changes in interest rates, and may
reduce the market value of the securities. In addition, mortgage-backed
securities are subject to prepayment risk, the risk that borrowers may pay off
their mortgages sooner than expected, particularly when interest rates decline.
This can reduce the funds', and therefore the trust's, returns because the funds
may have to reinvest that money at lower prevailing interest rates.
RESTRICTED SECURITIES. Certain funds held by the trust may invest in
securities that may only be resold pursuant to Rule 144A under the Securities
Act of 1933. Such securities may not be readily marketable. Restricted
securities may be sold only to purchasers meeting certain eligibility
requirements in privately negotiated transactions or in a public offering with
respect to which a registration statement is in effect under the Securities Act.
Where registration of such securities under the Securities Act is required, a
fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
were to develop, the fund might obtain a less favorable price than that which
prevailed when it decided to sell.
LIQUIDITY RISK is the risk that the value of a security will fall if trading
in the security is limited or absent. No one can guarantee that a liquid
trading market will exist for any security.
COVERED CALL OPTION STRATEGIES. Certain funds held by the trust may invest
using covered call option strategies. You should understand the risks of these
strategies before you invest. In employing a covered call strategy, a closed-
end fund will generally write (sell) call options on a significant portion of
the fund's managed assets. These call options will give the option holder the
right, but not the obligation, to purchase a security from the fund at the
strike price on or prior to the option's expiration date. The ability to
successfully implement the fund's investment strategy depends on the fund
adviser's ability to predict pertinent market movements, which cannot be
assured. Thus, the use of options may require a fund to sell portfolio
securities at inopportune times or for prices other than current market values,
may limit the amount of appreciation the fund can realize on an investment, or
may cause the fund to hold a security that it might otherwise sell. The writer
(seller) of an option has no control over the time when it may be required to
fulfill its obligation as a writer (seller) of the option. Once an option
writer (seller) has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying security at the exercise price. As the writer
(seller) of a covered call option, a fund forgoes, during
24 Understanding Your Investment
the option's life, the opportunity to profit from increases in the market value
of the security underlying the call option above the sum of the premium and the
strike price of the call option, but has retained the risk of loss should the
price of the underlying security decline. The value of the options written
(sold) by a fund, which will be marked-to-market on a daily basis, will be
affected by changes in the value and dividend rates of the underlying
securities, an increase in interest rates, changes in the actual or perceived
volatility of securities markets and the underlying securities and the remaining
time to the options' expiration. The value of the options may also be adversely
affected if the market for the options becomes less liquid or smaller.
An option is generally considered "covered" if a fund owns the security
underlying the call option or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if required, liquid
cash or other assets are segregated by the fund) upon conversion or exchange of
other securities held by the fund. In certain cases, a call option may also be
considered covered if a fund holds a call option on the same security as the
call option written (sold) provided that certain conditions are met. By writing
(selling) covered call options, a fund generally seeks to generate income, in
the form of the premiums received for writing (selling) the call options.
Investment income paid by a fund to its shareholders (such as the trust) may be
derived primarily from the premiums it receives from writing (selling) call
options and, to a lesser extent, from the dividends and interest it receives
from the equity securities or other investments held in the fund's portfolio and
short-term gains thereon. Premiums from writing (selling) call options and
dividends and interest payments made by the securities in a fund's portfolio can
vary widely over time.
REAL ESTATE RELATED SECURITIES. The trust and/or certain funds held by the
trust may invest in securities providing exposure to real estate investments.
Risks associated with the ownership of real estate include, among other factors,
changes in general U.S., global and local economic conditions, decline in real
estate values, changes in the financial health of tenants, overbuilding and
increased competition for tenants, oversupply of properties for sale, changing
demographics, changes in interest rates, tax rates and other operating expenses,
changes in government regulations, faulty construction and the ongoing need for
capital improvements, regulatory and judicial requirements, including relating
to liability for environmental hazards, changes in neighborhood values and buyer
demand, and the unavailability of construction financing or mortgage loans at
rates acceptable to developers.
REAL ESTATE INVESTMENT TRUSTS. The trust and/or certain funds held by the
trust may invest in securities issued by real estate investment trusts
("REITs"). Many factors can have an adverse impact on the performance of a
particular REIT, including its cash available for distribution, the credit
quality of a particular REIT or the real estate industry generally. The success
of a REIT depends on various factors, including the occupancy and rent levels,
appreciation of the underlying property and the ability to raise rents on those
properties. Economic recession, overbuilding, tax law changes, higher interest
rates or excessive speculation can all negatively impact REITs, their future
earnings and share prices. Variations in rental income and space availability
and vacancy rates in terms of supply and demand are additional factors affecting
real estate generally and REITs in particular. Properties owned by a REIT may
not be adequately insured against certain losses and may be subject to
significant environmental liabilities, including remediation costs. You
Understanding Your Investment 25
should also be aware that REITs may not be diversified and are subject to the
risks of financing projects. The real estate industry may be cyclical, and, if
a fund acquires REIT securities at or near the top of the cycle, there is
increased risk of a decline in value of the REIT securities. Recent demand for
certain types of real estate may have inflated the value of real estate. This
may increase the risk of a substantial decline in the value of such real estate
and increase the risk of a decline in the value of the securities. REITs are
also subject to defaults by borrowers and the market's perception of the REIT
industry generally. Because of their structure, and a current legal requirement
that they distribute at least 90% of their taxable income to shareholders
annually, REITs require frequent amounts of new funding, through both borrowing
money and issuing stock. Thus, REITs historically have frequently issued
substantial amounts of new equity shares (or equivalents) to purchase or build
new properties. This may have adversely affected REIT equity share market
prices. Both existing and new share issuances may have an adverse effect on
these prices in the future, especially if REITs continue to issue stock when
real estate prices are relatively high and stock prices are relatively low.
MLPS. The trust and/or certain funds held by the trust may invest in master
limited partnerships ("MLPs"). MLPs are limited partnership or limited
liability companies that are generally taxed as partnership whose interests are
generally traded on securities exchanges. An MLP consists of a general partner
and limited partners. The general partner manages the partnership, has an
ownership stake in the partnership and is eligible to receive an incentive
distribution. The limited partners provide capital to the partnership, have a
limited (if any) role in the operation and management of the partnership and
receive cash distributions. Most MLPs generally operate in the energy natural
resources or real estate sector and are subject to the risks generally
applicable to companies in those sectors. Those risks include, but are not
limited to, commodity pricing risk, supply and demand risk, depletion risk and
exploration risk. MLPs are also subject to the risk that authorities could
challenge the tax treatment of MLPs for federal income tax purposes which could
have a negative impact on the after-tax income available for distribution by the
MLPs and/or the value of the trust's investments.
DERIVATIVES RISK. Certain funds held by the trust may engage in transactions
in derivatives. Derivatives are subject to counterparty risk which is the risk
that the other party in a transaction may be unable or unwilling to meet
obligations when due. Use of derivatives may increase volatility of a fund and
the trust and reduce returns. Fluctuations in the value of derivatives may not
correspond with fluctuations of underlying exposures. Unanticipated market
movements could result in significant losses on derivative positions including
greater losses than amounts originally invested and potentially unlimited losses
in the case of certain derivatives. There are no assurances that there will be
a secondary market available in any derivative position which could result in
illiquidity and the inability of a fund to liquidate or terminate positions as
valued. Valuation of derivative positions may be difficult and increase during
times of market turmoil. Certain derivatives may be used as a hedge against
other securities positions however hedging can be subject to the risk of
imperfect alignment and there are no assurances that a hedge will be achieved as
intended which can pose significant loss to a fund and the trust. Recent
legislation has called for significant increases to the regulation of the
derivatives market. Regulatory changes and rulemaking is ongoing and the full
impact may not be known for some time. This
26 Understanding Your Investment
increased regulation may make derivatives more costly, limit the availability of
derivatives or otherwise adversely affect the value or performance of
derivatives. Examples of increased regulation include, but are not limited to
the imposition of clearing and reporting requirements on transactions that fall
within the definition of "swap" and "security-based swap", increased
recordkeeping and reporting requirements, changing definitional and registration
requirements, and changes to the way that funds' use of derivatives is
regulated. We cannot predict the effects of any new governmental regulation
that may be implemented on the ability of a fund to use any financial derivative
product, and there can be no assurance that any new governmental regulation will
not adversely affect a fund's ability to achieve its investment objective. The
federal income tax treatment of a derivative may not be as favorable as a direct
investment in the asset that a derivative provides exposure to which may
adversely impact the timing, character and amount of income a fund realizes from
its investment. The tax treatment of certain derivatives is unsettled and may
be subject to future legislation, regulation or administrative pronouncements.
SWAPS. Certain funds held by the trust may invest in swaps. In addition to
general risks associated with derivatives described above, swap agreements
involve the risk that the party with whom a fund has entered into the swap will
default on its obligation to pay a fund and the risk that a fund will not be
able to meet its obligations to pay the other party to the agreement. Swaps
entered into by a fund may include, but are not limited to, interest rate swaps,
total return swaps and/or credit default swaps. In an interest rate swap
transaction, two parties exchange rights to receive interest payments, such as
exchanging the right to receive floating rate payments based on a reference
interest rate for the right to receive fixed rate payments. In addition to the
general risks associated with derivatives and swaps described above, interest
rate swaps are subject to interest rate risk and credit risk. In a total return
swap transaction, one party agrees to pay another party an amount equal to the
total return on a reference asset during a specified period of time in return
for periodic payments based on a fixed or variable interest rate or on the total
return from a different reference asset. In addition to the general risks
associated with derivatives and swaps described above, total return swaps could
result in losses if the reference asset does not perform as anticipated and
these swaps can have the potential for unlimited losses. In a credit default
swap transaction, one party makes one or more payments over the term of the
contract to the counterparty, provided that no event of default with respect to
a specific obligation or issuer has occurred. In return, upon any event of
default, such party would receive from the counterparty a payment equal to the
par (or other agreed-upon) value of such specified obligation. In addition to
general risks associated with derivatives and swaps described above, credit
default swaps involve special risks because they are difficult to value, are
highly susceptible to liquidity and credit risk, and generally pay a return to
the party that has paid the premium only in the event of an actual default by
the issuer of the underlying obligation (as opposed to a credit downgrade or
other indication of financial difficulty).
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Certain funds held by the trust
may may engage in forward foreign currency exchange transactions. Forward
foreign exchange transactions are contracts to purchase or sell a specified
amount of a specified currency or multinational currency unit at a price and
future date set at the time of the contract. Forward foreign currency exchange
contracts do not eliminate fluctuations in the
Understanding Your Investment 27
value of non-U.S. securities but rather allow a fund to establish a fixed rate
of exchange for a future point in time. This strategy can have the effect of
reducing returns and minimizing opportunities for gain.
INDEXED AND INVERSE SECURITIES. Certain funds held by the trust may invest
in indexed and inverse securities. In addition to general risks associated with
derivatives described above, indexed and inverse securities are subject to risk
with respect to the value of the particular index. These securities are subject
to leverage risk and correlation risk. Certain indexed and inverse securities
have greater sensitivity to changes in interest rates or index levels than other
securities, and a fund's investment in such instruments may decline
significantly in value if interest rates or index levels move in a way a fund's
management does not anticipate.
FUTURES. Certain funds held by the trust may engage in futures transactions.
In addition to general risks associated with derivatives described above, the
primary risks associated with the use of futures contracts and options are (a)
the imperfect correlation between the change in market value of the instruments
held by a fund and the price of the futures contract or option; (b) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures contract when desired; (c) losses caused by
unanticipated market movements, which are potentially unlimited; (d) the
investment adviser's inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors; and
(e) the possibility that the counterparty will default in the performance of its
obligations. While futures contracts are generally liquid instruments, under
certain market conditions they may become illiquid. Futures exchanges may
impose daily or intra-day price change limits and/or limit the volume of
trading. Additionally, government regulation may further reduce liquidity
through similar trading restrictions.
OPTIONS. Certain funds held by the trust may engage in options transactions.
In addition to general risks associated with derivatives described above,
options are considered speculative. When a fund purchases an option, it may
lose the premium paid for it if the price of the underlying security or other
assets decreased or remained the same (in the case of a call option) or
increased or remained the same (in the case of a put option). If a put or call
option purchased by a fund were permitted to expire without being sold or
exercised, its premium would represent a loss to a fund. To the extent that a
fund writes or sells an option, if the decline or increase in the underlying
asset is significantly below or above the exercise price of the written option,
a fund could experience substantial and potentially unlimited losses.
REPURCHASE AGREEMENT RISK. If the other party to a repurchase agreement
defaults on its obligation under such agreement, a fund may suffer delays and
incur costs or lose money in exercising its rights under the agreement. If the
seller fails to repurchase the security under a repurchase agreement and the
market value of such security declines, such fund may lose money.
SHORT SALES RISK. Certain funds held by the trust may engage in short sales.
Because making short sales in securities that it does not own exposes a fund to
the risks associated with those securities, such short sales involve speculative
exposure risk. A fund will incur a loss as a result of a short sale if the
price of the security increases between the date of the short sale and the date
on which such fund replaces the security sold short. A fund will realize a gain
if the security declines
28 Understanding Your Investment
in price between those dates. As a result, if a fund makes short sales in
securities that increase in value, it will likely underperform similar funds
that do not make short sales in securities they do not own. There can be no
assurance that a fund will be able to close out a short sale position at any
particular time or at an acceptable price. Although a fund's gain is limited to
the amount at which it sold a security short, its potential loss is limited only
by the maximum attainable price of the security, less the price at which the
security was sold. Short sale transactions involve leverage because they can
provide investment exposure in an amount exceeding the initial investment. A
fund may also pay transaction costs and borrowing fees in connection with short
sales.
COMMODITIES. Certain funds held by the trust may have exposure to the
commodities market. This exposure could expose such funds and the trust to
greater volatility than investment in other securities. The value of
investments providing commodity exposure may be affected by changes in overall
market movements, commodity index volatility, changes in interest rates, or
factors affecting a particular industry or commodity, such as drought, floods,
weather, embargoes, tariffs and international economic, political and regulatory
developments.
MONEY MARKET SECURITIES. Certain funds held by the trust may invest in money
market securities. If market conditions improve while a fund has temporarily
invested some or all of its assets in high quality money market securities, this
strategy could result in reducing the potential gain from the market upswing,
thus reducing a fund's opportunity to achieve its investment objective.
LEGISLATION/LITIGATION. From time to time, various legislative initiatives
are proposed in the United States and abroad which may have a negative impact on
certain of the securities held by the trust or underlying funds. In addition,
litigation regarding any of the issuers of the securities or of the industries
represented by these issuers may negatively impact the share prices of these
securities. No one can predict what impact any pending or threatened litigation
will have on the share prices of the securities.
NO FDIC GUARANTEE. An investment in the trust is not a deposit of any bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
CLOSED-END FUNDS
Closed-end funds are a type of investment company that holds an actively
managed portfolio of securities. Closed-end funds issue shares in "closed-end"
offerings which generally trade on a stock exchange (although some closed-end
fund shares are not listed on a securities exchange). Since closed-end funds
maintain a relatively fixed pool of investment capital, portfolio managers may
be better able to adhere to their investment philosophies through greater
flexibility and control. In addition, closed-end funds do not have to manage
fund liquidity to meet potentially large redemptions.
Closed-end funds are subject to various risks, including management's ability
to meet the closed-end fund's investment objective, and to manage the closed-end
fund portfolio when the underlying securities are redeemed or sold, during
periods of market turmoil and as investors' perceptions regarding closed-end
funds or their underlying investments change.
Shares of closed-end funds frequently trade at a discount from their net
asset value in the secondary market. This risk is separate and distinct
Understanding Your Investment 29
from the risk that the net asset value of closed-end fund shares may decrease.
The amount of such discount from net asset value is subject to change from time
to time in response to various factors.
Certain of the closed-end funds included in the trust may employ the use of
leverage in their portfolios through the issuance of preferred stock. While
leverage often serves to increase the yield of a closed-end fund, this leverage
also subjects the closed-end fund to increased risks. These risks may include
the likelihood of increased volatility and the possibility that the closed-end
fund's common share income will fall if the dividend rate on the preferred
shares or the interest rate on any borrowings rises. The use of leverage may
cause a closed-end fund to liquidate portfolio positions when it may not be
advantageous to do so to satisfy its obligations or to meet any required asset
segregation requirements.
Certain closed-end funds held by the trust may engage in borrowing.
Borrowing may exaggerate changes in the net asset value of a fund's shares and
in the return on a fund's portfolio. Borrowing will cost a fund interest
expense and other fees. The costs of borrowing may reduce a fund's return.
Borrowing may cause a fund to liquidate positions when it may not be
advantageous to do so to satisfy its obligations.
Certain closed-end funds held by the trust may engage in securities lending.
Securities lending involves the risk that the borrower may fail to return the
securities in a timely manner or at all. As a result, a fund could lose money
and there may be a delay in recovering the loaned securities. A fund could also
lose money if it does not recover the securities and/or the value of the
collateral falls, including the value of investments made with cash collateral.
These events could trigger adverse tax consequences for a fund.
Only the trustee may vote the shares of the closed-end funds held in the
trust. The trustee will vote the shares in the same general proportion as
shares held by other shareholders of each fund. Your trust is generally
required, however, to reject any offer for securities or other property in
exchange for portfolio securities as described under "How the Trust Works--
Changing Your Portfolio."
HOW THE TRUST WORKS
YOUR TRUST. Your trust is a unit investment trust registered under the
Investment Company Act of 1940. We created the trust under a trust agreement
between Advisors Asset Management, Inc. (as depositor/sponsor, evaluator and
supervisor) and The Bank of New York Mellon (as trustee). To create your trust,
we deposited securities with the trustee (or contracts to purchase securities
along with an irrevocable letter of credit or other consideration to pay for the
securities). In exchange, the trustee delivered units of your trust to us.
Each unit represents an undivided interest in the assets of your trust. These
units remain outstanding until redeemed or until your trust terminates. At the
close of the New York Stock Exchange on the trust's inception date, the number
of units may be adjusted so that the public offering price per unit equals $10.
The number of units and fractional interest of each unit in the trust will
increase or decrease to the extent of any adjustment.
CHANGING YOUR PORTFOLIO. Your trust is not a managed fund. Unlike a managed
fund, we designed your portfolio to remain relatively fixed. Your trust will
generally buy and sell securities:
* to pay expenses,
* to issue additional units or redeem units,
30 Understanding Your Investment
* in limited circumstances to protect the trust,
* to make required distributions or avoid imposition of taxes on the trust,
or
* as permitted by the trust agreement.
When your trust sells securities, the composition and diversity of the
securities in the portfolio may be altered. However, if the trustee sells fund
shares to redeem units or to pay trust expenses or sales charges, the trustee
will do so, as nearly as practicable, on a pro rata basis. If a public tender
offer has been made for a security or a merger, acquisition or similar
transaction has been announced affecting a security, the trustee may either sell
the security or accept a tender offer if the supervisor determines that the
action is in the best interest of unitholders. The trustee will distribute any
cash proceeds to unitholders. If your trust receives securities or other
property, it will either hold the securities or property in the portfolio or
sell the securities or property and distribute the proceeds. If any contract
for the purchase of securities fails, the sponsor will refund the cash and sales
fee attributable to the failed contract to unitholders on or before the next
distribution date unless substantially all of the moneys held to cover the
purchase are reinvested in substitute securities in accordance with the trust
agreement. The sponsor may direct the reinvestment of security sale proceeds if
the sale is the direct result of serious adverse credit factors which, in the
opinion of the sponsor, would make retention of the securities detrimental to
the trust. In such a case, the sponsor may, but is not obligated to, direct the
reinvestment of sale proceeds in any other securities that meet the criteria for
inclusion in the trust on the trust's inception date. The sponsor may also
instruct the trustee to take action necessary to ensure that the portfolio
continues to satisfy the qualifications of a regulated investment company.
We will increase the size of your trust as we sell units. When we create
additional units, we will seek to replicate the existing portfolio. When your
trust buys securities, it may pay brokerage or other acquisition fees. You
could experience a dilution of your investment because of these fees and
fluctuations in security prices between the time we create units and the time
your trust buys the securities. When your trust buys or sells securities, we
may direct that it place orders with and pay brokerage commissions to brokers
that sell units or are affiliated with us, your trust or the trustee.
Pursuant to an exemptive order, your trust may be able to purchase securities
from other trusts that we sponsor when we create additional units. Your trust
may also be able to sell securities to other trusts that we sponsor to satisfy
unit redemption, pay deferred sales charges or expenses, in connection with
periodic tax compliance or in connection with the termination of your trust.
The exemption may enable each trust to eliminate commission costs on these
transactions. The price for those securities will be the closing price on the
sale date on the exchange where the securities are principally traded as
certified by us to the trustee.
AMENDING THE TRUST AGREEMENT. The sponsor and the trustee can change the
trust agreement without your consent to correct any provision that may be
defective or to make other provisions that will not materially adversely affect
your interest (as determined by the sponsor and the trustee). We cannot change
this agreement to reduce your interest in your trust without your consent.
Investors owning two-thirds of the units in your trust may vote to change this
agreement.
TERMINATION OF YOUR TRUST. Your trust will terminate on the termination date
set forth under "Essential Information" in the "Investment Summary" section of
this prospectus. The trustee
Understanding Your Investment 31
may terminate your trust early if the value of the trust is less than 40% of the
original value of the securities in the trust at the time of deposit. At this
size, the expenses of your trust may create an undue burden on your investment.
Investors owning two-thirds of the units in your trust may also vote to
terminate the trust early. The trustee will liquidate the trust in the event
that a sufficient number of units not yet sold to the public are tendered for
redemption so that the net worth of the trust would be reduced to less than 40%
of the value of the securities at the time they were deposited in the trust. If
this happens, we will refund any sales charge that you paid.
The trustee will notify you of any termination and sell any remaining
securities. The trustee will send your final distribution to you within a
reasonable time following liquidation of all the securities after deducting
final expenses. Your termination distribution may be less than the price you
originally paid for your units.
THE SPONSOR. The sponsor of the trust is Advisors Asset Management, Inc. We
are a broker-dealer specializing in providing trading and support services to
broker-dealers, registered representatives, investment advisers and other
financial professionals. Our headquarters are located at 18925 Base Camp Road,
Monument, Colorado 80132. You can contact our unit investment trust division at
8100 East 22nd Street North, Building 800, Suite 102, Wichita, Kansas 67226 or
by using the contacts listed on the back cover of this prospectus. AAM is a
registered broker-dealer and investment adviser, a member of the Financial
Industry Regulatory Authority, Inc. (FINRA) and Securities Investor Protection
Corporation (SIPC) and a registrant of the Municipal Securities Rulemaking Board
(MSRB). If we fail to or cannot perform our duties as sponsor or become
bankrupt, the trustee may replace us, continue to operate your trust without a
sponsor, or terminate your trust.
We and your trust have adopted a code of ethics requiring our employees who
have access to information on trust transactions to report personal securities
transactions. The purpose of the code is to avoid potential conflicts of
interest and to prevent fraud, deception or misconduct with respect to your
trust.
The sponsor or an affiliate may use the list of securities in the trust in
its independent capacity (which may include acting as an investment adviser or
broker-dealer) and distribute this information to various individuals and
entities. The sponsor or an affiliate may recommend or effect transactions in
the securities. This may also have an impact on the price your trust pays for
the securities and the price received upon unit redemption or trust termination.
The sponsor may act as agent or principal in connection with the purchase and
sale of securities, including those held by the trust, and may act as a
specialist market maker in the securities. The sponsor may also issue reports
and make recommendations on the securities in the trust. The sponsor or an
affiliate may have participated in a public offering of one or more of the
securities in the trust. The sponsor, an affiliate or their employees may have
a long or short position in these securities or related securities. An officer,
director or employee of the sponsor or an affiliate may be an officer or
director for the issuers of the securities.
THE TRUSTEE. The Bank of New York Mellon is the trustee of your trust with
its principal unit investment trust division offices located at 2 Hanson Place,
12th Floor, Brooklyn, New York 11217. You can contact the trustee by calling
the telephone number on the back cover of this prospectus or by writing to its
unit
32 Understanding Your Investment
investment trust office. We may remove and replace the trustee in some cases
without your consent. The trustee may also resign by notifying us and
investors.
PORTFOLIO CONSULTANT. The trust's portfolio consultant, Value Architects
Asset Management LLC, is headquartered at 50 Harrison Street, Suite 312,
Hoboken, New Jersey 07030 and was established in 2001 with a core belief in
value investing. Though there are many investment philosophies in the
marketplace, the Portfolio Consultant has focused on the concept that if you
seek out and buy companies based on reasonable business valuations, you have the
potential to minimize risk and maximize returns. Companies can become
undervalued when there is a lack of investor awareness, when an entire industry
is out of favor with investors or when a company experiences a short-term
difficulty which, following careful analysis, the Portfolio Consultant believes
can be overcome. Rather than trying to predict short-term fluctuations in a
company's share price, the Portfolio Consultant focuses on determining the
inherent value of each company.
The Portfolio Consultant is not an affiliate of the sponsor. The Portfolio
Consultant selected a list of securities to be included in the portfolio based
on the criteria provided by the sponsor. The Portfolio Consultant makes no
representations that the security portfolio will achieve the investment
objectives or will be profitable or suitable for any particular potential
investor. The sponsor did not select the securities for the trust.
The Portfolio Consultant may use the list of securities in its independent
capacity as an investment adviser and distribute this information to various
individuals and entities. The Portfolio Consultant may recommend to other
clients or otherwise effect transactions in the securities held by the trust.
This may have an adverse effect on the prices of the securities. This also may
have an impact on the price the trust pays for the securities and the price
received upon unit redemptions or liquidation of the securities. The Portfolio
Consultant also issues reports and makes recommendations on securities, which
may include the securities in the trust.
Neither the Portfolio Consultant nor the sponsor manages the trust. Opinions
expressed by the Portfolio Consultant are not necessarily those of the sponsor,
and may not actually come to pass. The Portfolio Consultant is being
compensated for its portfolio consulting services, including selection of the
trust portfolio.
HOW WE DISTRIBUTE UNITS. We sell units to the public through broker-dealers
and other firms. We pay part of the sales fee to these distribution firms when
they sell units. During the initial offering period, the distribution fee per
unit (the broker-dealer concession or agency commission) for broker-dealers and
other firms is as follows:
TRANSACTION CONCESSION OR
AMOUNT: AGENCY COMMISSION:
------------------------------------------
Less than $50,000 3.10%
$50,000 - $99,999 2.85
$100,000 - $249,999 2.60
$250,000 - $499,999 2.30
$500,000 - $999,999 2.20
$1,000,000 or more 1.75
We apply these concessions or agency commissions as a percent of the public
offering price per unit at the time of the transaction. The broker-dealer
concession or agency commission is 65% of the sales fee for secondary market
sales. For transactions involving unitholders of other unit investment trusts
who use their redemption
Understanding Your Investment 33
or termination proceeds to purchase units of the trust, the distribution fee is
2.15% of the public offering price per unit. No distribution fee is paid to
broker-dealers, investment advisers or other selling firms in connection with
unit sales in Fee Accounts subject to a Wrap Fee.
Broker-dealers and other firms that sell units of certain unit investment
trusts for which AAM acts as sponsor are eligible to receive additional
compensation for volume sales. The sponsor offers two separate volume
concession structures for certain trusts that are referred to as "Volume
Concession A" and "Volume Concession B." The trust offered in this prospectus
is a Volume Concession A trust. Broker-dealers and other firms that sell units
of any Volume Concession A trust are eligible to receive the additional
compensation described below. Such payments will be in addition to the regular
concessions paid to firms as set forth in the applicable trust's prospectus.
The additional concession is based on total initial offering period sales of all
Volume Concession A trusts during a calendar quarter as set forth in the
following table:
INITIAL OFFERING PERIOD SALES VOLUME
DURING CALENDAR QUARTER CONCESSION
---------------------------------------------------------
Less than $10,000,000 0.000%
$10,000,000 but less than $25,000,000 0.050
$25,000,000 but less than $50,000,000 0.100
$50,000,000 but less than $75,000,000 0.110
$75,000,000 but less than $100,000,000 0.120
$100,000,000 but less than $250,000,000 0.125
$250,000,000 but less than $500,000,000 0.135
$500,000,000 or more 0.150
This volume concession will be paid on units of all Volume Concession A
trusts sold in the initial offering period, except as described below. For a
trust to be eligible for this additional Volume Concession A compensation for
calendar quarter sales, the trust's prospectus must include disclosure related
to this additional Volume Concession A compensation; a trust is not eligible for
this additional Volume Concession A compensation if the prospectus for such
trust does not include disclosure related to this additional Volume Concession A
compensation. Broker-dealer firms will not receive additional compensation
unless they sell at least $10.0 million of units of Volume Concession A trusts
during a calendar quarter. For example, if a firm sells $9.5 million of units
of Volume Concession A trusts in the initial offering period during a calendar
quarter, the firm will not receive any additional compensation with respect to
such trusts. Once a firm reaches a particular breakpoint during a quarter, the
firm will receive the stated volume concession on all initial offering period
sales of Volume Concession A trusts during the applicable quarter. For example,
if a firm sells $12.5 million of units of Volume Concession A trusts in the
initial offering period during a calendar quarter, the firm will receive
additional compensation of 0.05% of $12.5 million and if a firm sells $27.0
million of units of Volume Concession A trusts in the initial offering period
during a calendar quarter, the firm will receive additional compensation of
0.100% of $27.0 million.
In addition, dealer firms will not receive volume concessions on the sale of
units which are not subject to a transactional sales charge. However, such
sales will be included in determining whether a firm has met the sales level
breakpoints for volume concessions subject to the policies of the related
selling firm. Secondary market sales of all unit trusts are excluded for
purposes of these volume concessions. We will pay these amounts out of our own
assets within a reasonable time following each calendar quarter.
Any sales fee discount is borne by the broker-dealer or selling firm out of
the distribution fee.
34 Understanding Your Investment
We reserve the right to change the amount of concessions or agency commissions
from time to time.
We currently provide, at our own expense and out of our own profits,
additional compensation and benefits to broker-dealers who sell units of this
trust and our other products. This compensation is intended to result in
additional sales of our products and/or compensate broker-dealers and financial
advisors for past sales. A number of factors are considered in determining
whether to pay these additional amounts. Such factors may include, but are not
limited to, the level or type of services provided by the intermediary, the
level or expected level of sales of our products by the intermediary or its
agents, the placing of our products on a preferred or recommended product list
and access to an intermediary's personnel. We may make these payments for
marketing, promotional or related expenses, including, but not limited to,
expenses of entertaining retail customers and financial advisors, advertising,
sponsorship of events or seminars, obtaining information about the breakdown of
unit sales among an intermediary's representatives or offices, obtaining shelf
space in broker-dealer firms and similar activities designed to promote the sale
of our products. We make such payments to a substantial majority of
intermediaries that sell our products. We may also make certain payments to, or
on behalf of, intermediaries to defray a portion of their costs incurred for the
purpose of facilitating unit sales, such as the costs of developing or
purchasing trading systems to process unit trades. Payments of such additional
compensation described in this paragraph and the volume concessions described
above, some of which may be characterized as "revenue sharing," may create an
incentive for financial intermediaries and their agents to sell or recommend our
products, including this trust, over other products. These arrangements will
not change the price you pay for your units.
We generally register units for sale in various states in the U.S. We do not
register units for sale in any foreign country. This prospectus does not
constitute an offer of units in any state or country where units cannot be
offered or sold lawfully. We may reject any order for units in whole or in
part.
We may gain or lose money when we hold units in the primary or secondary
market due to fluctuations in unit prices. The gain or loss is equal to the
difference between the price we pay for units and the price at which we sell or
redeem them. We may also gain or lose money when we deposit securities to
create units. The amount of our profit or loss on the initial deposit of
securities into the trust is shown in the "Notes to Portfolio."
TAXES
This section summarizes some of the main U.S. federal income tax consequences
of owning units of the trust. This section is current as of the date of this
prospectus. Tax laws and interpretations change frequently, and these summaries
do not describe all of the tax consequences to all taxpayers. For example,
these summaries generally do not describe your situation if you are a
corporation, a non-U.S. person, a broker/dealer, or other investor with special
circumstances. In addition, this section does not describe your state, local or
foreign tax consequences.
This federal income tax summary is based in part on the advice of counsel to
the sponsor. The Internal Revenue Service could disagree with any conclusions
set forth in this section. In addition, our counsel was not asked to review,
and has not reached a conclusion with respect to the federal income tax
treatment of the assets to be deposited in the trust. This may not be
sufficient for you to
Understanding Your Investment 35
use for the purpose of avoiding penalties under federal tax law.
As with any investment, you should seek advice based on your individual
circumstances from your own tax advisor.
TRUST STATUS. The trust intends to qualify as a "regulated investment
company" under the federal tax laws. If the trust qualifies as a regulated
investment company and distributes its income as required by the tax law, the
trust generally will not pay federal income taxes.
DISTRIBUTIONS. Trust distributions are generally taxable. After the end of
each year, you will receive a tax statement that separates your trust's
distributions into three categories, ordinary income distributions, capital
gains dividends and return of capital. Ordinary income distributions are
generally taxed at your ordinary tax rate, however, as further discussed below,
certain ordinary income distributions received from the trust may be taxed at
the capital gains tax rates. Generally, you will treat all capital gains
dividends as long-term capital gains regardless of how long you have owned your
units. To determine your actual tax liability for your capital gains dividends,
you must calculate your total net capital gain or loss for the tax year after
considering all of your other taxable transactions, as described below. In
addition, the trust may make distributions that represent a return of capital
for tax purposes and thus will generally not be taxable to you. The tax status
of your distributions from your trust is not affected by whether you reinvest
your distributions in additional units or receive them in cash. The income from
your trust that you must take into account for federal income tax purposes is
not reduced by amounts used to pay a deferred sales fee, if any. The tax laws
may require you to treat distributions made to you in January as if you had
received them on December 31 of the previous year. Under the "Health Care and
Education Reconciliation Act of 2010," income from the trust may also be subject
to a 3.8 percent "medicare tax". This tax will generally apply to your net
investment income if your adjusted gross income exceeds certain threshold
amounts, which are $250,000 in the case of married couples filing joint returns
and $200,000 in the case of single individuals.
DIVIDENDS RECEIVED DEDUCTION. A corporation that owns units generally will
not be entitled to the dividends received deduction with respect to many
dividends received from the trust because the dividends received deduction is
generally not available for distributions from regulated investment companies.
However, certain ordinary income dividends on units that are attributable to
qualifying dividends received by the trust from certain corporations may be
reported by the trust as being eligible for the dividends received deduction.
SALE OR REDEMPTION OF UNITS. If you sell or redeem your units, you will
generally recognize a taxable gain or loss. To determine the amount of this
gain or loss, you must subtract your tax basis in your units from the amount you
receive in the transaction. Your tax basis in your units is generally equal to
the cost of your units, generally including sales charges. In some cases,
however, you may have to adjust your tax basis after you purchase your units.
CAPITAL GAINS AND LOSSES AND CERTAIN ORDINARY INCOME DIVIDENDS. If you are
an individual, the maximum marginal stated federal tax rate for net capital gain
is generally 20% for taxpayers in the 39.6% tax bracket, 15% for taxpayers in
the 25%, 28%, 33% and 35% tax brackets and 0% for taxpayers in the 10% and 15%
tax brackets. Some portion of your capital gains dividends may
36 Understanding Your Investment
be subject to higher maximum marginal stated federal income tax rates. Capital
gains may also be subject to the "medicare tax" described above. Capital gain
received from assets held for more than one year that is considered
"unrecaptured section 1250 gain" (which may be the case, for example, with some
capital gains attributable to equity interests in real estate investment trusts
that constitute interests in entities treated as real estate investment trusts
for federal income tax purposes) is taxed at a maximum stated tax rate of 25%.
In the case of capital gains dividends, the determination of which portion of
the capital gains dividend, if any, is subject to the 25% tax rate, will be made
based on rules prescribed by the United States Treasury.
Net capital gain equals net long-term capital gain minus net short-term
capital loss for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one year or less. You must exclude the date you
purchase your units to determine your holding period. However, if you receive a
capital gain dividend from your trust and sell your unit at a loss after holding
it for six months or less, the loss will be recharacterized as long-term capital
loss to the extent of the capital gain dividend received. The tax rates for
capital gains realized from assets held for one year or less are generally the
same as for ordinary income. The Internal Revenue Code treats certain capital
gains as ordinary income in special situations.
Ordinary income dividends received by an individual unitholder from a
regulated investment company such as the trust are generally taxed at the same
rates that apply to net capital gain (as discussed above), provided certain
holding period requirements are satisfied and provided the dividends are
attributable to qualifying dividends received by the trust itself.
Distributions with respect to shares in real estate investment trusts are
qualifying dividends only in limited circumstances. The trust will provide
notice to its unitholders of the amount of any distribution which may be taken
into account as a dividend which is eligible for the capital gains tax rates.
IN-KIND DISTRIBUTIONS. Under certain circumstances, as described in this
prospectus, you may receive an in-kind distribution of trust securities when you
redeem units or when your trust terminates. This distribution will be treated
as a sale for federal income tax purposes and you will generally recognize gain
or loss, generally based on the value at that time of the securities and the
amount of cash received. The Internal Revenue Service could however assert that
a loss could not be currently deducted.
EXCHANGES. If you elect to have your proceeds from your trust rolled over
into a future trust, the exchange would generally be considered a sale for
federal income tax purposes.
DEDUCTIBILITY OF TRUST EXPENSES. Expenses incurred and deducted by your
trust will generally not be treated as income taxable to you. In some cases,
however, you may be required to treat your portion of these trust expenses as
income. In these cases you may be able to take a deduction for these expenses.
However, certain miscellaneous itemized deductions, such as investment expenses,
may be deducted by individuals only to the extent that all of these deductions
exceed 2% of the individual's adjusted gross income. Some individuals may also
be subject to further limitations on the amount of their itemized deductions,
depending on their income.
FOREIGN TAX CREDIT. If your trust invests in any foreign securities, the tax
statement that you
Understanding Your Investment 37
receive may include an item showing foreign taxes your trust paid to other
countries. In this case, dividends taxed to you will include your share of the
taxes your trust paid to other countries. You may be able to deduct or receive
a tax credit for your share of these taxes.
INVESTMENTS IN CERTAIN FOREIGN CORPORATIONS. If the trust holds an equity
interest in any "passive foreign investment companies" ("PFICs"), which are
generally certain foreign corporations that receive at least 75% of their annual
gross income from passive sources (such as interest, dividends, certain rents
and royalties or capital gains) or that hold at least 50% of their assets in
investments producing such passive income, the trust could be subject to U.S.
federal income tax and additional interest charges on gains and certain
distributions with respect to those equity interests, even if all the income or
gain is timely distributed to its unitholders. The trust will not be able to
pass through to its unitholders any credit or deduction for such taxes. The
trust may be able to make an election that could ameliorate these adverse tax
consequences. In this case, the trust would recognize as ordinary income any
increase in the value of such PFIC shares, and as ordinary loss any decrease in
such value to the extent it did not exceed prior increases included in income.
Under this election, the trust might be required to recognize in a year income
in excess of its distributions from PFICs and its proceeds from dispositions of
PFIC stock during that year, and such income would nevertheless be subject to
the distribution requirement and would be taken into account for purposes of the
4% excise tax. Dividends paid by PFICs are not treated as qualified dividend
income.
FOREIGN INVESTORS. If you are a foreign investor (i.e., an investor other
than a U.S. citizen or resident or a U.S. corporation, partnership, estate or
trust), you should be aware that, generally, subject to applicable tax treaties,
distributions from the trust will be characterized as dividends for federal
income tax purposes (other than dividends which the trust properly reports as
capital gain dividends) and will be subject to U.S. income taxes, including
withholding taxes, subject to certain exceptions described below. However,
distributions received by a foreign investor from the trust that are properly
reported by the trust as capital gain dividends may not be subject to U.S.
federal income taxes, including withholding taxes, provided that the trust makes
certain elections and certain other conditions are met. In addition,
distributions in respect of shares may be subject to a U.S. withholding tax of
30% in the case of distributions to (i) certain non-U.S. financial institutions
that have not entered into an agreement with the U.S. Treasury to collect and
disclose certain information and are not resident in a jurisdiction that has
entered into such an agreement with the U.S. Treasury and (ii) certain other
non-U.S. entities that do not provide certain certifications and information
about the entity's U.S. owners. Dispositions of units by such persons may be
subject to such withholding after December 31, 2016. You should also consult
your tax advisor with respect to other U.S. withholding and reporting
requirements.
EXPENSES
Your trust will pay various expenses to conduct its operations. The "Fees
and Expenses" section of the "Investment Summary" in this prospectus shows the
estimated amount of these expenses.
The sponsor will receive a fee from your trust for creating and developing
the trust, including determining the trust's objectives, policies, composition
and size, selecting service
38 Understanding Your Investment
providers and information services and for providing other similar
administrative and ministerial functions. This "creation and development fee"
is a charge of $0.05 per unit. The trustee will deduct this amount from your
trust's assets as of the close of the initial offering period. No portion of
this fee is applied to the payment of distribution expenses or as compensation
for sales efforts. This fee will not be deducted from proceeds received upon a
repurchase, redemption or exchange of units before the close of the initial
public offering period.
Your trust will pay a fee to the trustee for its services. The trustee also
benefits when it holds cash for your trust in non-interest bearing accounts.
Your trust will reimburse us as supervisor, evaluator and sponsor for providing
portfolio supervisory services, for evaluating your portfolio and for providing
bookkeeping and administrative services. Our reimbursements may exceed the
costs of the services we provide to your trust but will not exceed the costs of
services provided to all of our unit investment trusts in any calendar year.
All of these fees may adjust for inflation without your approval.
Your trust will also pay its general operating expenses. Your trust may pay
expenses such as trustee expenses (including legal and auditing expenses),
various governmental charges, fees for extraordinary trustee services, costs of
taking action to protect your trust, costs of indemnifying the trustee and the
sponsor, legal fees and expenses, expenses incurred in contacting you and costs
incurred to reimburse the trustee for advancing funds to meet distributions.
Your trust may pay the costs of updating its registration statement each year.
The trustee will generally pay trust expenses from distributions received on the
securities but in some cases may sell securities to pay trust expenses.
The trust will also indirectly bear the expenses of the underlying closed-end
funds. While the trust will not pay these expenses directly out of its assets,
these expenses are shown in the trust's annual operating expenses under "Fees
and Expenses" to illustrate the impact of these expenses.
EXPERTS
LEGAL MATTERS. Chapman and Cutler LLP acts as counsel for the trust and has
given an opinion that the units are validly issued. Dorsey & Whitney LLP acts
as counsel for the trustee.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. Grant Thornton LLP,
independent registered public accounting firm, audited the statement of
financial condition and the portfolio included in this prospectus.
ADDITIONAL INFORMATION
This prospectus does not contain all the information in the registration
statement that your trust filed with the Securities and Exchange Commission.
The Information Supplement, which was filed with the Securities and Exchange
Commission, includes more detailed information about the securities in your
portfolio, investment risks and general information about your trust. You can
obtain the Information Supplement by contacting us or the Securities and
Exchange Commission as indicated on the back cover of this prospectus. This
prospectus incorporates the Information Supplement by reference (it is legally
considered part of this prospectus).
Understanding Your Investment 39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
UNITHOLDERS
ADVISORS DISCIPLINED TRUST 1368
We have audited the accompanying statement of financial condition, including the
trust portfolio on pages 5, 6 and 7, of Advisors Disciplined Trust 1368, as of
____________, 2014, the initial date of deposit. The statement of financial
condition is the responsibility of the trust's sponsor. Our responsibility is
to express an opinion on this statement of financial condition based on our
audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the statement of financial condition is free of material misstatement. We were
not engaged to perform an audit of the trust's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the trust's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
financial condition, assessing the accounting principles used and significant
estimates made by the sponsor, as well as evaluating the overall statement of
financial condition presentation. Our procedures included confirmation with The
Bank of New York Mellon, trustee, of cash or an irrevocable letter of credit
deposited for the purchase of securities as shown in the statement of financial
condition as of ____________, 2014. We believe that our audit of the statement
of financial condition provides a reasonable basis for our opinion.
In our opinion, the statement of financial condition referred to above presents
fairly, in all material respects, the financial position of Advisors Disciplined
Trust 1368 as of ____________, 2014, in conformity with accounting principles
generally accepted in the United States of America.
Chicago, Illinois GRANT THORNTON LLP
____________, 2014
ADVISORS DISCIPLINED TRUST 1368
STATEMENT OF FINANCIAL CONDITION AS OF ____________, 2014
-----------------------------------------------------------------------------------------------------------
INVESTMENT IN SECURITIES
Contracts to purchase underlying securities (1)(2) . . . . . . . . . . . . . . . . . . . . . . $
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
==========
LIABILITIES AND INTEREST OF INVESTORS
Liabilities:
Organization costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred sales fee (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Creation and development fee (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
----------
----------
Interest of investors:
Cost to investors (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: initial sales fee (4)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: deferred sales fee, creation and development fee and organization costs (3)(4)(5) . .
----------
Net interest of investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
==========
Number of units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
==========
Net asset value per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
==========
<FN>
(1) Aggregate cost of the securities is based on the closing sale price
evaluations as determined by the evaluator.
(2) Cash or an irrevocable letter of credit has been deposited with the trustee
covering the funds (aggregating $200,000) necessary for the purchase of
securities in the trust represented by purchase contracts.
(3) A portion of the public offering price represents an amount sufficient to
pay for all or a portion of the costs incurred in establishing and offering
the trust. These costs have been estimated at $0.038 per unit for the
trust. A distribution will be made as of the earlier of the close of the
initial offering period or six months following the trust's inception date
to an account maintained by the trustee from which this obligation of the
investors will be satisfied. To the extent the actual organization costs
are greater than the estimated amount, only the estimated organization
costs added to the public offering price will be reimbursed to the sponsor
and deducted from the assets of the trust.
(4) The total sales fee consists of an initial sales fee, a deferred sales fee
and a creation and development fee. The initial sales fee is equal to the
difference between the maximum sales fee and the sum of the remaining
deferred sales fee and the total creation and development fee. On the
inception date, the total sales fee is 3.95% of the public offering price
per unit. The deferred sales fee is equal to $0.245 per unit and the
creation and development fee is equal to $0.05 per unit.
(5) The aggregate cost to investors includes the applicable sales fee assuming
no reduction of sales fees.
</FN>
40 Understanding Your Investment
CONTENTS
INVESTMENT SUMMARY
-----------------------------------------------------------------------
A concise description 2 Investment Objective
of essential information 2 Principal Investment Strategy
about the portfolio 2 Principal Risks
4 Who Should Invest
4 Essential Information
4 Fees and Expenses
5 Portfolio
UNDERSTANDING YOUR INVESTMENT
-----------------------------------------------------------------------
Detailed information to 8 How to Buy Units
help you understand 11 How to Sell Your Units
your investment 13 Distributions
14 Investment Risks
29 Closed-End Funds
30 How the Trust Works
35 Taxes
38 Expenses
39 Experts
39 Additional Information
40 Report of Independent Registered
Public Accounting Firm
40 Statement of Financial Condition
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Supplement (877) 858-1773
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ADDITIONAL INFORMATION
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This prospectus does not contain all information filed with the
Securities and Exchange Commission. To obtain or copy this
information including the Information Supplement (a duplication
fee may be required):
E-MAIL: publicinfo@sec.gov
WRITE: Public Reference Section
Washington, D.C. 20549
VISIT: http://www.sec.gov
(EDGAR Database)
CALL: 1-202-551-8090
(only for information on the operation of the
Public Reference Section)
REFER TO:
ADVISORS DISCIPLINED TRUST 1368
Securities Act file number: 333-199229
Investment Company Act file number: 811-21056
VALUE ARCHITECTS
BALANCED FLEX CORE
PORTFOLIO,
SERIES 2014-1
PROSPECTUS
____________, 2014
[LOGO]
AAM
ADVISORS
ASSET MANAGEMENT
ADVISORS DISCIPLINED TRUST 1368
VALUE ARCHITECTS BALANCED FLEX CORE PORTFOLIO, SERIES 2014-1
INFORMATION SUPPLEMENT
This Information Supplement provides additional information concerning each
trust described in the prospectus for the Advisors Disciplined Trust series
identified above. This Information Supplement should be read in conjunction
with the prospectus. It is not a prospectus. It does not include all of the
information that an investor should consider before investing in a trust. It
may not be used to offer or sell units of a trust without the prospectus. This
Information Supplement is incorporated into the prospectus by reference and has
been filed as part of the registration statement with the Securities and
Exchange Commission. Investors should obtain and read the prospectus prior to
purchasing units of a trust. You can obtain the prospectus without charge by
contacting your financial professional or by contacting the unit investment
trust division of Advisors Asset Management, Inc. at 18925 Base Camp Road, Suite
203, Monument, Colorado 80132, at 8100 East 22nd Street North, Building 800,
Suite 102, Wichita, Kansas 67226 or by calling (877) 858-1773. This Information
Supplement is dated as of the date of the prospectus.
CONTENTS
General Information 2
Investment Objective and Policies 3
Closed-End Funds 5
Risk Factors 5
Administration of the Trust 16
Portfolio Transactions and Brokerage Allocation 25
Purchase, Redemption and Pricing of Units 25
Taxation 30
Performance Information 36
GENERAL INFORMATION
Each trust is one of a series of separate unit investment trusts created
under the name Advisors Disciplined Trust and registered under the Investment
Company Act of 1940. Each trust was created as a common law trust on the
inception date described in the prospectus under the laws of the state of
New York. Each trust was created under a trust agreement among Advisors Asset
Management, Inc. (as sponsor, evaluator and supervisor) and The Bank of New York
Mellon (as trustee).
When your trust was created, the sponsor delivered to the trustee
securities or contracts for the purchase thereof for deposit in the trust and
the trustee delivered to the sponsor documentation evidencing the ownership of
units of the trust. At the close of the New York Stock Exchange on the trust's
inception date, the number of units may be adjusted so that the public offering
price per unit equals $10. The number of units, fractional interest of each
unit in the trust and estimated income distributions per unit will increase or
decrease to the extent of any adjustment. Additional units of each trust may be
issued from time to time by depositing in the trust additional securities (or
contracts for the purchase thereof together with cash or irrevocable letters of
credit) or cash (including a letter of credit or the equivalent) with
instructions to purchase additional securities. As additional units are issued
by a trust as a result of the deposit of additional securities by the sponsor,
the aggregate value of the securities in the trust will be increased and the
fractional undivided interest in the trust represented by each unit will be
decreased. The sponsor may continue to make additional deposits of securities
into a trust, provided that such additional deposits will be in amounts, which
will generally maintain the existing relationship among the shares of the
securities in such trust. Thus, although additional units will be issued, each
unit will generally continue to represent the same number of shares of each
security. If the sponsor deposits cash to purchase additional securities,
existing and new investors may experience a dilution of their investments and a
reduction in their anticipated income because of fluctuations in the prices of
the securities between the time of the deposit and the purchase of the
securities and because the trust will pay any associated brokerage fees.
The trustee has not participated in the selection of the securities
deposited in the trust and has no responsibility for the composition of the
trust portfolio.
Each unit initially offered represents an undivided interest in the related
trust. To the extent that any units are redeemed by the trustee or additional
units are issued as a result of additional securities being deposited by the
sponsor, the fractional undivided interest in a trust represented by each
unredeemed unit will increase or decrease accordingly, although the actual
interest in such trust represented by such fraction will remain unchanged.
Units will remain outstanding until redeemed upon tender to the trustee by
unitholders, which may include the sponsor, or until the termination of the
trust agreement.
A trust consists of (a) the securities listed under "Portfolio" in the
prospectus as may continue to be held from time to time in the trust, (b) any
additional securities acquired and held by the trust pursuant to the provisions
of the trust agreement and (c) any cash held in the accounts of the trust.
Neither the sponsor nor the trustee shall be liable in any way for any failure
in any of the securities. However, should any contract for the purchase of any
of the securities initially
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deposited in a trust fail, the sponsor will, unless substantially all of the
moneys held in the trust to cover such purchase are reinvested in substitute
securities in accordance with the trust agreement, refund the cash and sales fee
attributable to such failed contract to all unitholders on the next distribution
date.
INVESTMENT OBJECTIVE AND POLICIES
The trust seeks to provide above average total return. The prospectus
provides additional information regarding the trust's objective and investment
strategy.
The trust is a unit investment trust and is not an "actively managed" fund.
Traditional methods of investment management for a managed fund typically
involve frequent changes in a portfolio of securities on the basis of economic,
financial and market analysis. The portfolio of a trust, however, will not be
actively managed and therefore the adverse financial condition of an issuer will
not necessarily require the sale of its securities from a portfolio.
The sponsor may not alter the portfolio of a trust by the purchase, sale or
substitution of securities, except in special circumstances as provided in the
trust agreement. Thus, the assets of a trust will generally remain unchanged
under normal circumstances. The trust agreement provides that the sponsor may
(but need not) direct the trustee to dispose of a security in certain events
such as the issuer having defaulted on the payment on any of its outstanding
obligations or the price of a security has declined to such an extent or other
such credit factors exist so that in the opinion of the supervisor the retention
of such securities would be detrimental to the trust.
If a public tender offer has been made for a security or a merger,
acquisition or similar transaction has been announced affecting a security, the
trustee may either sell the security or accept a tender offer if the supervisor
determines that the action is in the best interest of unitholders. The trustee
will distribute any excess cash proceeds to unitholders. If your trust receives
securities or other property, it will either hold the securities or property in
the portfolio or sell the securities or property and distribute the proceeds.
The sponsor may direct the reinvestment of security sale proceeds if the sale is
the direct result of serious adverse credit factors which, in the opinion of the
sponsor, would make retention of the securities detrimental to the trust. In
such a case, the sponsor may, but is not obligated to, direct the reinvestment
of sale proceeds in any other securities that meet the criteria for inclusion in
the trust on the trust's inception date. The sponsor may also instruct the
trustee to take action necessary to ensure that the portfolio continues to
satisfy the qualifications of a regulated investment company for federal tax
purposes if the trust has elected to be taxed as a regulated investment company.
The trustee may sell securities, designated by the supervisor, from a trust
for the purpose of redeeming units of such trust tendered for redemption and the
payment of expenses.
In addition, if a trust has elected to be taxed as a regulated investment
company, the trustee may dispose of certain securities and take such further
action as may be needed from time to time to ensure that a trust continues to
satisfy the qualifications of a regulated investment company, including the
requirements with respect to diversification under Section 851 of the
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Internal Revenue Code, and as may be needed from time to time to avoid the
imposition of any tax on a trust or undistributed income of a trust as a
regulated investment company.
Proceeds from the sale of securities (or any securities or other property
received by a trust in exchange for securities) are credited to the Capital
Account of a trust for distribution to unitholders or to meet redemptions.
Except for failed securities and as provided herein, in the prospectus or in the
trust agreement, the acquisition by a trust of any securities other than the
portfolio securities is prohibited.
Because certain of the securities in certain of the trusts may from time to
time under certain circumstances be sold or otherwise liquidated and because the
proceeds from such events will be distributed to unitholders and will not be
reinvested, no assurance can be given that a trust will retain for any length of
time its present size and composition. Neither the sponsor nor the trustee
shall be liable in any way for any default, failure or defect in any security.
In the event of a failure to deliver any security that has been purchased for a
trust under a contract ("Failed Securities"), the sponsor is authorized under
the trust agreement to direct the trustee to acquire other securities
("Replacement Securities") to make up the original corpus of such trust.
The Replacement Securities must be purchased within 20 days after delivery
of the notice that a contract to deliver a security will not be honored and the
purchase price may not exceed the amount of funds reserved for the purchase of
the Failed Securities. The Replacement Securities must be equity securities of
the type selected for the trust and must not adversely affect the federal income
tax status of the trust. Whenever a Replacement Security is acquired for a
trust, the trustee shall notify all unitholders of the trust of the acquisition
of the Replacement Security and shall, on the next monthly distribution date
which is more than 30 days thereafter, make a pro rata distribution of the
amount, if any, by which the cost to the trust of the Failed Security exceeded
the cost of the Replacement Security. Once all of the securities in a trust are
acquired, the trustee will have no power to vary the investments of the trust,
i.e., the trustee will have no managerial power to take advantage of market
variations to improve a unitholder's investment.
If the right of limited substitution described in the preceding paragraphs
is not utilized to acquire Replacement Securities in the event of a failed
contract, the sponsor will refund the sales fee attributable to such Failed
Securities to all unitholders of the trust and the trustee will distribute the
cash attributable to such Failed Securities not more than 30 days after the date
on which the trustee would have been required to purchase a Replacement
Security. In addition, unitholders should be aware that, at the time of receipt
of such cash, they may not be able to reinvest such proceeds in other securities
at a return equal to or in excess of the return which such proceeds would have
earned for unitholders of such trust.
In the event that a Replacement Security is not acquired by a trust, the
income for such trust may be reduced.
To the best of the sponsor's knowledge, there is no litigation pending as
of the trust's inception in respect of any security that might reasonably be
expected to have a material adverse effect on the trust. At any time after the
trust's inception, litigation may be instituted on a variety of grounds with
respect to the securities. The sponsor is unable to predict whether any such
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litigation may be instituted, or if instituted, whether such litigation might
have a material adverse effect on the trust. The sponsor and the trustee shall
not be liable in any way for any default, failure or defect in any security.
CLOSED-END FUNDS
Closed-end funds are actively managed investment companies that invest in
various types of securities. Closed-end funds issue shares of common stock that
are generally traded on a securities exchange (although some closed-end fund
shares are not listed on a securities exchange). Closed-end funds are subject
to various risks, including management's ability to meet the closed-end fund's
investment objective, and to manage the closed-end fund portfolio when the
underlying securities are redeemed or sold, during periods of market turmoil and
as investors' perceptions regarding closed-end funds or their underlying
investments change.
Shares of closed-end funds frequently trade at a discount from their net
asset value in the secondary market. This risk is separate and distinct from
the risk that the net asset value of closed-end fund shares may decrease. The
amount of such discount from net asset value is subject to change from time to
time in response to various factors.
Certain of the closed-end funds included in the trust may employ the use of
leverage in their portfolios through the issuance of preferred stock. While
leverage often serves to increase the yield of a closed-end fund, this leverage
also subjects the closed-end fund to increased risks. These risks may include
the likelihood of increased volatility and the possibility that the closed-end
fund's common share income will fall if the dividend rate on the preferred
shares or the interest rate on any borrowings rises.
RISK FACTORS
MARKET RISK. Because the trust invests in stocks, you should understand the
risks of investing in stocks before purchasing units. These risks include the
risk that the financial condition of the company or the general condition of the
stock market may worsen and the value of the stocks (and therefore units) will
fall. Stocks are especially susceptible to general stock market movements. The
value of stocks often rises or falls rapidly and unpredictably as market
confidence and perceptions of companies change. These perceptions are based on
factors including expectations regarding government economic policies,
inflation, interest rates, economic expansion or contraction, political climates
and economic or banking crises. The value of units will fluctuate with the value
of the stocks in the trust and may be more or less than the price you originally
paid for your units. As with any investment, we cannot guarantee that the
performance of the trust will be positive over any period of time. Because the
trust is unmanaged, the Trustee will not sell stocks in response to market
fluctuations as is common in managed investments. In addition, because some
trusts hold a relatively small number of stocks, you may encounter greater
market risk than in a more diversified investment.
DIVIDENDS. Stocks represent ownership interests in a company and are not
obligations of the company. Common stockholders have a right to receive
payments from the company that is
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subordinate to the rights of creditors, bondholders or preferred stockholders of
the company. This means that common stockholders have a right to receive
dividends only if a company's board of directors declares a dividend and the
company has provided for payment of all of its creditors, bondholders and
preferred stockholders. If a company issues additional debt securities or
preferred stock, the owners of these securities will have a claim against the
company's assets before common stockholders if the company declares bankruptcy
or liquidates its assets even though the common stock was issued first. As a
result, the company may be less willing or able to declare or pay dividends on
its common stock.
CLOSED-END FUNDS. The closed-end funds in the trust invest in various
securities. As such, an investment in units of the trust should be made with an
understanding of the risks of investing in both closed-end fund shares and such
securities.
Closed-end funds' portfolios are managed and their shares are generally
listed on a securities exchange. The net asset value of closed-end fund shares
will fluctuate with changes in the value of the underlying securities that the
closed-end fund owns. In addition, for various reasons closed-end fund shares
frequently trade at a discount from their net asset value in the secondary
market. The amount of such discount from net asset value is subject to change
from time to time in response to various factors. Closed-end funds' articles of
incorporation may contain certain anti-takeover provisions that may have the
effect of inhibiting a fund's possible conversion to open-end status and
limiting the ability of other persons to acquire control of a fund. In certain
circumstances, these provisions might also inhibit the ability of stockholders
(including the trust) to sell their shares at a premium over prevailing market
prices. This characteristic is a risk separate and distinct from the risk that
a fund's net asset value will decrease. In particular, this characteristic
would increase the loss or reduce the return on the sale of those closed-end
fund shares that were purchased by the trust at a premium. In the unlikely
event that a closed-end fund converts to open-end status at a time when its
shares are trading at a premium there would be an immediate loss in value to the
trust since shares of open-end funds trade at net asset value. Certain closed-
end funds may have in place or may put in place in the future plans pursuant to
which the fund may repurchase its own shares in the marketplace. Typically,
these plans are put in place in an attempt by a fund's board of directors to
reduce a discount on its share price. To the extent that such a plan is
implemented and shares owned by the trust are repurchased by a fund, the trust's
position in that fund will be reduced and the cash will be distributed.
The trust is prohibited from subscribing to a rights offering for shares of
any of the closed-end funds in which it invests. In the event of a rights
offering for additional shares of a fund, unitholders should expect that the
trust will, at the completion of the offer, own a smaller proportional interest
in such fund that would otherwise be the case. It is not possible to determine
the extent of this dilution in share ownership without knowing what proportion
of the shares in a rights offering will be subscribed. This may be particularly
serious when the subscription price per share for the offer is less than the
fund's net asset value per share. Assuming that all rights are exercised and
there is no change in the net asset value per share, the aggregate net asset
value of each shareholder's shares of common stock should decrease as a result
of the offer. If a fund's subscription price per share is below that fund's net
asset value per share at the expiration of the offer, shareholders would
experience an immediate dilution of the
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aggregate net asset value of their shares of common stock as a result of the
offer, which could be substantial.
Closed-end funds may use leveraging in their portfolios. Leveraging can be
expected to cause increased price volatility for those fund's shares, and as a
result, increased volatility for the price of the units of the trust. There can
be no assurance that a leveraging strategy will be successful during any period
in which it is employed.
FOREIGN ISSUERS. Since certain or all of the trust's portfolio securities
or the underlying securities held by certain of the closed-end funds trust are
issued by foreign companies, an investment in the trust involves certain
investment risks that are different in some respects from an investment in a
trust which invests entirely in the securities of domestic issuers. These
investment risks include future political or governmental restrictions which
might adversely affect the payment or receipt of payment of dividends on the
relevant securities, the possibility that the financial condition of the issuers
of the securities may become impaired or that the general condition of the
relevant stock market may worsen (both of which would contribute directly to a
decrease in the value of the securities and thus in the value of the units), the
limited liquidity and relatively small market capitalization of the relevant
securities market, expropriation or confiscatory taxation, economic
uncertainties and foreign currency devaluations and fluctuations. In addition,
for foreign issuers that are not subject to the reporting requirements of the
Securities Exchange Act of 1934, there may be less publicly available
information than is available from a domestic issuer. In addition, foreign
issuers are not necessarily subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic issuers. The securities of many foreign issuers are less
liquid and their prices more volatile than securities of comparable domestic
issuers. In addition, fixed brokerage commissions and other transaction costs
in foreign securities markets are generally higher than in the United States and
there is generally less government supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the United States.
However, due to the nature of the issuers of the securities in the closed-end
funds selected for the trust, the sponsor believes that adequate information
will be available to allow the Supervisor to provide portfolio surveillance for
the trust.
Securities issued by non-U.S. issuers generally pay income in foreign
currencies and principally trade in foreign currencies. Therefore, there is a
risk that the U.S. dollar value of these securities will vary with fluctuations
in the U.S. dollar foreign exchange rates for the various securities.
There can be no assurance that exchange control regulations might not be
adopted in the future which might adversely affect payment to the closed-end
funds or the trust. The adoption of exchange control regulations and other
legal restrictions could have an adverse impact on the marketability of
international securities in the trust and on the ability of the trust to satisfy
its obligation to redeem units tendered to the trustee for redemption. In
addition, restrictions on the settlement of transactions on either the purchase
or sale side, or both, could cause delays or increase the costs associated with
the purchase and sale of the foreign Securities and correspondingly could affect
the price of the units.
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Investors should be aware that it may not be possible to buy all securities
at the same time because of the unavailability of any security, and restrictions
applicable to the trust relating to the purchase of a security by reason of the
federal securities laws or otherwise.
Foreign securities generally have not been registered under the Securities
Act of 1933 and may not be exempt from the registration requirements of such
Act. Sales of non-exempt securities by a closed-end fund in the United States
securities markets are subject to severe restrictions and may not be
practicable. Accordingly, sales of these securities by a closed-end fund will
generally be effected only in foreign securities markets. Investors should
realize that the securities in the closed-end funds might be traded in foreign
countries where the securities markets are not as developed or efficient and may
not be as liquid as those in the United States. The value of the securities
will be adversely affected if trading markets for the securities are limited or
absent.
HIGH-YIELD SECURITIES. An investment in units of the trust should be made
with an understanding of the risks that an investment in "high-yield, high-risk"
debt obligations or "junk" obligations may entail, including increased credit
risks and the risk that the value of the units will decline, and may decline
precipitously, with increases in interest rates. In recent years there have
been wide fluctuations in interest rates and thus in the value of debt
obligations generally. Certain of the securities included in the funds in the
trust may be subject to greater market fluctuations and risk of loss of income
and principal than are investments in lower-yielding, higher-rated securities,
and their value may decline precipitously because of increases in interest
rates, not only because the increases in rates generally decrease values, but
also because increased rates may indicate a slowdown in the economy and a
decrease in the value of assets generally that may adversely affect the credit
of issuers of high-yield, high-risk securities resulting in a higher incidence
of defaults among high-yield, high-risk securities. A slowdown in the economy,
or a development adversely affecting an issuer's creditworthiness, may result in
the issuer being unable to maintain earnings or sell assets at the rate and at
the prices, respectively, that are required to produce sufficient cash flow to
meet its interest and principal requirements. For an issuer that has
outstanding both senior commercial bank debt and subordinated high-yield, high-
risk securities, an increase in interest rates will increase that issuer's
interest expense insofar as the interest rate on the bank debt is fluctuating.
However, many leveraged issuers enter into interest rate protection agreements
to fix or cap the interest rate on a large portion of their bank debt. This
reduces exposure to increasing rates, but reduces the benefit to the issuer of
declining rates. The sponsor cannot predict future economic policies or their
consequences or, therefore, the course or extent of any similar market
fluctuations in the future.
"High-yield" or "junk" securities, the generic names for securities rated
below BBB by Standard & Poor's, or below Baa by Moody's, are frequently issued
by corporations in the growth stage of their development, by established
companies whose operations or industries are depressed or by highly leveraged
companies purchased in leveraged buyout transactions. The market for high-yield
securities is very specialized and investors in it have been predominantly
financial institutions. High-yield securities are generally not listed on a
national securities exchange. Trading of high- yield securities, therefore,
takes place primarily in over-the-counter markets that consist of groups of
dealer firms that are typically major securities firms. Because the high-yield
security market is a dealer market, rather than an auction market, no single
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obtainable price for a given security prevails at any given time. Prices are
determined by negotiation between traders. The existence of a liquid trading
market for the securities may depend on whether dealers will make a market in
the securities. There can be no assurance that a market will be made for any of
the securities, that any market for the securities will be maintained or of the
liquidity of the securities in any markets made. Not all dealers maintain
markets in all high-yield securities. Therefore, since there are fewer traders
in these securities than there are in "investment grade" securities, the bid-
offer spread is usually greater for high-yield securities than it is for
investment grade securities. The price at which the securities may be sold to
meet redemptions and the value of the trust will be adversely affected if
trading markets for the securities are limited or absent. If the rate of
redemptions is great, the value of the trust may decline to a level that
requires liquidation.
Lower-rated securities tend to offer higher yields than higher-rated
securities with the same maturities because the creditworthiness of the issuers
of lower-rated securities may not be as strong as that of other issuers.
Moreover, if a security is recharacterized as equity by the Internal Revenue
Service for federal income tax purposes, the issuer's interest deduction with
respect to the security will be disallowed and this disallowance may adversely
affect the issuer's credit rating. Because investors generally perceive that
there are greater risks associated with the lower-rated securities in the funds
in the trust, the yields and prices of these securities tend to fluctuate more
than higher- rated securities with changes in the perceived quality of the
credit of their issuers. In addition, the market value of high-yield, high-risk
securities may fluctuate more than the market value of higher-rated securities
since these securities tend to reflect short-term credit development to a
greater extent than higher-rated securities. Lower-rated securities generally
involve greater risks of loss of income and principal than higher-rated
securities. Issuers of lower-rated securities may possess fewer
creditworthiness characteristics than issuers of higher-rated securities and,
especially in the case of issuers whose obligations or credit standing have been
downgraded, may be subject to claims by debtholders, owners of property leased
to the issuer or others which, if sustained, would make it more difficult for
the issuers to meet their payment obligations. High-yield, high-risk securities
are also affected by variables such as interest rates, inflation rates and real
growth in the economy. Therefore, investors should consider carefully the
relative risks associated with investment in securities that carry lower
ratings.
The value of the shares of the closed-end funds reflects the value of the
portfolio securities, including the value (if any) of securities in default.
Should the issuer of any security default in the payment of principal or
interest, the closed-end funds in the trust may incur additional expenses
seeking payment on the defaulted security. Because amounts (if any) recovered
by the funds in payment under the defaulted security may not be reflected in the
value of the fund shares until actually received by the funds, and depending
upon when a unitholder purchases or sells his or her units, it is possible that
a unitholder would bear a portion of the cost of recovery without receiving any
portion of the payment recovered.
High-yield, high-risk securities are generally subordinated obligations.
The payment of principal (and premium, if any), interest and sinking fund
requirements with respect to subordinated obligations of an issuer is
subordinated in right of payment to the payment of senior obligations of the
issuer. Senior obligations generally include most, if not all, significant debt
-9-
obligations of an issuer, whether existing at the time of issuance of
subordinated debt or created thereafter. Upon any distribution of the assets of
an issuer with subordinated obligations upon dissolution, total or partial
liquidation or reorganization of or similar proceeding relating to the issuer,
the holders of senior indebtedness will be entitled to receive payment in full
before holders of subordinated indebtedness will be entitled to receive any
payment. Moreover, generally no payment with respect to subordinated
indebtedness may be made while there exists a default with respect to any senior
indebtedness. Thus, in the event of insolvency, holders of senior indebtedness
of an issuer generally will recover more, ratably, than holders of subordinated
indebtedness of that issuer.
Obligations that are rated lower than "BBB" by Standard & Poor's, or "Baa"
by Moody's, respectively, should be considered speculative as such ratings
indicate a quality of less than investment grade. Investors should carefully
review the objective of the trust and consider their ability to assume the risks
involved before making an investment in the trust.
CONVERTIBLE SECURITIES RISKS. The closed-end funds held by a trust may
invest in convertible securities. Convertible securities generally offer lower
interest or dividend yields than non-convertible fixed-income securities of
similar credit quality because of the potential for capital appreciation. The
market values of convertible securities tend to decline as interest rates
increase and, conversely, to increase as interest rates decline. However, a
convertible security's market value also tends to reflect the market price of
the common stock of the issuing company, particularly when the stock price is
greater than the convertible security's conversion price. The conversion price
is defined as the predetermined price or exchange ratio at which the convertible
security can be converted or exchanged for the underlying common stock. As the
market price of the underlying common stock declines below the conversion price,
the price of the convertible security tends to be increasingly influenced more
by the yield of the convertible security than by the market price of the
underlying common stock. Thus, it may not decline in price to the same extent as
the underlying common stock, and convertible securities generally have less
potential for gain or loss than common stocks. However, mandatory convertible
securities (as discussed below) generally do not limit the potential for loss to
the same extent as securities convertible at the option of the holder. In the
event of a liquidation of the issuing company, holders of convertible securities
would be paid before that company's common stockholders. Consequently, an
issuer's convertible securities generally entail less risk than its common
stock. However, convertible securities fall below debt obligations of the same
issuer in order of preference or priority in the event of a liquidation and are
typically unrated or rated lower than such debt obligations. In addition,
contingent payment, convertible securities allow the issuer to claim deductions
based on its nonconvertible cost of debt, which generally will result in
deduction in excess of the actual cash payments made on the securities (and
accordingly, holders will recognize income in amounts in excess of the cash
payments received).
Mandatory convertible securities are distinguished as a subset of
convertible securities because the conversion is not optional and the conversion
price at maturity is based solely upon the market price of the underlying common
stock, which may be significantly less than par or the price (above or below
par) paid. For these reasons, the risks associated with investing in mandatory
convertible securities most closely resemble the risks inherent in common
stocks. Mandatory convertible securities customarily pay a higher coupon yield
to compensate for the
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potential risk of additional price volatility and loss upon conversion. Because
the market price of a mandatory convertible security increasingly corresponds to
the market price of its underlying common stock as the convertible security
approaches its conversion date, there can be no assurance that the higher coupon
will compensate for the potential loss.
SENIOR LOANS. The trust and/or the closed-end funds held by a trust may
invest in senior loans issued by banks, other financial institutions, and other
investors to corporations, partnerships, limited liability companies and other
entities to finance leveraged buyouts, recapitalizations, mergers, acquisitions,
stock repurchases, debt refinancings and, to a lesser extent, for general
operating and other purposes. Senior loans in which the closed-end funds
invest:
* generally are of below investment grade credit quality;
* may be unrated at the time of investment;
* generally are not registered with the SEC or any state securities
commission; and
* generally are not listed on any securities exchange.
An investment by closed-end funds in senior loans involves risk that the
borrowers under senior loans may default on their obligations to pay principal
or interest when due. Although senior loans may be secured by specific
collateral, there can be no assurance that liquidation of collateral would
satisfy the borrower's obligation in the event of non-payment or that such
collateral could be readily liquidated. Senior loans are typically structured as
floating rate instruments in which the interest rate payable on the obligation
fluctuates with interest rate changes. As a result, the yield on closed-end
funds investing in senior loans will generally decline in a falling interest
rate environment and increase in a rising interest rate environment.
The amount of public information available on senior loans generally will
be less extensive than that available for other types of assets. No reliable,
active trading market currently exists for many senior loans, although a
secondary market for certain senior loans has developed over the past several
years. Senior loans are thus relatively illiquid. Liquidity relates to the
ability of a closed-end fund to sell an investment in a timely manner at a price
approximately equal to its value on the closed-end fund's books. The illiquidity
of senior loans may impair a closed-end fund's ability to realized the full
value of its assets in the event of a voluntary or involuntary liquidation of
such assets. Because of the lack of an active trading market, illiquid
securities are also difficult to value and prices provided by external pricing
services may not reflect the true value of the securities. However, many senior
loans are of a large principal amount and are held by a large number of
financial institutions. To the extent that a secondary market does exist for
certain senior loans, the market may be subject to irregular trading activity,
wide bid/ask spreads and extended trade settlement periods. The market for
senior loans could be disrupted in the event of an economic downturn or a
substantial increase or decrease in interest rates. This could result in
increased volatility in the market and in the trust's net asset value.
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If legislation or state or federal regulators impose additional
requirements or restrictions on the ability of financial institutions to make
loans that are considered highly leveraged transactions, the availability of
senior loans for investment by the closed-end funds may be adversely affected.
In addition, such requirements or restrictions could reduce or eliminate sources
of financing for certain borrowers. This would increase the risk of default. If
legislation or federal or state regulators require financial institutions to
dispose of senior loans that are considered highly leveraged transactions or
subject such senior loans to increased regulatory scrutiny, financial
institutions may determine to sell such senior loans. Such sales could result in
depressed prices. If a closed-end fund attempts to sell a senior loan at a time
when a financial institution is engaging in such a sale, the price a closed-end
fund could get for the senior loan may be adversely affected.
Some senior loans are subject to the risk that a court, pursuant to
fraudulent conveyance or other similar laws, could subordinate the senior loans
to presently existing or future indebtedness of the borrower or take other
action detrimental to lenders. Such court action could under certain
circumstances include invalidation of senior loans. Any lender, which could
include a closed-end fund, is subject to the risk that a court could find the
lender liable for damages in a claim by a borrower arising under the common laws
of tort or contracts or anti-fraud provisions of certain securities laws for
actions taken or omitted to be taken by the lenders under the relevant terms of
a loan agreement or in connection with actions with respect to the collateral
underlying the senior loan.
PREFERRED STOCK RISKS. The trust and/or closed-end funds held by a trust
may invest in preferred stocks. Preferred stocks may be susceptible to general
stock market movements and to volatile increases and decreases of value as
market confidence in and perceptions of the issuers change. These perceptions
are based on unpredictable factors, including expectations regarding government,
economic, monetary and fiscal policies, inflation and interest rates, economic
expansion or contraction, market liquidity, and global or regional political,
economic or banking crises. Preferred stocks are also vulnerable to
Congressional reductions in the dividends-received deduction which would
adversely affect the after-tax return to the investors who can take advantage of
the deduction. Such a reduction might adversely affect the value of preferred
stocks in general. Holders of preferred stocks, as owners of the entity, have
rights to receive payments from the issuers of those preferred stocks that are
generally subordinate to those of creditors of, or holders of debt obligations
or, in some cases, other senior preferred stocks of, such issuers. Preferred
stocks do not represent an obligation of the issuer and, therefore, do not offer
any assurance of income or provide the same degree of protection of capital as
do debt securities. The issuance of additional debt securities or senior
preferred stocks will create prior claims for payment of principal and interest
and senior dividends which could adversely affect the ability and inclination of
the issuer to declare or pay dividends on its preferred stock or the rights of
holders of preferred stock with respect to assets of the issuer upon liquidation
or bankruptcy. The value of preferred stocks is subject to market fluctuations
for as long as the preferred stocks remain outstanding, and thus the value of
the securities may be expected to fluctuate over the life of the trust to values
higher or lower than those prevailing on the trust's inception date.
TRUST PREFERRED SECURITIES RISKS. The trust and/or the closed-end funds
held by a trust may invest in various preferred securities. Holders of trust
preferred securities incur risks in
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addition to or slightly different than the typical risks of holding preferred
stocks. Trust preferred securities are limited-life preferred securities that
are typically issued by corporations, generally in the form of interest-bearing
notes or preferred securities issued by corporations, or by an affiliated
business trust of a corporation, generally in the form of beneficial interests
in subordinated debentures issued by the corporation, or similarly structured
securities. The maturity and dividend rate of the trust preferred securities are
structured to match the maturity and coupon interest rate of the interest-
bearing notes, preferred securities or subordinated debentures. Trust preferred
securities usually mature on the stated maturity date of the interest-bearing
notes, preferred securities or subordinated debentures and may be redeemed or
liquidated prior to the stated maturity date of such instruments for any reason
on or after their stated call date or upon the occurrence of certain
circumstances at any time. Trust preferred securities generally have a yield
advantage over traditional preferred stocks, but unlike preferred stocks,
distributions on the trust preferred securities are generally treated as
interest rather than dividends for federal income tax purposes. Unlike most
preferred stocks, distributions received from trust preferred securities are
generally not eligible for the dividends received deduction. Certain of the
risks unique to trust preferred securities include: (i) distributions on trust
preferred securities will be made only if interest payments on the interest-
bearing notes, preferred securities or subordinated debentures are made; (ii) a
corporation issuing the interest-bearing notes, preferred securities or
subordinated debentures may defer interest payments on these instruments for up
to 20 consecutive quarters and if such election is made, distributions will not
be made on the trust preferred securities during the deferral period; (iii)
certain tax or regulatory events may trigger the redemption of the interest-
bearing notes, preferred securities or subordinated debentures by the issuing
corporation and result in prepayment of the trust preferred securities prior to
their stated maturity date; (iv) future legislation may be proposed or enacted
that may prohibit the corporation from deducting its interest payments on the
interest-bearing notes, preferred securities or subordinated debentures for tax
purposes, making redemption of these instruments likely; (v) a corporation may
redeem the interest-bearing notes, preferred securities or subordinated
debentures in whole at any time or in part from time to time on or after a
stated call date; (vi) trust preferred securities holders have very limited
voting rights; and (vii) payment of interest on the interest-bearing notes,
preferred securities or subordinated debentures, and therefore distributions on
the trust preferred securities, is dependent on the financial condition of the
issuing corporation.
REAL ESTATE INVESTMENT TRUSTS. Many factors can have an adverse impact on
the performance of a particular real estate investment trust ("REIT"), including
its cash available for distribution, the credit quality of a particular REIT or
the real estate industry generally. The success of REITs depends on various
factors, including the occupancy and rent levels, appreciation of the underlying
property and the ability to raise rents on those properties. Economic recession,
overbuilding, tax law changes, higher interest rates or excessive speculation
can all negatively impact REITs, their future earnings and share prices.
Risks associated with the direct ownership of real estate include, among
other factors,
* general U.S. and global as well as local economic conditions,
* decline in real estate values,
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* the financial health of tenants,
* overbuilding and increased competition for tenants,
* oversupply of properties for sale,
* changing demographics,
* changes in interest rates, tax rates and other operating expenses,
* changes in government regulations,
* changes in zoning laws,
* the ability of the owner to provide adequate management, maintenance and
insurance,
* faulty construction and the ongoing need for capital improvements,
* the cost of complying with the Americans with Disabilities Act,
* regulatory and judicial requirements, including relating to liability for
environmental hazards,
* natural or man-made disasters,
* changes in the perception of prospective tenants of the safety, convenience
and attractiveness of the properties changes in neighborhood values and
buyer demand, and
* the unavailability of construction financing or mortgage loans at rates
acceptable to developers.
Variations in rental income and space availability and vacancy rates in
terms of supply and demand are additional factors affecting real estate
generally and REITs in particular. Properties owned by a REIT may not be
adequately insured against certain losses and may be subject to significant
environmental liabilities, including remediation costs.
The value of real estate investments may also be affected by the downturn
in the subprime mortgage lending market in the United States. Subprime loans
have higher defaults and losses than prime loans. Subprime loans also have
higher serious delinquency rates than prime loans. The downturn in the subprime
mortgage lending market may have far-reaching consequences into many aspects and
geographic regions of the real estate business, and consequently, the value of
the portfolio may decline in response to such developments.
You should also be aware that REITs may not be diversified and are subject
to the risks of financing projects. The real estate industry may be cyclical,
and, if the Trust acquires REIT Securities at or near the top of the cycle,
there is increased risk of a decline in value of the REIT
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Securities and therefore the value of the Units. REITs are also subject to
defaults by borrowers and the market's perception of the REIT industry
generally.
Because of their structure, and the legal requirement that they distribute
at least 90% of their taxable income to shareholders annually, REITs require
frequent amounts of new funding, through both borrowing money and issuing stock.
Thus, REITs historically have frequently issued substantial amounts of new
equity shares (or equivalents) to purchase or build new properties. This may
have adversely affected REIT equity share market prices. Both existing and new
share issuances may have an adverse effect on these prices in the future,
especially when REITs continue to issue stock when real estate prices are
relatively high and stock prices are relatively low.
The value of REITs may also be affected by the downturn in the housing and
mortgage lending markets. In response, government authorities have initiated
and may continue to engage in administrative and legislative action intended to
address both short- and long-term difficulties facing the housing and mortgage
lending markets and the broader economy. No one can predict the action that
might be taken or the effect any action or inaction will have and it is possible
that any actions taken by government authorities will not address or help
improve the state of these difficulties as intended. The downturn and
corresponding government action may have far reaching consequences into many
geographic regions and, consequently, the value of securities in the portfolio
may decline in response to such developments.
DISCOUNT SECURITIES. Certain of the securities held by the closed-end
funds in the trust may have been acquired at a market discount from par value at
maturity. The coupon interest rates on the discount securities at the time they
were purchased and deposited in the funds were lower than the current market
interest rates for newly issued securities of comparable rating and type. If
such interest rates for newly issued comparable securities increase, the market
discount of previously issued securities will become greater, and if such
interest rates for newly issued comparable securities decline, the market
discount of previously issued securities will be reduced, other things being
equal. Investors should also note that the value of securities purchased at a
market discount will increase in value faster than securities purchased at a
market premium if interest rates decrease. Conversely, if interest rates
increase, the value of securities purchased at a market discount will decrease
faster than securities purchased at a market premium. In addition, if interest
rates rise, the prepayment risk of higher yielding, premium securities and the
prepayment benefit for lower yielding, discount securities will be reduced.
Market discount attributable to interest changes does not indicate a lack of
market confidence in the issue. Neither the sponsor nor the trustee shall be
liable in any way for any default, failure or defect in any of the securities.
PREMIUM SECURITIES. Certain of the securities held by the closed-end funds
in the trust may have been acquired at a market premium from par value at
maturity. The coupon interest rates on the premium securities at the time they
were purchased by the fund were higher than the current market interest rates
for newly issued securities of comparable rating and type. If such interest
rates for newly issued and otherwise comparable securities decrease, the market
premium of previously issued securities will be increased, and if such interest
rates for newly issued comparable securities increase, the market premium of
previously issued securities will be
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reduced, other things being equal. The current returns of securities trading at
a market premium are initially higher than the current returns of comparable
securities of a similar type issued at currently prevailing interest rates
because premium securities tend to decrease in market value as they approach
maturity when the face amount becomes payable. Because part of the purchase
price is thus returned not at maturity but through current income payments,
early redemption of a premium security at par or early prepayments of principal
will result in a reduction in yield. Redemption pursuant to call provisions
generally will, and redemption pursuant to sinking fund provisions may, occur at
times when the redeemed securities have an offering side valuation which
represents a premium over par or for original issue discount securities a
premium over the accreted value.
ADDITIONAL DEPOSITS. The trust agreement authorizes the sponsor to
increase the size of a trust and the number of units thereof by the deposit of
additional securities, or cash (including a letter of credit or the equivalent)
with instructions to purchase additional securities, in such trust and the
issuance of a corresponding number of additional units. In connection with
these deposits, existing and new investors may experience a dilution of their
investments and a reduction in their anticipated income because of fluctuations
in the prices of the securities between the time of the deposit and the purchase
of the securities and because a trust will pay the associated brokerage fees and
other acquisition costs.
ADMINISTRATION OF THE TRUST
DISTRIBUTIONS TO UNITHOLDERS. Income received by a trust is credited by
the trustee to the Income Account for the trust. All other receipts are
credited by the trustee to a separate Capital Account for the trust. The
trustee will normally distribute any income received by a trust on each
distribution date or shortly thereafter to unitholders of record on the
preceding record date. The trust will also generally make required distributions
or distributions to avoid imposition of tax at the end of each year if it has
elected to be taxed as a "regulated investment company" for federal tax
purposes. Unitholders will receive an amount substantially equal to their pro
rata share of the available balance of the Income Account of the trust. All
distributions will be net of applicable expenses. There is no assurance that
any actual distributions will be made since all dividends received may be used
to pay expenses. In addition, excess amounts from the Capital Account of a
trust, if any, will be distributed at least annually to the unitholders then of
record. Proceeds received from the disposition of any of the securities after a
record date and prior to the following distribution date will be held in the
Capital Account and not distributed until the next distribution date applicable
to the Capital Account. The trustee shall be required to make a distribution
from the Capital Account if the cash balance on deposit therein available for
distribution shall be sufficient to distribute at least $1.00 per unit. The
trustee is not required to pay interest on funds held in the Capital or Income
Accounts (but may itself earn interest thereon and therefore benefits from the
use of such funds).
The distribution to the unitholders as of each record date will be made on
the following distribution date or shortly thereafter and shall consist of an
amount substantially equal to the unitholders' pro rata share of the available
balance of the Income Account of the trust after deducting estimated expenses.
Because dividends are not received by a trust at a constant rate throughout the
year, such distributions to unitholders are expected to fluctuate. Persons who
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purchase units will commence receiving distributions only after such person
becomes a record owner. A person will become the owner of units, and thereby a
unitholder of record, on the date of settlement provided payment has been
received. Notification to the trustee of the transfer of units is the
responsibility of the purchaser, but in the normal course of business the
selling broker-dealer provides such notice.
The trustee will periodically deduct from the Income Account of a trust
and, to the extent funds are not sufficient therein, from the Capital Account of
a trust amounts necessary to pay the expenses of the trust. The trustee also
may withdraw from said accounts such amounts, if any, as it deems necessary to
establish a reserve for any governmental charges payable out of a trust.
Amounts so withdrawn shall not be considered a part of a trust's assets until
such time as the trustee shall return all or any part of such amounts to the
appropriate accounts. In addition, the trustee may withdraw from the Income and
Capital Accounts of a trust such amounts as may be necessary to cover
redemptions of units.
DISTRIBUTION REINVESTMENT. Unitholders may reinvest distributions into
additional units of their trust without a sales fee. Your trust will pay any
deferred sales fee and creation and development fee per unit regardless of any
sales fee discounts. However, if you are eligible to receive a discount such
that the sales fee you must pay is less than the applicable deferred sales fee
and creation and development fee, you will be credited the difference between
your sales fee and the deferred sales fee and the creation and development fee
at the time you buy your units. Accordingly, if you reinvest distributions into
additional units of your trust, you will be credited the amount of any remaining
deferred sales fee and creation and development fee on such units at the time of
reinvestment.
STATEMENTS TO UNITHOLDERS. With each distribution, the trustee will
furnish to each unitholder a statement of the amount of income and the amount of
other receipts, if any, which are being distributed, expressed in each case as a
dollar amount per unit.
The accounts of a trust are required to be audited annually, at the related
trust's expense, by independent public accountants designated by the sponsor,
unless the sponsor determines that such an audit would not be in the best
interest of the unitholders of the trust. The accountants' report will be
furnished by the trustee to any unitholder upon written request. Within a
reasonable period of time after the end of each calendar year, the trustee shall
furnish to each person who at any time during the calendar year was a unitholder
of a trust a statement, covering the calendar year, setting forth for the trust:
(A) As to the Income Account:
(1) the amount of income received on the securities (including income
received as a portion of the proceeds of any disposition of
securities);
(2) the amounts paid for purchases of replacement securities or for
purchases of securities otherwise pursuant to the trust
agreement, if any, and for redemptions;
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(3) the deductions, if any, from the Income Account for payment into
the Reserve Account;
(4) the deductions for applicable taxes and fees and expenses of the
trustee, the depositor, the evaluator, the supervisor, counsel,
auditors and any other expenses paid by the trust;
(5) the amounts reserved for purchases of contract securities, for
purchases made pursuant to replace failed contract securities or
for purchases of securities otherwise pursuant to the trust
agreement, if any;
(6) the deductions for payment of the depositor's expenses of
maintaining the registration of the trust units, if any;
(7) the aggregate distributions to unitholders; and
(8) the balance remaining after such deductions and distributions,
expressed both as a total dollar amount and as a dollar amount
per unit outstanding on the last business day of such calendar
year;
(B) As to the Capital Account:
(1) the net proceeds received due to sale, maturity, redemption,
liquidation or disposition of any of the securities, excluding
any portion thereof credited to the Income Account;
(2) the amount paid for purchases of replacement securities or for
purchases of securities otherwise pursuant to the trust
agreement, if any, and for redemptions;
(3) the deductions, if any, from the Capital Account for payments
into the Reserve Account;
(4) the deductions for payment of applicable taxes and fees and
expenses of the trustee, the depositor, the evaluator, the
supervisor, counsel, auditors and any other expenses paid by the
trust;
(5) the deductions for payment of the depositor's expenses of
organizing the trust;
(6) the amounts reserved for purchases of contract securities, for
purchases made pursuant to replace failed contract securities or
for purchases of securities otherwise pursuant to the trust
agreement, if any;
(7) the deductions for payment of deferred sales fee and creation and
development fee, if any;
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(8) the deductions for payment of the depositor's expenses of
maintaining the registration of the trust units, if any;
(9) the aggregate distributions to unitholders; and
(10) the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount
per unit outstanding on the last business day of such calendar
year; and
(C) the following information:
(1) a list of the securities held as of the last business day of such
calendar year and a list which identifies all securities sold or
other securities acquired during such calendar year, if any;
(2) the number of units outstanding on the last business day of such
calendar year;
(3) the unit value based on the last trust evaluation of such trust
made during such calendar year; and
(4) the amounts actually distributed during such calendar year from
the Income and Capital Accounts, separately stated, expressed
both as total dollar amounts and as dollar amounts per unit
outstanding on the record dates for such distributions.
RIGHTS OF UNITHOLDERS. A unitholder may at any time tender units to the
trustee for redemption. The death or incapacity of any unitholder will not
operate to terminate a trust nor entitle legal representatives or heirs to claim
an accounting or to bring any action or proceeding in any court for partition or
winding up of a trust. No unitholder shall have the right to control the
operation and management of a trust in any manner, except to vote with respect
to the amendment of the trust agreement or termination of a trust.
AMENDMENT AND TERMINATION. The trust agreement may be amended from time to
time by the sponsor and trustee or their respective successors, without the
consent of any of the unitholders, (i) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent with any other
provision contained in the trust agreement, (ii) to make such other provision in
regard to matters or questions arising under the trust agreement as shall not
materially adversely affect the interests of the unitholders or (iii) to make
such amendments as may be necessary (a) for the trust to continue to qualify as
a regulated investment company for federal income tax purposes if the trust has
elected to be taxed as such under the United States Internal Revenue Code of
1986, as amended, or (b) to prevent the trust from being deemed an association
taxable as a corporation for federal income tax purposes if the trust has not
elected to be taxed as a regulated investment company under the United States
Internal Revenue Code of 1986, as amended. The trust agreement may not be
amended, however, without the consent of all unitholders then outstanding, so as
(1) to permit, except in accordance with the terms and
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conditions thereof, the acquisition hereunder of any securities other than those
specified in the schedules to the trust agreement or (2) to reduce the
percentage of units the holders of which are required to consent to certain of
such amendments. The trust agreement may not be amended so as to reduce the
interest in a trust represented by units without the consent of all affected
unitholders. Except for the amendments, changes or modifications described
above, neither the sponsor nor the trustee may consent to any other amendment,
change or modification of the trust agreement without the giving of notice and
the obtaining of the approval or consent of unitholders representing at least 66
2/3% of the units then outstanding of the affected trust. No amendment may
reduce the aggregate percentage of units the holders of which are required to
consent to any amendment, change or modification of the trust agreement without
the consent of the unitholders of all of the units then outstanding of the
affected trust and in no event may any amendment be made which would (1) alter
the rights to the unitholders as against each other, (2) provide the trustee
with the power to engage in business or investment activities other than as
specifically provided in the trust agreement, (3) adversely affect the tax
status of the trust for federal income tax purposes or result in the units being
deemed to be sold or exchanged for federal income tax purposes or (4) unless the
trust has elected to be taxed as a regulated investment company for federal
income tax purposes, result in a variation of the investment of unitholders in
the trust. The trustee will notify unitholders of the substance of any such
amendment.
The trust agreement provides that a trust shall terminate upon the
liquidation, redemption or other disposition of the last of the securities held
in the trust but in no event is it to continue beyond the mandatory termination
date. If the value of a trust shall be less than the applicable minimum value
stated in the prospectus (generally 40% of the total value of securities
deposited in the trust during the initial offering period), the trustee may, in
its discretion, and shall, when so directed by the sponsor, terminate the trust.
A trust may be terminated at any time by the holders of units representing 66
2/3% of the units thereof then outstanding. In addition, the sponsor may
terminate a trust if it is based on a security index and the index is no longer
maintained. A trust will be liquidated by the trustee in the event that a
sufficient number of units of the trust not yet sold are tendered for redemption
by the sponsor, so that the net worth of the trust would be reduced to less than
40% of the value of the securities at the time they were deposited in the trust.
If a trust is liquidated because of the redemption of unsold units by the
sponsor, the sponsor will refund to each purchaser of units the entire sales fee
paid by such purchaser.
Beginning nine business days prior to, but no later than, the scheduled
termination date described in the prospectus, the trustee may begin to sell all
of the remaining underlying securities on behalf of unitholders in connection
with the termination of the trust. The sponsor may assist the trustee in these
sales and receive compensation to the extent permitted by applicable law. The
sale proceeds will be net of any incidental expenses involved in the sales.
The sponsor will generally instruct the trustee to sell the securities as
quickly as practicable during the termination proceedings without in its
judgment materially adversely affecting the market price of the securities, but
it is expected that all of the securities will in any event be disposed of
within a reasonable time after a trust's termination. The sponsor does not
anticipate that the period will be longer than one month, and it could be as
short as one day, depending on the liquidity of the securities being sold. The
liquidity of any security depends on
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the daily trading volume of the security and the amount that the sponsor has
available for sale on any particular day. Of course, no assurances can be given
that the market value of the securities will not be adversely affected during
the termination proceedings.
Approximately thirty days prior to termination of a trust, the trustee will
notify unitholders of the termination and provide a form allowing qualifying
unitholders to elect an in-kind distribution. A unitholder who owns the minimum
number of units described in the prospectus may request an in-kind distribution
from the trustee instead of cash. The trustee will make an in-kind distribution
through the distribution of each of the securities of the trust in book entry
form to the account of the unitholder's bank or broker-dealer at Depository
Trust Company. The unitholder will be entitled to receive whole shares of each
of the securities comprising the portfolio of a trust and cash from the Capital
Account equal to the fractional shares to which the unitholder is entitled. The
trustee may adjust the number of shares of any security included in a
unitholder's in-kind distribution to facilitate the distribution of whole
shares. The sponsor may terminate the in-kind distribution option at any time
upon notice to the unitholders. Special federal income tax consequences will
result if a unitholder requests an in-kind distribution.
Within a reasonable period after termination, the trustee will sell any
securities remaining in a trust and, after paying all expenses and charges
incurred by the trust, will distribute to unitholders thereof their pro rata
share of the balances remaining in the Income and Capital Accounts of the trust.
The sponsor may, but is not obligated to, offer for sale units of a
subsequent series of a trust at approximately the time of the mandatory
termination date. If the sponsor does offer such units for sale, unitholders
may be given the opportunity to purchase such units at a public offering price
that includes a reduced sales fee. There is, however, no assurance that units
of any new series of a trust will be offered for sale at that time, or if
offered, that there will be sufficient units available for sale to meet the
requests of any or all unitholders.
THE TRUSTEE. The trustee is The Bank of New York Mellon, a trust company
organized under the laws of New York. The Bank of New York Mellon has its
principal unit investment trust division offices at 2 Hanson Place, 12th Floor,
Brooklyn, New York 11217, (800) 848-6468. The Bank of New York Mellon is subject
to supervision and examination by the Superintendent of Banks of the State of
New York and the Board of Governors of the Federal Reserve System, and its
deposits are insured by the Federal Deposit Insurance Corporation to the extent
permitted by law.
The trustee, whose duties are ministerial in nature, has not participated
in selecting the portfolio of any trust. In accordance with the trust
agreement, the trustee shall keep records of all transactions at its office.
Such records shall include the name and address of, and the number of units held
by, every unitholder of a trust. Such books and records shall be open to
inspection by any unitholder at all reasonable times during usual business
hours. The trustee shall make such annual or other reports as may from time to
time be required under any applicable state or federal statute, rule or
regulation. The trustee shall keep a certified copy or duplicate original of
the trust agreement on file in its office available for inspection at all
reasonable times during usual business hours by any unitholder, together with a
current list of the securities held in each trust.
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Pursuant to the trust agreement, the trustee may employ one or more agents for
the purpose of custody and safeguarding of securities comprising a trust.
Under the trust agreement, the trustee or any successor trustee may resign
and be discharged of a trust created by the trust agreement by executing an
instrument in writing and filing the same with the sponsor.
The trustee or successor trustee must mail a copy of the notice of
resignation to all unitholders then of record, not less than sixty days before
the date specified in such notice when such resignation is to take effect. The
sponsor upon receiving notice of such resignation is obligated to appoint a
successor trustee promptly. If, upon such resignation, no successor trustee has
been appointed and has accepted the appointment within thirty days after
notification, the retiring trustee may apply to a court of competent
jurisdiction for the appointment of a successor. In case at any time the trustee
shall not meet the requirements set forth in the trust agreement, or shall
become incapable of acting, or if a court having jurisdiction in the premises
shall enter a decree or order for relief in respect of the trustee in an
involuntary case, or the trustee shall commence a voluntary case, under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or any receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) for the trustee or for any substantial part of its
property shall be appointed, or the trustee shall generally fail to pay its
debts as they become due, or shall fail to meet such written standards for the
trustee's performance as shall be established from time to time by the sponsor,
or if the sponsor determines in good faith that there has occurred either (1) a
material deterioration in the creditworthiness of the trustee or (2) one or more
grossly negligent acts on the part of the trustee with respect to a trust, the
sponsor, upon sixty days' prior written notice, may remove the trustee and
appoint a successor trustee, as hereinafter provided, by written instrument, in
duplicate, one copy of which shall be delivered to the trustee so removed and
one copy to the successor trustee. Notice of such removal and appointment shall
be mailed to each unitholder by the sponsor. Upon execution of a written
acceptance of such appointment by such successor trustee, all the rights,
powers, duties and obligations of the original trustee shall vest in the
successor. The trustee must be a corporation organized under the laws of the
United States, or any state thereof, be authorized under such laws to exercise
trust powers and have at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
THE SPONSOR. The sponsor of the trust is Advisors Asset Management, Inc.
acting through its unit investment trust division. The sponsor is a broker-
dealer specializing in providing services to broker-dealers, registered
representatives, investment advisers and other financial professionals. The
sponsor's headquarters are located at 18925 Base Camp Road, Monument, Colorado
80132. You can contact the unit investment trust division at 8100 East 22nd
Street North, Building 800, Suite 102, Wichita, Kansas 67226 or by using the
contacts listed on the back cover of the prospectus. The sponsor is a registered
broker-dealer and investment adviser and a member of the Financial Industry
Regulatory Authority, Inc. (FINRA) and the Securities Investor Protection
Corporation (SIPC), and a registrant of the Municipal Securities Rulemaking
Board (MSRB).
If at any time the sponsor shall fail to perform any of its duties under
the trust agreement or shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or shall have its
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affairs taken over by public authorities, then the trustee may (a) appoint a
successor sponsor at rates of compensation deemed by the trustee to be
reasonable and not exceeding such reasonable amounts as may be prescribed by the
Securities and Exchange Commission, (b) terminate the trust agreement and
liquidate any trust as provided therein, or (c) continue to act as trustee
without terminating the trust agreement.
THE EVALUATOR AND SUPERVISOR. Advisors Asset Management, Inc., the
sponsor, also serves as evaluator and supervisor. The evaluator and supervisor
may resign or be removed by the sponsor and trustee in which event the sponsor
or trustee is to use its best efforts to appoint a satisfactory successor. Such
resignation or removal shall become effective upon acceptance of appointment by
the successor evaluator. If upon resignation of the evaluator no successor has
accepted appointment within thirty days after notice of resignation, the
evaluator may apply to a court of competent jurisdiction for the appointment of
a successor. Notice of such resignation or removal and appointment shall be
mailed by the trustee to each unitholder.
LIMITATIONS ON LIABILITY. The sponsor, evaluator, and supervisor are
liable for the performance of their obligations arising from their
responsibilities under the trust agreement but will be under no liability to the
unitholders for taking any action or refraining from any action in good faith
pursuant to the trust agreement or for errors in judgment, except in cases of
its own gross negligence, bad faith or willful misconduct or its reckless
disregard for its duties thereunder. The sponsor shall not be liable or
responsible in any way for depreciation or loss incurred by reason of the sale
of any securities.
The trust agreement provides that the trustee shall be under no liability
for any action taken in good faith in reliance upon prima facie properly
executed documents or for the disposition of moneys, securities or certificates
except by reason of its own gross negligence, bad faith or willful misconduct,
or its reckless disregard for its duties under the trust agreement, nor shall
the trustee be liable or responsible in any way for depreciation or loss
incurred by reason of the sale by the trustee of any securities. In the event
that the sponsor shall fail to act, the trustee may act and shall not be liable
for any such action taken by it in good faith. The trustee shall not be
personally liable for any taxes or other governmental charges imposed upon or in
respect of the securities or upon the interest thereof. In addition, the trust
agreement contains other customary provisions limiting the liability of the
trustee.
The trustee and unitholders may rely on any evaluation furnished by the
evaluator and shall have no responsibility for the accuracy thereof. The trust
agreement provides that the determinations made by the evaluator shall be made
in good faith upon the basis of the best information available to it, provided,
however, that the evaluator shall be under no liability to the trustee or
unitholders for errors in judgment, but shall be liable for its gross
negligence, bad faith or willful misconduct or its reckless disregard for its
obligations under the trust agreement.
EXPENSES OF THE TRUST. The sponsor will not charge a trust any fees for
services performed as sponsor. The sponsor will receive a portion of the sale
commissions paid in connection with the purchase of units and will share in
profits, if any, related to the deposit of securities in the trust.
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The sponsor may receive a fee from your trust for creating and developing
the trust, including determining the trust's objectives, policies, composition
and size, selecting service providers and information services and for providing
other similar administrative and ministerial functions. The amount of this
"creation and development fee" is set forth in the prospectus. The trustee will
deduct this amount from your trust's assets as of the close of the initial
offering period. No portion of this fee is applied to the payment of
distribution expenses or as compensation for sales efforts. This fee will not be
deducted from proceeds received upon a repurchase, redemption or exchange of
units before the close of the initial public offering period.
The trustee receives for its services that fee set forth in the prospectus.
The trustee's fee which is calculated and paid monthly is based on the total
number of units of the related trust outstanding as of January 1 for any annual
period, except during the initial offering period the fee will be based on the
units outstanding at the end of each month. The trustee benefits to the extent
there are funds for future distributions, payment of expenses and redemptions in
the Capital and Income Accounts since these Accounts are non-interest bearing
and the amounts earned by the trustee are retained by the trustee. Part of the
trustee's compensation for its services to a trust is expected to result from
the use of these funds.
The supervisor will charge a trust a surveillance fee for services
performed for the trust in an amount not to exceed that amount set forth in the
prospectus but in no event will such compensation, when combined with all
compensation received from other unit investment trusts for which the sponsor
both acts as sponsor and provides portfolio surveillance, exceed the aggregate
cost to the sponsor of providing such services. Such fee shall be based on the
total number of units of the related trust outstanding as of January 1 for any
annual period, except during the initial offering period the fee will be based
on the units outstanding at the end of each month.
For evaluation of the securities in a trust, the evaluator shall receive an
evaluation fee in an amount not to exceed that amount set forth in the
prospectus but in no event will such compensation, when combined with all
compensation from other unit investment trusts for which the sponsor acts as
sponsor and provides evaluation services, exceed the aggregate cost of providing
such services. Such fee shall be based on the total number of units of the
related trust outstanding as of January 1 for any annual period, except during
the initial offering period the fee will be based on the units outstanding at
the end of each month.
For providing bookkeeping and administrative services to a trust, the
sponsor shall receive an administration fee in an amount not to exceed that
amount set forth in the prospectus but in no event will such compensation, when
combined with all compensation from other unit investment trusts for which the
sponsor acts as sponsor and provides evaluation services, exceed the aggregate
cost of providing such services. Such fee shall be based on the total number of
units of the related trust outstanding as of January 1 for any annual period,
except during the initial offering period the fee will be based on the units
outstanding at the end of each month.
The trustee's fee, sponsor's fee for providing bookkeeping and
administrative services to the trust, supervisor's fee and evaluator's fee are
deducted from the Income Account of the related trust to the extent funds are
available and then from the Capital Account. Each such fee
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(other than any creation and development fee) may be increased without approval
of unitholders by amounts not exceeding a proportionate increase in the Consumer
Price Index or any equivalent index substituted therefor.
The following additional charges are or may be incurred by the trust:
(a) fees for the trustee's extraordinary services; (b) expenses of the trustee
(including legal and auditing expenses and reimbursement of the cost of advances
to the trust for payment of expenses and distributions, but not including any
fees and expenses charged by an agent for custody and safeguarding of
securities) and of counsel, if any; (c) various governmental charges;
(d) expenses and costs of any action taken by the trustee to protect the trust
or the rights and interests of the unitholders; (e) indemnification of the
trustee for any loss, liability or expense incurred by it in the administration
of the trust not resulting from negligence, bad faith or willful misconduct on
its part or its reckless disregard of its obligations under the trust agreement;
(f) indemnification of the sponsor for any loss, liability or expense incurred
in acting in that capacity without gross negligence, bad faith or willful
misconduct or its reckless disregard for its obligations under the trust
agreement; and (g) expenditures incurred in contacting unitholders upon
termination of the trust. The fees and expenses set forth herein are payable
out of a trust and, when owing to the trustee, are secured by a lien on the
trust. If the balances in the Income and Capital Accounts are insufficient to
provide for amounts payable by the trust, the trustee has the power to sell
securities to pay such amounts. These sales may result in capital gains or
losses to unitholders. A trust may pay the costs of updating its registration
statement each year.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
When a trust sells securities, the composition and diversity of the
securities in the trust may be altered. In order to obtain the best price for a
trust, it may be necessary for the sponsor to specify minimum amounts in which
blocks of securities are to be sold. In effecting purchases and sales of a
trust's portfolio securities, the sponsor may direct that orders be placed with
and brokerage commissions be paid to brokers, including brokers which may be
affiliated with the trust, the sponsor or dealers participating in the offering
of units.
PURCHASE, REDEMPTION AND PRICING OF UNITS
PUBLIC OFFERING PRICE. Units of a trust are offered at the public offering
price thereof. The public offering price per unit is equal to the net asset
value per unit plus organization costs plus the applicable sales fee referred to
in the prospectus. The initial sales fee is equal to the difference between the
maximum sales fee and the sum of the remaining deferred sales fee and the total
creation and development fee. The sales fee as a percentage of the public
offering price and the net amount invested is set forth in the prospectus. The
deferred sales fee is a fixed dollar amount and will be collected in
installments as described in the prospectus. The creation and development fee
is a fixed dollar amount and will be collected at the end of the initial
offering period as described in the prospectus. Units purchased after the
initial deferred sales fee payment will be subject to the remaining deferred
sales fee payments. Units sold or redeemed prior to such time as the entire
applicable deferred sales fee has been collected will be assessed the remaining
deferred sales fee at the time of such sale or redemption. Units sold or
redeemed prior
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to such time as the entire applicable creation and development fee has been
collected will not be assessed the remaining creation and development fee at the
time of such sale or redemption. During the initial offering period, a portion
of the public offering price includes an amount of securities to pay for all or
a portion of the costs incurred in establishing a trust. These costs include
the cost of preparing the registration statement, the trust indenture and other
closing documents, registering units with the Securities and Exchange Commission
and states, the initial audit of the trust portfolio, legal fees and the initial
fees and expenses of the trustee. These costs will be deducted from a trust as
of the end of the initial offering period or after six months, if earlier.
Certain broker-dealers may charge a transaction fee for processing unit
purchases.
As indicated above, the initial public offering price of the units was
established by dividing the aggregate underlying value of the securities by the
number of units outstanding. Such price determination as of the opening of
business on the date a trust was created was made on the basis of an evaluation
of the securities in the trust prepared by the evaluator. After the opening of
business on this date, the evaluator will appraise or cause to be appraised
daily the value of the underlying securities as of the close of regular trading
on the New York Stock Exchange on days the New York Stock Exchange is open and
will adjust the public offering price of the units commensurate with such
valuation. Such public offering price will be effective for all orders received
at or prior to the close of regular trading on the New York Stock Exchange on
each such day as discussed in the prospectus. Orders received by the trustee,
sponsor or authorized financial professional for purchases, sales or redemptions
after that time, or on a day when the New York Stock Exchange is closed, will be
held until the next determination of price as discussed in the prospectus.
Had units of a trust been available for sale at the close of business on
the business day before the inception date of the trust, the public offering
price would have been as shown under "Essential Information" in the prospectus.
The public offering price per unit of a trust on the date of the prospectus or
on any subsequent date will vary from the amount stated under "Essential
Information" in the prospectus in accordance with fluctuations in the prices of
the underlying securities. Net asset value per unit is determined by dividing
the value of a trust's portfolio securities, cash and other assets, less all
liabilities, by the total number of units outstanding. The portfolio securities
are valued by the evaluator as follows: If the security is listed on a national
securities exchange, the evaluation will generally be based on the last sale
price on the exchange (unless the evaluator deems the price inappropriate as a
basis for evaluation). If the security is not so listed or, if so listed and
the principal market for the security is other than on the exchange, the
evaluation will generally be made by the evaluator in good faith based on an
appraisal of the fair value of the securities using recognized pricing methods.
The foregoing evaluations and computations shall be made as of the close of
regular trading on the New York Stock Exchange, on each business day commencing
with the trust's inception date of the securities, effective for all sales made
during the preceding 24-hour period.
Although payment is normally made three business days following the order
for purchase, payments may be made prior thereto. A person will become the
owner of units on the date of settlement provided payment has been received.
Cash, if any, made available to the sponsor prior to the date of settlement for
the purchase of units may be used in the sponsor's business and may
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be deemed to be a benefit to the sponsor, subject to the limitations of the
Securities Exchange Act of 1934.
PUBLIC DISTRIBUTION OF UNITS. The sponsor intends to qualify the units for
sale in a number of states. Units will be sold through dealers who are members
of the National Association of Securities Dealers, Inc. and through others.
Sales may be made to or through dealers at prices which represent discounts from
the public offering price as set forth in the prospectus. Certain commercial
banks may be making units available to their customers on an agency basis. The
sponsor reserves the right to change the discounts from time to time.
We may provide, at our own expense and out of our own profits, additional
compensation and benefits to broker-dealers who sell shares of units of this
trust and our other products. This compensation is intended to result in
additional sales of our products and/or compensate broker-dealers and financial
advisors for past sales. We may make these payments for marketing, promotional
or related expenses, including, but not limited to, expenses of entertaining
retail customers and financial advisors, advertising, sponsorship of events or
seminars, obtaining shelf space in broker-dealer firms and similar activities
designed to promote the sale of the our products. These arrangements will not
change the price you pay for your units.
The sponsor reserves the right to reject, in whole or in part, any order
for the purchase of units.
PROFITS OF SPONSOR. The sponsor will receive gross sales fees equal to the
percentage of the offering price of the units of such trusts stated in the
prospectus and will pay a portion of such sales fees to dealers and agents. In
addition, the sponsor may realize a profit or a loss resulting from the
difference between the purchase prices of the securities to the sponsor and the
cost of such securities to a trust. The sponsor may also realize profits or
losses with respect to securities deposited in a trust which were acquired from
underwriting syndicates of which the sponsor was a member. An underwriter or
underwriting syndicate purchases securities from the issuer on a negotiated or
competitive bid basis, as principal, with the motive of marketing such
securities to investors at a profit. The sponsor may realize additional profits
or losses during the initial offering period on unsold units as a result of
changes in the daily evaluation of the securities in a trust.
MARKET FOR UNITS. After the initial offering period, while not obligated
to do so, the sponsor may, subject to change at any time, maintain a market for
units of the trust offered hereby and to continuously offer to purchase said
units at the net asset value determined by the evaluator, provided that the
repurchase price will not be reduced by any remaining creation and development
fee or organization costs during the initial offering period. While the sponsor
may repurchase units from time to time, it does not currently intend to maintain
an active secondary market for units. Unitholders who wish to dispose of their
units should inquire of their broker as to current market prices in order to
determine whether there is in existence any price in excess of the redemption
price and, if so, the amount thereof. Unitholders who sell or redeem units
prior to such time as the entire deferred sales fee on such units has been
collected will be assessed the amount of the remaining deferred sales fee at the
time of such sale or redemption. Unitholders who sell or redeem units prior to
such time as the entire creation and development fee on such
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units has been collected will not be assessed the amount of the remaining
creation and development fee at the time of such sale or redemption. The
offering price of any units resold by the sponsor will be in accord with that
described in the currently effective prospectus describing such units. Any
profit or loss resulting from the resale of such units will belong to the
sponsor. If the sponsor decides to maintain a secondary market, it may suspend
or discontinue purchases of units of the trust if the supply of units exceeds
demand, or for other business reasons.
REDEMPTION. A unitholder who does not dispose of units in the secondary
market described above may cause units to be redeemed by the trustee by making a
written request to the trustee at its unit investment trust division office.
Unitholders must sign the request exactly as their names appear on the records
of the trustee. Additional documentation may be requested, and a signature
guarantee is always required, from corporations, executors, administrators,
trustees, guardians or associations. The signatures must be guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP") or
such other signature guaranty program in addition to, or in substitution for,
STAMP, as may be accepted by the trustee.
Redemption shall be made by the trustee no later than the seventh day
following the day on which a tender for redemption is received (the "Redemption
Date") by payment of cash equivalent to the redemption price, determined as set
forth below under "Computation of Redemption Price," as of the close of regular
trading on the New York Stock Exchange next following such tender, multiplied by
the number of units being redeemed. Any units redeemed shall be canceled and
any undivided fractional interest in the related trust extinguished. The price
received upon redemption might be more or less than the amount paid by the
unitholder depending on the value of the securities in the trust at the time of
redemption. Unitholders who sell or redeem units prior to such time as the
entire deferred sales fee on such units has been collected will be assessed the
amount of the remaining deferred sales fee at the time of such sale or
redemption. Unitholders who sell or redeem units prior to such time as the
entire creation and development fee on such units has been collected will not be
assessed the amount of the remaining creation and development fee at the time of
such sale or redemption. Certain broker-dealers may charge a transaction fee
for processing redemption requests.
Under regulations issued by the Internal Revenue Service, the trustee is
required to withhold a specified percentage of the principal amount of a unit
redemption if the trustee has not been furnished the redeeming unitholder's tax
identification number in the manner required by such regulations. Any amount so
withheld is transmitted to the Internal Revenue Service and may be recovered by
the unitholder only when filing a tax return. Under normal circumstances, the
trustee obtains the unitholder's tax identification number from the selling
broker. However, any time a unitholder elects to tender units for redemption,
such unitholder should make sure that the trustee has been provided a certified
tax identification number in order to avoid this possible "back-up withholding."
In the event the trustee has not been previously provided such number, one must
be provided at the time redemption is requested. Any amounts paid on redemption
representing interest shall be withdrawn from the Income Account of a trust to
the extent that funds are available for such purpose. All other amounts paid on
redemption shall be withdrawn from the Capital Account for a trust.
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Unitholders tendering units for redemption may request a distribution in
kind (a "Distribution In Kind") from the trustee in lieu of cash redemption of
an amount and value of securities per unit equal to the redemption price per
unit as determined as of the evaluation time next following the tender, provided
that the tendering unitholder meets the requirements stated in the prospectus
and the unitholder has elected to redeem at least thirty days prior to the
termination of the trust. If the unitholder meets these requirements, a
Distribution In Kind will be made by the trustee through the distribution of
each of the securities of the trust in book entry form to the account of the
unitholder's bank or broker-dealer at Depository Trust Company. The tendering
unitholder shall be entitled to receive whole shares of each of the securities
comprising the portfolio of the trust and cash from the Capital Account equal to
the fractional shares to which the tendering unitholder is entitled. The
trustee shall make any adjustments necessary to reflect differences between the
redemption price of the units and the value of the securities distributed in
kind as of the date of tender. If funds in the Capital Account are insufficient
to cover the required cash distribution to the tendering unitholder, the trustee
may sell securities. The in kind redemption option may be terminated by the
sponsor at any time.
The trustee is empowered to sell securities in order to make funds
available for the redemption of units. To the extent that securities are sold
or redeemed in-kind, the size of a trust will be, and the diversity of a trust
may be, reduced but each remaining unit will continue to represent approximately
the same proportional interest in each security. Sales may be required at a
time when securities would not otherwise be sold and may result in lower prices
than might otherwise be realized. The price received upon redemption may be
more or less than the amount paid by the unitholder depending on the value of
the securities in the portfolio at the time of redemption.
The trustee is irrevocably authorized in its discretion, if the sponsor
does not elect to purchase any unit tendered for redemption, in lieu of
redeeming such units, to sell such units in the over-the-counter market for the
account of tendering unitholders at prices which will return to the unitholders
amounts in cash, net after brokerage commissions, transfer taxes and other
charges, equal to or in excess of the redemption price for such units. In the
event of any such sale, the trustee shall pay the net proceeds thereof to the
unitholders on the day they would otherwise be entitled to receive payment of
the redemption price.
The right of redemption may be suspended and payment postponed (1) for any
period during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or during which (as determined by the Securities
and Exchange Commission) trading on the New York Stock Exchange is restricted;
(2) for any period during which an emergency exists as a result of which
disposal by the trustee of securities is not reasonably practicable or it is not
reasonably practicable to fairly determine the value of the underlying
securities in accordance with the trust agreement; or (3) for such other period
as the Securities and Exchange Commission may by order permit. The trustee is
not liable to any person in any way for any loss or damage which may result from
any such suspension or postponement.
COMPUTATION OF REDEMPTION PRICE. The redemption price for units of each
trust is computed by the evaluator as of the evaluation time stated in the
prospectus next occurring after the tendering of a unit for redemption and on
any other business day desired by it, by:
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A. Adding: (1) the cash on hand in the trust other than cash deposited in the
trust to purchase securities not applied to the purchase of such securities
and (2) the aggregate value of each issue of the securities held in the
trust as determined by the evaluator as described above;
B. Deducting therefrom (1) amounts representing any applicable taxes or
governmental charges payable out of the trust and for which no deductions
have been previously made for the purpose of additions to the Reserve
Account; (2) an amount representing estimated accrued expenses, including
but not limited to fees and expenses of the trustee (including legal and
auditing fees), the evaluator, the sponsor and counsel, if any; (3) cash
held for distribution to unitholders of record as of the business day prior
to the evaluation being made; and (4) other liabilities incurred by the
trust, provided that the redemption price will not be reduced by any
remaining creation and development fee or organization costs during the
initial offering period; and
C. Finally dividing the results of such computation by the number of units of
the trust outstanding as of the date thereof.
RETIREMENT PLANS. A trust may be suited for purchase by Individual
Retirement Accounts, Keogh Plans, pension funds and other qualified retirement
plans. Generally, capital gains and income received under each of the foregoing
plans are deferred from Federal taxation. All distributions from such plans are
generally treated as ordinary income but may, in some cases, be eligible for
special income averaging or tax-deferred rollover treatment. Investors
considering participation in any such plan should review specific tax laws
related thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan. Such plans are offered
by brokerage firms and other financial institutions. The trust will lower the
minimum investment requirement for IRA accounts. Fees and charges with respect
to such plans may vary.
OWNERSHIP OF UNITS. Ownership of units will not be evidenced by
certificates. Units may be purchased in denomination of one unit or any
multiple thereof, subject to the minimum investment requirement. Fractions of
units, if any, will be computed to three decimal places.
TAXATION
The prospectus summarizes some of the main U.S. federal income tax
consequences of owning units of a trust. The discussion below supplements the
prospectus discussion and is qualified in its entirety by the prospectus
discussion. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of trust units, as well as the tax consequences arising under the
laws of any state, locality, non-U.S. country, or other taxing jurisdiction.
The federal income tax summary below and in the prospectus is based in part
on the advice of counsel to your trust. The Internal Revenue Service could
disagree with any conclusions set forth in these discussions. Tax laws and
interpretations change frequently, and these summaries do not describe all of
the tax consequences to all taxpayers. For example, these
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summaries do not describe your situation if you are a corporation, a non-U.S.
person, a broker-dealer, ort other investor with special circumstances. In
addition, this section does not describe you state, local or foreign tax
consequences. In addition, our counsel was not asked to review, and has not
reached a conclusion with respect to the federal income tax treatment of the
assets to be held by your trust. This may not be sufficient for prospective
investors to use for the purpose of avoiding penalties under federal tax law.
Your trust intends (i) to elect to be treated as, and (ii) to qualify
annually as, a regulated investment company under the Code and to comply with
applicable distribution requirements so that it will not pay federal income tax
on income and capital gains distributed to its unitholders.
To qualify for the favorable U.S. federal income tax treatment generally
accorded to regulated investment companies, your trust must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies, or net income derived from interests in certain publicly traded
partnerships; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the trust's assets is
represented by cash and cash items (including receivables), U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer generally limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the trust's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. government securities or
the securities of other regulated investment companies) of any one issuer, or
two or more issuers which the trust controls and are engaged in the same,
similar or related trades or businesses, or the securities of certain publicly
traded partnerships; and (c) distribute at least 90% of its investment company
taxable income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and at least
90% of its net tax-exempt interest income each taxable year. There are certain
exceptions for failure to qualify if the failure is for reasonable cause or is
de minimis, and certain corrective action is taken and certain tax payments are
made by the trust.
As a regulated investment company, your trust generally will not be subject
to U.S. federal income tax on its investment company taxable income (as that
term is defined in the Code, but without regard to the deduction for dividends
paid) and net capital gain (the excess of net long-term capital gain over net
short term capital loss), if any, that it distributes to unitholders. The trusts
intend to distribute to its unitholders, at least annually, substantially all of
its investment company taxable income and net capital gain. If your trust
retains any net capital gain or investment company taxable income, it will
generally be subject to federal income tax at regular corporate rates on the
amount retained. In addition, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax unless, generally, your trust distributes during
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98.2% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for the one-year period ending
October 31 of the calendar
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year, and (3) any ordinary income and capital gains for previous years that were
not distributed during those years. To prevent application of the excise tax,
your trust intends to make its distributions in accordance with the calendar
year distribution requirement. Further, if your trust retains any net capital
gain, the trust may designate the retained amount as undistributed capital gains
in a notice to unitholders who, if subject to federal income tax on long-term
capital gains (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their share of such undistributed amount,
and (ii) will be entitled to credit their proportionate share of the tax paid by
the trust against their federal income tax liabilities if any, and to claim
refunds to the extent the credit exceeds such liabilities. A distribution will
be treated as paid on December 31 of the current calendar year if it is declared
by your trust in October, November or December with a record date in such a
month and paid by your trust during January of the following calendar year.
These distributions will be taxable to unitholders in the calendar year in which
the distributions are declared, rather than the calendar year in which the
distributions are received.
Subject to certain reasonable cause and de minimis exceptions, if your
trust failed to qualify as a regulated investment company or failed to satisfy
the 90% distribution requirement in any taxable year, the trust would be taxed
as an ordinary corporation on its taxable income (even if such income were
distributed to its unitholders) and all distributions out of earnings and
profits would be taxed to unitholders as ordinary income.
DISTRIBUTIONS
Dividends paid out of the trust's investment company taxable income are
generally taxable to a unitholder as ordinary income to the extent of the
trust's earnings and profits, whether paid in cash or reinvested in additional
units. However, certain ordinary income distributions received from the trust
may be taxed at capital gains tax rates. In particular, ordinary income
dividends received by an individual unitholder from a regulated investment
company such as the trust are generally taxed at the same rates that apply to
net capital gain, provided that certain holding period requirements are
satisfied and provided the dividends are attributable to qualifying dividends
received by the trust itself. Dividends received by the trust from REITs and
foreign corporations are qualifying dividends eligible for this lower tax rate
only in certain circumstances. The trust will provide notice to its unitholders
of the amount of any distributions which may be taken into account as a dividend
which is eligible for the capital gains tax rates. The trust can not make any
guarantees as to the amount of any distribution which will be regarded as a
qualifying dividend.
Under the "Health Care and Education Reconciliation Act of 2010," income
from a trust may also be subject to a 3.8% "Medicare tax". This tax will
generally apply to net investment income if the taxpayer's adjusted gross income
exceeds certain threshold amounts, which are $250,000 in the case of married
couples filing joint returns and $200,000 in the case of single individuals.
A corporation that owns units generally will not be entitled to the
dividends received deduction with respect to many dividends received from the
trust because the dividends received deduction is generally not available for
distributions from regulated investment companies.
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However, certain ordinary income dividends on units that are attributable to
qualifying dividends received by the trust from certain domestic corporations
may be reported by the trust as being eligible for the dividends received
deduction.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss), if any, properly reported as capital gain
dividends are taxable to a unitholder as long-term capital gains, regardless of
how long the unitholder has held trust units. Unitholders receiving
distributions in the form of additional units, rather than cash, generally will
have a cost basis in each such unit equal to the value of a unit of the trust on
the reinvestment date. A distribution of an amount in excess of the trust's
current and accumulated earnings and profits will be treated by a unitholder as
a return of capital which is applied against and reduces the unitholder's basis
in his or her units. To the extent that the amount of any such distribution
exceeds the unitholder's basis in his or her units, the excess will be treated
by the unitholder as gain from a sale or exchange of the units.
Unitholders will be notified annually as to the U.S. federal income tax
status of distributions, and unitholders receiving distributions in the form of
additional units will receive a report as to the value of those units.
SALE OR EXCHANGE OF TRUST UNITS
Upon the sale or other disposition of units of the trust, which a
unitholder holds as a capital asset, such a unitholder may realize a capital
gain or loss which will be long-term or short-term, depending upon the
unitholder's holding period for the units. Generally, a unitholder's gain or
loss will be a long-term gain or loss if the units have been held for more than
one year.
Any loss realized on a sale or exchange will be disallowed to the extent
that units disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of units or to the extent that the unitholder, during
such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In such a case, the basis of the
units acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a unitholder on a disposition of trust units held by the unitholder
for six months or less will be treated as a long-term capital loss to the extent
of any distributions of long-term capital gain received by the unitholder with
respect to such units.
NATURE OF TRUST'S INVESTMENTS
Certain of the trust's investment practices are subject to special and
complex federal income tax provisions that may, among other things,
(i) disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited),
(iv) cause the trust to recognize income or gain without a corresponding receipt
of cash, (v) adversely affect the time as
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to when a purchase or sale of stock or securities is deemed to occur and
(vi) adversely alter the characterization of certain complex financial
transactions.
FUTURES CONTRACTS AND OPTIONS
The trust's transactions in futures contracts and options, if any, will be
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the trust (i.e., may affect
whether gains or losses are ordinary or capital, or short-term or long-term),
may accelerate recognition of income to the trust and may defer trust losses.
These rules could, therefore, affect the character, amount and timing of
distributions to unitholders. These provisions also (a) will require the trust
to mark-to-market certain types of the positions in its portfolio (i.e., treat
them as if they were closed out), and (b) may cause the trust to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement for qualifying to be taxed
as a regulated investment company and the distribution requirements for avoiding
excise taxes.
INVESTMENTS IN CERTAIN FOREIGN CORPORATIONS
If the trust holds an equity interest in any "passive foreign investment
companies" ("PFICs"), which are generally certain foreign corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, certain rents and royalties or capital gains) or that hold
at least 50% of their assets in investments producing such passive income, the
trust could be subject to U.S. federal income tax and additional interest
charges on gains and certain distributions with respect to those equity
interests, even if all the income or gain is timely distributed to its
unitholders. The trust will not be able to pass through to its unitholders any
credit or deduction for such taxes. The trust may be able to make an election
that could ameliorate these adverse tax consequences. In this case, the trust
would recognize as ordinary income any increase in the value of such PFIC
shares, and as ordinary loss any decrease in such value to the extent it did not
exceed prior increases included in income. Under this election, the trust might
be required to recognize in a year income in excess of its distributions from
PFICs and its proceeds from dispositions of PFIC stock during that year, and
such income would nevertheless be subject to the distribution requirement and
would be taken into account for purposes of the 4% excise tax (described above).
Dividends paid by PFICs are not treated as qualified dividend income.
BACKUP WITHHOLDING
The trust may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to unitholders who fail to
provide the trust with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate unitholders and
certain other unitholders specified in the Code generally are exempt from such
backup withholding. This withholding is not an additional tax. Any amounts
withheld may be credited against the unitholder's U.S. federal income tax
liability.
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NON-U.S. UNITHOLDERS
U.S. taxation of a unitholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("non-U.S. unitholder") depends on whether the income of
the trust is "effectively connected" with a U.S. trade or business carried on by
the unitholder.
In addition to the rules described in this section concerning the potential
imposition of withholding on distributions to non-U.S. persons, distributions
after June 30, 2014, to non-U.S. persons that are "financial institutions" may
be subject to a withholding tax of 30% unless an agreement is in place between
the financial institution and the U.S. Treasury to collect and disclose
information about accounts, equity investments, or debt interests in the
financial institution held by one or more U.S. persons or the institution is
resident in a jurisdiction that has entered into such an agreement with the U.S.
Treasury. For these purpose, a "financial institution" means any entity that
(i) accepts deposits in the ordinary course of a banking or similar business,
(ii) holds financial assets for the account of others as a substantial portion
of its business, or (iii) is engaged (or holds itself out as being engaged)
primarily in the business of investing, reinvesting or trading in securities,
partnership interests, commodities or any interest (including a futures contract
or option) in such securities, partnership interests or commodities.
Dispositions of units by such persons may be subject to such withholding after
December 31, 2016.
Distributions to non-financial non-U.S. entities (other than publicly
traded foreign entities, entities owned by residents of U.S. possessions,
foreign governments, international organizations, or foreign central banks)
after June 30, 2014, will also be subject to a withholding tax of 30% if the
entity does not certify that the entity does not have any substantial U.S.
owners or provide the name, address and TIN of each substantial U.S. owner.
Dispositions of units by such persons may be subject to such withholding after
December 31, 2016.
Income Not Effectively Connected. If the income from the trust is not
"effectively connected" with a U.S. trade or business carried on by the non-U.S.
unitholder, distributions of investment company taxable income will generally be
subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally
withheld from such distributions.
Distributions of capital gain dividends and any amounts retained by the
trust which are properly reported by the trust as undistributed capital gains
will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless
the non-U.S. unitholder is a nonresident alien individual and is physically
present in the United States for more than 182 days during the taxable year and
meets certain other requirements. However, this 30% tax on capital gains of
nonresident alien individuals who are physically present in the United States
for more than the 182 day period only applies in exceptional cases because any
individual present in the United States for more than 182 days during the
taxable year is generally treated as a resident for U.S. income tax purposes; in
that case, he or she would be subject to U.S. income tax on his or her worldwide
income at the graduated rates applicable to U.S. citizens, rather than the 30%
U.S. tax. In the case of a non-U.S. unitholder who is a nonresident alien
individual, the trust may be required to withhold U.S. income tax from
distributions of net capital gain unless the non-U.S. unitholder certifies his
or
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her non-U.S. status under penalties of perjury or otherwise establishes an
exemption. If a non-U.S. unitholder is a nonresident alien individual, any gain
such unitholder realizes upon the sale or exchange of such unitholder's units of
the trust in the United States will ordinarily be exempt from U.S. tax unless
the gain is U.S. source income and such unitholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements.
In the case of dividends with respect to taxable years of the trust
beginning prior to 2014, distributions from the trust that are properly reported
by the trust as an interest-related dividend attributable to certain interest
income received by the trust or as a short-term capital gain dividend
attributable to certain net short-term capital gain income received by the trust
may not be subject to U.S. federal income taxes, including withholding taxes
when received by certain non-U.S. investors, provided that the trust makes
certain elections and certain other conditions are met.
Income Effectively Connected. If the income from the trust is "effectively
connected" with a U.S. trade or business carried on by a non-U.S. unitholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the trust which are properly reported by the
trust as undistributed capital gains and any gains realized upon the sale or
exchange of units of the trust will be subject to U.S. income tax at the
graduated rates applicable to U.S. citizens, residents and domestic
corporations. Non-U.S. corporate unitholders may also be subject to the branch
profits tax imposed by the Code. The tax consequences to a non-U.S. unitholder
entitled to claim the benefits of an applicable tax treaty may differ from those
described herein. Non-U.S. unitholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the trust.
OTHER TAXATION
Trust unitholders may be subject to state, local and foreign taxes on their
trust distributions. Unitholders are advised to consult their own tax advisors
with respect to the particular tax consequences to them of an investment in the
trust.
PERFORMANCE INFORMATION
Information contained in this Information Supplement or in the prospectus,
as it currently exists or as further updated, may also be included from time to
time in other prospectuses or in advertising material. Information on the
performance of a trust strategy or the actual performance of a trust may be
included from time to time in other prospectuses or advertising material and may
reflect sales fees and expenses of a trust. The performance of a trust may also
be compared to the performance of money managers as reported in SEI Fund
Evaluation Survey or of mutual funds as reported by Lipper Analytical Services
Inc. (which calculates total return using actual dividends on ex-dates
accumulated for the quarter and reinvested at quarter end), Money Magazine Fund
Watch (which rates fund performance over a specified time period after sales fee
and assuming all dividends reinvested) or Wiesenberger Investment Companies
Service (which states fund performance annually on a total return basis) or of
the New York Stock
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Exchange Composite Index, the American Stock Exchange Index (unmanaged indices
of stocks traded on the New York and American Stock Exchanges, respectively),
the Dow Jones Industrial Average (an index of 30 widely traded industrial common
stocks) or the Standard & Poor's 500 Index (an unmanaged diversified index of
500 stocks) or similar measurement standards during the same period of time.
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CONTENTS OF REGISTRATION STATEMENT
This Amendment to the Registration Statement comprises the following papers
and documents:
The facing sheet
The prospectus
The signatures
The consents of the initial evaluator, independent public accountants and
legal counsel
The following exhibits:
1.1 Trust Agreement (to be filed by amendment).
1.1.1 Standard Terms and Conditions of Trust (to be filed by amendment).
1.2 Certificate of Amendment of Certificate of Incorporation and Certificate
of Merger of Advisors Asset Management, Inc. Reference is made to
Exhibit 1.2 to the Registration Statement on Form S-6 for Advisors
Disciplined Trust 647 (File No. 333-171079) as filed on January 6, 2011.
1.3 Bylaws of Advisors Asset Management, Inc. Reference is made to
Exhibit 1.3 to the Registration Statement on Form S-6 for Advisors
Disciplined Trust 647 (File No. 333-171079) as filed on January 6, 2011.
1.5 Form of Dealer Agreement. Reference is made to Exhibit 1.5 to the
Registration Statement of Form S-6 for Advisors Disciplined Trust 262
(File No. 333-150575) as filed of June 17, 2008.
2.2 Form of Code of Ethics. Reference is made to Exhibit 2.2 to the
Registration Statement on Form S-6 for Advisor's Disciplined Trust 73
(File No. 333-131959) as filed on March 16, 2006.
3.1 Opinion of counsel as to legality of securities being registered (to be
filed by amendment).
3.3 Opinion of counsel as to the Trustee and the Trust. (to be filed by
amendment).
4.1 Consent of evaluator (to be filed by amendment).
4.2 Consent of independent auditors (to be filed by amendment).
6.1 Directors and Officers of Advisors Asset Management, Inc. Reference is
made to Exhibit 6.1 to the Registration Statement on Form S-6 for
Advisors Disciplined Trust 1112 (File No. 333-190165) as filed on
December 11, 2013.
7.1 Power of Attorney. Reference is made to Exhibit 7.1 to the Registration
Statement on Form S-6 for Advisors Disciplined Trust 933
(File No. 333-186716) as filed on May 3, 2013.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Advisors Disciplined Trust 1368 has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Wichita and State of Kansas on the October 24,
2014
ADVISORS DISCIPLINED TRUST 1368
By ADVISORS ASSET MANAGEMENT, INC., DEPOSITOR
By /s/ ALEX R MEITZNER
-----------------------------
Alex R. Meitzner
Senior Vice President
to the Registration Statement has been signed below on October 24, 2014 by the
following persons in the capacities indicated:
SIGNATURE TITLE
Scott I. Colyer Director of Advisors Asset )
Management, Inc. )
Lisa A. Colyer Director of Advisors Asset )
Management, Inc. )
James R. Costas Director of Advisors Asset )
Management, Inc. )
Christopher T. Genovese Director of Advisors Asset )
Management, Inc. )
Randy J. Pegg Director of Advisors Asset )
Management, Inc. )
R. Scott Roberg Director of Advisors Asset )
Management, Inc. )
S-2
Jack Simkin Director of Advisors Asset )
Management, Inc. )
Andrew Williams Director of Advisors Asset )
Management, Inc. )
By /s/ ALEX R MEITZNER
-----------------------------
Alex R. Meitzner
Attorney-in-Fact*
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*An executed copy of each of the related powers of attorney is filed
herewith or incorporated herein by reference as Exhibit 7.1.
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