State Street Navigator Securities
As filed with the U.S. Securities and Exchange Commission on April 24, 2026
1940 Act File No. 811-07567
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 |
|
| |
|
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
(Exact Name of Registrant as Specified in Charter)
One Congress Street, Boston, Massachusetts 02114
(Address of Principal Executive Offices)
(Registrant's Telephone Number)
Andrew J. DeLorme
Chief Legal Officer
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, Massachusetts 02114
(Name and Address of Agent for Service)
Copy to:
Adam M. Schlichtmann, Esq.
Ropes & Gray LLP
Prudential Tower, 800 Boylston Street
Boston, Massachusetts
02199-3600
This Registration Statement on Form N-1A has been filed by the Registrant pursuant to Section 8(b) of the Investment Company Act of 1940, as amended (the “1940 Act”). However, beneficial interests in the Registrant are not registered under the Securities Act of 1933, as amended (the “1933 Act”) because such interests are issued solely in private placement transactions that do not involve any “public offering” within the meaning of Section 4(a)(2) of the 1933 Act. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, within the meaning of the 1933 Act, any beneficial interests in the Registrant.
PART
A
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
State Street Navigator Securities Lending Portfolio I
Because the State Street Navigator Securities Lending Trust (the “Trust”) is only registered under the Investment Company Act of 1940, as amended (the “1940 Act”), responses to Items 1, 2, 3, 4 and 13 of Form N-1A have been omitted. Item 8 is omitted because it is not
applicable.
The Trust is an open-end management investment company organized as
a business trust under the laws of the Commonwealth of Massachusetts on June 15, 1995.
The Trust issues beneficial interests of its series solely in
private placement transactions that do not involve any “public offering” within the meaning of Section 4(a)(2) of the Securities Act of 1933, as amended (the
“1933 Act”). This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to
buy, any
“security” within the meaning
of the 1933 Act.
State Street Bank and Trust
Company (“State
Street”) has established a securities lending program for its clients (the “State Street Securities Lending Program”). Each client that participates in the State Street Securities Lending Program as a lender (each, a
“Client Lending
Fund” and collectively, the “Client Lending
Funds”) enters into a securities lending authorization agreement with State Street. Under such agreement, State Street is authorized to invest the cash collateral securing loans of securities of each Client Lending Fund in a variety of investments, as consistent with applicable law. Shares of the Trust are offered primarily to, and held by, the Client Lending Funds in the State Street Securities Lending Program, and may, on a case-by-case basis, be offered to and held by institutional investors that participate in a third-party lending agent program (“Third-Party Lending Funds” and “Third-Party Securities Lending
Program(s)”). The Client Lending Funds and the Third-Party Lending Funds are sometimes referred to herein collectively as the “Lending Funds”; the State Street Securities Lending Program and the Third-Party Securities Lending Program are sometimes
referred to herein collectively as the “Securities Lending Program.”
Shares of the Portfolio are available to be purchased only by
authorized clients of the Securities Lending Program that are advised by Diamond Hill Investment Partners LP or its affiliates.
SSGA Funds Management, Inc. (“SSGA FM” or the
“Adviser”) serves as the investment adviser to State Street Navigator Securities Lending Portfolio I
(“Portfolio I” or the
“Portfolio”), a series of the Trust. The Adviser and certain other affiliates of State Street Corporation make up State Street
Investment Management.
The professionals
primarily responsible for the day-to-day management of the Portfolio are Todd Bean, Sean Lussier, and Alexis Hayes. Todd Bean and Sean Lussier have served as
portfolio managers of the Portfolio since organization in 2018. Alexis Hayes has served as a portfolio manager of the Portfolio since 2026.
Todd Bean, CFA, is a Managing Director of the Adviser and Head of
U.S. Traditional Cash Strategies in the Global Fixed Income Solutions Team. He joined the Adviser in 2002.
Sean Lussier is a Vice President of the Adviser and a Senior
Portfolio Manager in the Global Fixed Income Solutions Team. He joined the Adviser in 2004.
Alexis Hayes is an Assistant Vice President of the Adviser and a
dual Portfolio Manager and Credit Trader in the Global Fixed Income Solutions Team. She joined the Adviser in 2024.
Item 6. Purchase and Sale of Portfolio Shares
There is no minimum initial or subsequent investment amount for the
Portfolio.
Shares are
offered solely in private placement transactions that do not involve any “public offering” within the
meaning of Section 4(a)(2) of the 1933 Act.
Shares of Portfolio I are only offered to, and may only be held by, the Lending Funds in the Securities Lending Program. Shares of Portfolio I are available for purchase each day on which the New York Stock Exchange
(“NYSE”) and State Street are open for business (a “Business Day”). Purchases are effected on behalf of a Client Lending Fund by State Street, in its capacity as
securities lending agent for the Lending Fund. All shares of Portfolio I are purchased at the net asset value (“NAV”) per share of the Portfolio next determined after the purchase is communicated to the Trust's transfer
agent and determined to be in good order. Redemptions are effected on behalf of a Client Lending Fund by State Street, in its capacity as securities lending agent for the Client
Lending Fund.
Shares of Portfolio I may be
redeemed on each Business Day at the NAV per share of the Portfolio next determined after the redemption is communicated to the Trust's transfer agent.
Under normal circumstances, the Portfolio expects to meet
redemption requests by using cash or cash equivalents in its portfolio and/or selling portfolio assets to generate cash. The Portfolio also may pay redemption
proceeds using cash obtained through borrowing arrangements that may be available from time to time.
The Portfolio intends to make distributions that may be taxed as ordinary
income.
Item 9. Investment Objective, Principal
Investment Strategies, Related Risks, and Disclosure of Portfolio Holdings
The investment objective, principal strategies, risks and portfolio
holdings disclosure policy of Portfolio I are described below. The investment objective of Portfolio I may be changed at any time by the Board of Trustees of
the Trust (the “Board”) upon at least sixty (60) days' prior written notice to shareholders of the Portfolio. The Board may change
the Portfolio's investment strategies and other policies without shareholder approval, except as otherwise indicated. See the Part B of the Registration Statement (“Part B”) for a description of certain
fundamental investment restrictions for the Portfolio. The Portfolio's investment adviser is SSGA FM, a wholly-owned subsidiary of State Street Global
Advisors, Inc.
State Street
Navigator Securities Lending Portfolio I
The Portfolio seeks current yield to
the extent consistent with maintaining liquidity and the preservation of principal while providing a market rate of return.
Principal Investment Strategies
Portfolio I is not a money market fund and it will
not seek to use the amortized cost method of valuation, which may be used by certain money market funds, to seek to maintain a stable NAV per
share. Portfolio I is not subject to the investment and other requirements that apply to money market funds and it may invest in a manner that is inconsistent with the rules governing money market funds. For example,
Portfolio I will not be limited by the credit quality, maturity, liquidity, diversification, or other requirements imposed on money market funds. The investment
return and principal value of an investment in Portfolio I will fluctuate and a shareholder's shares, when redeemed, may be worth more or less than their original cost. Investments in Portfolio I are neither
insured nor guaranteed by the U.S. government or State Street.
The Portfolio's investments include, among other things, fixed and floating rate securities of varying maturities, including but not limited to (i) corporate obligations (including commercial paper of U.S. and foreign entities, master notes, and medium term notes); (ii) U.S. government securities (including U.S. Treasury bills, notes and bonds and other securities issued or guaranteed as to principal or interest by the U.S. government or its agencies or instrumentalities); (iii) mortgage-backed and other asset backed securities; (iv) money market instruments (including certificates of deposits and time deposits of U.S. and foreign banks (including European Certificates of Deposit (“ECDs”), European Time Deposits (“ETDs”) and Yankee Certificates of Deposit
(“YCDs”), and banker acceptances); and (v) repurchase agreements.
Portfolio I seeks to achieve its investment objective by investing in a diversified portfolio of U.S. dollar denominated, investment grade fixed income securities. The Portfolio invests only in U.S. dollar-denominated, short-term, high quality debt obligations (generally, securities that have remaining maturities of 397 calendar days or less and either have been rated A-1 or A-2 by Standard & Poor's, P-1 or P-2 by Moody's, F1 or F2 by Fitch, or are considered by the Adviser to be of comparable quality). If a security is downgraded and is no longer investment grade, the Portfolio may continue to hold the security if the Adviser determines that to be in the best interest of the Portfolio. Under normal circumstances, the weighted average maturity
(“WAM”) of the Portfolio is expected to be sixty (60) days or less, and the weighted average life (“WAL”) of the Portfolio is expected to be one hundred and twenty (120) days or less. The Portfolio will not purchase any security with a remaining maturity that exceeds three hundred and ninety seven (397) days. For purposes of this restriction and for purposes of determining the Portfolio's WAM or WAL, a security's final maturity date will be used, unless the security is a floating rate or variable rate security in which case the security may be deemed to have a maturity equal to the period remaining until the next readjustment of its interest rate, or, if it is a government security or short-term floating rate security, one day. Securities with demand features may be deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand. The Portfolio may purchase securities on a forward commitment basis.
Under normal circumstances, Portfolio I will be invested in assets that are intended to provide a market rate of return while providing liquidity and quality suitable to its investment objective, although Portfolio I may seek investments of additional liquidity and safety during times of market stress. The Portfolio may invest in both fixed rate of return and floating rate of return instruments. Portfolio I will only invest in floating rate instruments if the instrument's interest rate is tied to a publicly available index or other measure, such as the Secured Overnight Funding Rate
(“SOFR”), the federal funds rate, Prime interest rates, and Treasury bill yields. Portfolio I may invest up to
15% of the Portfolio's net assets in illiquid investments (i.e., investments that the Portfolio reasonably expects cannot be sold or disposed of in current
market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment).
From time to time, the Portfolio may take temporary defensive positions in an attempt to respond to adverse market, economic or other conditions. This may include holding uninvested cash. These temporary defensive actions may be a departure from Portfolio I's other investment strategies and the Portfolio may not achieve its investment objective while taking such defensive positions.
The Adviser
buys and sells securities for the Portfolio based on its analysis of credit quality and the Portfolio's overall WAM and WAL. The Adviser follows a disciplined
investment process, basing its investment decisions on the relative attractiveness of different instruments. Among other things, the Adviser conducts its own
credit analyses of potential investments and portfolio holdings, and relies substantially on a dedicated short-term credit research team. In the Adviser's opinion the attractiveness of an instrument may vary depending on a variety of factors, including for example the general level of interest rates, imbalances of supply and demand in the market, and the credit quality of the obligors. The Portfolio principally invests in “bonds,”
which include debt securities and fixed income and income-producing instruments of any kind
issued by governmental or private-sector entities. Most bonds consist of a security or instrument having one or more of the following characteristics: a
fixed-income security, a security issued at a discount to its face value, a security that pays interest, whether fixed, floating or variable, or a security with a
stated principal amount that requires repayment of some or all of that principal amount to the holder of the security. The Adviser interprets the term bond
broadly as an instrument or security evidencing what is commonly referred to as an IOU rather than evidencing the corporate ownership of equity unless that equity represents an indirect or derivative interest in one or more debt securities. The Portfolio may invest in stripped securities, which are U.S. Treasury bonds and notes, the unmatured interest coupons of which have been separated from the underlying obligation. Stripped securities are zero coupon obligations that are normally issued at a discount from their face value. The Portfolio may invest no more than 25% of its assets in stripped securities that have been stripped by their holder, which is typically a custodian bank or investment brokerage firm.
Portfolio I is used exclusively for the investment of cash
received as collateral for securities loans. Accordingly, Portfolio I may experience significant redemptions in response to declines in the value of securities on
loan or the quantity of loans outstanding from time to time. If the Portfolio is required to sell securities to meet significant redemptions during a period of market disruption, the Portfolio may experience losses. The rate of income of Portfolio I will vary from day-to-day, depending on short-term interest rates.
Principal Risks of Investing in Portfolio I
The Portfolio is subject to the following principal risks. You could
lose money by investing in the Portfolio. Certain risks relating to instruments and strategies used in the management of the Portfolio are placed first. The
significance of any specific risk to an investment in the Portfolio will vary over time, depending on the composition of the Portfolio's portfolio, market conditions, and other factors. You should read all of the risk information presented below carefully, because any one or more of these risks may result in losses to the Portfolio. Because the share price of the Portfolio will fluctuate, when you sell your shares, they may be worth more or less than what you originally paid for them. An investment in Portfolio I is subject to investment risks,
including possible loss of principal, is not a deposit in State Street or any other bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation (the “FDIC”) or any other governmental agency. The Portfolio may not achieve its investment
objective. Investors should consult their own advisers as to the role of the Portfolio in their overall investment programs.
Market Risk. Market prices of investments held by the Portfolio will go up or down,
sometimes rapidly or unpredictably. The Portfolio's investments are subject to changes in general economic conditions, general market fluctuations and the risks inherent in investment in securities markets. Investment markets can be volatile, and prices of investments can change substantially due to various factors, including, but not limited to, economic growth or recession, changes in interest rates, inflation, changes in actual or perceived creditworthiness of issuers and general market liquidity. Even if general economic conditions do not change, the value of an investment in the Portfolio could decline if the particular industries, sectors or companies in which the Portfolio invests do not perform well or are adversely affected by events. Further, legal, political, regulatory and tax changes also may cause fluctuations in markets and securities prices. Local, regional or global events such as war, military conflicts, acts of terrorism, trade policy changes or disputes, the threat or actual imposition of tariffs, natural disasters, public health issues, or other events could have a significant impact on the Portfolio and its investments. Due to the interconnectedness of economies and financial markets throughout the world, if the Portfolio invests in securities of issuers located in or with significant exposure to countries experiencing economic and financial difficulties, the value and liquidity of the Portfolio's investments may be negatively affected. A widespread outbreak of an infectious illness and efforts to contain its spread, may result in market volatility, inflation, reduced liquidity of certain instruments, disruption in the trading of certain instruments, and systemic economic weakness. The foregoing could impact the Portfolio and its investments and result in disruptions to the services provided to the Portfolio by its service providers.
Debt Securities Risk. The values of debt securities may increase or decrease as a
result of the following: market fluctuations, changes in interest rates, actual or perceived inability or unwillingness of issuers, guarantors or liquidity
providers to make scheduled principal or interest payments or illiquidity in debt securities markets. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. A rising interest rate environment may cause the value of the Portfolio's fixed income securities to decrease, an adverse impact on the liquidity of the Portfolio's fixed income securities, and increased volatility of the fixed income markets. During periods when interest rates are at low levels, the Portfolio's yield can be low, and the Portfolio may have a negative yield (i.e., it may lose money on an operating basis). To the extent that interest rates fall, certain underlying obligations may be paid off substantially faster than originally anticipated. If the principal on a debt obligation is prepaid before expected, the prepayments of principal may have to be reinvested in obligations paying interest at lower rates. During periods of falling interest rates, the income received by the Portfolio may decline. Changes in interest rates will likely have a greater effect on the values of debt securities of longer durations. Returns on investments in debt securities could trail the returns on other investment options, including investments in equity securities. High levels of inflation and/or a significantly changing interest rate environment can lead to heightened levels of volatility and reduced liquidity.
In general, bond prices fall when interest rates rise. During periods of rising interest rates, a fund's yield generally is lower than prevailing market rates. In periods of falling interest rates, a fund's yield generally is higher than prevailing market rates. Typically, the more distant the expected cash flow that a fund is to receive from a security, the more sensitive the market value of the security is to movements in interest rates. If a fund owns securities that have variable or floating interest rates, as interest rates fall, the income a fund receives from those securities also will fall. Rising interest rates could have unpredictable effects on the markets and may expose fixed income and related markets to heightened volatility.
Adverse market or economic conditions or investor perceptions may result in little or no trading activity in one or more particular securities, thus making it difficult to determine their values. A fund holding those securities may have to value them at prices that reflect unrealized losses, or, if it elects to sell them, it may have to accept lower prices than the prices at which it is then valuing them. A fund also may not be able to sell the securities at any price. For certain fixed income securities, an increase in interest rates may lead to increased redemptions and increased portfolio turnover, which could reduce liquidity for certain portfolio investments, adversely affect values, and increase a fund's costs. If dealer capacity in fixed income markets is insufficient for market conditions, liquidity may be further inhibited and volatility may increase.
Section 4(a)(2) Commercial Paper and Rule 144A
Securities Risk. The Portfolio may invest in commercial paper issued in reliance on the
private placement exemption from registration afforded by Section 4(a)(2) of the 1933 Act. This commercial paper is commonly called “Section 4(a)(2) paper.” The Portfolio may also invest in securities that may be offered and sold only to “qualified
institutional buyers” under Rule 144A of the 1933 Act (“Rule
144A securities”).
Section 4(a)(2) paper is sold to institutional investors who must agree to purchase the paper for investment and not with a view to public distribution. Any resale by the purchaser must be in a transaction exempt from the registration requirements of the 1933 Act. Section 4(a)(2) paper normally is resold to other institutional investors like the Portfolio through or with the assistance of the issuer or investment dealers that make a market in Section 4(a)(2) paper. As a result, it suffers from liquidity risk, the risk that the securities may be difficult to value because of the absence of an active market and the risk that it may be sold only after considerable expense and delay, if at all. Rule 144A securities generally must be sold only to other qualified institutional buyers.
Section 4(a)(2) paper and Rule 144A securities will not be
considered illiquid for purposes of the Portfolio's limitation on illiquid securities if the Adviser (pursuant to guidelines adopted by the Board) determines that
a liquid trading market exists for the securities in question. There can be no assurance that a liquid trading market will exist at any time for any particular Section 4(a)(2) paper or Rule 144A securities.
Repurchase Agreement Risk. A repurchase agreement is an agreement to buy a security
from a seller at one price and a simultaneous agreement to sell it back to the original seller at an agreed-upon price, typically representing the purchase price plus interest. Repurchase agreements may be viewed as loans made by the Portfolio which are collateralized by the securities subject to repurchase. The Portfolio's investment return on such transactions will depend on the counterparty's willingness and ability to perform its obligations under a repurchase agreement. If the Portfolio's counterparty should default on its obligations and the Portfolio is delayed or prevented from recovering the collateral, or if the value of the collateral is insufficient, the Portfolio may realize a loss. The SEC has finalized new rules that will require certain
transactions involving U.S. Treasuries, including repurchase agreements, to be centrally cleared.
Historically, such transactions have not been required to be cleared and voluntary clearing of such transactions has generally been limited. Compliance with these rules is expected to be required in the middle of 2027. Although the impact of these rules on the Portfolio is difficult to predict, the new clearing requirement could make it more difficult for the Portfolio to execute certain investment strategies, reduce the availability or increase the costs of such transactions and may adversely affect the Portfolio's performance.
Banking Companies Risk. The performance of bank stocks may be affected by extensive
governmental regulation, which may limit the amounts and types of loans and other financial commitments they can make, the interest rates and fees they can charge, and the amount of capital they must maintain. The impact of changes in regulations and capital requirements on a banking company cannot be predicted and may negatively impact such banking company. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers can negatively impact banking companies. To the extent a bank's portfolio of loans or investments are concentrated in a particular industry, the bank may be vulnerable to economic conditions that affect that industry. Banks may also be subject to severe price competition. Competition among banking companies is high and failure to maintain or increase market share may result in lost market value.
U.S. Government Securities Risk. U.S. government securities, such as Treasury bills, notes and bonds and mortgage-backed securities
guaranteed by the Government National Mortgage Association (“Ginnie Mae”), are supported by the
full faith and credit of the United States; others are supported by the right of the issuer to borrow from the U.S. Treasury; others are supported by the discretionary authority of the U.S. government to purchase the agency's obligations; and still others are supported only by the credit of the issuing agency, instrumentality, or enterprise. Although U.S. government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National
Mortgage Association (“Fannie Mae”) may be chartered or
sponsored by Congress, they are not funded by Congressional appropriations, and their securities are not issued by the U.S. Treasury nor supported by the full
faith and credit of the U.S. government. There is no assurance that the U.S. government would provide financial support to its agencies and instrumentalities if not required to do so. In addition, certain governmental entities have been subject to regulatory scrutiny regarding their accounting policies and practices and other concerns that may result in legislation, changes in regulatory oversight and/or other consequences that could adversely affect the credit quality, availability, or investment character of securities issued by these entities. The value and liquidity of U.S. government securities may be affected adversely by changes in the ratings of those securities. Securities issued by the U.S. Treasury historically have been considered to present minimal credit risk. The downgrade in the long-term U.S. credit rating by at least two major rating agencies has introduced greater uncertainty about the ability of the U.S. to repay its obligations. Further credit rating downgrades or a U.S. credit default could decrease the value and increase the volatility of the Portfolio's investments.
Mortgage-Related and Other Asset-Backed
Securities Risk. Investments in mortgage-related and other asset-backed securities are
subject to the risk of significant credit downgrades, illiquidity, and defaults to a greater extent than many other types of fixed income investments. The
liquidity of mortgage-related and asset-backed securities may change over time. Mortgage-related securities represent a participation in, or are secured by,
mortgage loans. Other asset-backed securities are typically structured like mortgage-related securities, but instead of mortgage loans or interests in
mortgage loans, the underlying assets may include, for example, items such as motor vehicle installment sales or installment loan contracts, leases on various types of real and personal property, and receivables from credit card agreements. During periods of falling interest rates, mortgage-related and other asset-backed securities, which typically provide the issuer with the right to prepay the security prior to maturity, may be prepaid, which may result in the Portfolio having to reinvest the proceeds in other investments at lower interest rates. During periods of rising interest rates, the average life of mortgage-related and other asset-backed securities may extend because of slower-than expected principal payments. This may lock in a below market interest rate, increase the security's duration and interest rate sensitivity, and reduce the value of the security. As a result, mortgage-related and other asset-backed securities may have less potential for capital appreciation during periods of declining interest rates than other debt securities of comparable maturities, although they may have a similar risk of decline in market values during periods of rising interest rates. Prepayment rates are difficult to predict and the potential impact of prepayments on the value of a mortgage-related or other asset-backed security depends on the terms of the instrument and can result in significant volatility. The price of a mortgage-related or other asset-backed security also depends on the credit quality and adequacy of the underlying assets or collateral. Mortgage-related or other asset-backed securities issued by non-governmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) will generally entail greater credit risk than obligations guaranteed by the U.S. government. Defaults on the underlying assets, if any, may impair the value of a mortgage-related or other asset-backed security. For some asset-backed
securities
in which the Portfolio invests, such as those backed by credit card receivables, the underlying cash flows may not be supported by a security interest in a
related asset. Moreover, the values of mortgage-related and other asset-backed securities may be substantially dependent on the servicing of the underlying asset
pools, and are therefore subject to risks associated with the negligence or malfeasance by their servicers and to the credit risk of their servicers. In certain situations, the mishandling of related documentation may also affect the rights of securities holders in and to the underlying collateral. There may be legal and practical limitations on the enforceability of any security interest granted with respect to underlying assets, or the value of the underlying assets, if any, may be insufficient if the issuer defaults.
In a “forward roll” transaction, a Portfolio will sell a mortgage-related security to a bank or other
permitted entity and simultaneously agree to purchase a similar security from the institution at a later date at an agreed upon price. The mortgage securities that are purchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories than those sold. The values of such transactions will be affected by many of the same factors that affect the values of mortgage-related securities generally. In addition, forward roll transactions may have the effect of creating investment leverage in a Portfolio.
Call/Prepayment Risk. Call/prepayment risk is the
risk that an issuer will exercise its right to pay principal on an obligation held by the Portfolio earlier than expected or required. This may occur, for
example, when there is a decline in interest rates, and an issuer of bonds or preferred stock redeems the bonds or stock in order to replace them with
obligations on which it is required to pay a lower interest or dividend rate. It may also occur when there is an unanticipated increase in the rate at which mortgages or other receivables underlying mortgage- or asset-backed securities held by the Portfolio are prepaid. In any such case, the Portfolio may be forced to invest the prepaid amounts in lower-yielding investments, resulting in a decline in the Portfolio's income.
Counterparty Risk. The Portfolio will be subject to credit risk with respect to the
counterparties with which the Portfolio enters into repurchase agreements and other transactions. If a counterparty fails to meet its contractual obligations, the
Portfolio may be unable to terminate the transaction, and it may be delayed or prevented from realizing on any collateral in the event of a bankruptcy or insolvency proceeding relating to the counterparty.
Credit Risk. Credit risk is the risk that an
issuer, guarantor or liquidity provider of a fixed-income security held by the Portfolio may be unable or unwilling, or may be perceived (whether by market
participants, ratings agencies, pricing services or otherwise) as unable or unwilling, to make timely principal and/or interest payments, or to otherwise honor
its obligations. It includes the risk that the security will be downgraded by a credit rating agency; generally, lower credit quality issuers present higher credit risks. An actual or perceived decline in creditworthiness of an issuer of a fixed-income security held by the Portfolio may result in a decrease in the value of the security. It is possible that the ability of an issuer to meet its obligations will decline substantially during the period when the Portfolio owns securities of the issuer or that the issuer will default on its obligations or that the obligations of the issuer will be limited or restructured.
The credit rating assigned to any particular investment does not
necessarily reflect the issuer's current financial condition and does not reflect an assessment of an investment's volatility or liquidity. Securities rated in
the lowest category of investment-grade are considered to have speculative characteristics. If a security held by the Portfolio loses its rating or its rating is downgraded, the Portfolio may nonetheless continue to hold the security in the discretion of the Adviser. In the case of asset-backed or mortgage-related securities, changes in the actual or perceived ability of the obligors on the underlying assets or mortgages to make payments of interest and/or principal may affect the values of those securities.
Eurodollar Certificates of Deposit, Eurodollar
Time Deposits and Yankee Certificates of Deposit Risk. The Portfolio may invest in ECDs,
ETDs and YCDs. ECDs and ETDs are U.S. dollar-denominated certificates of deposit and time deposits, respectively, issued by foreign branches of domestic banks and
foreign banks. YCDs are U.S. dollar denominated certificates of deposit issued by U.S. branches of foreign banks.
Different risks than those associated with the obligations of
domestic banks may exist for ECDs, ETDs and YCDs because the banks issuing these instruments, or their domestic or foreign branches, are not necessarily subject
to the same regulatory requirements that apply to domestic banks, such as loan limitations, examinations and reserve, accounting, auditing, recordkeeping and public reporting requirements. Obligations of foreign issuers also involve risks such as future unfavorable political and economic developments, withholding or other tax, seizures of foreign deposits, currency controls, interest limitations, and other governmental restrictions that might affect repayment of principal or payment of interest, or the ability to honor a credit commitment.
Extension Risk. During periods of rising interest rates, the average life of certain types of securities may be extended
because of slower-than-expected principal payments. This may increase the period of time during which an investment earns a below-market interest rate, increase the security's duration and reduce the value of the security. Extension risk may be heightened during periods of adverse economic conditions generally, as payment rates decline due to higher unemployment levels and other factors.
Financial Institutions Risk. Some instruments are issued or guaranteed by financial
institutions, such as banks and brokers, or are collateralized by securities issued or guaranteed by financial institutions. Changes in the creditworthiness of
any of these institutions may adversely affect the values of instruments of issuers in financial industries. Financial institutions may be particularly sensitive to certain economic factors such as interest rate changes, adverse developments in the real estate market, fiscal and monetary policy and general economic cycles. Adverse developments in banking and other financial industries may cause the Portfolio to underperform relative to other funds that invest more broadly across different industries or have a smaller exposure to financial institutions. Other adverse developments that affect financial institutions or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, may reduce liquidity in the market generally or have other adverse effects on the economy or the Portfolio. In addition, the Portfolio may not be able to identify all potential solvency or stress concerns with respect to a financial institution or to transfer assets from one bank or financial institution to another in a timely manner in the event such bank or financial institution comes under stress or fails. Changes in governmental regulation and oversight of financial institutions may have an adverse effect on the financial condition or the earnings or operations of a financial institution and on the types and amounts of businesses in which a financial institution may engage. An investor may be delayed or prevented from exercising certain remedies against a financial institution. The amount of the Portfolio's assets that may be invested in any financial institution, or financial institutions generally, may be limited by applicable law.
Forward Commitments Risk. The Portfolio may enter into contracts to purchase securities for a fixed price at a future date
beyond customary settlement time (“forward commitments”), consistent with the Portfolio's ability to manage its investment portfolio and meet redemption requests. Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Portfolio's other assets. Where such purchases are made through dealers, the Portfolio relies on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the Portfolio of an advantageous yield or price.
Although the Portfolio will generally enter into forward commitments with the intention of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, the Portfolio may dispose of a commitment prior to settlement if the Adviser deems it appropriate to do so. The Portfolio may realize short-term profits or losses upon the sale of forward commitments. When effecting such transactions, cash or other liquid assets (such as liquid high quality debt obligations) held by the Portfolio of a dollar amount sufficient to make payment for the portfolio securities to be purchased will be segregated on the Portfolio's records at the trade date and maintained until the transaction is settled. Such segregated assets will be marked to market on a daily basis, and if the market value of such assets declines, additional cash or assets will be segregated so that the market value of the segregated assets will equal the amount of such the Portfolio's obligations. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, or if the other party fails to complete the transaction.
Illiquid Securities Risk. The Portfolio will not
invest more than 15% of its net assets in illiquid investments (i.e., investments that the Portfolio reasonably expects cannot be sold or disposed of
in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment), including
repurchase agreements and time deposits of more than seven days' duration. The absence of a regular trading market for illiquid securities imposes additional risks on investments in these securities. Illiquid securities may be difficult to value and may often be disposed of only after considerable expense and delay.
Income Risk. The Portfolio's income may decline due to falling interest rates or other factors. Issuers of securities held by the Portfolio may call or redeem the securities during periods of falling interest rates, and the Portfolio would likely be required to reinvest in securities paying lower interest rates. If an obligation held by the Portfolio is prepaid, the Portfolio may have to reinvest the prepayment in other obligations paying income at lower rates. A reduction in the income earned by the Portfolio may limit the Portfolio's ability to achieve its objective.
Interest Rate Risk. Interest rate risk is the risk that the securities held by the
Portfolio will decline in value because of increases in market interest rates. Duration is a measure used to determine the sensitivity of a security's price to
changes in interest rates. Debt securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter durations. For example, the value of a security with a duration of five years would be expected to decrease by 5% for every 1% increase in interest rates. Falling interest rates also create the potential for a decline in the Portfolio's income and yield. Interest-only and principal-only securities are especially sensitive to interest rate changes, which can affect not only their prices but can also change the income flows and repayment assumptions about those investments. Variable and floating rate securities also generally increase or decrease in value in response to changes in interest rates, although generally to a lesser degree than fixed-rate securities. A substantial increase in interest rates may also have an adverse impact on the liquidity of a security, especially those with longer durations. Changes in governmental policy, including changes in central bank monetary policy, could cause interest rates to rise rapidly, or cause investors to expect a rapid rise in interest rates. This could lead to heightened levels of interest rate, volatility and liquidity risks for the fixed income markets generally and could have a substantial and immediate effect on the values of the Portfolio's investments. High levels of inflation and/or a significantly changing interest rate environment can lead to heightened levels of volatility and reduced liquidity.
Large Transactions Risk. To the extent a large
proportion of the shares of the Portfolio are highly concentrated or held by a small number of shareholders (or a single shareholder), including funds or accounts
over which the Adviser has investment discretion, the Portfolio is subject to the risk that these shareholders will purchase or redeem Portfolio interests in large amounts rapidly or unexpectedly, including as a result of an asset allocation decision made by the Adviser. In addition, a large number of shareholders collectively may purchase or redeem Portfolio interests in large amounts rapidly or unexpectedly (collectively, such transactions are referred to as “large shareholder transactions”). Large
shareholder transactions could adversely affect the ability of the Portfolio to conduct its investment program. For example, they could require the Portfolio to sell portfolio securities or purchase portfolio securities unexpectedly and incur substantial transaction costs and/or accelerate the realization of taxable income and/or gains to shareholders. The effects of taxable income and/or gains resulting from large shareholder transactions would particularly impact non-redeeming shareholders who do not hold their Portfolio interests in an IRA, 401(k) plan or other tax-advantaged plan. To the extent that such transactions result in short-term capital gains, such gains will generally be taxed at the ordinary income tax rate for shareholders who hold Portfolio interests in a taxable account. In addition, the Portfolio may be required to sell its more liquid portfolio investments to meet a large redemption, in which case the Portfolio's remaining assets may be less liquid, more volatile, and more difficult to price. The Portfolio may hold a relatively large proportion of its assets in cash in anticipation of large redemptions, diluting its investment returns. A number of circumstances may cause the Portfolio to experience large redemptions, such as changes in investors' circumstances; changes in the eligibility criteria for the Portfolio or share class of the Portfolio; liquidations, reorganizations, repositionings, or other announced Portfolio events; or changes in investment objectives, strategies, policies, risks, or investment personnel.
Liquidity Risk. Liquidity risk is the risk that the Portfolio may not be able to dispose of investments or close out transactions readily at a favorable time or prices (or at all) or at prices approximating those at which the Portfolio currently values them. For example, certain investments may be subject to restrictions on resale, may trade in the over-the-counter market or in limited volume, or may not have an active trading market. Illiquid investments may trade at a discount from comparable, more liquid investments and may be subject to wide fluctuations in market value. It may be difficult for the Portfolio to value illiquid investments accurately. The market for certain investments may become illiquid under adverse market or economic conditions independent of any specific adverse changes in the conditions of a particular issuer. Disposal of illiquid investments may entail registration expenses and other transaction costs that are higher than those for liquid investments. The Portfolio may seek to borrow money to meet its obligations (including among other things redemption obligations) if it is unable to dispose of illiquid investments, resulting in borrowing expenses and possible leveraging of the Portfolio. In some cases, due to unanticipated levels of illiquidity the Portfolio may choose to meet its redemption obligations wholly or in part by distributions of assets in-kind.
The term “illiquid
investments” for this purpose means investments that the Portfolio reasonably expects cannot
be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investments. If the Portfolio determines at any time that it owns illiquid investments in excess of 15% of its net assets, it will cease to undertake new commitments to acquire illiquid investments until its holdings are no longer in excess of 15% of its NAV, report the occurrence in compliance with Rule 30b1-10 under the 1940 Act and, depending on circumstances, may take additional steps to reduce its holdings of illiquid investments. The U.S. Securities and Exchange Commission
(“SEC”) has recently proposed rule amendments that, if adopted as proposed, could result in a larger percentage of the
Portfolio's investments being classified as illiquid investments.
Low Short-Term Interest Rate Risk. During market conditions in which short-term
interest rates are at low levels the Portfolio's yield can be very low. During these conditions, it is possible that the Portfolio will generate an insufficient
amount of income to pay its expenses, and that it will not be able to pay a daily dividend and may have a negative yield (i.e., it may lose money on an operating basis). It is possible that the Portfolio would, during these conditions, maintain a substantial portion of its assets in cash, on which it may earn little, if any, income.
Market Disruption and Geopolitical Risk. The
Portfolio is subject to the risk that geopolitical events will disrupt securities markets and adversely affect global economies and markets. War, terrorism, and
related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and
world economies and markets generally. Likewise, trade policy changes or disputes, the threat of or actual imposition of tariffs, natural and environmental disasters, pandemics and epidemics, and systemic market dislocations may be highly disruptive to economies and markets. Those events, as well as other changes in foreign and domestic economic and political conditions, also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Portfolio's investments. Given the increasing interdependence among global economies and markets, conditions in one country, market, or region might adversely affect markets, issuers, and/or foreign exchange rates in other countries, including the U.S. Any partial or complete dissolution of the Economic and Monetary Union of the European Union, or any increased uncertainty as to its status, could have significant adverse effects on currency and financial markets, and on the values of the Portfolio's investments. On January 31, 2020, the United Kingdom (“UK”) formally withdrew from the European
Union (“EU”) (commonly known as
“Brexit”). An agreement between the UK and the EU governing their future trade relationship became effective
January 1, 2021, but that agreement does not include an agreement on financial services, and it is unlikely that such agreement will be concluded. Moreover, the
UK government has started a program of financial services law reform with the ultimate aim of repealing many EU financial services laws that were assimilated into
UK law from January 1, 2021, and replacing them with legislation or rules made by the UK government or financial services regulators. Accordingly, uncertainty remains in certain areas as to the future relationship between the UK and the EU. Brexit has already had a significant impact on the UK, Europe, and global economies, and could continue to result in volatility and illiquidity, legal, political, economic and regulatory uncertainties and lower economic growth for these economies that could in turn have an adverse effect on the value of the Portfolio's investments. Any further exits from the EU, or the possibility of such exits, or the abandonment of the euro, may cause additional market disruption globally and introduce new legal and regulatory uncertainties.
Securities and financial markets may be susceptible to market
manipulation or other fraudulent trade practices, which could disrupt the orderly functioning of these markets or adversely affect the values of investments
traded in these markets, including investments held by the Portfolio. To the extent the Portfolio has focused its investments in the market or index of a particular region, adverse geopolitical and other events could have a disproportionate impact on the Portfolio.
New or escalation of hostilities in the Middle East region could
disrupt energy production or transportation, including through key shipping routes, which may lead to increased volatility in energy and other commodity prices.
The extent and duration of these conflicts, and others around the world, are impossible to predict but could continue to be significant. Market disruption caused by these conflicts, and any countermeasures or responses thereto (including international sanctions, a downgrade in a country's credit rating, purchasing and financing restrictions, boycotts, tariffs, changes in consumer or purchaser preferences, cyberattacks and espionage) could continue to have severe adverse impacts on regional and/or global securities and commodities markets, including markets for oil and natural gas. These impacts may include reduced market liquidity, distress in credit markets, further disruption of global supply chains, increased risk of inflation, and limited access to investments in certain international markets and/or issuers. These developments and other related events could negatively impact Portfolio performance.
Market Volatility; Government Intervention Risk.
Market dislocations and other external events, such as the failures or near failures of significant financial institutions, dislocations in investment or currency
markets, corporate or governmental defaults or credit downgrades, or poor collateral performance, may subject the Portfolio to significant risk of
substantial volatility and loss. Governmental and regulatory authorities have taken, and may in the future take, actions to provide or arrange credit supports to financial institutions whose operations have been compromised by credit market dislocations and to restore liquidity and stability to financial systems in their jurisdictions; the implementation of such governmental interventions and their impact on both the markets generally and the Portfolio's investment program in particular can be uncertain. Governmental and non-governmental issuers may default on, or be forced to restructure, their debts, and other issuers may face difficulties obtaining credit. Raising the U.S. Government debt ceiling has become increasingly politicized. Any failure to increase the total amount that the U.S. Government is authorized to borrow could lead to
a default
on U.S. Government obligations. A default or a threat of default by the U.S. Government would be highly disruptive to the U.S. and global securities markets and
could significantly reduce the value of the Portfolio's investments. Defaults or restructurings by governments or others of their debts could have substantial
adverse effects on economies, financial markets, and asset valuations around the world. Federal Reserve or other U.S. or non-U.S. governmental or central bank actions, including interest rate increases or contrary actions by different governments, or investor perception that these efforts are not succeeding, could negatively affect financial markets generally as well as the values and liquidity of certain securities.
Non-U.S. Securities Risk. Investments in securities of non-U.S.
issuers (including depositary receipts) entail risks not typically associated with investing in securities of U.S. issuers. Similar risks may apply to
securities traded on a U.S. securities exchange that are issued by entities with significant exposure to non-U.S. countries. In certain countries, legal remedies available to investors may be more limited than those available with regard to U.S. investments. Income and gains with respect to investments in certain countries may be subject to withholding and other taxes. There may be less information publicly available about a non-U.S. entity than about a U.S. entity, and many non-U.S. entities are not subject to accounting, auditing, and financial reporting standards, regulatory framework and practices comparable to those in the United States. The securities of some non-U.S. entities are less liquid and at times more volatile than securities of comparable U.S. entities, and could become subject to sanctions or embargoes that adversely affect the Portfolio's investment. Non-U.S. transaction costs, such as brokerage commissions and custody costs may be higher than in the U.S. In addition, there may be a possibility of nationalization or expropriation of assets, imposition of currency exchange controls, confiscatory taxation, and diplomatic developments that could adversely affect the values of the Portfolio's investments in certain non-U.S. countries. Investments in securities of non-U.S. issuers also are subject to foreign political and economic risk not associated with U.S. investments, meaning that political events (civil unrest, national elections, changes in political conditions and foreign relations, imposition of exchange controls and repatriation restrictions), social and economic events (labor strikes, rising inflation) and natural disasters occurring in a country where the Portfolio invests could cause the Portfolio's investments to experience gains or losses. In addition, the threat of or actual imposition of tariffs may adversely impact the price of non-U.S. securities.
Rapid Changes in Interest Rates. The values of instruments held by the Portfolio may be adversely affected by rapid changes in
interest rates. Rapid changes in interest rates may cause significant requests to redeem Portfolio Shares, and possibly cause the Portfolio to sell portfolio securities at a
loss to satisfy those requests.
Reinvestment Risk. Income from the Portfolio may decline when the Portfolio invests the proceeds from investment income,
sales of portfolio securities or matured, traded or called debt obligations. For instance, during periods of declining interest rates, an issuer of debt
obligations may exercise an option to redeem securities prior to maturity, forcing the Portfolio to reinvest the proceeds in lower-yielding securities. A decline
in income received by the Portfolio from its investments is likely to have a negative effect on the yield and total return of the Portfolio Shares.
Stripped Securities Risk. The Portfolio may invest in stripped securities, which are U.S. Treasury bonds and notes, the
unmatured interest coupons of which have been separated from the underlying obligation. Stripped securities are zero coupon obligations that are normally issued at a discount from their face value. The Portfolio may invest no more than 25% of its assets in stripped securities that have been stripped by their holder, which is typically a custodian bank or investment brokerage firm. A number of securities firms and banks have stripped the interest coupons and resold them in custodian receipt programs with different names. In meeting its responsibility to determine whether it is the beneficial holder of the U.S. government securities underlying such certificates, the Trust intends to rely on the opinions of counsel to the sellers of these certificates or other evidences of ownership of U.S. Treasury obligations that, for U.S. federal income tax and securities law purposes, purchasers of such certificates most likely will be deemed the beneficial holders of the underlying U.S. government securities. The Trust is unaware of any binding legislative, judicial or administrative authority on this issue. Privately-issued stripped securities are not themselves guaranteed by the U.S. government, but the future payment of principal or interest on the U.S. Treasury obligations which they represent is so guaranteed.
Variable and Floating Rate Securities Risk. Variable or floating rate securities are debt securities with variable or floating interest rates
payments. Variable or floating rate securities bear rates of interest that are adjusted periodically according to formulae intended generally to reflect market
rates of interest and allow the Portfolio to participate (determined in accordance with the terms of the securities) in increases in interest rates through upward
adjustments of the coupon rates on the securities. However, during periods of increasing interest rates, changes in the coupon rates may lag behind the changes in market rates or may have limits on the maximum increases in coupon rates. Alternatively, during periods of declining interest rates, the coupon rates on such securities will typically readjust downward resulting in a lower yield.
Zero-Coupon Bond Risk. Zero-coupon bonds are debt obligations that are generally
issued at a discount and payable in full at maturity, and that do not provide for current payments of interest prior to maturity. Zero-coupon bonds usually trade
at a deep discount from their face or par values and are subject to greater market value fluctuations from changing interest rates than debt obligations of comparable maturities that make current distributions of interest. When interest rates rise, the values of zero-coupon bonds fall more rapidly than securities paying interest on a current basis, because the Portfolio is unable to reinvest interest payments at the higher rates.
Additional Information About Non-Principal Investment Strategies and Risks
The investments described below reflect the Portfolio's current practices. In addition to the principal risks described above, other risks are described in some of the descriptions of the investments below:
Conflicts of Interest Risk. An investment in the
Portfolio will be subject to a number of actual or potential conflicts of interest. For example, the Adviser or its affiliates may provide services to the
Portfolio, such as custodial, administrative, bookkeeping, and accounting services, transfer agency and investor servicing, securities brokerage services, and
other services for which the Portfolio would compensate the Adviser and/or such affiliates. The Portfolio may invest in other pooled investment vehicles sponsored, managed, or otherwise affiliated with the Adviser. There is no assurance that the rates at which the Portfolio pays fees or expenses to the Adviser or its affiliates, or the terms on which it enters into transactions with the Adviser or its affiliates will be the most favorable available in the market generally or as favorable as the rates the Adviser or its affiliates make available to other clients. Because of its financial interest, the Adviser will have an incentive to enter into transactions or arrangements on behalf of the Portfolio with itself or its affiliates in circumstances where it might not have done so in the absence of that interest, provided that the Adviser will comply with applicable regulatory requirements.
The Adviser and its affiliates serve as investment adviser to other clients and may make investment decisions that may be different from those that will be made by the Adviser on behalf of the Portfolio. For example, the Adviser may provide asset allocation advice to some clients that may include a recommendation to invest in or redeem from particular issuers while not providing that same recommendation to all clients invested in the same or similar issuers. The Adviser may (subject to applicable law) be simultaneously seeking to purchase (or sell) investments for the Portfolio and to sell (or purchase) the same investment for accounts, funds, or structured products for which it serves as asset manager, or for other clients or affiliates. The Adviser and its affiliates may invest for clients in various securities that are senior, pari passu or junior to, or have interests different from or adverse to, the securities that are owned by the Portfolio. The Adviser or its affiliates, in connection with its other business activities, may acquire material nonpublic confidential information that may restrict the Adviser from purchasing securities or selling securities for itself or its clients (including the Portfolio) or otherwise using such information for the benefit of its clients or itself.
The foregoing does not purport to be a comprehensive list or complete explanation of all potential conflicts of interests which may affect the Portfolio. The Portfolio may encounter circumstances, or enter into transactions, in which conflicts of interest that are not listed or discussed above may arise.
Cybersecurity Risk. With the increased use of technologies such as the Internet and
the dependence on computer systems to perform business and operational functions, funds (such as the Portfolio) and their service providers (including the Adviser) may be prone to operational and information security risks resulting from cyber-attacks and/or technological malfunctions. Furthermore, geopolitical tensions may have increased the scale and sophistication of deliberate cybersecurity attacks, particularly those from nation-states or from entities with nation-state backing. In general, cyber-attacks are deliberate, but unintentional events may have similar effects. Cyber-attacks include, among others, stealing or corrupting data maintained online or digitally, preventing legitimate users from accessing information or services on a website, releasing confidential information without authorization, and causing operational disruption. Successful cyber-attacks against, or security breakdowns of, the Portfolio, the Adviser, a custodian, the transfer agent, or other affiliated or third-party service provider may adversely affect the Portfolio or its investors. For instance, cyber-attacks or technical malfunctions may interfere with the processing of investor or other transactions, affect the Portfolio's ability to calculate its NAV, cause the release of private investor information or confidential Portfolio information, impede trading, cause reputational damage, and subject the Portfolio to regulatory fines, penalties or financial losses, reimbursement or other compensation costs, and additional compliance costs. Cyber-attacks or technical malfunctions may render records of Portfolio assets and transactions, investor ownership of Portfolio Shares, and other data integral to the functioning of the Portfolio inaccessible or inaccurate or incomplete. The Portfolio may also incur substantial costs for cybersecurity risk management in order to prevent cyber incidents in the future. The Portfolio and its investors could be negatively impacted as
a result.
While the Adviser has established business continuity plans and systems designed to minimize the risk of cyber-attacks through the use of technology, processes
and controls, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified, given the evolving
nature of this threat. The use of artificial intelligence and machine learning could exacerbate these risks or result in cyber security incidents that
implicate personal data. The Portfolio relies on third-party service providers for many of its day-to-day operations, and will be subject to the risk that the protections and protocols implemented by those service providers will be ineffective to protect the Portfolio from cyber-attack. The Adviser does not control the cybersecurity plans and systems put in place by third-party service providers, and such third-party service providers may have limited indemnification obligations to the Adviser or the Portfolio. Similar types of cybersecurity risks or technical malfunctions also are present for issuers of securities in which the Portfolio invests, which could result in material adverse consequences for such issuers, and may cause the Portfolio's investment in such securities to lose value.
Investments by Acquired Funds in Fund of Funds Arrangements. Because the Portfolio
serves as an acquired fund of one or more Lending Funds, Rule 12d1-4(b)(3) under the 1940 Act generally prohibits the Portfolio from purchasing or otherwise acquiring the securities of an investment company if immediately after such purchase or acquisition, the securities of investment companies owned by the Portfolio have an aggregate value in excess of 10% of the value of the total assets of the Portfolio, with certain exceptions. This 10% limitation does not apply to investments by the Portfolio in: securities acquired in reliance on Section 12(d)(1)(E) of the 1940 Act (i.e. master-feeder arrangements); money market funds in reliance on Rule 12d1-1; a subsidiary that is
wholly owned and controlled by the Portfolio; securities received as a dividend or as a result of a plan of reorganization of a company; or securities of another
investment company received pursuant to exemptive relief from the SEC to engage in interfund borrowing and lending transactions.
Temporary Defensive Positions. In response to actual or perceived adverse market, economic, political, or other conditions, a
Portfolio may (but will not necessarily), without notice, depart from its principal investment strategies by temporarily investing for defensive purposes. While
investing defensively, the Portfolio may maintain a substantial portion of its assets in cash, on which the Portfolio may earn little if any income. If a
Portfolio invests for defensive purposes, it may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
Portfolio Holdings Disclosure
The Portfolio's portfolio holdings disclosure policy is described in the Part
B.
Item 10. Management, Organization and
Capital Structure
The Portfolio is a separate, diversified series of the Trust.
SSGA FM serves as the investment adviser to the Portfolio pursuant
to an investment advisory agreement (“Investment Advisory Agreement”)
between the Trust and the Adviser, and, subject to the oversight of the Board, is responsible for the investment management of the Portfolio. The Adviser provides
an investment management program for the Portfolio and manages the investment of the Portfolio's assets. In addition, the Adviser provides administrative,
compliance and general management services to the Portfolio. The Adviser is a wholly-owned subsidiary of State Street Global Advisors, Inc., which itself is a wholly-owned subsidiary of State Street Corporation. The Adviser is registered with the SEC under the Investment Advisers Act of 1940, as amended. The Adviser and certain other affiliates of State Street Corporation make up State Street Investment Management, the investment management arm of State Street Corporation. As of December 31, 2025, the Adviser managed approximately $1.34 trillion in assets and State Street Investment Management managed approximately $5.66 trillion in assets. The Adviser's principal business address is One Congress Street, Boston, Massachusetts 02114.
A discussion regarding the Board's consideration of the Portfolio's Investment Advisory Agreement is provided in the Portfolio's Form N-CSR filing with the SEC for the period ended June 30, 2025.
The Adviser
manages the Portfolio using a team of investment professionals. The team approach is used to create an environment that encourages the flow of investment ideas.
The portfolio managers within each team work together in a cohesive manner to develop and enhance techniques that drive the investment process for
the respective investment strategy. This approach requires portfolio managers to share a variety of responsibilities, including investment strategy and analysis, while retaining responsibility for the implementation of the strategy within any particular portfolio. The approach also enables each team to draw upon the resources of other groups within State Street Investment Management. The portfolio management team is overseen by State Street Investment Management's internal governance.
The professionals primarily responsible for the day-to-day management of the Portfolio are Todd Bean, Sean Lussier and Alexis Hayes.
Todd Bean, CFA, is a Managing Director of State Street Investment Management and the Adviser and Head of U.S. Traditional Cash Strategies in the Global Fixed Income Solutions Team. In his role, he oversees a team of portfolio managers while maintaining portfolio management responsibilities for several strategies. He began his career at State Street Corporation in 1999, joining the firm as an analyst in the firm's custody and accounting area. Following a period on the cash operations staff, Mr. Bean joined the Cash Management Group as a portfolio manager in 2004. He received Bachelor's degrees in Economics and Government from St. Lawrence University and a Master of Science in Finance from Northeastern University. He has earned the Chartered Financial Analyst (CFA) designation and is a member of CFA Society Boston, Inc.
Sean Lussier is a Vice President of State Street Investment Management and the Adviser and a Senior Portfolio Manager in the North America Cash Management Group within the Global Fixed Income Solutions Team. He has experience in managing registered taxable and tax-exempt money market funds, as well as U.S. and Canada domiciled separately managed cash and securities lending mandates. He has also been a member of the Global Fixed Income Beta Solutions Group and was responsible for the transition and management of several Canadian passive fixed income strategies. Prior to joining State Street Investment Management, Mr. Lussier worked as an account manager at State Street Bank and Trust where his primary responsibilities were the custody and accounting operations of the State Street Investment Management money market and securities lending collateral accounts. He holds a Bachelor of Science from Massachusetts College of Liberal Arts.
Alexis Hayes is an Assistant Vice President of State Street Investment Management and a dual Portfolio Manager and Credit Trader in the Global Fixed Income Solutions Team. Prior to joining State Street Investment Management in 2024, she spent three years as a Credit Trader at Wells Fargo. Ms. Hayes received a Bachelor of Science degree in Business Administration from the University of North Carolina at Chapel Hill's Kenan-Flagler Business School.
Additional information about the portfolio managers' compensation,
other accounts managed by the portfolio managers, and the portfolio managers' ownership of the Portfolio is available in the Part B.
The Administrator, Sub-Administrator, Custodian and
Transfer Agent
The Adviser serves as
administrator of the Portfolio. State Street, a subsidiary of State Street Corporation, serves as sub-administrator, custodian and transfer agent for the
Portfolio. The Portfolio pays an annual fee that is accrued daily and payable monthly for the administration, sub-administration, custody and transfer agency
services SSGA FM and State Street provide. For its role in providing administrative services to the Portfolio, the Adviser receives a portion of such fee paid by the Portfolio at the annual rate of 0.00075%.
The Trustees of the Trust oversee generally the operations of the Portfolio and the Trust. The Trust enters into contractual arrangements with various parties, including, among others, the Portfolio's investment adviser, custodian, transfer agent, and accountants, who provide services to the Portfolio. Shareholders are not parties to any such contractual arrangements or intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any investor any right to enforce them directly against the service providers or to seek any remedy under them directly against the service providers.
This Part A provides information concerning the Trust and the Portfolio that you should consider in determining whether to purchase shares of the Portfolio. Neither this Part A, nor the related Part B, is intended, or should be read, to be or to give rise to an agreement or contract between the Trust or the Portfolio and any investor, or to give rise to any rights in any investor or other person other than any rights under federal or state law that may not be
waived.
Advisory Fee
As compensation for the Adviser's services to the Portfolio, the
Portfolio is obligated to pay a fee of 0.025% of its average daily net assets. The Portfolio's investment adviser, SSGA FM, is contractually obligated until April
30, 2027 (i) to waive up to the full amount of the advisory fee payable by the Portfolio and/or (ii) to reimburse the Portfolio for expenses to the extent that Total Annual Fund Operating Expenses (exclusive of non-recurring account fees and/or extraordinary expenses) exceed 0.042% of average daily net assets on an annual basis. This waiver and/or reimbursement may not be terminated prior to April 30, 2027 except with approval of the Board.
Shares of the Trust are not registered under the 1933 Act or the securities law of any state and are sold in reliance upon exemptions from registration under such laws. Shares may not be transferred or resold without registration under the 1933 Act, except pursuant to an exemption from registration. However, shares of the Trust may be redeemed on any Business Day in accordance with the terms of the Trust's Master Trust Agreement and the Confidential Offering Memorandum relating to the Portfolio provided to shareholders.
Item 11. Shareholder Information
The Portfolio determines its NAV per share once each Business Day (as defined below), typically at 5:00 p.m. ET (the time when the Portfolio determines its NAV per share is referred to herein as the “Valuation Time”). The Portfolio reserves
the right to advance the time for accepting purchase or redemption orders and/or the Valuation Time on any day when the NYSE, bond markets (as recommended by The Securities Industry and Financial Markets Association
(“SIFMA”)) or any Federal Reserve bank close early, trading on the NYSE is restricted, an emergency arises or
as otherwise permitted by the SEC. The Portfolio reserves the right to continue to accept orders to purchase or redeem shares following the close of the NYSE on any day on which the NYSE closes early, provided that either the Federal Reserve or the bond markets remain open. In addition, the Board may, for any Business Day, decide to change the time as of which the Portfolio's NAV is calculated in response to new developments such as altered trading hours, or as otherwise permitted by the SEC.
Shares of the Portfolio are available for purchase each day on which the NYSE and State Street are open for business (a “Business Day”). In the event the NYSE does not open for business, the Portfolio may, but is not required to, open for purchase or redemption transactions. The Federal Reserve is closed on certain holidays on which the NYSE is open. These holidays are Columbus Day and Veterans Day. On these holidays, you will not be able to purchase shares by wiring Federal Funds because Federal Funds wiring does not occur on days when the Federal Reserve is closed. In the event that the Portfolio invokes the right to accept orders to purchase or redeem shares on any day that is not a Business Day, the Portfolio will post advance notice of these events at: www.statestreet.com/im.
There is no minimum initial or subsequent
investment amount for the Portfolio. Shares of Portfolio I are only offered to, and may only be held by, the Client Lending Funds in the State
Street Securities Lending Program. Purchases are effected on behalf of a Client Lending Fund by State Street, in its capacity as securities
lending agent for the Client Lending Fund. All shares of Portfolio I are purchased at the NAV per share of the Portfolio next determined after
the purchase is communicated to the Trust's transfer agent and determined to be in good order. Shares of Portfolio I may be redeemed at the NAV per share of the Portfolio next determined after the redemption is communicated to the Trust's transfer agent. Redemptions are effected on behalf of a Client Lending Fund by State Street, in its capacity as lending agent for the Client Lending Fund. With the exceptions noted below, the Portfolio values its investment portfolio at market value. This generally means that securities listed and traded principally on any national securities exchange are valued on the basis of the last sale price or, lacking any sales, at the closing bid price on the primary exchange on which the security is traded. United States securities traded principally over-the-counter and options are valued on the basis of the last reported bid price.
Because many fixed-income securities do not trade each day, last
sale or bid prices are frequently not available. Therefore, fixed-income securities may be valued using prices provided by a pricing service when such prices are
determined by the Adviser to reflect the market value of such securities.
International securities traded over the counter are valued on the basis of best bid or official
bid, as determined by the relevant securities exchange. In the absence of a last sale or best or official bid price, such securities may be valued on the basis of prices provided by a pricing service if those prices are believed to reflect the market value of such securities.
The Portfolio calculates its NAV per share to two decimal places.
The NAV per share of the Portfolio is determined once each Business Day as of 5:00 p.m. Eastern Time on a scheduled trading day on the NYSE, except for
Columbus Day and Veterans Day. In unusual circumstances, such as an emergency or an unscheduled close or halt of trading on the NYSE, the time at which share prices are determined may be changed.
If the Portfolio receives a redemption order in good form prior to 5:00 p.m. Eastern Time on a Business Day, the Portfolio typically expects to pay out redemption proceeds on that day regardless of the method the Portfolio uses to make such payment. If a redemption order is placed after 5:00 p.m. Eastern Time, the Portfolio typically expects to pay out redemption proceeds on the next Business Day. The Portfolio reserves the right to pay for redeemed shares within seven days after receiving a redemption order if, in the judgment of the Adviser, an earlier payment could adversely affect the Portfolio.
The transfer agent may temporarily delay for more than seven days the disbursement of redemption proceeds from the Portfolio account of a
“Specified
Adult” (as defined in Financial Industry Regulatory Authority, Inc. (“FINRA”) Rule 2165) based on a reasonable belief that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted, subject to certain conditions.
Under normal circumstances, Portfolio I expects to meet redemption requests by using cash or cash equivalents in its portfolio and/or selling portfolio assets to generate cash. Portfolio I also may pay redemption proceeds using cash obtained through borrowing arrangements that may be available from time to time.
Portfolio I may pay all or a portion of your redemption proceeds by giving you securities (for example, if the Portfolio reasonably believes that a cash redemption may have a substantial impact on Portfolio I and its remaining shareholders). A redemption is generally a taxable event for shareholders, regardless of whether the redemption is satisfied in cash or in kind. You may pay transaction costs (including through the realization of taxable gain) to dispose of the securities, and you may receive less for them than the price at which they were valued for purposes of the redemption. In addition, you will be subject to the market risks associated with such securities until such time as you choose to dispose of the security.
During periods of deteriorating or stressed market conditions,
when an increased portion of the Portfolio's portfolio may be comprised of less-liquid investments, or during extraordinary or emergency circumstances, Portfolio
I may be more likely to pay redemption proceeds with cash obtained through short-term borrowing arrangements (if available) or by giving you securities.
In accordance with certain federal regulations, the Trust is required to obtain, verify and record information that identifies each entity that applies to open an account, including, in certain cases, information concerning such entity's beneficial owners. For this reason, when you open (or change ownership of) an account, the Trust will request certain information, including your name, address and taxpayer identification number, which will be used to verify your identity. If you are unable to provide sufficient information to verify your identity, the Trust will not open an account for you. As required by law, the Trust may employ various procedures, such as comparing your information to fraud databases or requesting additional information and documentation from you, to ensure that the information supplied by you is correct. The Trust reserves the right to reject any purchase for any reason, including failure to provide the Trust with information necessary to confirm your identity as required by law.
Dividends and Distributions
Dividends on shares of Portfolio I will be declared and paid daily from Portfolio I's net investment income. Distributions of net short- and long-term capital gains, if any, will be made at least annually. Dividends will be processed pursuant to the securities lending authorization agreement between the Lending Fund and State Street. Generally, distributions will be declared and paid in December, if required, for Portfolio I to avoid imposition of a federal excise tax on undistributed capital gains. Portfolio I does not expect to make distributions that are eligible for taxation as long-term capital gains.
Frequent
Purchases and Redemptions of Portfolio Shares
The Board
has not adopted market timing policies and procedures with respect to the Portfolio. The Board has evaluated the risks of market timing activities by Portfolio
I's shareholders and has determined that due to the (i) nature of Portfolio I's portfolio holdings, (ii) nature of Portfolio I's shareholders, (iii) inability of
Portfolio I's shareholders to exchange into other mutual funds, and (iv) inability of Portfolio I's shareholders to direct transactions because cash moves in and
out of Portfolio I as securities are lent and returned, it is unlikely that (a) market timing would be attempted by Portfolio I's shareholders or (b) any attempts to market time Portfolio I by shareholders would result in a negative impact to Portfolio I or its shareholders.
U.S. Federal Income Tax Status
The following discussion is a summary of some important U.S. federal income tax considerations generally applicable to an investment in Portfolio I. Your investment in Portfolio I may have other tax implications. Please consult your tax advisor about federal, state, local, foreign or other tax laws applicable to you.
Portfolio I has elected to be treated as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) and intends each year to qualify
and to be eligible to be treated as such. A regulated investment company generally is not subject to tax at the corporate level on income and gains that are
timely distributed to shareholders. In order to qualify and be eligible for treatment as a regulated investment company, Portfolio I must, among other things, satisfy diversification, qualifying income and distribution requirements. Portfolio I's failure to qualify as a regulated investment company would result in fund-level taxation and, consequently, a reduction in income available for distribution to shareholders.
If Portfolio I fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or for the one-year period ending November 30 or December 31 if Portfolio I is eligible to elect and so elects), plus any retained amount from the prior year, Portfolio I will be subject to a nondeductible 4% excise tax on the undistributed amounts. A dividend paid to shareholders by Portfolio I in January of a year is generally deemed to have been paid by Portfolio I on December 31 of the preceding year, if the distribution was declared and payable to shareholders of record on a date in October, November or December of that preceding year. The Portfolio intends generally to make distributions sufficient to avoid imposition of the 4% excise tax although there can be no assurance it will do so. In addition, if Portfolio I were to qualify as a
“personal holding
company,” it may have to comply with additional requirements with respect to its distributions to shareholders in order to avoid
the fund-level tax under the personal holding company rules of the Code.
For U.S. federal income tax purposes, distributions of investment income generally are taxable to you as ordinary income. Taxes on distributions of capital gains generally are determined by how long Portfolio I owned (or is deemed to have owned) the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains (that is, the excess of net long-term capital gains over net short-term capital losses) from the sale of investments that Portfolio I owned for more than one year that are properly reported by Portfolio I as capital gain dividends generally will be treated as long-term capital gain includible in your net capital gain and taxed to individuals at reduced rates. The Internal Revenue Service (“IRS”) and the Department of the
Treasury have issued regulations that impose special rules in respect of capital gain dividends received through partnership interests constituting “applicable partnership
interests” under Section 1061 of the Code. Portfolio I does not expect to make distributions that
are eligible for taxation as long-term capital gains. Distributions of gains from investments that Portfolio I owned for one year or less generally will be taxable to you as ordinary income. Distributions are taxable to you even if they are paid from income or gains earned by the Portfolio before your investment (and thus were included in the price you paid for your shares). Distributions may also be subject to state, local or foreign taxes and are taxable whether you receive them in cash or reinvest them in additional shares.
Gain, if any, resulting from the redemption of Portfolio I shares generally will also be taxable to you as either short-term or long-term capital gain, depending upon how long you held such Portfolio I shares, except that, as and where Portfolio I is not a “publicly
offered” regulated investment company (as described below), in certain circumstances it is possible that the
proceeds of a redemption of Portfolio I shares may be taxable as dividend income or a return of capital. Investors in Portfolio I will not be eligible for the tax
treatment afforded to investments in money market funds, which (i) per
mits money
market fund shareholders to use a simplified method of accounting for gains and losses realized in their money market fund shares, allowing such shareholders
essentially to compute gain or loss on such shares by aggregating all purchase and sales within any taxable year, and (ii) generally excepts such sales from the
wash-sale rule of the Code.
A regulated investment company is considered “publicly
offered” if its shares are continuously offered pursuant to a public offering, its shares are regularly traded
on an established securities exchange, or it has at least 500 shareholders at all times during a taxable year. Because shares of Portfolio I are not so registered
or traded, and Portfolio I is not expected to have at least 500 shareholders at all times during the taxable year, a portion or all the proceeds of redemptions of
Portfolio I shares may be treated as dividends. If a shareholder redeems fewer than all of its shares, such shareholder may be treated as having received a distribution under Section 301 of the Code (a “Section 301 distribution”) unless the
redemption is treated as being either (i) “substantially disproportionate” with respect to such shareholder by satisfying certain numerical tests relating to the reduction in the redeeming shareholder's percentage interest, and percentage voting interest, in Portfolio I, or (ii) otherwise “not essentially equivalent to a dividend” under the relevant rules of the Code. For any period during which Portfolio I has a single shareholder, all redemption distributions will be treated as Section 301 distributions. A Section 301 distribution is not treated as a sale or exchange giving rise to a capital gain or loss, but rather is treated as a dividend to the extent supported by Portfolio I's current and accumulated earnings and profits, with the excess treated as a return of capital reducing the shareholder's tax basis in Portfolio I shares, and thereafter as capital gain.
In addition, in the event Portfolio I is not considered publicly offered, certain shareholders will be deemed to receive distributions equal to their allocable shares of certain expenses paid by Portfolio I. Very generally, expenses that are deemed distributed by Portfolio I include those paid or incurred during a calendar year that are deductible in determining Portfolio I's investment company taxable income for a taxable year beginning or ending within that calendar year, including in particular its advisory fee, but excluding those expenses incurred by virtue of Portfolio I's organization as a registered investment company (such as its registration fees, trustees' fees, expenses of periodic trustees' and shareholders' meetings, transfer agent fees, certain legal and accounting fees, the expenses of shareholder communications required by law, and certain other expenses). Shareholders of Portfolio I that will be deemed to have received distributions of such expenses include (i) individuals taxable in the U.S. or persons calculating their taxable income in the same way as do such individuals and (ii) pass-through entities having such an individual or person or another pass-through entity as an interest holder or beneficiary. Such deemed distributions of expenses are not deductible under current law by those direct or indirect shareholders who are individuals (or entities that compute their taxable income in the same manner as an individual). The deemed distributions of expenses could as a result increase a shareholder's net taxes owed, lowering Portfolio I's effective yield with respect to such a shareholder.
An additional 3.8% Medicare contribution tax is imposed on the “net investment
income” of individuals, estates and trusts to the extent their income exceeds certain threshold amounts. Net
investment income generally includes for this purpose dividends paid by the Portfolio, including any capital gain dividends, and net gains recognized on the
redemption or other taxable disposition of shares of the Portfolio.
Portfolio I's income from or the proceeds of dispositions of its investments in non-U.S. assets may be subject to non-U.S. withholding or other taxes, which will reduce the yield on those investments. Shareholders generally will not be entitled separately to claim a credit or deduction with respect to foreign taxes incurred by the Portfolio. If shareholders are not entitled to claim such a credit or deduction, the Portfolio's taxable income will be reduced by the foreign taxes paid or withheld. Shareholders that are not subject to U.S. federal income tax, and those who invest in the Portfolio through tax-advantaged accounts (including those who invest through individual retirement accounts or other tax-advantaged retirement plans), generally will receive no benefit from any tax credit or deduction passed through by Portfolio I, if any.
Certain of Portfolio I's investment practices, including
derivative transactions and investments in debt obligations issued or purchased at a discount, will be subject to special and complex U.S. federal income tax
provisions. These special rules may affect the timing, character, and/or amount of Portfolio I's distributions, and may require Portfolio I to sell its
investments at a time when it is not advantageous to do so.
If you are
not a U.S. person, dividends paid by Portfolio I that Portfolio I properly reports as capital gain dividends, short-term capital gain dividends, or
interest-related dividends are not subject to withholding of U.S. federal income tax, provided that certain other requirements are met. Portfolio I is permitted,
but is not required, to report any part of its dividends as are eligible for such treatment. Portfolio I's dividends other than those Portfolio I so reports as
capital gain dividends, short-term capital gain dividends, or interest-related dividends generally will be subject to a U.S. withholding tax at a 30% rate (or lower applicable treaty rate).
The U.S. Treasury and IRS generally require Portfolio I to obtain information sufficient to identify the status of each shareholder under Sections 1471-1474 of the Code and the U.S. Treasury and IRS guidance issued thereunder (collectively,
“FATCA”) or under an applicable intergovernmental agreement between the United States and a foreign government.
Cost Basis Reporting. U.S. Treasury regulations mandate cost basis reporting to shareholders and the IRS for redemptions of
Portfolio shares. With respect to shares acquired and held directly through the Portfolio and not through a financial intermediary, the Portfolio will use a
default average cost basis methodology for tracking and reporting cost basis on the Portfolio shares, unless another cost basis reporting methodology is requested in
writing.
Item 12. Distribution
Arrangements
Shares of Portfolio I are being
offered primarily to Lending Funds in connection with the State Street Securities Lending Program. Shares of Portfolio I are sold in private placement
transactions that do not involve any “public offering” within
the meaning of Section 4(a)(2) of the 1933 Act. Shares of the Trust are sold directly by the Trust without a distributor and are not subject to a sales load or redemption fee. Assets of Portfolio I are not subject to fees permitted pursuant to Rule 12b-1 under the 1940 Act.
PART
A
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
State Street Navigator Securities Lending Portfolio II
Because the State Street Navigator Securities Lending Trust (the “Trust”) is only registered under the Investment Company Act of 1940, as amended (the “1940 Act”), responses to Items 1, 2, 3, 4 and 13 of Form N-1A have been omitted. Item 8 is omitted because it is not
applicable.
The Trust is an open-end management investment company organized as
a business trust under the laws of the Commonwealth of Massachusetts on June 15, 1995.
The Trust issues beneficial interests of its series solely in
private placement transactions that do not involve any “public offering” within the meaning of Section 4(a)(2) of the Securities Act of 1933, as amended (the
“1933 Act”). This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to
buy, any
“security” within the meaning
of the 1933 Act.
State Street Bank and Trust
Company (“State
Street”) has established a securities lending program for its clients (the “State Street Securities Lending Program”). Each client that participates in the State Street Securities Lending Program as a lender (each, a
“Client Lending
Fund” and collectively, the “Client Lending
Funds”) enters into a securities lending authorization agreement with State Street. Under such agreement, State Street is authorized to invest the cash collateral securing loans of securities of each Client Lending Fund in a variety of investments, as consistent with applicable law. Shares of the Trust are offered primarily to, and held by, the Client Lending Funds in the State Street Securities Lending Program, and may, on a case-by-case basis, be offered to and held by institutional investors that participate in a third-party lending agent program (“Third-Party Lending Funds” and “Third-Party Securities Lending
Program(s)”). The Client Lending Funds and the Third-Party Lending Funds are sometimes referred to herein collectively as the “Lending Funds”; the State Street Securities Lending Program and the Third-Party Securities Lending Program are sometimes
referred to herein collectively as the “Securities Lending Program.”
SSGA Funds Management, Inc. (“SSGA FM” or the
“Adviser”) serves as the investment adviser to State Street Navigator Securities Lending Portfolio II
(“Portfolio
II” or
the
“Portfolio”), a series of the Trust. The Adviser and certain other affiliates of State Street Corporation make up State Street
Investment Management.
The professionals
primarily responsible for the day-to-day management of the Portfolio are Todd Bean, Sean Lussier, and Alexis Hayes. Todd Bean and Sean Lussier have served as
portfolio managers of the Portfolio since organization in 2018. Alexis Hayes has served as a portfolio manager of the Portfolio since 2026.
Todd Bean, CFA, is a Managing Director of the Adviser and Head of
U.S. Traditional Cash Strategies in the Global Fixed Income Solutions Team. He joined the Adviser in 2002.
Sean Lussier is a Vice President of the Adviser and a Senior
Portfolio Manager in the Global Fixed Income Solutions Team. He joined the Adviser in 2004.
Alexis Hayes is an Assistant Vice President of the Adviser and a
dual Portfolio Manager and Credit Trader in the Global Fixed Income Solutions Team. She joined the Adviser in 2024.
Item 6. Purchase and Sale of Portfolio Shares
There is no minimum initial or subsequent investment amount for the
Portfolio.
Shares are offered solely in
private placement transactions that do not involve any “public offering” within the
meaning of Section 4(a)(2) of the 1933 Act.
Shares of
Portfolio II are only offered to, and may only be held by, the Lending Funds in the Securities Lending Program. Shares of Portfolio II are available for purchase
each day on which the New York Stock Exchange (“NYSE”) and State Street are
open for business (a “Business Day”). Purchases are effected on behalf of a Client Lending Fund by State Street, in its capacity as securities lending agent for the Lending Fund. All shares of Portfolio II are purchased at the net asset value (“NAV”) per share of the Portfolio next determined after the purchase is communicated to the Trust's transfer agent and determined to be in good order. Redemptions are effected on behalf of a Client Lending Fund by State Street, in its capacity as securities lending agent for the Client Lending Fund.
Shares of Portfolio II may be redeemed on each Business Day at the NAV per share of the Portfolio next determined after the redemption is communicated to the Trust's transfer agent.
Under normal circumstances, the Portfolio expects to meet redemption requests by using cash or cash equivalents in its portfolio and/or selling portfolio assets to generate cash. The Portfolio also may pay redemption proceeds using cash obtained through borrowing arrangements that may be available from time to time.
The Portfolio intends to make distributions that may be taxed as ordinary income.
Item 9. Investment Objective, Principal Investment Strategies,
Related Risks, and Disclosure of Portfolio Holdings
The investment objective, principal strategies, risks and portfolio holdings disclosure policy of Portfolio II are described below. The investment objective of Portfolio II may be changed at any time by the Board of Trustees of the Trust (the “Board”) upon at least sixty (60) days' prior written notice to shareholders of the Portfolio. The Board may change the Portfolio's investment strategies and other policies without shareholder approval, except as otherwise indicated. See the Part B of the Registration Statement (“Part B”) for a description of certain
fundamental investment restrictions for the Portfolio. The Portfolio's investment adviser is SSGA FM, a wholly-owned subsidiary of State Street Global
Advisors, Inc.
State Street
Navigator Securities Lending Portfolio II
The Portfolio seeks current yield to
the extent consistent with maintaining liquidity and the preservation of principal while providing a market rate of return.
Principal Investment Strategies
Portfolio II is not a money market fund and it will
not seek to use the amortized cost method of valuation, which may be used by certain money market funds, to seek to maintain a stable NAV per
share. Portfolio II is not subject to the investment and other requirements that apply to money market funds and it may invest in a manner
that is inconsistent with the rules governing money market funds. For
example, Portfolio II is not subject to the regulatory requirements applicable to money market funds in relation to credit quality, maturity, liquidity,
diversification, or other requirements imposed on money market funds. The investment return and principal value of an investment in Portfolio II will fluctuate and a shareholder's shares, when redeemed, may be worth more or less than their original cost. Investments in Portfolio II are neither insured nor guaranteed by the U.S. government or State Street.
The Portfolio attempts to meet its investment objective by
investing in a broad range of money market instruments including, among other things, U.S. government securities (including U.S. Treasury bills, notes and bonds
and other securities issued or guaranteed as to principal or interest by the U.S. government or its agencies or instrumentalities); certificates of deposit and time deposits of U.S. and foreign banks; commercial paper and other high quality obligations of U.S. or foreign companies, including bank obligations; asset-backed securities, including asset backed commercial paper; mortgage-related securities; and repurchase agreements. These instruments may bear fixed, variable or floating rates of interest or may be zero-coupon securities. The Portfolio also may invest in shares of money market funds, including funds advised by the Adviser. A substantial portion of the Portfolio may be invested in securities that are issued or traded pursuant to exemptions from registration under the federal securities laws. The Portfolio may purchase securities on a forward commitment basis.
The Portfolio may invest in U.S. and foreign bank time deposits (including European Certificates of Deposit (“ECDs”), European Time Deposits
(“ETDs”) and Yankee Certificates of Deposit
(“YCDs”)) and banker acceptances. ECDs are U.S. dollar-denominated certificates of deposit issued by a bank
outside of the United States. ETDs are U.S. dollar-denominated deposits in foreign branches of U.S. banks and foreign banks. YCDs are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks. These instruments have different risks than those associated with the obligations of U.S. banks operating in the United States.
In managing Portfolio II, the Adviser follows a disciplined investment process, basing its investment decisions on the relative attractiveness of different money market instruments. Among other things, the Adviser conducts its own credit analyses of potential investments and portfolio holdings, and relies substantially on a dedicated short-term credit research team. The Adviser's view of the attractiveness of an instrument may vary depending on a variety of factors, including, for example, the general level of interest rates, imbalances of supply and demand in the market, the Portfolio's overall weighted average maturity (“WAM”) and weighted average life
(“WAL”) and the credit quality of the obligors.
The Portfolio invests only in U.S. dollar-denominated, short-term, high quality debt obligations (generally, securities that have remaining maturities of 397 calendar days or less and either have been rated A-1 or A-2 by Standard & Poor's, P-1 or P-2 by Moody's, F1 or F2 by Fitch, or are considered by the Adviser to be of comparable quality). The Portfolio generally holds at least 25% of its total assets in securities offering daily liquidity and at least 50% of its total assets in securities offering weekly liquidity. The Portfolio will maintain a WAM of sixty (60) days or less and a WAL of one hundred and twenty (120) days or less. The Portfolio will not purchase any security with a remaining maturity that exceeds three hundred and ninety seven (397) days. For purposes of this restriction and for purposes of determining the Portfolio's WAM or WAL, a security's final maturity date will be used, unless the security is a floating rate or variable rate security in which case the security may be deemed to have a maturity equal to the period remaining until the next readjustment of its interest rate, or, if it is a government security or short-term floating rate security, one day. Securities with demand features may be deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand.
Portfolio
II will only invest in floating rate instruments if the instrument's interest rate is tied to a publicly available index or other measure, such as the Secured
Overnight Funding Rate
(“SOFR”), the federal funds rate, U.S. or non-U.S. prime interest rates, and Treasury bill yields. The
Portfolio will not invest more than 5% of its total assets in illiquid securities (i.e., securities that cannot be sold or disposed of in the ordinary course of
business at approximately their carrying values within seven days), including repurchase agreements and time deposits of more than seven days' duration.
The Portfolio principally invests in “bonds,” which include debt securities and fixed income and income-producing instruments of any kind issued by governmental or private-sector entities. Most bonds consist of a security or instrument having one or more of the following characteristics: a fixed-income security, a security issued at a discount to its face value, a security that pays interest, whether fixed, floating or variable, or a security with a stated principal amount that requires repayment of some or all of that principal amount to the holder of the security. The Adviser interprets the term bond broadly as an instrument or security evidencing what is commonly referred to as an IOU rather than evidencing the corporate ownership of equity unless that equity represents an indirect or derivative interest in one or more debt securities. The Portfolio may invest in stripped securities, which are U.S. Treasury bonds and notes, the unmatured interest coupons of which have been separated from the underlying obligation. Stripped securities are zero coupon obligations that are normally issued at a discount from their face value. The Portfolio may invest no more than 25% of its assets in stripped securities that have been stripped by their holder, which is typically a custodian bank or investment brokerage firm.
Portfolio II is used exclusively for the investment of cash received as collateral for securities loans. Accordingly, Portfolio II may experience significant redemptions in response to declines in the value of securities on loan or the quantity of loans outstanding from time to time. If the Portfolio is required to sell securities to meet significant redemptions during a period of market disruption, the Portfolio may experience losses. The rate of income of Portfolio II will vary from day-to-day, depending on short-term interest rates.
Principal Risks of Investing in Portfolio II
Note: Portfolio II is not operated as a money market fund pursuant to Rule 2a-7 under the 1940 Act.
Its net asset value
(“NAV”) per share may fluctuate. A shareholder's shares, when redeemed, may be worth more or less than their original cost.
Investments in Portfolio II are neither insured nor guaranteed by the U.S. government or State Street.
The Portfolio is subject to the following principal risks. You could lose money by investing in the Portfolio. Certain risks relating to instruments and strategies used in the management of the Portfolio are placed first. The significance of any specific risk to an investment in the Portfolio will vary over time, depending on the composition of the Portfolio's portfolio, market conditions, and other factors. You should read all of the risk information presented below carefully, because any one or more of these risks may result in losses to the Portfolio. Because the share price of the Portfolio will fluctuate, when you sell your shares, they may be worth more or less than what you originally paid for them. An investment in Portfolio II is subject to investment risks,
including possible loss of principal, is not a deposit in State Street or any other bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation (the “FDIC”) or any other governmental agency. The Portfolio may not achieve its investment
objective. Investors should consult their own advisers as to the role of the Portfolio in their overall investment programs.
Market Risk. Market prices of investments held by the Portfolio will go up or down,
sometimes rapidly or unpredictably. The Portfolio's investments are subject to changes in general economic conditions, general market fluctuations and the risks inherent in investment in securities markets. Investment markets can be volatile, and prices of investments can change substantially due to various factors, including, but not limited to, economic growth or recession, changes in interest rates, inflation, changes in actual or perceived creditworthiness of issuers and general market liquidity. Even if general economic conditions do not change, the value of an investment in the Portfolio could decline if the particular industries, sectors or companies in which the Portfolio invests do not perform well or are adversely affected by events. Further, legal, political, regulatory and tax changes also may cause fluctuations in markets and securities prices. Local, regional or global events such as war, military conflicts, acts of terrorism, trade policy changes or disputes, the threat or actual imposition of tariffs, natural disasters, public health issues, or other events could have a significant impact on the Portfolio and its investments. Due to the interconnectedness of economies and financial markets throughout the world, if the Portfolio invests in securities of issuers located in or with significant exposure to countries experiencing economic and financial difficulties, the value and liquidity of the Portfolio's investments may be negatively affected. A widespread out
break of an
infectious illness and efforts to contain its spread, may result in market volatility, inflation, reduced liquidity of certain instruments, disruption in the
trading of certain instruments, and systemic economic weakness. The foregoing could impact the Portfolio and its investments and result in disruptions to the
services provided to the Portfolio by its service providers.
Debt Securities Risk. The values of debt securities may increase or decrease as a
result of the following: market fluctuations, changes in interest rates, actual or perceived inability or unwillingness of issuers, guarantors or liquidity
providers to make scheduled principal or interest payments or illiquidity in debt securities markets. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. A rising interest rate environment may cause the value of the Portfolio's fixed income securities to decrease, an adverse impact on the liquidity of the Portfolio's fixed income securities, and increased volatility of the fixed income markets. During periods when interest rates are at low levels, the Portfolio's yield can be low, and the Portfolio may have a negative yield (i.e., it may lose money on an operating basis). To the extent that interest rates fall, certain underlying obligations may be paid off substantially faster than originally anticipated. If the principal on a debt obligation is prepaid before expected, the prepayments of principal may have to be reinvested in obligations paying interest at lower rates. During periods of falling interest rates, the income received by the Portfolio may decline. Changes in interest rates will likely have a greater effect on the values of debt securities of longer durations. Returns on investments in debt securities could trail the returns on other investment options, including investments in equity securities. High levels of inflation and/or a significantly changing interest rate environment can lead to heightened levels of volatility and reduced liquidity.
In general, bond prices fall when interest rates rise. During periods of rising interest rates, a fund's yield generally is lower than prevailing market rates. In periods of falling interest rates, a fund's yield generally is higher than prevailing market rates. Typically, the more distant the expected cash flow that a fund is to receive from a security, the more sensitive the market value of the security is to movements in interest rates. If a fund owns securities that have variable or floating interest rates, as interest rates fall, the income a fund receives from those securities also will fall. Rising interest rates could have unpredictable effects on the markets and may expose fixed income and related markets to heightened volatility.
Adverse market or economic conditions or investor perceptions may result in little or no trading activity in one or more particular securities, thus making it difficult to determine their values. A fund holding those securities may have to value them at prices that reflect unrealized losses, or, if it elects to sell them, it may have to accept lower prices than the prices at which it is then valuing them. A fund also may not be able to sell the securities at any price. For certain fixed income securities, an increase in interest rates may lead to increased redemptions and increased portfolio turnover, which could reduce liquidity for certain portfolio investments, adversely affect values, and increase a fund's costs. If dealer capacity in fixed income markets is insufficient for market conditions, liquidity may be further inhibited and volatility may increase.
Section 4(a)(2) Commercial Paper and Rule 144A
Securities Risk. The Portfolio may invest in commercial paper issued in reliance on the
private placement exemption from registration afforded by Section 4(a)(2) of the 1933 Act. This commercial paper is commonly called “Section 4(a)(2) paper.” The Portfolio may also invest in securities that may be offered and sold only to “qualified
institutional buyers” under Rule 144A of the 1933 Act (“Rule
144A securities”).
Section 4(a)(2) paper is sold to institutional investors who must agree to purchase the paper for investment and not with a view to public distribution. Any resale by the purchaser must be in a transaction exempt from the registration requirements of the 1933 Act. Section 4(a)(2) paper normally is resold to other institutional investors like the Portfolio through or with the assistance of the issuer or investment dealers that make a market in Section 4(a)(2) paper. As a result, it suffers from liquidity risk, the risk that the securities may be difficult to value because of the absence of an active market and the risk that it may be sold only after considerable expense and delay, if at all. Rule 144A securities generally must be sold only to other qualified institutional buyers.
Section 4(a)(2) paper and Rule 144A securities will not be
considered illiquid for purposes of the Portfolio's limitation on illiquid securities if the Adviser (pursuant to guidelines adopted by the Board) determines that
a liquid trading market exists for the securities in question. There can be no assurance that a liquid trading market will exist at any time for any particular Section 4(a)(2) paper or Rule 144A securities.
Repurchase Agreement Risk. A repurchase agreement is an agreement to buy a security
from a seller at one price and a simultaneous agreement to sell it back to the original seller at an agreed-upon price, typically representing the purchase price plus interest. Repurchase agreements may be viewed as loans made by the Portfolio which are collateralized by the securities subject to repurchase. The Portfolio's investment return on such transactions will depend on the counterparty's willingness and ability to perform its obligations under a repurchase agreement. If the Portfolio's counterparty should default on its obligations and the Portfolio is delayed or prevented from recovering the collateral, or if the value of the collateral is insufficient, the Portfolio may realize a loss. The SEC has finalized new rules that will require certain transactions involving U.S. Treasuries, including repurchase agreements, to be centrally cleared. Historically, such transactions have not been required to be cleared and voluntary clearing of such transactions has generally been limited. Compliance with these rules is expected to be required in the middle of 2027. Although the impact of these rules on the Portfolio is difficult to predict, the new clearing requirement could make it more difficult for the Portfolio to execute certain investment strategies, reduce the availability or increase the costs of such transactions and may adversely affect the Portfolio's performance.
Banking Companies Risk. The performance of bank stocks may be affected by extensive
governmental regulation, which may limit the amounts and types of loans and other financial commitments they can make, the interest rates and fees they can charge, and the amount of capital they must maintain. The impact of changes in regulations and capital requirements on a banking company cannot be predicted and may negatively impact such banking company. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers can negatively impact banking companies. To the extent a bank's portfolio of loans or investments are concentrated in a particular industry, the bank may be vulnerable to economic conditions that affect that industry. Banks may also be subject to severe price competition. Competition among banking companies is high and failure to maintain or increase market share may result in lost market value.
Focused Investment Risk. To the extent the Portfolio invests a large percentage of its assets in securities within the same
country, state, region, or economic sector its investment strategy could result in more risk or greater volatility in returns than if the Portfolio's investments were less focused. Similarly, to the extent the Portfolio holds investments with closely correlated market prices, it will be subject to greater risk than a fund with investments that are not as closely correlated. Changes in the value of a single security or issuer or the impact of a single economic, political, or regulatory occurrence may have a greater adverse impact on the Portfolio's net asset value.
A fund that invests in the securities of a small number of issuers has greater exposure to adverse developments affecting those issuers and a resulting decline in the market price of those issuers' securities as compared to a fund that invests in the securities of a larger number of issuers. Companies that share common characteristics are often subject to similar business risks and regulatory burdens and often react similarly to specific economic, market, political or other developments.
Similarly, funds having a significant portion of their assets in investments tied economically to a particular geographic region, country, or market (e.g., emerging markets) or to sectors within a region, country, or market have more exposure to regional and country economic risks than do funds whose investments are more geographically diverse.
U.S. Government Securities Risk. U.S. government securities, such as Treasury bills, notes and bonds and mortgage-backed securities
guaranteed by the Government National Mortgage Association (“Ginnie Mae”), are supported by the
full faith and credit of the United States; others are supported by the right of the issuer to borrow from the U.S. Treasury; others are supported by the discretionary authority of the U.S. government to purchase the agency's obligations; and still others are supported only by the credit of the issuing agency, instrumentality, or enterprise. Although U.S. government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National
Mortgage Association (“Fannie Mae”) may be chartered or
sponsored by Congress, they are not funded by Congressional appropriations, and their securities are not issued by the U.S. Treasury nor supported by the full
faith and credit of the U.S. government. There is no assurance that the U.S. government would provide financial support to its agencies and instrumentalities if not required to do so. In addition, certain governmental entities have been subject to regulatory scrutiny regarding their accounting policies and practices and other concerns that may result in legislation, changes in regulatory oversight and/or other consequences that could adversely affect the credit quality, availability, or investment character of securities issued by these entities. The value and liquidity of U.S. government securities may be affected adversely by changes in the ratings of those securities. Securities issued by the U.S. Treasury historically have been considered to
present
minimal credit risk. The downgrade in the long-term U.S. credit rating by at least two major rating agencies has introduced greater uncertainty about the ability
of the U.S. to repay its obligations. Further credit rating downgrades or a U.S. credit default could decrease the value and increase the volatility of the Portfolio's
investments.
Mortgage-Related and
Other Asset-Backed Securities Risk. Investments in mortgage-related and other asset-backed
securities are subject to the risk of significant credit downgrades, illiquidity, and defaults to a greater extent than many other types of fixed income investments. The liquidity of mortgage-related and asset-backed securities may change over time. Mortgage-related securities represent a participation in, or are secured by, mortgage loans. Other asset-backed securities are typically structured like mortgage-related securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include, for example, items such as motor vehicle installment sales or installment loan contracts, leases on various types of real and personal property, and receivables from credit card agreements. During periods of falling interest rates, mortgage-related and other asset-backed securities, which typically provide the issuer with the right to prepay the security prior to maturity, may be prepaid, which may result in the Portfolio having to reinvest the proceeds in other investments at lower interest rates. During periods of rising interest rates, the average life of mortgage-related and other asset-backed securities may extend because of slower-than expected principal payments. This may lock in a below market interest rate, increase the security's duration and interest rate sensitivity, and reduce the value of the security. As a result, mortgage-related and other asset-backed securities may have less potential for capital appreciation during periods of declining interest rates than other debt securities of comparable maturities, although they may have a similar risk of decline in market values during periods of rising interest rates. Prepayment rates are difficult to predict and the potential impact of prepayments on the value of a mortgage-related or other asset-backed security depends on the terms of the instrument and can result in significant volatility. The price of a mortgage-related or other asset-backed security also depends on the credit quality and adequacy of the underlying assets or collateral. Mortgage-related or other asset-backed securities issued by non-governmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) will generally entail greater credit risk than obligations guaranteed by the U.S. government. Defaults on the underlying assets, if any, may impair the value of a mortgage-related or other asset-backed security. For some asset-backed securities in which the Portfolio invests, such as those backed by credit card receivables, the underlying cash flows may not be supported by a security interest in a related asset. Moreover, the values of mortgage-related and other asset-backed securities may be substantially dependent on the servicing of the underlying asset pools, and are therefore subject to risks associated with the negligence or malfeasance by their servicers and to the credit risk of their servicers. In certain situations, the mishandling of related documentation may also affect the rights of securities holders in and to the underlying collateral. There may be legal and practical limitations on the enforceability of any security interest granted with respect to underlying assets, or the value of the underlying assets, if any, may be insufficient if the issuer defaults.
In a “forward roll” transaction, a Portfolio will sell a mortgage-related security to a bank or other
permitted entity and simultaneously agree to purchase a similar security from the institution at a later date at an agreed upon price. The mortgage securities that are purchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories than those sold. The values of such transactions will be affected by many of the same factors that affect the values of mortgage-related securities generally. In addition, forward roll transactions may have the effect of creating investment leverage in a Portfolio.
Call/Prepayment Risk. Call/prepayment risk is the
risk that an issuer will exercise its right to pay principal on an obligation held by the Portfolio earlier than expected or required. This may occur, for
example, when there is a decline in interest rates, and an issuer of bonds or preferred stock redeems the bonds or stock in order to replace them with
obligations on which it is required to pay a lower interest or dividend rate. It may also occur when there is an unanticipated increase in the rate at which mortgages or other receivables underlying mortgage- or asset-backed securities held by the Portfolio are prepaid. In any such case, the Portfolio may be forced to invest the prepaid amounts in lower-yielding investments, resulting in a decline in the Portfolio's income.
Counterparty Risk. The Portfolio will be subject to credit risk with respect to the
counterparties with which the Portfolio enters into repurchase agreements and other transactions. If a counterparty fails to meet its contractual obligations, the
Portfolio may be unable to terminate the transaction, and it may be delayed or prevented from realizing on any collateral in the event of a bankruptcy or insolvency proceeding relating to the counterparty.
Credit Risk. Credit risk is the risk that an
issuer, guarantor or liquidity provider of a fixed-income security held by the Portfolio may be unable or unwilling, or may be perceived (whether by market
participants, ratings agencies, pricing services or otherwise) as unable or unwilling, to make timely principal and/or interest payments, or to otherwise honor
its
obligations. It includes the risk that the security will be downgraded by a credit rating agency;
generally, lower credit quality issuers present higher credit risks. An actual or perceived decline in creditworthiness of an issuer of a fixed-income security held by the Portfolio may result in a decrease in the value of the security. It is possible that the ability of an issuer to meet its obligations will decline substantially during the period when the Portfolio owns securities of the issuer or that the issuer will default on its obligations or that the obligations of the issuer will be limited or restructured.
The credit rating assigned to any particular investment does not
necessarily reflect the issuer's current financial condition and does not reflect an assessment of an investment's volatility or liquidity. Securities rated in
the lowest category of investment-grade are considered to have speculative characteristics. If a security held by the Portfolio loses its rating or its rating is downgraded, the Portfolio may nonetheless continue to hold the security in the discretion of the Adviser. In the case of asset-backed or mortgage-related securities, changes in the actual or perceived ability of the obligors on the underlying assets or mortgages to make payments of interest and/or principal may affect the values of those securities.
Eurodollar Certificates of Deposit, Eurodollar
Time Deposits and Yankee Certificates of Deposit Risk. The Portfolio may invest in ECDs,
ETDs and YCDs. ECDs and ETDs are U.S. dollar-denominated certificates of deposit and time deposits, respectively, issued by foreign branches of domestic banks and
foreign banks. YCDs are U.S. dollar denominated certificates of deposit issued by U.S. branches of foreign banks.
Different risks than those associated with the obligations of
domestic banks may exist for ECDs, ETDs and YCDs because the banks issuing these instruments, or their domestic or foreign branches, are not necessarily subject
to the same regulatory requirements that apply to domestic banks, such as loan limitations, examinations and reserve, accounting, auditing, recordkeeping and public reporting requirements. Obligations of foreign issuers also involve risks such as future unfavorable political and economic developments, withholding or other tax, seizures of foreign deposits, currency controls, interest limitations, and other governmental restrictions that might affect repayment of principal or payment of interest, or the ability to honor a credit commitment.
Extension Risk. During periods of rising interest rates, the average life of certain types of securities may be extended
because of slower-than-expected principal payments. This may increase the period of time during which an investment earns a below-market interest rate, increase the security's duration and reduce the value of the security. Extension risk may be heightened during periods of adverse economic conditions generally, as payment rates decline due to higher unemployment levels and other factors.
Financial Institutions Risk. Some instruments are issued or guaranteed by financial
institutions, such as banks and brokers, or are collateralized by securities issued or guaranteed by financial institutions. Changes in the creditworthiness of
any of these institutions may adversely affect the values of instruments of issuers in financial industries. Financial institutions may be particularly sensitive to certain economic factors such as interest rate changes, adverse developments in the real estate market, fiscal and monetary policy and general economic cycles. Adverse developments in banking and other financial industries may cause the Portfolio to underperform relative to other funds that invest more broadly across different industries or have a smaller exposure to financial institutions. Other adverse developments that affect financial institutions or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, may reduce liquidity in the market generally or have other adverse effects on the economy or the Portfolio. In addition, the Portfolio may not be able to identify all potential solvency or stress concerns with respect to a financial institution or to transfer assets from one bank or financial institution to another in a timely manner in the event such bank or financial institution comes under stress or fails. Changes in governmental regulation and oversight of financial institutions may have an adverse effect on the financial condition or the earnings or operations of a financial institution and on the types and amounts of businesses in which a financial institution may engage. An investor may be delayed or prevented from exercising certain remedies against a financial institution. The amount of the Portfolio's assets that may be invested in any financial institution, or financial institutions generally, may be limited by applicable law.
Forward Commitments Risk. The Portfolio may enter into contracts to purchase securities for a fixed price at a future date
beyond customary settlement time (“forward commitments”), consistent with the Portfolio's ability to manage its investment portfolio and meet redemption requests. Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Portfolio's other assets. Where such purchases are made through dealers, the Portfolio relies on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the Portfolio of an advantageous yield or price.
Although
the Portfolio will generally enter into forward commitments with the intention of acquiring securities for its portfolio or for delivery pursuant to options
contracts it has entered into, the Portfolio may dispose of a commitment prior to settlement if the Adviser deems it appropriate to do so. The Portfolio may
realize short-term profits or losses upon the sale of forward commitments. When effecting such transactions, cash or other liquid assets (such as liquid high
quality debt obligations) held by the Portfolio of a dollar amount sufficient to make payment for the portfolio securities to be purchased will be segregated on the Portfolio's records at the trade date and maintained until the transaction is settled. Such segregated assets will be marked to market on a daily basis, and if the market value of such assets declines, additional cash or assets will be segregated so that the market value of the segregated assets will equal the amount of such the Portfolio's obligations. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, or if the other party fails to complete the transaction.
Illiquid Securities Risk. The Portfolio will not
invest more than 5% of its total assets in illiquid securities (i.e., securities that cannot be sold or disposed of in the ordinary course of business
at approximately their carrying values within seven days), including repurchase agreements and time deposits of more than seven days' duration. The absence of a
regular trading market for illiquid securities imposes additional risks on investments in these securities. Illiquid securities may be difficult to value and may often be disposed of only after considerable expense and delay.
Income Risk. The Portfolio's income may decline due to falling interest rates or other factors. Issuers of securities held by the Portfolio may call or redeem the securities during periods of falling interest rates, and the Portfolio would likely be required to reinvest in securities paying lower interest rates. If an obligation held by the Portfolio is prepaid, the Portfolio may have to reinvest the prepayment in other obligations paying income at lower rates. A reduction in the income earned by the Portfolio may limit the Portfolio's ability to achieve its objective.
Interest Rate Risk. Interest rate risk is the
risk that the securities held by the Portfolio will decline in value because of increases in market interest rates. Duration is a measure used to determine the
sensitivity of a security's price to changes in interest rates. Debt securities with longer durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than debt securities with shorter durations. For example, the value of a security with a duration of five years would be expected to decrease by 5% for every 1% increase in interest rates. Falling interest rates also create the potential for a decline in the Portfolio's income and yield. Interest-only and principal-only securities are especially sensitive to interest rate changes, which can affect not only their prices but can also change the income flows and repayment assumptions about those investments. Variable and floating rate securities also generally increase or decrease in value in response to changes in interest rates, although generally to a lesser degree than fixed-rate securities. A substantial increase in interest rates may also have an adverse impact on the liquidity of a security, especially those with longer durations. Changes in governmental policy, including changes in central bank monetary policy, could cause interest rates to rise rapidly, or cause investors to expect a rapid rise in interest rates. This could lead to heightened levels of interest rate, volatility and liquidity risks for the fixed income markets generally and could have a substantial and immediate effect on the values of the Portfolio's investments. High levels of inflation and/or a significantly changing interest rate environment can lead to heightened levels of volatility and reduced liquidity.
Large Transactions Risk. To the extent a large
proportion of the shares of the Portfolio are highly concentrated or held by a small number of shareholders (or a single shareholder), including funds or accounts
over which the Adviser has investment discretion, the Portfolio is subject to the risk that these shareholders will purchase or redeem Portfolio interests in large amounts rapidly or unexpectedly, including as a result of an asset allocation decision made by the Adviser. In addition, a large number of shareholders collectively may purchase or redeem Portfolio interests in large amounts rapidly or unexpectedly (collectively, such transactions are referred to as “large shareholder transactions”). Large
shareholder transactions could adversely affect the ability of the Portfolio to conduct its investment program. For example, they could require the Portfolio to sell portfolio securities or purchase portfolio securities unexpectedly and incur substantial transaction costs and/or accelerate the realization of taxable income and/or gains to shareholders. The effects of taxable income and/or gains resulting from large shareholder transactions would particularly impact non-redeeming shareholders who do not hold their Portfolio interests in an IRA, 401(k) plan or other tax-advantaged plan. To the extent that such transactions result in short-term capital gains, such gains will generally be taxed at the ordinary income tax rate for shareholders who hold Portfolio interests in a taxable account. In addition, the Portfolio may be required to sell its more liquid portfolio investments to meet a large redemption, in which case the Portfolio's remaining assets may be less liquid, more volatile, and more difficult to price. The Portfolio may hold a relatively large proportion of its assets in cash in anticipation of large redemptions, diluting its investment returns. A number of circumstances may cause the
Portfolio
to experience large redemptions, such as changes in investors' circumstances; changes in the eligibility criteria for the Portfolio or share class of the
Portfolio; liquidations, reorganizations, repositionings, or other announced Portfolio events; or changes in investment objectives, strategies, policies, risks, or investment
personnel.
Liquidity Risk. Liquidity risk is the risk that the Portfolio may not be able to dispose of investments or close out transactions readily at a favorable time or prices (or at all) or at prices approximating those at which the Portfolio currently values them. For example, certain investments may be subject to restrictions on resale, may trade in the over-the-counter market or in limited volume, or may not have an active trading market. Illiquid investments may trade at a discount from comparable, more liquid investments and may be subject to wide fluctuations in market value. It may be difficult for the Portfolio to value illiquid investments accurately. The market for certain investments may become illiquid under adverse market or economic conditions independent of any specific adverse changes in the conditions of a particular issuer. Disposal of illiquid investments may entail registration expenses and other transaction costs that are higher than those for liquid investments. The Portfolio may seek to borrow money to meet its obligations (including among other things redemption obligations) if it is unable to dispose of illiquid investments, resulting in borrowing expenses and possible leveraging of the Portfolio. In some cases, due to unanticipated levels of illiquidity the Portfolio may choose to meet its redemption obligations wholly or in part by distributions of assets in-kind.
The term “illiquid
investments” for this purpose means investments that the Portfolio reasonably expects cannot
be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investments. As described above, the Portfolio has adopted a policy that it will not invest more than 5% of its total assets in illiquid securities (i.e., securities that cannot be sold or disposed of in the ordinary course of business at approximately their carrying values within seven days), including repurchase agreements and time deposits of more than seven days' duration. Since the Portfolio is not a money market fund, it is also subject to the regulatory requirement that if the Portfolio determines at any time that it owns illiquid investments in excess of 15% of its net assets, it will cease to undertake new commitments to acquire illiquid investments until its holdings are no longer in excess of 15% of its NAV, report the occurrence in compliance with Rule 30b1-10 under the 1940 Act and, depending on circumstances, may take additional steps to reduce its holdings of illiquid investments. The U.S. Securities and Exchange Commission (“SEC”) has recently proposed rule amendments that, if adopted as proposed, could result in a larger
percentage of the Portfolio's investments being classified as illiquid investments.
Low Short-Term Interest Rate Risk. During market
conditions in which short-term interest rates are at low levels the Portfolio's yield can be very low. During these conditions, it is possible that the Portfolio
will generate an insufficient amount of income to pay its expenses, and that it will not be able to pay a daily dividend and may have a negative yield (i.e., it
may lose money on an operating basis). It is possible that the Portfolio would, during these conditions, maintain a substantial portion of its assets in cash, on which it may earn little, if any, income.
Market Disruption and Geopolitical Risk. The
Portfolio is subject to the risk that geopolitical events will disrupt securities markets and adversely affect global economies and markets. War, terrorism, and
related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and
world economies and markets generally. Likewise, trade policy changes or disputes, the threat of or actual imposition of tariffs, natural and environmental disasters, pandemics and epidemics, and systemic market dislocations may be highly disruptive to economies and markets. Those events, as well as other changes in foreign and domestic economic and political conditions, also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Portfolio's investments. Given the increasing interdependence among global economies and markets, conditions in one country, market, or region might adversely affect markets, issuers, and/or foreign exchange rates in other countries, including the U.S. Any partial or complete dissolution of the Economic and Monetary Union of the European Union, or any increased uncertainty as to its status, could have significant adverse effects on currency and financial markets, and on the values of the Portfolio's investments. On January 31, 2020, the United Kingdom (“UK”) formally withdrew from the European
Union (“EU”) (commonly known as
“Brexit”). An agreement between the UK and the EU governing their future trade relationship became effective
January 1, 2021, but that agreement does not include an agreement on financial services, and it is unlikely that such agreement will be concluded. Moreover, the
UK government has started a program of financial services law reform with the ultimate aim of repealing many EU financial services laws that were assimilated into
UK law from January 1, 2021, and replacing them with legislation or rules made by the UK government or financial services regulators. Accordingly, uncertainty remains in certain areas as to the future relationship between the UK and the EU. Brexit has already had a significant impact on the UK, Europe, and global economies, and could continue to result in volatility and illiquid
ity, legal,
political, economic and regulatory uncertainties and lower economic growth for these economies that could in turn have an adverse effect on the value of the
Portfolio's investments. Any further exits from the EU, or the possibility of such exits, or the abandonment of the euro, may cause additional market
disruption globally and introduce new legal and regulatory uncertainties.
Securities and financial markets may be susceptible
to market manipulation or other fraudulent trade practices, which could disrupt the orderly functioning of these markets or adversely affect the values of
investments traded in these markets, including investments held by the Portfolio. To the extent the Portfolio has focused its investments in the market or index of a particular region, adverse geopolitical and other events could have a disproportionate impact on the Portfolio.
New or escalation of hostilities in the Middle East region could
disrupt energy production or transportation, including through key shipping routes, which may lead to increased volatility in energy and other commodity prices.
The extent and duration of these conflicts, and others around the world, are impossible to predict but could continue to be significant. Market disruption caused by these conflicts, and any countermeasures or responses thereto (including international sanctions, a downgrade in a country's credit rating, purchasing and financing restrictions, boycotts, tariffs, changes in consumer or purchaser preferences, cyberattacks and espionage) could continue to have severe adverse impacts on regional and/or global securities and commodities markets, including markets for oil and natural gas. These impacts may include reduced market liquidity, distress in credit markets, further disruption of global supply chains, increased risk of inflation, and limited access to investments in certain international markets and/or issuers. These developments and other related events could negatively impact Portfolio performance.
Market Volatility; Government Intervention Risk.
Market dislocations and other external events, such as the failures or near failures of significant financial institutions, dislocations in investment or currency
markets, corporate or governmental defaults or credit downgrades, or poor collateral performance, may subject the Portfolio to significant risk of
substantial volatility and loss. Governmental and regulatory authorities have taken, and may in the future take, actions to provide or arrange credit supports to financial institutions whose operations have been compromised by credit market dislocations and to restore liquidity and stability to financial systems in their jurisdictions; the implementation of such governmental interventions and their impact on both the markets generally and the Portfolio's investment program in particular can be uncertain. Governmental and non-governmental issuers may default on, or be forced to restructure, their debts, and other issuers may face difficulties obtaining credit. Raising the U.S. Government debt ceiling has become increasingly politicized. Any failure to increase the total amount that the U.S. Government is authorized to borrow could lead to a default on U.S. Government obligations. A default or a threat of default by the U.S. Government would be highly disruptive to the U.S. and global securities markets and could significantly reduce the value of the Portfolio's investments. Defaults or restructurings by governments or others of their debts could have substantial adverse effects on economies, financial markets, and asset valuations around the world. Federal Reserve or other U.S. or non-U.S. governmental or central bank actions, including interest rate increases or contrary actions by different governments, or investor perception that these efforts are not succeeding, could negatively affect financial markets generally as well as the values and liquidity of certain securities.
Non-U.S. Securities Risk. Investments in securities of non-U.S.
issuers (including depositary receipts) entail risks not typically associated with investing in securities of U.S. issuers. Similar risks may apply to
securities traded on a U.S. securities exchange that are issued by entities with significant exposure to non-U.S. countries. In certain countries, legal remedies available to investors may be more limited than those available with regard to U.S. investments. Income and gains with respect to investments in certain countries may be subject to withholding and other taxes. There may be less information publicly available about a non-U.S. entity than about a U.S. entity, and many non-U.S. entities are not subject to accounting, auditing, and financial reporting standards, regulatory framework and practices comparable to those in the United States. The securities of some non-U.S. entities are less liquid and at times more volatile than securities of comparable U.S. entities, and could become subject to sanctions or embargoes that adversely affect the Portfolio's investment. Non-U.S. transaction costs, such as brokerage commissions and custody costs may be higher than in the U.S. In addition, there may be a possibility of nationalization or expropriation of assets, imposition of currency exchange controls, confiscatory taxation, and diplomatic developments that could adversely affect the values of the Portfolio's investments in certain non-U.S. countries. Investments in securities of non-U.S. issuers also are subject to foreign political and economic risk not associated with U.S. investments, meaning that political events (civil unrest, national elections, changes in political conditions and foreign relations, imposition of exchange controls and repatriation restrictions), social and economic events (labor strikes, rising inflation) and natural disasters occurring in a country where the Portfolio invests could cause the Portfolio's investments to experience gains or losses. In addition, the threat of or actual imposition of tariffs may adversely impact the price of non-U.S. securities.
Rapid Changes in Interest Rates. The values of instruments held by the Portfolio may
be adversely affected by rapid changes in interest rates. Rapid changes in interest rates may cause significant requests to redeem Portfolio Shares, and possibly cause the Portfolio to sell portfolio securities at a loss to satisfy those requests.
Reinvestment Risk. Income from the Portfolio may decline when the Portfolio invests the proceeds from investment
income, sales of portfolio securities or matured, traded or called debt obligations. For instance, during periods of declining interest rates, an issuer of debt obligations may exercise an option to redeem securities prior to maturity, forcing the Portfolio to reinvest the proceeds in lower-yielding securities. A decline in income received by the Portfolio from its investments is likely to have a negative effect on the yield and total return of the Portfolio Shares.
Risk of Investment in Other Pools. If the
Portfolio invests in another pooled investment vehicle, it is exposed to the risk that the other pool will not perform as expected. The Portfolio is exposed
indirectly to all of the risks applicable to an investment in such other pool. In addition, lack of liquidity in the underlying pool could result in its value
being more volatile than the underlying portfolio of securities, and may limit the ability of the Portfolio to sell or redeem its interest in the pool at a time or at a price it might consider desirable. The investment policies and limitations of the other pool may not be the same as those of the Portfolio; as a result, the Portfolio may be subject to additional or different risks, or may achieve a reduced investment return, as a result of its investment in another pool. If a pool is an exchange-traded fund or other product traded on a securities exchange or otherwise actively traded, its shares may trade at a premium or discount to their NAV, an effect that might be more pronounced in less liquid markets. The Portfolio bears its proportionate share of the fees and expenses of any pool in which it invests. The Adviser or an affiliate may serve as investment adviser to a pool in which the Portfolio may invest, leading to potential conflicts of interest. For example, the Adviser or its affiliates may receive fees based on the amount of assets invested in the pool. Investment by the Portfolio in the pool may be beneficial to the Adviser or an affiliate in the management of the pool, by helping to achieve economies of scale or enhancing cash flows. Due to this and other factors, the Adviser may have an incentive to invest the Portfolio's assets in a pool sponsored or managed by the Adviser or its affiliates in lieu of investments by the Portfolio directly in portfolio securities, or may have an incentive to invest in the pool over a pool sponsored or managed by others. Similarly, the Adviser may have an incentive to delay or decide against the sale of interests held by the Portfolio in a pool sponsored or managed by the Adviser or its affiliates. It is possible that other clients of the Adviser or its affiliates will purchase or sell interests in a pool sponsored or managed by the Adviser or its affiliates at prices and at times more favorable than those at which the Portfolio does so.
Stripped Securities Risk. The Portfolio may invest in stripped securities, which are
U.S. Treasury bonds and notes, the unmatured interest coupons of which have been separated from the underlying obligation. Stripped securities are zero coupon obligations that are normally issued at a discount from their face value. The Portfolio may invest no more than 25% of its assets in stripped securities that have been stripped by their holder, which is typically a custodian bank or investment brokerage firm. A number of securities firms and banks have stripped the interest coupons and resold them in custodian receipt programs with different names. In meeting its responsibility to determine whether it is the beneficial holder of the U.S. government securities underlying such certificates, the Trust intends to rely on the opinions of counsel to the sellers of these certificates or other evidences of ownership of U.S. Treasury obligations that, for U.S. federal income tax and securities law purposes, purchasers of such certificates most likely will be deemed the beneficial holders of the underlying U.S. government securities. The Trust is unaware of any binding legislative, judicial or administrative authority on this issue. Privately-issued stripped securities are not themselves guaranteed by the U.S. government, but the future payment of principal or interest on the U.S. Treasury obligations which they represent is so guaranteed.
Variable and Floating Rate Securities
Risk. Variable or floating rate securities are debt securities with variable or floating
interest rates payments. Variable or floating rate securities bear rates of interest that are adjusted periodically according to formulae intended generally to
reflect market rates of interest and allow the Portfolio to participate (determined in accordance with the terms of the securities) in increases in interest rates
through upward adjustments of the coupon rates on the securities. However, during periods of increasing interest rates, changes in the coupon rates may lag behind
the changes in market rates or may have limits on the maximum increases in coupon rates. Alternatively, during periods of declining interest rates, the coupon rates on such securities will typically readjust downward resulting in a lower yield.
Zero-Coupon Bond Risk. Zero-coupon bonds are debt obligations that are generally issued at a discount and payable in full at
maturity, and that do not provide for current payments of interest prior to maturity. Zero-coupon bonds usually trade at a deep discount from their face or par
values and are subject to greater market value fluctuations from changing inter
est rates
than debt obligations of comparable maturities that make current distributions of interest. When interest rates rise, the values of zero-coupon bonds fall more
rapidly than securities paying interest on a current basis, because the Portfolio is unable to reinvest interest payments at the higher rates.
Additional Information About Non-Principal Investment Strategies
and Risks
The investments described below
reflect the Portfolio's current practices. In addition to the principal risks described above, other risks are described in some of the descriptions of the investments
below:
Conflicts of Interest
Risk. An investment in the Portfolio will be subject to a number of actual or potential conflicts of interest. For example, the Adviser or its affiliates may provide services to the Portfolio, such as custodial, administrative, bookkeeping, and accounting services, transfer agency and investor servicing, securities brokerage services, and other services for which the Portfolio would compensate the Adviser and/or such affiliates. The Portfolio may invest in other pooled investment vehicles sponsored, managed, or otherwise affiliated with the Adviser. There is no assurance that the rates at which the Portfolio pays fees or expenses to the Adviser or its affiliates, or the terms on which it enters into transactions with the Adviser or its affiliates will be the most favorable available in the market generally or as favorable as the rates the Adviser or its affiliates make available to other clients. Because of its financial interest, the Adviser will have an incentive to enter into transactions or arrangements on behalf of the Portfolio with itself or its affiliates in circumstances where it might not have done so in the absence of that interest, provided that the Adviser will comply with applicable regulatory requirements.
The Adviser and its affiliates serve as investment adviser to other clients and may make investment decisions that may be different from those that will be made by the Adviser on behalf of the Portfolio. For example, the Adviser may provide asset allocation advice to some clients that may include a recommendation to invest in or redeem from particular issuers while not providing that same recommendation to all clients invested in the same or similar issuers. The Adviser may (subject to applicable law) be simultaneously seeking to purchase (or sell) investments for the Portfolio and to sell (or purchase) the same investment for accounts, funds, or structured products for which it serves as asset manager, or for other clients or affiliates. The Adviser and its affiliates may invest for clients in various securities that are senior, pari passu or junior to, or have interests different from or adverse to, the securities that are owned by the Portfolio. The Adviser or its affiliates, in connection with its other business activities, may acquire material nonpublic confidential information that may restrict the Adviser from purchasing securities or selling securities for itself or its clients (including the Portfolio) or otherwise using such information for the benefit of its clients or itself.
The foregoing does not purport to be a comprehensive list or complete explanation of all potential conflicts of interests which may affect the Portfolio. The Portfolio may encounter circumstances, or enter into transactions, in which conflicts of interest that are not listed or discussed above may arise.
Cybersecurity Risk. With the increased use of technologies such as the Internet and
the dependence on computer systems to perform business and operational functions, funds (such as the Portfolio) and their service providers (including the Adviser) may be prone to operational and information security risks resulting from cyber-attacks and/or technological malfunctions. Furthermore, geopolitical tensions may have increased the scale and sophistication of deliberate cybersecurity attacks, particularly those from nation-states or from entities with nation-state backing. In general, cyber-attacks are deliberate, but unintentional events may have similar effects. Cyber-attacks include, among others, stealing or corrupting data maintained online or digitally, preventing legitimate users from accessing information or services on a website, releasing confidential information without authorization, and causing operational disruption. Successful cyber-attacks against, or security breakdowns of, the Portfolio, the Adviser, a custodian, the transfer agent, or other affiliated or third-party service provider may adversely affect the Portfolio or its investors. For instance, cyber-attacks or technical malfunctions may interfere with the processing of investor or other transactions, affect the Portfolio's ability to calculate its NAV, cause the release of private investor information or confidential Portfolio information, impede trading, cause reputational damage, and subject the Portfolio to regulatory fines, penalties or financial losses, reimbursement or other compensation costs, and additional compliance costs. Cyber-attacks or technical malfunctions may render records of Portfolio assets and transactions, investor ownership of Portfolio Shares, and other data integral to the functioning of the Portfolio inaccessible or inaccurate or incomplete. The Portfolio may also incur substantial costs for cybersecurity risk management in order to prevent cyber incidents in the future. The Portfolio and its investors could be negatively impacted as a result. While the Adviser has established business continuity plans and systems designed to minimize the risk of cyber-attacks through the use of technology, processes and controls, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified, given the evolving nature of this threat. The use of
artificial
intelligence and machine learning could exacerbate these risks or result in cyber security incidents that implicate personal data. The Portfolio relies on
third-party service providers for many of its day-to-day operations, and will be subject to the risk that the protections and protocols implemented by those
service providers will be ineffective to protect the Portfolio from cyber-attack. The Adviser does not control the cybersecurity plans and systems put in place by
third-party service providers, and such third-party service providers may have limited indemnification obligations to the Adviser or the Portfolio. Similar types of cybersecurity risks or technical malfunctions also are present for issuers of securities in which the Portfolio invests, which could result in material adverse consequences for such issuers, and may cause the Portfolio's investment in such securities to lose value.
Investments by Acquired Funds in Fund of Funds Arrangements. Because the Portfolio
serves as an acquired fund of one or more Lending Funds, Rule 12d1-4(b)(3) under the 1940 Act generally prohibits the Portfolio from purchasing or otherwise acquiring the securities of an investment company if immediately after such purchase or acquisition, the securities of investment companies owned by the Portfolio have an aggregate value in excess of 10% of the value of the total assets of the Portfolio, with certain exceptions. This 10% limitation does not apply to investments by the Portfolio in: securities acquired in reliance on Section 12(d)(1)(E) of the 1940 Act (i.e. master-feeder arrangements); money market funds in reliance on Rule 12d1-1; a subsidiary that is
wholly owned and controlled by the Portfolio; securities received as a dividend or as a result of a plan of reorganization of a company; or securities of another
investment company received pursuant to exemptive relief from the SEC to engage in interfund borrowing and lending transactions.
Temporary Defensive Positions. In response to actual or perceived adverse market, economic, political, or other conditions, a
Portfolio may (but will not necessarily), without notice, depart from its principal investment strategies by temporarily investing for defensive purposes. While
investing defensively, the Portfolio may maintain a substantial portion of its assets in cash, on which the Portfolio may earn little if any income. If a
Portfolio invests for defensive purposes, it may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
Portfolio Holdings Disclosure
The Portfolio's portfolio holdings disclosure policy is described in the Part
B.
Item 10. Management, Organization and
Capital Structure
The Portfolio is a separate, diversified series of the Trust.
SSGA FM serves as the investment adviser to the Portfolio pursuant
to an investment advisory agreement (“Investment Advisory Agreement”)
between the Trust and the Adviser, and, subject to the oversight of the Board, is responsible for the investment management of the Portfolio. The Adviser provides
an investment management program for the Portfolio and manages the investment of the Portfolio's assets. In addition, the Adviser provides administrative,
compliance and general management services to the Portfolio. The Adviser is a wholly-owned subsidiary of State Street Global Advisors, Inc., which itself is a wholly-owned subsidiary of State Street Corporation. The Adviser is registered with the SEC under the Investment Advisers Act of 1940, as amended. The Adviser and certain other affiliates of State Street Corporation make up State Street Investment Management, the investment management arm of State Street Corporation. As of December 31, 2025, the Adviser managed approximately $1.34 trillion in assets and State Street Investment Management managed approximately $5.66 trillion in assets. The Adviser's principal business address is One Congress Street, Boston, Massachusetts 02114.
A discussion regarding the Board's consideration of the Portfolio's Investment Advisory Agreement is provided in the Portfolio's Form N-CSR filing with the SEC for the period ended June 30, 2025.
The Adviser manages the Portfolio using a team of investment professionals. The team approach is used to create an environment that encourages the flow of investment ideas. The portfolio managers within each team work together in a cohesive manner to develop and enhance techniques that drive the investment process for the respective investment strategy. This approach requires portfolio managers to share a variety of responsibilities, including investment strategy
and
analysis, while retaining responsibility for the implementation of the strategy within any particular portfolio. The approach also enables each team to draw upon
the resources of other groups within State Street Investment Management. The portfolio management team is overseen by State Street Investment Management's internal
governance.
The professionals primarily responsible
for the day-to-day management of the Portfolio are Todd Bean, Sean Lussier and Alexis Hayes.
Todd Bean, CFA, is a Managing Director of State Street Investment
Management and the Adviser and Head of U.S. Traditional Cash Strategies in the Global Fixed Income Solutions Team. In his role, he oversees a team of portfolio
managers while maintaining portfolio management responsibilities for several strategies. He began his career at State Street Corporation in 1999, joining the firm as an analyst in the firm's custody and accounting area. Following a period on the cash operations staff, Mr. Bean joined the Cash Management Group as a portfolio manager in 2004. He received Bachelor's degrees in Economics and Government from St. Lawrence University and a Master of Science in Finance from Northeastern University. He has earned the Chartered Financial Analyst (CFA) designation and is a member of CFA Society Boston, Inc.
Sean Lussier is a Vice President of State Street Investment Management and the Adviser and a Senior Portfolio Manager in the North America Cash Management Group within the Global Fixed Income Solutions Team. He has experience in managing registered taxable and tax-exempt money market funds, as well as U.S. and Canada domiciled separately managed cash and securities lending mandates. He has also been a member of the Global Fixed Income Beta Solutions Group and was responsible for the transition and management of several Canadian passive fixed income strategies. Prior to joining State Street Investment Management, Mr. Lussier worked as an account manager at State Street Bank and Trust where his primary responsibilities were the custody and accounting operations of the State Street Investment Management money market and securities lending collateral accounts. He holds a Bachelor of Science from Massachusetts College of Liberal Arts.
Alexis Hayes is an Assistant Vice President of State Street Investment Management and a dual Portfolio Manager and Credit Trader in the Global Fixed Income Solutions Team. Prior to joining State Street Investment Management in 2024, she spent three years as a Credit Trader at Wells Fargo. Ms. Hayes received a Bachelor of Science degree in Business Administration from the University of North Carolina at Chapel Hill's Kenan-Flagler Business School.
Additional information about the portfolio managers' compensation,
other accounts managed by the portfolio managers, and the portfolio managers' ownership of the Portfolio is available in the Part B.
The Administrator, Sub-Administrator, Custodian and
Transfer Agent
The Adviser serves as
administrator of the Portfolio. State Street, a subsidiary of State Street Corporation, serves as sub-administrator, custodian and transfer agent for the
Portfolio. The Portfolio pays an annual fee that is accrued daily and payable monthly for the administration, sub-administration, custody and transfer agency
services SSGA FM and State Street provide. For its role in providing administrative services to the Portfolio, the Adviser receives a portion of such fee paid by the Portfolio at the annual rate of 0.00075%.
The Trustees of the Trust oversee generally the operations of the Portfolio and the Trust. The Trust enters into contractual arrangements with various parties, including, among others, the Portfolio's investment adviser, custodian, transfer agent, and accountants, who provide services to the Portfolio. Investors are not parties to any such contractual arrangements or intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any investor any right to enforce them directly against the service providers or to seek any remedy under them directly against the service providers.
This Part A provides information concerning the Trust and the Portfolio that you should consider in determining whether to purchase shares of the Portfolio. Neither this Part A, nor the related Part B, is intended, or should be read, to be or to give rise to an agreement or contract between the Trust or the Portfolio and any investor, or to give rise to any rights in any investor or other person other than any rights under federal or state law that may not be
waived.
As compensation for the Adviser's services to the Portfolio, the Portfolio is obligated to pay a fee of 0.025% of its average daily net assets. The Portfolio's investment adviser, SSGA FM, is contractually obligated until April 30, 2027 (i) to waive up to the full amount of the advisory fee payable by the Portfolio and/or (ii) to reimburse the Portfolio for expenses
to the
extent that Total Annual Fund Operating Expenses (exclusive of non-recurring account fees and/or extraordinary expenses) exceed 0.042% of average daily net assets
on an annual basis. This waiver and/or reimbursement may not be terminated prior to April 30, 2027 except with approval of the Board.
Shares of the Trust are not registered under the 1933 Act or the
securities law of any state and are sold in reliance upon exemptions from registration under such laws. Shares may not be transferred or resold without
registration under the 1933 Act, except pursuant to an exemption from registration. However, shares of the Trust may be redeemed on any Business Day in accordance with the terms of the Trust's Master Trust Agreement and the Confidential Offering Memorandum relating to the Portfolio provided to shareholders.
Item 11. Shareholder Information
The Portfolio determines its NAV per share once each Business Day (as defined below), typically at 5:00 p.m. ET (the time when the Portfolio determines its NAV per share is referred to herein as the “Valuation Time”). The Portfolio reserves
the right to advance the time for accepting purchase or redemption orders and/or the Valuation Time on any day when the NYSE, bond markets (as recommended by The Securities Industry and Financial Markets Association
(“SIFMA”)) or any Federal Reserve bank close early, trading on the NYSE is restricted, an emergency arises or
as otherwise permitted by the SEC. The Portfolio reserves the right to continue to accept orders to purchase or redeem shares following the close of the NYSE on any day on which the NYSE closes early, provided that either the Federal Reserve or the bond markets remain open. In addition, the Board may, for any Business Day, decide to change the time as of which the Portfolio's NAV is calculated in response to new developments such as altered trading hours, or as otherwise permitted by the SEC.
Shares of the Portfolio are available for purchase each day on which the NYSE and State Street are open for business (a “Business Day”). In the event the NYSE does not open for business, the Portfolio may, but is not required to, open for purchase or redemption transactions. The Federal Reserve is closed on certain holidays on which the NYSE is open. These holidays are Columbus Day and Veterans Day. On these holidays, you will not be able to purchase shares by wiring Federal Funds because Federal Funds wiring does not occur on days when the Federal Reserve is closed. In the event that the Portfolio invokes the right to accept orders to purchase or redeem shares on any day that is not a Business Day, the Portfolio will post advance notice of these events at: www.statestreet.com/im.
There is no minimum initial or subsequent
investment amount for the Portfolio. Shares of Portfolio II are only offered to, and may only be held by, Lending Funds. Purchases are
effected on behalf of a Lending Fund by State Street, in its capacity as securities lending agent for the Lending Fund. All shares of
Portfolio II are purchased at the NAV per share of the Portfolio next determined after the purchase is communicated to the Trust's transfer
agent and determined to be in good order. Shares of Portfolio II may be redeemed at the NAV per share of the Portfolio next determined after
the redemption is communicated to the Trust's transfer agent. Redemptions are effected on behalf of a Lending Fund by State Street, in its capacity as lending agent for the Lending Fund.
With the exceptions noted below, the Portfolio values its investment portfolio at market value. This generally means that securities listed and traded principally on any national securities exchange are valued on the basis of the last sale price or, lacking any sales, at the closing bid price on the primary exchange on which the security is traded. United States securities traded principally over-the-counter and options are valued on the basis of the last reported bid price.
Because many fixed-income securities do not trade each day, last
sale or bid prices are frequently not available. Therefore, fixed-income securities may be valued using prices provided by a pricing service when such prices are
determined by the Adviser to reflect the market value of such securities.
International securities traded over the counter are valued on the basis of best bid or official bid, as determined by the relevant securities exchange. In the absence of a last sale or best or official bid price, such securities may be valued on the basis of prices provided by a pricing service if those prices are believed to reflect the market value of such securities.
The
Portfolio calculates its NAV per share to two decimal places. The NAV per share of the Portfolio is determined once each Business Day as of 5:00 p.m. Eastern
Time on a scheduled trading day on the NYSE, except for Columbus Day and Veterans Day. In unusual circumstances, such as an emergency or an unscheduled close
or halt of trading on the NYSE, the time at which share prices are determined may be changed.
If the Portfolio receives a redemption order in good form prior to
5:00 p.m. Eastern Time on a Business Day, the Portfolio typically expects to pay out redemption proceeds on that day regardless of the method the Portfolio uses
to make such payment. If a redemption order is placed after 5:00 p.m. Eastern Time, the Portfolio typically expects to pay out redemption proceeds on the next Business Day. The Portfolio reserves the right to pay for redeemed shares within seven days after receiving a redemption order if, in the judgment of the Adviser, an earlier payment could adversely affect the Portfolio.
The transfer agent may temporarily delay for more than seven days the disbursement of redemption proceeds from the Portfolio account of a
“Specified
Adult” (as defined in Financial Industry Regulatory Authority, Inc. (“FINRA”) Rule 2165) based on a reasonable belief that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted, subject to certain conditions.
Under normal circumstances, Portfolio II expects to meet redemption requests by using cash or cash equivalents in its portfolio and/or selling portfolio assets to generate cash. Portfolio II also may pay redemption proceeds using cash obtained through borrowing arrangements that may be available from time to time.
Portfolio II may pay all or a portion of your redemption proceeds by giving you securities (for example, if the Portfolio reasonably believes that a cash redemption may have a substantial impact on Portfolio II and its remaining shareholders). A redemption is generally a taxable event for shareholders, regardless of whether the redemption is satisfied in cash or in kind. You may pay transaction costs (including through the realization of taxable gain) to dispose of the securities, and you may receive less for them than the price at which they were valued for purposes of the redemption. In addition, you will be subject to the market risks associated with such securities until such time as you choose to dispose of the security.
During periods of deteriorating or stressed market conditions, when an increased portion of the Portfolio's portfolio may be comprised of less-liquid investments, or during extraordinary or emergency circumstances, Portfolio II may be more likely to pay redemption proceeds with cash obtained through short-term borrowing arrangements (if available) or by giving you securities.
In accordance with certain federal regulations, the Trust is required to obtain, verify and record information that identifies each entity that applies to open an account, including, in certain cases, information concerning such entity's beneficial owners. For this reason, when you open (or change ownership of) an account, the Trust will request certain information, including your name, address and taxpayer identification number, which will be used to verify your identity. If you are unable to provide sufficient information to verify your identity, the Trust will not open an account for you. As required by law, the Trust may employ various procedures, such as comparing your information to fraud databases or requesting additional information and documentation from you, to ensure that the information supplied by you is correct. The Trust reserves the right to reject any purchase for any reason, including failure to provide the Trust with information necessary to confirm your identity as required by law.
Dividends and Distributions
Dividends on shares of Portfolio II will be declared and paid daily from Portfolio II's net investment income. Distributions of net short- and long-term capital gains, if any, will be made at least annually. Dividends will be processed pursuant to the securities lending authorization agreement between the Lending Fund and State Street. Generally, distributions will be declared and paid in December, if required, for Portfolio II to avoid imposition of a federal excise tax on undistributed capital gains. Portfolio II does not expect to make distributions that are eligible for taxation as long-term capital gains.
Frequent Purchases and Redemptions of Portfolio Shares
The Board has not adopted market timing policies and
procedures with respect to the Portfolio. The Board has evaluated the risks of market timing activities by Portfolio II's shareholders and has determined that due
to the (i) nature of Portfolio II's portfolio holdings, (ii) nature of Portfolio II's shareholders, (iii) inability of Portfolio II's shareholders to exchange
into other
mutual funds, and (iv) inability of Portfolio II's shareholders to direct transactions because cash moves in and out of Portfolio II as securities are lent and
returned, it is unlikely that (a) market timing would be attempted by Portfolio II's shareholders or (b) any attempts to market time Portfolio II by shareholders
would result in a negative impact to Portfolio II or its shareholders.
U.S. Federal Income Tax Status
The following discussion is a summary of some important U.S. federal income tax considerations generally applicable to an investment in Portfolio II. Your investment in Portfolio II may have other tax implications. Please consult your tax advisor about federal, state, local, foreign or other tax laws applicable to you.
Portfolio II has elected to be treated as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) and intends each year to qualify
and to be eligible to be treated as such. A regulated investment company generally is not subject to tax at the corporate level on income and gains that are
timely distributed to shareholders. In order to qualify and be eligible for treatment as a regulated investment company, Portfolio II must, among other things, satisfy diversification, qualifying income and distribution requirements. Portfolio II's failure to qualify as a regulated investment company would result in fund-level taxation and, consequently, a reduction in income available for distribution to shareholders.
If Portfolio II fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or for the one-year period ending November 30 or December 31 if Portfolio II is eligible to elect and so elects), plus any retained amount from the prior year, Portfolio II will be subject to a nondeductible 4% excise tax on the undistributed amounts. A dividend paid to shareholders by Portfolio II in January of a year is generally deemed to have been paid by Portfolio II on December 31 of the preceding year, if the distribution was declared and payable to shareholders of record on a date in October, November or December of that preceding year. The Portfolio intends generally to make distributions sufficient to avoid imposition of the 4% excise tax although there can be no assurance it will do so. In addition, if Portfolio II were to qualify as a “personal holding
company,” it may have to comply with additional requirements with respect to its distributions to shareholders in order to avoid
the fund-level tax under the personal holding company rules of the Code.
For U.S. federal income tax purposes, distributions of investment income generally are taxable to you as ordinary income. Taxes on distributions of capital gains generally are determined by how long Portfolio II owned (or is deemed to have owned) the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains (that is, the excess of net long-term capital gains over net short-term capital losses) from the sale of investments that Portfolio II owned for more than one year that are properly reported by Portfolio II as capital gain dividends generally will be treated as long-term capital gain includible in your net capital gain and taxed to individuals at reduced rates. The Internal Revenue Service (“IRS”) and the Department of the
Treasury have issued regulations that impose special rules in respect of capital gain dividends received through partnership interests constituting “applicable partnership
interests” under Section 1061 of the Code. Portfolio II does not expect to make distributions that
are eligible for taxation as long-term capital gains. Distributions of gains from investments that Portfolio II owned for one year or less generally will be taxable to you as ordinary income. Distributions are taxable to you even if they are paid from income or gains earned by the Portfolio before your investment (and thus were included in the price you paid for your shares). Distributions may also be subject to state, local or foreign taxes and are taxable whether you receive them in cash or reinvest them in additional shares.
Gain, if any, resulting from the redemption of Portfolio II shares generally will also be taxable to you as either short-term or long-term capital gain, depending upon how long you held such Portfolio II shares, except that, as and where Portfolio II is not a “publicly
offered” regulated investment company (as described below), in certain circumstances, it is possible that the
proceeds of a redemption of Portfolio II shares may be taxable as dividend income or a return of capital. Investors in Portfolio II will not be eligible for the
tax treatment afforded to investments in money market funds, which (i) permits money market fund shareholders to use a simplified method of accounting for gains
and losses realized in their money market fund shares, allowing such shareholders essentially to compute gain or loss on such shares by aggregating all purchase and sales within any taxable year, and (ii) generally excepts such sales from the wash-sale rule of the Code.
A regulated
investment company is considered “publicly offered” if its
shares are continuously offered pursuant to a public offering, its shares are regularly traded on an established securities exchange, or it has at least 500
shareholders at all times during a taxable year. Because shares of Portfolio II are not so registered or traded, and Portfolio II is not expected to have at least 500 shareholders at all times during the taxable year, a portion or all the proceeds of redemptions of Portfolio II shares may be treated as dividends. If a shareholder redeems fewer than all of its shares, such shareholder may be treated as having received a distribution under Section 301 of the Code (a
“Section 301
distribution”) unless the redemption is treated as being either (i) “substantially
disproportionate” with respect to such shareholder by satisfying certain numerical tests relating to the reduction in the
redeeming shareholder's percentage interest, and percentage voting interest, in Portfolio II, or (ii) otherwise “not essentially equivalent to a
dividend” under the relevant rules of the Code. For any period during which Portfolio II has a single
shareholder, all redemption distributions will be treated as Section 301 distributions. A Section 301 distribution is not treated as a sale or exchange giving
rise to a capital gain or loss, but rather is treated as a dividend to the extent supported by Portfolio II's current and accumulated earnings and profits, with the excess treated as a return of capital reducing the shareholder's tax basis in Portfolio II shares, and thereafter as capital gain.
In addition, in the event Portfolio II is not considered publicly offered, certain shareholders will be deemed to receive distributions equal to their allocable shares of certain expenses paid by Portfolio II. Very generally, expenses that are deemed distributed by Portfolio II include those paid or incurred during a calendar year that are deductible in determining Portfolio II's investment company taxable income for a taxable year beginning or ending within that calendar year, including in particular its advisory fee, but excluding those expenses incurred by virtue of Portfolio II's organization as a registered investment company (such as its registration fees, trustees' fees, expenses of periodic trustees' and shareholders' meetings, transfer agent fees, certain legal and accounting fees, the expenses of shareholder communications required by law, and certain other expenses). Shareholders of Portfolio II that will be deemed to have received distributions of such expenses include (i) individuals taxable in the U.S. or persons calculating their taxable income in the same way as do such individuals and (ii) pass-through entities having such an individual or person or another pass-through entity as an interest holder or beneficiary. Such deemed distributions of expenses are not deductible under current law by those direct or indirect shareholders who are individuals (or entities that compute their taxable income in the same manner as an individual). The deemed distributions of expenses could as a result increase a shareholder's net taxes owed, lowering Portfolio II's effective yield with respect to such a shareholder.
An additional 3.8% Medicare contribution tax is imposed on the
“net investment
income” of individuals, estates and trusts to the extent their income exceeds certain threshold amounts. Net
investment income generally includes for this purpose dividends paid by the Portfolio, including any capital gain dividends, and net gains recognized on the
redemption or other taxable disposition of shares of the Portfolio.
Portfolio II's income from or the proceeds of dispositions of its investments in non-U.S. assets may be subject to non-U.S. withholding or other taxes, which will reduce the yield on those investments. Shareholders generally will not be entitled separately to claim a credit or deduction with respect to foreign taxes incurred by the Portfolio. If shareholders are not entitled to claim such a credit or deduction, the Portfolio's taxable income will be reduced by the foreign taxes paid or withheld. Shareholders that are not subject to U.S. federal income tax, and those who invest in the Portfolio through tax-advantaged accounts (including those who invest through individual retirement accounts or other tax-advantaged retirement plans), generally will receive no benefit from any tax credit or deduction passed through by Portfolio II, if any.
Certain of Portfolio II's investment practices, including derivative transactions and investments in debt obligations issued or purchased at a discount, will be subject to special and complex U.S. federal income tax provisions. These special rules may affect the timing, character, and/or amount of Portfolio II's distributions, and may require Portfolio II to sell its investments at a time when it is not advantageous to do so.
If you are not a U.S. person, dividends paid by Portfolio II that Portfolio II properly reports as capital gain dividends, short-term capital gain dividends, or interest-related dividends are not subject to withholding of U.S. federal income tax, provided that certain other requirements are met. Portfolio II is permitted, but is not required, to report any part of its dividends as are eligible for such treatment. Portfolio II's dividends other than those Portfolio II so reports as capital gain dividends, short-term capital gain dividends, or interest-related dividends generally will be subject to a U.S. withholding tax at a 30% rate (or lower applicable treaty rate).
The U.S.
Treasury and IRS generally require Portfolio II to obtain information sufficient to identify the status of each shareholder under Sections 1471-1474 of the Code
and the U.S. Treasury and IRS guidance issued thereunder (collectively,
“FATCA”) or under an applicable intergovernmental agreement between the United States and a foreign government.
Cost Basis Reporting. U.S. Treasury regulations
mandate cost basis reporting to shareholders and the IRS for redemptions of Portfolio II shares. With respect to shares acquired and held directly through
Portfolio II and not through a financial intermediary, Portfolio II will use a default average cost basis methodology for tracking and reporting cost basis on
Portfolio II shares, unless another cost basis reporting methodology is requested in writing.
Item 12. Distribution Arrangements
Shares of Portfolio II are being offered primarily to Lending Funds
in connection with the State Street Securities Lending Program. Shares of Portfolio II are sold in private placement transactions that do not involve any “public offering” within the meaning of Section 4(a)(2) of the 1933 Act. Shares of the Trust are sold
directly by the Trust without a distributor and are not subject to a sales load or redemption fee. Assets of Portfolio II are not subject to fees permitted
pursuant to Rule 12b-1 under the 1940 Act.
PART
A
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
State Street Navigator Securities Lending Government Money Market Portfolio
Because the State Street Navigator Securities Lending Trust (the “Trust”) is only registered under the Investment
Company Act of 1940, as amended (the
“1940 Act”), responses to Items 1, 2, 3, 4 and 13 of Form N-1A have been omitted. Item 8 is omitted because it is not
applicable.
The Trust is an open-end management investment company organized as
a business trust under the laws of the Commonwealth of Massachusetts on June 15, 1995.
The Trust issues beneficial interests of its series solely in
private placement transactions that do not involve any “public offering” within the meaning of Section 4(a)(2) of the Securities Act of 1933, as amended (the
“1933 Act”). This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to
buy, any
“security” within the meaning
of the 1933 Act.
State Street Bank and Trust
Company (“State
Street”) has established a securities lending program for its clients (the “State Street Securities Lending Program”). Each client that participates in the State Street Securities Lending Program as a lender (each, a
“Client Lending
Fund” and collectively, the “Client Lending
Funds”) enters into a securities lending authorization agreement with State Street. Under such agreement, State Street is authorized to invest the cash collateral securing loans of securities of each Client Lending Fund in a variety of investments, as consistent with applicable law. Shares of the Trust are offered primarily to, and held by, the Client Lending Funds in the State Street Securities Lending Program, and may, on a case-by-case basis, be offered to and held by institutional investors that participate in a third-party lending agent program (“Third-Party Lending Funds” and “Third-Party Securities Lending
Program(s)”). The Client Lending Funds and the Third-Party Lending Funds are sometimes referred to herein collectively as the “Lending Funds”; the State Street Securities Lending Program and the Third-Party Securities Lending Program are sometimes
referred to herein collectively as the “Securities Lending Program.”
SSGA Funds Management, Inc. (“SSGA FM” or the
“Adviser”) serves as the investment adviser to the State Street Navigator Securities Lending Government
Money Market Portfolio (the “Government Money Market Portfolio” or the
“Portfolio”), a series of the Trust.
Item 6. Purchase and Sale of Portfolio Shares
There is no minimum initial or subsequent investment amount for the Portfolio.
Shares are offered solely in private placement transactions that do not involve any “public offering” within the meaning
of Section 4(a)(2) of the 1933 Act.
Shares of the Portfolio are only offered to, and may only be held by, the Lending Funds in the Securities Lending Program. Shares of the Portfolio are available for purchase each day on which the New York Stock Exchange
(“NYSE”) and State Street are open for business (a “Business Day”). Purchases are effected on behalf of a Client Lending Fund by State Street, in its capacity as
securities lending agent for the Lending Fund. All shares of the Portfolio are purchased at the net asset value (“NAV”) per share of the Portfolio next determined after the purchase is communicated to the Trust's transfer
agent and determined to be in good order. Redemptions are effected on behalf of a Client Lending Fund by State Street, in its capacity as securities lending agent for the Client
Lending Fund.
Shares of the Portfolio may be
redeemed on each Business Day at the NAV per share of the Portfolio next determined after the redemption is communicated to the Trust's transfer agent.
Under
normal circumstances, the Portfolio expects to meet redemption requests by using cash or cash equivalents in its portfolio and/or selling portfolio assets to
generate cash. The Portfolio also may pay redemption proceeds using cash obtained through borrowing arrangements that may be available from time to time.
The Portfolio intends to make distributions that may be taxed as ordinary
income.
Item 9. Investment Objective, Principal
Investment Strategies, Related Risks, and Disclosure of Portfolio Holdings
The investment objective, principal strategies, risks and portfolio
holdings disclosure policy of the Portfolio are described below. The investment objective of the Portfolio may be changed at any time by the Board of
Trustees of the Trust (the “Board”) upon at least sixty (60) days' prior written notice to shareholders of the Portfolio. The Board may change
the Portfolio's investment strategies and other policies without shareholder approval, except as otherwise indicated. See the Part B of the Registration Statement (“Part B”) for a description of certain
fundamental investment restrictions for the Portfolio. The Portfolio's investment adviser is SSGA FM, a wholly-owned subsidiary of State Street Global
Advisors, Inc.
State Street
Navigator Securities Lending Government Money Market Portfolio
The investment objective of the Portfolio is to seek to maximize current income, to the extent consistent with the preservation of capital and liquidity and the maintenance of a stable $1.00 per share NAV.
Principal Investment Strategies
The Portfolio is a government money market fund and invests only in obligations issued or guaranteed as to principal and/or interest, as applicable, by the U.S. government or its agencies and instrumentalities, as well as repurchase agreements secured by such instruments. The Portfolio will provide shareholders with at least 60 days' prior notice of any change in this investment policy. The Portfolio may hold a portion of its assets in cash pending investment, to satisfy redemption requests or to meet the Portfolio's other cash management needs.
The Portfolio follows a disciplined investment process that attempts to provide stability of principal, liquidity and current income, by investing in U.S. government securities. Among other things, SSGA FM, the investment adviser to the Portfolio, conducts its own credit analyses of potential investments and portfolio holdings, and relies substantially on a dedicated short-term credit research team. The Portfolio invests in accordance with regulatory requirements applicable to money market funds. Regulations require, among other things, a money market fund to invest only in short-term, high quality debt obligations (generally, securities that have remaining maturities of 397 calendar days or less, with the exception of certain floating rate securities that may have final maturities longer than 397 days but use maturity shortening provisions under Rule 2a-7 to meet the 397 day requirement, and that the Portfolio believes present minimal credit risk), to maintain a maximum dollar-weighted average maturity and dollar-weighted average life of sixty (60) days or less and 120 days or less, respectively, and to meet requirements as to portfolio diversification and liquidity. All securities held by the Portfolio are U.S. dollar-denominated, and they may have fixed, variable or floating interest rates.
The Portfolio attempts to meet its investment objective by investing
in:
•
Obligations issued or guaranteed as to principal and/or interest, as applicable, by the
U.S. government or its agencies and instrumentalities, such as U.S. Treasury securities and securities issued by the Government National Mortgage Association (“GNMA”), which are backed by the full faith and credit of the United States;
•
Obligations issued or guaranteed by the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, and U.S. government-sponsored entities such as the Federal Home Loan Bank, and the Federal Farm Credit Banks Funding Corporation, which are not backed by the full faith and credit of the United States; and
•
Repurchase agreements collateralized by U.S. government securities.
The
Portfolio is used exclusively for the investment of cash received as collateral for securities loans. Accordingly, the Portfolio may experience significant
redemptions in response to declines in the value of securities on loan or the quantity of loans outstanding from time to time. If the Portfolio is required to
sell securities to meet significant redemptions during a period of market disruption, the Portfolio may experience losses, which may impair the ability of the
Portfolio to maintain a stable NAV of $1.00 per share.
Principal Risks of Investing in the Portfolio
The Portfolio is subject to the following principal risks. You could lose money by investing in the Portfolio. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Portfolio is subject to investment risks,
including possible loss of principal, is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation
(“FDIC”) or any other governmental agency. The Portfolio's sponsor has no legal obligation to provide financial support
to the Portfolio, and you should not expect that the sponsor will provide financial support to the Portfolio at any time. Certain risks relating to instruments and strategies used in the management of the Portfolio are placed first. The significance of any specific risk to an investment in the Portfolio will vary over time, depending on the composition of the Portfolio's portfolio, market conditions, and other factors. You should read all of the risk information presented below carefully, because any one or more of these risks may result in losses to the Portfolio.
Money Market Fund Risk. An investment in a money market fund is not a deposit of any
bank and is not insured or guaranteed by the FDIC or any other government agency. Although a money market fund generally seeks to preserve the value of its shares at $1.00 per share, there can be no assurance that it will do so, and it is possible to lose money by investing in a money market fund. A major or unexpected change in interest rates or a decline in the credit quality of an issuer or entity providing credit support, an inactive trading market for money market instruments, or adverse market, economic, industry, political, regulatory, geopolitical, and other conditions could cause a money market fund's share price to fall below $1.00. It is possible that a money market fund will issue and redeem shares at $1.00 per share at times when the fair value of the money market fund's portfolio per share is more or less than $1.00. Rule 2a-7 as adopted by the SEC permits a money market fund to impose a liquidity fee upon the sale of fund shares under certain circumstances, however the State Street Navigator Securities Lending Government Money Market Portfolio is a government money market fund that has not elected to be subject to the liquidity fee provision of Rule 2a-7. None of State Street Corporation, State Street, State Street Investment Management, SSGA FM or their affiliates (collectively, the
“State Street
Entities”)
guarantee the value of an investment in a money market fund at $1.00 per share. Investors should have no expectation of capital support to a money market fund from the State Street Entities.
U.S. Government Securities Risk. U.S. government securities, such as Treasury bills,
notes and bonds and mortgage-backed securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), are supported by the full faith and credit of the United States; others are supported by the right
of the issuer to borrow from the U.S. Treasury; others are supported by the discretionary authority of the U.S. government to purchase the agency's obligations;
and still others are supported only by the credit of the issuing agency, instrumentality, or enterprise. Although U.S. government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National
Mortgage Association (“Fannie Mae”) may be chartered or
sponsored by Congress, they are not funded by Congressional appropriations, and their securities are not issued by the U.S. Treasury nor supported by the full
faith and credit of the U.S. government. There is no assurance that the U.S. government would provide financial support to its agencies and instrumentalities if not required to do so. In addition, certain governmental entities have been subject to regulatory scrutiny regarding their accounting policies and practices and other concerns that may result in legislation, changes in regulatory oversight and/or other consequences that could adversely affect the credit quality, availability, or investment character of securities issued by these entities. The value and liquidity of U.S. government securities may be affected adversely by changes in the ratings of those securities. Securities issued by the U.S. Treasury historically have been considered to present minimal credit risk. The downgrade in the long-term U.S. credit rating by at least two major rating agencies has introduced greater uncertainty about the ability of the U.S. to repay its obligations. Further credit rating downgrades or a U.S. credit default could decrease the value and increase the volatility of the Portfolio's investments.
Repurchase Agreement Risk. A repurchase agreement is an agreement to buy a security from a seller at one price and a
simultaneous agreement to sell it back to the original seller at an agreed-upon price, typically representing the purchase price plus interest. Repurchase
agreements may be viewed as loans made by the Portfolio, which are collateralized by the securities subject to repurchase. The Portfolio's investment return on
such transactions will depend on the counterparty's willingness and ability to perform its obligations under a repurchase agreement. If the Portfolio's
counterparty should default on its obligations and the Portfolio is delayed or prevented from recovering the collateral, or if the value of the collateral is insufficient, the Portfolio may realize a loss. The SEC has finalized new rules that will require certain transactions involving U.S. Treasuries, including repurchase agreements, to be centrally cleared. Historically, such transactions have not been required to be cleared and voluntary clearing of such transactions has generally been limited. Compliance with these rules is expected to be required in the middle of 2027. Although the impact of these rules on the Portfolio is difficult to predict, the new clearing requirement could make it more difficult for the Portfolio to execute certain investment strategies, reduce the availability or increase the costs of such transactions and may adversely affect the Portfolio's performance.
Stable Share Price Risk. If the market value of one or more of the Portfolio's
investments changes substantially, the Portfolio may not be able to maintain a stable share price of $1.00. This risk typically is higher during periods of
rapidly changing interest rates or when issuer credit quality generally is falling, and is made worse when the Portfolio experiences significant redemption requests.
Market Risk. Market prices of investments held by the Portfolio will go up or down, sometimes rapidly or unpredictably. The Portfolio's investments are subject to changes in general economic conditions, general market fluctuations and the risks inherent in investment in securities markets. Investment markets can be volatile, and prices of investments can change substantially due to various factors, including, but not limited to, economic growth or recession, changes in interest rates, inflation, changes in actual or perceived creditworthiness of issuers and general market liquidity. Even if gen
eral
economic conditions do not change, the value of an investment in the Portfolio could decline if the particular industries, sectors or companies in which the
Portfolio invests do not perform well or are adversely affected by events. Further, legal, political, regulatory and tax changes also may cause fluctuations in
markets and securities prices. Local, regional or global events such as war, military conflicts, acts of terrorism, trade policy changes or disputes, the threat
or actual imposition of tariffs, natural disasters, public health issues, or other events could have a significant impact on the Portfolio and its investments. Due to the interconnectedness of economies and financial markets throughout the world, if a Portfolio invests in securities of issuers located in or with significant exposure to countries experiencing economic and financial difficulties, the value and liquidity of the Portfolio's investments may be negatively affected. A widespread outbreak of an infectious illness and efforts to contain its spread, may result in market volatility, inflation, reduced liquidity of certain instruments, disruption in the trading of certain instruments, and systemic economic weakness. The foregoing could impact the Portfolio and its investments and result in disruptions to the services provided to the Portfolio by its service providers.
Money Market Fund Regulatory Risk. Money market funds and the securities they invest
in are subject to comprehensive regulations. The SEC has adopted amendments to money market fund regulation that, among other things, increase the daily and weekly liquid asset requirements (“Money Market Fund Reform”). Money Market
Fund Reform permits government money market funds (such as the Portfolio), that are experiencing a negative gross yield as a result of negative interest rates, to either convert from a stable share price to a floating share price or reduce the number of shares outstanding to maintain a stable net asset value per share, subject to certain Board determinations and disclosures to investors. The SEC and other government agencies continue to review the regulation of money market funds and may implement additional regulatory changes in the future. The enactment of any new legislation or regulations impacting the money market fund industry could limit the Portfolio's investment flexibility and reduce its ability to generate returns.
Low Short-Term Interest Rate Risk. During market conditions in which short-term interest rates are at low levels, the Portfolio's yield
can be very low. During these conditions, it is possible that the Portfolio will generate an insufficient amount of income to pay its expenses, and that it will
not be able to pay a daily dividend and may have a negative yield (i.e., it may lose money on an operating basis). It is possible that the Portfolio would, during
these conditions, maintain a substantial portion of its assets in cash, on which it may earn little, if any, income.
Call/Prepayment Risk. Call/prepayment risk is the risk that an issuer will exercise its right to pay principal on an obligation held by the Portfolio earlier than expected or required. This may occur, for example, when there is a decline in interest rates, and an issuer of bonds or preferred stock redeems the bonds or stock in order to replace them with obligations on which it is required to pay a lower interest or dividend rate. It may also occur when there is an unanticipated increase in the rate at which mortgages or other receivables underlying mortgage- or asset-backed securities held by the Portfolio are prepaid. In any such case, the Portfolio may be forced to invest the prepaid amounts in lower-yielding investments, resulting in a decline in the Portfolio's income.
Counterparty Risk. The Portfolio will be subject to credit risk with respect to the
counterparties with which the Portfolio enters into repurchase agreements and other transactions. If a counterparty fails to meet its contractual obligations, the
Portfolio may be unable to terminate the transaction, and it may be delayed or prevented from realizing on any collateral in the event of a bankruptcy or insolvency proceeding relating to the counterparty.
Credit Risk. Credit risk is the risk that an
issuer, guarantor or liquidity provider of a fixed-income security held by the Portfolio may be unable or unwilling, or may be perceived (whether by market
participants, ratings agencies, pricing services or otherwise) as unable or unwilling, to make timely principal and/or interest payments, or to otherwise honor
its obligations. It includes the risk that the security will be downgraded by a credit rating agency; generally, lower credit quality issuers present higher credit risks. An actual or perceived decline in creditworthiness of an issuer of a fixed-income security held by the Portfolio may result in a decrease in the value of the security. It is possible that the ability of an issuer to meet its obligations will decline substantially during the period when the Portfolio owns securities of the issuer or that the issuer will default on its obligations or that the obligations of the issuer will be limited or restructured.
The credit rating assigned to any particular investment does not
necessarily reflect the issuer's current financial condition and does not reflect an assessment of an investment's volatility or liquidity. Securities rated in
the lowest category of investment-grade are considered to have speculative characteristics. If a security held by the Portfolio loses its rating
or its
rating is downgraded, the Portfolio may nonetheless continue to hold the security in the discretion of the Adviser. In the case of asset-backed or
mortgage-related securities, changes in the actual or perceived ability of the obligors on the underlying assets or mortgages to make payments of interest and/or
principal may affect the values of those securities.
Debt Securities Risk. The values of debt securities may increase or decrease as a
result of the following: market fluctuations, changes in interest rates, actual or perceived inability or unwillingness of issuers, guarantors or liquidity
providers to make scheduled principal or interest payments or illiquidity in debt securities markets. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. A rising interest rate environment may cause the value of the Portfolio's fixed income securities to decrease, an adverse impact on the liquidity of the Portfolio's fixed income securities, and increased volatility of the fixed income markets. During periods when interest rates are at low levels, the Portfolio's yield can be low, and the Portfolio may have a negative yield (i.e., it may lose money on an operating basis). To the extent that interest rates fall, certain underlying obligations may be paid off substantially faster than originally anticipated. If the principal on a debt obligation is prepaid before expected, the prepayments of principal may have to be reinvested in obligations paying interest at lower rates. During periods of falling interest rates, the income received by the Portfolio may decline. Changes in interest rates will likely have a greater effect on the values of debt securities of longer durations. Returns on investments in debt securities could trail the returns on other investment options, including investments in equity securities. High levels of inflation and/or a significantly changing interest rate environment can lead to heightened levels of volatility and reduced liquidity.
Focused Investment Risk. To the extent the Portfolio invests a large percentage of
its assets in securities within the same country, state, region, or economic sector its investment strategy could result in more risk or greater volatility in
returns than if the Portfolio's investments were less focused. Similarly, to the extent the Portfolio holds investments with closely correlated market prices, it will be subject to greater risk than a fund with investments that are not as closely correlated. Changes in the value of a single security or issuer or the impact of a single economic, political, or regulatory occurrence may have a greater adverse impact on the Portfolio's net asset value.
A fund that invests in the securities of a small number of issuers has greater exposure to adverse developments affecting those issuers and a resulting decline in the market price of those issuers' securities as compared to a fund that invests in the securities of a larger number of issuers. Companies that share common characteristics are often subject to similar business risks and regulatory burdens and often react similarly to specific economic, market, political or other developments.
Similarly, funds having a significant portion of their assets in investments tied economically to a particular geographic region, country, or market (e.g., emerging markets) or to sectors within a region, country, or market have more exposure to regional and country economic risks than do funds whose investments are more geographically diverse.
Income Risk. The Portfolio's income may decline due to falling interest rates or other factors. Issuers of
securities held by the Portfolio may call or redeem the securities during periods of falling interest rates, and the Portfolio would likely be required to reinvest in securities paying lower interest rates. If an obligation held by the Portfolio is prepaid, the Portfolio may have to reinvest the prepayment in other obligations paying income at lower rates. A reduction in the income earned by the Portfolio may limit the Portfolio's ability to achieve its objective.
Interest Rate Risk. Interest rate risk is the
risk that the securities held by the Portfolio will decline in value because of increases in market interest rates. Duration is a measure used to determine the
sensitivity of a security's price to changes in interest rates. Debt securities with longer durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than debt securities with shorter durations. For example, the value of a security with a duration of five years would be expected to decrease by 5% for every 1% increase in interest rates. Falling interest rates also create the potential for a decline in the Portfolio's income and yield. Interest-only and principal-only securities are especially sensitive to interest rate changes, which can affect not only their prices but can also change the income flows and repayment assumptions about those investments. Variable and floating rate securities also generally increase or decrease in value in response to changes in interest rates, although generally to a lesser degree than fixed-rate securities. A substantial increase in interest rates may also have an adverse impact on the liquidity of a security, especially those with longer durations. Changes in governmental policy, including changes in central bank monetary policy, could cause interest rates to rise rapidly, or cause investors to expect a rapid rise in interest rates. This could lead to heightened levels of
interest
rate, volatility and liquidity risks for the fixed income markets generally and could have a substantial and immediate effect on the values of the Portfolio's
investments. High levels of inflation and/or a significantly changing interest rate environment can lead to heightened levels of volatility and reduced
liquidity.
Large Transactions
Risk. To the extent a large proportion of the shares of the Portfolio are highly concentrated or held by a small number of shareholders (or a single shareholder), including funds or accounts over which the Adviser has investment discretion, the Portfolio is subject to the risk that these shareholders will purchase or redeem Portfolio interests in large amounts rapidly or unexpectedly, including as a result of an asset allocation decision made by the Adviser. In addition, a large number of shareholders collectively may purchase or redeem Portfolio interests in large amounts rapidly or unexpectedly (collectively, such transactions are referred to as “large shareholder transactions”). Large
shareholder transactions could adversely affect the ability of the Portfolio to conduct its investment program. For example, they could require the Portfolio to sell portfolio securities or purchase portfolio securities unexpectedly and incur substantial transaction costs and/or accelerate the realization of taxable income and/or gains to shareholders. The effects of taxable income and/or gains resulting from large shareholder transactions would particularly impact non-redeeming shareholders who do not hold their Portfolio interests in an IRA, 401(k) plan or other tax-advantaged plan. To the extent that such transactions result in short-term capital gains, such gains will generally be taxed at the ordinary income tax rate for shareholders who hold Portfolio interests in a taxable account. In addition, the Portfolio may be required to sell its more liquid portfolio investments to meet a large redemption, in which case the Portfolio's remaining assets may be less liquid, more volatile, and more difficult to price. The Portfolio may hold a relatively large proportion of its assets in cash in anticipation of large redemptions, diluting its investment returns. A number of circumstances may cause the Portfolio to experience large redemptions, such as changes in investors' circumstances; changes in the eligibility criteria for the Portfolio or share class of the Portfolio; liquidations, reorganizations, repositionings, or other announced Portfolio events; or changes in investment objectives, strategies, policies, risks, or investment personnel.
Market Disruption and Geopolitical Risk. The Portfolio is subject to the risk that geopolitical events will disrupt securities markets and
adversely affect global economies and markets. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term
market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, trade policy changes or disputes, the threat
of or actual imposition of tariffs, natural and environmental disasters, pandemics and epidemics, and systemic market dislocations may be highly disruptive to economies and markets. Those events, as well as other changes in foreign and domestic economic and political conditions, also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Portfolio's investments. Given the increasing interdependence among global economies and markets, conditions in one country, market, or region might adversely affect markets, issuers, and/or foreign exchange rates in other countries, including the U.S. Any partial or complete dissolution of the Economic and Monetary Union of the European Union, or any increased uncertainty as to its status, could have significant adverse effects on currency and financial markets, and on the values of the Portfolio's investments. On January 31, 2020, the United Kingdom (“UK”) formally withdrew from the European
Union (“EU”) (commonly known as
“Brexit”). An agreement between the UK and the EU governing their future trade relationship became effective
January 1, 2021, but that agreement does not include an agreement on financial services, and it is unlikely that such agreement will be concluded. Moreover, the
UK government has started a program of financial services law reform with the ultimate aim of repealing many EU financial services laws that were assimilated into
UK law from January 1, 2021, and replacing them with legislation or rules made by the UK government or financial services regulators. Accordingly, uncertainty remains in certain areas as to the future relationship between the UK and the EU. Brexit has already had a significant impact on the UK, Europe, and global economies, and could continue to result in volatility and illiquidity, legal, political, economic and regulatory uncertainties and lower economic growth for these economies that could in turn have an adverse effect on the value of the Portoflio's investments. Any further exits from the EU, or the possibility of such exits, or the abandonment of the euro, may cause additional market disruption globally and introduce new legal and regulatory uncertainties.
Securities and financial markets may be susceptible to market
manipulation or other fraudulent trade practices, which could disrupt the orderly functioning of these markets or adversely affect the values of investments
traded in these markets, including investments held by the Portfolio. To the extent the Portfolio has focused its investments in the market or index of a particular region, adverse geopolitical and other events could have a disproportionate impact on the Portfolio.
New or escalation of hostilities in the Middle East region could
disrupt energy production or transportation, including through key shipping routes, which may lead to increased volatility in energy and other commodity prices.
The extent and duration of these conflicts, and others around the world, are impossible to predict but could continue to be significant.
Market
disruption caused by these conflicts, and any countermeasures or responses thereto (including international sanctions, a downgrade in a country's credit rating,
purchasing and financing restrictions, boycotts, tariffs, changes in consumer or purchaser preferences, cyberattacks and espionage) could continue to have severe
adverse impacts on regional and/or global securities and commodities markets, including markets for oil and natural gas. These impacts may include reduced market liquidity, distress in credit markets, further disruption of global supply chains, increased risk of inflation, and limited access to investments in certain international markets and/or issuers. These developments and other related events could negatively impact Portfolio performance.
Market Volatility; Government Intervention Risk. Market dislocations and other
external events, such as the failures or near failures of significant financial institutions, dislocations in investment or currency markets, corporate or
governmental defaults or credit downgrades, or poor collateral performance, may subject the Portfolio to significant risk of substantial volatility and loss. Governmental and regulatory authorities have taken, and may in the future take, actions to provide or arrange credit supports to financial institutions whose operations have been compromised by credit market dislocations and to restore liquidity and stability to financial systems in their jurisdictions; the implementation of such governmental interventions and their impact on both the markets generally and the Portfolio's investment program in particular can be uncertain. Governmental and non-governmental issuers may default on, or be forced to restructure, their debts, and other issuers may face difficulties obtaining credit. Raising the U.S. Government debt ceiling has become increasingly politicized. Any failure to increase the total amount that the U.S. Government is authorized to borrow could lead to a default on U.S. Government obligations. A default or a threat of default by the U.S. Government would be highly disruptive to the U.S. and global securities markets and could significantly reduce the value of the Portfolio's investments. Defaults or restructurings by governments or others of their debts could have substantial adverse effects on economies, financial markets, and asset valuations around the world. Federal Reserve or other U.S. or non-U.S. governmental or central bank actions, including interest rate increases or contrary actions by different governments, or investor perception that these efforts are not succeeding, could negatively affect financial markets generally as well as the values and liquidity of certain securities.
Mortgage-Related and Other Asset-Backed Securities Risk. Investments in
mortgage-related and other asset-backed securities are subject to the risk of significant credit downgrades, illiquidity, and defaults to a greater extent than
many other types of fixed income investments. The liquidity of mortgage-related and asset-backed securities may change over time. Mortgage-related securities represent a participation in, or are secured by, mortgage loans. Other asset-backed securities are typically structured like mortgage-related securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include, for example, items such as motor vehicle installment sales or installment loan contracts, leases on various types of real and personal property, and receivables from credit card agreements. During periods of falling interest rates, mortgage-related and other asset-backed securities, which typically provide the issuer with the right to prepay the security prior to maturity, may be prepaid, which may result in the Portfolio having to reinvest the proceeds in other investments at lower interest rates. During periods of rising interest rates, the average life of mortgage-related and other asset-backed securities may extend because of slower-than expected principal payments. This may lock in a below market interest rate, increase the security's duration and interest rate sensitivity, and reduce the value of the security. As a result, mortgage-related and other asset-backed securities may have less potential for capital appreciation during periods of declining interest rates than other debt securities of comparable maturities, although they may have a similar risk of decline in market values during periods of rising interest rates. Prepayment rates are difficult to predict and the potential impact of prepayments on the value of a mortgage-related or other asset-backed security depends on the terms of the instrument and can result in significant volatility. The price of a mortgage-related or other asset-backed security also depends on the credit quality and adequacy of the underlying assets or collateral. Mortgage-related or other asset-backed securities issued by non-governmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) will generally entail greater credit risk than obligations guaranteed by the U.S. government. Defaults on the underlying assets, if any, may impair the value of a mortgage-related or other asset-backed security. For some asset-backed securities in which the Portfolio may invest, such as those backed by credit card receivables, the underlying cash flows may not be supported by a security interest in a related asset. Moreover, the values of mortgage-related and other asset-backed securities may be substantially dependent on the servicing of the underlying asset pools, and are therefore subject to risks associated with the negligence or malfeasance by their servicers and to the credit risk of their servicers. In certain situations, the mishandling of related documentation may also affect the rights of securities holders in and to the underlying collateral. There may be legal and practical limitations on the enforceability of any security interest granted with respect to underlying assets, or the value of the underlying assets, if any, may be insufficient if the issuer defaults.
Rapid Changes in Interest Rates. The values of instruments held by the Portfolio may
be adversely affected by rapid changes in interest rates. Rapid changes in interest rates may cause significant requests to redeem Portfolio Shares, and possibly cause the Portfolio to sell portfolio securities at a loss to satisfy those requests. Significant losses could impair the Portfolio's ability to maintain a stable share price of $1.00.
Reinvestment Risk. Income from the Portfolio may decline when the Portfolio invests the proceeds from investment income,
sales of portfolio securities or matured, traded or called debt obligations. For instance, during periods of declining interest rates, an issuer of debt
obligations may exercise an option to redeem securities prior to maturity, forcing the Portfolio to reinvest the proceeds in lower-yielding securities. A decline
in income received by the Portfolio from its investments is likely to have a negative effect on the yield and total return of the Portfolio Shares.
Significant Exposure to U.S. Government Agencies
or Instrumentalities Risk. To the extent the Portfolio focuses its investments in
securities issued or guaranteed by U.S. government agencies or instrumentalities, any market movements, regulatory changes or changes in political or economic
conditions that affect the U.S. government agencies or instrumentalities in which the Portfolio invests may have a significant impact on the Portfolio's
performance. Events that would adversely affect the market prices of securities issued or guaranteed by one government agency or instrumentality may adversely affect the market price of securities issued or guaranteed by other government agencies or instrumentalities.
U.S. Treasury Obligations Risk. U.S. Treasury obligations may differ from other securities in their interest rates, maturities, times
of issuance and other characteristics. Similar to other issuers, changes to the financial condition or credit rating of the U.S. government may cause the value of
the Portfolio's U.S. Treasury obligations to decline. The total public debt of the United States as a percentage of gross domestic product grew rapidly after the
financial crisis of 2008 and has remained at a historically high level. Although high debt levels do not necessarily indicate or cause economic problems, they may create certain systemic risks if sound debt management practices are not implemented. A high national debt level may increase market pressures to meet government funding needs, which may drive debt cost higher and cause a country to sell additional debt, thereby increasing refinancing risk. A high national debt also raises concerns that a government will not be able to make principal or interest payments when they are due. In the worst case, unsustainable debt levels can cause a decline in the value of the dollar (which may lead to inflation), and can prevent the U.S. government from implementing effective countercyclical fiscal policy in economic downturns. On August 5, 2011, Standard & Poor's Ratings Services downgraded U.S. Treasury securities from AAA rating to AA+ rating. Standard & Poor's Ratings Services stated that its decision was prompted by its view on the rising public debt burden and its perception of greater policymaking uncertainty. Fitch also downgraded its rating of U.S. Treasury securities from AAA to AA+ in August 2023 citing increasing government debt and erosion in confidence regarding governance of fiscal matters as a result of repeated political standoffs related to debt limit approvals. Most recently, on May 16, 2025, Moody's downgraded U.S. long-term issuer and senior unsecured rating from Aaa to Aa1 to reflect over a decade-long increase in government debt, as well as interest payment ratios higher than those of similarly rated countries. A downgrade of the ratings of U.S. government debt obligations, which are often used as a benchmark for other borrowing arrangements, could result in higher interest rates for individual and corporate borrowers, cause disruptions in the international bond markets and have a substantial negative effect on the U.S. economy. Any additional downgrades of U.S. Treasury securities from ratings agencies may cause the value of the Portfolio's U.S. Treasury obligations to decline. In recent years, impasses in Congress regarding the federal budget have caused temporary Federal government shutdowns. While Congress has temporarily suspended the debt limit from time to time, the risks that the U.S. government will not adopt a long-term budget or deficit reduction plan, of one or more additional Federal government shutdowns or of future failures to not increase the Federal government's debt limit, may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree.
Variable and Floating Rate Securities Risk.
Variable or floating rate securities are debt securities with variable or floating interest rates payments. Variable or floating rate securities bear rates of
interest that are adjusted periodically according to formulae intended generally to reflect market rates of interest and allow the Portfolio to participate
(determined in accordance with the terms of the securities) in increases in interest rates through upward adjustments of the coupon rates on the securities. However, during periods of increasing interest rates, changes in the coupon rates may lag behind the changes in market rates or may have limits on the maximum increases in coupon rates. Alternatively, during periods of declining interest rates, the coupon rates on such securities will typically readjust downward resulting in a lower yield.
Additional
Information About Non-Principal Investment Strategies and Risks
The investments described below reflect the Portfolio's current practices. In addition to the principal risks described above, other risks are described in some of the descriptions of the investments below:
Conflicts of Interest Risk. An investment in the
Portfolio will be subject to a number of actual or potential conflicts of interest. For example, the Adviser or its affiliates may provide services to the
Portfolio, such as custodial, administrative, bookkeeping, and accounting services, transfer agency and investor servicing, securities brokerage services, and
other services for which the Portfolio would compensate the Adviser and/or such affiliates. The Portfolio may invest in other pooled investment vehicles sponsored, managed, or otherwise affiliated with the Adviser. There is no assurance that the rates at which the Portfolio pays fees or expenses to the Adviser or its affiliates, or the terms on which it enters into transactions with the Adviser or its affiliates will be the most favorable available in the market generally or as favorable as the rates the Adviser or its affiliates make available to other clients. Because of its financial interest, the Adviser will have an incentive to enter into transactions or arrangements on behalf of the Portfolio with itself or its affiliates in circumstances where it might not have done so in the absence of that interest, provided that the Adviser will comply with applicable regulatory requirements.
The Adviser and its affiliates serve as investment adviser to other clients and may make investment decisions that may be different from those that will be made by the Adviser on behalf of the Portfolio. For example, the Adviser may provide asset allocation advice to some clients that may include a recommendation to invest in or redeem from particular issuers while not providing that same recommendation to all clients invested in the same or similar issuers. The Adviser may (subject to applicable law) be simultaneously seeking to purchase (or sell) investments for the Portfolio and to sell (or purchase) the same investment for accounts, funds, or structured products for which it serves as asset manager, or for other clients or affiliates. The Adviser and its affiliates may invest for clients in various securities that are senior, pari passu or junior to, or have interests different from or adverse to, the securities that are owned by the Portfolio. The Adviser or its affiliates, in connection with its other business activities, may acquire material nonpublic confidential information that may restrict the Adviser from purchasing securities or selling securities for itself or its clients (including the Portfolio) or otherwise using such information for the benefit of its clients or itself.
The foregoing does not purport to be a comprehensive list or complete explanation of all potential conflicts of interests which may affect the Portfolio. The Portfolio may encounter circumstances, or enter into transactions, in which conflicts of interest that are not listed or discussed above may arise.
Cybersecurity Risk. With the increased use of technologies such as the Internet and
the dependence on computer systems to perform business and operational functions, funds (such as the Portfolio) and their service providers (including the Adviser) may be prone to operational and information security risks resulting from cyber-attacks and/or technological malfunctions. Furthermore, geopolitical tensions may have increased the scale and sophistication of deliberate cybersecurity attacks, particularly those from nation-states or from entities with nation-state backing. In general, cyber-attacks are deliberate, but unintentional events may have similar effects. Cyber-attacks include, among others, stealing or corrupting data maintained online or digitally, preventing legitimate users from accessing information or services on a website, releasing confidential information without authorization, and causing operational disruption. Successful cyber-attacks against, or security breakdowns of, the Portfolio, the Adviser, a custodian, the transfer agent, or other affiliated or third-party service provider may adversely affect the Portfolio or its investors. For instance, cyber-attacks or technical malfunctions may interfere with the processing of investor or other transactions, affect the Portfolio's ability to calculate its NAV, cause the release of private investor information or confidential Portfolio information, impede trading, cause reputational damage, and subject the Portfolio to regulatory fines, penalties or financial losses, reimbursement or other compensation costs, and additional compliance costs. Cyber-attacks or technical malfunctions may render records of Portfolio assets and transactions, investor ownership of Portfolio Shares, and other data integral to the functioning of the Portfolio inaccessible or inaccurate or incomplete. The Portfolio may also incur substantial costs for cybersecurity risk management in order to prevent cyber incidents in the future. The Portfolio and its investors could be negatively impacted as a result. While the Adviser has established business continuity plans and systems designed to minimize the risk of cyber-attacks through the use of technology, processes and controls, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified, given the evolving nature of this threat. The use of artificial intelligence and machine learning could exacerbate these risks or result in cyber security incidents that implicate personal data. The Portfolio relies on third-party service providers for many of its day-to-day operations, and will be subject to the risk that the protections and protocols implemented by those service providers will be ineffective to protect the Portfolio from cyber-attack. The Adviser does not control the cybersecurity plans and systems put in place by third-
party
service providers, and such third-party service providers may have limited indemnification obligations to the Adviser or the Portfolio. Similar types of
cybersecurity risks or technical malfunctions also are present for issuers of securities in which the Portfolio may invest, which could result in material adverse
consequences for such issuers, and may cause the Portfolio's investment in such securities to lose value.
Temporary Defensive Positions. In response to actual or perceived adverse market, economic, political, or other conditions, a
Portfolio may (but will not necessarily), without notice, depart from its principal investment strategies by temporarily investing for defensive purposes. While
investing defensively, the Portfolio may maintain a substantial portion of its assets in cash, on which the Portfolio may earn little if any income. If a
Portfolio invests for defensive purposes, it may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
Portfolio Holdings Disclosure
The Portfolio's portfolio holdings disclosure policy is described in the Part
B.
Item 10. Management, Organization and
Capital Structure
The Portfolio is a separate, diversified series of the Trust.
SSGA FM serves as the investment adviser to the Portfolio pursuant
to an investment advisory agreement (“Investment Advisory Agreement”)
between the Trust and the Adviser, and, subject to the oversight of the Board, is responsible for the investment management of the Portfolio. The Adviser provides
an investment management program for the Portfolio and manages the investment of the Portfolio's assets. In addition, the Adviser provides administrative,
compliance and general management services to the Portfolio. The Adviser is a wholly-owned subsidiary of State Street Global Advisors, Inc., which itself is a wholly-owned subsidiary of State Street Corporation. The Adviser is registered with the SEC under the Investment Advisers Act of 1940, as amended. The Adviser and certain other affiliates of State Street Corporation make up State Street Investment Management, the investment management arm of State Street Corporation. As of December 31, 2025, the Adviser managed approximately $1.34 trillion in assets and State Street Investment Management managed approximately $5.66 trillion in assets. The Adviser's principal business address is One Congress Street, Boston, Massachusetts 02114.
A discussion regarding the Board's consideration of the Portfolio's Investment Advisory Agreement is provided in the Portfolio's Form N-CSR filing with the SEC for the period ended June 30, 2025.
The Administrator, Sub-Administrator, Custodian and Transfer Agent
The Adviser serves as administrator of the Portfolio. State Street,
a subsidiary of State Street Corporation, serves as sub-administrator, custodian and transfer agent for the Portfolio. The Portfolio pays an annual fee that
is accrued daily and payable monthly for the administration, sub-administration, custody and transfer agency services SSGA FM and State Street provide. For its role in providing administrative services to the Portfolio, the Adviser receives a portion of such fee paid by the Portfolio at the annual rate of 0.00075%.
The Trustees of the Trust oversee generally the operations of the Portfolio and the Trust. The Trust enters into contractual arrangements with various parties, including, among others, the Portfolio's investment adviser, custodian, transfer agent, and accountants, who provide services to the Portfolio. Investors are not parties to any such contractual arrangements or intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any investor any right to enforce them directly against the service providers or to seek any remedy under them directly against the service providers.
This Part A provides information concerning the Trust and the Portfolio that you should consider in determining whether to purchase shares of the Portfolio. Neither this Part A, nor the related Part B, is intended, or should be read, to be or to give rise to an agreement or contract between the Trust or the Portfolio and any investor, or to give rise to any rights in any investor or other person other than any rights under federal or state law that may not be
waived.
Advisory Fee
As compensation for the Adviser's services to the Portfolio, the
Portfolio is obligated to pay a fee of 0.0175% of its average daily net assets. SSGA FM, is contractually obligated until April 30, 2027 (i) to waive its up to
the full amount of the advisory fee payable by the Portfolio and/or (ii) to reimburse the Portfolio for expenses to the extent that Total Annual Fund Operating Expenses (exclusive of non-recurring account fees and/or extraordinary expenses) exceed 0.042% of average daily net assets on an annual basis. This waiver and/or reimbursement may not be terminated prior to April 30, 2027 except with approval of the Board.
The Adviser and certain of its affiliates (each a “Service Provider”) also may voluntarily
reduce all or a portion of its fees and/or reimburse expenses for the Portfolio to the extent necessary to maintain a certain minimum net yield, which may vary from time to time, in SSGA FM's sole discretion (any such waiver or reimbursement of expenses by a Service Provider being referred to herein as a “Voluntary Reduction”). Under an
agreement with the Service Providers relating to the Voluntary Reduction, the Portfolio has agreed to reimburse the Service Providers for the full dollar amount
of any Voluntary Reduction beginning on May 1, 2020, subject to certain limitations. Each Service Provider may, in its sole discretion, irrevocably waive receipt of any or all reimbursement amounts due from the Portfolio.
A reimbursement to the Service Provider would increase fund expenses and may negatively impact the Portfolio's yield during such period. There is no guarantee that the Voluntary Reduction will be in effect at any given time or that the Portfolio will be able to avoid a negative yield. The Portfolio has agreed, subject to certain limitations, to reimburse the applicable Service Provider for the full dollar amount of any Voluntary Reduction incurred after May 1, 2020. Any such future reimbursement of an applicable Service Provider may result in the total annual operating expenses of the Portfolio exceeding the amount of the expense cap under the contractual expense limitation agreement because the expense is not covered by the agreement.
Shares of the Trust are not registered under the 1933 Act or the securities law of any state and are sold in reliance upon exemptions from registration under such laws. Shares may not be transferred or resold without registration under the 1933 Act, except pursuant to an exemption from registration. However, shares of the Trust may be redeemed on any Business Day in accordance with the terms of the Trust's Master Trust Agreement and the Confidential Offering Memorandum relating to the Portfolio provided to shareholders.
Item 11. Shareholder Information
The Portfolio determines its NAV per share once each Business Day (as defined below), typically at 5:00 p.m. ET (the time when the Portfolio determines its NAV per share is referred to herein as the “Valuation Time”). The Portfolio reserves
the right to advance the time for accepting purchase or redemption orders and/or the Valuation Time on any day when the NYSE, bond markets (as recommended by The Securities Industry and Financial Markets Association
(“SIFMA”)) or any Federal Reserve bank close early, trading on the NYSE is restricted, an emergency arises or
as otherwise permitted by the SEC. The Portfolio reserves the right to continue to accept orders to purchase or redeem shares following the close of the NYSE on any day on which the NYSE closes early, provided that either the Federal Reserve or the bond markets remain open. In addition, the Board may, for any Business Day, decide to change the time as of which the Portfolio's NAV is calculated in response to new developments such as altered trading hours, or as otherwise permitted by the SEC.
Shares of the Portfolio are available for purchase each day on which the NYSE and State Street are open for business (a “Business Day”). In the event the NYSE does not open for business, the Portfolio may, but is not required to, open for purchase or redemption transactions. The Federal Reserve is closed on certain holidays on which the NYSE is open. These holidays are Columbus Day and Veterans Day. On these holidays, you will not be able to purchase shares by wiring Federal Funds because Federal Funds wiring does not occur on days when the Federal Reserve is closed. In the event that the Portfolio invokes the right to accept orders to purchase or redeem shares on any day that is not a Business Day, the Portfolio will post advance notice of these events at: www.statestreet.com/im.
There is no minimum initial or subsequent
investment amount for the Portfolio. Shares of the Portfolio are only offered to, and may only be held by, the Lending Funds in the State
Street Securities Lending Program and may, on a case-by-case basis be offered to and held by Third-Party Lending Funds in Third-Party
Securities Lending Programs. Purchases are effected on behalf of a Client Lending Fund by State Street, or, to the extent applicable, a
third-party lending agent,
in its
capacity as securities lending agent for the Third-Party Lending Fund. All shares of the Portfolio are purchased at the NAV per share of the Portfolio next
determined after the purchase is communicated to the Trust's transfer agent and determined to be in good order. Shares of the Portfolio may be redeemed at the NAV
per share of the Portfolio next determined after the redemption is communicated to the Trust's transfer agent. Rule 2a-7 as adopted by the SEC permits a money market fund to impose a liquidity fee upon the sale of fund shares under certain circumstances, however the Portfolio is a government money market fund that has not elected to be subject to the liquidity fee provision of Rule 2a-7. Redemptions are effected on behalf of a Client Lending Fund by State Street, or, to the extent applicable, a third-party lending agent, in its capacity as securities lending agent for the Third Party Lending Fund.
The NAV per share of the Portfolio for a Business Day is determined by dividing the NAV of the Portfolio on such Business Day, calculated typically by using the amortized cost method of valuation, by the number of issued and outstanding shares on that Business Day. The amortized cost valuation method initially prices an instrument at its cost and thereafter assumes a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument.
The NAV per share of the Portfolio is determined at 5:00 p.m. Eastern Time on each Business Day. For so long as the Portfolio may use the amortized cost method of valuing securities held by the Portfolio, it expects to maintain a NAV per share of $1.00. There is no guarantee that the Portfolio will maintain a stable NAV per share of $1.00.
If the Portfolio receives a redemption order in good form prior to
5:00 p.m. Eastern Time on a Business Day, the Portfolio typically expects to pay out redemption proceeds on that day regardless of the method the Portfolio
uses to make such payment. If a redemption order is placed after 5:00 p.m. Eastern Time on a Business Day, the Portfolio typically expects to pay out redemption proceeds on the next Business Day. The Portfolio reserves the right to pay for redeemed shares within seven days after receiving a redemption order if, in the judgment of the Adviser, an earlier payment could adversely affect the Portfolio.
The transfer agent may temporarily delay for more than seven days the disbursement of redemption proceeds from the Portfolio account of a
“Specified
Adult” (as defined in Financial Industry Regulatory Authority, Inc. (“FINRA”) Rule 2165) based on a reasonable belief that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted, subject to certain conditions.
Under normal circumstances, the Portfolio expects to meet redemption requests by using cash or cash equivalents in its portfolio and/or selling portfolio assets to generate cash. The Portfolio also may pay redemption proceeds using cash obtained through borrowing arrangements that may be available from time to time.
The Portfolio may pay all or a portion of your redemption proceeds by giving you securities (for example, if the Portfolio reasonably believes that a cash redemption may have a substantial impact on the Portfolio and its remaining shareholders). A redemption is generally a taxable event for shareholders, regardless of whether the redemption is satisfied in cash or in kind. You may pay transaction costs (including through the realization of taxable gain) to dispose of the securities, and you may receive less for them than the price at which they were valued for purposes of the redemption. In addition, you will be subject to the market risks associated with such securities until such time as you choose to dispose of the security.
During periods of deteriorating or stressed market conditions or during extraordinary or emergency circumstances, the Portfolio may be more likely to pay redemption proceeds with cash obtained through short-term borrowing arrangements (if available) or by giving you securities.
In accordance with certain federal regulations, the Trust is required to obtain, verify and record information that identifies each entity that applies to open an account, including, in certain cases, information concerning such entity's beneficial owners. For this reason, when you open (or change ownership of) an account, the Trust will request certain information, including your name, address and taxpayer identification number, which will be used to verify your identity. If you are unable to provide sufficient information to verify your identity, the Trust will not open an account for you. As required by law, the Trust may employ various procedures, such as comparing your information to fraud databases or requesting additional information and documentation from you, to ensure that the information supplied by you is correct. The Trust reserves the right to reject any purchase for any reason, including failure to provide the Trust with information necessary to confirm your identity as required by law.
Dividends
and Distributions
Dividends on shares of the Portfolio
will be declared and paid daily from the Portfolio's net investment income. Distributions of net short- and long-term capital gains, if any, will be made at least
annually. Dividends will be processed pursuant to the securities lending authorization agreement between the Lending Fund and State Street, or, to the extent
applicable, as otherwise directed by a Third-Party Lending Fund. Generally, distributions will be declared and paid in December, if required, for the Portfolio to avoid imposition of a federal excise tax on undistributed capital gains. The Portfolio does not expect to make distributions that are eligible for taxation as long-term capital gains.
A shareholder's right to receive dividends and distributions with respect to shares purchased commences on the effective date of the purchase of such shares and continues through the day immediately preceding the effective date of redemption of such shares.
Frequent Purchases and Redemptions of Portfolio Shares
The Board has not adopted market timing policies and procedures with respect to the Portfolio. The Board has evaluated the risks of market timing activities by the Portfolio's shareholders and has determined that due to the (i) the Portfolio's use of the amortized cost methodology of maintaining the NAV at $1.00 each day, (ii) nature of the Portfolio's portfolio holdings, (iii) nature of the Portfolio's shareholders, (iv) inability of the Portfolio's shareholders to exchange into other mutual funds, and (v) inability of the Portfolio's shareholders to direct transactions because cash moves in and out of the Portfolio as securities are lent and returned, it is unlikely that (a) market timing would be attempted by the Portfolio's shareholders or (b) any attempts to market time the Portfolio by shareholders would result in a negative impact to the Portfolio or its shareholders.
U.S. Federal Income Tax Status
The following discussion is a summary of some important U.S. federal income tax considerations generally applicable to an investment in the Portfolio. Your investment in the Portfolio may have other tax implications. Please consult your tax advisor about federal, state, local, foreign or other tax laws applicable to you.
The Portfolio has elected to be treated as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) and intends each year to qualify
and to be eligible to be treated as such. A regulated investment company generally is not subject to tax at the corporate level on income and gains that are
timely distributed to shareholders. In order to qualify and be eligible for treatment as a regulated investment company, the Portfolio must, among other things, satisfy diversification, qualifying income and distribution requirements. The Portfolio's failure to qualify as a regulated investment company would result in fund-level taxation and, consequently, a reduction in income available for distribution to shareholders.
If the Portfolio fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or for the one-year period ending November 30 or December 31 if the Portfolio is eligible to elect and so elects), plus any retained amount from the prior year, the Portfolio will be subject to a nondeductible 4% excise tax on the undistributed amounts. A dividend paid to shareholders by the Portfolio in January of a year is generally deemed to have been paid by the Portfolio on December 31 of the preceding year, if the distribution was declared and payable to shareholders of record on a date in October, November or December of that preceding year. The Portfolio intends generally to make distributions sufficient to avoid imposition of the 4% excise tax although there can be no assurance it will do so. In addition, if the Portfolio were to qualify as a “personal holding
company,” it may have to comply with additional requirements with respect to its distributions to shareholders in order to avoid
the fund-level tax under the personal holding company rules of the Code.
For U.S. federal income tax purposes, distributions of investment income generally are taxable to you as ordinary income. Taxes on distributions of capital gains generally are determined by how long the Portfolio owned (or is deemed to have owned) the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains (that is, the excess of net long-term capital gains over net short-term capital losses) from the sale of investments that the Portfolio owned for more than one year that are properly reported by the Portfolio as capital gain dividends generally will be treated as long-term capital gain includible in your net capital gain and taxed to individuals at reduced rates. The Portfolio does not expect to make distributions that are eligible for taxation as long-term capital gains. Distributions of gains from investments that the Portfolio owned for one year or less generally will be taxable to you as
ordinary
income. Distributions are taxable to you even if they are paid from income or gains earned by the Portfolio before your investment (and thus were included in the
price you paid for your shares). Distributions may also be subject to state, local or foreign taxes and are taxable whether you receive them in cash or reinvest them in
additional shares.
If the NAV of Portfolio shares
were to vary from $1.0000 per share, shareholders generally would realize a gain or loss upon the redemption or other taxable disposition of such Portfolio
shares. Any such gain would be taxable to you as either short-term or long-term capital gain, depending upon how long you held such Portfolio shares, except that,
as and where the Portfolio is not a “publicly
offered” regulated investment company (as described below), in certain circumstances, it is possible that the
proceeds of a redemption of Portfolio shares may be taxable as dividend income or a return of capital. The Internal Revenue Service (“IRS”) permits a simplified method of accounting for gains and losses realized upon the disposition of
shares of a regulated investment company that is a money market fund. If you elect to adopt this simplified method of accounting, rather than compute gain or
loss on every taxable disposition of Portfolio shares, you will determine your gain or loss based on the change in the aggregate value of your Portfolio shares
during a computation period (such as your taxable year), reduced by your net investment (purchase minus sales) in those shares during that period. Under this simplified method, any resulting net capital gain or loss would be treated as short-term capital gain or loss.
A regulated investment company is considered “publicly
offered” if its shares are continuously offered pursuant to a public offering, its shares are regularly traded
on an established securities exchange, or it has at least 500 shareholders at all times during a taxable year. Because shares of the Portfolio are not so
registered or traded, and the Portfolio is not expected to have at least 500 shareholders at all times during the taxable year, a portion or all the proceeds of
redemptions of the Portfolio shares may be treated as dividends. If a shareholder redeems fewer than all of its shares, such shareholder may be treated as having received a distribution under Section 301 of the Code (a
“Section 301
distribution”) unless the redemption is treated as being either (i) “substantially
disproportionate” with respect to such shareholder by satisfying certain numerical tests relating to the reduction in the
redeeming shareholder's percentage interest, and percentage voting interest, in the Portfolio, or (ii) otherwise “not essentially equivalent to a
dividend” under the relevant rules of the Code. For any period during which the Portfolio has a single
shareholder, all redemption distributions will be treated as Section 301 distributions. A Section 301 distribution is not treated as a sale or exchange giving
rise to a capital gain or loss, but rather is treated as a dividend to the extent supported by the Portfolio's current and accumulated earnings and profits, with the excess treated as a return of capital reducing the shareholder's tax basis in the Portfolio shares, and thereafter as capital gain.
In addition, in the event the Portfolio is not considered publicly offered, certain shareholders will be deemed to receive distributions equal to their allocable shares of certain expenses paid by the Portfolio. Very generally, expenses that are deemed distributed by the Portfolio include those paid or incurred during a calendar year that are deductible in determining the Portfolio's investment company taxable income for a taxable year beginning or ending within that calendar year, including in particular its advisory fee, but excluding those expenses incurred by virtue of the Portfolio's organization as a registered investment company (such as its registration fees, trustees' fees, expenses of periodic trustees' and shareholders' meetings, transfer agent fees, certain legal and accounting fees, the expenses of shareholder communications required by law, and certain other expenses). Shareholders of the Portfolio that will be deemed to have received distributions of such expenses include (i) individuals taxable in the U.S. or persons calculating their taxable income in the same way as do such individuals and (ii) pass-through entities having such an individual or person or another pass-through entity as an interest holder or beneficiary. Such deemed distributions of expenses are not deductible under current law by those direct or indirect shareholders who are individuals (or entities that compute their taxable income in the same manner as an individual). The deemed distributions of expenses could as a result increase a shareholder's net taxes owed, lowering the Portfolio's effective yield with respect to such a shareholder.
An additional 3.8% Medicare contribution tax is imposed on the
“net investment
income” of individuals, estates and trusts to the extent their income exceeds certain threshold amounts. Net
investment income generally includes for this purpose dividends paid by the Portfolio, including any capital gain dividends, and net gains recognized on the
redemption or other taxable disposition of shares of the Portfolio.
Certain of the Portfolio's investment practices, including derivative transactions and investments in debt obligations issued or purchased at a discount, will be subject to special and complex U.S. federal income tax provisions. These special rules may affect the timing, character, and/or amount of the Portfolio's distributions, and may require the Portfolio to sell its investments at a time when it is not advantageous to do so.
If you are
not a U.S. person, dividends paid by the Portfolio that the Portfolio properly reports as capital gain dividends, short-term capital gain dividends, or
interest-related dividends are not subject to withholding of U.S. federal income tax, provided that certain other requirements are met. The Portfolio is
permitted, but is not required, to report any part of its dividends as are eligible for such treatment. The Portfolio's dividends other than those the Portfolio
so reports as capital gain dividends, short-term capital gain dividends, or interest-related dividends generally will be subject to a U.S. withholding tax at a 30% rate (or lower applicable treaty rate).
The U.S. Treasury and IRS generally require the Portfolio to obtain information sufficient to identify the status of each shareholder under Sections 1471-1474 of the Code and the U.S. Treasury and IRS guidance issued thereunder (collectively,
“FATCA”) or under an applicable intergovernmental agreement between the United States and a foreign government.
Item 12. Distribution Arrangements
Shares of the Portfolio are being offered primarily to Lending Funds
in connection with the State Street Securities Lending Program. However, from time to time, on a case-by-case basis, State Street may offer shares of the
Portfolio to institutional investors that participate in Third-Party Securities Lending Program(s) administered by a third-party lending agent. Shares of the Portfolio are sold in private placement transactions that do not involve any
“public
offering” within the meaning of Section 4(a)(2) of the 1933 Act. Shares of the Trust are sold directly by the
Trust without a distributor and are not subject to a sales load or redemption fee. Assets of the Portfolio are not subject to fees permitted pursuant to Rule 12b-1 under the 1940 Act.
PART B
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
State Street Navigator Securities Lending Portfolio I
One Congress Street
Boston, Massachusetts 02114
(877) 521-4083
ITEM 14. COVER PAGE AND TABLE OF CONTENTS
State Street Navigator Securities Lending Trust (the “Trust”) is a registered open-end management investment company organized as a Massachusetts business trust offering shares of
beneficial interest in separate investment portfolios. Each series of the Trust is diversified as defined in the Investment Company Act of 1940, as amended (the “1940 Act”), and is subject to the procedural and substantive requirements of the 1940 Act.
This Part B of the Registration Statement (the “Part B”) relates to the information contained in Part A of the Trust's Registration Statement dated April 30, 2026 as further
amended from time to time thereafter for the State Street Navigator Securities Lending Portfolio I
(“Portfolio I” or the “Portfolio”).
This Part B is not a Prospectus and should be read in conjunction with the Part A and the Confidential Offering Memorandum
relating to the Portfolio, which may be obtained by telephoning or writing the Trust at the number or address shown above.
The Portfolio's audited financial statements for the fiscal year ended December 31, 2025,
including the independent registered public accounting firm's report thereon, are included in the Portfolio's
Form N-CSR filing, which was filed with the U.S. Securities
and Exchange Commission (the
“SEC”) on March 9, 2026, and are incorporated into this Part B by reference. Copies of the Portfolio's annual reports,
semi-annual reports and other information such as the Portfolio's financial statements are available, without charge, upon request, by calling (collect calls are accepted) the
number shown above.
ITEM
15. TRUST HISTORY
The Trust was organized as a Massachusetts business trust on
June 15, 1995. Effective October 12, 2016, the State Street Navigator Securities Lending Prime Portfolio II was renamed State Street Navigator Securities Lending Portfolio
I.
ITEM 16. DESCRIPTION
OF THE PORTFOLIO AND ITS INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
The Portfolio is an open-end, diversified, management investment company. The Portfolio's
investment adviser is SSGA Fund's Management, Inc. (the “Adviser” or “SSGA FM”). The Portfolio's Part A contains information about the investment objective and policies of the Portfolio. This Part B
should only be read in conjunction with the Part A of the Portfolio. In addition to the principal investment strategies and the principal risks of the Portfolio described in Part
A, the Portfolio may employ other investment practices and may be subject to additional risks, which are described below.
ADDITIONAL INVESTMENTS AND RISKS
To the extent consistent with its investment objective and restrictions, the Portfolio may
invest in the following instruments and use the following techniques, and is subject to the following additional risks.
The Portfolio may invest in auction rate municipal securities, which permit the holder to
sell the securities in an auction at par value at specified intervals. The dividend or interest is typically reset by “Dutch” auction in which bids are made by broker-dealers and other institutions for a certain amount of securities at a specified
minimum yield. The rate set by the auction is the lowest interest or dividend rate that covers all securities offered for sale. While this process is designed to permit auction rate securities to be traded at par value, there is the risk that an auction will fail due to insufficient demand for the securities. The Portfolio will take the time remaining until the next scheduled auction date into account for purposes
of determining the securities' duration.
The Portfolio may invest a portion of its assets in bonds. A bond is an interest-bearing security issued by a company,
governmental unit or, in some cases, a non-U.S. entity. The issuer of a bond has a contractual obligation to pay interest at a stated rate on specific dates and to repay principal (the bond's face value) periodically or on a specified maturity date;
provided, however, a zero-coupon bond pays no interest to its holder during its life. The value of a zero-coupon bond to the Portfolio consists of the difference between such bond's face value at the time of maturity and the price for which it was
acquired, which may be an amount significantly less than its face value (sometimes referred to as a
“deep discount” price).
An
issuer may have the right to redeem or “call” a bond before maturity, in which case the shareholder may have to reinvest the proceeds at lower market rates. Most bonds bear interest income at a “coupon” rate that is fixed for the life of
the bond. The value of a fixed rate bond usually rises when market interest rates fall, and falls when market interest rates rise. Accordingly, a fixed rate bond's yield (income as a percent of the bond's current value) may differ from its coupon
rate as its value rises or falls. Fixed rate bonds generally are also subject to inflation risk, which is the risk that the value of the bond or income from the bond will be worth less in the future as inflation decreases the value of money. This could mean
that, as inflation increases, the
“real” value of the assets of the Portfolio holding fixed rate bonds can decline, as can the value of the Portfolio's
distributions. Other types of bonds bear income at an interest rate that is adjusted periodically. Because of their adjustable interest rates, the value of “floating-rate” or “variable-rate” bonds fluctuates much less in response to
market interest rate movements than the value of fixed rate bonds. The Portfolio may treat some of these bonds as having a shorter maturity for purposes of calculating the weighted
average maturity of its investment portfolio. Bonds may be senior or subordinated obligations. Senior obligations generally have the first claim on a corporation's earnings and assets and, in the event of liquidation, are paid before subordinated obligations. Bonds may be
unsecured (backed only by the issuer's general creditworthiness) or secured (also backed by specified collateral).
The investment return of corporate bonds reflects interest on the bond and changes in the
market value of the bond. The market value of a corporate bond may be affected by the credit rating of the corporation, the corporation's performance and perceptions of the corporation in the market place. There is a risk that the issuers of the securities may not be able to
meet their obligations on interest or principal payments at the time called for by such a security.
The Portfolio may hold portions of its assets in cash to meet anticipated redemptions and
day-to-day operating expenses.
Cleared Derivatives
Transactions
Transactions in some types of derivatives are required to be
centrally cleared by applicable rules and regulations and a Portfolio may also voluntarily centrally clear other transactions that are available for clearing. In a cleared
derivatives transaction, the Portfolio's counterparty to the transaction is a central derivatives clearing organization, or clearing house, rather than a bank or broker. Because the Portfolio is not a member of a clearing house, and only members of a clearing
house can participate directly in the clearing house, the Portfolio hold cleared derivatives through accounts at clearing members. In cleared derivatives transactions, the Portfolio will make payments (including margin payments) to and receive
payments from a clearing house through its accounts at clearing members. Clearing members guarantee performance of their clients' obligations to the clearing house. Centrally cleared derivative arrangements may be less favorable to the
Portfolio than bilateral (non-cleared) arrangements. For example, the Portfolio may be required to provide greater amounts of margin for cleared derivatives transactions than for bilateral derivatives transactions. Also, in contrast to bilateral
derivatives transactions, a clearing member generally can require termination of existing cleared derivatives transactions at any time and can increase margin requirements above the margin that the clearing member required at the beginning of a
transaction. Clearing houses also have broad rights to increase margin requirements for existing transactions or to terminate transactions at any time. The Portfolio is subject to
risk if it enters into a derivatives transaction that is required to be cleared (or which the Adviser expects to be cleared), and no clearing member is willing or able to clear the
transaction on the Portfolio's behalf. In that case, the transaction might have to be terminated, and the Portfolio could lose some or all of the benefit of the transaction, including loss of an increase in the value of the transaction and loss of
hedging protection. In addition, the documentation governing the relationship between the Portfolio and clearing members is drafted by the clearing members and generally is less favorable to the Portfolio than typical bilateral derivatives
documentation. For example, documentation relating to cleared derivatives generally includes a one-way indemnity by the Portfolio in favor of the clearing member for losses the clearing member incurs as the Portfolio's clearing member. Also,
such documentation typically does not provide the Portfolio any remedies if the clearing member defaults or becomes insolvent.
Counterparty risk with respect to derivatives has been and will continue to be affected by new rules and regulations relating to the derivatives market. With respect to a centrally cleared transaction, a party is subject to the credit risk of the clearing house and the clearing member through which it holds its cleared position. Credit risk of market participants with
respect to centrally cleared derivatives is concentrated in a few clearing houses and increasingly fewer clearing members. It is not clear how an insolvency proceeding of a clearing house would be conducted and what impact an insolvency of a
clearing house would have on the financial system. A clearing member is obligated by contract and regulation to
segregate all funds received from customers with respect to cleared derivatives positions from the clearing member's proprietary assets. However, all funds and other property received by a clearing member from its customers with respect to
cleared derivatives are generally held by the clearing member on a commingled basis in an omnibus account (which can be invested in instruments permitted under the regulations). Therefore, the Portfolio might not be fully protected in the
event of the bankruptcy of the Portfolio's clearing member because the Portfolio would be limited to recovering only a pro rata share of the funds held by the clearing member on behalf of customers with respect to the relevant account class, with
a claim against the clearing member for any deficiency. Also, the clearing member is required to transfer to the clearing house the amount of margin required by the clearing house
for cleared derivatives, which amount is generally held in an omnibus account at the clearing house for all customers of the clearing member. Regulations promulgated by the Commodity Futures Trading Commission (the
“CFTC”) require that the clearing member notify the clearing house of the initial margin provided by the clearing member to the
clearing house that is attributable to each customer. However, if the clearing member does not accurately report the Portfolio's initial margin, the Portfolio is subject to the
risk that a clearing house will use the assets attributable to it in the clearing house's omnibus account to satisfy payment obligations a defaulting customer of the clearing member has to the clearing house. In addition, clearing members generally provide the
clearing house the net amount of variation margin required for cleared derivatives for all of its customers, rather than individually for each customer. The Portfolio is therefore
subject to the risk that a clearing house will not make variation margin payments owed to the Portfolio if another customer of the clearing member has suffered a loss and is in
default, and the risk that the Portfolio will be required to provide additional margin to the clearing house before the clearing house will move the Portfolio's cleared derivatives positions to another clearing member. In addition, if a clearing member does
not comply with the applicable regulations, fails to maintain accurate records or its agreement with the Portfolio, or in the event of fraud or misappropriation of customer assets by a clearing member, the Portfolio could have only an unsecured
creditor claim in an insolvency of the clearing member with respect to the margin held by the clearing member. In addition,
a Portfolio may be subject to execution risk if it
enters into a derivatives transaction that is required to be (or the Adviser expects to be) cleared, and no clearing member is willing to clear the transaction on the Portfolio's
behalf. In that case, the transaction might have to be terminated, and the Portfolio could lose some or all of the benefit of any increase in the value of the transaction after the time of the trade.
Swap Execution Facilities
Certain derivatives contracts are required to be (or are capable of being) executed through swap execution facilities
(“SEFs”). A SEF is a trading platform where multiple market participants can execute derivatives by accepting bids and
offers made by multiple other participants in the platform. For derivatives that are required to be traded on a SEF, such requirements may make it more difficult and costly for investment funds, such as the Portfolio, to enter into highly tailored
or customized transactions. Trading derivatives on a SEF may offer certain advantages over traditional bilateral over-the-counter trading, such as ease of execution, price transparency, increased liquidity and/or favorable pricing. Execution through a
SEF is not, however, without additional costs and risks, as parties are required to comply with SEF and CFTC rules and regulations, including disclosure and recordkeeping
obligations, and SEF rights of inspection, among others. SEFs typically charge fees, and if the Portfolio executes derivatives on a swap execution facility through a broker intermediary, the intermediary may impose fees as well. The Portfolio also may be required to indemnify a SEF, or a broker
intermediary who executes derivatives on a SEF on the Portfolio's behalf, against any losses or costs that may be incurred as a result of the Portfolio's transactions on the SEF. In addition, the Portfolio may be subject to execution risk if it enters into a derivatives transaction that is required to be (or the Adviser expects to be) executed on a SEF and cleared, and no
SEF or clearing member is willing to accept and clear the transaction on the Portfolio's behalf. In that case, the transaction might have to be terminated, and the Portfolio could lose some or all of the benefit of any increase in the value of the
transaction after the time of the trade.
Risks Associated with Derivatives Regulation
The U.S. government has enacted and is continuing to implement legislation that provides for regulation of the derivatives
market, including clearing, margin, reporting, and registration requirements. The European Union
(“EU”), the United Kingdom (the “UK”) and some other countries have also adopted
and are continuing to implement similar requirements, which will affect the Portfolio when it enters into a derivatives transaction with a counterparty organized in that country or
otherwise subject to that country's derivatives regulations. Such rules and other rules and regulations could, among other things, restrict the Portfolio's ability to engage in, or increase the cost to the Portfolio of, derivatives transactions, for
example, by making some types of derivatives no longer available to the Portfolio, increasing margin or capital
requirements, or otherwise limiting liquidity or increasing transaction costs. While the rules and regulations and central clearing of some derivatives transactions are designed to reduce systemic risk (i.e., the risk that the interdependence of
large derivatives dealers could cause them to suffer liquidity, solvency or other challenges simultaneously), there is no assurance that they will achieve that result, and in the meantime, as noted above, central clearing and related requirements
expose the Portfolio to other kinds of costs and risks.
In the event of
a counterparty's (or its affiliate's) insolvency, the Portfolio's ability to exercise remedies, such as the termination of transactions, netting of obligations and realization on
collateral, could be stayed or eliminated under special resolution regimes adopted in the United States, the EU, the UK and various other jurisdictions. Such regimes provide
government authorities with broad authority to intervene when a financial institution is experiencing financial difficulty. In particular, with respect to counterparties who are subject to such proceedings in the EU and the U., the liabilities of such
counterparties to the Portfolio could be reduced, eliminated, or converted to equity in such counterparties (sometimes referred to as a “bail in”).
The SEC adopted Rule 18f-4 under the 1940 Act providing for the regulation of registered investment companies' use of derivatives and certain related instruments. The rule, among other things, limits derivatives exposure through one of two
value-at-risk tests and in connection with adopting the rule, the SEC eliminated the asset segregation framework for covering derivatives and certain financial instruments arising from the SEC's Release 10666 and ensuing staff guidance. The
rule also requires funds to adopt and implement a derivatives risk management program (including the appointment of a derivatives risk manager and the implementation of certain
testing requirements) and subjects funds to certain reporting requirements in respect of derivatives. Limited derivatives users (as determined by Rule 18f-4) are not, however,
subject to the full requirements under the rule.
Additionally, U.S. regulators, the EU, the UK and
certain other jurisdictions have adopted minimum margin and capital requirements for uncleared derivatives transactions. These rules impose minimum margin requirements on
derivatives transactions between the Portfolio and its counterparties. They impose regulatory requirements on the timing of transferring margin and the types of collateral that parties are permitted to exchange.
These and other regulations are evolving, so their full impact on the Portfolio and the financial system are not yet known.
There are risks involved in dealing with the custodians or brokers who hold the Portfolio's
investments or settle the Portfolio's trades. It is possible that, in the event of the insolvency or bankruptcy of a custodian or broker, the Portfolio would be delayed or prevented from recovering its assets from the custodian or broker, or its estate, and may have only a
general unsecured claim against the custodian or broker for those assets. In recent insolvencies of brokers or other financial institutions, the ability of certain customers to recover their assets from the insolvent's estate has been delayed,
limited, or prevented, often unpredictably, and there is no assurance that any assets held by the Portfolio with a custodian or broker will be readily recoverable by the Portfolio. In addition, there may be limited recourse against non-U.S. sub-custodians in those situations in which the Portfolio invests in markets where custodial and/or settlement systems and regulations are
not fully developed, including emerging markets, and the assets of the Portfolio have been entrusted to such sub-custodians. SSGA FM or an affiliate may serve as the custodian of
the Portfolio.
Eurodollar Certificates of
Deposit (“ECDs”), Eurodollar Time Deposits (“ETDs”) and Yankee Certificates of Deposit (“YCDs”)
The Portfolio may invest in ECDs, ETDs and YCDs. ECDs and ETDs are U.S. dollar denominated certificates of deposit and time
deposits, respectively, issued by non-U.S. branches of domestic banks and non-U.S. banks. YCDs are U.S. dollar denominated certificates of deposit issued by U.S. branches of
non-U.S. banks.
Different risks than those associated with the
obligations of domestic banks may exist for ECDs, ETDs and YCDs because the banks issuing these instruments, or their domestic or non-U.S. branches, are not necessarily subject to
the same regulatory requirements that apply to domestic banks, such as loan limitations, examinations, and reserve, accounting, auditing, recordkeeping and public reporting requirements. Obligations of non-U.S. issuers also involve risks such as future
unfavorable political and economic developments, withholding or other tax, seizures of non-U.S. deposits, currency controls, interest limitations, and other governmental
restrictions that might affect repayment of principal or payment of interest, or the ability to honor a credit commitment.
The Portfolio may invest in forward commitments. The Portfolio may contract to purchase
securities for a fixed price at a future date beyond customary settlement time consistent with the Portfolio's ability to manage its investment portfolio and meet redemption requests. The Portfolio may dispose of a commitment prior to settlement if it is appropriate to do so and
realize short-term profits or losses upon such sale. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, or if the other party fails to complete the transaction.
Futures Contracts and Options on Futures
The Portfolio may enter into futures contracts on securities in which it may invest or on
indices comprised of such securities and may purchase and write call and put options on such contracts.
Futures contracts. A financial futures contract is a contract to buy or sell a specified quantity
of financial instruments such as U.S. Treasury bills, notes and bonds at a specified future date at a price agreed upon when the contract is made. An index futures contract is a contract to buy or sell specified units of an index at a specified future date at a price agreed
upon when the contract is made. The value of a unit is based on the current value of the index. Under such contracts no delivery of the actual securities making up the index takes place. Rather, upon expiration of the contract, settlement is
made by exchanging cash in an amount equal to the difference between the contract price and the closing price of the index at expiration, net of variation margin previously paid. Futures contracts are traded in the United States only on
commodity exchanges or boards of trade — known as “contract markets” — approved for such
trading by the Commodity Futures Trading Commission, and must be executed through a futures commission merchant or brokerage firm, which is a member of the relevant contract market.
Although many futures contracts by their terms call for actual delivery or acceptance of the underlying commodities,
securities or other instruments, in most cases the contracts are closed out before the settlement date without the making or taking of delivery, but rather by entering into an offsetting contract (a “closing transaction”). Upon entering into a
futures
contract, the Portfolio is required to deposit an
initial margin with the futures broker. The initial margin serves as a “good faith” deposit that the Portfolio will honor its
futures commitments. Subsequent payments (called “variation margin” or “maintenance margin”) to and from the broker are
made on a daily basis as the price of the underlying instrument fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as
“marking to the market.” If the Portfolio is unable to enter into a closing transaction, the amount of the Portfolio's potential loss may
be unlimited. Futures contracts also involve brokerage costs.
The Portfolio will not commit more than 5% of the market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
Registration under the Commodity Exchange Act. The Portfolio is operated by the Adviser, which has
claimed an exclusion from the definition of the term “commodity pool operator” with respect to the
Portfolio under the Commodity Exchange Act (the “CEA”), and therefore, is not subject to
registration or regulation as a pool operator under the CEA with respect to the Porfolio. As a result, the Portfolio is limited in its ability to have exposure to instruments
subject to the CFTC jurisdiction, including commodity futures (which include futures on broad-based securities indexes, interest rate futures and currency futures), options on commodity futures, certain swaps or other investments (whether directly or indirectly through
investments in other investment vehicles).
Under this exclusion, the Portfolio must satisfy one of the following two limitations whenever it enters into a new
commodity trading position: (1) the aggregate initial margin and premiums required to establish the Portfolio's positions in CFTC-regulated instruments may not exceed 5% of the liquidation value of the Portfolio's portfolio (after accounting for
unrealized profits and unrealized losses on any such investments); or (2) the aggregate net notional value of such instruments, determined at the time the most recent position was established, may not exceed 100% of the liquidation value
of the Portfolio's portfolio (after accounting for unrealized profits and unrealized losses on any such positions). The Portfolio would not be required to consider its exposure to
such instruments if they were held for “bona fide hedging” purposes, as such term is
defined in the rules of the CFTC. In addition to meeting one of the foregoing limitations, the Portfolio may not market itself as a commodity pool or otherwise as a vehicle for
trading in the markets for CFTC-regulated instruments.
Options on futures contracts. In return for the premium paid, options on futures contracts give
the purchaser the right to assume a position in a futures contract at the specified option exercise price at any time during the exercisable period of the option. Options on futures are similar to options on securities except that options on futures give the purchaser the
right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the exercisable period of the option.
Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the futures.
If an option is exercised on the last trading day prior to its expiration date, the settlement will be made entirely in cash. Purchasers of options who fail to exercise their
options prior to the expiration date suffer a loss of the premium paid.
As with options on securities, the holder or writer of an option may terminate his position by selling or purchasing an offsetting option. There is no guarantee that such closing transactions can be effected.
U.S. Treasury security futures contracts and options. Some U.S.
Treasury security futures contracts require the seller to deliver, or the purchaser to take delivery of, the type of U.S. Treasury security called for in the contract at a
specified date and price; others may be settled in cash. Options on U.S. Treasury security futures contracts give the purchaser the right in return for the premium paid to assume a position in a U.S. Treasury security futures contract at the specified option
exercise price at any time during the exercisable period of the option.
Successful use of U.S. Treasury security futures contracts by the Portfolio is subject to the Adviser's ability to predict movements in the direction of interest rates and other factors affecting markets for debt securities. For example, if the
Portfolio has sold U.S. Treasury security futures contracts in order to hedge against the possibility of an increase in interest rates, which would adversely affect the values of securities held in its portfolio, and the prices of the Portfolio's
securities increase instead as a result of a decline in interest rates, the Portfolio will lose part or all of the benefit of the increased value of its securities, which it has hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily maintenance margin requirements at a time when it may be disadvantageous to do so.
There is also a risk that price movements in U.S.
Treasury security futures contracts and related options will not correlate closely with price movements in markets for particular securities. For example, if the Portfolio has
hedged against a decline in the values of tax-exempt securities held by it by selling Treasury security futures and the values of Treasury securities subsequently increase while the values of the Portfolio's tax-exempt securities decrease, the Portfolio would
incur losses on both the Treasury security futures contracts written by it and the tax-exempt securities held in its portfolio.
The Portfolio may invest in illiquid investments. The absence of a regular trading market
for illiquid investments imposes additional risks on investments in these securities. Illiquid investments may be difficult to value and may often be disposed of only after considerable expense and delay.
The SEC has adopted a liquidity risk management rule (the “Liquidity Rule”) that requires the Portfolio to
establish a liquidity risk management program (the “LRMP”). The Trustees, including a majority of the
Independent Trustees (defined infra), have designated the Adviser to administer the
Portfolio's LRMP. Under the LRMP, the Adviser assesses, manages, and periodically reviews the Portfolio's liquidity risk. The Liquidity Rule defines “liquidity risk” as the risk that the Portfolio could not meet requests to redeem shares issued by the Portfolio without significant
dilution of remaining investors' interests in the Portfolio. The liquidity of the Portfolio's portfolio investments is determined based on relevant market, trading and investment-specific considerations under the LRMP. To the extent that an investment is deemed to be an illiquid
investment or a less liquid investment, the Portfolio can expect to be exposed to greater liquidity risk. While the LRMP attempts to assess and manage liquidity risk, there is no
guarantee it will be effective in its operations and may not reduce the liquidity risk inherent in the Portfolio's investments.
Industrial Development and Private Activity Bonds
Industrial development bonds are issued to finance a wide variety of capital
projects, including: electric, gas, water and sewer systems; ports and airport facilities; colleges and universities; and hospitals. The principal security for these bonds is generally the net revenues derived from a particular facility, group of facilities, or in some cases, the proceeds of a
special excise tax or other specific revenue sources. Although the principal security behind these bonds may vary, many provide additional security in the form of a debt service reserve fund whose money may be used to make principal and
interest payments on the issuer's obligations. Some authorities provide further security in the form of a state's ability without obligation to make up deficiencies in the debt service reserve fund.
Private activity bonds are considered municipal securities if the interest paid thereon is exempt from U.S. federal income
tax and are issued by or on behalf of public authorities to raise money to finance various privately operated facilities for business and manufacturing, housing, sports, and pollution control. These bonds are also used to finance public facilities
such as airports, mass transit systems, ports and parking. The payment of the principal and interest on such bonds is dependent solely on the ability of the facility's user to meet its financial obligations and the value of any real or personal
property pledged as security for such payment. Interest income on these bonds may be an item of tax preference subject to federal alternative minimum tax for shareholders subject to such tax.
Insured Municipal Securities
Insured municipal securities are those for which scheduled payments of interest and principal are guaranteed by a private
(non-governmental) insurance company. The insurance entitles a fund to receive only the face or par value of the
securities held by the fund, but the ability to be paid is limited to the claims paying ability of the insurer. The insurance does not guarantee the market value of the municipal securities or the net asset value (“NAV”) of a fund's shares. Insurers are selected based upon the diversification of its portfolio and the strength of the management team, which contributes to
the claims paying ability of the entity. However, the Adviser selects securities based upon the underlying credit with bond insurance viewed as an enhancement only. The Adviser's objective is to have an enhancement that provides additional
liquidity to insulate against volatility in changing markets.
The Portfolio may invest in investment grade corporate notes and bonds that are rated by a nationally recognized statistical
rating organization
(“NRSRO”) or, if unrated, are of comparable quality to the rated securities described above, as determined by the Adviser, in
accordance with procedures established by the Board of Trustees of the Trust (the “Board” and each member thereof, a “Trustee”). Investment-grade securities include
securities rated Baa or higher by Moody's or BBB- or higher by S&P (and securities of comparable quality); securities rated Baa or BBB may have speculative characteristics.
Market Disruption and
Geopolitical Risk
The Portfolio is subject to the risk that geopolitical
events will disrupt securities markets and adversely affect global economies and markets. War, terrorism, and related geopolitical events have led, and in the future may lead, to
increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, trade policy changes or disputes, the threat or actual imposition of tariffs, natural and environmental disasters,
epidemics or pandemics, and systemic market dislocations may be highly disruptive to economies and markets. Those
events as well as other changes in non-U.S. and domestic economic and political conditions also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor
sentiment, and other factors affecting the value of the Portfolio's investments. Given the increasing interdependence between global economies and markets, conditions in one country, market, or region might adversely impact markets, issuers
and/or foreign exchange rates in other countries, including the U.S. Continuing uncertainty as to the status of the euro and the Economic and Monetary Union of the European Union
(the “EMU”) has created significant volatility in currency and financial markets generally. Any partial or complete dissolution of the
EMU, or any increased uncertainty as to its status, could have significant adverse effects on currency and financial markets, and on the values of a Fund's investments. On January 31, 2020, the United Kingdom (“UK”) formally withdrew from the European Union
(“EU”) (commonly known as “Brexit”). An agreement between the UK and the EU
governing their future trade relationship became effective January 1, 2021, but that agreement does not include an agreement on financial services, and it is unlikely that such agreement will be concluded. Moreover, the UK government has started a program of financial services law
reform with the ultimate aim of repealing many EU financial services laws that were assimilated into UK law from January 1, 2021, and replacing them with legislation or rules made
by the UK government or financial services regulators. Accordingly, uncertainty remains in certain areas as to the future relationship between the UK and the EU. Brexit has already had a significant impact on the UK, Europe, and global economies, and could continue to result in volatility and
illiquidity, legal, political, economic and regulatory uncertainties and lower economic growth for these economies that could in turn have an adverse effect on the value of the Funds' investments. Any further exits from the EU, or the possibility of
such exits, or the abandonment of the euro, may cause additional market disruption globally and introduce new legal and regulatory uncertainties.
Securities markets may be susceptible to market manipulation or other fraudulent trade practices, which could disrupt the
orderly functioning of these markets or adversely affect the value of investments traded in these markets, including investments of the Portfolio.
Recent political activity in the U.S. has increased the risk that the U.S. could default on some or any of its obligations.
While it is impossible to predict the consequences of such an unprecedented event, it is likely that a default by the U.S. would be highly disruptive to the U.S. and global securities markets and could significantly impair the value of the
Portfolio's investments. Similarly, political events within the U.S. at times have resulted, and may in the future result, in a shutdown of government services, which could negatively affect the U.S. economy, decrease the value of the Portfolio
investments, and increase uncertainty in or impair the operation of the U.S. or other securities markets.
Market Turbulence Resulting from Infectious Illness
A widespread outbreak of an infectious illness may lead to governments and
businesses world-wide taking aggressive measures, including closing borders, restricting international and domestic travel, and the imposition of prolonged quarantines of large populations. The spread of such an illness may result in the disruption of and delays in the delivery of
healthcare services and processes, the cancellation of organized events and educational institutions, the disruption of production and supply chains, a decline in consumer demand for certain goods and services, and general concern and
uncertainty, all of which may contribute to increased volatility in global markets. Epidemics and pandemics that may arise in the future could adversely affect the economies of many nations, the global economy, individual companies, economic
sectors and industries, and capital markets in ways that cannot be foreseen at the present time. In addition, the impact of infectious diseases in developing or emerging market countries may be greater due to limited healthcare resources.
Political, economic and social stresses caused by an infectious illness also may exacerbate other pre-existing political, social and economic risks in certain countries. The duration of such an illness and its effects cannot be determined at this
time, but the effects could be present for an extended period of time.
Mortgage-Related
Securities
The Portfolio may invest in mortgage-related securities.
Mortgage-related securities represent an interest in a pool of, or are secured by, mortgage loans. Mortgage-related securities may be issued or guaranteed by (i) U.S. Government
agencies or instrumentalities such as the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), the Federal National Mortgage Association
(“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation
(“FHLMC” or “Freddie Mac”) or (ii) other issuers, including
private companies.
Many mortgage-related securities provide regular
payments, which consist of interest and, in most cases, principal. In contrast, other forms of debt securities normally provide for periodic payment of interest in fixed amounts
with principal payments at maturity or specified call dates. In effect, payments on many mortgage-related securities are a “pass-through” of the payments made by the individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities.
Besides the scheduled repayment of principal, repayments of principal may result from the voluntary prepayment, refinancing
or foreclosure of the underlying mortgage loans. If property owners make unscheduled prepayments of their mortgage loans, these prepayments will typically result in early payment
of the applicable mortgage-related securities. The occurrence of mortgage prepayments is affected by a variety of factors, including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and demographic conditions. During periods of
falling interest rates, the rate of mortgage prepayments tends to increase, thereby tending to decrease the life of mortgage-related securities. During periods of rising interest
rates, the rate of mortgage prepayments usually decreases, thereby tending to increase the life of mortgage-related securities.
Because of the possibility of prepayments (and due to scheduled repayments of principal),
mortgage-related securities are less effective than other types of securities as a means of “locking in” attractive long-term interest rates.
Prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have a similar
risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of
rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and,
therefore, potentially increasing the volatility of the Portfolio.
Collateralized mortgage obligations (“CMOs”) may be issued by a U.S. Government agency
or instrumentality or by a private issuer. CMOs are typically structured with classes or series that have different maturities and are generally retired in sequence. Each class of obligations receives periodic interest payments according to its terms. However, monthly
principal payments and any prepayments from the collateral pool are generally paid first to the holders of the most senior class. Thereafter, payments of principal are generally allocated to the next most senior class of obligations until that class
of obligations has been fully repaid. Any or all classes of obligations of a CMO may be paid off sooner than expected because of an increase in the payoff speed of the pool. Changes in prepayment rates may have significant effects on the
values and the volatility of the various classes and series of a CMO. Payment of interest or principal on some classes or series of a CMO may be subject to contingencies or some classes or series may bear some or all of the risk of default on the
underlying mortgages.
Ongoing developments in the residential and
commercial mortgage markets may have additional consequences for the market for mortgage-backed securities. During the periods of deteriorating economic conditions, such as
recessions or periods of rising unemployment, delinquencies and losses generally increase, sometimes dramatically, with respect to securitizations involving mortgage loans. Many sub-prime mortgage pools have become distressed during the periods of
economic distress and may trade at significant discounts to their face value during such period.
Stripped mortgage-related securities are usually structured with two classes that receive
different portions of the interest and principal distributions on a pool of mortgage loans. The yield to maturity on an interest only or “IO” class of stripped mortgage-related securities is extremely sensitive not only to changes in prevailing interest rates but
also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurable adverse effect on a Portfolio's yield to maturity to the extent it invests in IOs. If the assets underlying the IO
experience greater than anticipated prepayments of principal, the Portfolio may fail to recoup fully, or at all, its initial investment in these securities. Conversely, principal only securities or “POs” tend to increase in value if prepayments are
greater than anticipated and decline if
prepayments are slower than anticipated. The secondary market for stripped mortgage-related securities may be more volatile and less liquid than that for other mortgage-related
securities, potentially limiting a Portfolio's ability to buy or sell those securities at any particular time.
Municipal and Municipal-Related Securities
Municipal securities may bear fixed, floating or variable rates of interest or may be zero
coupon securities. Municipal securities are generally of two types: general obligations and revenue obligations. General obligations are backed by the full faith and credit of the issuer. These securities include tax anticipation notes, bond anticipation notes, general obligation bonds and commercial paper. Revenue obligations are backed by the revenues generated from a specific project or facility and
include industrial development bonds and private activity bonds. Tax anticipation notes are issued to finance working capital needs of municipalities and are generally issued in
anticipation of future tax revenues. Bond anticipation notes are issued in expectation of the issuer obtaining longer-term financing.
The Portfolio may purchase participation interests in municipal obligations, including
municipal lease/purchase agreements. Municipal leases are an undivided interest in a portion of an obligation in the form of a lease or installment purchase issued by a state or local government to acquire equipment or facilities. These instruments may have fixed,
floating or variable rates of interest, with remaining maturities of 13 months or less. Certain participation interests may permit the Portfolio to demand payment on not more than seven days' notice, for all or any part of the Portfolio's interest,
plus accrued interest.
Municipal leases frequently have special risks not normally associated with general obligation or revenue bonds. Some leases
or contracts include
“non-appropriation” clauses, which provide that the governmental issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis. To reduce these risks, the Portfolio will only purchase
municipal leases subject to a non-appropriation clause when the payment of principal and accrued interest is backed by a letter of credit or guarantee of a bank.
Whether a municipal lease agreement will be considered illiquid for the purpose of the Portfolio's restriction on
investments in illiquid securities will be determined in accordance with procedures established by the Board.
Government Mortgage-Related Securities
GNMA is the principal federal government guarantor of mortgage-related securities. GNMA is a
wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-related securities.
GNMA pass-through securities are considered to have a relatively low risk of default in that (1) the underlying mortgage loan portfolio is comprised entirely of government-backed loans and (2) the timely payment of both principal and interest on
the securities is guaranteed by the full faith and credit of the U.S. Government, regardless of whether they have been collected. GNMA pass-through securities are, however, subject
to the same interest rate risk as comparable privately issued mortgage-related securities. Therefore, the effective maturity and market value of a Portfolio's GNMA securities
can be expected to fluctuate in response to changes in interest rate levels.
Residential mortgage loans are also pooled by FHLMC, a corporate instrumentality of the U.S. Government. The mortgage loans in FHLMC's portfolio are not government backed; FHLMC, not the U.S. Government, guarantees the timely payment
of interest and ultimate collection of principal on FHLMC securities. FHLMC also issues guaranteed mortgage certificates, on which it guarantees semiannual interest payments and a
specified minimum annual payment of principal.
FNMA is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by
the Secretary of Housing and Urban Development. FNMA purchases residential mortgages from a list of approved seller/servicers, which include savings and loan associations, savings banks, commercial banks, credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest only by FNMA, not the U.S. Government.
Other Asset-Backed Securities
In addition to the mortgage related securities discussed above, the Portfolio may invest in
asset-backed securities that are not mortgage-related. Asset-backed securities other than mortgage-related securities represent undivided fractional interests in pools of instruments, such as consumer loans, and are typically similar in structure to mortgage-related pass-
through securities. Payments of principal and
interest are passed through to holders of the securities and are typically supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee
by another entity, or by priority to certain of the borrower's other securities. The degree of credit-enhancement, if any, varies, applying only until exhausted and generally covering only a fraction of the security's par value.
The value of such asset-backed securities is affected by changes in the market's perception of the asset backing the security, changes in the creditworthiness of the servicing agent for the instrument pool, the originator of the instruments,
or the financial institution providing any credit enhancement and the expenditure of any portion of any credit
enhancement. The risks of investing in asset-backed securities are ultimately dependent upon payment of the underlying instruments by the obligors, and the Portfolio would generally have no recourse against the obligee of the instruments in
the event of default by an obligor. The underlying instruments are subject to prepayments, which shorten the duration of asset-backed securities and may lower their return, in generally the same manner as described above for prepayments of pools
of mortgage loans underlying mortgage-related securities. During periods of deteriorating economic conditions, such as recessions or periods of rising unemployment, delinquencies
and losses generally increase, sometimes dramatically, with respect to securitizations involving loans, sales contracts, receivables and other obligations underlying asset-backed securities.
Purchase of Other Investment Company Shares
The Portfolio may, to the extent permitted under the 1940 Act and rules thereunder, invest in shares of other investment
companies, which include funds managed by SSGA FM, which invest exclusively in money market instruments or in
investment companies with investment policies and objectives which are substantially similar to those of the Portfolio. These investments may be made temporarily, for example, to invest uncommitted cash balances or, in limited circumstances, to
assist in meeting shareholder redemptions, or as long-term investments. In general, the 1940 Act prohibits the Portfolio from acquiring more than 3% of the voting shares of any one
other investment company, and prohibits the Portfolio investing more than 5% of its total assets in the securities of any one other investment company or more than 10% of its total assets in securities of other investment companies in the aggregate. The percentage limitations
above apply to investments in any investment company. Pursuant to rules adopted by the SEC, the Portfolio may invest in excess of these limitations if the Portfolio and the investment company in which the Portfolio would like to invest comply
with certain conditions. Certain of the conditions do not apply if the Portfolio is investing in shares issued by affiliated funds. In addition, the Portfolio may invest in shares issued by money market funds, including certain unregistered money
market funds, in excess of the limitations. The Portfolio's investments in another investment company will be subject to the risks of the purchased investment company's portfolio securities. The Portfolio's shareholders must bear not only their
proportionate share of the Portfolio's fees and expenses, but they also must bear indirectly the fees and expenses of the other investment company.
The Portfolio may enter into repurchase agreements, which are a form of borrowing, with banks, other financial institutions,
such as broker-dealers, and other institutional counterparties. Under a repurchase agreement, the Portfolio purchases securities from a financial institution that agrees to
repurchase the securities at the Portfolio's original purchase price plus interest within a specified time. The Portfolio will limit repurchase transactions to those member banks
of the Federal Reserve System, broker-dealers, and other financial institutions whose creditworthiness the Adviser considers satisfactory. Should the counterparty to a transaction fail financially, the Portfolio may encounter delay and incur costs
before being able to sell the securities, or may be prevented from realizing on the securities. Further, the amount realized upon the sale of the securities may be less than that necessary to fully compensate the Portfolio. The SEC has finalized new
rules requiring the central clearing of certain repurchase transactions involving U.S. Treasuries. Historically, such transactions have not been required to be cleared and
voluntary clearing of such transactions has generally been limited. Compliance with the new rules is currently expected to be required in the middle of 2027. While it is currently
difficult to predict the full impact of these new rules particularly because the compliance date has not yet occurred, the new clearing requirements could make it more difficult for the Portfolio to execute certain investment strategies, may reduce the
availability or increase the costs of such transactions and may adversely affect a Portfolio's performance. See
“Risks Associated with Derivatives
Regulation” for additional information.
Reverse Repurchase Agreements
The Portfolio may enter into reverse repurchase agreements. Under reverse repurchase
agreements, which are a form of borrowing, the Portfolio transfers possession of portfolio securities to financial institutions in return for cash in an amount equal to a percentage of the portfolio securities' market value and agrees to repurchase the securities at a future date by
repaying the cash with interest. The Portfolio
retains the right to receive interest and principal payments from the securities. Reverse repurchase agreements involve the risk that the market value of securities sold by the
Portfolio may decline below the price at which it is obligated to repurchase the securities. Reverse repurchase agreements involve the risk that the buyer of the securities sold might be unable to deliver them when the Portfolio seeks to repurchase the
securities. If the buyer files for bankruptcy or becomes insolvent, the Portfolio may be delayed or prevented from recovering the security that it sold. The SEC has finalized new rules requiring the central clearing of certain repurchase
transactions involving U.S. Treasuries. Historically, such transactions have not been required to be cleared and voluntary clearing of such transactions has generally been limited. Compliance with the new rules is currently expected to be required
in the middle of 2027. While it is currently difficult to predict the full impact of these new rules particularly because the compliance date has not yet occurred, new clearing
requirements could make it more difficult for the Portfolio to execute certain investment strategies, may reduce the availability or increase the costs of such transactions and may
adversely affect a Portfolio's performance. See “Risks Associated with Derivatives Regulation” for
additional information.
Certain financial institutions have in the past been accused by
various regulators of manipulating certain reference rates (e.g., the London Interbank Offered Rate (“LIBOR”)) and
have been alleged to have altered costs when reporting them to regulators. There can be no assurance that the rate-setting process for reference rates will not be affected by
similar conduct in the future, or that any investigations into any rate-setting process and any related litigation will not result in disruptive changes in the process used to determine reference rates or will not affect the use of reference rates going
forward. Therefore, the performance, availability or prices of the Portfolio's investments which are based on reference rates may be adversely affected by misconduct in the rate-setting process for reference rates and/or as a result of future
changes to such process or reference rates becoming no longer available.
In addition, interest rates or other types of rates and indices which are classed as
“benchmarks” have been the subject of ongoing national and international regulatory reform, including under the E.U. regulation on
indices used as benchmarks in financial instruments and financial contracts (known as the “Benchmarks Regulation”). The
Benchmarks Regulation has been enacted into United Kingdom law by virtue of the European Union (Withdrawal) Act 2018 (as amended), subject to amendments made by the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (SI 2019/657) and
other statutory instruments. Following the implementation of these reforms, the manner of administration benchmarks has changed and may in the future change, with the result that
they may perform differently than in the past, the use of benchmarks that are not compliant with the new standards by certain supervised entities is restricted, certain benchmarks are in the process of being eliminated entirely and there could be other consequences which cannot be
predicted.
LIBOR was the offered rate for short-term Eurodollar deposits between major international
banks. In connection with the global transition away from LIBOR led by regulators and market participants, LIBOR was last published on a representative basis at the end of June 2023. Alternative reference rates to LIBOR have been established in most major
currencies (e.g., the Secured Overnight Financing Rate (“SOFR”) for U.S. dollar LIBOR and
the Sterling Overnight Index Average for GBP LIBOR) and the transition to alternative reference rates continues. The transition away from LIBOR to the use of replacement rates has gone relatively smoothly but the full impact of the transition on the Portfolio or the financial
instruments in which the Portfolio invests cannot yet be fully determined.
SOFR is an index rate calculated based on short-term repurchase agreements backed by U.S. Treasury Instruments. While LIBOR was an unsecured rate, SOFR is a secured rate. There can be no assurance that SOFR will perform in the same way
as LIBOR would have at any time, including, without limitation, as a result of changes in interest and yield rates in the market, monetary policy, bank credit risk, market
volatility or global or regional economic, financial, political, regulatory, judicial or other events. There can be no assurance that SOFR will not be discontinued or fundamentally
altered in a manner that is materially adverse to the interests of the Portfolio. If the manner in which SOFR is calculated is changed, that change may result in a reduction of the amount of interest payable on SOFR-linked floating rate instruments
and the trading prices of such instruments. Additionally, daily changes in SOFR have, on occasion, been more volatile than daily changes in other benchmark or market rates.
Although occasional, increased daily volatility in SOFR would not necessarily lead to more volatile interest payments, the return on and value of SOFR-linked floating rate instruments may fluctuate more than floating rate instruments that are linked to less volatile rates.
The elimination of a benchmark or a benchmarks being non-compliant under any regulatory regime, changes in the manner of administration of any benchmark, or actions by regulators or law enforcement agencies could result in changes to
the levels of the published rates of certain benchmarks, or those benchmarks being discontinued or replaced and could involve, among other things, increased volatility or
illiquidity in markets for instruments that rely on such benchmarks. The
discontinuation or replacement of a benchmark
could require an adjustment to the terms and conditions (including a value payment between the parties) or otherwise result in rates being determined in accordance with fallback
provisions contained in the terms and conditions, or have other consequences, in respect of any debt or hedging linked to such benchmark, and there may be mismatches between the rates applicable to different types of financial contracts that are
linked to the same benchmark. For example, certain investments may involve individual contracts that have no existing fallback provision or language that contemplates the discontinuation of a relevant benchmark, and those investments could
experience increased volatility or illiquidity as a result of any transition process. In addition, interest rate provisions included in such contracts, or in contracts or other
arrangements may need to be renegotiated. The transition of an instrument from a benchmark to a replacement rate as a result of amendment, application of existing fallbacks,
statutory requirements or otherwise may result in a reduction in the value of certain instruments held by the Portfolio, or a reduction in the effectiveness of related transactions such as hedges. The discontinuation of or replacement of a benchmark could have
a material adverse effect on the performance of the Portfolio.
Following Russia's invasion of Ukraine in late February 2022, various countries, including the U.S. and the UK, as well as
the E.U., issued broad-ranging economic sanctions against Russia. The U.S. and other countries have also imposed
economic sanctions on Belarus and may impose sanctions on other countries that support Russia's invasion. A large
number of corporations and U.S. states have also announced plans to divest interests or otherwise curtail business dealings with certain Russian businesses. These sanctions and any additional sanctions or other intergovernmental actions
that have been or may be undertaken in the future, against Russia, Russian entities or Russian individuals, or other countries that support Russia's military invasion, may result
in the devaluation of Russian currency, a downgrade in the country's credit rating, an immediate freeze of Russian assets, a decline in the value and liquidity of Russian securities, property or interests, and/or other adverse consequences to the Russian economy or the Portfolio. The scope and
scale of sanctions in place at a particular time may be expanded or otherwise modified in a way that have negative effects on the Portfolio. Sanctions, or the threat of new or
modified sanctions, could impair the ability of the Portfolio to buy, sell, hold, receive, deliver or otherwise transact in certain affected securities or other investment
instruments. Sanctions could also result in Russia taking counter measures or other actions in response (including cyberattacks and espionage), which may further impair the value and liquidity of Russian securities. These sanctions, and the resulting
disruption of the Russian economy, may cause volatility in other regional and global markets and may negatively impact the performance of various sectors and industries, as well as companies in other countries, which could have a negative
effect on the performance of the Portfolio, even if the Portfolio does not have direct exposure to securities of Russian issuers. As a collective result of the imposition of sanctions, Russian government countermeasures and the impact that they
have had on the trading markets for Russian securities, certain Portfolios have used, and may in the future use, fair valuation procedures approved by the Portfolio's Board to
value certain Russian securities, which could result in such securities being deemed to have a zero value.
Section 4(a)(2) Commercial Paper/Rule 144A
Securities
The Portfolio may invest in commercial paper issued in
reliance on the so called “private placement” exemption from registration afforded by Section
4(a)(2) of the Securities Act of 1933, as amended (“1933 Act”) (“Section 4(a)(2) paper”).
Section 4(a)(2) paper is restricted as to disposition under the federal securities laws and
generally is sold to investors who agree that they are purchasing the paper for investment and not with a view to public distribution. Any resale by the purchaser must be a transaction exempt from the registration requirements of the 1933 Act. Section 4(a)(2) paper normally is
resold to other institutional investors like the Portfolio through or with the assistance of the issuer or investment dealers that make a market in Section 4(a)(2) paper. Rule 144A
securities generally must be sold only to other institutional investors.
There can be no assurance that a liquid trading market will exist at any time for any particular Section 4(a)(2) paper or Rule 144A securities.
Tax Exempt Commercial Paper
The Portfolio may invest in tax exempt commercial paper. Tax exempt commercial paper is a short-term obligation with a
stated maturity of 365 days or less. It is typically issued to finance seasonal working capital needs or as short-term financing in anticipation of longer term financing. Each instrument may be backed only by the credit of the issuer or may be
backed by some form of credit enhancement, typically in the form of a guarantee by a commercial bank. Commercial paper backed by guarantees of foreign banks may involve additional
risk due to the difficulty of obtaining and enforcing
judgments against such banks and the generally
less restrictive regulations to which such banks are subject. The Portfolio will only invest in commercial paper rated at the time of purchase not less than Prime-1 by Moody's, A-1
by S&P or F-1 by Fitch Ratings. See Appendix A for more information on the ratings of debt instruments.
Temporary Defensive Positions
From time to time, the Portfolio may take temporary defensive positions in attempting to
respond to adverse market, economic or other conditions. Temporary defensive positions may be taken, for example, to preserve capital or if the Portfolio is unable to pursue its investment strategies or acquire the types of securities in which it normally invests.
Temporary defensive positions will be in high-quality fixed income securities, cash or cash equivalents. These positions include, but are not limited to: (1) obligations issued or guaranteed as to principal and interest by the U.S. Government, its
agencies or instrumentalities; (2) commercial paper, bank certificates of deposit, bankers' acceptances and time deposits; (3) repurchase agreements; or (4) uninvested cash, some or all of which may be held in a non-interest bearing demand deposit
account at the Portfolio's affiliated custodian. The Adviser has discretion in determining: (i) whether taking a temporary defensive position is appropriate for the Portfolio at a
particular time, and (ii) the types of instruments that the Portfolio will hold in taking a temporary defensive position.
When taking a temporary defensive position, the Portfolio may not achieve its investment
objective.
A tender option is a municipal obligation (generally held pursuant to a custodial
arrangement) having a relatively long maturity and bearing interest at a fixed rate substantially higher than prevailing short-term tax exempt rates, that has been coupled with the agreement of a third-party, such as a bank, broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at periodic intervals, to tender their securities to the institution and receive the face value thereof. As consideration for providing the option, the financial institution receives periodic fees
equal to the difference between the municipal obligation's fixed coupon rate and the rate, as determined by a remarketing or similar agent at or near the commencement of such period, that would cause the securities, coupled with the tender
option, to trade at par on the date of such determination. Thus, after payment of this fee, the security holder effectively holds a demand obligation that bears interest at the prevailing short-term tax exempt rate. Subject to applicable regulatory
requirements, the Portfolio may buy tender option bonds if the agreement gives the Portfolio the right to tender the bond to its sponsor no less frequently than once every 397 days. The Adviser will consider on an ongoing basis the creditworthiness
of the issuer of the underlying obligation, any custodian and the third-party provider of the tender option. In certain instances, and for certain tender option bonds, the option
may be terminable in the event of a default in payment of principal or interest on the underlying municipal obligation and for other reasons.
Treasury Inflation-Protected Securities
The Portfolio may invest in Inflation-Protection Securities (“TIPSs”), a type of inflation-indexed Treasury security. TIPSs typically provide for semiannual payments of interest and a payment
of principal at maturity. In general, each payment will be adjusted to take into account any inflation or deflation that occurs between the issue date of the security and the
payment date based on the Consumer Price Index for All Urban Consumers (“CPI-U”).
Each semiannual payment of interest will be determined by multiplying a single fixed rate of
interest by the inflation-adjusted principal amount of the security for the date of the interest payment. Thus, although the interest rate will be fixed, the amount of each interest payment will vary with changes in the principal of the security as adjusted for inflation and
deflation.
TIPSs also provide for an additional payment (a
“minimum guarantee
payment”) at maturity if the security's inflation-adjusted principal amount for the maturity date is less than the security's principal amount at issuance. The amount of the
additional payment will equal the excess of the security's principal amount at issuance over the security's inflation-adjusted principal amount for the maturity date.
U.S. Government Securities
The Portfolio may purchase U.S. Government securities. The types of U.S. Government obligations in which the Portfolio may
at times invest include: (1) U.S. Treasury obligations and (2) obligations issued or guaranteed by U.S. Government agencies and instrumentalities, which are supported by any of the
following: (a) the full faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government agency or instrumentality, or (d) the credit of the instrumentality (examples of agencies and instrumentalities are: Federal Land Banks, Federal Housing Administration, Federal Farm Credit Bank,
Farmers Home Administration, Export-Import Bank of
the United States, Central Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks, General Services Administration, Maritime Administration, Tennessee Development Bank, Asian-American Development Bank, International Bank for Reconstruction and Development and
Federal National Mortgage Association). No assurance can be given that in the future the U.S. Government will provide financial support to U.S. Government securities it is not
obligated to support.
The Portfolio may purchase U.S. Government obligations
on a forward commitment basis.
U.S.
Registered Securities of Non-U.S. Issuers
The Portfolio may purchase
publicly traded common stocks of non-U.S. corporations. Investing in U.S. registered, dollar-denominated, securities issued by non-U.S. issuers involves some risks and
considerations not typically associated with investing in U.S. companies. These include differences in accounting, auditing and financial reporting standards, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations,
political instability, which could affect U.S. investments in non-U.S. countries, and potential restrictions of the flow of international capital. Non-U.S. companies may be subject to less governmental regulation than U.S. issuers. Moreover,
individual non-U.S. economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payment positions.
The Portfolio's investment in common stock of non-U.S. corporations may also be in the form
of American Depositary Receipts
(“ADRs”), Global Depositary Receipts (“GDRs”) and European Depositary Receipts
(“EDRs”) (collectively “Depositary Receipts”). Depositary Receipts are receipts, typically issued by a bank or trust company, which evidence ownership of underlying securities issued by a non-U.S. corporation. For ADRs, the depository is typically a U.S. financial
institution and the underlying securities are issued by a non-U.S. issuer. For other Depositary Receipts, the depository may be a non-U.S. or a U.S. entity, and the underlying securities may have a non-U.S. or a U.S. issuer. Depositary Receipts will
not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designated for use in European securities
markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world. The Portfolio may invest in unsponsored Depositary Receipts. The
issuers of unsponsored Depositary Receipts are not obligated to disclose material information in the United States, and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary
Receipts.
Variable Amount Master Demand
Notes
The Portfolio may invest in variable amount master demand notes,
which are unsecured obligations that are redeemable upon demand and are typically unrated. These instruments are issued pursuant to written agreements between their issuers and holders. The agreements permit the holders to increase (subject to an agreed maximum) and the holders and
issuers to decrease the principal amount of the notes, and specify that the rate of interest payable on the principal fluctuates according to an agreed formula. Generally, changes in interest rates will have a smaller effect on the market
value of these securities than on the market value of comparable fixed income obligations. Thus, investing in these securities generally allows less opportunity for capital appreciation and depreciation than investing in comparable fixed
income securities. There may be no active secondary market with respect to a particular variable rate instrument.
Variable and Floating Rate Securities
The Portfolio may invest in variable and floating rate securities. In general variable rate
securities are instruments issued or guaranteed by entities such as (1) U.S. Government, or an agency or instrumentality thereof, (2) corporations, (3) financial institutions, (4) insurance companies or (5) trusts that have a rate of interest subject to adjustment at regular
intervals. A variable rate security provides for the automatic establishment of a new interest rate on set dates. Interest rates on these securities are ordinarily tied to widely recognized market rates, which are typically set once a day.
Generally, changes in interest rates will have a smaller effect on the market value of variable and floating rate securities than on the market value of comparable fixed income obligations. Variable rate obligations will be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate.
When-Issued
Securities
The Portfolio may purchase securities on a when-issued basis.
Delivery of and payment for these securities may take place as long as a month or more after the date of the purchase commitment. The value of these securities is subject to
market fluctuation during this period, and no income accrues to the Portfolio until settlement takes place. When entering into a when-issued transaction, the Portfolio will rely on the other party to consummate the transaction; if the other party
fails to do so, the Portfolio may be disadvantaged. The Portfolio will not invest more than 25% of its respective net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Portfolio are subject to
changes in market value based upon actual or perceived changes in the level of interest rates. Generally, the value of such securities will fluctuate inversely to changes in interest rates — i.e., they will appreciate in value when interest rates decline and decrease in value when
interest rates rise. Therefore, if, in order to achieve higher interest income, the Portfolio remains substantially fully invested at the same time that it has purchased securities on a “when-issued” basis, there will be a greater
possibility of fluctuation in the Portfolio's NAV.
The Portfolio may invest in zero coupon securities. Zero-coupon securities are notes, bonds and debentures that: (1) do not
pay current interest and are issued at a substantial discount from par value; (2) have been stripped of their unmatured interest coupons and receipts; or (3) pay no interest until
a stated date one or more years into the future. These securities also include certificates representing interests in such stripped coupons and receipts. Generally, changes in
interest rates will have a greater impact on the market value of a zero-coupon security than on the market value of the comparable securities that pay interest periodically during the life of the instrument. In the case of any zero-coupon debt obligations
with a fixed maturity date of more than one year from the date of issuance that are treated as issued originally at a discount, the Portfolio will be required to accrue original issue discount (“OID”) for U.S. federal income tax purposes and
may as a result be required to pay out as an income distribution an amount which is greater than the total amount of cash interest the Portfolio actually received. The Portfolio may be required to sell investments in order to meet such distribution
requirements, including at a time when it may not be advantageous to do so.
The Portfolio may invest no more than 25% of its total assets in stripped securities that have been stripped by their holder, typically a custodian bank or investment brokerage firm. A number of securities firms and banks have stripped the interest
coupons and resold them in custodian receipt programs with different names. Privately-issued stripped securities are not themselves guaranteed by the U.S. Government, but the future payment of principal or interest on U.S. Treasury obligations,
which they represent, is so guaranteed.
Fundamental
Investment Restrictions
The Trust has adopted the following fundamental
investment policies with respect to the Portfolio, which may not be changed without the affirmative vote of a
“majority of the outstanding voting securities” of the shareholders of the Portfolio. A “majority of the outstanding voting
securities” is defined in the 1940 Act to mean the affirmative vote of the lesser of: (1) more than 50% of the outstanding shares of a portfolio; and (2) 67% or more of the shares present at a
meeting if more than 50% of the outstanding shares are present at the meeting in person or by proxy. The Portfolio may not:
1.
Borrow money, except
as a temporary measure for extraordinary or emergency purposes or to facilitate redemptions (not for leveraging or investment), provided that borrowing does not exceed an amount
equal to 33 1/3% of the current value of the Portfolio's assets taken at market value, less liabilities, other than borrowings. If, at any time, the Portfolio's borrowings exceed this limitation due to a decline in net assets, such borrowings will, within
three days, be reduced to the extent necessary to comply with this limitation. The Portfolio will not purchase investments once borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets.
2.
Make loans to any person or firm; provided, however, that the making of a loan shall not
include (i) the acquisition for investment of bonds, debentures, notes or other evidence of indebtedness that is publicly distributed or of a type customarily purchased by institutional investors, or (ii) entering into repurchase agreements, and provided further
that the Portfolio may lend its portfolio securities to broker-dealers or other institutional investors if the aggregate value of all securities loaned does not exceed 33 1/3% of
the value of the Portfolio's total assets.
3.
Engage in the business of underwriting securities issued by others, except that the Portfolio
will not be deemed to be an underwriter or to be underwriting on account of the purchase or sale of securities subject to legal or contractual restrictions on disposition.
4.
Issue senior
securities, except as permitted by its investment objective, policies and restrictions, and except as permitted by the 1940 Act.
5.
Invest 25% or more of
the value of its total assets in securities of companies primarily engaged in any one industry (other than the U.S. Government, its agencies and instrumentalities); provided,
however, that concentration may occur as a result of changes in the market value of portfolio securities and from investments in bankers' acceptances, certificates of deposit, time deposits and other similar instruments issued by foreign and domestic
branches of U.S. and foreign banks.
6.
With respect to 75% of its total assets, invest in securities of any one issuer (other than
securities issued by the U.S. Government, its agencies and instrumentalities and shares of investment companies), if immediately thereafter and as a result of such investment (i) the current market value of the Portfolio's holdings in the securities of
such issuer exceeds 5% of the value of the Portfolio's assets or (ii) the Portfolio owns more than 10% of the outstanding voting securities of the issuer.
7.
Purchase or sell real
estate or real estate mortgage loans; provided, however, that the Portfolio may invest in securities secured by real estate or interests therein or issued by companies, which
invest in real estate or interests therein.
8.
Invest in commodities, except that the Portfolio may purchase and sell financial futures
contracts and options thereon.
The concentration policy of the Portfolio (as set forth in Investment Restriction No. 5, above) permits the Portfolio to invest, without limit (other than any investment limitation described herein), in bankers' acceptances, certificates of deposit, time
deposits and similar instruments issued by (i) U.S. banks, (ii) U.S. branches of foreign banks (in circumstances in which the U.S. branches of foreign banks are subject to the same regulation as U.S. banks), (iii) foreign branches of U.S. banks
(in circumstances in which the Portfolio will have recourse to the U.S. bank for the obligations of the foreign branch), and (iv) foreign branches of foreign banks to the extent that the Adviser determines that the foreign branches of foreign banks
are subject to the same or substantially similar regulations as U.S. banks. The Portfolio may concentrate in such
instruments when, in the opinion of the Adviser, the yield, marketability and availability of investments meeting the Portfolio's quality standards in the banking industry justify any additional risks associated with the concentration of the
Portfolio's assets in such industry.
If concentration in an industry (other than as contemplated by Investment Restriction No. 5) occurs as a result of changes
in the market value of securities held by the Portfolio (including as a result of reductions in the net assets of the Portfolio in connection with the redemptions of shares of the Portfolio), future purchases of securities will be made in a manner that
does not increase such concentration and, over time, can be expected to eliminate such concentration.
The Portfolio shall not invest more than 50% of the value of its total assets in securities issued by foreign branches of
foreign banks. This non-fundamental restriction may be changed by the Board without the approval of shareholders.
Disclosure of Portfolio Holdings
The Trust's Policies on Disclosure of Portfolio Holdings (“Disclosure Policy”) are intended to ensure compliance by the Trust's service providers and the Trust with (1) applicable regulations of the
federal securities laws, including the 1940 Act, and the Investment Advisers Act of 1940 and (2) general principles of fiduciary duty relating to client accounts. The Board must approve all material amendments to this policy and may amend this policy from time to time.
The Trust may disclose the securities holdings of the Portfolio on a daily basis to shareholders and to investors eligible to invest in the Portfolio, provided that those investors (“Eligible Investors”) are a party to a currently
effective securities lending agency agreement with State Street Bank and Trust Company (“State Street”). Information regarding holdings of
the Portfolio and other online reports are available electronically on a daily basis to shareholders of the Trust and Eligible Investors with a one-day lag through State Street's web portal, www.my.statestreet.com. The Trust may also disclose holdings
of the Portfolio (i) to the extent required by law; (ii) to the Trust's service providers who generally need access to such information in the performance of their contractual
duties and responsibilities, such as the Trustees of the Trust, the Trust's investment adviser, custodian, fund accountant, administrator, independent public accountants,
attorneys, and each of their respective affiliates and advisers, and are subject to duties of confidentiality imposed by law and/or contract; and (iii) to broker-dealers to facilitate trading.
Notwithstanding anything contained herein to the
contrary, the Board and SSGA FM may, on a case-by-case basis, impose restrictions on the disclosure of portfolio holdings information, including, without limitation, suspension or
cessation of disclosure of holdings information of the Trust or the Portfolio.
The Disclosure Policy may not be waived, or exceptions made, without the written consent of an officer of the Trust. No waiver or exception may be granted unless the person or entity benefiting thereby agrees in writing to maintain the
confidentiality of information disclosed and to use such information solely in connection with its decisions relating to participation in a Securities Lending Program. All waivers and exceptions involving the Trust will be disclosed to the Board
no later than its next regularly scheduled quarterly meeting.
ITEM 17. MANAGEMENT OF THE TRUST
The Board is responsible for overseeing generally the management, activities and affairs of
the Portfolio and has approved contracts with various organizations to provide, among other services, day-to-day management required by the Trust (see the section called “Investment
Advisory and Other Services”). The Board has engaged the Adviser to manage the Portfolio on a day-to day basis. The Board is responsible for overseeing the Adviser and other service providers in the
operation of the Trust in accordance with the provisions of the 1940 Act, applicable Massachusetts law and regulation, other applicable laws and regulations, and the Second Amended and Restated Master Trust Agreement. The Trustees listed below
are also Trustees of SSGA Funds, State Street Master Funds, State Street Institutional Investment Trust, Elfun Diversified Fund, Elfun Government Money Market Fund, Elfun
Tax-Exempt Income Fund, Elfun Income Fund, Elfun International Equity Fund and Elfun Trusts (collectively, the
“Elfun Funds”), State Street Institutional Funds and State Street Variable Insurance Series Funds, Inc., and their respective series. The
following table provides information with respect to each Trustee, including those Trustees who are not considered to be “interested” as that term is defined in the 1940 Act (the
“Independent Trustees”), and each officer of the Trust.
Name, Address, and Year of Birth |
Position(s) Held With Trust
|
Term
of Office and Length of Time Served
|
Principal
Occupation During Past Five Years and Relevant
Experience |
Number
of Funds in Fund Complex
Overseen by Trustee† |
Other
Directorships Held by Trustee During Past
Five Years |
| |
|
PATRICK J. RILEY
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1948 |
Trustee and Chairperson of the Board |
Term: Indefinite Elected: 1/14 |
Independent Director, State Street Global Advisers Europe Limited (investment company) (1998 – 2023); Independent Director, SSGA Liquidity plc (formerly, SSGA Cash Management Fund plc) (1998 – 2023); and Independent Director, SSGA Fixed Income plc (January 2009 – 2023). |
|
Board Director and
Chairman, SSGA SPDR ETFs Europe I plc (2011 – March 2023); Board Director and Chairman, SSGA SPDR ETFs
Europe II plc (2013 –
March 2023); Board Director, State Street Liquidity plc (1998 – March 2023). |
MARGARET K.
MCLAUGHLIN
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1967 |
Trustee, Chairperson of the Qualified Legal Compliance Committee, and Vice-Chairperson of the Valuation Committee |
Term: Indefinite Elected: 12/24 |
Consultant, Bates Group (consultants) (September 2020 – January 2023); Consultant, Madison Dearborn Partners (private equity) (2019 – 2020). |
|
Director, Manning & Napier Fund Inc (2021 – 2022). |
GEORGE M. PEREIRA
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1964 |
Trustee, Chairperson of the Nominating Committee, Chairperson of the Governance Committee, and |
Term: Indefinite Elected: 12/24 |
Chief Operating Officer (January 2011 – September 2020) and Chief Financial Officer (November 2004 – September 2020), Charles Schwab |
|
Director, Pave Finance Inc. (May 2023 – present); Director, Pacific Premier Bancorp and Pacific Premier Bank (2021 – August 2025). |
Name, Address, and Year of Birth |
Position(s) Held With Trust
|
Term
of Office and Length of Time Served
|
Principal
Occupation During Past Five Years and Relevant
Experience |
Number
of Funds in Fund Complex
Overseen by Trustee† |
Other
Directorships Held by Trustee During Past
Five Years |
| |
Vice-Chairperson of the Qualified Legal Compliance Committee |
|
|
|
|
DONNA M. RAPACCIOLI
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1962 |
Trustee, Chairperson of the Audit Committee, Vice-Chairperson of the Nominating Committee, and Vice-Chairperson of the Governance Committee |
Term: Indefinite Elected: 12/18 |
Dean of the Gabelli School of Business (2007 – June 2022) and Accounting Professor (1987 – present) at Fordham University. |
|
Director- Graduate
Management Admissions Council
(2015 – 2022). |
MARK E. SWANSON
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1963 |
Trustee, Chairperson of the Valuation Committee, and Vice-Chairperson of the Audit Committee |
Term: Indefinite Elected: 12/24 |
Treasurer, Chief Accounting Officer and Chief Financial Officer, Russell Investment Funds (“RIF”) (1998 – 2022); Global Head of Fund Services, Russell Investments (2013 – 2022); Treasurer, Chief Accounting Officer and Chief Financial Officer, Russell Investment Company (“RIC”) (1998 – 2022); President and Chief Executive Officer, RIF (2016 – 2017 and 2020 to 2022); President and Chief Executive Officer, RIC (2016 – 2017 and 2020 – 2022). |
|
Director and President, Russell Investments Fund Services, LLC
(2010 – 2023); Director,
Russell Investment Management, LLC,
Russell Investments Trust Company and
Russell Investments Financial Services, LLC (2010 – 2023). |
Name, Address, and Year of Birth |
Position(s) Held With Trust
|
Term
of Office and Length of Time Served
|
Principal
Occupation During Past Five Years and Relevant
Experience |
Number
of Funds in Fund Complex
Overseen by Trustee† |
Other
Directorships Held by Trustee During Past
Five Years |
| |
|
|
|
|
|
JEANNE LAPORTA(2)
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1965 |
|
Term: Indefinite Elected: 12/24 |
Chair and Director, SSGA Funds Management, Inc. (October 2024 – present); Senior Managing Director, State Street Investment Management (August 2024 – present); Head of Global Funds Management (August 2024 – Present); Chief Administrative Officer at ClearAlpha Technologies LP (FinTech startup) (January 2021 – August 2024); Senior Managing Director at State Street Investment Management (July 2016 – 2021); Manager of State Street Global Advisors Funds Distributors, LLC (May 2017 – 2021); Director of SSGA Funds Management, Inc. (March 2020 - 2021); President of State Street Institutional Funds and State Street Variable Insurance Series Funds, Inc. (April 2014 – March 2020). |
|
Interested Trustee, Select Sector SPDR
Trust, SPDR Series Trust, SPDR Index
Shares Funds and SSGA Active Trust
(November 2024 –
present); Interested Trustee, Elfun
Government Money Market Fund, Elfun Tax Exempt Income Fund, Elfun Income Fund,
Elfun Diversified Fund,
Elfun International Equity Fund, Elfun
Trusts (2016 – 2021). |
†
For the purpose of determining the number of portfolios overseen by the Trustees, “Fund Complex” comprises registered investment companies for which SSGA FM serves as investment adviser.
(1)
The individual listed
below is a Trustee who is an “interested person,” as defined in the 1940 Act, of the Trust
(“Interested Trustee”).
(2)
Ms. LaPorta is an Interested Trustee because of her employment with State Street Investment Management, an affiliate of the Trust.
The following lists the principal officers for the Trust, as well as their
mailing addresses and ages, positions with the Trust and length of time served, and present and principal occupations:
Name, Address, and Year of Birth |
Position(s)
Held With
Trust |
Term of Office and Length of Time
Served |
Principal
Occupation During Past Five Years |
| |
ANN M. CARPENTER
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1966 |
President and Principal Executive Officer; Deputy Treasurer |
Term: Indefinite Served: since 5/23 (with respect to President and Principal Executive Officer); Term: Indefinite Served: since 4/19 (with respect to Deputy Treasurer) |
Chief Operating Officer, SSGA Funds Management, Inc. (April 2005 – present)*; Managing Director, State Street Investment Management (April 2005 – present).* |
Name, Address, and Year of Birth |
Position(s)
Held With Trust |
Term of
Office and Length of Time Served
|
Principal
Occupation During Past Five Years |
BRUCE S. ROSENBERG
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1961 |
Treasurer and Principal Financial Officer |
Term: Indefinite Served: since 2/16 |
Managing Director, State Street Investment Management and SSGA Funds Management, Inc. (July 2015 – present). |
CHAD C. HALLETT
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1969 |
|
Term: Indefinite Served: since 2/16 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (November 2014 – present). |
DARLENE ANDERSON-VASQUEZ
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1968 |
|
Term: Indefinite Served: since 11/16 |
Managing Director, State Street Investment Management and SSGA Funds Management, Inc. (May 2016 – present). |
ARTHUR A. JENSEN
SSGA Funds Management, Inc.
400 Atlantic St.
Stamford, CT 06901
YOB: 1966 |
|
Term: Indefinite Served: since 11/16 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (July 2016 – present). |
DAVID LANCASTER
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1971 |
|
Term: Indefinite Served: since 11/20 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (July 2017 – present).* |
JOHN BETTENCOURT
SSGA Funds Management, Inc.
One Congress Street,
Boston, MA 02114 YOB:1976 |
|
Term: Indefinite Served: since 5/22 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (March 2020 – present); Assistant Vice President, State Street Investment Management (June 2007 – March 2020). |
BRIAN HARRIS
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1973 |
Chief Compliance Officer; Anti-Money Laundering Officer; Code of Ethics Compliance Officer |
Term: Indefinite Served: since 7/16 |
Managing Director, State Street Investment Management and SSGA Funds Management, Inc. (June 2013 – present).* |
ANDREW J. DELORME
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1975 |
|
Term: Indefinite Served: since 2/24 |
Managing Director and Managing Counsel, State Street Investment Management (March 2023 – present); Counsel, K&L Gates (February 2021 – March 2023). |
DAVID BARR
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1974 |
|
Term: Indefinite Served: since 9/20 |
Vice President and Senior Counsel, State Street Investment Management (October 2019 – present). |
E. GERARD MAIORANA, JR. SSGA Funds Management, Inc. One Congress Street Boston, MA 02114
YOB: 1971 |
|
Term: Indefinite Served: since 5/23 |
Assistant Vice President, State Street Investment Management (July 2014 – present). |
DAVID URMAN
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1985 |
|
Term: Indefinite Served: since 8/19 |
Vice President and Senior Counsel, State Street Investment Management (April 2019 – present). |
*
Served in various capacities and/or with various affiliated entities during noted time
period.
Summary of Trustees' Qualifications
Following is a brief discussion of the experience, qualifications, attributes or skills, which qualify each Trustee to serve on the Board, in light of the Trust's business and structure.
Patrick J. Riley: Mr. Riley is an experienced
business executive with over 48 years of experience in the legal and financial services industries; his experience includes service as a trustee or director of various investment
companies and Associate Justice of the Superior Court of the Commonwealth of Massachusetts. He has served on the Board of Trustees and related committees of the Trust for 36 years and possesses significant experience regarding the operations and history
of the Trust. Mr. Riley serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment Trust, State Street Master Funds, Elfun Funds, and State Street
Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Margaret K. McLaughlin: Ms. McLaughlin has over 28 years of experience she has gained in a variety of roles encompassing regulatory, operating, legal, and compliance functions, serving both firms and their boards. Ms. McLaughlin
formerly served as a founding member of the executive management team for Kramer Van Kirk Credit Strategies L.P. and its technology affiliate, Mariana Systems LLC, where she was integrally involved in corporate strategy, operational
oversight, risk management and board governance. Prior to Kramer Van Kirk, Ms. McLaughlin was Assistant General
Counsel to Harris Associates L.P., where she was responsible for legal, regulatory and compliance activities related to the Oakmark Mutual Funds. Ms. McLaughlin has an extensive understanding and perspective on governance, oversight, regulation,
policies and procedures from these positions as well as her prior experience with both the Securities and Exchange Commission and the Department of Justice. Ms. McLaughlin
currently serves on the Governing Council of the Independent Directors Council and the Board of Governors of the Investment Company Institute. Most recently, Ms. McLaughlin has held consulting positions at a major private equity firm and a management consulting firm. Ms. McLaughlin
serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment Trust, State Street Master Funds, Elfun Funds, and State Street Institutional Funds and a
Director of State Street Variable Insurance Series Funds, Inc.
George M. Pereira: Mr. Pereira has over 33 years of experience in executive management with financial institutions,
including extensive experience relating to financial reporting, operations, cybersecurity oversight, and enterprise risk management. Mr. Pereira retired from Charles Schwab Investment Management Inc., having served as Chief Operating Officer and
Chief Financial Officer during his tenure. Previously, Mr. Pereira also served as Head of Financial Reporting for Charles Schwab & Co., Inc. Earlier in his career, Mr. Pereira
gained valuable regulatory experience and perspective while serving as managing director at the New York Stock Exchange. With this professional experience, Mr. Pereira has developed wide-ranging expertise in building and managing financial, operational, technology and risk control platforms for
growth and scale within the financial services industry. Additionally, Mr. Pereira is a member of the Latino Corporate Directors Association. Mr. Pereira serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment
Trust, State Street Master Funds, Elfun Funds, and State Street Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Donna M. Rapaccioli: Ms. Rapaccioli has over 36 years of service as a full-time member of the business faculty at Fordham
University, where she developed and taught undergraduate and graduate courses, including International Accounting and Financial Statement Analysis, has taught at the executive MBA
level. Ms. Rapaccioli is dean emerita after serving as Dean of the Gabelli School of Business for 15 years. She has served on Association to Advance Collegiate Schools of Business accreditation team visits, as a director for the graduate management admissions council, as well as
trustee at Emmanuel College. Ms. Rapaccioli has lectured on accounting and finance topics and consulted for numerous investment banks. Ms. Rapaccioli also serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment
Trust, State Street Master Funds, Elfun Funds, and State Street Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Mark E. Swanson: Mr. Swanson has over 28 years of experience in executive management with financial services
institutions, including extensive experience relating to, fund operations, financial reporting, fund accounting, and fund services. Mr. Swanson recently retired from Russell Investments, having served most recently as the Global Head of Fund
Services. Additionally, Mr. Swanson served as Treasurer, Chief Accounting Officer and Chief Financial Officer of Russell Investment Company (“RIC”) and Russell Investment Funds (“RIF”). Previously, Mr. Swanson served as
Global Head of Fund Operations for Russell, as well as serving in different directorships with RIC, RIF and other Russell entities. Mr. Swanson serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment Trust, State Street
Master Funds, Elfun Funds, and State Street Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Jeanne LaPorta: Ms. LaPorta is a Senior Managing Director of State Street Investment Management and Head of Global Funds Management. Prior to joining State Street Investment Management, she was the Chief Administrative Officer of a Fintech
startup and served as a director of their flagship hedge fund. Ms. LaPorta previously worked at State Street
Investment Management from 2016 to 2021 as a
Senior Managing Director and at GE Asset Management (GEAM) from 1997 to July 2016 where she held various positions at GEAM, including Senior Vice President and Commercial Operations Leader, Senior Vice President and Commercial Administrative Officer, Senior Vice President and Deputy General
Counsel and Vice President and Associate General Counsel.
The discussion of
the experience, qualifications, attributes and skills of the Trustees above is provided as required by the federal securities laws and the regulations of the SEC promulgated
thereunder, does not constitute holding out of the Board or any Trustee as having any special expertise or experience, and shall not impose any greater responsibility or liability on any such person or on the Board by reason thereof.
The Board of Trustees has established various committees to facilitate the timely and efficient consideration of various
matters of importance to the Independent Trustees, the Trust, and the Portfolio's shareholders and to facilitate compliance with legal and regulatory requirements. Currently, the Board has created an Audit Committee, Governance Committee, Valuation
Committee, Nominating Committee and Qualified Legal Compliance Committee (the “QLCC”).
The Audit Committee is composed of all of the Independent Trustees. The Audit Committee meets twice a year, or more often as required, in conjunction with meetings of the Board of Trustees. The Audit Committee oversees and monitors the
Trust's internal accounting and control structure, its auditing function and its financial reporting process. The Audit Committee is responsible for selecting and retaining the independent accountants for the Trust. The Audit Committee is
responsible for approving the audit plans, fees and other material arrangements in respect of the engagement of the independent accountants, including non-audit services performed. The Audit Committee reviews the qualifications of the
independent accountant's key personnel involved in the foregoing activities and monitors the independent accountant's independence. During the Trust's fiscal year ended December 31, 2025, the Audit Committee held four meetings.
Each of the Governance Committee and Nominating Committee is composed of all the
Independent Trustees. The primary functions of the Governance Committee, and the Nominating Committee are to review and evaluate the composition and performance of the Board; make nominations for membership on the Board and committees; review the
responsibilities of each committee; and review governance procedures, compensation of Independent Trustees, and
independence of outside counsel to the Trustees. The Nominating Committee will consider nominees to the Board
recommended by shareholders. Recommendations should be submitted in accordance with the procedures set forth in the Nominating Committee Charter and should be submitted in writing to the Trust, to the attention of the Trust's Secretary, at
the address of the principal executive offices of the Trust. Shareholder recommendations must be delivered to, or mailed and received at, the principal executive offices of the Trust not less than sixty (60) calendar days nor more than ninety (90)
calendar days prior to the date of the Board or shareholder meeting at which the nominee candidate would be considered for election. The Governance Committee performs an annual self-evaluation of Board members. During the fiscal year ended
December 31, 2025, the Governance Committee and Nominating Committee held four combined meetings.
The Valuation Committee is composed of all the Independent Trustees. The Valuation Committee's primary purpose is to review
the actions and recommendations of the Adviser's Oversight Committee no less often than quarterly. The Trust has established procedures and guidelines for valuing portfolio
securities and making fair value determinations from time to time through the Valuation Committee, with the assistance of the Oversight Committee, State Street and SSGA FM. During the fiscal year ended December 31, 2025, the Valuation Committee held four meetings.
The QLCC is composed of all the Independent Trustees. The primary functions of the QLCC are to receive quarterly reports from the Trust's chief compliance officer (the “Chief Compliance Officer”); to oversee generally
the Trust's responses to regulatory inquiries; and to investigate matters referred to it by the Chief Legal Officer and make recommendations to the Board regarding the implementation of an appropriate response to evidence of a material violation of
the securities laws or breach of fiduciary duty or similar violation by the Trust, its officers or the Trustees. During the fiscal year ended December 31, 2025, the QLCC Committee
held four meetings.
Leadership Structure and
Risk Management Oversight
The Board has chosen to select different
individuals as Chairperson of the Board of the Trust, as Chairperson and Vice-Chairperson of the Committees of the Board, and as President of the Trust. Currently,
Mr. Riley, an Independent Trustee, serves as Chairperson of the Board, Ms. Rapaccioli serves as Chairperson of the Audit Committee, Ms. McLaughlin serves as Chairperson of the QLCC, Mr. Swanson serves as Chairperson of the Valuation Committee and
Mr. Pereira serves as Chairperson of each of the Governance Committee and Nominating Committee. Mr. Swanson serves as Vice-Chairperson of the Audit Committee, Ms. McLaughlin serves as Vice-Chairperson of the Valuation Committee, Mr.
Pereira serves as Vice-Chairperson of the QLCC,
and Ms. Rapaccioli serves as Vice-Chairperson of each of the Governance Committee and Nominating Committee. Ms. Carpenter, who is an employee of the Adviser, serves as President of the Trust. The Board believes that this leadership structure is appropriate. Ms. Carpenter is available to
provide the Board with insight regarding the Trust's day-to-day management when requested, while Mr. Riley provides an independent perspective on the Trust's overall operation and Ms. Rapaccioli provides a specialized perspective on audit
matters.
The Board has delegated management of the Trust to service providers who are responsible for the day-to-day management of risks applicable to the Trust. The Board oversees risk management for the Trust in several ways. The Board receives
regular reports from both the CCO and administrator for the Trust, detailing the results of the Trust's compliance with its Board-adopted policies and procedures, the
investment policies and limitations of the Portfolios, and applicable provisions of the federal securities laws and the Code. As needed, the Adviser discusses management issues regarding the Trust with the Board, soliciting the Board's input on many aspects of management,
including potential risks to the Portfolios. The Board's Audit Committee also receives reports on various aspects of risk that might affect the Trust and offers advice to management, as appropriate. The Trustees also meet in executive session
with the independent counsel to the Independent Trustees, the independent registered public accounting firm, counsel to the Trust, the CCO and representatives of management, as needed. Through these regular reports and interactions, the
Board oversees the risk management parameters for the Trust, which are effected on a day-to-day basis by service providers to the Trust.
Trustee Ownership of Securities of the Trust or Adviser
As of December 31, 2025, none of the Independent Trustees or their family members had any ownership of securities of the Adviser or any person directly or indirectly controlling, controlled by, or under common control with the Adviser.
The following table sets forth information describing the dollar range of the Trust's
equity securities beneficially owned by each Trustee as of December 31,
2025.
| |
Dollar Range Of Equity Securities In The Funds |
Aggregate Dollar Range Of Equity Securities In
All Registered Investment Companies
Overseen By
Trustees In Family of
Investment Companies |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
Independent Trustees are compensated on a calendar year basis. An Interested Trustee does not receive compensation from the
Portfolios for his or her service as a Trustee. Effective January 1, 2025, each Independent Trustee receives for his or her services to the State Street Master Funds, State Street
Institutional Investment Trust, the SSGA Funds, the Elfun Funds, the Trust, State Street Institutional Funds and State Street Variable Insurance Series Funds, Inc. (together,
the “Fund Entities”) a $400,000 annual base retainer. In addition, the Chairperson of each of the Valuation Committee, QLCC, Nominating Committee and Governance Committee will receive an additional $25,000 stipend and the Chairperson of the
Audit Committee will receive an additional $40,000 stipend. As of January 1, 2024, each Independent Trustee receives an additional $25,000 for each special in-person meeting and
$5,000 for each special telephonic meeting. The Chairperson of the Board receives an additional $100,000 annual retainer. The Independent Trustees are reimbursed for travel and other out-of-pocket expenses in connection with meeting attendance. As of the date of this SAI, the Trustees were
not paid pension or retirement benefits as part of the Trust's expenses. The Trust's officers are compensated by the Adviser and its affiliates.
The table below shows the compensation that the
Trustees received during the Trust's fiscal year ended December 31, 2025.
| |
Aggregate Compensation from the
Trust |
Pension or Retirement Benefits
Accrued as Part of Trust Expenses
|
Estimated Annual Benefits Upon
Retirement |
Total Compensation from the Trust
and Fund Complex Paid to Trustees |
| |
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
| |
|
|
|
|
The total compensation from Portfolio I paid to the Trustees for the Trust's fiscal year
ended December 31, 2025 is as follows:
| |
Aggregate Compensation from the
Portfolio |
Name of Independent Trustee |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
The Trust and the Adviser have each adopted a code of ethics (together, the “Codes of Ethics”) pursuant to Rule 17j-1 as required by applicable law, which is designed to prevent affiliated persons of the Trust and the
Adviser from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Portfolio (which may also be held by persons subject to the Codes of Ethics). The Codes of Ethics permit personnel, subject to the Codes of
Ethics and their provisions, to invest in securities for their personal investment accounts, subject to certain limitations, including securities that may be purchased or held by
the Trust, Adviser and State Street.
The Board has delegated to the Adviser the responsibility to
vote proxies on securities held by the Trust, subject to certain exceptions. The Board has retained authority to vote proxies for certain bank and bank holding company securities
(“Bank Securities”) that may be held by one or more Funds and Portfolios from time to time. The Board has adopted the Institutional Shareholder Services, Inc.'s
(“ISS”) benchmark proxy voting policy with respect to voting such Bank Securities' proxies. The Board has retained this authority
in order to permit the Adviser to utilize exemptions from limitations arising under the Bank Holding Company Act of 1956, as amended, that might otherwise prevent the Adviser
from investing a Fund's or Portfolio's assets in Bank Securities. Each of the Trust's and the Adviser's proxy voting policies, as well as ISS' benchmark proxy voting policy, are attached as an appendix to this SAI. Information regarding how a Fund or
Portfolio voted proxies relating to its portfolio securities during the most recent twelve-month period ended June 30 is available: (1) without charge by calling 1-866-787-2257;
(2) on the Funds' and Portfolios' website at www.statestreet.com/im; and (3) on the SEC's website at
www.sec.gov.
Reporting a Material Conflict of
Interest
A material conflict of interest may arise in a situation where the
proxy analyst, Portfolio Manager or Securities Analyst, when voting the proxy, has knowledge of a situation where either SSGA FM or one of its affiliates would enjoy a substantial or significant benefit from casting a vote in a particular way (“Material Conflict of Interest”). If a Material
Conflict of Interest does arise, such conflict will be documented by SSGA FM or each Sub-Adviser, as applicable, on a Material Conflict of Interest form and the Board will be notified of such Material Conflict of Interest at the next regular
board meeting after the Material Conflict of Interest occurs.
ITEM 18. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
In connection with State Street's Securities Lending Program, State Street holds certain collateral on behalf of its
securities lending clients to secure the return of loaned securities. Such collateral may be invested in Trust shares from time to time. Shares of Portfolio I will be registered with the Trust's transfer agent in the name of State Street, as agent for each Lending Fund, or in the name of the Lending Fund or the Lending Fund's custodian. Consequently, State Street will not
be a controlling person of the Trust for purposes of the 1940 Act.
Persons or organizations owning 25% or more of the voting interests of the Portfolio may be presumed to “control” (as that term is defined in the 1940 Act) the Portfolio. As a result, these persons or organizations could have the ability
to approve or reject those matters submitted to the investors of the Portfolio for their approval.
As of March 31, 2026, no shareholders of record, through one or more accounts, owned 25% or
more of the issued and outstanding shares of the Portfolio.
As of March 31, 2026, the following shareholders of record, through one or more accounts, owned 5% or more of the issued and
outstanding shares of the Portfolio:
| |
|
Diamond Hill Small-Mid Cap Fund 325 John H. McConnell Blvd, Suite 200 Columbus, OH 43215 |
|
Diamond Hill Long-Short Fund 325 John H. McConnell Blvd, Suite 200 Columbus, OH 43215 |
|
Diamond Hill Large Cap Fund 325 John H. McConnell Blvd, Suite 200 Columbus, OH 43215 |
|
Diamond Hill Small Cap Fund 325 John H. McConnell Blvd, Suite 200 Columbus, OH 43215 |
|
Diamond Hill Core Bond Fund 325 John H. McConnell Blvd, Suite 200 Columbus, OH 43215 |
|
Diamond Hill Select Fund 325 John H. McConnell Blvd, Suite 200 Columbus, OH 43215 |
|
Diamond Hill International Fund 325 John H. McConnell Blvd, Suite 200 Columbus, OH 43215 |
|
As of March 31, 2026, the Trustees and officers of the Trust, as a group, did not own any of the Trust's voting securities.
ITEM
19. INVESTMENT ADVISORY AND OTHER SERVICES
Most of the Portfolio's necessary day-to-day operations are
performed by service providers under contract to the Trust. The principal service providers for the Portfolio I are:
Investment Adviser and Administrator: Custodian, Transfer Agent and Sub-Administrator: Independent Registered Public Accounting Firm: |
SSGA FM State
Street Bank and Trust Company Ernst & Young LLP |
SSGA FM serves as the investment adviser to the Portfolio pursuant to an Advisory Agreement
dated as of May 1, 2001, as amended
(“Advisory Agreement”), by and between the Adviser and the Trust. The Adviser is a wholly-owned subsidiary of State Street Global Advisors, Inc.,
which itself is a wholly-owned subsidiary of State Street Corporation, a publicly held financial holding company. Prior to June 8, 2017, SSGA FM was a wholly-owned subsidiary of
State Street Corporation. The Adviser's mailing address is One Congress Street, Boston, Massachusetts 02114.
Under the Advisory Agreement, the Adviser directs the Portfolio's investments in accordance
with its investment objectives, policies and limitations. For these services, the Portfolio pays a fee to the Adviser at the rates stated in the Part A. The advisory fees paid by the Portfolio to SSGA FM for the fiscal years ended December 31, 2025, December 31, 2024 and
December 31, 2023 were $166,157, $168,207 and $149,612, respectively.
Total Annual Fund Operating Expense Waivers. The Adviser has contractually agreed with the Trust, through
April 30, 2026, (i) to waive up to the full amount of the advisory fee payable by the Portfolio, and/or (ii) to reimburse the Portfolio for expenses to the extent that Total Annual Fund Operating Expenses (subject to certain exclusions) exceed 0.042% of average
daily net assets on an annual basis.
The Advisory Agreement will continue
from year to year provided that such continuance is specifically approved at least annually by (a) the Trustees or by the vote of a majority of the outstanding voting securities of
the Portfolio, and (b) vote of a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement may be terminated by the Adviser or the Trust without penalty upon sixty days' notice and will terminate
automatically upon its assignment.
SSGA FM serves as the Administrator (the
“Administrator”) of the Portfolio pursuant to an Administration Agreement dated as of June 3, 2015, as amended (“Administration Agreement”) by and between SSGA FM and the Trust. Under the Administration Agreement, the Administrator will, among other things (i)
provide Portfolio I with administrative and clerical services, including the maintenance of certain of the Portfolio's books and records; (ii) arrange the periodic updating of
the Trust's Registration Statement and the Portfolio's Confidential Offering Memorandum; and (iii) provide proxy materials and reports to the Portfolio's shareholders and the SEC. For these services, the Portfolio pays an annual administration fee
equal to 0.00075% of the Portfolio's average daily net assets. The administration fees paid by the Portfolio to SSGA FM for the fiscal years ended December 31, 2025, December 31,
2024, and December 31, 2023 were $4,985, $5,046, and $4,488, respectively. The Portfolio reimburses SSGA FM for certain out-of-pocket travel expenses of the CCO and compliance team incurred on the Portfolio's behalf.
The Administration Agreement was approved initially for a one-year term by the Trustees, and will continue in effect from
year to year unless terminated in writing by either the Administrator or the Trust at the end of such period or thereafter on 60 days' prior written notice given by either party to the other party.
SUB-ADMINISTRATOR, CUSTODY, FUND ACCOUNTING AND TRANSFER AGENCY
State Street serves as the sub-administrator for the Trust, pursuant to a sub-administration agreement dated June 1, 2015 (the “Sub-Administration Agreement”). State Street serves as the custodian for the Trust, pursuant to a custody agreement dated April 11, 2012 (the “Custody
Agreement”). Under the Sub-Administration Agreement, State Street is obligated to provide certain sub-administrative services to the Trust. Under the Custody Agreement, State Street is obligated to provide
certain custody services to the Trust, as well as basic portfolio recordkeeping required by the Trust for regulatory and financial reporting purposes. State Street also serves as transfer agent for the Portfolio. State Street is a wholly owned
subsidiary of State Street Corporation, a publicly held financial holding company, and is affiliated with the Adviser. State Street's mailing address is One Congress Street, Boston, Massachusetts 02114.
As consideration for sub-administration, custody,
fund accounting, and transfer agency services, the Portfolio pays State Street an annual fee (payable monthly) based on the average monthly net assets of the Portfolio. The
Portfolio also pays State Street transaction and service fees for these services and reimburses State Street for out-of-pocket expenses.
The custodian, sub-administration, fund accounting and transfer agent service fees paid by
the Portfolio to State Street for the fiscal years ended December 31, 2025, December 31, 2024, and December 31, 2023 were $102,729, $108,588, and $97,561, respectively.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ropes & Gray LLP serves as counsel to the Trust. The principal business address of Ropes & Gray LLP is 800 Boylston
Street, Boston, Massachusetts 02199. Sullivan & Worcester LLP, located at One Post Office Square, Boston,
Massachusetts, 02109, serves as independent counsel to the Independent Trustees.
The Audit Committee approved the appointment of Ernst & Young LLP (“E&Y”), 200 Clarendon Street, Boston, MA
02116, as the Portfolio's independent registered public accounting firm for the fiscal year ending December 31, 2025.
ITEM 20. PORTFOLIO MANAGERS
The Adviser manages the Funds using a team of investment professionals. The
following table lists the number and types of accounts managed by each of the key professionals involved in the day-to-day portfolio management for each Fund and assets under management in those accounts.
| |
Registered Investment Company
Accounts |
Assets Managed (billions)*
|
Other Pooled Investment Vehicle
Accounts |
Assets Managed (billions)*
|
|
Assets Managed (billions)*
|
Total Assets Managed
(billions) |
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
*
There are no performance-based fees associated with these accounts.
The portfolio managers did not
beneficially own any shares of the Portfolio as of December 31, 2025.
A
portfolio manager that has responsibility for managing more than one account may be subject to potential conflicts of interest because he or she is responsible for other accounts
in addition to the Portfolio. Those conflicts could include preferential treatment of one account over others in terms of: (a) the portfolio manager's execution of different
investment strategies for various accounts; or (b) the allocation of resources or of investment opportunities.
Portfolio managers may manage numerous accounts for multiple clients. These accounts may
include registered investment companies, other types of pooled accounts (e.g., collective investment funds), and separate accounts (i.e., accounts managed on behalf of individuals or public or private institutions). Portfolio managers make investment decisions
for each account based on the investment objectives and policies and other relevant investment considerations applicable to that portfolio. A potential conflict of interest may arise as a result of a portfolio manager's responsibility for multiple
accounts with similar investment guidelines. Under these circumstances, a potential investment may be suitable for more than one of the portfolio manager's accounts, but the quantity of the investment available for purchase is less than the
aggregate amount the accounts would ideally allocate to the opportunity. Similar conflicts may arise when multiple accounts seek to dispose of the same investment. The portfolio managers may also manage accounts whose objectives and
policies differ from that of the Portfolio. These differences may be such that under certain circumstances, trading activity appropriate for one account managed by the portfolio
manager may have adverse consequences for another account managed by the portfolio manager. For example, an account may sell a significant position in a security, which could cause the market price of that security to decrease, while a Portfolio maintained its position in that security.
A potential conflict may arise when the portfolio managers are responsible for accounts that
have different advisory fees— the difference in fees could create an incentive for the portfolio manager to favor one account over another, for example, in terms of access to investment opportunities. This conflict may be heightened if an account is subject to a performance-based
fee, as applicable. Another potential conflict may arise when the portfolio manager has a personal investment in one or more accounts that participate in transactions with other
accounts. His or her personal investment(s) may create an incentive for the portfolio manager to favor one account over another. The Adviser has adopted policies and procedures
reasonably designed to address these potential material conflicts. For instance, portfolio managers are normally
responsible for all accounts within a certain
investment discipline and do not, absent special circumstances, differentiate among the various accounts when allocating resources. Additionally, the Adviser and its advisory
affiliates have processes and procedures for allocating investment opportunities among portfolios that are designed to provide a fair and equitable allocation. With respect to conflicts arising from personal investments, all employees, including portfolio managers, must
comply with personal trading controls established by each of the Adviser's and Trust's Code of Ethics.
Compensation. State Street Investment Management's (“State
Street IM”) culture is complemented and reinforced by a total rewards strategy that is based on a pay for performance philosophy which seeks to offer a competitive pay mix of base
salary, benefits, cash incentives and deferred compensation.
Salary is based on a number of factors, including external benchmarking data and market trends, and performance both at the business and individual level. State Street IM's Global Human Resources department regularly participates in
compensation surveys in order to provide State Street IM with market-based compensation information that helps support individual pay decisions.
Additionally, subject to State Street and State Street IM business results, an incentive
pool is allocated to State Street IM to reward its employees. The size of the incentive pool for most business units is based on the firm's overall profitability and other factors, including performance against risk-related goals. For most State Street IM investment teams, State Street
IM recognizes and rewards performance by linking annual incentive decisions for investment teams to the firm's or business unit's profitability and business unit investment
performance over a multi-year period.
Incentive pool funding for most active investment teams is driven in part by the post-tax investment performance of fund(s)
managed by the team versus the return levels of the benchmark index(es) of the fund(s) on a one-, three- and, in some cases, five-year basis. For most active investment teams, a material portion of incentive compensation for senior staff is
deferred over a four-year period into the State Street Investment Management Long-Term Incentive
(“State Street Investment Management
LTI”) program. For these teams, the State Street Investment Management LTI program indexes the performance of these deferred awards against the post-tax investment performance of fund(s) managed by the team. This is
intended to align State Street IM's investment team's compensation with client interests, both through annual incentive compensation awards and through the long-term value of
deferred awards in the State Street Investment Management LTI program.
For the index equity investment team, incentive pool funding is driven in part by the
post-tax 1- and 3-year tracking error of the funds managed by the team against the benchmark indexes of the funds.
The discretionary allocation of the incentive pool to the business units within State Street IM is influenced by
market-based compensation data, as well as the overall performance of each business unit. Individual compensation decisions are made by the employee's manager, in conjunction with the senior management of the employee's business unit. These
decisions are based on the overall performance of the employee and, as mentioned above, on the performance of the firm and business unit. Depending on the job level, a portion of the annual incentive may be awarded in deferred compensation,
which may include cash and/or Deferred Stock Awards (State Street stock), which typically vest over a four-year period. This helps to retain staff and further aligns State Street
IM employees' interests with State Street IM clients' and shareholders' long-term interests.
State Street IM recognizes and rewards outstanding performance
by:
•Promoting employee ownership to connect employees directly to the
company's success.
•Using rewards to reinforce mission, vision, values and business
strategy.
•Seeking to recognize and preserve the firm's unique culture and team
orientation.
•Providing all employees the opportunity to share in the success of State
Street IM.
ITEM 21.
BROKERAGE ALLOCATION AND OTHER PRACTICES
All portfolio transactions are
placed on behalf of a Portfolio by the Adviser. Purchases and sales of securities on a securities exchange are affected through brokers who charge a commission for their services.
Ordinarily commissions are not charged on over-the-counter orders (e.g., fixed income securities) because the Portfolio pays a spread which is included in the cost of the security and represents the difference between the dealer's quoted price at which it is willing to
sell the security and the dealer's quoted price at which it is willing to buy the security. When a Portfolio executes an over-
the-counter order with an electronic
communications network or an alternative trading system, a commission is charged by such electronic communications networks and alternative trading systems as they execute such
orders on an agency basis. Securities may be purchased from underwriters at prices that include underwriting fees.
In placing a portfolio transaction, the Adviser seeks to achieve best execution. The
Adviser's duty to seek best execution requires the Adviser to take reasonable steps to obtain for the client as favorable an overall result as possible for portfolio transactions under the circumstances, taking into account various factors that are relevant to the particular transaction.
The Adviser refers to and selects from the list of approved trading counterparties
maintained by the Adviser's Credit Risk Management team. In selecting a trading counterparty for a particular trade, the Adviser seeks to weigh relevant factors including, but not limited to the following:
•Prompt and reliable execution;
•The competitiveness of commission rates and spreads, if applicable;
•The financial strength, stability
and/or reputation of the trading counterparty;
•The willingness and ability of the executing trading
counterparty to execute transactions (and commit capital) of size in liquid and illiquid markets without disrupting the market for the security;
•Local laws, regulations or restrictions;
•The ability of the trading counterparty to maintain
confidentiality;
•The availability and capability of execution venues,
including electronic communications networks for trading and execution management systems made available to Adviser;
•Execution related costs;
•History of execution of orders;
•Likelihood of execution and settlement;
•Clearance and settlement capabilities, especially in high volatility
market environments;
•Availability of lendable
securities;
•Sophistication of the trading counterparty's trading capabilities and infrastructure/facilities;
•The operational efficiency with which transactions are processed and cleared, taking into account the order size and complexity;
•Speed and responsiveness to the Adviser;
•Access to secondary markets;
•Counterparty exposure; and
•Depending upon the circumstances, the Adviser may take other relevant factors into account if the Adviser believes that these are important in taking all sufficient steps to obtain the best possible result for execution of the order.
In selecting a trading counterparty, the price of the transaction and costs related to the
execution of the transaction typically merit a high relative importance, depending on the circumstances. The Adviser does not necessarily select a trading counterparty based upon price and costs but may take other relevant factors into account if it believes that these
are important in taking reasonable steps to obtain the best possible result for a Portfolio under the circumstances. Consequently, the Adviser may cause a client to pay a trading counterparty more than another trading counterparty might have
charged for the same transaction in recognition of the value and quality of the brokerage services provided. The following matters may influence the relative importance that the
Adviser places upon the relevant factors:
(i)
The nature and
characteristics of the order or transaction. For example, size of order, market impact of order, limits, or other instructions relating to the order;
(ii)
The characteristics
of the financial instrument(s) or other assets which are the subject of that order. For example, whether the order pertains to an equity, fixed income, derivative or convertible
instrument;
(iii)
The characteristics
of the execution venues to which that order can be directed, if relevant. For example, availability and capabilities of electronic trading systems;
(iv)
Whether the
transaction is a ‘delivery versus payment' or ‘over-the-counter' transaction. The creditworthiness of the trading counterparty, the amount of existing exposure to a
trading counterparty and trading counterparty settlement capabilities may be given a higher relative importance in the case of ‘over-the-counter' transactions; and/or
(v)
Any other circumstances that the Adviser believes are relevant at the time.
The process by which
trading counterparties are selected to effect transactions is designed to exclude consideration of the sales efforts conducted by broker-dealers in relation to the
Portfolio.
The Adviser does not currently use the Portfolio's assets in
connection with third-party soft dollar arrangements. While the Adviser does not currently use “soft” or commission dollars paid by the Portfolio
for the purchase of third-party research, the Adviser reserves the right to do so in the future.
ITEM 22. CAPITAL STOCK AND OTHER
SECURITIES
Under its Master Trust Agreement, the Trust is authorized to
issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share, which may be divided into one or more series, each of which evidences pro rata
ownership interest in a different investment portfolio. The Trustees may create additional portfolio series at any time without shareholder approval. The shares of the Portfolio may have such rights and preferences as the Trustees may establish
from time to time, including the right of redemption (including the price, manner and terms of redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions, conversion rights and conditions under which the Portfolio may have separate voting rights or no voting
rights.
This Part B covers Portfolio I, which commenced operations on
July 11, 2016. The Trust is authorized, without shareholder approval, to divide shares of any series into two or more classes of shares, each class having such different dividend,
liquidation, voting and other rights as the Trustees may determine without shareholder approval.
Any amendment to the Master Trust Agreement that would materially and adversely affect
shareholders of the Trust as a whole, or shareholders of a particular portfolio series, must be approved by the holders of a majority of the shares of the Trust or the portfolio series, respectively. All other amendments may be effected by the Board.
The Master Trust Agreement provides that shareholders shall not be subject to any personal liability for the acts or obligations of the Portfolio and that every written agreement, obligation, or other undertaking of the Portfolio shall contain
a provision to the effect that the shareholders are not personally liable thereunder. If any present or past shareholder of the Portfolio is charged or held personally liable for any obligation or liability of the Trust solely by reason of being or
having been a shareholder and not because of such shareholder's acts or omissions or for some other reason, the
Portfolio series, upon request, shall assume the defense against such charge and satisfy any judgment thereon, and the shareholder or former shareholder shall be entitled out of the assets of the Portfolio to be held harmless from and
indemnified against all loss and expense arising from such liability. Thus, the risk to shareholders of incurring financial loss beyond their investments is limited to circumstances in which the Portfolio itself would be unable to meet its obligations.
The Trust will not have an Annual Meeting of Shareholders. Special Meetings may be convened
(i) by the Board (ii) upon written request to the Board by the holders of at least 10% of the outstanding shares of the Trust, or (iii) upon the Board's failure to honor the shareholders' request as described above, by holders of at least 10% of the outstanding shares giving
notice of the special meeting to the shareholders.
ITEM 23. PURCHASE, REDEMPTION, AND PRICING OF SHARES
MANNER IN WHICH SHARES ARE OFFERED
Shares for the Portfolio are sold in private placement transactions that do not involve any
“public offering” within the meaning of Section (4)(a)(2) under the 1933 Act. Shares of the Portfolio are available to be purchased only by
authorized clients of the Securities Lending Program that are advised by Diamond Hill Investment Partners LP or its affiliates.
Shares of the Portfolio are sold directly by the Trust without a distributor and are not
subject to a sales load or redemption fee. Additionally, assets of the Portfolio are not subject to fees permitted pursuant to Rule 12b-1 under the 1940 Act.
VALUATION OF FUND
SHARES
Pricing of shares of the Portfolio does not occur on New York Stock
Exchange (“NYSE”) holidays. The NYSE is open for trading every weekday except for: (a) the following holidays: New Year's Day, Martin Luther
King, Jr.'s Birthday, Washington's Birthday (the third Monday in February), Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day; and (b) the preceding Friday or the subsequent Monday
when one of the calendar-determined holidays falls on a Saturday or Sunday, respectively. Purchases and withdrawals will be effected at the time of determination of NAV next
following the receipt of any purchase or withdrawal order, which is determined to be in good order. The Portfolio's securities will be valued pursuant to guidelines established
by the Board of Trustees.
The Portfolio determines its NAV per share once each business day as of the scheduled close of regular trading on the NYSE.
In unusual circumstances, such as an emergency or an unscheduled close or halt of trading on the NYSE, the time at which share prices are determined may be changed. The NAV per
share of the Portfolio is based on the market value of the investments held in the Portfolio. The Portfolio values each security or other investment pursuant to guidelines adopted by the Board. The Board has appointed the Adviser as the valuation designee to fair value securities or other
investments pursuant to procedures approved by the Board, under certain limited circumstances. For example, fair value pricing may be used when market quotations are not readily available or reliable, such as when (i) trading for a security is
restricted; or (ii) a significant event, as determined by the Adviser, that may affect the value of one or more securities or other investments held by the Portfolio occurs after the close of a related exchange but before the determination of the
Portfolio's NAV. Attempts to determine the fair value of securities or other investments introduce an element of subjectivity to the pricing of securities or other investments. As a result, the price of a security or other investment determined through
fair valuation techniques may differ from the price quoted or published by other sources and may not accurately reflect the price a Portfolio would have received had it sold the investment. To the extent that the Portfolio invests in the shares of
other registered open-end investment companies that are not traded on an exchange (mutual funds), such shares are
valued at their published NAV per share as reported by the funds. The prospectuses of these funds explain the
circumstances under which the funds will use fair value pricing and the effects of using fair value pricing.
In accordance with certain federal regulations, the Trust is required to obtain, verify and
record information that identifies each entity that applies to open an account, including, in certain cases, information concerning such entity's beneficial owners. For this reason, when you open (or change ownership of) an account, the Trust will request certain information,
including your name, address and taxpayer identification number, which will be used to verify your identity. If you are unable to provide sufficient information to verify your identity, the Trust will not open an account for you. As required by law, the Trust may employ various procedures, such as comparing your information to fraud databases or requesting additional
information and documentation from you, to ensure that the information supplied by you is correct. The Trust reserves the right to reject any purchase for any reason, including failure to provide the Trust with information necessary to confirm your
identity as required by law.
U.S. FEDERAL INCOME TAXES
The following discussion of certain U.S. federal income tax consequences of an investment in the Portfolio is based on the
Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations, and other
applicable authority, as of the date of this Part B. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of the important U.S. federal income tax
considerations generally applicable to investments in the Portfolio. This summary does not purport to be a complete description of the U.S. federal income tax considerations applicable to an investment in shares of the Portfolio. There may
be other tax considerations applicable to particular shareholders.
Shareholders should consult their own tax advisors regarding their particular situation and the possible application of foreign, state and local tax laws.
Special tax rules apply to investments through defined contribution plans and other tax-qualified plans or tax-advantaged
arrangements. Shareholders should consult their tax advisers to determine the suitability of shares of the Portfolio as an investment through such plans and arrangements and the precise effect of an investment on their particular tax situations.
Qualification as a
Regulated Investment Company
The Portfolio has elected to be treated as a
regulated investment company
(“RIC”) under Subchapter M of the Code and intends each year to qualify and be eligible to be treated as such. In order to qualify
for the special tax treatment accorded RICs and their shareholders, the Portfolio must, among other things, (a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, gains from the sale of securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or currencies and (ii) net income derived from interests in “qualified publicly traded
partnerships” (as defined below); (b) diversify its holdings so that, at the end of each quarter of the Portfolio's taxable year, (i) at least 50% of the value of the Portfolio's total assets consists of cash and cash items (including receivables), U.S. Government securities, securities of other RICs, and other securities limited in respect
of any one issuer to a value not greater than 5% of the value of the Portfolio's total assets and no more than 10% of the outstanding voting securities of such issuer, and (ii) no more than 25% of its assets are invested, including through
corporations in which the Portfolio owns a 20% or more voting stock interest, (x) in the securities (other than those of the U.S. Government or other RICs) of any one issuer or of two or more issuers, which the Portfolio controls and which are
engaged in the same, similar or related trades and businesses, or (y) in the securities of one or more qualified publicly traded partnerships (as defined below); and (c) distribute with respect to each taxable year at least 90% of the sum of its
investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid — generally taxable ordinary income and the excess, if any, of net short-term capital gains over net long-term capital
losses) and net tax-exempt income, for such year.
In general, for purposes of the 90% gross income requirement described in (a) above, income derived from a partnership will
be treated as qualifying income only to the extent such income is attributable to items of income of the partnership, which would be qualifying income if realized directly by the
RIC. However, 100% of the net income derived from an interest in a qualified publicly traded partnership (a partnership (x) the interests in which are traded on an established
securities market or are readily tradable on a secondary market or the substantial equivalent thereof, and (y) that derives less than 90% of its income from the qualifying income described in section (a)(i) of the preceding paragraph), will be treated as
qualifying income. In general, qualified publicly traded partnerships will be treated as partnerships for U.S. federal income tax purposes, because they meet the passive income requirement under Code Section 7704(c)(2). Further, although in general
the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to items attributable to an interest in a qualified publicly traded
partnership.
For purposes of the diversification test in (b) above, the
term “outstanding voting securities of such issuer” will include the equity securities of a
qualified publicly traded partnership. Also, for purposes of the diversification test in (b) above, the identification of the issuer (or, in some cases, issuers) of a particular
investment can depend on the terms and conditions of that investment. In some cases, identification of the issuer (or issuers) is uncertain under current law, and an adverse
determination or future guidance by the Internal Revenue Service (“IRS”) with respect to issuer identification for a
particular type of investment may adversely affect the Portfolio's ability to meet the diversification test in (b) above.
If the Portfolio qualifies as a RIC that is accorded special tax treatment, the Portfolio
will not be subject to U.S. federal income tax on income or gains distributed in a timely manner to its shareholders in the form of dividends (including Capital Gain Dividends, as defined below). If the Portfolio were to fail to meet the income, diversification or distribution test
described above, the Portfolio could in some cases cure such failure, including by paying a Portfolio-level tax, paying interest, making additional distributions, or disposing of certain assets. If the Portfolio were ineligible to or otherwise did not cure such failure for any year, or if the Portfolio were otherwise to fail to qualify as a RIC accorded special tax
treatment in any taxable year, the Portfolio would be subject to tax at the Portfolio level on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income (if any) and net
long-term capital gains, would be taxable to shareholders as ordinary income. Some portions of such distributions may be eligible for the dividends-received deduction in the case of corporate shareholders and may be eligible to be treated as
“qualified dividend
income” in the case of shareholders taxed as individuals, provided, in both cases, the shareholder
meets certain holding period and other requirements in respect of the Portfolio's shares (as described below). In addition, the Portfolio could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial
distributions before re-qualifying as a RIC that is accorded special tax treatment.
The Portfolio intends to distribute at least annually to its shareholders all or substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction) and its net tax-exempt income (if any), and may
distribute its net capital gain (that is, the excess of net long-term capital gain over net short-term capital loss, in each case determined with reference to any loss
carryforwards). Any taxable income retained by the Portfolio will be subject to
tax at the Portfolio level at regular corporate
rates. In the case of net capital gain, the Portfolio is permitted to designate the retained amount as undistributed capital gain in a timely notice to its shareholders who would
then, in turn, be (a) required to include in income for U.S. federal income tax purposes, as long-term capital gain, their shares of such undistributed amount, and (b) entitled to credit their proportionate shares of the tax paid by the Portfolio on such
undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds on a properly-filed U.S. tax return to the extent the credit exceeds such liabilities. If the Portfolio makes this designation, for U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder of the Portfolio will be increased by an amount equal to the difference between the amount of undistributed capital gains included in the shareholder's gross income under clause (a) of
the preceding sentence and the tax deemed paid by the shareholder under clause (b) of the preceding sentence. The Portfolio is not required to, and there can be no assurance the
Portfolio will, make this designation if it retains all or a portion of its net capital gain in a taxable year.
In determining its net capital gain, including in connection with determining the amount
available to support a Capital Gain Dividend (as defined below), its taxable income, and its earnings and profits, a RIC generally may elect to treat part or all of any post-October capital loss (defined as any net capital loss attributable to the portion, if any, of the taxable year after October 31 or, if there is no such loss, the net long-term capital loss or net short-term capital loss attributable to any such portion of the taxable year) or late-year ordinary loss (generally, the sum of its (i) net ordinary loss, if any, from the sale, exchange or other taxable disposition of property, attributable to the portion, if any, of the taxable year after October 31,
and its (ii) other net ordinary loss, if any, attributable to the portion of the taxable year, if any, after December 31) as if incurred in the succeeding taxable year.
If the Portfolio were to fail to distribute in a calendar year at least an amount equal to the sum of 98% of its ordinary
income for such year and 98.2% of its capital gain net income for the one-year period ending October 31 of such year (or for the one-year period ending November 30 or December 31, if the Portfolio is eligible to elect and so elects), plus any
such amounts retained from the prior year, the Portfolio would be subject to a nondeductible 4% excise tax on the
undistributed amounts. For purposes of the required excise tax distribution, a RIC's ordinary gains and losses from the sale, exchange or other taxable disposition of property that would otherwise be taken into account after October 31 of a
calendar year (or November 30 of that year, if the RIC makes the election described above) generally are treated as arising on January 1 of the following calendar year; in the case of a RIC with a December 31 year end that makes the
election described above, no such gains or losses will be so treated. Also, for these purposes, the Portfolio will be treated as having distributed any amount on which it is subject to corporate income tax for the taxable year ending within the
calendar year. The Portfolio intends generally to make distributions sufficient to avoid imposition of the 4% excise tax although there can be no assurance it will do so. Distributions declared by the Portfolio during October, November and
December to shareholders of record on a date in any such month and paid by the Portfolio during the following January will be treated for U.S. federal tax purposes as paid by the Portfolio and received by shareholders on December 31 of the
year in which declared. In addition, if the Portfolio were to qualify as a “personal holding company,” it might have to
comply with additional requirements with respect to its distributions to shareholders in order to avoid the fund-level tax under the personal holding company rules of the Code.
Capital losses in excess of capital gains (“net
capital losses”) are not permitted to be deducted against the Portfolio's net investment income. Instead, potentially subject to certain limitations, the Portfolio may carry net capital losses from any
taxable year forward to subsequent taxable years to offset capital gains, if any, realized during such subsequent taxable years. Capital loss carryforwards are reduced to the extent they offset current-year net realized capital gains, whether the
Portfolio retains or distributes such gains. The Portfolio may carry net capital losses forward to one or more subsequent taxable years without expiration; any such carryforward losses will retain their character as short-term or long-term. The
Portfolio must apply such carryforwards first against gains of the same character.
Taxation of Distributions Received by Shareholders
For U.S. federal income tax purposes, distributions of investment income are generally
taxable to shareholders as ordinary income. Taxes on distributions of capital gains are determined by how long the Portfolio owned (or is deemed to have owned) the investments that generated them, rather than how long a shareholder has owned his or her Portfolio shares. In
general, the Portfolio will recognize long-term capital gain or loss on the disposition of assets the Portfolio has owned (or is deemed to have owned) for more than one year, and short-term capital gain or loss on the disposition of investments the
Portfolio has owned (or is deemed to have owned) for one year or less. Tax rules can alter the Portfolio's holding period in investments and thereby affect the tax treatment of gain or loss on such investments. Distributions of net capital gain
properly reported by the Portfolio as capital gain dividends (“Capital Gain Dividends”) generally will be
taxable to a shareholder receiving such distributions as long-term capital gains includible in net capital gain and taxed to individuals at
reduced rates relative to ordinary income. The IRS
and the Department of the Treasury have issued regulations that impose special rules in respect of Capital Gain Dividends received through partnership interests constituting
“applicable partnership
interests” under Section 1061 of the Code. Distributions of net short-term capital gain (as reduced by
any net long-term capital loss for the taxable year) will be taxable to shareholders as ordinary income. Distributions of investment income properly reported by the Portfolio as derived from “qualified dividend income” will be taxed in the
hands of individuals at the rates applicable to net long-term capital gain, provided holding period and other requirements are met at both the shareholder and Portfolio level. The Portfolio does not expect to realize any significant long-term capital gains or
losses or qualified dividend income.
The Code generally imposes a 3.8% Medicare contribution tax on the net investment income of certain individuals, trusts and
estates to the extent their income exceeds certain threshold amounts. For these purposes, “net investment
income” generally
includes, among other things, (i) distributions paid by the Portfolio of net investment income and capital gains, and (ii) any net gain from the sale, redemption, exchange or other
taxable disposition of Portfolio shares. Shareholders are advised to consult their tax advisors regarding the possible implications of this additional tax on their investment in
the Portfolio.
Shareholders of the Portfolio will be subject to U.S. federal income taxes as described herein on distributions made by the
Portfolio whether received in cash or reinvested in additional shares of the Portfolio.
If, in respect to any taxable year, the Portfolio makes a distribution to a shareholder in excess of the Portfolio's current and accumulated earnings and profits in any taxable year, the excess distribution will be treated as a return of capital to the
extent of such shareholder's tax basis in its shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a shareholder's tax basis in its shares, thus reducing any loss or increasing any gain on a subsequent taxable
disposition by the shareholder of its shares.
Distributions with respect to the Portfolio's shares are generally subject to U.S. federal income tax as described herein to
the extent they do not exceed the Portfolio's realized income and gains, even though such distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares
purchased at a time when the Portfolio's NAV includes either unrealized gains, or realized but undistributed income or gains that were therefore included in the price the shareholder paid. Such distributions may reduce the fair market value of
the Portfolio's shares below the shareholder's cost basis in those shares. As described above, the Portfolio is required to distribute realized income and gains regardless of whether the Portfolio's NAV also reflects unrealized losses.
In order for some portion of the dividends received by the Portfolio shareholder to be
“qualified dividend
income” that is eligible for
taxation at long-term capital gain rates, the Portfolio must meet holding period and other requirements with respect to the dividend-paying stocks held by the Portfolio and the
shareholder must meet holding period and other requirements with respect to some portion of Portfolio's shares. In general, a dividend will not be treated as qualified dividend income (at either the Portfolio or shareholder level) (a) if the dividend is received with respect to any share of
stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days
during the 181-day period beginning 90 days before such date), (b) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar
or related property, (c) if the recipient elects to have the dividend income treated as investment income for purposes of the limitation on deductibility of investment interest, or (d) if the dividend is received from a foreign corporation that is (i) not eligible for the benefits of a comprehensive income tax treaty with the United States (with the exception of dividends paid
on stock of such a foreign corporation readily tradable on an established securities market in the United States) or (ii) treated as a passive foreign investment company.
In general, distributions of investment income properly reported by the Portfolio as derived from qualified dividend income
will be treated as qualified dividend income in the hands of a shareholder taxed as an individual, provided the shareholder meets the holding period and other requirements described above with respect to the Portfolio's shares. If the aggregate
qualified dividends received by the Portfolio during any taxable year are 95% or more of the Portfolio's gross income (excluding net long-term capital gain over net short-term capital loss), then 100% of the Portfolio's dividends (other than
dividends properly reported as Capital Gain Dividends) will be eligible to be treated as qualified dividend income. Since the Portfolio primarily holds investments that do not pay dividends, it is not expected that a substantial portion (if any) of
the dividends paid by the Portfolio will qualify for the favorable income tax rates available to individuals on qualified dividend income.
In general, dividends of net investment income
received by corporate shareholders of the Portfolio will qualify for the dividends-received deduction generally available to corporations to the extent of the amount of eligible
dividends received by the Portfolio from domestic corporations for the taxable year. A dividend will not be treated as a dividend eligible for the dividends-received deduction (a) if it has been received with respect to any share of stock that the Portfolio has held for
less than 46 days (91 days in the case of certain preferred stock) during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend (during the 181-day period
beginning 90 days before such date in the case of certain preferred stock) or (b) to the extent that the Portfolio is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or related property. Moreover, the dividends-received deduction may otherwise be disallowed or reduced (x) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of the
Portfolio or (y) by application of various provisions of the Code (for instance, the dividends-received deduction is reduced in the case of a dividend received on debt-financed portfolio stock (generally, stock acquired with borrowed funds)). Since
the Portfolio primarily holds investments that do not pay dividends, it is not expected that a substantial portion (if any) of the dividends paid by the Portfolio will qualify for the dividends-received deduction for corporations.
Any distribution of income that is attributable to (i) income received by the Portfolio in lieu of dividends with respect to securities on loan pursuant to a securities lending transaction or (ii) dividend income received by the Portfolio on securities it temporarily purchased from a counterparty pursuant to a repurchase agreement that is treated for U.S. federal income tax
purposes as a loan by the Portfolio, will not constitute qualified dividend income to individual shareholders and will not be eligible for the dividends-received deduction for
corporate shareholders.
As required by federal law, detailed federal
tax information with respect to each calendar year will be furnished to each shareholder early in the succeeding year.
Redemptions and Exchanges
Redemptions and exchanges of the Portfolio's shares are taxable events. Gain, if any,
resulting from the redemption of Portfolio shares generally will also be taxable to you as either short-term or long-term capital gain, depending upon how long you held such Portfolio shares, except that, as and where the Portfolio is not a “publicly offered” RIC (as described below), in certain circumstances it is possible that the proceeds of a redemption of Portfolio shares may be taxable as
dividend income or a return of capital.
A RIC is considered “publicly offered” if its shares are continuously offered pursuant to a public offering, its shares are regularly traded on an established securities exchange, or it has at least 500 shareholders at all times during a taxable
year. Because shares of the Portfolio are not so registered or traded, and the Portfolio is not expected to have at least 500 shareholders at all times during the taxable year, a portion or all the proceeds of redemptions of Portfolio shares may be
treated as dividends. If a shareholder redeems fewer than all of its shares, such shareholder may be treated as having received a distribution under Section 301 of the Code (a “Section 301 distribution”) unless the redemption
is treated as being either (i)
“substantially
disproportionate” with respect to such shareholder by satisfying certain numerical tests relating to the reduction in the redeeming shareholder's percentage interest, and percentage voting interest, in the
Portfolio, or (ii) otherwise “not
essentially equivalent to a dividend” under the relevant rules of the Code. For any period during which the Portfolio has a single shareholder, all redemption distributions will be treated as Section 301 distributions. A Section 301 distribution is not treated as a sale or exchange giving rise to a capital gain or loss, but rather is treated as a dividend to the extent supported by the Portfolio's current and accumulated earnings and profits, with the excess treated as
a return of capital reducing the shareholder's tax basis in the Portfolio shares, and thereafter as capital gain.
In addition, as and where the Portfolio is not considered so publicly offered, certain shareholders will be deemed to
receive distributions equal to their allocable shares of certain expenses paid by the Portfolio. Very generally, expenses that are deemed distributed by the Portfolio include those paid or incurred during a calendar year that are deductible in
determining the Portfolio's investment company taxable income for a taxable year beginning or ending within that calendar year, including, in particular, its advisory fee, but excluding those expenses incurred by virtue of the Portfolio's organization as a registered investment company (such as its registration fees, trustees' fees, expenses of periodic trustees' and
shareholders' meetings, transfer agent fees, certain legal and accounting fees, the expenses of shareholder
communications required by law, and certain other expenses). Shareholders of the Portfolio that will be deemed to have received distributions of such expenses include (i) individuals taxable in the U.S. or persons calculating their taxable
income in the same way as do such individuals and (ii) pass-through entities having such an individual or person or another pass-through entity as an interest holder or beneficiary. Such deemed distributions of expenses are not deductible
under current law by those direct or indirect
shareholders who are individuals (or entities that compute their taxable income in the same manner as an individual). The deemed distributions of expenses could as a result
increase a shareholder's net taxes owed, lowering the Portfolio's effective yield with respect to such a shareholder.
Further, all or a portion of any loss realized upon a taxable disposition of Portfolio
shares will generally be disallowed under the Code's “wash sale” rule if other substantially identical
shares are purchased, including by means of dividend reinvestment, within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will
be adjusted to reflect the disallowed loss.
The Code's wash sale rule may also apply to certain redemptions and exchanges by non-U.S. shareholders. See “Non-U.S. Shareholders” below.
Tax Implications of Certain Portfolio Investments
Special Rules for Debt Obligations. Some debt obligations with a fixed maturity date of more than one year
from the date of issuance (and zero-coupon debt obligations with a fixed maturity date of more than one year from the date of issuance) will be treated as debt obligations that are issued originally at a discount. Generally, OID is treated as interest income and
is included in the Portfolio's income and required to be distributed by the Portfolio over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt
obligation. In addition, payment-in-kind securities will give rise to income, which is required to be distributed and is taxable even though the Portfolio holding the security receives no interest payment in cash on the security during the year. An
investor that receives an in-kind distribution of property from a Portfolio may be required to recognize taxable gain or loss upon a subsequent taxable disposition of that property.
Some debt obligations with a fixed maturity date of more than one year from the date of issuance that are acquired in the
secondary market by the Portfolio may be treated as having “market discount.” Very generally, market discount
is the excess of the stated redemption price of a debt obligation (or in the case of an obligation issued with OID, its “revised issue price”) over the purchase price of such obligation. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt obligation having market discount is treated as ordinary income to the extent the
gain, or principal payment, does not exceed the “accrued market discount” on such debt obligation.
Alternatively, the Portfolio may elect to accrue market discount currently, in which case the Portfolio will be required to include the accrued market discount in income (as ordinary income) and thus distribute it over the term of the debt obligation, even though
payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt obligation. If the Portfolio makes the election referred to in the preceding sentence, then the rate at which the market
discount accrues, and thus is included in the Portfolio's income, will depend upon which of the permitted accrual methods the Portfolio elects.
Some debt obligations with a fixed maturity date of one year or less from the date of issuance may be treated as having OID
or, in certain cases, “acquisition discount” (very generally, the excess of the stated redemption price over the purchase price). The Portfolio will be required to include the OID or acquisition discount in income (as ordinary income)
and thus distribute it over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt security. The rate at which OID or acquisition discount
accrues, and thus is included in the Portfolio's income, will depend upon which of the permitted accrual methods the Portfolio elects.
If the Portfolio holds the foregoing kinds of obligations or other obligations subject to special rules under the Code, the Portfolio may be required to pay out as an income distribution each year an amount which is greater than the total amount of
cash interest the Portfolio actually received. Such distributions may be made from the cash assets of the Portfolio or, if necessary, by disposition of portfolio securities,
including at a time when it may not be advantageous to do so. These dispositions may cause the Portfolio to realize higher amounts of short-term capital gains (generally taxed to
shareholders at ordinary income tax rates) and, in the event the Portfolio realizes net capital gains from such transactions, its shareholders may receive a larger Capital Gain Dividend than they would have if the Portfolio had not held such
obligations.
A portion of the OID accrued on certain high yield discount obligations may not be deductible to the issuer and will instead
be treated as a dividend paid by the issuer for purposes of the dividends-received deduction. In such cases, if the issuer of the high yield discount obligations is a domestic corporation, dividend payments by the Portfolio may be eligible for the
dividends-received deduction to the extent attributable to the deemed dividend portion of such OID.
Securities Purchased at a
Premium. Very generally, where the Portfolio purchases a bond at a price that exceeds the redemption price at
maturity – that is, at a premium — the premium is amortizable over the remaining term of the bond. In the case of a taxable bond, if the Portfolio makes an election
applicable to all such bonds it purchases, which election is irrevocable without consent of the IRS, the Portfolio reduces the current taxable income from the bond by the amortized
premium and reduces its tax basis in the bond by the amount of such offset; upon the disposition or maturity of such bonds acquired on or after January 4, 2013, the Portfolio is permitted to deduct any remaining premium allocable to a prior
period.
At-risk or Defaulted Debt Obligations. Investments in debt obligations that are at risk of or in default
present special tax issues for the Portfolio. Tax rules are not entirely clear about issues such as when the Portfolio may cease to accrue interest, OID or market discount; whether, when or to what extent the Portfolio should recognize market discount on such
debt obligations; when and to what extent the Portfolio may take deductions for bad debts or worthless securities; and how the Portfolio should allocate payments received on obligations in default between principal and income. These and other
related issues will be addressed by the Portfolio when, as and if it invests in such obligations, in order to seek to ensure that it distributes sufficient income to preserve its status as a RIC and does not become subject to U.S. federal income or
excise tax.
Certain Investments in REITs. Any investment by the Portfolio in equity securities of real estate
investment trusts qualifying as such under Subchapter M of the Code (“REITs”) may result in the Portfolio's receipt of
cash in excess of the REIT's earnings; if the Portfolio distributes these amounts, these distributions could constitute a return of capital to Portfolio shareholders for U.S. federal income tax purposes. Dividends received by the Portfolio from a REIT will not qualify
for the corporate dividends-received deduction and generally will not constitute qualified dividend income.
Distributions by the Portfolio to its shareholders that the Portfolio properly reports as
“section 199A
dividends,” as defined and subject
to certain conditions described below, are treated as qualified REIT dividends in the hands of non-corporate shareholders. Non-corporate shareholders are permitted a U.S. federal
income tax deduction equal to 20% of qualified REIT dividends received by them, subject to certain limitations. Very generally, a “section 199A dividend” is any dividend or portion thereof that is attributable to certain dividends received by a RIC from REITs, to the extent
such dividends are properly reported as such by the RIC in a written notice to its shareholders. A section 199A dividend is treated as a qualified REIT dividend only if the shareholder receiving such dividend holds the dividend-paying RIC shares for at least 46
days of the 91-day period beginning 45 days before the shares become ex-dividend, and is not under an obligation to make related payments with respect to a position in
substantially similar or related property. The Portfolio is permitted to report such part of its dividends as section 199A dividends as are eligible, but is not required to do
so.
Certain Investments in Mortgage Pooling
Vehicles. Special rules may apply if the Portfolio invests, directly or indirectly, in residual interests in
real estate mortgage investment conduits (“REMICs”) (including by investing in residual interests in
CMOs with respect to which an election to be treated as a REMIC is in effect) or equity interests in taxable mortgage pools (“TMPs”). Under a notice issued by the IRS in October 2006 and Treasury regulations that have yet to be issued but may apply retroactively, a portion of the Portfolio's income (including income allocated to the Portfolio from certain pass-through entities) that is attributable to a residual interest in a REMIC or an equity interest in a TMP (referred to in the Code as
an “excess inclusion”) will be subject to U.S. federal income tax in all events. This notice also provides, and the regulations are expected to
provide, that excess inclusion income of a RIC, such as the Portfolio, will be allocated to shareholders of the RIC in proportion to the dividends received by such shareholders,
with the same consequences as if the shareholders held the related interest directly. As a result, a RIC investing in such securities may not be a suitable investment for charitable remainder trusts
(“CRTs”), as noted below.
In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions), (ii) will constitute unrelated business taxable income (“UBTI”) to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt
entity) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess inclusion income, and that otherwise might not be required to file a tax return, to file a tax return and pay tax on such income, and (iii) in the case of a foreign shareholder will not qualify for any reduction in U.S. federal withholding tax. A shareholder will be subject to
U.S. federal income tax on such inclusions notwithstanding any exemption from such income tax otherwise available under the Code.
Foreign Currency Transactions. Any transaction by the Portfolio in foreign currencies, foreign
currency-denominated debt obligations or certain foreign currency options, futures contracts or forward contracts (or similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency
concerned. Any such net gains could require a larger dividend toward the end of the calendar year. Any such net losses
will generally reduce and potentially require the
recharacterization of prior ordinary income distributions. Such ordinary income treatment may accelerate the Portfolio's distributions to shareholders and increase the
distributions taxed to shareholders as ordinary income. Any net ordinary losses so created cannot be carried forward by the Portfolio to offset income or gains earned in subsequent taxable years.
Options and Futures. In general, option premiums received by the Portfolio are not immediately included in
the income of the Portfolio. Instead, the premiums are recognized when the option contract expires, the option is exercised by the holder, or the Portfolio transfers or otherwise terminates the option (e.g., through a closing transaction). If a call option written by the Portfolio is exercised and the Portfolio sells or delivers the underlying stock, the Portfolio generally will recognize
capital gain or loss equal to (a) the sum of the strike price and the option premium received by the Portfolio minus (b) the Portfolio's basis in the stock. Such gain or loss generally will be short-term or long-term depending upon the holding
period of the underlying stock. If securities are purchased by the Portfolio pursuant to the exercise of a put option written by it, the Portfolio generally will subtract the premium received for purposes of computing its cost basis in the securities
purchased. Gain or loss arising in respect of a termination of the Portfolio's obligation under an option other than through the exercise of the option will be short-term gain or loss depending on whether the premium income received by the Portfolio
is greater or less than the amount paid by the Portfolio (if any) in terminating the transaction. Subject to certain exceptions, some of which are described below, such gain or
loss will be short-term. Thus, for example, if an option written by the Portfolio expires unexercised, the Portfolio generally will recognize short-term gain equal to the premium
received.
The Portfolio's options activities may include transactions constituting straddles for U.S. federal income tax purposes, that
is, that trigger the U.S. federal income tax straddle rules contained primarily in Section 1092 of the Code. Such straddles include, for example, positions in a particular security, or an index of securities, and one or more options that offset the
former position, including options that are “covered” by the Portfolio's long position in the
subject security. Very generally, where applicable, Section 1092 requires (i) that losses be deferred on positions deemed to be offsetting positions with respect to “substantially similar or related
property,” to the extent of unrealized gain in the latter, and (ii) that the holding period of such a straddle position that has not already been held for the long-term holding period be terminated and begin
anew once the position is no longer part of a straddle. Options on single stocks that are not “deep in the money” may constitute qualified covered calls, which generally are not subject to the straddle rules; the holding period on stock
underlying qualified covered calls that are “in the money” although not “deep in the money” will be suspended during the period that such calls are outstanding. Thus, the straddle rules and the rules governing
qualified covered calls could cause gains that would otherwise constitute long-term capital gains to be treated as short-term capital gains, and distributions that would otherwise constitute “qualified
dividend income” or qualify for the dividends-received deduction to fail to satisfy the holding period requirements and therefore to be taxed as ordinary income or fail to qualify for the dividends-received
deduction, as the case may be.
The tax treatment of certain positions entered into by the Portfolio, including regulated futures contracts, certain foreign
currency positions and certain listed non-equity options, will be governed by Section 1256 of the Code
(“Section 1256 contracts”). Gains or losses on Section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses (“60/40”), although certain foreign currency gains and losses from such contracts may be treated as ordinary in character. Also, Section 1256 contracts held by the Portfolio at the end of each taxable year (and, for
purposes of the 4% excise tax, on certain other dates as prescribed under the Code) are “marked to market” with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as
ordinary or 60/40 gain or loss, as applicable.
Other Derivatives, Hedging, and Related Transactions. In addition to the special rules described above in
respect of futures and options transactions, the Portfolio's transactions in other derivative instruments (e.g., forward contracts and swap agreements), as well as any of its hedging, short sale, securities loan or similar transactions, may be subject to one
or more special tax rules (e.g., notional principal contract, straddle, constructive sale, wash sale and short sale rules). These rules may affect whether gains and losses recognized by the Portfolio are treated as ordinary or capital, accelerate
the recognition of income or gains to the Portfolio, defer losses to the Portfolio, and cause adjustments in the holding periods of the Portfolio's securities, thereby affecting, among other things, whether capital gains and losses are treated as
short-term or long-term. These rules could therefore affect the amount, timing and/or character of distributions to shareholders.
Because these and other tax rules applicable to
these types of transactions are in some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination
or guidance could be retroactive) may affect whether the Portfolio has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a RIC and avoid a Portfolio-level tax.
Commodity-Linked Instruments. The Portfolio's direct or indirect
investments in commodities and commodity-linked instruments can be limited by the Portfolio's intention to qualify as a RIC, and can bear on the Portfolio's ability to so qualify. Income and gains from commodities and certain commodity-linked instruments do not constitute qualifying income to a
RIC for purposes of the 90% gross income test described above. The tax treatment of some other commodity-linked instruments in which the Portfolio might invest is not certain, in
particular, with respect to whether income or gains from such instruments constitute qualifying income to a RIC. If the Portfolio were to treat income or gain from a particular
instrument as qualifying income and the income or gain were later determined not to constitute qualifying income and, together with any other nonqualifying income, caused the Portfolio's nonqualifying income to exceed 10% of its gross income
in any taxable year, the Portfolio would fail to qualify as a RIC unless it is eligible to and does pay a tax at the Portfolio level.
Book-Tax Differences. Certain of the Portfolio's investments in derivative instruments and foreign currency-denominated instruments, and any of
the Portfolio's transactions in foreign currencies and hedging activities, are likely to produce a difference between its book income and the sum of its taxable income and net
tax-exempt income (if any). If such a difference arises, and the Portfolio's book income is less than the sum of its taxable income and net tax-exempt income, the Portfolio could be required to make distributions exceeding book income to qualify as a RIC that is accorded special tax
treatment and to avoid an entity-level tax. In the alternative, if the Portfolio's book income exceeds the sum of its taxable income (including realized capital gains) and net
tax-exempt income, the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of the Portfolio's remaining earnings and profits (including
earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the recipient's basis in its shares, and (iii) thereafter as gain from the sale or exchange of a capital asset.
The Portfolio's income, proceeds and gains from sources within foreign countries may be subject to non-U.S. withholding or other taxes, which will reduce the yield on those investments. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. If, at the close of the Portfolio's taxable year, more than 50% of the assets of the Portfolio consists of the securities of foreign corporations, the Portfolio may elect to permit shareholders to claim a
credit or deduction (but not both) on their income tax returns for their pro rata portions of qualified taxes paid by the Portfolio to foreign countries in respect of foreign securities that the Portfolio has held for at least the minimum period
specified in the Code. In such a case, shareholders will include in gross income from foreign sources their pro rata shares of such taxes paid by the Portfolio.
A shareholder's ability to claim an offsetting foreign tax credit or deduction in respect of foreign taxes paid by the Portfolio is subject to certain limitations imposed by the Code, which may result in the shareholder's not receiving a full credit or
deduction (if any) for the amount of such taxes. Shareholders who do not itemize on their U.S. federal income tax returns may claim a credit (but not a deduction) for such foreign taxes. Even if the Portfolio is eligible to make such an election for a given year, it may determine not to do so. If the Portfolio does not qualify for or does not make such election,
shareholders will not be entitled to claim a credit or deduction with respect to foreign taxes paid by the Portfolio; in that case the foreign tax will nonetheless reduce the Portfolio's taxable income. Shareholders that are not subject to U.S.
federal income tax, and those who invest in the Portfolio through tax-advantaged accounts (including those who invest through individual retirement accounts or other tax-advantaged retirement plans), generally will receive no benefit from any
tax credit or deduction passed through by the Portfolio, if any. Under certain circumstances, if the Portfolio receives a refund of foreign taxes paid in respect of a prior year, the value of Portfolio Shares could be affected or any foreign tax
credits or deductions passed through to shareholders in respect of the Portfolio's foreign taxes for the current year could be reduced.
The Portfolio generally is required to withhold and remit to the U.S. Treasury a percentage of the taxable distributions and
redemption proceeds paid to any individual shareholder who fails to properly furnish the Portfolio with a correct taxpayer identification number (“TIN”), who has under-reported dividend or interest income, or who fails to certify to the Portfolio that he or she is not subject to such withholding.
Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal income tax liability, provided the appropriate information is furnished to the IRS.
Income of a RIC that would be UBTI if earned directly by a tax-exempt entity generally will
not constitute UBTI when distributed to a tax-exempt shareholder of the RIC. Notwithstanding this
“blocking” effect, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Portfolio if shares in the Portfolio
constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).
A tax-exempt shareholder may also recognize UBTI if the Portfolio recognizes “excess inclusion income” derived from direct or indirect investments in residual interests in REMICs or equity interests in TMPs as described above
if the amount of such income recognized by the Portfolio exceeds the Portfolio's investment company taxable income (after taking into account deductions for dividends paid by the Portfolio).
In addition, special tax consequences apply to CRTs that invest in RICs that invest directly or indirectly in residual interests in REMICs or equity interests in TMPs. Under legislation enacted in December 2006, a CRT (as defined in Section 664 of the
Code) that realizes any UBTI for a taxable year must pay an excise tax annually of an amount equal to such UBTI.
Under IRS guidance issued in October 2006, a CRT will not recognize UBTI as a result of investing in a RIC that recognizes
“excess inclusion
income.” Rather, if at any time during any taxable year a CRT (or one of certain other tax-exempt shareholders, such as the United States, a state or political subdivision, or an agency or instrumentality thereof, and
certain energy cooperatives) is a record holder of a share in a RIC that recognizes “excess inclusion
income,” then the RIC will be
subject to a tax on that portion of its “excess inclusion income” for the taxable year that is allocable to such
shareholders at the highest U.S. federal corporate income tax rate. The extent to which this IRS guidance remains
applicable in light of the December 2006 legislation is unclear. To the extent permitted under the 1940 Act, the Portfolio may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such shareholder's
distributions for the year by the amount of the tax that relates to such shareholder's interest in the Portfolio. CRTs and other tax-exempt investors are urged to consult their tax
advisors concerning the consequences of investing in the Portfolio.
Under U.S. Treasury regulations, if a shareholder recognizes a loss of at least $2 million in any single taxable year or $4 million in any combination of taxable years for an individual shareholder or at least $10 million in any taxable year or $20
million in any combination of taxable years for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC are not excepted. Future guidance may extend the
current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper.
Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Non-U.S. shareholders in the Portfolio should consult their tax advisors concerning the tax consequences of ownership of
shares in the Portfolio. Distributions by the Portfolio to shareholders that are not “U.S. persons” within the meaning of the Code (“foreign shareholders”) properly reported by the Portfolio as (1) Capital Gain Dividends, (2) short-term capital gain dividends, and (3) interest-related dividends, each as defined and subject to certain conditions described below, generally
are not subject to withholding of U.S. federal income tax.
In general, the Code defines (1) “short-term
capital gain dividends” as distributions of net short-term capital gains in excess of net long-term capital losses and (2)
“interest-related
dividends” as distributions from U.S.-source interest income of types similar to those not subject to U.S. federal income tax if earned directly by an individual foreign shareholder, in
each case to the extent such distributions are properly reported as such by the Portfolio in a written notice to
shareholders. The exceptions to withholding for Capital Gain Dividends and short-term capital gain dividends do not apply to (A) distributions to an individual foreign shareholder who is present in the United States for a period or periods
aggregating 183 days or more during the year of the distribution and (B) distributions attributable to gain that is treated as effectively connected with the conduct by the foreign shareholder of a trade or business within the United States under
special rules regarding the disposition of “U.S. real property interests” (“USRPIs”) as described below. The exception to withholding for interest-related dividends does not apply to distributions to a
foreign shareholder (i) that has not provided a
satisfactory statement that the beneficial owner
is not a U.S. person, (ii) to the extent that the dividend is attributable to certain interest on an obligation if the foreign shareholder is the issuer or is a 10% shareholder of
the issuer, (iii) that is within certain foreign countries that have inadequate information exchange with the United States, or (iv) to the extent the dividend is attributable to interest paid by a person that is a related person of the foreign shareholder and the foreign
shareholder is a controlled foreign corporation. If the Portfolio invests in a RIC that pays Capital Gain Dividends to the Portfolio, such distributions retain their character as not subject to withholding if properly reported when paid by the
Portfolio to foreign shareholders. The Portfolio is permitted to report such parts of its dividends as are eligible to be treated as interest-related or short-term capital gain dividends, but is not required to do so. In the case of shares held
through an intermediary, the intermediary may withhold even if the Portfolio reports all or a portion of a payment as an interest-related or short-term capital gain dividend to shareholders.
Foreign shareholders should contact their intermediaries regarding the application of withholding rules to their accounts.
Distributions by the Portfolio to foreign shareholders other than Capital Gain Dividends, short-term capital gain dividends
and interest-related dividends (e.g., dividends attributable to dividend and foreign-source interest income or to short-term capital gains or U.S. source interest income to which the exception from withholding described above does not apply) are
generally subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate).
A foreign shareholder is not, in general, subject to U.S. federal income tax on gains (and
is not allowed a deduction for losses) realized on the sale of shares of the Portfolio unless (a) such gain is effectively connected with the conduct of a trade or business carried on by such holder within the United States, (b) in the case of an individual holder, the holder is
present in the United States for a period or periods aggregating 183 days or more during the year of the sale and certain other conditions are met, or (c) the special rules relating to gain attributable to the sale or exchange of USRPIs apply to
the foreign shareholder's sale of shares of the Portfolio (as described below).
Foreign shareholders with respect to whom income from the Portfolio is effectively connected with a trade or business conducted by the foreign person within the United States will in general be subject to U.S. federal income tax on the income
derived from the Portfolio at the graduated rates applicable to U.S. citizens, residents or domestic corporations, whether such income is received in cash or reinvested in shares
of the Portfolio and, in the case of a foreign corporation, may also be subject to a branch profits tax. If a foreign shareholder is eligible for the benefits of a tax treaty, any
effectively connected income or gain will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by the shareholder in the United States. More generally, foreign shareholders who are
residents in a country with an income tax treaty with the United States may obtain different tax results than those described herein, and are urged to consult their tax
advisors.
Special rules would apply if the Portfolio were a qualified
investment entity
(“QIE”) because it is either a “U.S. real property
holding corporation” (“USRPHC”) or would be a USRPHC but for the operation of certain exceptions to the definition of USRPIs described below. Very
generally, a USRPHC is a domestic corporation that holds USRPIs the fair market value of which equals or exceeds 50% of the sum of the fair market values of the corporation's
USRPIs, interests in real property located outside the United States, and other trade or business assets. USRPIs are generally defined as any interest in U.S. real property and any interest (other than solely as a creditor) in a USRPHC or, very generally, an entity that has been
a USRPHC in the last five years. A fund that holds, directly or indirectly, significant interests in REITs may be a USRPHC. Interests in domestically controlled QIEs, including REITs and RICs that are QIEs, not-greater-than-10% interests in
publicly traded classes of stock in REITs and not-greater-than-5% interests in publicly traded classes of stock in RICs generally are not USRPIs, but these exceptions do not apply for purposes of determining whether the Portfolio is a QIE. If
an interest in the Portfolio were a USRPI, the Portfolio would be required to withhold U.S. tax on the proceeds of a share redemption by a greater-than-5% foreign shareholder, in which case such foreign shareholder generally would also be required
to file U.S. tax returns and pay any additional taxes due in connection with the redemption.
If the Portfolio were a QIE under a special
“look-through” rule, any distributions by the Portfolio to a foreign shareholder attributable directly or indirectly to (i) distributions
received by the Portfolio from a lower-tier RIC or REIT that the Portfolio is required to treat as USRPI gain in its hands and (ii) gains realized on the disposition of USRPIs by
the Portfolio, would retain their character as gains realized from USRPIs in the hands of the Portfolio's foreign shareholders and would be subject to U.S. tax withholding. In addition, such distributions could result in the foreign shareholder being required to file a U.S. tax return and pay tax on the distributions at regular U.S. federal income tax rates. The consequences to a foreign
shareholder, including the rate of such withholding and character of such distributions (e.g., as ordinary income or USRPI gain), would vary depending upon the extent of the foreign shareholder's current and past ownership of the Portfolio. The
Portfolio generally does not expect that it will be a QIE.
Foreign shareholders of the Portfolio also may be
subject to “wash sale” rules to prevent the avoidance of the tax-filing and –payment obligations discussed above through the sale and
repurchase of Portfolio shares.
Foreign shareholders should consult their tax
advisers and, if holding shares through intermediaries, their intermediaries, concerning the application of these rules to their investment in the Portfolio.
In order for a foreign shareholder to qualify for any exemptions from withholding described
above or from lower withholding tax rates under income tax treaties, or to establish an exemption from back-up withholding, the foreign shareholder must comply with special certification and filing requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, IRS Form W-8BEN-E or substitute form). Foreign shareholders in the Portfolio should consult their tax
advisers in this regard.
Special rules (including withholding and reporting requirements) apply to foreign partnerships and those holding Portfolio
shares through foreign partnerships. Additional considerations may apply to foreign trusts and estates. Investors holding Portfolio shares through foreign entities should consult their tax advisers about their particular situation.
A foreign shareholder may be subject to state and local tax and to the U.S. federal estate
tax in addition to the U.S. federal income tax on income referred to above.
Shareholder Reporting Obligations With Respect To Foreign Bank and Financial Accounts
Shareholders that are U.S. persons and own, directly or indirectly, more than 50% of the
Portfolio by vote or value could be required to report annually their “financial interest” in the Portfolio's “foreign financial accounts,” if any, on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). Shareholders should consult a tax advisor, and persons investing in the Portfolio through an intermediary should contact
their intermediary, regarding the applicability to them of this reporting requirement.
Other Reporting and Withholding Requirements
Sections 1471-1474 of the Code and the U.S. Treasury and IRS guidance issued thereunder (collectively, “FATCA”) generally require the Portfolio to obtain information sufficient to identify the status of each of its shareholders under
FATCA or under an applicable intergovernmental agreement (an “IGA”) between the United States and a foreign
government. If a shareholder fails to provide the requested information or otherwise fails to comply with FATCA or an IGA, the Portfolio may be required to withhold under FATCA at a rate of 30% with respect to that shareholder on ordinary
dividends it pays. The IRS and the Department of Treasury have issued proposed regulations providing that these
withholding rules will not apply to the gross proceeds of share redemptions or Capital Gain Dividends the Portfolio pays. If a payment by the Portfolio is subject to FATCA withholding, the Portfolio is required to withhold even if such payment would
otherwise be exempt from withholding under the rules applicable to foreign shareholders described above (e.g., short-term capital gain dividends and interest-related
dividends).
Each prospective investor is urged to consult its tax
adviser regarding the applicability of FATCA and any other reporting requirements with respect to the prospective investor's own situation, including investments through an
intermediary.
U.S. Treasury regulations mandate cost basis reporting to
shareholders and the IRS for redemptions of Portfolio shares. With respect to shares acquired and held directly through the Portfolio and not through a financial intermediary, the
Portfolio will use a default average cost basis methodology for tracking and reporting cost basis on Portfolio shares, unless another cost basis reporting methodology is requested in writing.
The U.S. federal income tax discussion set forth above is for general information only. Prospective investors should consult
their tax advisers regarding the specific U.S. federal income tax consequences of purchasing, holding, and disposing of shares of the Portfolio, as well as the effects of state, local, foreign, and other tax laws and any proposed tax law
changes.
ITEM
26. CALCULATION OF PERFORMANCE DATA
ITEM 27. FINANCIAL STATEMENTS
The audited financial statements for the fiscal year ended December 31, 2025 for the
Portfolio, including E&Y's report for the Portfolio thereon, are included in the Portfolio's Form N-CSR filing, which was filed with the SEC on March 9, 2026 (SEC Accession No. 0001193125-26-098723), and are incorporated into this Part B by reference. The Portfolio's Form N-CSR
filing is available, without charge, upon request, by calling (800) 242-0134 or through the Portfolio's website at www.statestreet.com/im.
APPENDIX A
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. (“MOODY'S”)
GLOBAL LONG-TERM RATING SCALE
Ratings assigned on Moody's global long-term rating scale are forward-looking opinions of the
relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of
one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
Aaa: Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit
risk.
Aa: Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A: Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa: Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain
speculative characteristics.
Ba: Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B: Obligations rated B are considered speculative and are subject to
high credit risk.
Caa: Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Additionally, a
“(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities
firms.*
*
By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
GLOBAL SHORT-TERM RATING SCALE
Ratings assigned on Moody's global short-term rating scale are forward-looking opinions of the relative credit risks of
financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen
months or less and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
P-1: Ratings of Prime-1 reflect a superior ability to repay short-term obligations.
P-2:
Ratings of Prime-2 reflect a strong ability to repay short-term obligations.
P-3: Ratings of Prime-3 reflect an acceptable ability to repay short-term obligations.
NP:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P
GLOBAL RATINGS
(“S&P”)
ISSUE CREDIT RATING DEFINITIONS
An S&P Global Ratings issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of
guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects
S&P Global Ratings' view of the obligor's capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral
security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS*
AAA: An
obligation rated ‘AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely
strong.
AA: An obligation rated ‘AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to
meet its financial commitments on the obligation is very strong.
A: An obligation rated ‘A' is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the obligation is strong.
BBB: An obligation rated ‘BBB' exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to weaken the obligor's capacity to meet its financial commitments on the obligation.
BB; B; CCC; CC; and C: Obligations rated ‘BB', ‘B', ‘CCC', ‘CC', and ‘C' are
regarded as having significant speculative characteristics. ‘BB' indicates the least degree of speculation and ‘C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
BB: An obligation rated ‘BB' is less vulnerable to nonpayment than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate capacity to meet its financial commitments on the obligation.
B: An obligation rated ‘B' is more vulnerable to nonpayment than obligations rated ‘BB', but
the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments on the obligation.
CCC: An obligation rated ‘CCC' is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
CC: An obligation rated ‘CC' is currently highly vulnerable to nonpayment. The ‘CC' rating is
used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default.
C: An
obligation rated ‘C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with
obligations that are rated higher.
D: An obligation rated ‘D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D' rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that
such payments will be made within the next five business days in the absence of a stated grace period or within the earlier of the stated grace period or the next 30 calendar days. The ‘D' rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to
automatic stay provisions. A rating on an obligation is lowered to 'D' if it is subject to a distressed debt restructuring.
NR:
This indicates that a rating has not been assigned or is no longer assigned.
*
Ratings from 'AA' to
'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1:
A short-term obligation rated ‘A-1' is rated in the highest category by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is
strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitments on these
obligations is extremely strong.
A-2: A short-term obligation rated ‘A-2' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitments on the obligation is satisfactory.
A-3: A short-term obligation rated ‘A-3' exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to weaken an obligor's capacity to meet its financial commitments on the obligation.
B: A short-term obligation rated ‘B' is regarded as vulnerable and has significant speculative
characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the obligor's inadequate capacity to meet its financial commitments.
C: A short-term obligation rated ‘C' is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.
D: A
short-term obligation rated ‘D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D' rating category is used when payments on
an obligation are not made on the date due, unless S&P Global Ratings believes that such payments will be made within any stated grace period. However, any stated grace period
longer than five business days will be treated as five business days. The ‘D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to
automatic stay provisions. A rating on an obligation's rating is lowered to ‘D' if it is subject to a distressed exchange offer.
Rated entities in several sectors, including financial and non-financial corporations,
sovereigns, insurance companies and some sectors within public finance, are generally assigned Issuer Default Ratings (IDRs). IDRs are also assigned to certain entities or enterprises in global infrastructure, project and public finance. IDRs opine on an entity's relative
vulnerability to default including by way of a distressed debt exchange (DDE) on financial obligations. The threshold default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the
uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts.
In aggregate, IDRs provide an ordinal ranking of issuers based on the agency's view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of default.
AAA: Highest credit quality.
‘AAA' ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable
events.
AA: Very high credit quality.
‘AA' ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable events.
‘A' ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB: Good credit
quality.
‘BBB' ratings indicate that expectations of default risk are
currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this
capacity.
‘BB' ratings indicate an elevated vulnerability to default risk, particularly in the
event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists that supports the servicing of financial commitments.
‘B' ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic
environment.
CCC: Substantial credit risk.
Very low margin for safety. Default is a real possibility.
CC: Very high levels of credit risk.
Default of some kind appears probable.
A default or default-like process has begun, or the issuer is in standstill, or for a closed funding vehicle, payment capacity
is irrevocably impaired. Conditions that are indicative of a ‘C' category rating for an issuer include:
a.
the issuer has entered into a grace or cure period following non-payment of a material
financial obligation;
b.
the issuer has entered into a temporary negotiated waiver or standstill agreement following a
payment default on a material financial obligation;
c.
the formal announcement by the issuer or their agent of a distressed debt
exchange;
d.
a closed financing vehicle where payment capacity is irrevocably impaired such that it is not
expected to pay interest and/or principal in full during the life of the transaction, but where no payment default is imminent.
‘RD' ratings indicate an issuer that in Fitch's opinion
has experienced:
a.
an uncured payment
default or distressed debt exchange on a bond, loan or other material financial obligation, but
b.
has not entered into bankruptcy filings, administration, receivership, liquidation, or other
formal winding-up procedure, and
c.
has not otherwise ceased operating.
i.
the selective payment default on a specific class or currency of debt;
ii.
the uncured expiry of
any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial
obligation;
iii.
the extension of multiple waivers or forbearance periods upon a payment default on one or more
material financial obligations, either in series or in parallel; ordinary execution of a distressed debt exchange on one or more material financial obligations.
‘D' ratings indicate an issuer that in Fitch's opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure or that has otherwise ceased business.
Default ratings are not assigned prospectively to
entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until
after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
In all cases, the assignment of a default rating reflects the agency's opinion as to the most appropriate rating category
consistent with the rest of its universe of ratings and may differ from the definition of default under the terms of an issuer's financial obligations or local commercial practice.
SHORT-TERM RATINGS ASSIGNED TO ISSUERS AND OBLIGATIONS
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity
and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-term deposit ratings may be adjusted for loss severity. Short-Term Ratings are assigned to obligations
whose initial maturity is viewed as
“short term” based on market convention (a long term rating can also be used to rate an issue with short maturity). Typically, this
means a timeframe of up to 13 months for corporate, sovereign, and structured obligations and up to 36 months for obligations in U.S. public finance markets.
F1: Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.
F2: Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of financial
commitments.
F3: Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B: Speculative Short-Term Credit Quality. Minimal capacity for timely
payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
C: High Short-Term Default risk. Default is a real possibility.
RD: Restricted Default. Indicates an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. Typically applicable to entity ratings only.
D: Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
Note: The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. For
example, the rating category ‘AA' has three notch-specific rating levels (‘AA+'; ‘AA'; ‘AA-'; each a rating level). Such suffixes are not added to ‘AAA' ratings and ratings below the 'CCC' category. For the short-term rating category of ‘F1', a ‘+' may be appended. For Viability Ratings, the modifiers “+” or “–” may be appended to a rating to denote relative status within categories from ‘AA'
to ‘CCC'. For derivative counterparty ratings the modifiers
“+” or “–” may be appended to the ratings within ‘AA(dcr)' to ‘CCC(dcr)' categories.
APPENDIX B—TRUST'S PROXY VOTING PROCEDURES
SSGA FUNDS
STATE STREET MASTER FUNDS
STATE STREET INSTITUTIONAL INVESTMENT TRUST
ELFUN GOVERNMENT MONEY MARKET FUND
ELFUN TAX-EXEMPT INCOME FUND
ELFUN INCOME FUND
ELFUN DIVERSIFIED FUND
ELFUN INTERNATIONAL EQUITY FUND
ELFUN TRUSTS
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
STATE STREET INSTITUTIONAL
FUNDS
STATE STREET VARIABLE INSURANCE SERIES FUNDS, INC. (THE
“COMPANY”)1
PROXY VOTING POLICY AND PROCEDURES
The Board of Trustees/Directors of the Trust/Company (each series thereof, a “Fund”) have adopted the following policy and procedures with respect to voting proxies relating to portfolio securities held by the Trust/Company's investment
portfolios.
The policy of the Trust/Company is to delegate the responsibility for voting proxies relating to portfolio securities held by
the Trust/Company to SSGA Funds Management, Inc., the Trust/Company's investment adviser (the “Adviser”), subject to the Trustees/Directors' continuing oversight.
The right to vote proxies with respect to a portfolio security held by the Trust/Company is an asset of the Trust/Company.
The Adviser acts as a fiduciary of the Trust/Company and must vote proxies in a manner consistent with the best interest of the Trust/Company and its shareholders.
3. Proxy Voting Procedures
A. At least annually, the Adviser shall present to the Boards of Trustees/Directors its policies, procedures and other
guidelines for voting proxies
(“Policy”) and the policy of any Sub-adviser (as defined below) to which proxy voting authority has been delegated (see Section 9
below). In addition, the Adviser shall notify the Trustees/Directors of material changes to its Policy or the policy of any Sub-adviser promptly and not later than the next regular
meeting of the Board of Trustees/Directors after such amendment is implemented.
B. At least annually, the Adviser shall present to the Boards of Trustees/Directors its policy for managing conflicts of interests that may arise through the Adviser's proxy voting activities. In addition, the Adviser shall report any Policy
overrides involving portfolio securities held by a Fund to the Trustees/Directors at the next regular meeting of the Board of Trustees/Directors after such override(s) occur.
C. At least annually, the Adviser shall inform the Trustees/Director that a record is available with respect to each proxy
voted with respect to portfolio securities of the Trust/Company during the year. Also see Section 5 below.
4. Revocation of Authority to Vote
The delegation by the Trustees/Directors of the authority to vote proxies relating to
portfolio securities of the Trust/Company may be revoked by the Trustees/Directors, in whole or in part, at any time.
____________
1
Unless otherwise noted, the singular term “Trust/Company” used throughout this document means each of SSGA Funds, State Street Master Funds, State Street Institutional Investment
Trust, State Street Navigator Securities Lending Trust, Elfun Government Money Market Fund, Elfun Tax-Exempt Income Fund, Elfun Income Fund, Elfun Diversified Fund, Elfun
International Equity Fund, Elfun Trusts, State Street Institutional Funds, and State Street Variable Insurance Series Funds, Inc.
5. Annual Filing of Proxy Voting
Record
The Adviser shall provide the required data for each proxy voted with
respect to portfolio securities of the Trust/Company to the Trust/Company or its designated service provider in a timely manner and in a format acceptable to be filed in the
Trust/Company's annual proxy voting report on Form N-PX for the twelve-month period ended June 30. Form N-PX is
required to be filed not later than August 31 of each year.
6. Retention and Oversight of Proxy Advisory Firms
A. In considering whether to retain or continue retaining a particular proxy advisory firm, the Adviser will ascertain whether
the proxy advisory firm has the capacity and competency to adequately analyze proxy issues, act as proxy voting agent as requested, and implement the Policy. In this regard, the Adviser will consider, at least annually, among other things, the
adequacy and quality of the proxy advisory firm's staffing and personnel and the robustness of its policies and procedures regarding its ability to identify and address any conflicts of interest. The Adviser shall, at least annually, report to Boards of Trustees/Directors regarding the results of this review.
B. The Adviser will request quarterly and annual reporting from any proxy advisory firm retained by the Adviser, and hold ad
hoc meetings with such proxy advisory firm, in order to determine whether there has been any business changes that might impact the proxy advisory firm's capacity or competency to
provide proxy voting advice or services or changes to the proxy advisory firm's conflicts policies or procedures. The Adviser will also take reasonable steps to investigate any
material factual error, notified to the Adviser by the proxy advisory firm or identified by the Adviser, made by the proxy advisory firm in providing proxy voting services.
The Adviser will periodically sample proxy votes to review whether they complied with the Policy. The Adviser shall, at least
annually, report to the Boards of Trustees/Directors regarding the frequency and results of the sampling performed.
A.
The Trust/Company shall include in its registration statement:
1. A description
of this policy and of the policies and procedures used by the Adviser to determine how to vote proxies relating to portfolio securities; and
1. A statement disclosing that information regarding how the Trust/Company
voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge, upon request, by calling the Trust/Company's toll-free telephone number; or through a specified Internet address; or both; and on the
Securities and Exchange Commission's (the “SEC”) website.
B.
The Trust/Company shall include in its Form N-CSR filings to shareholders:
1. A statement
disclosing that a description of the policies and procedures used by or on behalf of the Trust/Company to determine how to vote proxies relating to portfolio securities of the
Funds is available without charge, upon request, by calling the Trust/Company's toll-free telephone number; through a specified Internet address, if applicable; and on the SEC's website; and
2. A statement disclosing that information regarding how the Trust/Company voted proxies relating to portfolio securities
during the most recent twelve-month period ended June 30 is available without charge, upon request, by calling the Trust/Company's toll-free telephone number; or through a
specified Internet address; or both; and on the SEC's website.
For certain Funds, the Adviser may retain investment management firms (“Sub-advisers”) to provide day-to-day investment
management services to the Funds pursuant to sub-advisory agreements. It is the policy of the Trust/Company that the Adviser may delegate proxy voting authority with respect to a Fund to a Sub-adviser. Pursuant to such delegation, a
Sub-adviser is authorized to vote proxies on behalf of the applicable Fund or Funds for which it serves as sub-adviser, in accordance with the Sub-adviser's proxy voting policies and procedures.
The Trustees/Directors shall review this policy to determine its continued sufficiency as necessary from time to time.
APPENDIX C—ADVISER'S PROXY VOTING PROCEDURES AND GUIDELINES
Adviser's Proxy Voting Policies and Procedures
Global Proxy Voting and Engagement Policy
State Street Investment Management is the investment management arm of State Street Corporation, a leading provider of
financial services to institutional investors. As an asset manager, State Street Investment Management votes its clients' proxies where the client has delegated proxy voting
authority to it, and State Street Investment Management votes these proxies and engages with companies in the manner that we believe will most likely protect and promote the
long-term economic value of client investments, as described in this
document.1
When engaging with and voting proxies with respect to the portfolio companies in which we invest our clients' assets, we do
so on behalf of and in the best interests of the client accounts we manage and do not seek to change or influence control of any such portfolio companies. The State Street
Investment Management Global Proxy Voting and Engagement Policy (the “Policy”) contains certain policies that State
Street Investment Management will only apply in jurisdictions where permitted by local law and regulations. State Street Investment Management will not apply any policies contained
herein in any jurisdictions where State Street Investment Management believes that implementing or following such
policies would be deemed to constitute seeking to change or influence control of a portfolio company.
At State Street Investment Management, we take our fiduciary duties as an asset manager
very seriously. One of our fiduciary obligations to our clients is to always act in their best interest, including when making investment decisions, voting proxies, and conducting other shareholder engagement activities. State Street Investment Management focuses on risks
and opportunities that may impact long-term value creation for our clients' investments. We rely on the elected representatives of the companies in which we invest—the board
of directors—to oversee these firms' strategies. We expect effective independent board oversight of the material risks and opportunities to a firm's business and operations.
We believe that appropriate consideration of these risks and opportunities is an essential component of a firm's long-term business strategy, and expect boards to actively oversee the management of the firm's strategy.
Our Asset Stewardship program
State Street Investment Management's Asset Stewardship Team is responsible for developing and implementing this Policy, the implementation of third-party proxy voting guidelines where applicable, case-by-case voting items, issuer
engagement activities, and research and analysis of corporate governance issues and proxy voting items. All engagement activities conducted with U.S. public company issuers held in our clients' portfolios are conducted in accordance with
Appendix A to this Policy.
The Asset Stewardship Team's activities are overseen by State Street Investment Management's Global Fiduciary and Conduct
Committee (“GFCC”). The GFCC is responsible for overseeing State Street Investment Management's stewardship strategy, engagement priorities,
and the implementation of this Policy.
State Street Investment
Management has independently developed the Policy and all voting decisions and engagement activities for which State Street Investment Management has been given voting discretion
are undertaken in accordance with the principles and viewpoints set forth in this Policy. Exceptions to this Policy include the use of an independent third party to vote on State Street Corporation (“State
Street”) stock and the stock of other State Street affiliated entities, to mitigate a conflict of interest of voting on our parent company or affiliated entities, and other situations where we believe
we may be conflicted from voting (for example, stock of a public company for which a State Street director also serves as a director, or due to an outside business interest). In such cases, delegated third parties exercise vote decisions based on
their independent voting policy.
1
This Policy is applicable to SSGA Funds Management, Inc., State Street Global Advisors Trust
Company, and other investment advisory affiliates of State Street Corporation.
We aim to vote at all shareholder meetings where
our clients have given us the authority to vote their shares and where it is feasible to do so. However, when we deem appropriate, we may refrain from voting at meetinqs in cases
where:
•Power of attorney documentation is required.
•Voting would have a material impact on our ability to trade the
security.
•Voting is not permissible due to sanctions affecting a company or individual.
•Issuer-specific special documentation
is required or various market or issuer certifications are required.
•Certain market limitations would prohibit voting (e.g., partial/split
voting prohibitions or residency restrictions).
•Unless a client directs otherwise in so-called
“share blocking” markets (markets where proxy voters have their securities blocked from trading during the period of the annual
meeting).
Additionally, we are unable to vote proxies when certain
custodians used by our clients do not offer proxy voting in a jurisdiction or when they charge a meeting-specific fee in excess of the typical custody service
agreement.
Voting authority attached to certain securities held by State
Street Investment Management's pooled funds may be delegated to an independent third party as required by regulatory or other requirements. Under such arrangements, voting will be conducted by the independent third party pursuant to its proxy voting policy and not pursuant to this Policy.
The State Street Investment Management proxy voting choice
program
In addition to the option of delegating proxy voting authority to
State Street Investment Management pursuant to this Policy, clients may alternatively choose to participate in the State Street Investment Management Proxy Voting Choice Program (the “Proxy Voting Choice Program”), which empowers clients to direct the proxy voting of shares held by the eligible fund or segregated account² they own. Clients that participate in the Proxy Voting Choice Program have the option of selecting a third-party proxy voting guideline from the policies included in the Proxy Voting Choice Program to apply to
the vote of the client's pro rata share of the securities held by the eligible fund or segregated account they own. This Policy does not apply to shares voted under the Proxy Voting Choice Program.
Securities not voted pursuant to the policy
Where clients have asked State Street Investment Management to vote the client's shares on their behalf, including where a
pooled fund fiduciary has delegated the responsibility to vote the fund's securities to State Street Investment Management, State Street Investment Management votes those
securities in a unified manner, consistent with the principles described in this Policy. Exceptions to this unified voting policy are: (1) where State Street Investment Management has made its Proxy Voting Choice Program available to its separately managed account clients and investors within
a fund managed by State Street Investment Management, in which case a pro rata portion of shares held by the fund or segregated account attributable to clients who choose to
participate in the Proxy Voting Choice Program will be voted consistent with the third-party proxy voting guidelines selected by the clients, (2) where a pooled investment vehicle managed by State Street Investment Management utilizes a third party proxy voting guideline as set forth in that
fund's organizational and/or offering documents, and (3) where voting authority with respect to certain securities held by State Street Investment Management pooled funds may be delegated to an independent third party as required by regulatory or
other requirements. With respect to such funds and separately managed accounts utilizing third-party proxy voting guidelines, the terms of the applicable third-party proxy voting
guidelines shall apply in place of the Policy described herein and the proxy votes implemented with respect to such a fund or account may differ from and be contrary to the votes implemented for other portfolios managed by State Street Investment Management pursuant to this Policy.
When voting and engaging with companies, we may consider regional nuances that may be
relevant to companies in a particular jurisdiction. We expect companies to observe the relevant laws and regulations of their respective markets, as well as country-specific best practice guidelines and corporate governance codes.
Our proxy voting and engagement principles
State Street Investment Management's proxy voting and engagement program focuses on three broad principles:
2
“Eligible funds and
segregated accounts” include all fund and client accounts managed by State Street Investment Management
that employ an equity index strategy and which have granted, or are able to grant, proxy voting authority to State Street Investment Management.
1.
Effective board oversight: We believe that well-governed companies are best placed to protect and pursue shareholder interests. Principally, a board
acts on behalf of shareholders by protecting their interests and preserving their rights. In order to carry out their primary responsibilities, directors undertake activities that
include setting strategy and providing guidance on strategic matters, selecting the CEO and other senior executives, overseeing executive management, creating a succession plan for the board and management, and providing effective oversight of material
risks and opportunities relevant to their business. Further, good corporate governance necessitates the existence of effective internal controls and risk management systems, which
should be governed by the board.
We view board quality as a measure of director independence, director succession planning, board composition, evaluations and refreshment, and company governance practices.
2.
Disclosure: It
is important for shareholders to receive timely and accurate reporting of a company's financial performance and strategy so that they are able to assess both the value and risk of
their investment. In addition to information related to strategy and performance, companies should also provide disclosure relating to their approach to corporate governance and shareholder rights. Such information allows investors to determine whether their economic
interests have been safeguarded by the board and provides insights into the quality of the board's oversight of management. Ultimately, the board of directors is accountable for
the oversight and disclosure of the material risks and opportunities faced by the company.
3.
Shareholder protection: State Street Investment Management believes it is in the best interest of shareholders for companies to have appropriate
shareholder rights and accountability mechanisms in place. As a starting place for voting rights, it is necessary for ownership rights to reflect one vote for one share to ensure
that economic interests and proxy voting power are aligned. This share structure best supports the shareholders' right to exercise their proxy vote on matters that are important to the protection of their investment, such as share issuances and other dilutive events,
authorization of strategic transactions, approval of a shareholder rights plan, and changes to the corporate bylaws or charter, among others. In terms of accountability to
shareholders and appropriate checks and balances, we believe there should be annual elections of the full board of directors.
Application of
principles
These three principles of effective board oversight,
disclosure and shareholder protection apply across all of State Street Investment Management's proxy voting decisions and engagements. When engaging with or voting at portfolio
companies in different markets, State Street Investment Management may apply the principles in ways that are specific to a given market based on factors such as regulatory and/or legal requirements, availability of data, resources, disclosure practices,
and size of holdings in our clients' accounts.
When voting our clients' proxies, we may be presented with shareholder proposals at portfolio companies that must be
evaluated on a case-by-case basis and in accordance with the principles set forth above. Where a company has received a shareholder proposal on a commonly requested disclosure topic and the company has determined that the topic is material to
its business, we assess the effectiveness of the company's disclosure on such topic in connection with the proposal.
We conduct engagements with individual issuers to communicate the principles set forth in
this Policy and to learn more about companies' strategy, board oversight and disclosure practices. Engagements with US public companies held in our clients' accounts are conducted in accordance with Appendix A. In addition, we encourage issuers to increase the amount of
direct communication board members have with shareholders. We believe direct communication with executive board members and independent non-executive directors is critical to
helping companies understand shareholder concerns.
Section I. Effective board oversight
We believe independent directors are crucial to good corporate governance because we believe that independent perspectives
contribute to establishing and maintaining more sound corporate governance practices.
We have developed criteria for evaluating director
independence, which vary by region and/or local jurisdiction. These criteria generally follow relevant listing standards, local regulatory requirements and/or local market practice
standards. Such criteria may include:
•Participation in related-party transactions or other material business
relations with the company
•Employment history with the company
•Status as founder or member of the founding family
•Government representative
•Excessive tenure and preponderance of long-tenured directors
•Relations with significant shareholders
•Close family ties with any of the company's advisers, directors or senior
employees
•Receipt of non-board related compensation from the issuer, its auditors or
advisors
•Company's own classification of a director as non-independent
In some cases, State Street Investment Management's criteria may be more rigorous than applicable local or listing requirements.
Majority independent board
We believe a sufficiently independent board is key to effectively monitoring management performance and providing strategic
oversight.
We believe there needs to be strong independent leadership of the board, in accordance with
the principles discussed above. We believe the board is best placed to choose the governance structure that is most appropriate for that company.
We believe that board committees are crucial to robust corporate governance and should be
composed of a sufficient number of independent directors. We use the same criteria for evaluating committee independence as we do for evaluating director independence, which varies by region and/or local jurisdiction. Although we recognize that board
structures may vary by jurisdiction, where a board has established an audit committee and/or compensation/remuneration committee, we generally expect the committee to be primarily, and in some cases, fully independent.
We believe that average board tenure should broadly align with the length of the business cycle of the respective industry
in which a company operates. In assessing excessive tenure, we consider factors such as the preponderance of long
tenured directors, board refreshment practices, classified board structures and the business cycle for the industry in which a company operates.
Director time commitments
We believe a company's nominating committee is best placed to determine appropriate time commitments for the company's
directors. We consider if a company publicly discloses its director time commitment policy (e.g., within corporate governance guidelines, proxy statement, annual report, company
website, etc.) and if this policy or associated disclosure outlines the factors that the nominating committee considers to assess director time commitments during the annual policy review process.
We believe effective board oversight of a company's long-term business strategy necessitates a board composition with a
range of knowledge, expertise, experience, and perspectives. We recognize that many factors may influence board
composition, including board size, geographic location, and local regulations. We believe board members should have adequate knowledge and expertise to provide effective oversight of corporate strategy, operations, and risks and
opportunities. Further, we believe that a robust
nominating and governance process is essential to achieving a board composition that is designed to facilitate effective and independent oversight of a company's long-term
strategy. We believe nominating committees are best placed to determining the most effective board composition and to ensure that adequate knowledge, expertise, experience and perspectives are represented in the boardroom. Boards should also have a
regular evaluation process in place to assess the effectiveness of the board and the knowledge and expertise of board members to address material issues such as emerging risks,
changes to corporate strategy, and diversification of operations and geographic footprint.
Non-US companies in certain non-US indexes that do not meet established board diversity thresholds will be flagged for case-by-case review of the company's disclosures related to board composition. In addition, companies in certain established
markets demonstrating underperformance relative to their Global Industry Classification Standard (GICS) sector (based on a total shareholder return metric), will be flagged for
review of the company's disclosures related to board composition.
When evaluating board composition, we assess a company's financial performance relative to its GICS sector (based on a total
shareholder return metric) and relevant disclosures.
1. Oversight of strategy and risk
We believe that risk management is a key function of the board, which
is responsible for setting the overall risk appetite of a company and for providing oversight on the risk management process established by senior executives at a company. We recognize that boards are responsible for determining the ways in which they provide oversight in this area. However, we
expect companies to disclose how the board provides oversight of its risk management system and risk identification. Boards should also review existing and emerging risks that
evolve in tandem with the changing political and economic landscape or as companies diversify or expand their operations into new areas.
As responsible stewards, we believe in the importance of effective risk management and
oversight of issues that are material to a company. To effectively manage and assess the risk of our clients' portfolios, we expect our portfolio companies to manage risks and opportunities that are material, market specific and industry-specific and that have a
demonstrated link to long-term value creation, and to provide high-quality disclosure of this process to shareholders.
When evaluating a board's oversight of risks and opportunities, we assess the following
factors, based on various criteria including a company's financial performance relative to its sector (based on a total shareholder return metric), relevant disclosures by, and engagements with, portfolio companies:
•Oversees long-term strategy
–Articulates the material risks and opportunities and how those risks and opportunities fit into the firm's long-term business strategy
–Regularly assesses the effectiveness of the company's long-term strategy, and
management's execution of this strategy
•Demonstrates an effective oversight process
–Describes which committee(s) have oversight over specific risks and opportunities, as well as which topics are overseen and/or discussed at the full-board level
–Includes risks and opportunities in board and/or committee agendas, and
articulates how often specific topics are discussed at the committee and/or full- board level
–Utilizes KPIs or metrics to assess the effectiveness of risk management processes
–Engages with key stakeholders including employees and investors
•Ensures effective
leadership
–Holds management accountable for progress on relevant metrics and targets
–Integrates necessary knowledge and expertise into the board nominating and executive hiring processes, and
provides training to directors and executives on topics material to the company's business
–Conducts a periodic effectiveness review
•Ensures disclosures of material information
–Ensures publication of relevant disclosures, including those regarding material topics to the company's business
2. Compliance with corporate
governance principles
Our minimum expectation is that companies will comply with their respective market governance codes and/or stewardship principles. Issuers are encouraged to provide explanations of their level of compliance with their local market code and why
their preferred governance structure (if not compliant with the code) serves shareholders' long-term interests.
We will review governance practices at companies in selected indexes for their adherence to
market governance codes and/or stewardship principles.
3. Proxy contests
We believe nominating committees that are comprised of independent directors are best
placed to assess which individuals are adequately equipped with the knowledge and expertise to fulfill the duties of board members, and to act as effective fiduciaries. While our default position is to support the committees' judgement, we consider the following factors
when evaluating dissident nominees:
•Strategy presented by dissident nominees versus that of current
management, as overseen by the incumbent board
•Effectiveness, quality, and experience
of the management slate
•Material governance failures and the level of
responsiveness to shareholder concerns and market signals by the incumbent board
•Quality of disclosure and engagement practices to support changes to shareholder rights, capital allocation and/or governance structure
•Company performance and, if applicable, the merit of a recovery
plan
•Expertise of board members with respect to company industry and strategy
4. Compensation and remuneration
We consider it the board's
responsibility to determine the appropriate level of executive compensation. Despite the differences among the possible types of plans and awards, there is a simple underlying
philosophy that guides our analysis of executive compensation: we believe that there should be a direct relationship between executive compensation and company performance over the long term.
Shareholders should have the opportunity to assess whether pay structures and levels are aligned with business performance.
When assessing remuneration reports, we consider factors such as adequate disclosure of various remuneration elements, absolute and relative pay levels, peer selection and
benchmarking, the mix of long-term and short-term incentives, alignment of pay structures with shareholder interests, as well as with corporate strategy and performance.
For example, criteria we may consider include the following:
•The company's financial performance
relative to its GICS sector, based on a total shareholder return metric
•Overall quantum relative to company performance
•Vesting periods and length of performance targets
•Mix of performance, time and options-based stock units
•Use of special grants and one-time awards
•Retesting and repricing features
•Disclosure and transparency
5. Board meeting attendance
We expect directors to attend at least 75 percent of board meetings in the
last financial year or provide an appropriate explanation for why they were unable to meet this attendance threshold.
It is important for shareholders to receive timely and accurate reporting of a company's
financial performance and strategy so that they are able to assess both the value and risk of their investment. In addition to information related to strategy and performance, companies should provide disclosure relating to their approach to corporate governance and shareholder
rights. Such information allows investors to determine whether their financial interests have been protected by the board and provides insights into the board's oversight of
management. Ultimately, the board of directors is accountable for the oversight and disclosure of the material risks and opportunities faced by the company.
Reporting
1. Financial statements
We believe the disclosure and availability of reliable financial statements in a timely manner is imperative for investment
analysis. We expect external auditors to provide assurance of a company's financial condition.
2. Disclosures of material risks and opportunities faced by the
company
We believe in the importance of effective risk management and governance of issues that are material to a company. This may include sustainability-related risks and opportunities where a company has identified such risks and opportunities as
material to its business. Such disclosure allows shareholders to effectively assess companies' oversight, strategy, and business practices related to these issues identified as material.
Where a company has determined a topic is material to its business, we will assess the company's disclosure in accordance
with our evaluation criteria that we believe represent quality disclosure on common disclosure topics. We may also review the company's relevant disclosures against industry and
market practice (e.g., peer disclosure, relevant frameworks, relevant industry guidance).
We look to companies to provide disclosure on the risks and
opportunities relevant to their businesses, and on the board's oversight of these risks and opportunities, in line with applicable local regulatory requirements and any voluntary
standards and frameworks adopted by the company.
Section III. Shareholder protection
1. Share capital structure
The ability to raise capital is critical for companies to carry out strategy, to grow, and to achieve returns above their cost of capital. The approval of capital raising activities is fundamental to a shareholder's ability to monitor the amounts of
proceeds and to ensure capital is deployed efficiently. Altering the capital structure of a company is a critical decision for boards. When making such a decision, we believe the company should disclose a comprehensive business rationale that is
consistent with corporate strategy and not overly dilutive to its shareholders.
Our approach to share capital structure matters may vary by local market and jurisdiction,
due to regional nuances. Such proposals may include:
•Increase in authorized common shares
•Increase in authorized preferred shares
•Introduction of unequal voting rights
•Share repurchase programs
2. Reorganization, mergers and acquisitions
The reorganization of the structure of a company or mergers
often involve proposals relating to reincorporation, restructurings, liquidations, and other major changes to the corporation.
We expect proposals to be in the best interests of shareholders, demonstrated by enhancing
share value or improving the effectiveness of the company's operations.
We evaluate structural reorganizations and mergers on a case-by-case basis and expect transactions to maximize shareholder value. Some of the considerations include the following:
•Board oversight of the process for the recommended
transaction, including director and/or management conflicts of interest
•Offers made at a premium and where
there are no other higher bidders
•Offers in which the secondary market
price is substantially lower than the net asset value
We also may
consider other factors, such as:
•Offers with potentially negative consequences for minority shareholders because of illiquid stock
•Offers where we believe there is a reasonable prospect for an enhanced bid or other bidders
•Cases where the current market price of
the security exceeds the bid price at the time of voting
3. Related-party transactions
Some companies have a controlled
ownership structure and complex cross-shareholdings between subsidiaries and parent companies (“related companies”). Such structures may result
in the prevalence of related-party transactions between the company and its various stakeholders, such as directors and management, subsidiaries and shareholders. In markets where shareholders are required to approve such transactions, we expect companies to disclose details of the
transaction, such as the nature, the value and the purpose of such a transaction. We also believe independent directors should ratify such transactions. Further, we believe companies should describe the level of independent board oversight and
the approval process, including details of any independent valuations provided by financial advisors on related-party transactions.
1. Proxy access
In general, we believe that proxy access is a fundamental right and an accountability mechanism for all long-term
shareholders. We consider proposals relating to proxy access on a case-by-case basis and consider a balance between providing long-term shareholders accountability while preserving the flexibility for management to design a process that is
appropriate for the company's circumstances.
a.
Annual elections: We believe the establishment of annual elections of the board of directors is appropriate. We also consider the overall
level of board independence and the independence of the key committees, as well as the existence of a shareholder rights plan.
b.
Majority voting: We believe a majority vote standard based on votes cast for the election of directors is
appropriate.
a.
Special meetings and written consent: We believe the ability for shareholders to call special meetings, as well as act by written consent is
appropriate.
b.
Notice period to convene a general meeting: We expect companies to give as much notice as is practicable
when calling a general meeting, generally at least 14 days.
c.
Virtual/hybrid shareholder meetings: We believe the right to hold shareholder meetings in a virtual or hybrid format is appropriate provided the
company:
–Affords virtual attendee shareholders the same rights as would normally be
granted to in-person attendee shareholders
–Commit to time-bound renewal (five years or less) of meeting format
authorization by shareholders
–Provides a written record of all questions
posed during the meeting, and
–Complies with local market laws and
regulations relating to virtual and hybrid shareholder meeting practices
In evaluating these proposals we also consider the operating environment of the company, including local regulatory developments and specific market circumstances impacting virtual meeting practices.
Governance documents & miscellaneous items
1. Article amendments
We believe amendments to company bylaws that
may negatively impact shareholder rights (such as fee-shifting, forum selection, and exclusion service bylaws) should be put to a shareholder vote. We believe a majority voting
standard is generally appropriate.
We generally believe companies should have a fixed board size, or designate a range for the board size.
2. Anti-takeover issues
Occasionally, companies add anti-takeover provisions that reduce the chances of a potential acquirer to make an offer, or to reduce the likelihood of a successful offer. We generally believe shareholders should have the right to vote on
reasonable offers. Our approach to anti-takeover issues may vary by local market and jurisdiction, due to regional nuances.
3. Accounting and audit-related issues
Companies should have robust internal audit and internal control
systems designed for effective management of any potential and emerging risks to company operations and strategy. The responsibility of setting out an internal audit function lies with the audit committee, which should have independent non-executive directors designated as members.
We believe the disclosure and availability of reliable financial statements in a timely manner is imperative for investment
analysis. As a result, board oversight of the internal controls and the independence of the audit process are essential if investors are to rely upon financial statements. It is important for the audit committee to appoint external auditors who are
independent from management, as we expect auditors to provide assurance of a company's financial condition.
State Street Investment Management believes that a company's external auditor is an
essential feature of an effective and transparent system of external independent assurance. Shareholders should be given the opportunity to vote on their (re-)appointment at the annual meeting. When appointing external auditors and approving audit fees, we will take into consideration the
level of detail in company disclosures.
In circumstances where “other” fees include fees related to initial public offerings, bankruptcy emergence, and spin-offs, and the company makes public
disclosure of the amount and nature of those fees which are determined to be an exception to the standard
“non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to
audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
We believe that a company should be able to discharge its auditors in the absence of
pending litigation, governmental investigation, charges or fraud or other indication of significant concern. Further, we believe that auditors should attend the annual meeting of shareholders.
4. Indemnification and liability
Generally, we believe directors3 should be able to limit their liability and/or expand indemnification and liability
protection if a director has not acted in bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.
Section IV. Shareholder Proposals
We believe that company boards do right by investors and are responsible for overseeing strategy and company management. To
that end, we do not support shareholder proposals that are on a topic that the company has not determined to be material to its business or that appear to impose changes to
business strategy or operations, such as increasing or decreasing investment in certain products or businesses or phasing out a product or business line.
When assessing shareholder proposals, we fundamentally consider whether the adoption of the
resolution would promote long-term shareholder value in the context of our core governance principles:
1.
Effective board oversight
3.
Shareholder protection
State Street Investment Management takes a comprehensive approach to engaging with
portfolio companies. Through engagement, we aim to learn more about portfolio companies' strategy, board oversight and disclosure practices, and to better understand topics that companies deem material to their business.
3 In Japan, this includes statutory auditors.
Engagements with US portfolio
companies: Engagements with US public companies in our clients' portfolios are conducted in accordance with
Appendix A. We do not seek to change or influence control of any portfolio company through engagement.
Equity engagements: In these conversations State Street Investment Management may express viewpoints
regarding what constitutes best practices supporting effective board oversight, disclosure, and shareholder protection consistent with the Policy. Engagements may be held with portfolio companies to discuss a ballot item, event or other established topic
found in our Policy.
Fixed income engagements: From time-to-time, certain corporate action election events, reclassifications or
other changes to the investment terms of debt holdings may occur or an issuer may seek to engage with State Street Investment Management to discuss matters pertaining to the debt instruments that State Street Investment Management holds on
behalf of its clients. In such instances, State Street Investment Management may engage with the issuer to obtain further information about the matter for purposes of its
investment decision making. Such engagements are the responsibility of the Fixed Income portfolio management team, but may be supported by State Street Investment Management's Asset Stewardship Team. All election decisions are the responsibility of the relevant portfolio management
team.
Engaging with other investors soliciting State Street Investment Management's votes in connection with contested shareholder meetings, vote-no campaigns, or shareholder proposals
While it may be helpful to speak to other investors that are running proxy contests, putting forth vote-no campaigns, or proposing shareholder proposals at portfolio companies, we limit such discussions to investors who have filed necessary
documentation with regulators and engage in these discussions at our own discretion.
Our primary purpose of engaging with investors is:
•To gain a better understanding of their
position or concerns at portfolio companies.
•In proxy contest
situations:
–To assess possible director candidates where investors are seeking board representation in proxy contest
situations
–To understand the investor's proposed strategy for the company and investment
time horizon to assess their alignment with State Street Investment Management's views and interests as a long-term shareholder
Any information about our vote decisions are available in this document and on our
website.
All requests for engagement should be sent to GovernanceTeam@ssga.com.
Section VI. Other matters
As a responsible investor and fiduciary, we recognize the importance of balancing the benefits of voting shares and the
incremental lending revenue for the pooled funds that participate in State Street Investment Management's securities lending program (the “Funds”). Our objective is to recall securities on loan and restrict future lending until after the record date for the respective vote in instances where we believe that a particular vote could have a material impact on the Funds'
long-term financial performance and the benefit of voting shares will outweigh the forgone lending income.
Accordingly, we have set systematic recall and lending restriction criteria for shareholder meetings involving situations with
the highest potential financial implications (such as proxy contests and strategic transactions including mergers and acquisitions, going dark transactions, change of corporate form, or bankruptcy and liquidation). Generally, these criteria for
recall and restriction for lending only apply to certain large cap indices in developed
markets.
State Street Investment Management monitors the forgone lending revenue associated with each recall to determine if the
impact on the Funds' long-term financial performance and the benefit of voting shares will outweigh the forgone lending income.
Although
our objective is to systematically recall securities based on the aforementioned criteria, we must receive notice of the vote in sufficient time to recall the shares on or before
the record date. When we do not receive timely notice, we may be unable to recall the shares on or before the record date.
Reporting
We provide transparency for our stewardship activities through our regular client reports and
relevant information reported online in accordance with applicable legal and regulatory requirements. We publish an annual stewardship report that provides details of our stewardship approach, engagement and voting policies, and activities during the year. The annual
stewardship report is complemented by quarterly stewardship activity reports as well as the publication of thought leadership on governance and other topics . Our voting record information is available on Vote View, an interactive platform
that provides relevant company details, proposal types, resolution descriptions, and records of our votes cast.
Appendix A:
Policy guidelines for engagement with portfolio companies that are U.S. public companies
These policy guidelines apply to all stewardship engagement activities conducted by the State Street Investment Management's Asset Stewardship Team with portfolio companies that are U.S. public companies (“U.S. portfolio companies”). “U.S. public companies” is defined for purposes of the Policy and this Appendix A as any issuer that has registered one or more classes of securities under the U.S. Securities Exchange Act of 1934, as amended. These policy
guidelines apply to engagements related to voting matters at U.S. portfolio companies as well as offseason engagements with US portfolio companies.
As a matter of policy, State Street Investment Management does not seek to influence or
change control of any issuer, including U.S. portfolio companies.
When engaging with U.S. portfolio companies, the Asset Stewardship Team may discuss State
Street Investment Management's viewpoints regarding what constitutes best practices supporting effective board oversight of material risks, disclosure of material risks, and shareholder protection consistent with the Policy, including this Appendix A. However, the
Asset Stewardship Team will not discuss how it intends to cast its vote on any ballot item, nor its rationale for any vote it has made. Additionally, the Asset Stewardship Team will not dictate or pressure U.S. portfolio companies to adopt or change
any policies (including but not limited to policies related to climate, diversity, equity and inclusion, or sustainability) or fundamental business choices like capital allocation.
The Asset Stewardship Team will not engage in discussions with U.S. portfolio companies that explicitly or implicitly suggest contingent voting or divestment if a company does not
adopt State Street Investment Management's viewpoint on a particular item, or that suggest that any particular factor, policy or practice is dispositive in making engagement or voting decisions.
All meeting agendas with U.S. portfolio companies are set by the U.S. portfolio company. If requested by the U.S. portfolio
company, State Street Investment Management may engage with the company on topics that the U.S. portfolio company
has determined to be material to its business, at all times in accordance with the principles set forth in the Policy. However, the Asset Stewardship Team does not discuss, and will remain in listen-only mode during all discussions of, the following
topics with U.S. portfolio companies or other investors soliciting State Street Investment Management's votes in
connection with contested shareholder meetings, vote-no campaigns, or shareholder proposals:
•Contested director
elections
•Adoption of a climate transition plan
•Adoption of specific targets for emissions reductions
•Scope 3 emissions, including without limitation adoption of a Scope 3 emissions policy, disclosure of Scope 3
emissions, and any reduction of Scope 3 emissions
•Changes to the U.S. portfolio company's capital allocation
When engaging with U.S. portfolio companies on issues or matters relating to gender,
racial or ethnic diversity, the Asset Stewardship Team may discuss State Street Investment Management's belief that effective board oversight of a company's long-term business strategy necessitates a board composition with a range of knowledge, expertise, experience, and
perspectives. However, State Street Investment Management does not apply, nor will it discuss, specific targets or thresholds of gender, racial or ethnic diversity in connection
with U.S. portfolio companies.
About State Street Investment
Management
At State Street Investment Management, we have been helping create
better outcomes for institutions, financial intermediaries, and investors for nearly half a century. Starting with our early innovations in indexing and ETFs, our rigorous approach continues to be driven by market-tested expertise and a relentless commitment to those we serve. With over
$5 trillion in assets managed*, clients in over 60 countries, and a global network of strategic partners, we use our scale to deliver a comprehensive and cost-effective suite of
investment solutions that help investors get wherever they want to go.
*
This figure is presented as of December 31, 2025 and includes ETF AUM of $1,950.80 billion USO of which approximately $173.02 billion USO in gold assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Investment Management are affiliated. Please note all AUM is unaudited.
statestreet.com/investment-management
© 2026 State Street Corporation. All Rights Reserved.
ID3984850 0326. Exp. Date: 31/03/2027
TABLE OF CONTENTS
|
|
|
|
|
|
|
| Coverage |
|
|
9 |
|
|
|
| 1. Board of Directors |
|
|
10 |
|
|
|
| Voting on Director Nominees in Uncontested Elections |
|
|
10 |
|
|
|
| Independence |
|
|
10 |
|
|
|
| ISS Classification of Directors – U.S. |
|
|
11 |
|
|
|
| Composition |
|
|
13 |
|
|
|
| Attendance |
|
|
13 |
|
|
|
| Overboarded Directors |
|
|
13 |
|
|
|
| Gender Diversity |
|
|
14 |
|
|
|
| Racial and/or Ethnic Diversity |
|
|
14 |
|
|
|
| Responsiveness |
|
|
14 |
|
|
|
| Accountability |
|
|
15 |
|
|
|
| Poison Pills |
|
|
15 |
|
|
|
| Unequal Voting Rights |
|
|
15 |
|
|
|
| Classified Board Structure |
|
|
16 |
|
|
|
| Removal of Shareholder Discretion on Classified Boards |
|
|
16 |
|
|
|
| Problematic Governance Structure |
|
|
16 |
|
|
|
| Unilateral Bylaw/Charter Amendments |
|
|
16 |
|
|
|
| Restricting Binding Shareholder Proposals |
|
|
17 |
|
|
|
| Director Performance Evaluation |
|
|
17 |
|
|
|
| Management Proposals to Ratify Existing Charter or Bylaw Provisions |
|
|
17 |
|
|
|
| Problematic Audit-Related Practices |
|
|
17 |
|
|
|
| Problematic Compensation Practices |
|
|
18 |
|
|
|
| Problematic Pledging of Company Stock |
|
|
18 |
|
|
|
| Climate Accountability |
|
|
18 |
|
|
|
| Governance Failures |
|
|
19 |
|
|
|
| Voting on Director Nominees in Contested Elections |
|
|
19 |
|
|
|
| Vote-No Campaigns |
|
|
19 |
|
|
|
| Proxy Contests/Proxy Access |
|
|
19 |
|
|
|
| Other Board-Related Proposals |
|
|
20 |
|
|
|
| Adopt Anti-Hedging/Pledging/Speculative Investments Policy |
|
|
20 |
|
|
|
| Board Refreshment |
|
|
20 |
|
|
|
| Term/Tenure Limits |
|
|
20 |
|
|
|
| Age Limits |
|
|
20 |
|
|
|
| Board Size |
|
|
20 |
|
|
|
| Classification/Declassification of the Board |
|
|
20 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
2 of 82 |
|
|
|
|
|
|
|
|
| CEO Succession Planning |
|
|
21 |
|
|
|
| Cumulative Voting |
|
|
21 |
|
|
|
| Director and Officer Indemnification, Liability Protection, and Exculpation |
|
|
21 |
|
|
|
| Establish/Amend Nominee Qualifications |
|
|
22 |
|
|
|
| Establish Other Board Committee Proposals |
|
|
22 |
|
|
|
| Filling Vacancies/Removal of Directors |
|
|
22 |
|
|
|
| Independent Board Chair |
|
|
22 |
|
|
|
| Majority of Independent Directors/Establishment of Independent Committees |
|
|
23 |
|
|
|
| Majority Vote Standard for the Election of Directors |
|
|
23 |
|
|
|
| Proxy Access |
|
|
23 |
|
|
|
| Require More Nominees than Open Seats |
|
|
24 |
|
|
|
| Shareholder Engagement Policy (Shareholder Advisory Committee) |
|
|
24 |
|
|
|
| 2. Audit-Related |
|
|
25 |
|
|
|
| Auditor Indemnification and Limitation of Liability |
|
|
25 |
|
|
|
| Auditor Ratification |
|
|
25 |
|
|
|
| Shareholder Proposals Limiting Non-Audit Services |
|
|
25 |
|
|
|
| Shareholder Proposals on Audit Firm Rotation |
|
|
25 |
|
|
|
| 3. Shareholder Rights & Defenses |
|
|
27 |
|
|
|
| Advance Notice Requirements for Shareholder Proposals/Nominations |
|
|
27 |
|
|
|
| Amend Bylaws without Shareholder Consent |
|
|
27 |
|
|
|
| Control Share Acquisition Provisions |
|
|
27 |
|
|
|
| Control Share Cash-Out Provisions |
|
|
27 |
|
|
|
| Disgorgement Provisions |
|
|
28 |
|
|
|
| Fair Price Provisions |
|
|
28 |
|
|
|
| Freeze-Out Provisions |
|
|
28 |
|
|
|
| Greenmail |
|
|
28 |
|
|
|
| Shareholder Litigation Rights |
|
|
28 |
|
|
|
| Federal Forum Selection Provisions |
|
|
28 |
|
|
|
| Exclusive Forum Provisions for State Law Matters |
|
|
29 |
|
|
|
| Fee shifting |
|
|
29 |
|
|
|
| Net Operating Loss (NOL) Protective Amendments |
|
|
29 |
|
|
|
| Poison Pills (Shareholder Rights Plans) |
|
|
30 |
|
|
|
| Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy |
|
|
30 |
|
|
|
| Management Proposals to Ratify a Poison Pill |
|
|
30 |
|
|
|
| Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs) |
|
|
30 |
|
|
|
| Proxy Voting Disclosure, Confidentiality, and Tabulation |
|
|
31 |
|
|
|
| Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions |
|
|
31 |
|
|
|
| Reimbursing Proxy Solicitation Expenses |
|
|
32 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
3 of 82 |
|
|
|
|
|
|
|
|
| Reincorporation Proposals |
|
|
32 |
|
|
|
| Shareholder Ability to Act by Written Consent |
|
|
32 |
|
|
|
| Shareholder Ability to Call Special Meetings |
|
|
33 |
|
|
|
| Stakeholder Provisions |
|
|
33 |
|
|
|
| State Antitakeover Statutes |
|
|
33 |
|
|
|
| Supermajority Vote Requirements |
|
|
33 |
|
|
|
| Virtual Shareholder Meetings |
|
|
33 |
|
|
|
| 4. Capital/Restructuring |
|
|
34 |
|
|
|
| Capital |
|
|
34 |
|
|
|
| Adjustments to Par Value of Common Stock |
|
|
34 |
|
|
|
| Common Stock Authorization |
|
|
34 |
|
|
|
| General Authorization Requests |
|
|
34 |
|
|
|
| Specific Authorization Requests |
|
|
35 |
|
|
|
| Dual Class Structure |
|
|
35 |
|
|
|
| Issue Stock for Use with Rights Plan |
|
|
35 |
|
|
|
| Preemptive Rights |
|
|
35 |
|
|
|
| Preferred Stock Authorization |
|
|
35 |
|
|
|
| General Authorization Requests |
|
|
35 |
|
|
|
| Recapitalization Plans |
|
|
37 |
|
|
|
| Reverse Stock Splits |
|
|
37 |
|
|
|
| Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S. |
|
|
37 |
|
|
|
| Share Repurchase Programs |
|
|
37 |
|
|
|
| Share Repurchase Programs Shareholder Proposals |
|
|
38 |
|
|
|
| Stock Distributions: Splits and Dividends |
|
|
38 |
|
|
|
| Tracking Stock |
|
|
38 |
|
|
|
| Restructuring |
|
|
38 |
|
|
|
| Appraisal Rights |
|
|
38 |
|
|
|
| Asset Purchases |
|
|
38 |
|
|
|
| Asset Sales |
|
|
39 |
|
|
|
| Bundled Proposals |
|
|
39 |
|
|
|
| Conversion of Securities |
|
|
39 |
|
|
|
| Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans |
|
|
39 |
|
|
|
| Formation of Holding Company |
|
|
40 |
|
|
|
| Going Private and Going Dark Transactions (LBOs and Minority
Squeeze-outs) |
|
|
40 |
|
|
|
| Joint Ventures |
|
|
40 |
|
|
|
| Liquidations |
|
|
41 |
|
|
|
| Mergers and Acquisitions |
|
|
41 |
|
|
|
| Private Placements/Warrants/Convertible Debentures |
|
|
42 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
4 of 82 |
|
|
|
|
|
|
|
|
| Reorganization/Restructuring Plan (Bankruptcy) |
|
|
43 |
|
|
|
| Special Purpose Acquisition Corporations (SPACs) |
|
|
43 |
|
|
|
| Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions |
|
|
43 |
|
|
|
| Spin-offs |
|
|
44 |
|
|
|
| Value Maximization Shareholder Proposals |
|
|
44 |
|
|
|
| 5. Compensation |
|
|
45 |
|
|
|
| Executive Pay Evaluation |
|
|
45 |
|
|
|
| Advisory Votes on Executive Compensation—Management Proposals (Say-on-Pay) |
|
|
45 |
|
|
|
| Pay-for-Performance
Evaluation |
|
|
46 |
|
|
|
| Problematic Pay Practices |
|
|
47 |
|
|
|
| Compensation Committee Communications and Responsiveness |
|
|
48 |
|
|
|
| Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”) |
|
|
48 |
|
|
|
| Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale |
|
|
48 |
|
|
|
| Equity-Based and Other Incentive Plans |
|
|
49 |
|
|
|
| Shareholder Value Transfer (SVT) |
|
|
50 |
|
|
|
| Three-Year Value-Adjusted Burn Rate |
|
|
50 |
|
|
|
| Egregious Factors |
|
|
50 |
|
|
|
| Liberal Change in Control Definition |
|
|
50 |
|
|
|
| Repricing Provisions |
|
|
51 |
|
|
|
| Problematic Pay Practices or Significant
Pay-for-Performance Disconnect |
|
|
51 |
|
|
|
| Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)) |
|
|
51 |
|
|
|
| Specific Treatment of Certain Award Types in Equity Plan Evaluations |
|
|
52 |
|
|
|
| Dividend Equivalent Rights |
|
|
52 |
|
|
|
| Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs) |
|
|
52 |
|
|
|
| Other Compensation Plans |
|
|
52 |
|
|
|
| 401(k) Employee Benefit Plans |
|
|
52 |
|
|
|
| Employee Stock Ownership Plans (ESOPs) |
|
|
52 |
|
|
|
| Employee Stock Purchase Plans—Qualified Plans |
|
|
53 |
|
|
|
| Employee Stock Purchase Plans—Non-Qualified Plans |
|
|
53 |
|
|
|
| Option Exchange Programs/Repricing Options |
|
|
53 |
|
|
|
| Stock Plans in Lieu of Cash |
|
|
54 |
|
|
|
| Transfer Stock Option (TSO) Programs |
|
|
54 |
|
|
|
| Director Compensation |
|
|
55 |
|
|
|
| Shareholder Ratification of Director Pay Programs |
|
|
55 |
|
|
|
| Equity Plans for Non-Employee Directors |
|
|
55 |
|
|
|
| Non-Employee Director Retirement Plans |
|
|
55 |
|
|
|
| Shareholder Proposals on Compensation |
|
|
56 |
|
|
|
| Bonus Banking/Bonus Banking “Plus” |
|
|
56 |
|
|
|
| Compensation Consultants—Disclosure of Board or Company’s Utilization |
|
|
56 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
5 of 82 |
|
|
|
|
|
|
|
|
| Disclosure/Setting Levels or Types of Compensation for Executives and Directors |
|
|
56 |
|
|
|
| Golden Coffins/Executive Death Benefits |
|
|
56 |
|
|
|
| Hold Equity Past Retirement or for a Significant Period of Time |
|
|
56 |
|
|
|
| Pay Disparity |
|
|
57 |
|
|
|
| Pay for Performance/Performance-Based Awards |
|
|
57 |
|
|
|
| Pay for Superior Performance |
|
|
57 |
|
|
|
| Pre-Arranged Trading Plans
(10b5-1 Plans) |
|
|
58 |
|
|
|
| Prohibit Outside CEOs from Serving on Compensation Committees |
|
|
58 |
|
|
|
| Recoupment of Incentive or Stock Compensation in Specified Circumstances |
|
|
58 |
|
|
|
| Severance and Golden Parachute Agreements |
|
|
59 |
|
|
|
| Share Buyback Impact on Incentive Program Metrics |
|
|
59 |
|
|
|
| Supplemental Executive Retirement Plans (SERPs) |
|
|
59 |
|
|
|
| Tax Gross-Up Proposals |
|
|
59 |
|
|
|
| Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested
Equity |
|
|
60 |
|
|
|
| 6. Routine/Miscellaneous |
|
|
61 |
|
|
|
| Adjourn Meeting |
|
|
61 |
|
|
|
| Amend Quorum Requirements |
|
|
61 |
|
|
|
| Amend Minor Bylaws |
|
|
61 |
|
|
|
| Change Company Name |
|
|
61 |
|
|
|
| Change Date, Time, or Location of Annual Meeting |
|
|
62 |
|
|
|
| Other Business |
|
|
62 |
|
|
|
| 7. Social and Environmental Issues |
|
|
63 |
|
|
|
| Global Approach – E&S Shareholder Proposals |
|
|
63 |
|
|
|
| Endorsement of Principles |
|
|
63 |
|
|
|
| Animal Welfare |
|
|
63 |
|
|
|
| Animal Welfare Policies |
|
|
63 |
|
|
|
| Animal Testing |
|
|
64 |
|
|
|
| Animal Slaughter |
|
|
64 |
|
|
|
| Consumer Issues |
|
|
64 |
|
|
|
| Genetically Modified Ingredients |
|
|
64 |
|
|
|
| Reports on Potentially Controversial Business/Financial Practices |
|
|
65 |
|
|
|
| Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation |
|
|
65 |
|
|
|
| Product Safety and Toxic/Hazardous Materials |
|
|
65 |
|
|
|
| Tobacco-Related Proposals |
|
|
66 |
|
|
|
| Climate Change |
|
|
66 |
|
|
|
| Say on Climate (SoC) Management Proposals |
|
|
66 |
|
|
|
| Say on Climate (SoC) Shareholder Proposals |
|
|
67 |
|
|
|
| Climate Change/Greenhouse Gas (GHG) Emissions |
|
|
67 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
6 of 82 |
|
|
|
|
|
|
|
|
| Energy Efficiency |
|
|
68 |
|
|
|
| Renewable Energy |
|
|
68 |
|
|
|
| Diversity |
|
|
68 |
|
|
|
| Board Diversity |
|
|
68 |
|
|
|
| Equality of Opportunity |
|
|
69 |
|
|
|
| Gender Identity, Sexual Orientation, and Domestic Partner Benefits |
|
|
69 |
|
|
|
| Gender, Race/Ethnicity Pay Gap |
|
|
69 |
|
|
|
| Racial Equity and/or Civil Rights Audit Guidelines |
|
|
70 |
|
|
|
| Environment and Sustainability |
|
|
70 |
|
|
|
| Facility and Workplace Safety |
|
|
70 |
|
|
|
| Natural Capital- Related and/or Community Impact Assessment Proposals |
|
|
70 |
|
|
|
| Hydraulic Fracturing |
|
|
71 |
|
|
|
| Operations in Protected Areas |
|
|
71 |
|
|
|
| Recycling |
|
|
71 |
|
|
|
| Sustainability Reporting |
|
|
71 |
|
|
|
| Water Issues |
|
|
71 |
|
|
|
| General Corporate Issues |
|
|
72 |
|
|
|
| Charitable Contributions |
|
|
72 |
|
|
|
| Data Security, Privacy, and Internet Issues |
|
|
72 |
|
|
|
| ESG Compensation-Related Proposals |
|
|
72 |
|
|
|
| Human Rights, Human Capital Management, and International Operations |
|
|
73 |
|
|
|
| Human Rights Proposals |
|
|
73 |
|
|
|
| Mandatory Arbitration |
|
|
73 |
|
|
|
| Operations in High-Risk Markets |
|
|
73 |
|
|
|
| Outsourcing/Offshoring |
|
|
74 |
|
|
|
| Sexual Harassment |
|
|
74 |
|
|
|
| Weapons and Military Sales |
|
|
74 |
|
|
|
| Political Activities |
|
|
75 |
|
|
|
| Lobbying |
|
|
75 |
|
|
|
| Political Contributions |
|
|
75 |
|
|
|
| Political Expenditures and Lobbying Congruency |
|
|
75 |
|
|
|
| Political Ties |
|
|
76 |
|
|
|
| 8. Mutual Fund Proxies |
|
|
77 |
|
|
|
| Election of Directors |
|
|
77 |
|
|
|
| Closed End Funds- Unilateral Opt-In to Control Share Acquisition
Statutes |
|
|
77 |
|
|
|
| Converting Closed-end Fund to
Open-end Fund |
|
|
77 |
|
|
|
| Proxy Contests |
|
|
77 |
|
|
|
| Investment Advisory Agreements |
|
|
77 |
|
|
|
| Approving New Classes or Series of Shares |
|
|
78 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
7 of 82 |
|
|
|
|
|
|
|
|
| Preferred Stock Proposals |
|
|
78 |
|
|
|
| 1940 Act Policies |
|
|
78 |
|
|
|
| Changing a Fundamental Restriction to a Nonfundamental Restriction |
|
|
78 |
|
|
|
| Change Fundamental Investment Objective to Nonfundamental |
|
|
78 |
|
|
|
| Name Change Proposals |
|
|
78 |
|
|
|
| Change in Fund’s Subclassification |
|
|
79 |
|
|
|
| Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value |
|
|
79 |
|
|
|
| Disposition of Assets/Termination/Liquidation |
|
|
79 |
|
|
|
| Changes to the Charter Document |
|
|
79 |
|
|
|
| Changing the Domicile of a Fund |
|
|
80 |
|
|
|
| Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval |
|
|
80 |
|
|
|
| Distribution Agreements |
|
|
80 |
|
|
|
| Master-Feeder Structure |
|
|
80 |
|
|
|
| Mergers |
|
|
80 |
|
|
|
| Shareholder Proposals for Mutual Funds |
|
|
80 |
|
|
|
| Establish Director Ownership Requirement |
|
|
80 |
|
|
|
| Reimburse Shareholder for Expenses Incurred |
|
|
81 |
|
|
|
| Terminate the Investment Advisor |
|
|
81 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
8 of 82 |
|
Coverage
The U.S. research team provides proxy analyses and voting recommendations for the common shareholder meetings of U.S. - incorporated
companies that are publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are held in our institutional investor clients’ portfolios. Coverage generally includes corporate actions for common equity holders, such as
written consents and bankruptcies. ISS’ U.S. coverage includes investment companies (including open-end funds, closed-end funds, exchange-traded funds, and unit
investment trusts), limited partnerships (“LPs”), master limited partnerships (“MLPs”), limited liability companies (“LLCs”), and business development companies. ISS reviews its universe of coverage on an annual
basis, and the coverage is subject to change based on client need and industry trends.
Foreign-incorporated companies
In addition to U.S.- incorporated, U.S.- listed companies, ISS’ U.S. policies are applied to certain foreign-incorporated company analyses. Like
the SEC, ISS distinguishes two types of companies that list but are not incorporated in the U.S.:
| |
◾ |
|
U.S. Domestic Issuers – which have a majority of outstanding shares held in the U.S. and meet other criteria, as
determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies (e.g. they are required to file DEF14A proxy statements) – are generally covered under standard U.S. policy guidelines.
|
| |
◾ |
|
Foreign Private Issuers (FPIs) – which are allowed to take exemptions from most
disclosure requirements (e.g., they are allowed to file 6-K for their proxy materials) and U.S. listing standards – are generally covered under a combination of policy guidelines: |
| |
◾ |
|
FPI Guidelines (see the Americas Regional Proxy Voting
Guidelines), may apply to companies incorporated in governance havens, and apply certain minimum independence and disclosure standards in the evaluation of key proxy ballot items, such as the election of
directors; and/or |
| |
◾ |
|
Guidelines for the market that is responsible for, or most relevant to, the item on the ballot. |
U.S. incorporated companies listed only on non-U.S. exchanges are generally covered under the ISS guidelines for
the market on which they are traded.
An FPI is generally covered under ISS’ approach to FPIs outlined above, even if such FPI voluntarily
files a proxy statement and/or other filing normally required of a U.S. Domestic Issuer, so long as the company retains its FPI status.
In all
cases – including with respect to other companies with cross-market features that may lead to ballot items related to multiple markets – items that are on the ballot solely due to the requirements of another market (listing,
incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” primary market coverage.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
9 of 82 |
|
1. Board of
Directors
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
Independence: Boards should be sufficiently independent from management (and
significant shareholders) to ensure that they are able and motivated to effectively supervise management’s performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with
appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership
position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of
directors.
Composition: Companies should ensure that
directors add value to the board through their specific skills and expertise and by having sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence,
while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.
Responsiveness: Directors should respond to investor
input, such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority
of shares are tendered.
Accountability:
Boards should be sufficiently accountable to shareholders, including through transparency of the company’s governance practices and regular board elections, by the provision of sufficient information for shareholders to be able to
assess directors and board composition, and through the ability of shareholders to remove directors.
General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1
considered on case-by-case basis):
Independence
Vote against2
or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per ISS’ Classification of
Directors) when:
| |
◾ |
|
Independent directors comprise 50 percent or less of the board; |
| |
◾ |
|
The non-independent director serves on the audit, compensation, or nominating
committee; |
| |
◾ |
|
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or
|
1 A “new nominee” is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made
on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question.
2 In general, companies with a plurality vote standard use “Withhold” as the
contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
10 of 82 |
|
ISS
Classification of Directors – U.S.
| |
1.1. |
Current officer1 of the company or one of its
affiliates2. |
| |
2. |
Non-Independent Non-Executive Director
|
Board Identification
| |
2.1. |
Director identified as not independent by the board. |
Controlling/Significant Shareholder
| |
2.2. |
Beneficial owner of more than 50 percent of the company’s voting power (this may be aggregated if voting power
is distributed among more than one member of a group). |
Current Employment at Company or Related Company
| |
2.3. |
Non-officer employee of the firm (including employee representatives).
|
| |
2.4. |
Officer1, former officer, or general or limited
partner of a joint venture or partnership with the company. |
Former Employment
| |
2.5. |
Former CEO of the company.3, 4 |
| |
2.6. |
Former non-CEO
officer1 of the company or an affiliate2 within the past five years. |
| |
2.7. |
Former officer1 of an acquired company within the past
five years.4 |
| |
2.8. |
Officer1 of a former parent or predecessor firm at the
time the company was sold or split off within the past five years. |
| |
2.9. |
Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an
assessment of the interim officer’s employment agreement will be made.5 |
Family Members
| |
2.10. |
Immediate family member6 of a current or former
officer1 of the company or its affiliates2 within the last five years. |
| |
2.11. |
Immediate family member6 of a current employee of
company or its affiliates2 where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or
its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role). |
Professional, Transactional, and Charitable Relationships
| |
2.12. |
Director who (or whose immediate family member6)
currently provides professional services7 in excess of $10,000 per year to: the company, an affiliate2, or an
individual officer of the company or an affiliate; or who is (or whose immediate family member6 is) a partner, employee, or controlling shareholder of an organization which provides
the services. |
| |
2.13. |
Director who (or whose immediate family member6)
currently has any material transactional relationship8 with the company or its affiliates2; or who is (or whose
immediate family member6 is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship8 (excluding investments in the company through a private placement). |
| |
2.14. |
Director who (or whose immediate family
member6) is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or
endowments8 from the company or its affiliates2. |
Other Relationships
| |
2.15. |
Party to a voting agreement9 to vote in line with
management on proposals being brought to shareholder vote. |
| |
2.16. |
Has (or an immediate family member6 has) an
interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee.10 |
| |
2.17. |
Founder11 of the company but not currently an
employee. |
| |
2.18. |
Director with pay comparable to Named Executive Officers. |
| |
2.19. |
Any material12 relationship with the company.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
11 of 82 |
|
| |
3.1. |
No material12 connection to the company other than a
board seat. |
Footnotes:
1. The definition of officer will generally follow that of a “Section 16 officer” (officers subject to Section 16 of the
Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a
principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving
as an officer due to statutory requirements (e.g. corporate secretary) will generally be classified as a Non-Independent Non-Executive Director under “Any material
relationship with the company.” However, if the company provides explicit disclosure that the director is not receiving additional compensation exceeding $10,000 per year for serving in that capacity, then the director will be classified as an
Independent Director.
2. “Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control
ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate.
3. Includes any former CEO of the company prior to the company’s initial public offering (IPO).
4. When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, ISS will generally
classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the existence of
any other conflicting relationships or related party transactions.
5. ISS will look at the terms of the interim officer’s employment
contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also
consider if a formal search process was under way for a full-time officer at the time.
6. “Immediate family member” follows the
SEC’s definition of such and covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director,
nominee for director, executive officer, or significant shareholder of the company.
7. Professional services can be characterized as advisory
in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include
but are not limited to the following: investment banking/financial advisory services, commercial banking (beyond deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing services, legal
services, property management services, realtor services, lobbying services, executive search services, and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit
services, IT tech support services, educational services, and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject
to the associated materiality test) rather than a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or
is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional
rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory.
8. A material transactional relationship, including grants to non-profit organizations, exists if the
company makes annual payments to, or receives annual payments from, another entity, exceeding the greater of: $200,000 or 5 percent of the recipient’s gross revenues, for a company that follows NASDAQ listing standards; or the greater of
$1,000,000 or 2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows neither of the preceding standards, ISS will apply the NASDAQ-based materiality test. (The recipient
is the party receiving the financial proceeds from the transaction).
9. Dissident directors who are parties to a voting
agreement pursuant to a settlement or similar arrangement may be classified as Independent Directors if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’
interests: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any
conflicting relationships or related party transactions.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
12 of 82 |
|
10. Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in
the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).
11. The operating involvement of the founder with the company will be considered; if the founder was never employed by the company, ISS may
deem him or her an Independent Director.
12. For purposes of ISS’s director independence classification,
“material” will be defined as a standard of relationship (financial, personal, or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have
a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
Composition
Attendance at Board and Committee Meetings: Generally vote against or withhold from
directors (except nominees who served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for
which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
| |
◾ |
|
Medical issues/illness; |
| |
◾ |
|
Family emergencies; and |
| |
◾ |
|
Missing only one meeting (when the total of all meetings is three or fewer). |
In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote
against or withhold from appropriate members of the nominating/governance committees or the full board.
If the proxy disclosure is unclear and
insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
Overboarded Directors: Generally vote against or withhold from individual directors who:
| |
◾ |
|
Sit on more than five public company boards; or |
| |
◾ |
|
Are CEOs of public companies who sit on the boards of more than two public companies besides their own— withhold only
at their outside boards4. |
NOTE: For shareholder meeting reports
published on or after February 25th, 2025, Institutional Shareholder Services (ISS) has indefinitely halted the consideration of the gender diversity of a company’s board when making vote recommendations with respect to the election or re-election of directors at U.S. companies covered by these guidelines under its proprietary ISS U.S. Benchmark policy.
3 Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.
4 Although all of a CEO’s subsidiary boards with publicly-traded common stock will be
counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than
50 percent controlled and boards outside the parent/subsidiary relationships.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
13 of 82 |
|
Gender Diversity: Generally vote against or withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) at companies where there are no women on the company’s board. An exception will be made if there was at least one woman on the board at the
preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.
NOTE: For shareholder meeting
reports published on or after February 25th, 2025, Institutional Shareholder Services (ISS) has indefinitely halted the consideration of the racial and/or ethnic diversity of a company’s board when making vote recommendations with respect to
the election or re-election of directors at U.S. companies covered under these guidelines under its proprietary ISS U.S. Benchmark policy.
Racial and/or Ethnic Diversity: For
companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) where the board has no apparent racially or ethnically diverse members5. An exception
will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
Responsiveness
Vote case-by-case on individual directors, committee members, or the
entire board of directors as appropriate if:
| |
◾ |
|
The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the
previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are: |
| |
◾ |
|
Disclosed outreach efforts by the board to shareholders in the wake of the vote; |
| |
◾ |
|
Rationale provided in the proxy statement for the level of implementation; |
| |
◾ |
|
The subject matter of the proposal; |
| |
◾ |
|
The level of support for and opposition to the resolution in past meetings; |
| |
◾ |
|
Actions taken by the board in response to the majority vote and its engagement with shareholders; |
| |
◾ |
|
The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals);
and |
| |
◾ |
|
Other factors as appropriate. |
| |
◾ |
|
The board failed to act on takeover offers where the majority of shares are tendered; or |
| |
◾ |
|
At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast
and the company has failed to address the issue(s) that caused the high withhold/against vote. |
Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
| |
◾ |
|
The company’s previous say-on-pay
received the support of less than 70 percent of votes cast. Factors that will be considered are: |
| |
◾ |
|
The company’s response, including: |
| |
◾ |
|
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated); |
| |
◾ |
|
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; and |
| |
◾ |
|
Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
| |
◾ |
|
Other recent compensation actions taken by the company; |
| |
◾ |
|
Whether the issues raised are recurring or isolated; |
| |
◾ |
|
The company’s ownership structure; and
|
5 Aggregate diversity statistics provided by the board will only be considered if specific to
racial and/or ethnic diversity.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
14 of 82 |
|
| |
◾ |
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
| |
◾ |
|
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received
the plurality of votes cast. |
Accountability
PROBLEMATIC TAKEOVER DEFENSES, CAPITAL
STRUCTURE, AND GOVERNANCE STRUCTURE
Poison Pills: Generally vote against or withhold from all nominees (except new nominees 1,
who should be considered case-by-case) if:
| |
◾ |
|
The company has a poison pill with a deadhand or slowhand
feature6; |
| |
◾ |
|
The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or
lowering the trigger, without shareholder approval; or |
| |
◾ |
|
The company has a long-term poison pill (with a term of over one year) that was not approved by the public shareholders7. |
Vote
case-by-case on nominees if the board adopts an initial short-term pill6 (with a term of one year or less) without
shareholder approval, taking into consideration:
| |
◾ |
|
The trigger threshold and other terms of the pill; |
| |
◾ |
|
The disclosed rationale for the adoption; |
| |
◾ |
|
The context in which the pill was adopted, (e.g., factors such as the company’s size and stage of development, sudden
changes in its market capitalization, and extraordinary industry-wide or macroeconomic events); |
| |
◾ |
|
A commitment to put any renewal to a shareholder vote; |
| |
◾ |
|
The company’s overall track record on corporate governance and responsiveness to shareholders; and
|
| |
◾ |
|
Other factors as relevant. |
Unequal Voting Rights: Generally vote withhold or against directors individually, committee members, or the entire board (except new nominees 1, who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights8.
Exceptions to this policy will generally be limited to:
| |
◾ |
|
Newly-public companies9 with a sunset provision of no more than
seven years from the date of going public; |
| |
◾ |
|
Limited Partnerships and the Operating Partnership (OP) unit structure of REITs; |
| |
◾ |
|
Situations where the super-voting shares represent less than 5% of total voting power and therefore considered to be de
minimis; or |
| |
◾ |
|
The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular
binding vote on whether the capital structure should be maintained. |
6 If a short-term pill with a deadhand or slowhand feature is enacted but expires before the
next shareholder vote, ISS will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption.
7 Approval prior to, or in connection, with a company’s becoming publicly-traded, or in connection with a de-SPAC transaction, is insufficient.
8 This generally includes classes of common stock that have additional votes per share than
other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”).
9 Includes companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct
listings, and those who complete a traditional initial public offering.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
15 of 82 |
|
Classified Board Structure: The board is classified, and a
continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.
Problematic Governance Structure: For companies that hold or held their first annual
meeting 9 of public shareholders after Feb. 1, 2015, generally vote against or withhold from directors individually, committee members, or the entire board
(except new nominees 1, who should be considered case-by-case) if, prior to or in connection with the
company’s public offering, the company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:
| |
◾ |
|
Supermajority vote requirements to amend the bylaws or charter; |
| |
◾ |
|
A classified board structure; or |
| |
◾ |
|
Other egregious provisions. |
A provision which specifies that the problematic structure(s) will be sunset within seven years of the date of going public will be considered a
mitigating factor.
Unless the adverse provision is reversed or removed, vote
case-by-case on director nominees in subsequent years.
Unilateral Bylaw/Charter Amendments: Generally vote against or withhold from directors individually, committee members, or the entire
board (except new nominees 1, who should be considered case-by-case) if the board amends the company’s
bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors:
| |
◾ |
|
The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification;
|
| |
◾ |
|
Disclosure by the company of any significant engagement with shareholders regarding the amendment; |
| |
◾ |
|
The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the
bylaws/charter; |
| |
◾ |
|
The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment
provisions; |
| |
◾ |
|
The company’s ownership structure; |
| |
◾ |
|
The company’s existing governance provisions; |
| |
◾ |
|
The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and
|
| |
◾ |
|
Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
|
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees 1, who should be considered case-by-case) if the directors:
| |
◾ |
|
Adopted supermajority vote requirements to amend the bylaws or charter; |
| |
◾ |
|
Eliminated shareholders’ ability to amend bylaws; |
| |
◾ |
|
Adopted a fee-shifting provision; or
|
| |
◾ |
|
Adopted another provision deemed egregious. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
16 of 82 |
|
Restricting Binding Shareholder Proposals: Generally vote
against or withhold from the members of the governance committee if:
| |
◾ |
|
The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such
restrictions include but are not limited to: outright prohibition on the submission of binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis. |
Submission of management proposals to
approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Generally
continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Director Performance Evaluation: The board lacks
mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder
returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not
limited to:
| |
◾ |
|
A classified board structure; |
| |
◾ |
|
A supermajority vote requirement; |
| |
◾ |
|
Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;
|
| |
◾ |
|
The inability of shareholders to call special meetings; |
| |
◾ |
|
The inability of shareholders to act by written consent; |
| |
◾ |
|
A multi-class capital structure; and/or |
| |
◾ |
|
A non-shareholder-approved poison pill. |
Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
| |
◾ |
|
The presence of a shareholder proposal addressing the same issue on the same ballot; |
| |
◾ |
|
The board’s rationale for seeking ratification; |
| |
◾ |
|
Disclosure of actions to be taken by the board should the ratification proposal fail; |
| |
◾ |
|
Disclosure of shareholder engagement regarding the board’s ratification request; |
| |
◾ |
|
The level of impairment to shareholders’ rights caused by the existing provision; |
| |
◾ |
|
The history of management and shareholder proposals on the provision at the company’s past meetings;
|
| |
◾ |
|
Whether the current provision was adopted in response to the shareholder proposal; |
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Previous use of ratification proposals to exclude shareholder proposals. |
Problematic Audit-Related Practices
Generally vote against or withhold from the members of the Audit Committee if:
| |
◾ |
|
The non-audit fees paid to the auditor are
excessive; |
| |
◾ |
|
The company receives an adverse opinion on the company’s financial statements from its auditor; or
|
| |
◾ |
|
There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its
auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
17 of 82 |
|
Vote case-by-case on members of the Audit Committee and potentially the full board if:
| |
◾ |
|
Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP;
and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether
withhold/against votes are warranted. |
Problematic Compensation Practices
In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the
members of the Compensation Committee and potentially the full board if:
| |
◾ |
|
There is an unmitigated misalignment between CEO pay and company performance
(pay for performance); |
| |
◾ |
|
The company maintains significant problematic pay practices; or |
| |
◾ |
|
The board exhibits a significant level of poor communication and responsiveness to
shareholders. |
Generally vote against or withhold from the Compensation Committee chair, other committee members, or potentially
the full board if:
| |
◾ |
|
The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s
declared frequency of say on pay; or |
| |
◾ |
|
The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.
|
Generally vote against members of the board committee responsible for approving/setting
non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a
compelling rationale or other mitigating factors.
Problematic Pledging of Company
Stock: Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of
pledged company stock by executives or directors raises concerns. The following factors will be considered:
| |
◾ |
|
The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;
|
| |
◾ |
|
The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume;
|
| |
◾ |
|
Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
|
| |
◾ |
|
Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged
company stock; and |
| |
◾ |
|
Any other relevant factors. |
Climate Accountability
For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain10, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a
case-by-case basis) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate
change to the company and the larger economy.
Minimum steps to understand and mitigate those risks are considered to be the following. Both minimum
criteria will be required to be in alignment with the policy :
10 Companies defined as “significant GHG emitters” will be those on the current
Climate Action 100+ Focus Group list.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
18 of 82 |
|
| |
◾ |
|
Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on
Climate-related Financial Disclosures (TCFD), including: |
| |
◾ |
|
Board governance measures; |
| |
◾ |
|
Risk management analyses; and |
| |
◾ |
|
Appropriate GHG emissions reduction targets. |
At this time, “appropriate GHG emissions reductions targets” will be medium-term GHG reduction targets or Net
Zero-by-2050 GHG reduction targets for a company’s operations (Scope 1) and electricity use (Scope 2). Targets should cover the vast majority of the
company’s direct emissions.
Governance Failures
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
| |
◾ |
|
Material failures of governance, stewardship, risk oversight11,
or fiduciary responsibilities at the company; |
| |
◾ |
|
Failure to replace management as appropriate; or |
| |
◾ |
|
Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her
ability to effectively oversee management and serve the best interests of shareholders at any company. |
Voting on Director Nominees in Contested Elections
Vote-No Campaigns
General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by
shareholders and other publicly available information.
Proxy Contests/Proxy Access
General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:
| |
◾ |
|
Long-term financial performance of the company relative to its industry; |
| |
◾ |
|
Management’s track record; |
| |
◾ |
|
Background to the contested election; |
| |
◾ |
|
Nominee qualifications and any compensatory arrangements; |
| |
◾ |
|
Strategic plan of dissident slate and quality of the critique against management; |
| |
◾ |
|
Likelihood that the proposed goals and objectives can be achieved (both slates); and |
| |
◾ |
|
Stock ownership positions. |
In the case of candidates nominated pursuant to proxy access, vote
case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the
nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).
11 Examples of failure of risk oversight include but are not limited to: bribery; large or
serial fines or sanctions from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant adverse legal judgments or settlement; or hedging of company stock.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
19 of 82 |
|
Other Board-Related
Proposals
Adopt Anti-Hedging/Pledging/Speculative Investments Policy
General Recommendation: Generally vote for proposals
seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan.
However, the company’s existing policies regarding responsible use of company stock will be considered.
Board
Refreshment
Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to
ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed.
Term/Tenure Limits
General Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits,
considering:
| |
◾ |
|
The rationale provided for adoption of the term/tenure limit; |
| |
◾ |
|
The robustness of the company’s board evaluation process; |
| |
◾ |
|
Whether the limit is of sufficient length to allow for a broad range of director tenures; |
| |
◾ |
|
Whether the limit would disadvantage independent directors compared to
non-independent directors; and |
| |
◾ |
|
Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner.
|
| |
◾ |
|
Vote case-by-case on shareholder proposals
asking for the company to adopt director term/tenure limits, considering: |
| |
◾ |
|
The scope of the shareholder proposal; and |
| |
◾ |
|
Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.
|
Age Limits
General Recommendation: Generally vote against management
and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits.
Board Size
General Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size.
Vote against proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
General Recommendation: Vote against proposals to classify
(stagger) the board.
Vote for proposals to repeal classified boards and to elect all directors annually.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
20 of 82 |
|
CEO Succession
Planning
General Recommendation: Generally
vote for proposals seeking disclosure on a CEO succession planning policy, considering, at a minimum, the following factors:
| |
◾ |
|
The reasonableness/scope of the request; and |
| |
◾ |
|
The company’s existing disclosure on its current CEO succession planning process. |
Cumulative Voting
General Recommendation: Generally vote against management
proposals to eliminate cumulate voting, and for shareholder proposals to restore or provide for cumulative voting, unless:
| |
◾ |
|
The company has proxy access12, thereby allowing shareholders
to nominate directors to the company’s ballot; and |
| |
◾ |
|
The company has adopted a majority vote standard, with a carve-out for plurality
voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections. |
Vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).
Director and Officer Indemnification, Liability Protection, and Exculpation
General Recommendation: Vote case-by-case on proposals on director and officer indemnification, liability protection, and exculpation13.
Consider the stated rationale for the proposed change. Also consider, among other factors, the extent to which the proposal would:
| |
◾ |
|
Eliminate directors’ and officers’ liability for monetary damages for violating the duty of care;
|
| |
◾ |
|
Eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalt;
|
| |
◾ |
|
Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation
than mere carelessness; and |
| |
◾ |
|
Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts
that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify.
|
Vote for those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was
unsuccessful if both of the following apply:
| |
◾ |
|
If the individual was found to have acted in good faith and in a manner that the individual reasonably believed was in the
best interests of the company; and |
| |
◾ |
|
If only the individual’s legal expenses would be covered.
|
12 A proxy access right that meets the recommended guidelines.
13 Indemnification: the condition of being secured against loss or damage.
Limited
liability: a person’s financial liability is limited to a fixed sum, or personal financial assets are not at risk if the individual loses a lawsuit that results in financial award/damages to the plaintiff.
Exculpation: to eliminate or limit the personal liability of a director or officer to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director or officer.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
21 of 82 |
|
Establish/Amend
Nominee Qualifications
General Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the
criteria and the degree to which they may preclude dissident nominees from joining the board.
Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
| |
◾ |
|
The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative
to that of its peers; |
| |
◾ |
|
The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is
sought; |
| |
◾ |
|
The company’s disclosure and performance relating to the issue for which board oversight is sought and any
significant related controversies; and |
| |
◾ |
|
The scope and structure of the proposal. |
Establish Other Board Committee Proposals
General Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such proposals seek a specific
oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:
| |
◾ |
|
Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is
sought; |
| |
◾ |
|
Level of disclosure regarding the issue for which board oversight is sought; |
| |
◾ |
|
Company performance related to the issue for which board oversight is sought; |
| |
◾ |
|
Board committee structure compared to that of other companies in its industry sector; and |
| |
◾ |
|
The scope and structure of the proposal. |
Filling Vacancies/Removal of Directors
General Recommendation: Vote against proposals that
provide that directors may be removed only for cause. Vote for proposals to restore shareholders’ ability to remove directors with or without cause.
Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.
Vote for proposals that permit shareholders to elect directors to fill board vacancies.
Independent Board Chair
General Recommendation: Generally vote for shareholder
proposals requiring that the board chair position be filled by an independent director, taking into consideration the following:
| |
◾ |
|
The scope and rationale of the proposal; |
| |
◾ |
|
The company’s current board leadership structure; |
| |
◾ |
|
The company’s governance structure and practices; |
| |
◾ |
|
Company performance; and |
| |
◾ |
|
Any other relevant factors that may be applicable. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
22 of 82 |
|
The following factors will increase the
likelihood of a “for” recommendation:
| |
◾ |
|
A majority non-independent board and/or the presence of non-independent directors on key board committees; |
| |
◾ |
|
A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined
CEO/chair role; |
| |
◾ |
|
The presence of an executive or non-independent chair in addition to the CEO, a
recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair; |
| |
◾ |
|
Evidence that the board has failed to oversee and address material risks facing the company; |
| |
◾ |
|
A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the
board has materially diminished shareholder rights; or |
| |
◾ |
|
Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’
interests. |
Majority of Independent Directors/Establishment of Independent Committees
General Recommendation: Vote for shareholder proposals
asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS’ definition of Independent Director (See ISS’ Classification of Directors.)
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors
unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
General Recommendation: Generally vote for management
proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included.
Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors
need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a
plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
Proxy Access
General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:
| |
◾ |
|
Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
|
| |
◾ |
|
Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each
member of the nominating group; |
| |
◾ |
|
Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; and
|
| |
◾ |
|
Cap: cap on nominees of generally twenty-five percent (25%) of the board. |
Review for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are more restrictive than these
guidelines.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
23 of 82 |
|
Require More Nominees
than Open Seats
General Recommendation:
Vote against shareholder proposals that would require a company to nominate more candidates than the number of open board seats.
Shareholder Engagement Policy (Shareholder Advisory Committee)
General Recommendation: Generally vote for shareholder
proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:
| |
◾ |
|
Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information
between shareholders and members of the board; |
| |
◾ |
|
Effectively disclosed information with respect to this structure to its shareholders; |
| |
◾ |
|
Company has not ignored majority-supported shareholder proposals, or a majority withhold vote on a director nominee; and
|
| |
◾ |
|
The company has an independent chair or a lead director, according to ISS’
definition. This individual must be made available for periodic consultation and direct communication with major shareholders. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
24 of 82 |
|
2. Audit-Related
Auditor Indemnification and Limitation of Liability
General Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to:
| |
◾ |
|
The terms of the auditor agreement—the degree to which these agreements impact shareholders’ rights;
|
| |
◾ |
|
The motivation and rationale for establishing the agreements; |
| |
◾ |
|
The quality of the company’s disclosure; and |
| |
◾ |
|
The company’s historical practices in the audit area. |
Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Auditor Ratification
General Recommendation: Vote for proposals to ratify
auditors unless any of the following apply:
| |
◾ |
|
An auditor has a financial interest in or association with the company, and is therefore not independent;
|
| |
◾ |
|
There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of
the company’s financial position; |
| |
◾ |
|
Poor accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP;
or |
| |
◾ |
|
Fees for non-audit services (“Other” fees) are excessive.
|
Non-audit fees are excessive if:
| |
◾ |
|
Non-audit (“other”) fees > audit fees + audit-related fees +
tax compliance/preparation fees |
Tax compliance and preparation include the preparation of original and amended tax returns and
refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to
“Other” fees.
In circumstances where “Other” fees include fees related to significant
one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to
the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
Shareholder Proposals Limiting Non-Audit Services
General Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.
Shareholder Proposals on Audit Firm Rotation
General Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account:
| |
◾ |
|
The tenure of the audit firm; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
25 of 82 |
|
| |
◾ |
|
The length of rotation specified in the proposal; |
| |
◾ |
|
Any significant audit-related issues at the company; |
| |
◾ |
|
The number of Audit Committee meetings held each year; |
| |
◾ |
|
The number of financial experts serving on the committee; and |
| |
◾ |
|
Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive
price. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
26 of 82 |
|
3. Shareholder
Rights & Defenses
Advance Notice Requirements for Shareholder Proposals/Nominations
General Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as
reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.
To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the
anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a
90-120-day window). The submittal window is the period under which shareholders must file their proposals/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the
company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
General Recommendation: Vote against proposals giving the
board exclusive authority to amend the bylaws.
Vote
case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into account the following:
| |
◾ |
|
Any impediments to shareholders’ ability to amend the bylaws (i.e. supermajority voting requirements);
|
| |
◾ |
|
The company’s ownership structure and historical voting turnout; |
| |
◾ |
|
Whether the board could amend bylaws adopted by shareholders; and |
| |
◾ |
|
Whether shareholders would retain the ability to ratify any board-initiated amendments. |
Control Share Acquisition Provisions
General Recommendation: Vote for proposals to opt out of
control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders.
Vote against proposals to amend the charter to include control share acquisition provisions.
Vote for proposals to restore voting rights to the control shares.
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds.
Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer
to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Control
Share Cash-Out Provisions
General
Recommendation: Vote for proposals to opt out of control share cash-out statutes.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
27 of 82 |
|
Control share
cash-out statutes give dissident shareholders the right to “cash-out” of their position in a company at the expense of the shareholder who has taken a
control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
Disgorgement Provisions
General Recommendation: Vote for proposals to opt out of
state disgorgement provisions.
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a
company’s stock to disgorge, or pay back, to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a
certain period of time (between 18 months and 24 months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.
Fair Price Provisions
General Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire
the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.
Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
Freeze-Out Provisions
General Recommendation: Vote for proposals to opt out of
state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time
before gaining control of the company.
Greenmail
General Recommendation: Vote for proposals to adopt
anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments.
Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only
the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Shareholder Litigation Rights
Federal Forum Selection Provisions
Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal
securities law.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
28 of 82 |
|
General Recommendation: Generally vote for federal forum
selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or
board responsiveness to shareholders.
Vote against provisions that restrict the forum to a particular federal district court; unilateral
adoption (without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments
policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims
arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
General Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the state of Delaware as the exclusive forum for
corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
For states other than Delaware, vote case-by-case on exclusive forum
provisions, taking into consideration:
| |
◾ |
|
The company’s stated rationale for adopting such a provision; |
| |
◾ |
|
Disclosure of past harm from duplicative shareholder lawsuits in more than one forum; |
| |
◾ |
|
The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and
the definition of key terms; and |
| |
◾ |
|
Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote
standard applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections. |
Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that
specify a particular local court within the state; unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee shifting
Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.
General Recommendation: Generally vote against provisions
that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful).
Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments policy.
Net Operating Loss (NOL) Protective Amendments
General
Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of protecting a company’s net operating losses (NOL) if the effective term of the protective
amendment would exceed the shorter of three years and the exhaustion of the NOL.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
29 of 82 |
|
Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the
NOL:
| |
◾ |
|
The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder); |
| |
◾ |
|
Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon
exhaustion or expiration of the NOL); |
| |
◾ |
|
The company’s existing governance structure including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and |
| |
◾ |
|
Any other factors that may be applicable. |
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
General Recommendation: Vote for shareholder proposals
requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill
in the future specifying that the board will only adopt a shareholder rights plan if either:
| |
◾ |
|
Shareholders have approved the adoption of the plan; or |
| |
◾ |
|
The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders
under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder
ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate. |
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add
the caveat that a vote within 12 months would be considered sufficient implementation.
Management Proposals to Ratify a
Poison Pill
General Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following
attributes:
| |
◾ |
|
No lower than a 20 percent trigger, flip-in or flip-over;
|
| |
◾ |
|
A term of no more than three years; |
| |
◾ |
|
No deadhand, slowhand, no-hand, or similar feature that limits the ability of a
future board to redeem the pill; and |
| |
◾ |
|
Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a
qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill. |
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into
consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
General Recommendation: Vote against proposals to adopt a
poison pill for the stated purpose of protecting a company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
30 of 82 |
|
Vote case-by-case on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
| |
◾ |
|
The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent); |
| |
◾ |
|
Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or
expiration of NOLs); |
| |
◾ |
|
The company’s existing governance structure, including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and |
| |
◾ |
|
Any other factors that may be applicable. |
Proxy Voting Disclosure, Confidentiality, and Tabulation
General Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder
rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company’s vote-counting methodology.
While a variety of factors may be considered
in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
| |
◾ |
|
The scope and structure of the proposal; |
| |
◾ |
|
The company’s stated confidential voting policy (or other relevant policies) and whether it ensures a “level
playing field” by providing shareholder proponents with equal access to vote information prior to the annual meeting; |
| |
◾ |
|
The company’s vote standard for management and shareholder proposals and whether it ensures consistency and fairness
in the proxy voting process and maintains the integrity of vote results; |
| |
◾ |
|
Whether the company’s disclosure regarding its vote counting method and other relevant voting policies with respect
to management and shareholder proposals are consistent and clear; |
| |
◾ |
|
Any recent controversies or concerns related to the company’s proxy voting mechanics; |
| |
◾ |
|
Any unintended consequences resulting from implementation of the proposal; and |
| |
◾ |
|
Any other factors that may be relevant. |
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
General Recommendation: Generally vote against management
proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best practice.
In addition, voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
| |
◾ |
|
The presence of a shareholder proposal addressing the same issue on the same ballot; |
| |
◾ |
|
The board’s rationale for seeking ratification; |
| |
◾ |
|
Disclosure of actions to be taken by the board should the ratification proposal fail; |
| |
◾ |
|
Disclosure of shareholder engagement regarding the board’s ratification request; |
| |
◾ |
|
The level of impairment to shareholders’ rights caused by the existing provision; |
| |
◾ |
|
The history of management and shareholder proposals on the provision at the company’s past meetings;
|
| |
◾ |
|
Whether the current provision was adopted in response to the shareholder proposal; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
31 of 82 |
|
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Previous use of ratification proposals to exclude shareholder proposals. |
Reimbursing Proxy Solicitation Expenses
General Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses.
When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with
the election.
Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one
or more candidates in a contested election where the following apply:
| |
◾ |
|
The election of fewer than 50 percent of the directors to be elected is contested in the election;
|
| |
◾ |
|
One or more of the dissident’s candidates is elected; |
| |
◾ |
|
Shareholders are not permitted to cumulate their votes for directors; and |
| |
◾ |
|
The election occurred, and the expenses were incurred, after the adoption of this bylaw. |
Reincorporation Proposals
General Recommendation: Management or shareholder
proposals to change a company’s state of incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance
concerns including the following:
| |
◾ |
|
Reasons for reincorporation; |
| |
◾ |
|
Comparison of company’s governance practices and provisions prior to and following the reincorporation; and
|
| |
◾ |
|
Comparison of corporation laws of original state and destination state. |
Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.
Shareholder Ability to Act by Written Consent
General Recommendation: Generally vote against management
and shareholder proposals to restrict or prohibit shareholders’ ability to act by written consent.
Generally vote for
management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
| |
◾ |
|
Shareholders’ current right to act by written consent; |
| |
◾ |
|
The inclusion of exclusionary or prohibitive language; |
| |
◾ |
|
Investor ownership structure; and |
| |
◾ |
|
Shareholder support of, and management’s response to, previous shareholder proposals. |
Vote case-by-case on shareholder proposals if, in addition to the
considerations above, the company has the following governance and antitakeover provisions:
| |
◾ |
|
An unfettered14 right for shareholders to call special meetings at a 10 percent threshold; |
| |
◾ |
|
A majority vote standard in uncontested director elections;
|
14 quality of the company’s disclosure; and “Unfettered” means no restrictions on
agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no
greater than 90 prior to the next annual meeting.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
32 of 82 |
|
| |
◾ |
|
No non-shareholder-approved pill; and |
| |
◾ |
|
An annually elected board. |
Shareholder Ability to Call Special Meetings
General Recommendation: Vote against management or
shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings.
Generally vote for management or
shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:
| |
◾ |
|
Shareholders’ current right to call special meetings; |
| |
◾ |
|
Minimum ownership threshold necessary to call special meetings (10 percent preferred); |
| |
◾ |
|
The inclusion of exclusionary or prohibitive language; |
| |
◾ |
|
Investor ownership structure; and |
| |
◾ |
|
Shareholder support of, and management’s response to, previous shareholder proposals. |
Stakeholder Provisions
General Recommendation: Vote against proposals that ask
the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
State Antitakeover Statutes
General Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and
labor contract provisions, and anti-greenmail provisions).
Supermajority Vote Requirements
General Recommendation: Vote against proposals to require
a supermajority shareholder vote.
Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for
companies with shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:
| |
◾ |
|
Quorum requirements; and |
Virtual Shareholder Meetings
General Recommendation: Generally vote for management
proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which
virtual-only15 meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting.
15 Virtual-only shareholder meeting” refers to a meeting of shareholders that is held
exclusively using technology without a corresponding in-person meeting.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
33 of 82 |
|
Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:
| |
◾ |
|
Scope and rationale of the proposal; and |
| |
◾ |
|
Concerns identified with the company’s prior meeting practices. |
4. Capital/Restructuring
Capital
Adjustments to Par Value of Common Stock
General Recommendation:
Vote for management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action.
Vote for management proposals to eliminate par value.
Common Stock Authorization
General Authorization Requests
General Recommendation: Vote
case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes:
| |
◾ |
|
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized share; |
| |
◾ |
|
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares; |
| |
◾ |
|
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage; or
|
| |
◾ |
|
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the
company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| |
◾ |
|
The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights
to other share classes; |
| |
◾ |
|
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization; |
| |
◾ |
|
The company has a non-shareholder approved poison pill (including an NOL pill); or
|
| |
◾ |
|
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| |
◾ |
|
In, or subsequent to, the company’s most recent 10-K filing, the company
discloses that there is substantial doubt about its ability to continue as a going concern; |
| |
◾ |
|
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or |
| |
◾ |
|
A government body has in the past year required the company to increase its capital ratios. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
34 of 82 |
|
For companies incorporated in states that allow
increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to
increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same
ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| |
◾ |
|
twice the amount needed to support the transactions on the ballot, and |
| |
◾ |
|
the allowable increase as calculated for general issuances above. |
Dual Class Structure
General Recommendation: Generally vote against proposals
to create a new class of common stock unless:
| |
◾ |
|
The company discloses a compelling rationale for the dual-class capital structure, such as: |
| |
◾ |
|
The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as
a going concern; or |
| |
◾ |
|
The new class of shares will be transitory; |
| |
◾ |
|
The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term
and long term; and |
| |
◾ |
|
The new class is not designed to preserve or increase the voting power of an insider or significant shareholder.
|
Issue Stock for Use with Rights Plan
General Recommendation: Vote against proposals that
increase authorized common stock for the explicit purpose of implementing a non-shareholder-approved shareholder rights plan (poison pill).
Preemptive Rights
General Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into consideration:
| |
◾ |
|
The size of the company; |
| |
◾ |
|
The shareholder base; and |
| |
◾ |
|
The liquidity of the stock. |
Preferred Stock Authorization
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes:
| |
◾ |
|
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized shares; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
35 of 82 |
|
| |
◾ |
|
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares; |
| |
◾ |
|
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.
|
| |
◾ |
|
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization; or |
| |
◾ |
|
If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a
specific use for the shares. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the
company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| |
◾ |
|
If the shares requested are blank check preferred shares that can be used for antitakeover purposes;16 |
| |
◾ |
|
The company seeks to increase a class of non-convertible preferred shares entitled
to more than one vote per share on matters that do not solely affect the rights of preferred stockholders “supervoting shares”); |
| |
◾ |
|
The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number
of common shares into which they are convertible (“supervoting shares”) on matters that do not solely affect the rights of preferred stockholders; |
| |
◾ |
|
The stated intent of the increase in the general authorization is to allow the company to increase an existing designated
class of supervoting preferred shares; |
| |
◾ |
|
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization; |
| |
◾ |
|
The company has a non-shareholder approved poison pill (including an NOL pill); and
|
| |
◾ |
|
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| |
◾ |
|
In, or subsequent to, the company’s most recent 10-K filing, the company
discloses that there is substantial doubt about its ability to continue as a going concern; |
| |
◾ |
|
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or |
| |
◾ |
|
A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all
nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to
increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the
same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| |
◾ |
|
twice the amount needed to support the transactions on the ballot, and |
| |
◾ |
|
the allowable increase as calculated for general issuances above.
|
16 To be acceptable, appropriate disclosure would be needed that the shares are
“declawed”: i.e., representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights
plan.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
36 of 82 |
|
Recapitalization Plans
General Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into account the following:
| |
◾ |
|
More simplified capital structure; |
| |
◾ |
|
Fairness of conversion terms; |
| |
◾ |
|
Impact on voting power and dividends; |
| |
◾ |
|
Reasons for the reclassification; |
| |
◾ |
|
Conflicts of interest; and |
| |
◾ |
|
Other alternatives considered. |
Reverse Stock Splits
General Recommendation: Vote for management proposals to
implement a reverse stock split if:
| |
◾ |
|
The number of authorized shares will be proportionately reduced; or |
| |
◾ |
|
The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with
ISS’ Common Stock Authorization policy. |
Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:
| |
◾ |
|
Stock exchange notification to the company of a potential delisting; |
| |
◾ |
|
Disclosure of substantial doubt about the company’s ability to continue as a going concern without additional
financing; |
| |
◾ |
|
The company’s rationale; or |
| |
◾ |
|
Other factors as applicable. |
Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S.
General Recommendation: For U.S. domestic issuers
incorporated outside the U.S. and listed solely on a U.S. exchange, generally vote for resolutions to authorize the issuance of common shares up to 20 percent of currently issued common share capital, where not tied
to a specific transaction or financing proposal.
For pre-revenue or other early-stage companies that
are heavily reliant on periodic equity financing, generally vote for resolutions to authorize the issuance of common shares up to 50 percent of currently issued common share capital. The burden of proof will be on the company to establish that
it has a need for the higher limit.
Renewal of such mandates should be sought at each year’s annual meeting.
Vote case-by-case on share issuances for a specific transaction or
financing proposal.
Share Repurchase Programs
General Recommendation: For U.S.-incorporated companies,
and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the
board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding:
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
37 of 82 |
|
| |
◾ |
|
The use of buybacks to inappropriately manipulate incentive compensation metrics; |
| |
◾ |
|
Threats to the company’s long-term viability; or |
| |
◾ |
|
Other company-specific factors as warranted. |
Vote case-by-case on proposals to repurchase shares directly from
specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
General Recommendation: Generally vote against shareholder
proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by
executives exercising options or selling shares during periods of share buybacks.
Stock Distributions: Splits and
Dividends
General Recommendation:
Generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less
than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.
Tracking
Stock
General Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:
| |
◾ |
|
Adverse governance changes; |
| |
◾ |
|
Excessive increases in authorized capital stock; |
| |
◾ |
|
Unfair method of distribution; |
| |
◾ |
|
Diminution of voting rights; |
| |
◾ |
|
Adverse conversion features; |
| |
◾ |
|
Negative impact on stock option plans; and |
| |
◾ |
|
Alternatives such as spin-off. |
Restructuring
Appraisal Rights
General Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal.
Asset
Purchases
General Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors:
| |
◾ |
|
Financial and strategic benefits; |
| |
◾ |
|
How the deal was negotiated; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
38 of 82 |
|
| |
◾ |
|
Other alternatives for the business; and |
Asset Sales
General Recommendation: Vote case-by-case on asset sales, considering the
following factors:
| |
◾ |
|
Impact on the balance sheet/working capital; |
| |
◾ |
|
Potential elimination of diseconomies; |
| |
◾ |
|
Anticipated financial and operating benefits; |
| |
◾ |
|
Anticipated use of funds; |
| |
◾ |
|
Value received for the asset; |
| |
◾ |
|
How the deal was negotiated; and |
Bundled Proposals
General Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the
packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals.
Conversion of Securities
General Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the
conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.
Vote for the
conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy
Plans/Reverse Leveraged Buyouts/Wrap Plans
General Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating:
| |
◾ |
|
Dilution to existing shareholders’ positions; |
| |
◾ |
|
Terms of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties;
exit strategy; |
| |
◾ |
|
Financial issues - company’s financial situation; degree of need for capital; use of proceeds; effect of the
financing on the company’s cost of capital; |
| |
◾ |
|
Management’s efforts to pursue other alternatives; |
| |
◾ |
|
Control issues - change in management; change in control, guaranteed board and committee seats; standstill provisions;
voting agreements; veto power over certain corporate actions; and |
| |
◾ |
|
Conflict of interest - arm’s length transaction, managerial incentives. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
39 of 82 |
|
Vote for the debt restructuring if it is
expected that the company will file for bankruptcy if the transaction is not approved.
Formation of Holding Company
General Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into consideration the following:
| |
◾ |
|
The reasons for the change; |
| |
◾ |
|
Any financial or tax benefits; |
| |
◾ |
|
Increases in capital structure; and |
| |
◾ |
|
Changes to the articles of incorporation or bylaws of the company. |
Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include
either of the following:
| |
◾ |
|
Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or
|
| |
◾ |
|
Adverse changes in shareholder rights. |
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
General Recommendation: Vote case-by-case on going private transactions, taking into account the following:
| |
◾ |
|
How the deal was negotiated; |
| |
◾ |
|
Other alternatives/offers considered; and |
Vote case-by-case on going dark transactions, determining whether the
transaction enhances shareholder value by taking into consideration:
| |
◾ |
|
Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market
research of the stock); and |
| |
◾ |
|
Balanced interests of continuing vs. cashed-out shareholders, taking into account
the following: |
| |
◾ |
|
Are all shareholders able to participate in the transaction? |
| |
◾ |
|
Will there be a liquid market for remaining shareholders following the transaction? |
| |
◾ |
|
Does the company have strong corporate governance? |
| |
◾ |
|
Will insiders reap the gains of control following the proposed transaction? and |
| |
◾ |
|
Does the state of incorporation have laws requiring continued reporting that may benefit shareholders?
|
Joint Ventures
General Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following:
| |
◾ |
|
Percentage of assets/business contributed; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
40 of 82 |
|
| |
◾ |
|
Financial and strategic benefits; |
| |
◾ |
|
Other alternatives; and |
Liquidations
General Recommendation: Vote case-by-case on liquidations, taking into account
the following:
| |
◾ |
|
Management’s efforts to pursue other alternatives; |
| |
◾ |
|
Appraisal value of assets; and |
| |
◾ |
|
The compensation plan for executives managing the liquidation. |
Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
Mergers and Acquisitions
General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing
factors including:
| |
◾ |
|
Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While
the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale. |
| |
◾ |
|
Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause
closer scrutiny of a deal. |
| |
◾ |
|
Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and
revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
| |
◾ |
|
Negotiations and process - Were the terms of the transaction negotiated at
arm’s-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation “wins” can also signify the deal makers’
competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. |
| |
◾ |
|
Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as
compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these
interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the “ISS Transaction Summary” section of this report is an aggregate figure that
can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
|
| |
◾ |
|
Governance - Will the combined company have a better or worse governance profile than the current governance
profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
41 of 82 |
|
Private
Placements/Warrants/Convertible Debentures
General Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration:
| |
◾ |
|
Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be
weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event
to trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to
trigger the dilutive event. |
| |
◾ |
|
Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features,
termination penalties, exit strategy): |
| |
◾ |
|
The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial
condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement. |
| |
◾ |
|
When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or
premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry, and anticipation of future performance. |
| |
◾ |
|
The company’s financial condition; |
| |
◾ |
|
Degree of need for capital; |
| |
◾ |
|
Effect of the financing on the company’s cost of capital; |
| |
◾ |
|
Current and proposed cash burn rate; and |
| |
◾ |
|
Going concern viability and the state of the capital and credit markets. |
| |
◾ |
|
Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A
fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger, or sale of part or all of the company. |
| |
◾ |
|
Guaranteed board and committee seats; |
| |
◾ |
|
Veto power over certain corporate actions; and |
| |
◾ |
|
Minority versus majority ownership and corresponding minority discount or majority control premium. |
| |
◾ |
|
Conflicts of interest should be viewed from the perspective of the company and the investor; and |
| |
◾ |
|
Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder
interests? |
| |
◾ |
|
The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be
addressed by analyzing the one-day impact on the unaffected stock price. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
42 of 82 |
|
Vote for the private placement, or for the
issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan (Bankruptcy)
General Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to:
| |
◾ |
|
Estimated value and financial prospects of the reorganized company; |
| |
◾ |
|
Percentage ownership of current shareholders in the reorganized company; |
| |
◾ |
|
Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an
Official Equity Committee); |
| |
◾ |
|
The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);
|
| |
◾ |
|
Existence of a superior alternative to the plan of reorganization; and |
| |
◾ |
|
Governance of the reorganized company. |
Special Purpose Acquisition Corporations (SPACs)
General Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following:
| |
◾ |
|
Valuation - Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness
opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to
the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target if it is a private entity. |
| |
◾ |
|
Market reaction - How has the market responded to the proposed deal? A negative market reaction may be a
cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
| |
◾ |
|
Deal timing - A main driver for most transactions is that the SPAC charter typically requires the deal to be
complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date. |
| |
◾ |
|
Negotiations and process - What was the process undertaken to identify potential target companies within
specified industry or location specified in charter? Consider the background of the sponsors. |
| |
◾ |
|
Conflicts of interest - How are sponsors benefiting from the transaction compared to IPO shareholders?
Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter
requires that the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a
transaction to be completed within the 18-24-month timeframe. |
| |
◾ |
|
Voting agreements - Are the sponsors entering into enter into any voting agreements/tender offers with
shareholders who are likely to vote against the proposed merger or exercise conversion rights? |
| |
◾ |
|
Governance - What is the impact of having the SPAC CEO or founder on key committees following the proposed
merger? |
Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions
The main purpose of SPACs is to identify and acquire a viable target within a specified timeframe, and failure to achieve this objective within the
allotted time calls into question management’s ability to execute its primary objective. The end of that timeframe is generally referred to as the termination date.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
43 of 82 |
|
General Recommendation: Generally
support requests to extend the termination date by up to one year from the SPAC’s original termination date (inclusive of any built-in extension options, and accounting for prior extension
requests).
Other factors that may be considered include: any added incentives, business combination status, other amendment terms, and, if
applicable, use of money in the trust fund to pay excise taxes on redeemed shares.
Spin-offs
General Recommendation: Vote case-by-case on spin-offs, considering:
| |
◾ |
|
Tax and regulatory advantages; |
| |
◾ |
|
Planned use of the sale proceeds; |
| |
◾ |
|
Benefits to the parent company; |
| |
◾ |
|
Corporate governance changes; and |
| |
◾ |
|
Changes in the capital structure. |
Value Maximization Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by:
| |
◾ |
|
Hiring a financial advisor to explore strategic alternatives; |
| |
◾ |
|
Selling the company; or |
| |
◾ |
|
Liquidating the company and distributing the proceeds to shareholders. |
These proposals should be evaluated based on the following factors:
| |
◾ |
|
Prolonged poor performance with no turnaround in sight; |
| |
◾ |
|
Signs of entrenched board and management (such as the adoption of takeover defenses); |
| |
◾ |
|
Strategic plan in place for improving value; |
| |
◾ |
|
Likelihood of receiving reasonable value in a sale or dissolution; and |
| |
◾ |
|
The company actively exploring its strategic options, including retaining a financial advisor. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
44 of 82 |
|
5. Compensation
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and
director compensation programs:
| |
1. |
Maintain appropriate pay-for-performance
alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over
the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; |
| |
2. |
Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or
indefinite contracts, excessive severance packages, and guaranteed compensation; |
| |
3. |
Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs
by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); |
| |
4. |
Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of
informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; and |
| |
5. |
Avoid inappropriate pay to non-executive directors: This principle recognizes the
interests of shareholders in ensuring that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level,
it may incorporate a variety of generally accepted best practices. |
Advisory Votes on Executive
Compensation—Management Proposals (Say-on-Pay)
General Recommendation: Vote case-by-case on ballot items related to executive
pay and practices, as well as certain aspects of outside director compensation.
Vote against Advisory Votes on Executive Compensation
(Say-on-Pay or “SOP”) if:
| |
◾ |
|
There is an unmitigated misalignment between CEO pay and company performance ( pay for
performance); |
| |
◾ |
|
The company maintains significant problematic pay practices; or |
| |
◾ |
|
The board exhibits a significant level of poor communication and responsiveness to
shareholders. |
Vote against or withhold from the members of the Compensation Committee and potentially the full board if:
| |
◾ |
|
There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;
|
| |
◾ |
|
The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes
cast; |
| |
◾ |
|
The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or
|
| |
◾ |
|
The situation is egregious. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
45 of 82 |
|
Primary Evaluation Factors for Executive
Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to
identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the S&P1500, Russell 3000, or Russell 3000E Indices17, this
analysis considers the following:
| |
1. |
Peer Group18 Alignment: |
| |
◾ |
|
The degree of alignment between the company’s annualized TSR rank and the CEO’s annualized total pay rank
within a peer group, each measured over a three-year period. |
| |
◾ |
|
The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year
period. |
| |
◾ |
|
The multiple of the CEO’s total pay relative to the peer group median in the most recent fiscal year.
|
| |
2. |
Absolute Alignment19 – the absolute alignment between
the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period. |
If the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our analysis
may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
| |
◾ |
|
The ratio of performance- to time-based incentive awards; |
| |
◾ |
|
The overall ratio of performance-based compensation to fixed or discretionary pay; |
| |
◾ |
|
The rigor of performance goals; |
| |
◾ |
|
The complexity and risks around pay program design; |
| |
◾ |
|
The transparency and clarity of disclosure; |
| |
◾ |
|
The company’s peer group benchmarking practices; |
| |
◾ |
|
Financial/operational results, both absolute and relative to peers; |
| |
◾ |
|
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards); |
| |
◾ |
|
Realizable pay20 compared to grant pay; and
|
| |
◾ |
|
Any other factors deemed relevant. |
17 The Russell
3000E Index includes approximately 4,000 of the largest U.S. equity securities.
18 The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company’s
selected peers’ GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of
the company’s market cap. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
19 Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
20 ISS research reports include realizable pay for S&P1500 companies.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
46 of 82 |
|
Problematic Pay
Practices
Problematic pay elements are generally evaluated
case-by-case considering the context of a company’s overall pay program and demonstrated
pay-for-performance philosophy. The focus is on executive compensation practices that contravene the global pay principles, including:
| |
◾ |
|
Problematic practices related to non-performance-based compensation elements;
|
| |
◾ |
|
Incentives that may motivate excessive risk-taking or present a windfall risk; and |
| |
◾ |
|
Pay decisions that circumvent
pay-for-performance, such as options backdating or waiving performance requirements. |
The list of examples below highlights certain problematic practices that carry significant weight in this overall consideration and may result
in adverse vote recommendations:
| |
◾ |
|
Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and
voluntary surrender of underwater options); |
| |
◾ |
|
Extraordinary perquisites or tax gross-ups; |
| |
◾ |
|
New or materially amended agreements that provide for: |
| |
◾ |
|
Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent
bonus); |
| |
◾ |
|
CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or
“modified single” triggers) or in connection with a problematic Good Reason definition; |
| |
◾ |
|
CIC excise tax gross-up entitlements (including “modified” gross-ups); and/or |
| |
◾ |
|
Multi-year guaranteed awards that are not at risk due to rigorous performance conditions; |
| |
◾ |
|
Liberal CIC definition combined with any single-trigger CIC benefits; |
| |
◾ |
|
Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of
pay programs and practices applicable to the EMI’s executives is not possible; |
| |
◾ |
|
Severance payments made when the termination is not clearly disclosed as involuntary (for example, a termination without
cause or resignation for good reason); and/or |
| |
◾ |
|
Any other provision or practice deemed to be egregious and present a significant risk to investors. |
The above examples are not an exhaustive list. Please refer to ISS’ U.S.
Compensation Policies FAQ document for additional detail on specific pay practices that have been identified as problematic and may lead to negative vote recommendations.
Options Backdating
The following
factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
| |
◾ |
|
Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;
|
| |
◾ |
|
Duration of options backdating; |
| |
◾ |
|
Size of restatement due to options backdating; |
| |
◾ |
|
Corrective actions taken by the board or compensation committee, such as canceling or
re-pricing backdated options, the recouping of option gains on backdated grants; and |
| |
◾ |
|
Adoption of a grant policy that prohibits backdating and creates a fixed grant schedule or window period for equity grants
in the future. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
47 of 82 |
|
Compensation Committee
Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
| |
◾ |
|
Failure to respond to majority-supported shareholder proposals on executive pay topics; or |
| |
◾ |
|
Failure to adequately respond to the company’s previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account: |
| |
◾ |
|
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated); |
| |
◾ |
|
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
| |
◾ |
|
Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
| |
◾ |
|
Other recent compensation actions taken by the company; |
| |
◾ |
|
Whether the issues raised are recurring or isolated; |
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)
General Recommendation: Vote for annual advisory votes on
compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
General Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of existing
change-in-control arrangements maintained with named executive officers but also considering new or extended arrangements.
Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude,
and/or timing of issue(s):
| |
◾ |
|
Single- or modified-single-trigger cash severance; |
| |
◾ |
|
Single-trigger acceleration of unvested equity awards; |
| |
◾ |
|
Full acceleration of equity awards granted shortly before the change in control; |
| |
◾ |
|
Acceleration of performance awards above the target level of performance without compelling rationale;
|
| |
◾ |
|
Excessive cash severance (generally >3x base salary and bonus); |
| |
◾ |
|
Excise tax gross-ups triggered and payable; |
| |
◾ |
|
Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or
|
| |
◾ |
|
Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary
equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or |
| |
◾ |
|
The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute
advisory vote. |
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis.
However, the presence of multiple legacy problematic features will also be closely scrutinized.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
48 of 82 |
|
In cases where the golden parachute vote is
incorporated into a company’s advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
Please refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
General Recommendation: Vote case-by-case on certain equity-based
compensation plans21 depending on a
combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an “Equity Plan
Scorecard” (EPSC) approach with three pillars:
| |
◾ |
|
Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap
peers, measured by the company’s estimated Shareholder Value Transfer (SVT) in relation to peers and considering both: |
| |
◾ |
|
SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;
and |
| |
◾ |
|
SVT based only on new shares requested plus shares remaining for future grants. |
| |
◾ |
|
Quality of disclosure around vesting upon a change in control (CIC); |
| |
◾ |
|
Discretionary vesting authority; |
| |
◾ |
|
Liberal share recycling on various award types; |
| |
◾ |
|
Lack of minimum vesting period for grants made under the plan; and |
| |
◾ |
|
Dividends payable prior to award vesting. |
| |
◾ |
|
The company’s three-year burn rate relative to its industry/market cap peers; |
| |
◾ |
|
Vesting requirements in CEO’s recent equity grants (3-year look-back);
|
| |
◾ |
|
The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by
the average annual shares granted in the prior three years); |
| |
◾ |
|
The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
|
| |
◾ |
|
Whether the company maintains a sufficient claw-back policy; and |
| |
◾ |
|
Whether the company maintains sufficient post-exercise/vesting share-holding requirements. |
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’
interests, or if any of the following egregious factors (“overriding factors”) apply:
| |
◾ |
|
Awards may vest in connection with a liberal
change-of-control definition; |
| |
◾ |
|
The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly
permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing – for non-listed companies); |
| |
◾ |
|
The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; |
| |
◾ |
|
The plan is excessively dilutive to shareholders’ holdings; |
| |
◾ |
|
The plan contains an evergreen (automatic share replenishment) feature; or |
| |
◾ |
|
Any other plan features are determined to have a significant negative impact on shareholder interests.
|
21 Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock
option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further
evaluated case-by-case.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
49 of 82 |
|
Further Information on certain EPSC
Factors:
Shareholder Value Transfer (SVT)
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the
amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans,
and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types
of awards (for example, full-value awards), the assumption is made that all awards to be granted will be the most expensive types.
For proposals
that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using
the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables
most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size, and cash compensation into the industry cap equations to
arrive at the company’s benchmark.22
Three-Year
Value-Adjusted Burn Rate
A “Value-Adjusted Burn Rate” is used for stock plan evaluations. Value-Adjusted Burn Rate
benchmarks are calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company’s GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year’s burn-rate benchmark.
The Value-Adjusted Burn Rate is calculated as follows:
Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) /
(Weighted average common shares * stock price).
Egregious Factors
Liberal Change in Control Definition
Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal
definition of change in control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a
“potential” takeover, shareholder approval of a merger or other transactions, or similar language.
22 For plans evaluated under the Equity Plan Scorecard policy, the company’s SVT benchmark is
considered along with other factors.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
50 of 82 |
|
Repricing Provisions
Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without
prior shareholder approval. “Repricing” typically includes the ability to do any of the following:
| |
◾ |
|
Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;
|
| |
◾ |
|
Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise
price of the original options or SARs; |
| |
◾ |
|
Cancel underwater options in exchange for stock awards; or |
| |
◾ |
|
Provide cash buyouts of underwater options. |
While the above cover most types of repricing, ISS may view other provisions as akin to repricing depending on the facts and circumstances.
Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by ISS),
without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote against plans that do not expressly prohibit
repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.
Problematic Pay Practices or Significant
Pay-for-Performance Disconnect
If the equity plan on the
ballot is a vehicle for problematic pay practices, vote against the plan.
ISS may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment. Considerations in voting against the equity plan may include, but are not limited to:
| |
◾ |
|
Severity of the pay-for-performance
misalignment; |
| |
◾ |
|
Whether problematic equity grant practices are driving the misalignment; and/or |
| |
◾ |
|
Whether equity plan awards have been heavily concentrated to the CEO and/or the other NEOs. |
Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
General Recommendation: Vote case-by-case on amendments to cash and equity incentive plans.
Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| |
◾ |
|
Addresses administrative features only; or |
| |
◾ |
|
Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of
independent directors, per ISS’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time for any reason (including after the company’s initial public
offering), or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below). |
Vote against proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| |
◾ |
|
Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of
independent directors, per ISS’ Classification of Directors. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
51 of 82 |
|
Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company’s IPO and/or proposals that bundle material
amendment(s) other than those for Section 162(m) purposes.
Vote
case-by-case on all other proposals to amend equity incentive plans, considering the following:
| |
◾ |
|
If the proposal requests additional shares and/or the amendments include a term extension or addition of full value awards
as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments; |
| |
◾ |
|
If the plan is being presented to shareholders for the first time (including after the company’s IPO), whether or not
additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments; and |
| |
◾ |
|
If there is no request for additional shares and the amendments do not include a term extension or addition of full value
awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown only for informational purposes. |
In the first two case-by-case evaluation scenarios, the EPSC
evaluation/score is the more heavily weighted consideration.
Specific Treatment of Certain Award Types in Equity Plan
Evaluations
Dividend Equivalent Rights
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the
binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder
equity to employees and non-employee directors and this cost should be captured.
Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the
share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Other Compensation Plans
401(k) Employee Benefit Plans
General Recommendation: Vote for proposals to implement a 401(k) savings plan for
employees.
Employee Stock Ownership Plans (ESOPs)
General Recommendation: Vote for proposals to implement an ESOP or increase authorized
shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
52 of 82 |
|
Employee Stock
Purchase Plans—Qualified Plans
General Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply:
| |
◾ |
|
Purchase price is at least 85 percent of fair market value; |
| |
◾ |
|
Offering period is 27 months or less; and |
| |
◾ |
|
The number of shares allocated to the plan is 10 percent or less of the outstanding shares. |
Vote against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.
Employee Stock Purchase Plans—Non-Qualified Plans
General
Recommendation: Vote case-by-case on nonqualified
employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features:
| |
◾ |
|
Broad-based participation; |
| |
◾ |
|
Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;
|
| |
◾ |
|
Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of
20 percent from market value; and |
| |
◾ |
|
No discount on the stock price on the date of purchase when there is a company matching contribution.
|
Vote against nonqualified employee stock purchase plans when the plan features do not meet all of the above criteria. If the
matching contribution or effective discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of the assessment.
Option Exchange Programs/Repricing Options
General Recommendation: Vote case-by-case on management proposals
seeking approval to exchange/reprice options taking into consideration:
| |
◾ |
|
Historic trading patterns--the stock price should not be so volatile that the
options are likely to be back “in-the-money” over the near term; |
| |
◾ |
|
Rationale for the re-pricing--was the stock
price decline beyond management’s control?; |
| |
◾ |
|
Is this a value-for-value exchange?;
|
| |
◾ |
|
Are surrendered stock options added back to the plan reserve?; |
| |
◾ |
|
Timing—repricing should occur at least one year out from any precipitous drop in company’s stock price;
|
| |
◾ |
|
Option vesting—does the new option vest immediately or is there a black-out
period?; |
| |
◾ |
|
Term of the option--the term should remain the same as that of the replaced option;
|
| |
◾ |
|
Exercise price—should be set at fair market or a premium to market; and |
| |
◾ |
|
Participants—executive officers and directors must be excluded. |
If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration
the company’s total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent,
rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the
company’s stock price demonstrates poor timing
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
53 of 82 |
|
and warrants additional scrutiny. Also,
consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take
advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder vote.
Stock Plans in Lieu of Cash
General Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.
Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not
dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture
the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
General Recommendation: One-time Transfers: Vote
against or withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval.
Vote case-by-case on one-time
transfers. Vote for if:
| |
◾ |
|
Executive officers and non-employee directors are excluded from participating;
|
| |
◾ |
|
Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing
models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and |
| |
◾ |
|
There is a two-year minimum holding period for sale proceeds (cash or stock) for
all participants. |
Additionally, management should provide a clear explanation of why options are being transferred to a
third-party institution and whether the events leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote
against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure, and mechanics must be disclosed to shareholders.
The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
| |
◾ |
|
Cost of the program and impact of the TSOs on company’s total option expense; and |
| |
◾ |
|
Option repricing policy. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
54 of 82 |
|
Amendments to existing plans that allow for
introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.
Director Compensation
Shareholder Ratification of Director Pay Programs
General Recommendation: Vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:
| |
◾ |
|
If the equity plan under which non-employee director grants are made is on the
ballot, whether or not it warrants support; and |
| |
◾ |
|
An assessment of the following qualitative factors: |
| |
◾ |
|
The relative magnitude of director compensation as compared to companies of a similar profile; |
| |
◾ |
|
The presence of problematic pay practices relating to director compensation; |
| |
◾ |
|
Director stock ownership guidelines and holding requirements; |
| |
◾ |
|
Equity award vesting schedules; |
| |
◾ |
|
The mix of cash and equity-based compensation; |
| |
◾ |
|
Meaningful limits on director compensation; |
| |
◾ |
|
The availability of retirement benefits or perquisites; and |
| |
◾ |
|
The quality of disclosure surrounding director compensation. |
Equity Plans for Non-Employee Directors
General Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on:
| |
◾ |
|
The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the
company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; |
| |
◾ |
|
The company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and
|
| |
◾ |
|
The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk).
|
On occasion, non-employee director stock plans will exceed the plan cost or burn-rate
benchmarks when combined with employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative
factors:
| |
◾ |
|
The relative magnitude of director compensation as compared to companies of a similar profile; |
| |
◾ |
|
The presence of problematic pay practices relating to director compensation; |
| |
◾ |
|
Director stock ownership guidelines and holding requirements; |
| |
◾ |
|
Equity award vesting schedules; |
| |
◾ |
|
The mix of cash and equity-based compensation; |
| |
◾ |
|
Meaningful limits on director compensation; |
| |
◾ |
|
The availability of retirement benefits or perquisites; and |
| |
◾ |
|
The quality of disclosure surrounding director compensation. |
Non-Employee Director Retirement Plans
General Recommendation: Vote
against retirement plans for non-employee directors. Vote for shareholder proposals to eliminate retirement plans for non-employee directors.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
55 of 82 |
|
Shareholder Proposals on
Compensation
Bonus Banking/Bonus Banking “Plus”
General Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the
named executive officers or a wider group of employees), taking into account the following factors:
| |
◾ |
|
The company’s past practices regarding equity and cash compensation; |
| |
◾ |
|
Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at
least 50 percent for full tenure); and |
| |
◾ |
|
Whether the company has a rigorous claw-back policy in place. |
Compensation Consultants—Disclosure of Board or Company’s Utilization
General Recommendation: Generally
vote for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid.
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
General Recommendation: Generally vote for shareholder proposals seeking additional
disclosure of executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome
to the company.
Generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form
of compensation (such as types of compensation elements or specific metrics) to be used for executive or directors.
Generally vote against
shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Vote case-by-case on all other shareholder proposals regarding executive
and director pay, taking into account relevant factors, including but not limited to: company performance, pay level and design versus peers, history of compensation concerns or
pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.
Golden Coffins/Executive Death Benefits
General Recommendation: Generally vote for proposals calling for companies to adopt a
policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses,
accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based
employee population is eligible.
Hold Equity Past Retirement or for a Significant Period of Time
General Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors
will be taken into account:
| |
◾ |
|
The percentage/ratio of net shares required to be retained; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
56 of 82 |
|
| |
◾ |
|
The time period required to retain the shares; |
| |
◾ |
|
Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness
of such requirements; |
| |
◾ |
|
Whether the company has any other policies aimed at mitigating risk taking by executives; |
| |
◾ |
|
Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested
holding period/retention ratio or the company’s existing requirements; and |
| |
◾ |
|
Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus.
|
Pay Disparity
General Recommendation: Vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The following factors will
be considered:
| |
◾ |
|
The company’s current level of disclosure of its executive compensation setting process, including how the company
considers pay disparity; |
| |
◾ |
|
If any problematic pay practices or
pay-for-performance concerns have been identified at the company; and |
| |
◾ |
|
The level of shareholder support for the company’s pay programs. |
Generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio in a specific way to set or limit executive pay.
Pay for Performance/Performance-Based Awards
General Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the
board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
| |
◾ |
|
First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent
options or restricted stock, indexed options, or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top
executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards;
and |
| |
◾ |
|
Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based
program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor
design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test. |
In general, vote for the shareholder proposal if the company does not meet both of the above two steps.
Pay for Superior Performance
General Recommendation: Vote case-by-case on shareholder proposals that request the board establish a pay-for-superior
performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles:
| |
◾ |
|
Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group
median; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
57 of 82 |
|
| |
◾ |
|
Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested,
equity awards; |
| |
◾ |
|
Provide the strategic rationale and relative weightings of the financial and
non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan; |
| |
◾ |
|
Establish performance targets for each plan financial metric relative to the performance of the company’s peer
companies; and |
| |
◾ |
|
Limit payment under the annual and performance-vested long-term incentive components of the plan to when the
company’s performance on its selected financial performance metrics exceeds peer group median performance. |
Consider the
following factors in evaluating this proposal:
| |
◾ |
|
What aspects of the company’s annual and long-term equity incentive programs are performance driven?
|
| |
◾ |
|
If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates
disclosed to shareholders or are they benchmarked against a disclosed peer group? |
| |
◾ |
|
Can shareholders assess the correlation between pay and performance based on the current disclosure? and
|
| |
◾ |
|
What type of industry and stage of business cycle does the company belong to? |
Pre-Arranged Trading Plans (10b5-1 Plans)
General Recommendation: Generally vote for shareholder proposals calling
for the addition of certain safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include:
| |
◾ |
|
Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K; |
| |
◾ |
|
Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary
circumstances, as determined by the board; |
| |
◾ |
|
Request that a certain number of days that must elapse between adoption or amendment of a
10b5-1 Plan and initial trading under the plan; |
| |
◾ |
|
Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
|
| |
◾ |
|
An executive may not trade in company stock outside the 10b5-1 Plan; and
|
| |
◾ |
|
Trades under a 10b5-1 Plan must be handled by a broker who does not handle other
securities transactions for the executive. |
Prohibit Outside CEOs from Serving on Compensation Committees
General Recommendation: Generally vote against proposals seeking a policy
to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.
Recoupment of Incentive or Stock Compensation in Specified Circumstances
General Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to
have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company’s financial position or reputation, or if the senior executive failed to manage or
monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies that permit recoupment in cases where an executive’s fraud, misconduct, or negligence significantly
contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant financial restatements.
Misconduct, negligence, or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
58 of 82 |
|
In considering whether to support such
shareholder proposals, ISS will take into consideration the following factors:
| |
◾ |
|
If the company has adopted a formal recoupment policy; |
| |
◾ |
|
The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock
compensation; |
| |
◾ |
|
Whether the company has chronic restatement history or material financial problems; |
| |
◾ |
|
Whether the company’s policy substantially addresses the concerns raised by the proponent; |
| |
◾ |
|
Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; and
|
| |
◾ |
|
Any other relevant factors. |
Severance and Golden Parachute Agreements
General Recommendation: Vote case-by-case on shareholder proposals requiring that executive severance (including change-in-control related)
arrangements or payments be submitted for shareholder ratification.
Factors that will be considered include, but are not limited to:
| |
◾ |
|
The company’s severance or
change-in-control agreements in place, and the presence of problematic features (such as excessive severance entitlements, single triggers, excise tax gross-ups, etc.); |
| |
◾ |
|
Any existing limits on cash severance payouts or policies which require shareholder ratification of severance payments
exceeding a certain level; |
| |
◾ |
|
Any recent severance-related controversies; and |
| |
◾ |
|
Whether the proposal is overly prescriptive, such as requiring shareholder approval of severance that does not exceed
market norms. |
Share Buyback Impact on Incentive Program Metrics
General Recommendation: Vote case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following factors:
| |
◾ |
|
The frequency and timing of the company’s share buybacks; |
| |
◾ |
|
The use of per-share metrics in incentive plans; |
| |
◾ |
|
The effect of recent buybacks on incentive metric results and payouts; and |
| |
◾ |
|
Whether there is any indication of metric result manipulation. |
Supplemental Executive Retirement Plans (SERPs)
General Recommendation: Generally vote for shareholder proposals requesting to put
extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement
plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.
Tax Gross-Up Proposals
General Recommendation: Generally vote for proposals calling for companies to adopt a
policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement
applicable to management employees of the company, such as a relocation or expatriate tax equalization policy.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
59 of 82 |
|
Termination of
Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
General Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of
employment prior to severance payment and/or eliminating accelerated vesting of unvested equity.
The following factors will be considered:
| |
◾ |
|
The company’s current treatment of equity upon employment termination and/or in change-in-control situations (i.e., vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.); and
|
| |
◾ |
|
Current employment agreements, including potential poor pay practices such as
gross-ups embedded in those agreements. |
Generally vote for proposals seeking a policy
that prohibits automatic acceleration of the vesting of equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of
any related performance goals between the award date and the change in control).
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
60 of 82 |
|
6.
Routine/Miscellaneous
Adjourn Meeting
General Recommendation: Generally vote against proposals
to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.
Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against
proposals if the wording is too vague or if the proposal includes “other business.”
Amend Quorum Requirements
General
Recommendation: Vote case-by-case on proposals to reduce quorum requirements for shareholder meetings below a majority
of the shares outstanding, taking into consideration:
| |
◾ |
|
The new quorum threshold requested; |
| |
◾ |
|
The rationale presented for the reduction; |
| |
◾ |
|
The market capitalization of the company (size, inclusion in indices); |
| |
◾ |
|
The company’s ownership structure; |
| |
◾ |
|
Previous voter turnout or attempts to achieve quorum; |
| |
◾ |
|
Any provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve
sufficiently; and |
| |
◾ |
|
Other factors as appropriate. |
In general, a quorum threshold kept as close to a majority of shares outstanding as is achievable is preferred.
Vote case-by-case on directors who unilaterally lower the quorum
requirements below a majority of the shares outstanding, taking into consideration the factors listed above.
Amend Minor Bylaws
General
Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections).
Change Company Name
General Recommendation: Vote for proposals to change the
corporate name unless there is compelling evidence that the change would adversely impact shareholder value.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
61 of 82 |
|
Change Date, Time, or Location of Annual Meeting
General Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is
unreasonable.
Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling
or location is unreasonable.
Other Business
General Recommendation: Vote against proposals to approve
other business when it appears as a voting item.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
62 of 82 |
|
7. Social and
Environmental Issues
Global Approach – E&S Shareholder Proposals
ISS applies a common approach globally to evaluating social and environmental proposals which cover a wide range of topics, including consumer and
product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations
focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
General Recommendation: Generally vote case-by-case, examining
primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors will be considered:
| |
◾ |
|
If the issues presented in the proposal are being appropriately or effectively dealt with through legislation or government
regulation; |
| |
◾ |
|
If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
|
| |
◾ |
|
Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive;
|
| |
◾ |
|
The company’s approach compared with any industry standard practices for addressing the issue(s) raised by the
proposal; |
| |
◾ |
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s practices
related to the issue(s) raised in the proposal; |
| |
◾ |
|
If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is
currently available to shareholders from the company or from other publicly available sources; and |
| |
◾ |
|
If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or
confidential information that could place the company at a competitive disadvantage. |
Endorsement of
Principles
General Recommendation: Generally
vote against proposals seeking a company’s endorsement of principles that support a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue that is beyond its own control and
may limit its flexibility with respect to future developments.
Management and the board should be afforded the flexibility to make decisions
on specific public policy positions based on their own assessment of the most beneficial strategies for the company.
Animal
Welfare
Animal Welfare Policies
General Recommendation: Generally vote
for proposals seeking a report on a company’s animal welfare standards, or animal welfare-related risks, unless:
| |
◾ |
|
The company has already published a set of animal welfare standards and monitors compliance; |
| |
◾ |
|
The company’s standards are comparable to industry peers; and |
| |
◾ |
|
There are no recent significant fines, litigation, or controversies related to the company’s and/or its
suppliers’ treatment of animals. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
63 of 82 |
|
Animal Testing
General
Recommendation: Generally vote against proposals to phase out the use of animals in product testing,
unless:
| |
◾ |
|
The company is conducting animal testing programs that are unnecessary or not required by regulation;
|
| |
◾ |
|
The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or
|
| |
◾ |
|
There are recent, significant fines or litigation related to the company’s treatment of animals.
|
Animal Slaughter
General Recommendation: Generally vote against proposals
requesting the implementation of Controlled Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.
Vote case-by-case on proposals requesting a report on the feasibility of
implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at
the company.
Consumer Issues
Genetically Modified Ingredients
General Recommendation: Generally vote against proposals
requesting that a company voluntarily label genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities.
Vote case-by-case on proposals asking for a report on the
feasibility of labeling products containing GE ingredients, taking into account:
| |
◾ |
|
The potential impact of such labeling on the company’s business; |
| |
◾ |
|
The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this
disclosure compares with industry peer disclosure; and |
| |
◾ |
|
Company’s current disclosure on the feasibility of GE product labeling. |
Generally vote against proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of
this sort are better undertaken by regulators and the scientific community.
Generally vote against proposals to eliminate GE ingredients from the
company’s products, or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current
regulations.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
64 of 82 |
|
Reports on Potentially Controversial Business/Financial Practices
General Recommendation: Vote case-by-case on requests for reports on a
company’s potentially controversial business or financial practices or products, taking into account:
| |
◾ |
|
Whether the company has adequately disclosed mechanisms in place to prevent abuses; |
| |
◾ |
|
Whether the company has adequately disclosed the financial risks of the products/practices in question;
|
| |
◾ |
|
Whether the company has been subject to violations of related laws or serious controversies; and |
| |
◾ |
|
Peer companies’ policies/practices in this area. |
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug
Reimportation
General Recommendation:
Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry
norms in its product pricing practices.
Vote
case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
| |
◾ |
|
The potential for reputational, market, and regulatory risk exposure; |
| |
◾ |
|
Existing disclosure of relevant policies; |
| |
◾ |
|
Deviation from established industry norms; |
| |
◾ |
|
Relevant company initiatives to provide research and/or products to disadvantaged consumers; |
| |
◾ |
|
Whether the proposal focuses on specific products or geographic regions; |
| |
◾ |
|
The potential burden and scope of the requested report; and |
| |
◾ |
|
Recent significant controversies, litigation, or fines at the company. |
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless
such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or
constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
Product Safety and Toxic/Hazardous Materials
General Recommendation: Generally vote
for proposals requesting that a company report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or
product safety in its supply chain, unless:
| |
◾ |
|
The company already discloses similar information through existing reports such as a supplier code of conduct and/or a
sustainability report; |
| |
◾ |
|
The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply
chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; or |
| |
◾ |
|
The company has not been recently involved in relevant significant controversies, fines, or litigation.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
65 of 82 |
|
Vote
case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous
materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:
| |
◾ |
|
The company’s current level of disclosure regarding its product safety policies, initiatives, and oversight
mechanisms; |
| |
◾ |
|
Current regulations in the markets in which the company operates; and |
| |
◾ |
|
Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company.
|
Generally vote against resolutions requiring that a company reformulate its products.
Tobacco-Related Proposals
General Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products,
considering:
| |
◾ |
|
Recent related fines, controversies, or significant litigation; |
| |
◾ |
|
Whether the company complies with relevant laws and regulations on the marketing of tobacco; |
| |
◾ |
|
Whether the company’s advertising restrictions deviate from those of industry peers; |
| |
◾ |
|
Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and
|
| |
◾ |
|
Whether restrictions on marketing to youth extend to foreign countries. |
Vote case-by-case on proposals regarding second-hand smoke, considering;
| |
◾ |
|
Whether the company complies with all laws and regulations; |
| |
◾ |
|
The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and
|
| |
◾ |
|
The risk of any health-related liabilities. |
Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
Climate Change
Say on Climate (SoC) Management Proposals
General Recommendation:
Vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action
plan23, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:
| |
◾ |
|
The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other
market standards; |
23 Variations of this request also include climate transition related ambitions, or commitment
to reporting on the implementation of a climate plan.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
66 of 82 |
|
| |
◾ |
|
Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3); |
| |
◾ |
|
The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply
chain GHG emissions (Scopes 1, 2, and 3 if relevant); |
| |
◾ |
|
Whether the company has sought and received third-party approval that its targets are science-based; |
| |
◾ |
|
Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes
1, 2, and 3) by 2050; |
| |
◾ |
|
Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;
|
| |
◾ |
|
Whether the company’s climate data has received third-party assurance; |
| |
◾ |
|
Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;
|
| |
◾ |
|
Whether there are specific industry decarbonization challenges; and |
| |
◾ |
|
The company’s related commitment, disclosure, and performance compared to its industry peers. |
Say on Climate (SoC) Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its
upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following:
| |
◾ |
|
The completeness and rigor of the company’s climate-related disclosure; |
| |
◾ |
|
The company’s actual GHG emissions performance; |
| |
◾ |
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
its GHG emissions; and |
| |
◾ |
|
Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.
|
Climate Change/Greenhouse Gas (GHG) Emissions
General Recommendation: Generally vote for resolutions
requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks,
considering:
| |
◾ |
|
Whether the company already provides current, publicly-available information on the impact that climate change may have on
the company as well as associated company policies and procedures to address related risks and/or opportunities; |
| |
◾ |
|
The company’s level of disclosure compared to industry peers; and |
| |
◾ |
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate
change-related performance. |
Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company
operations and/or products and operations, unless:
| |
◾ |
|
The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the
company as well as associated company policies and procedures to address related risks and/or opportunities; |
| |
◾ |
|
The company’s level of disclosure is comparable to that of industry peers; or |
| |
◾ |
|
There are no significant, controversies, fines, penalties, or litigation associated with the company’s GHG emissions.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
67 of 82 |
|
Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
| |
◾ |
|
Whether the company provides disclosure of year-over-year GHG emissions performance data; |
| |
◾ |
|
Whether company disclosure lags behind industry peers; |
| |
◾ |
|
The company’s actual GHG emissions performance; |
| |
◾ |
|
The company’s current GHG emission policies, oversight mechanisms, and related initiatives; and
|
| |
◾ |
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
GHG emissions. |
Energy Efficiency
General Recommendation: Generally vote for proposals
requesting that a company report on its energy efficiency policies, unless:
| |
◾ |
|
The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy
efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or |
| |
◾ |
|
The proponent requests adoption of specific energy efficiency goals within specific timelines. |
Renewable Energy
General Recommendation: Generally vote for requests for
reports on the feasibility of developing renewable energy resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business.
Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s
evaluation of the feasibility and financial impact that such programs may have on the company.
Generally vote against proposals that call
for the adoption of renewable energy goals, taking into account:
| |
◾ |
|
The scope and structure of the proposal; |
| |
◾ |
|
The company’s current level of disclosure on renewable energy use and GHG emissions; and |
| |
◾ |
|
The company’s disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate
climate change risks. |
Diversity
Board Diversity
General Recommendation: Generally vote for requests for
reports on a company’s efforts to diversify the board, unless:
| |
◾ |
|
The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies
of similar size and business; or |
| |
◾ |
|
The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within
the company. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
68 of 82 |
|
Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
| |
◾ |
|
The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
|
| |
◾ |
|
The level of gender and racial minority representation that exists at the company’s industry peers;
|
| |
◾ |
|
The company’s established process for addressing gender and racial minority board representation;
|
| |
◾ |
|
Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
|
| |
◾ |
|
The independence of the company’s nominating committee; |
| |
◾ |
|
Whether the company uses an outside search firm to identify potential director nominees; and |
| |
◾ |
|
Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.
|
Equality of Opportunity
General Recommendation: Generally vote for proposals
requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data,
unless:
| |
◾ |
|
The company publicly discloses equal opportunity policies and initiatives in a comprehensive manner; |
| |
◾ |
|
The company already publicly discloses comprehensive workforce diversity data; or |
| |
◾ |
|
The company has no recent significant EEO-related violations or litigation.
|
Generally vote against proposals seeking information on the diversity efforts of suppliers and service providers. Such requests
may pose a significant burden on the company.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
General Recommendation: Generally vote
for proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome.
Generally vote against proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions regarding benefits should be
left to the discretion of the company.
Gender, Race/Ethnicity Pay Gap
General Recommendation: Vote case-by-case on requests for reports on a company’s pay data by gender or race/ ethnicity, or a report on a company’s policies and goals to reduce any
gender or race/ethnicity pay gaps, taking into account:
| |
◾ |
|
The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and
its compensation philosophy on fair and equitable compensation practices; |
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race,
or ethnicity pay gap issues; |
| |
◾ |
|
The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its
industry peers; and |
| |
◾ |
|
Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
69 of 82 |
|
Racial Equity and/or
Civil Rights Audit Guidelines
General Recommendation: Vote case-by-case on proposals asking a company to conduct an independent racial equity and/or civil rights audit, taking into account:
| |
◾ |
|
The company’s established process or framework for addressing racial inequity and discrimination internally;
|
| |
◾ |
|
Whether the company adequately discloses workforce diversity and inclusion metrics and goals; |
| |
◾ |
|
Whether the company has issued a public statement related to its racial justice efforts in recent years, or has committed
to internal policy review; |
| |
◾ |
|
Whether the company has engaged with impacted communities, stakeholders, and civil rights experts; |
| |
◾ |
|
The company’s track record in recent years of racial justice measures and outreach externally; and
|
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial
inequity or discrimination. |
Environment and Sustainability
Facility and Workplace Safety
General Recommendation: Vote case-by-case on requests for workplace safety reports, including reports on accident risk reduction efforts, taking into account:
| |
◾ |
|
The company’s current level of disclosure of its workplace health and safety performance data, health and safety
management policies, initiatives, and oversight mechanisms; |
| |
◾ |
|
The nature of the company’s business, specifically regarding company and employee exposure to health and safety
risks; |
| |
◾ |
|
Recent significant controversies, fines, or violations related to workplace health and safety; and |
| |
◾ |
|
The company’s workplace health and safety performance relative to industry peers. |
Vote case-by-case on resolutions requesting that a company report on
safety and/or security risks associated with its operations and/or facilities, considering:
| |
◾ |
|
The company’s compliance with applicable regulations and guidelines; |
| |
◾ |
|
The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance
monitoring; and |
| |
◾ |
|
The existence of recent, significant violations, fines, or controversy regarding the safety and security of the
company’s operations and/or facilities. |
Natural Capital- Related and/or Community Impact
Assessment Proposals
General Recommendation:
Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental
impact of company operations, considering:
| |
◾ |
|
Alignment of current disclosure of applicable company policies, metrics, risk assessment report(s) and risk management
procedures with any relevant, broadly accepted reporting frameworks; |
| |
◾ |
|
The impact of regulatory non-compliance, litigation, remediation, or reputational
loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations; |
| |
◾ |
|
The nature, purpose, and scope of the company’s operations in the specific region(s); |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
70 of 82 |
|
| |
◾ |
|
The degree to which company policies and procedures are consistent with industry norms; and |
| |
◾ |
|
The scope of the resolution. |
Hydraulic Fracturing
General Recommendation: Generally vote for proposals
requesting greater disclosure of a company’s (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations,
considering:
| |
◾ |
|
The company’s current level of disclosure of relevant policies and oversight mechanisms; |
| |
◾ |
|
The company’s current level of such disclosure relative to its industry peers; |
| |
◾ |
|
Potential relevant local, state, or national regulatory developments; and |
| |
◾ |
|
Controversies, fines, or litigation related to the company’s hydraulic fracturing operations. |
Operations in Protected Areas
General Recommendation: Generally vote for requests for
reports on potential environmental damage as a result of company operations in protected regions, unless:
| |
◾ |
|
Operations in the specified regions are not permitted by current laws or regulations; |
| |
◾ |
|
The company does not currently have operations or plans to develop operations in these protected regions; or
|
| |
◾ |
|
The company’s disclosure of its operations and environmental policies in these regions is comparable to industry
peers. |
Recycling
General Recommendation: Vote case-by-case on proposals to report on an existing recycling program, or adopt a new recycling program, taking into account:
| |
◾ |
|
The nature of the company’s business; |
| |
◾ |
|
The current level of disclosure of the company’s existing related programs; |
| |
◾ |
|
The timetable and methods of program implementation prescribed by the proposal; |
| |
◾ |
|
The company’s ability to address the issues raised in the proposal; and |
| |
◾ |
|
How the company’s recycling programs compare to similar programs of its industry peers. |
Sustainability Reporting
General Recommendation: Generally vote for proposals
requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:
| |
◾ |
|
The company already discloses similar information through existing reports or policies such as an environment, health, and
safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or |
| |
◾ |
|
The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified time frame. |
Water Issues
General Recommendation: Vote case-by-case on proposals requesting a company report on, or adopt a new policy on, water-related risks and concerns, taking into account:
| |
◾ |
|
The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
71 of 82 |
|
| |
◾ |
|
Whether or not the company’s existing water-related policies and practices are consistent with relevant
internationally recognized standards and national/local regulations; |
| |
◾ |
|
The potential financial impact or risk to the company associated with water-related concerns or issues; and
|
| |
◾ |
|
Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers.
|
General Corporate Issues
Charitable Contributions
General Recommendation: Vote against proposals restricting
a company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence,
management should determine which, and if, contributions are in the best interests of the company.
Data Security,
Privacy, and Internet Issues
General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and
management policies and procedures, considering:
| |
◾ |
|
The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech,
information access and management, and Internet censorship; |
| |
◾ |
|
Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of
information on the Internet; |
| |
◾ |
|
The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other
telecommunications; |
| |
◾ |
|
Applicable market-specific laws or regulations that may be imposed on the company; and |
| |
◾ |
|
Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship.
|
ESG Compensation-Related Proposals
General Recommendation: Vote case-by-case on proposals seeking a report or additional disclosure on the
company’s approach, policies, and practices on incorporating environmental and social criteria into its executive compensation strategy, considering:
| |
◾ |
|
The scope and prescriptive nature of the proposal; |
| |
◾ |
|
The company’s current level of disclosure regarding its environmental and social performance and governance;
|
| |
◾ |
|
The degree to which the board or compensation committee already discloses information on whether it has considered related
E&S criteria; and |
| |
◾ |
|
Whether the company has significant controversies or regulatory violations regarding social or environmental issues.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
72 of 82 |
|
Human Rights, Human
Capital Management, and International Operations
Human Rights Proposals
General Recommendation: Generally vote for proposals
requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed.
Vote case-by-case on proposals to implement company or company
supplier labor and/or human rights standards and policies, considering:
| |
◾ |
|
The degree to which existing relevant policies and practices are disclosed; |
| |
◾ |
|
Whether or not existing relevant policies are consistent with internationally recognized standards; |
| |
◾ |
|
Whether company facilities and those of its suppliers are monitored and how; |
| |
◾ |
|
Company participation in fair labor organizations or other internationally recognized human rights initiatives;
|
| |
◾ |
|
Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;
|
| |
◾ |
|
Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;
|
| |
◾ |
|
The scope of the request; and |
| |
◾ |
|
Deviation from industry sector peer company standards and practices. |
Vote case-by-case on proposals requesting that a company conduct an
assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering:
| |
◾ |
|
The degree to which existing relevant policies and practices are disclosed, including information on the implementation of
these policies and any related oversight mechanisms; |
| |
◾ |
|
The company’s industry and whether the company or its suppliers operate in countries or areas where there is a
history of human rights concerns; |
| |
◾ |
|
Recent significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and
whether the company has taken remedial steps; and |
| |
◾ |
|
Whether the proposal is unduly burdensome or overly prescriptive. |
Mandatory Arbitration
General Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory
arbitration on employment-related claims, taking into account:
| |
◾ |
|
The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace
claims; |
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of
mandatory arbitration agreements on workplace claims; and |
| |
◾ |
|
The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements
compared to its peers. |
Operations in High-Risk Markets
General Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk”
markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account:
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
73 of 82 |
|
| |
◾ |
|
The nature, purpose, and scope of the operations and business involved that could be affected by social or political
disruption; |
| |
◾ |
|
Current disclosure of applicable risk assessment(s) and risk management procedures; |
| |
◾ |
|
Compliance with U.S. sanctions and laws; |
| |
◾ |
|
Consideration of other international policies, standards, and laws; and |
| |
◾ |
|
Whether the company has been recently involved in recent, significant controversies, fines, or litigation related to its
operations in “high-risk” markets. |
Outsourcing/Offshoring
General Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated
with outsourcing/plant closures, considering:
| |
◾ |
|
Controversies surrounding operations in the relevant market(s); |
| |
◾ |
|
The value of the requested report to shareholders; |
| |
◾ |
|
The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and
|
| |
◾ |
|
The company’s existing human rights standards relative to industry peers. |
Sexual Harassment
General Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed
by a company’s failure to prevent workplace sexual harassment, taking into account:
| |
◾ |
|
The company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment;
|
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace
sexual harassment issues; and |
| |
◾ |
|
The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry
peers. |
Weapons and Military Sales
General Recommendation: Vote against reports on foreign
military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.
Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or
nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses,
and withdrawal from these contracts could have a negative impact on the company’s business.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
74 of 82 |
|
Political Activities
Lobbying
General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures,
considering:
| |
◾ |
|
The company’s current disclosure of relevant lobbying policies, and management and board oversight;
|
| |
◾ |
|
The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that
engage in lobbying activities; and |
| |
◾ |
|
Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities.
|
Political Contributions
General Recommendation: Generally vote for proposals
requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering:
| |
◾ |
|
The company’s policies, and management and board oversight related to its direct political contributions and payments
to trade associations or other groups that may be used for political purposes; |
| |
◾ |
|
The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may
make political contributions; and |
| |
◾ |
|
Recent significant controversies, fines, or litigation related to the company’s political contributions or political
activities. |
Vote against proposals barring a company from making political contributions. Businesses are affected by legislation
at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote against proposals
to publish in newspapers and other media a company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Political Expenditures and Lobbying Congruency
General Recommendation: Generally vote case-by-case on proposals requesting greater disclosure of a company’s alignment of political contributions, lobbying, and electioneering spending with a
company’s publicly stated values and policies, considering:
| |
◾ |
|
The company’s policies, management, board oversight, governance processes, and level of disclosure related to direct
political contributions, lobbying activities, and payments to trade associations, political action committees, or other groups that may be used for political purposes; |
| |
◾ |
|
The company’s disclosure regarding: the reasons for its support of candidates for public offices; the reasons for
support of and participation in trade associations or other groups that may make political contributions; and other political activities; |
| |
◾ |
|
Any incongruencies identified between a company’s direct and indirect political expenditures and its publicly stated
values and priorities; and |
| |
◾ |
|
Recent significant controversies related to the company’s direct and indirect lobbying, political contributions, or
political activities. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
75 of 82 |
|
Generally vote
case-by-case on proposals requesting comparison of a company’s political spending to objectives that can mitigate material risks for the company, such as limiting
global warming.
Political Ties
General Recommendation: Generally vote against proposals
asking a company to affirm political nonpartisanship in the workplace, so long as:
| |
◾ |
|
There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions
or trade association spending; and |
| |
◾ |
|
The company has procedures in place to ensure that employee contributions to company-sponsored political action committees
(PACs) are strictly voluntary and prohibit coercion. |
Vote against proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful
information to shareholders.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
76 of 82 |
|
8. Mutual Fund Proxies
Election of Directors
General Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual
fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
Closed
End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
General Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from
nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote.
Converting Closed-end Fund to Open-end Fund
General Recommendation: Vote case-by-case on conversion proposals, considering the following factors:
| |
◾ |
|
Past performance as a closed-end fund; |
| |
◾ |
|
Market in which the fund invests; |
| |
◾ |
|
Measures taken by the board to address the discount; and |
| |
◾ |
|
Past shareholder activism, board activity, and votes on related proposals. |
Proxy Contests
General Recommendation: Vote case-by-case on proxy contests, considering the following factors:
| |
◾ |
|
Past performance relative to its peers; |
| |
◾ |
|
Market in which the fund invests; |
| |
◾ |
|
Measures taken by the board to address the issues; |
| |
◾ |
|
Past shareholder activism, board activity, and votes on related proposals; |
| |
◾ |
|
Strategy of the incumbents versus the dissidents; |
| |
◾ |
|
Independence of directors; |
| |
◾ |
|
Experience and skills of director candidates; |
| |
◾ |
|
Governance profile of the company; and |
| |
◾ |
|
Evidence of management entrenchment. |
Investment Advisory Agreements
General Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors:
| |
◾ |
|
Proposed and current fee schedules; |
| |
◾ |
|
Fund category/investment objective; |
| |
◾ |
|
Performance benchmarks; |
| |
◾ |
|
Share price performance as compared with peers; |
| |
◾ |
|
Resulting fees relative to peers; and |
| |
◾ |
|
Assignments (where the advisor undergoes a change of control). |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
77 of 82 |
|
Approving New Classes
or Series of Shares
General Recommendation:
Vote for the establishment of new classes or series of shares.
Preferred
Stock Proposals
General Recommendation:
Vote case-by-case on the authorization for or increase in preferred shares, considering the following factors:
| |
◾ |
|
Stated specific financing purpose; |
| |
◾ |
|
Possible dilution for common shares; and |
| |
◾ |
|
Whether the shares can be used for antitakeover purposes. |
1940 Act Policies
General Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors:
| |
◾ |
|
Potential competitiveness; |
| |
◾ |
|
Regulatory developments; |
| |
◾ |
|
Current and potential returns; and |
| |
◾ |
|
Current and potential risk. |
Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
General Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:
| |
◾ |
|
The fund’s target investments; |
| |
◾ |
|
The reasons given by the fund for the change; and |
| |
◾ |
|
The projected impact of the change on the portfolio. |
Change Fundamental Investment Objective to Nonfundamental
General Recommendation: Vote against proposals to change a
fund’s fundamental investment objective to non-fundamental.
Name
Change Proposals
General Recommendation:
Vote case-by-case on name change proposals, considering the following factors:
| |
◾ |
|
Political/economic changes in the target market; |
| |
◾ |
|
Consolidation in the target market; and |
| |
◾ |
|
Current asset composition. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
78 of 82 |
|
Change in Fund’s
Subclassification
General Recommendation:
Vote case-by-case on changes in a fund’s sub-classification, considering the
following factors:
| |
◾ |
|
Potential competitiveness; |
| |
◾ |
|
Current and potential returns; |
| |
◾ |
|
Risk of concentration; and |
| |
◾ |
|
Consolidation in target industry. |
Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value
General Recommendation: Vote for proposals
authorizing the board to issue shares below Net Asset Value (NAV) if:
| |
◾ |
|
The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders
approve the underlying proposal, as required under the Investment Company Act of 1940; |
| |
◾ |
|
The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent
directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and |
| |
◾ |
|
The company has demonstrated responsible past use of share issuances by either: |
| |
◾ |
|
Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or |
| |
◾ |
|
Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts
to NAV and economic dilution to existing non-participating shareholders. |
Disposition of Assets/Termination/Liquidation
General
Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the
following factors:
| |
◾ |
|
Strategies employed to salvage the company; |
| |
◾ |
|
The fund’s past performance; and |
| |
◾ |
|
The terms of the liquidation. |
Changes to the Charter Document
General Recommendation: Vote case-by-case on changes to the charter document, considering the following factors:
| |
◾ |
|
The degree of change implied by the proposal; |
| |
◾ |
|
The efficiencies that could result; |
| |
◾ |
|
The state of incorporation; and |
| |
◾ |
|
Regulatory standards and implications. |
Vote against any of the following changes:
| |
◾ |
|
Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series;
|
| |
◾ |
|
Removal of shareholder approval requirement for amendments to the new declaration of trust; |
| |
◾ |
|
Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be
modified by the investment manager and the trust management, as permitted by the 1940 Act; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
79 of 82 |
|
| |
◾ |
|
Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales
charges and redemption fees that may be imposed upon redemption of a fund’s shares; |
| |
◾ |
|
Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements; or |
| |
◾ |
|
Removal of shareholder approval requirement to change the domicile of the fund. |
Changing the Domicile of a Fund
General Recommendation: Vote case-by-case on re-incorporations, considering the following factors:
| |
◾ |
|
Regulations of both states; |
| |
◾ |
|
Required fundamental policies of both states; and |
| |
◾ |
|
The increased flexibility available. |
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
General Recommendation: Vote against proposals authorizing
the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser.
Distribution Agreements
General Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors:
| |
◾ |
|
Fees charged to comparably sized funds with similar objectives; |
| |
◾ |
|
The proposed distributor’s reputation and past performance; |
| |
◾ |
|
The competitiveness of the fund in the industry; and |
| |
◾ |
|
The terms of the agreement. |
Master-Feeder Structure
General Recommendation: Vote for the establishment of a
master-feeder structure.
Mergers
General Recommendation: Vote case-by-case on merger proposals, considering the following factors:
| |
◾ |
|
Resulting fee structure; |
| |
◾ |
|
Performance of both funds; |
| |
◾ |
|
Continuity of management personnel; and |
| |
◾ |
|
Changes in corporate governance and their impact on shareholder rights. |
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
General Recommendation: Generally vote against shareholder
proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
80 of 82 |
|
Reimburse Shareholder
for Expenses Incurred
General Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the
reimbursement of the proxy solicitation expenses.
Terminate the Investment Advisor
General Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the following factors:
| |
◾ |
|
Performance of the fund’s Net Asset Value (NAV); |
| |
◾ |
|
The fund’s history of shareholder relations; and |
| |
◾ |
|
The performance of other funds under the advisor’s management. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
81 of 82 |
|
We empower investors and
companies to build for long-term and sustainable growth by providing
high-quality data, analytics, and insight.
G E T S T A R T E D W I T H I S S S O L U T I O N S
Email sales@issgovernance.com or
visit www.issgovernance.com for more information.
Founded in 1985, Institutional Shareholder Services group of companies (ISS) empowers investors and companies to build for long-term and sustainable
growth by providing high-quality data, analytics and insight. ISS, which is majority owned by Deutsche Bourse Group, along with Genstar Capital and ISS management, is a leading provider of corporate governance and responsible investment solutions,
market intelligence, fund services, and events and editorial content for institutional investors and corporations, globally. ISS’ 2,600 employees operate worldwide across 29 global locations in 15 countries. Its approximately 3,400 clients
include many of the world’s leading institutional investors who rely on ISS’ objective and impartial offerings, as well as public companies focused on ESG and governance risk mitigation as a shareholder value enhancing measure. Clients
rely on ISS’ expertise to help them make informed investment decisions. This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the “Information”) is
the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.
The Information has not
been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or
recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or
trading strategies.
The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the
Information for any direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
© 2025 | Institutional Shareholder Services and/or its affiliates
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
82 of 82 |
|
PART B
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
State Street Navigator Securities Lending Portfolio II
One Congress Street
Boston, Massachusetts 02114
(877) 521-4083
ITEM 14. COVER PAGE AND TABLE OF CONTENTS
State Street Navigator Securities Lending Trust (the “Trust”) is a registered open-end management
investment company organized as a Massachusetts business trust offering shares of beneficial interest in separate investment portfolios. Each series of the Trust is diversified as defined in the Investment Company Act of 1940, as amended (the “1940 Act”), and is subject to the procedural and substantive requirements of the 1940 Act.
This Part B of the Registration Statement (the
“Part B”) relates to the information contained in Part A of the Trust's Registration Statement dated April 30, 2026 as further
amended from time to time thereafter for the State Street Navigator Securities Lending Portfolio II
(“Portfolio II” or the “Portfolio”).
This Part B is not a Prospectus and should be read in conjunction with the Part A and the Confidential Offering Memorandum
relating to the Portfolio, which may be obtained by telephoning or writing the Trust at the number or address shown above.
The Portfolio's audited financial statements for the fiscal year ended December 31, 2025,
including the independent registered public accounting firm's report thereon, are included in the Portfolio's
Form N-CSR filing, which was filed with the U.S. Securities
and Exchange Commission (the
“SEC”) on March 9, 2026, and are incorporated into this Part B by reference. Copies of the Portfolio's annual reports,
semi-annual reports and other information such as the Portfolio's financial statements are available, without charge, upon request, by calling (collect calls are accepted) the
number shown above.
ITEM
15. TRUST HISTORY
The Trust was organized as a Massachusetts business trust on
June 15, 1995.
ITEM 16.
DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
The Portfolio is an open-end, diversified, management investment company. The Portfolio's
investment adviser is SSGA Fund's Management, Inc. (the “Adviser” or “SSGA FM”). The Portfolio's Part A contains information about the investment objective and policies of the Portfolio. This Part B
should only be read in conjunction with the Part A of the Portfolio. In addition to the principal investment strategies and the principal risks of the Portfolio described in Part
A, the Portfolio may employ other investment practices and may be subject to additional risks, which are described below.
ADDITIONAL INVESTMENTS AND RISKS
To the extent consistent with its investment objective and restrictions, the Portfolio may
invest in the following instruments and use the following techniques, and is subject to the following additional risks.
The Portfolio may invest a portion of its assets in bonds. A bond is an interest-bearing
security issued by a company, governmental unit or, in some cases, a non-U.S. entity. The issuer of a bond has a contractual obligation to pay interest at a stated rate on specific dates and to repay principal (the bond's face value) periodically or on a specified maturity date;
provided, however, a zero-coupon bond pays no interest to its holder during its life. The value of a zero-coupon bond to the Portfolio consists of the difference between such bond's face value at the time of maturity and the price for which it was
acquired, which may be an amount significantly less than its face value (sometimes referred to as a
“deep discount” price).
An
issuer may have the right to redeem or “call” a bond before maturity, in which case the shareholder may have to reinvest the proceeds at lower market rates. Most bonds bear interest income at a “coupon” rate that is fixed for the life of
the bond. The value of a fixed rate bond usually rises when market interest rates fall, and falls when market interest rates rise. Accordingly, a fixed rate bond's yield (income as a percent of the bond's current value) may differ from its coupon
rate as its value rises or falls. Fixed rate bonds generally are also subject to inflation risk, which is the risk that the value of the bond or income from the bond will be worth less in the future as inflation decreases the value of money. This could mean
that, as inflation increases, the
“real” value of the assets of the Portfolio holding fixed rate bonds can decline, as can the value of the Portfolio's
distributions. Other types of bonds bear income at an interest rate that is adjusted periodically. Because of their adjustable interest rates, the value of “floating-rate” or “variable-rate” bonds fluctuates much less in response to
market interest rate movements than the value of fixed rate bonds. The Portfolio may treat some of these bonds as having a shorter maturity for purposes of calculating the weighted
average maturity of its investment portfolio. Bonds may be senior or subordinated obligations. Senior obligations generally have the first claim on a corporation's earnings and assets and, in the event of liquidation, are paid before subordinated obligations. Bonds may be
unsecured (backed only by the issuer's general creditworthiness) or secured (also backed by specified collateral).
The investment return of corporate bonds reflects interest on the bond and changes in the
market value of the bond. The market value of a corporate bond may be affected by the credit rating of the corporation, the corporation's performance and perceptions of the corporation in the market place. There is a risk that the issuers of the securities may not be able to
meet their obligations on interest or principal payments at the time called for by such a security.
There are risks involved in dealing with the custodians or brokers who hold the Portfolio's
investments or settle the Portfolio's trades. It is possible that, in the event of the insolvency or bankruptcy of a custodian or broker, the Portfolio would be delayed or prevented from recovering its assets from the custodian or broker, or its estate, and may have only a
general unsecured claim against the custodian or broker for those assets. In recent insolvencies of brokers or other financial institutions, the ability of certain customers to recover their assets from the insolvent's estate has been delayed,
limited, or prevented, often unpredictably, and there is no assurance that any assets held by the Portfolio with a custodian or broker will be readily recoverable by the Portfolio. In addition, there may be limited recourse against non-U.S. sub-custodians in those situations in which the Portfolio invests in markets where custodial and/or settlement systems and regulations are
not fully developed, including emerging markets, and the assets of the Portfolio have been entrusted to such sub-custodians. The Adviser or an affiliate may serve as the custodian
of the Portfolio.
Eurodollar Certificates
of Deposit (“ECDs”), Eurodollar Time Deposits (“ETDs”) and Yankee Certificates of Deposit (“YCDs”)
The Portfolio may invest in ECDs, ETDs and YCDs. ECDs and ETDs are U.S. dollar denominated certificates of deposit and time
deposits, respectively, issued by non-U.S. branches of domestic banks and non-U.S. banks. YCDs are U.S. dollar denominated certificates of deposit issued by U.S. branches of
non-U.S. banks.
Different risks than those associated with the
obligations of domestic banks may exist for ECDs, ETDs and YCDs because the banks issuing these instruments, or their domestic or non-U.S. branches, are not necessarily subject to
the same regulatory requirements that apply to domestic banks, such as loan limitations, examinations, and reserve, accounting, auditing, recordkeeping and public reporting requirements. Obligations of non-U.S. issuers also involve risks such as future
unfavorable political and economic developments, withholding or other tax, seizures of non-U.S. deposits, currency controls, interest limitations, and other governmental
restrictions that might affect repayment of principal or payment of interest, or the ability to honor a credit commitment.
The Portfolio may invest in forward commitments. The Portfolio may contract to purchase
securities for a fixed price at a future date beyond customary settlement time consistent with the Portfolio's ability to manage its investment portfolio and meet redemption requests. The Portfolio may dispose of a commitment prior to settlement if it is appropriate to do so and
realize short-term profits or losses upon such sale. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, or if the other party fails to complete the transaction.
The Portfolio generally holds at least 25% of its total assets in securities offering daily
liquidity and at least 50% of its total assets in securities offering weekly liquidity. Assets that are cash or securities that can readily be converted to cash within one business day constitute daily liquid assets while cash or securities that can readily be converted to cash in five
business days constitute weekly liquid assets.
The Portfolio may invest in illiquid investments. The absence of a regular trading market for illiquid investments imposes
additional risks on investments in these securities. Illiquid investments may be difficult to value and may often be disposed of only after considerable expense and delay.
The SEC has adopted a liquidity risk management rule (the “Liquidity Rule”) that requires the Portfolio to
establish a liquidity risk management program (the “LRMP”). The Trustees, including a majority of the
Independent Trustees (defined infra), have designated the Adviser to administer the
Portfolio's LRMP. Under the LRMP, the Adviser assesses, manages, and periodically reviews the Portfolio's liquidity risk. The Liquidity Rule defines “liquidity risk” as the risk that the Portfolio could not meet requests to redeem shares issued by the Portfolio without significant
dilution of remaining investors' interests in the Portfolio. The liquidity of the Portfolio's portfolio investments is determined based on relevant market, trading and investment-specific considerations under the LRMP. To the extent that an investment is deemed to be an illiquid
investment or a less liquid investment, the Portfolio can expect to be exposed to greater liquidity risk. While the LRMP attempts to assess and manage liquidity risk, there is no
guarantee it will be effective in its operations and may not reduce the liquidity risk inherent in the Portfolio's investments.
Market Disruption and Geopolitical Risk
The Portfolio is subject to the risk that geopolitical events will disrupt securities markets
and adversely affect global economies and markets. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally.
Likewise, trade policy changes or disputes, the threat or actual imposition of tariffs, natural and environmental disasters, epidemics or pandemics, and systemic market dislocations may be highly disruptive to economies and markets. Those events, as
well as other changes in non-U.S. and domestic economic and political conditions, also could adversely affect individual issuers or related groups of issuers, securities markets,
interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Portfolio's investments. Given the increasing interdependence between global economies and markets, conditions in one country, market, or region might adversely impact markets, issuers
and/or foreign exchange rates in other countries, including the U.S. Continuing uncertainty as to the status of the euro and the Economic and Monetary Union of the European Union
(the “EMU”) has created significant volatility in currency and financial markets generally. Any partial or complete dissolution of the
EMU, or any increased uncertainty as
to its status, could have significant adverse
effects on currency and financial markets, and on the values of a Portfolio's investments. On January 31, 2020, the United Kingdom (“UK”) formally withdrew from the European Union
(“EU”) (commonly known as “Brexit”). An agreement between the UK and the EU
governing their future trade relationship became effective January 1, 2021, but that agreement does not include an agreement on financial services, and it is unlikely that such agreement will be concluded. Moreover, the UK government has started a program of financial services law
reform with the ultimate aim of repealing many EU financial services laws that were assimilated into UK law from January 1, 2021, and replacing them with legislation or rules made
by the UK government or financial services regulators. Accordingly, uncertainty remains in certain areas as to the future relationship between the UK and the EU. Brexit has already had a significant impact on the UK, Europe, and global economies, and could continue to result in volatility and
illiquidity, legal, political, economic and regulatory uncertainties and lower economic growth for these economies that could in turn have an adverse effect on the value of the Portfolio's investments. Any further exits from the EU, or the possibility of such exits, or the abandonment of the euro, may cause additional market disruption globally and introduce new legal and
regulatory uncertainties.
Securities markets may be susceptible to market manipulation or other fraudulent trade practices, which could disrupt the
orderly functioning of these markets or adversely affect the value of investments traded in these markets, including investments of the Portfolio.
Recent political activity in the U.S. has increased the risk that the U.S. could default on some or any of its obligations.
While it is impossible to predict the consequences of such an unprecedented event, it is likely that a default by the U.S. would be highly disruptive to the U.S. and global securities markets and could significantly impair the value of the
Portfolio's investments. Similarly, political events within the U.S. at times have resulted, and may in the future result, in a shutdown of government services, which could negatively affect the U.S. economy, decrease the value of the Portfolio
investments, and increase uncertainty in or impair the operation of the U.S. or other securities markets. To the extent the Portfolio has focused its investments in the stock market index of a particular region, adverse geopolitical and other events
could have a disproportionate impact on the Portfolio.
Market Turbulence Resulting from Infectious Illness
A widespread outbreak of an infectious illness may lead to governments and businesses world-wide taking aggressive measures,
including closing borders, restricting international and domestic travel, and the imposition of prolonged quarantines of large populations. The spread of such an illness may result
in the disruption of and delays in the delivery of healthcare services and processes, the cancellation of organized events and educational institutions, the disruption of production and supply chains, a decline in consumer demand for certain goods and services, and general concern and
uncertainty, all of which may contribute to increased volatility in global markets. Epidemics and pandemics that may arise in the future could adversely affect the economies of many nations, the global economy, individual companies, economic
sectors and industries, and capital markets in ways that cannot be foreseen at the present time. In addition, the impact of infectious diseases in developing or emerging market countries may be greater due to limited healthcare resources.
Political, economic and social stresses caused by an infectious illness also may exacerbate other pre-existing political, social and economic risks in certain countries. The duration of such an illness and its effects cannot be determined at this
time, but the effects could be present for an extended period of time.
Mortgage-Related Securities
The Portfolio may invest in mortgage-related securities. Mortgage-related securities represent an interest in a pool of, or are secured by, mortgage loans. Mortgage-related securities may be issued or guaranteed by (i) U.S. Government agencies or
instrumentalities such as the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), the Federal National Mortgage Association
(“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation
(“FHLMC” or “Freddie Mac”) or (ii) other issuers, including
private companies.
Many mortgage-related securities provide regular
payments, which consist of interest and, in most cases, principal. In contrast, other forms of debt securities normally provide for periodic payment of interest in fixed amounts
with principal payments at maturity or specified call dates. In effect, payments on many mortgage-related securities are a “pass-through” of the payments made by the individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities.
Besides the scheduled repayment of principal, repayments of principal may result from the voluntary prepayment, refinancing
or foreclosure of the underlying mortgage loans. If property owners make unscheduled prepayments of their mortgage loans, these prepayments will typically result in early payment
of the applicable mortgage-related securities. The occurrence of mortgage prepayments is affected by a variety of factors, including the level of interest rates, general
economic conditions, the location and age of the
mortgage, and other social and demographic conditions. During periods of falling interest rates, the rate of mortgage prepayments tends to increase, thereby tending to decrease the
life of mortgage-related securities. During periods of rising interest rates, the rate of mortgage prepayments usually decreases, thereby tending to increase the life of mortgage-related securities.
Because of the possibility of prepayments (and due to scheduled repayments of principal), mortgage-related securities are
less effective than other types of securities as a means of “locking in” attractive long-term interest rates. Prepayments
would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have a similar
risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of
rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and,
therefore, potentially increasing the volatility of the Portfolio.
Collateralized mortgage obligations (“CMOs”) may be issued by a U.S. Government agency
or instrumentality or by a private issuer. CMOs are typically structured with classes or series that have different maturities and are generally retired in sequence. Each class of obligations receives periodic interest payments according to its terms. However, monthly
principal payments and any prepayments from the collateral pool are generally paid first to the holders of the most senior class. Thereafter, payments of principal are generally allocated to the next most senior class of obligations until that class
of obligations has been fully repaid. Any or all classes of obligations of a CMO may be paid off sooner than expected because of an increase in the payoff speed of the pool. Changes in prepayment rates may have significant effects on the
values and the volatility of the various classes and series of a CMO. Payment of interest or principal on some classes or series of a CMO may be subject to contingencies or some classes or series may bear some or all of the risk of default on the
underlying mortgages.
Ongoing developments in the residential and
commercial mortgage markets may have additional consequences for the market for mortgage-backed securities. During the periods of deteriorating economic conditions, such as
recessions or periods of rising unemployment, delinquencies and losses generally increase, sometimes dramatically, with respect to securitizations involving mortgage loans. Many sub-prime mortgage pools have become distressed during the periods of
economic distress and may trade at significant discounts to their face value during such period.
Stripped mortgage-related securities are usually structured with two classes that receive
different portions of the interest and principal distributions on a pool of mortgage loans. The yield to maturity on an interest only or “IO” class of stripped mortgage-related securities is extremely sensitive not only to changes in prevailing interest rates but
also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurable adverse effect on the Portfolio's yield to maturity to the extent it invests in IOs. If the assets underlying the IO experience greater than anticipated prepayments of principal, the Portfolio may fail to recoup fully, or at all, its initial
investment in these securities. Conversely, principal only securities or “POs” tend to increase in value if prepayments are
greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for stripped mortgage-related securities may be more volatile and less liquid than that for other mortgage-related securities, potentially
limiting a Portfolio's ability to buy or sell those securities at any particular time.
Government Mortgage-Related Securities
GNMA is the principal federal government guarantor of mortgage-related securities. GNMA is a wholly -owned U.S. Government corporation within the Department of Housing and Urban Development. It guarantees, with the full faith and credit
of the United States, full and timely payment of all monthly principal and interest on its mortgage-related securities. GNMA pass-through securities are considered to have a
relatively low risk of default in that (1) the underlying mortgage loan portfolio is comprised entirely of government-backed loans and (2) the timely payment of both principal and
interest on the securities is guaranteed by the full faith and credit of the U.S. Government, regardless of whether they have been collected. GNMA pass-through securities are, however, subject to the same interest rate risk as comparable privately issued
mortgage-related securities. Therefore, the effective maturity and market value of a Portfolio's GNMA securities can be expected to fluctuate in response to changes in interest
rate levels.
Residential mortgage loans are also pooled by
FHLMC, a corporate instrumentality of the U.S. Government. The mortgage loans in FHLMC's portfolio are not government backed; FHLMC, not the U.S. Government, guarantees the timely payment of interest and ultimate collection of principal on FHLMC securities. FHLMC also issues guaranteed mortgage
certificates, on which it guarantees semiannual interest payments and a specified minimum annual payment of principal.
FNMA is a government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases residential mortgages from a list of approved seller/servicers, which include savings and loan associations, savings banks, commercial banks, credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest only by FNMA, not the U.S. Government.
Other Asset-Backed Securities
In addition to the mortgage related securities discussed above, the Portfolio may invest in
asset-backed securities that are not mortgage-related. Asset-backed securities other than mortgage-related securities represent undivided fractional interests in pools of instruments, such as consumer loans, and are typically similar in structure to mortgage-related pass-through securities. Payments of principal and interest are passed through to holders of the securities and are typically supported
by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity, or by priority to certain of the borrower's other securities. The
degree of credit-enhancement, if any, varies, applying only until exhausted and generally covering only a fraction of the security's par value.
The value of such asset-backed securities is affected by changes in the market's perception
of the asset backing the security, changes in the creditworthiness of the servicing agent for the instrument pool, the originator of the instruments, or the financial institution providing any credit enhancement and the expenditure of any portion of any credit enhancement.
The risks of investing in asset-backed securities are ultimately dependent upon payment of the underlying instruments by the obligors, and the Portfolio would generally have no
recourse against the obligee of the instruments in the event of default by an obligor. The underlying instruments are subject to prepayments, which shorten the duration of asset-backed securities and may lower their return, in generally the same manner as described above for prepayments of pools
of mortgage loans underlying mortgage-related securities. During periods of deteriorating economic conditions, such as recessions or periods of rising unemployment, delinquencies
and losses generally increase, sometimes dramatically, with respect to securitizations involving loans, sales contracts, receivables and other obligations underlying asset-backed securities.
Registration under the Commodity Exchange Act. The Portfolio is operated by the Adviser, which has
claimed an exclusion from the definition of the term “commodity pool operator” with respect to the
Portfolio, under the Commodity Exchange Act (the “CEA”), and therefore, is not subject to
registration or regulation as a commodity pool operator under the CEA with respect to the Portfolio. As a result, the Portfolio is limited in its ability to have exposure to
instruments subject to the CFTC's jurisdiction, including commodity futures (which include futures on broad-based securities indexes, interest rate futures and currency futures), options on commodity futures, certain swaps or other investments (whether directly or
indirectly through investments in other investment vehicles).
Under this exclusion, the Portfolio must satisfy one of the following two limitations whenever it enters into a new
commodity trading position: (1) the aggregate initial margin and premiums required to establish the Portfolio's positions in CFTC-regulated instruments may not exceed 5% of the liquidation value of the portfolio (after accounting for unrealized
profits and unrealized losses on any such investments); or (2) the aggregate net notional value of such instruments, determined at the time the most recent position was established, may not exceed 100% of the liquidation value of the
portfolio (after accounting for unrealized profits and unrealized losses on any such positions). The Portfolio would not be required to consider its exposure to such instruments if they were held for “bona fide hedging” purposes, as such term is
defined in the rules of the CFTC. In addition to meeting one of the foregoing limitations, the Portfolio may not market itself as a commodity pool or otherwise as a vehicle for trading in the markets for CFTC-regulated instruments.
Purchase of Other Investment Company Shares
The Portfolio may, to the extent permitted under the 1940 Act and rules thereunder, invest in shares of other investment companies, which include funds managed by SSGA FM, which invest exclusively in money market instruments or in investment
companies with investment policies and objectives which are substantially similar to those of the Portfolio. These investments may be made temporarily, for example, to invest
uncommitted cash balances or, in limited circumstances, to assist in meeting shareholder redemptions, or as long-term investments. In general, the 1940 Act prohibits the Portfolio from acquiring more than 3% of the voting shares of any one other investment company, and
prohibits the Portfolio investing more than 5% of
its total assets in the securities of any one other investment company or more than 10% of its total assets in securities of other investment companies in the aggregate. The
percentage limitations above apply to investments in any investment company. Pursuant to rules adopted by the SEC, the Portfolio may invest in excess of these limitations if the Portfolio and the investment company in which the Portfolio would like to invest comply
with certain conditions. Certain of the conditions do not apply if the Portfolio is investing in shares issued by affiliated funds. In addition, the Portfolio may invest in shares issued by money market funds, including certain unregistered money
market funds, in excess of the limitations. The Portfolio's investments in another investment company will be subject to the risks of the purchased investment company's portfolio securities. The Portfolio's shareholders must bear not only their
proportionate share of the Portfolio's fees and expenses, but they also must bear indirectly the fees and expenses of the other investment company.
The Portfolio may enter into repurchase agreements, which are a form of borrowing, with banks, other financial institutions,
such as broker-dealers, and other institutional counterparties. Under a repurchase agreement, the Portfolio purchases securities from a financial institution that agrees to
repurchase the securities at the Portfolio's original purchase price plus interest within a specified time. The Portfolio will limit repurchase transactions to those member banks
of the Federal Reserve System, broker-dealers, and other financial institutions whose creditworthiness the Adviser considers satisfactory. Should the counterparty to a transaction fail financially, the Portfolio may encounter delay and incur costs
before being able to sell the securities, or may be prevented from realizing on the securities. Further, the amount realized upon the sale of the securities may be less than that necessary to fully compensate the Portfolio. The SEC has finalized new
rules requiring the central clearing of certain repurchase transactions involving U.S. Treasuries. Historically, such transactions have not been required to be cleared and
voluntary clearing of such transactions has generally been limited. Compliance with the new rules is currently expected to be required in the middle of 2027. While it is currently
difficult to predict the full impact of these new rules particularly because the compliance date has not yet occurred, the new clearing requirements could make it more difficult for the Portfolio to execute certain investment strategies, may reduce the
availability or increase the costs of such transactions and may adversely affect a Portfolio's performance. See
“Risks Associated with Derivatives
Regulation” for additional information.
Risks Associated with Derivatives Regulation
The U.S. government has enacted and is continuing to implement legislation that provides
for regulation of the derivatives market, including clearing, margin, reporting, and registration requirements. The European Union (“EU”), the UK and some other countries have also adopted and are continuing to implement similar requirements, which will affect
the Portfolio when it enters into a derivatives transaction with a counterparty organized in that country or otherwise subject to that country's derivatives regulations. Such rules and other rules and regulations could, among other things, restrict the
Portfolio's ability to engage in, or increase the cost to the Portfolio of, derivatives transactions, for example, by making some types of derivatives no longer available to the Portfolio, increasing margin or capital requirements, or otherwise
limiting liquidity or increasing transaction costs. While the rules and regulations and central clearing of some derivatives transactions are designed to reduce systemic risk (i.e., the risk that the interdependence of large derivatives dealers could
cause them to suffer liquidity, solvency or other challenges simultaneously), there is no assurance that they will achieve that result, and in the meantime, as noted above, central clearing and related requirements expose the Portfolio to other
kinds of costs and risks.
In the event of a counterparty's (or its affiliate's) insolvency, the Portfolio's ability to exercise remedies, such as the
termination of transactions, netting of obligations and realization on collateral, could be stayed or eliminated under special resolution regimes adopted in the United States, the EU, the UK and various other jurisdictions. Such regimes provide
government authorities with broad authority to intervene when a financial institution is experiencing financial difficulty. In particular, with respect to counterparties who are subject to such proceedings in the EU and the UK, the liabilities of such
counterparties to the Portfolio could be reduced, eliminated, or converted to equity in such counterparties (sometimes referred to as a “bail in”).
The SEC adopted Rule 18f-4 under the 1940 Act providing for the regulation of registered investment companies' use of derivatives and certain related instruments. The rule, among other things, limits derivatives exposure through one of two
value-at-risk tests and in connection with adopting the rule, the SEC eliminated the asset segregation framework for covering derivatives and certain financial instruments arising from the SEC's Release 10666 and ensuing staff guidance.
The rule also requires funds to adopt and
implement a derivatives risk management program (including the appointment of a derivatives risk manager and the implementation of certain testing requirements) and subjects funds
to certain reporting requirements in respect of derivatives. Limited derivatives users (as determined by Rule 18f-4) are not, however, subject to the full requirements under the rule.
Additionally, U.S. regulators, the EU, the UK and certain other jurisdictions have adopted minimum margin and capital
requirements for uncleared derivatives transactions. These rules impose minimum margin requirements on derivatives transactions between the Portfolio and its counterparties. They impose regulatory requirements on the timing of transferring
margin and the types of collateral that parties are permitted to exchange.
These and other regulations are evolving, so their full impact on the Portfolio and the financial system are not yet known.
Reverse Repurchase Agreements
The Portfolio may enter into reverse repurchase agreements. Under reverse repurchase
agreements, which are a form of borrowing, the Portfolio transfers possession of portfolio securities to financial institutions in return for cash in an amount equal to a percentage of the portfolio securities' market value and agrees to repurchase the securities at a future date by
repaying the cash with interest. The Portfolio retains the right to receive interest and principal payments from the securities. Reverse repurchase agreements involve the risk that the market value of securities sold by the Portfolio may
decline below the price at which it is obligated to repurchase the securities. Reverse repurchase agreements involve the risk that the buyer of the securities sold might be unable to deliver them when the Portfolio seeks to repurchase the
securities. If the buyer files for bankruptcy or becomes insolvent, the Portfolio may be delayed or prevented from recovering the security that it sold. The SEC has finalized new rules requiring the central clearing of certain repurchase
transactions involving U.S. Treasuries. Historically, such transactions have not been required to be cleared and voluntary clearing of such transactions has generally been limited. Compliance with the new rules is currently expected to be required
in the middle of 2027. While it is currently difficult to predict the full impact of these new rules particularly because the compliance date has not yet occurred, new clearing
requirements could make it more difficult for the portfolio to execute certain investment strategies, may reduce the availability or increase the costs of such transactions and may
adversely affect a Portfolio's performance. See “Risks Associated with Derivatives Regulation” for
additional information.
Certain financial institutions have in the past been accused by
various regulators of manipulating certain reference rates (e.g., the London Interbank Offered Rate (“LIBOR”)) and
have been alleged to have altered costs when reporting them to regulators. There can be no assurance that the rate-setting process for reference rates will not be affected by
similar conduct in the future, or that any investigations into any rate-setting process and any related litigation will not result in disruptive changes in the process used to determine reference rates or will not affect the use of reference rates going
forward. Therefore, the performance, availability or prices of the Portfolio's investments which are based on reference rates may be adversely affected by misconduct in the rate-setting process for reference rates and/or as a result of future
changes to such process or reference rates becoming no longer available.
In addition, interest rates or other types of rates and indices which are classed as
“benchmarks” have been the subject of ongoing national and international regulatory reform, including under the E.U. regulation on
indices used as benchmarks in financial instruments and financial contracts (known as the “Benchmarks Regulation”). The
Benchmarks Regulation has been enacted into United Kingdom law by virtue of the European Union (Withdrawal) Act 2018 (as amended), subject to amendments made by the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (SI 2019/657) and
other statutory instruments. Following the implementation of these reforms, the manner of administration benchmarks has changed and may in the future change, with the result that
they may perform differently than in the past, the use of benchmarks that are not compliant with the new standards by certain supervised entities is restricted, certain benchmarks are in the process of being eliminated entirely and there could be other consequences which cannot be
predicted.
LIBOR was the offered rate for short-term Eurodollar deposits between major international
banks. In connection with the global transition away from LIBOR led by regulators and market participants, LIBOR was last published on a representative basis at the end of June 2023. Alternative reference rates to LIBOR have been established in most major
currencies (e.g., the Secured Overnight Financing Rate (“SOFR”) for U.S. dollar LIBOR and
the Sterling Overnight Index Average for GBP LIBOR) and the transition to alternative reference rates continues. The transition away from LIBOR to the use of replacement rates has gone relatively smoothly but the full impact of the transition on the Portfolio or the financial
instruments in which the Portfolio invests cannot yet be fully determined.
SOFR is an index rate calculated based on
short-term repurchase agreements backed by U.S. Treasury Instruments. While LIBOR was an unsecured rate, SOFR is a secured rate. There can be no assurance that SOFR will perform in
the same way as LIBOR would have at any time, including, without limitation, as a result of changes in interest and yield rates in the market, monetary policy, bank credit risk, market volatility or global or regional economic, financial, political,
regulatory, judicial or other events. There can be no assurance that SOFR will not be discontinued or fundamentally altered in a manner that is materially adverse to the interests of the Portfolio. If the manner in which SOFR is calculated is
changed, that change may result in a reduction of the amount of interest payable on SOFR-linked floating rate
instruments and the trading prices of such instruments. Additionally, daily changes in SOFR have, on occasion, been more volatile than daily changes in other benchmark or market rates. Although occasional, increased daily volatility in SOFR
would not necessarily lead to more volatile interest payments, the return on and value of SOFR-linked floating rate instruments may fluctuate more than floating rate instruments that are linked to less volatile rates.
The elimination of a benchmark or a benchmarks being non-compliant under any regulatory regime, changes in the manner of administration of any benchmark, or actions by regulators or law enforcement agencies could result in changes to
the levels of the published rates of certain benchmarks, or those benchmarks being discontinued or replaced and could involve, among other things, increased volatility or
illiquidity in markets for instruments that rely on such benchmarks. The discontinuation or replacement of a benchmark could require an adjustment to the terms and conditions
(including a value payment between the parties) or otherwise result in rates being determined in accordance with fallback provisions contained in the terms and conditions, or have other consequences, in respect of any debt or hedging linked to such
benchmark, and there may be mismatches between the rates applicable to different types of financial contracts that are linked to the same benchmark. For example, certain investments may involve individual contracts that have no existing
fallback provision or language that contemplates the discontinuation of a relevant benchmark, and those investments could experience increased volatility or illiquidity as a result of any transition process. In addition, interest rate provisions included in such contracts, or in contracts or other arrangements may need to be renegotiated. The transition of an
instrument from a benchmark to a replacement rate as a result of amendment, application of existing fallbacks, statutory requirements or otherwise may result in a reduction in the value of certain instruments held by the Portfolio, or a reduction
in the effectiveness of related transactions such as hedges. The discontinuation of or replacement of a benchmark could have a material adverse effect on the performance of the Portfolio.
Following Russia's invasion of Ukraine in late February 2022, various countries, including the U.S. and the UK, as well as
the E.U., issued broad-ranging economic sanctions against Russia. The U.S. and other countries have also imposed
economic sanctions on Belarus and may impose sanctions on other countries that support Russia's invasion. A large
number of corporations and U.S. states have also announced plans to divest interests or otherwise curtail business dealings with certain Russian businesses. These sanctions and any additional sanctions or other intergovernmental actions
that have been or may be undertaken in the future, against Russia, Russian entities or Russian individuals, or other countries that support Russia's military invasion, may result
in the devaluation of Russian currency, a downgrade in the country's credit rating, an immediate freeze of Russian assets, a decline in the value and liquidity of Russian securities, property or interests, and/or other adverse consequences to the Russian economy or the Portfolio. The scope and
scale of sanctions in place at a particular time may be expanded or otherwise modified in a way that have negative effects on the Portfolio. Sanctions, or the threat of new or
modified sanctions, could impair the ability of the Portfolio to buy, sell, hold, receive, deliver or otherwise transact in certain affected securities or other investment
instruments. Sanctions could also result in Russia taking counter measures or other actions in response (including cyberattacks and espionage), which may further impair the value and liquidity of Russian securities. These sanctions, and the resulting
disruption of the Russian economy, may cause volatility in other regional and global markets and may negatively impact the performance of various sectors and industries, as well as companies in other countries, which could have a negative
effect on the performance of the Portfolio, even if the Portfolio does not have direct exposure to securities of Russian issuers. As a collective result of the imposition of sanctions, Russian government countermeasures and the impact that they
have had on the trading markets for Russian securities, certain Portfolios have used, and may in the future use, fair valuation procedures approved by the Portfolio's Board to
value certain Russian securities, which could result in such securities being deemed to have a zero value.
Section 4(a)(2) Commercial Paper/Rule 144A Securities
The Portfolio may invest in commercial paper issued in reliance on the so called
“private placement” exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (“1933 Act”) (“Section 4(a)(2) paper”).
Section 4(a)(2) paper is restricted as to
disposition under the federal securities laws and generally is sold to investors who agree that they are purchasing the paper for investment and not with a view to public
distribution. Any resale by the purchaser must be a transaction exempt from the registration requirements of the 1933 Act. Section 4(a)(2) paper normally is resold to other institutional investors like the Portfolio through or with the assistance of the issuer or investment dealers that make a market in Section 4(a)(2) paper. Rule 144A securities generally must be sold only to other institutional
investors.
There can be no assurance that a liquid trading market will exist at any time for any particular Section 4(a)(2) paper or Rule 144A securities.
Treasury Inflation-Protected Securities
The Portfolio may invest in Inflation-Protection Securities (“TIPSs”), a type of inflation-indexed Treasury
security. TIPSs typically provide for semiannual payments of interest and a payment of principal at maturity. In general, each payment will be adjusted to take into account any inflation or deflation that occurs between the issue date of the security and the
payment date based on the Consumer Price Index for All Urban Consumers (“CPI-U”).
Each semiannual payment of interest will be determined by multiplying a single fixed rate
of interest by the inflation-adjusted principal amount of the security for the date of the interest payment. Thus, although the interest rate will be fixed, the amount of each interest payment will vary with changes in the principal of the security as adjusted for inflation and
deflation.
TIPSs also provide for an additional payment (a
“minimum guarantee
payment”) at maturity if the security's inflation-adjusted principal amount for the maturity date is less than the security's principal amount at issuance. The amount of the
additional payment will equal the excess of the security's principal amount at issuance over the security's inflation-adjusted principal amount for the maturity date.
U.S. Government Securities
The Portfolio may purchase U.S. Government securities. The types of U.S. Government obligations in which the Portfolio may
at times invest include: (1) U.S. Treasury obligations and (2) obligations issued or guaranteed by U.S. Government agencies and instrumentalities, which are supported by any of the
following: (a) the full faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government agency or instrumentality, or (d) the credit of the instrumentality (examples of agencies and instrumentalities are: Federal Land Banks, Federal Housing Administration, Federal Farm Credit Bank, Farmers
Home Administration, Export-Import Bank of the United States, Central Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks, General Services
Administration, Maritime Administration, Tennessee Development Bank, Asian-American Development Bank, International Bank for Reconstruction and Development and Federal National Mortgage Association). No assurance can be given that in the future the U.S. Government
will provide financial support to U.S. Government securities it is not obligated to support.
The Portfolio may purchase U.S. Government obligations on a forward commitment basis.
Variable Amount Master Demand Notes
The Portfolio may invest in variable amount master demand notes, which are unsecured obligations that are redeemable upon demand and are typically unrated. These instruments are issued pursuant to written agreements between their issuers and
holders. The agreements permit the holders to increase (subject to an agreed maximum) and the holders and issuers to decrease the principal amount of the notes, and specify that
the rate of interest payable on the principal fluctuates according to an agreed formula. Generally, changes in interest rates will have a smaller effect on the market value of these securities than on the market value of comparable fixed income obligations. Thus, investing in these
securities generally allows less opportunity for capital appreciation and depreciation than investing in comparable fixed income securities. There may be no active secondary market with respect to a particular variable rate instrument.
Variable and Floating Rate Securities
The Portfolio may invest in variable and floating rate securities. In general variable rate
securities are instruments issued or guaranteed by entities such as (1) U.S. Government, or an agency or instrumentality thereof, (2) corporations, (3) financial institutions, (4) insurance companies or (5) trusts that have a rate of interest subject to adjustment at regular
intervals. A variable rate security provides for the automatic establishment of a new interest rate on set dates. Interest rates on these securities are ordinarily tied to widely recognized market rates, which are typically set once a day.
Generally, changes in interest rates will have a
smaller effect on the market value of variable and floating rate securities than on the market value of comparable fixed income obligations. Variable rate obligations will be
deemed to have a maturity equal to the period remaining until the next readjustment of the interest rate.
Variable Rate Demand Obligations
The Portfolio may invest in variable rate demand obligations (“VRDOs”). A VRDO is a tax-exempt municipal obligation with an interest rate that adjusts periodically according to a formula and a
demand feature giving the holder of the VRDO the right to receive payment of the unpaid principal balance plus accrued interest upon no more than seven days' notice. The interest rate on a VRDO is adjusted at intervals (ranging from daily to up to one year) according to a formula based on a
prevailing market rate for similar investments. The adjustment formula is designed to maintain the market rate of the VRDO at approximately the par value of the VRDO on the adjustment date. During periods of declining interest rates, the
Portfolio's yield on a VRDO will decrease, and during periods of rising interest rates, the Portfolio's yield on a VRDO will increase. The demand feature of a VRDO may not be honored in the event of the default or insolvency of the counterparty
granting the right of demand. Like other municipal securities, the market for VRDOs may be less liquid than for taxable bonds. This means that it may be harder to buy and sell
municipal securities, especially on short notice, than non-municipal securities. In addition, the municipal securities market is generally characterized as a buy and hold investment strategy. As a result, the accessibility of municipal securities in the market is generally greater closer to the
original date of issue of the securities and lessens as the securities move further away from such issuance date.
The Portfolio may purchase securities on a when-issued basis. Delivery of and payment for
these securities may take place as long as a month or more after the date of the purchase commitment. The value of these securities is subject to market fluctuation during this period, and no income accrues to the Portfolio until settlement takes place. When entering
into a when-issued transaction, the Portfolio will rely on the other party to consummate the transaction; if the other party fails to do so, the Portfolio may be disadvantaged. The Portfolio will not invest more than 25% of its respective net assets
in when-issued securities.
Securities purchased on a when-issued basis and held by the Portfolio are subject to
changes in market value based upon actual or perceived changes in the level of interest rates. Generally, the value of such securities will fluctuate inversely to changes in interest rates — i.e., they will appreciate in value when interest rates decline and decrease in value when
interest rates rise. Therefore, if, in order to achieve higher interest income, the Portfolio remains substantially fully invested at the same time that it has purchased securities on a “when-issued” basis, there will be a greater
possibility of fluctuation in the Portfolio's net asset value (“NAV”).
The Portfolio may invest in zero-coupon securities. Zero-coupon securities are notes, bonds
and debentures that: (1) do not pay current interest and are issued at a substantial discount from par value; (2) have been stripped of their unmatured interest coupons and receipts; or (3) pay no interest until a stated date one or more years into the future. These securities
also include certificates representing interests in such stripped coupons and receipts. Generally, changes in interest rates will have a greater impact on the market value of a zero-coupon security than on the market value of the comparable
securities that pay interest periodically during the life of the instrument. In the case of any zero-coupon debt obligations with a fixed maturity date of more than one year from the date of issuance that are treated as issued originally at a
discount, the Portfolio will be required to accrue original issue discount (“OID”) for U.S. federal income tax purposes and
may as a result be required to pay out as an income distribution an amount, which is greater than the total amount of cash interest the Portfolio actually received. The Portfolio may be required to sell investments in order to meet such distribution
requirements, including at a time when it may not be advantageous to do so.
The Portfolio may invest no more than 25% of its total assets in stripped securities that have been stripped by their holder, typically a custodian bank or investment brokerage firm. A number of securities firms and banks have stripped the interest
coupons and resold them in custodian receipt programs with different names. Privately-issued stripped securities are not themselves guaranteed by the U.S. Government, but the future payment of principal or interest on U.S. Treasury obligations,
which they represent, is so guaranteed.
Fundamental Investment
Restrictions
The Trust has adopted the following fundamental investment
policies with respect to the Portfolio, which may not be changed without the affirmative vote of a
“majority of the outstanding voting securities” of the shareholders of the Portfolio. A “majority of the outstanding voting
securities” is defined in the 1940 Act to mean the affirmative vote of the lesser of: (1) more than 50% of the outstanding shares of a portfolio; and (2) 67% or more of the shares present at a
meeting if more than 50% of the outstanding shares are present at the meeting in person or by proxy.
1.
The Portfolio may borrow money and issue senior securities to the extent consistent with
applicable law from time to time.
2.
The Portfolio may make loans, including to affiliated companies, to the extent consistent with
applicable law from time to time.
3.
The Portfolio may purchase or sell commodities to the extent consistent with applicable law
from time to time.
4.
The Portfolio may purchase, sell or hold real estate to the extent consistent with applicable
law from time to time.
5.
The Portfolio may underwrite securities to the extent consistent with applicable law from time
to time.
6.
The Portfolio may not purchase any security if, as a result, 25% or more of the Portfolio's
total assets (taken at current value) would be invested in a particular industry (for purposes of this restriction, investment companies are not considered to constitute a particular industry or group of industries), except as is consistent with applicable law from
time to time and as follows: the Portfolio is permitted to invest without limit in “government
securities” (as defined in the 1940
Act), tax-exempt securities issued by a U.S. territory or possession, a state or local government, or a political subdivision of any of the foregoing and bankers' acceptances,
certificates of deposit and similar instruments issued by: (i) U.S. banks, (ii) U.S. branches of foreign banks (in circumstances in which the Adviser determines that the U.S. branches of foreign banks are subject to the same regulation as U.S. banks), (iii) foreign
branches of U.S. banks (in circumstances in which the Adviser determines that the Portfolio will have recourse to the U.S. bank for the obligations of the foreign branch), and (iv)
foreign branches of foreign banks (to the extent that the Adviser determines that the foreign branches of foreign banks are subject to the same or substantially similar regulations as U.S. banks).
With respect to investment policy on concentration (#6 above), the Portfolio may
concentrate in bankers' acceptances, certificates of deposit and similar instruments when, in the opinion of the Adviser, the yield, marketability and availability of investments meeting the Portfolio's quality standards in the banking industry justify any additional risks associated with the
concentration of the Portfolio's assets in such industry.
Fundamental Investment Restrictions (1) through (5), as numbered above limit the Portfolio's ability to engage in certain
investment practices and purchase securities or other instruments to the extent consistent with applicable law as that law changes from time to time. Applicable law includes the 1940 Act, the rules or regulations thereunder and applicable orders
of SEC as are currently in place. In addition, interpretations and guidance provided by the SEC staff may be taken into account, where deemed appropriate by the Portfolio, to determine if an investment practice or the purchase of securities or
other instruments is permitted by applicable law. As such, the effects of these limitations will change as the statute, rules, regulations or orders (or, if applicable,
interpretations) change, and no shareholder vote will be required or sought when such changes permit or require a resulting change in practice.
Except for the investment restrictions expressly identified as fundamental the other
investment policies described in this Part B or in the Part A are not fundamental and may be changed by approval of the Trustees without shareholder approval.
Disclosure of Portfolio Holdings
The Trust's Policies on Disclosure of Portfolio Holdings (“Disclosure Policy”) are intended to ensure
compliance by the Trust's service providers and the Trust with (1) applicable regulations of the federal securities laws, including the 1940 Act, and the Investment Advisers Act of 1940 and (2) general principles of fiduciary duty relating to client accounts. The
Portfolio's Board of Trustees (the
“Board” and each member thereof, a “Trustee”) must approve all material amendments to this
policy and may amend this policy from time to time.
The Trust may
disclose the securities holdings of the Portfolio on a daily basis to shareholders and to investors eligible to invest in the Portfolio, provided that those investors (“Eligible Investors”) are a party to a currently effective securities lending agency agreement with State Street Bank and Trust Company (“State Street”). Information regarding holdings of
the Portfolio and other online reports are
available electronically on a daily basis to shareholders of the Trust and Eligible Investors with a one-day lag through State Street's web portal, www.my.statestreet.com. The
Trust may also disclose holdings of the Portfolio (i) to the extent required by law; (ii) to the Trust's service providers who generally need access to such information in the performance of their contractual duties and responsibilities, such as the Trustees of the Trust, the
Trust's investment adviser, custodian, fund accountant, administrator, independent public accountants, attorneys, and each of their respective affiliates and advisers, and are subject to duties of confidentiality imposed by law and/or contract; and
(iii) to broker-dealers to facilitate trading.
Notwithstanding anything contained herein to the contrary, the Board and SSGA FM may, on a case-by-case basis, impose
restrictions on the disclosure of portfolio holdings information, including, without limitation, suspension or cessation of disclosure of holdings information of the Trust or the Portfolio.
The Disclosure Policy may not be waived, or exceptions made, without the written consent of an officer of the Trust. No
waiver or exception may be granted unless the person or entity benefiting thereby agrees in writing to maintain the confidentiality of information disclosed and to use such information solely in connection with its decisions relating to
participation in a Securities Lending Program. All waivers and exceptions involving the Trust will be disclosed to the Board no later than its next regularly scheduled quarterly meeting.
ITEM 17. MANAGEMENT OF THE TRUST
The Board is responsible for overseeing generally the management, activities and affairs of the Portfolio and has approved
contracts with various organizations to provide, among other services, day-to-day management required by the Trust (see the section called “Investment Advisory and Other
Services”). The Board has engaged the Adviser to manage the Portfolio on a day-to day basis. The Board is responsible for overseeing the Adviser and other service providers in the
operation of the Trust in accordance with the provisions of the 1940 Act, applicable Massachusetts law and regulation, other applicable laws and regulations, and the Second Amended and Restated Master Trust Agreement. The Trustees listed below
are also Trustees of SSGA Funds, State Street Master Funds, State Street Institutional Investment Trust, Elfun Diversified Fund, Elfun Government Money Market Fund, Elfun
Tax-Exempt Income Fund, Elfun Income Fund, Elfun International Equity Fund and Elfun Trusts (collectively, the
“Elfun Funds”), State Street Institutional Funds and State Street Variable Insurance Series Funds, Inc., and their respective series. The
following table provides information with respect to each Trustee, including those Trustees who are not considered to be “interested” as that term is defined in the 1940 Act (the
“Independent Trustees”), and each officer of the Trust.
Name, Address, and Year of Birth |
Position(s) Held With Trust
|
Term
of Office and Length of Time Served
|
Principal
Occupation During Past Five Years and Relevant
Experience |
Number
of Funds in Fund Complex
Overseen by Trustee† |
Other
Directorships Held by Trustee During Past
Five Years |
| |
|
PATRICK J. RILEY
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1948 |
Trustee and Chairperson of the Board |
Term: Indefinite Elected: 1/14 |
Independent Director, State Street Global Advisers Europe Limited (investment company) (1998 – 2023); Independent Director, SSGA Liquidity plc (formerly, SSGA Cash Management Fund plc) (1998 – 2023); and Independent Director, SSGA Fixed Income plc (January 2009 – 2023). |
|
Board Director and
Chairman, SSGA SPDR ETFs Europe I plc (2011 – March 2023); Board Director and Chairman, SSGA SPDR ETFs
Europe II plc (2013 –
March 2023); Board Director, State Street Liquidity plc (1998 – March 2023). |
MARGARET K.
MCLAUGHLIN
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1967 |
Trustee, Chairperson of the Qualified Legal Compliance Committee, and Vice-Chairperson |
Term: Indefinite Elected: 12/24 |
Consultant, Bates Group (consultants) (September 2020 – January 2023); Consultant, Madison Dearborn Partners (private equity) (2019 – |
|
Director, Manning & Napier Fund Inc (2021 – 2022). |
Name, Address, and Year of Birth |
Position(s) Held With Trust
|
Term
of Office and Length of Time Served
|
Principal
Occupation During Past Five Years and Relevant
Experience |
Number
of Funds in Fund Complex
Overseen by Trustee† |
Other
Directorships Held by Trustee During Past
Five Years |
| |
of the Valuation Committee |
|
|
|
|
GEORGE M. PEREIRA
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1964 |
Trustee, Chairperson of the Nominating Committee, Chairperson of the Governance Committee, and Vice-Chairperson of the Qualified Legal Compliance Committee |
Term: Indefinite Elected: 12/24 |
Chief Operating Officer (January 2011 – September 2020) and Chief Financial Officer (November 2004 – September 2020), Charles Schwab Investment Management. |
|
Director, Pave Finance Inc. (May 2023 – present); Director, Pacific Premier Bancorp and Pacific Premier Bank (2021 – August 2025). |
DONNA M. RAPACCIOLI
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1962 |
Trustee, Chairperson of the Audit Committee, Vice-Chairperson of the Nominating Committee, and Vice-Chairperson of the Governance Committee |
Term: Indefinite Elected: 12/18 |
Dean of the Gabelli School of Business (2007 – June 2022) and Accounting Professor (1987 – present) at Fordham University. |
|
Director- Graduate
Management Admissions Council
(2015 – 2022). |
MARK E. SWANSON
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1963 |
Trustee, Chairperson of the Valuation Committee, and Vice-Chairperson of the Audit Committee |
Term: Indefinite Elected: 12/24 |
Treasurer, Chief Accounting Officer and Chief Financial Officer, Russell Investment Funds (“RIF”) (1998 – 2022); Global Head of Fund Services, Russell Investments (2013 – 2022); Treasurer, Chief Accounting Officer and Chief Financial Officer, Russell Investment Company (“RIC”) (1998 – 2022); President and Chief Executive Officer, RIF (2016 – 2017 and 2020 to 2022); President and Chief Executive Officer, RIC (2016 – 2017 and 2020 – 2022). |
|
Director and President, Russell Investments Fund Services, LLC
(2010 – 2023); Director,
Russell Investment Management, LLC,
Russell Investments Trust Company and
Russell Investments Financial Services, LLC (2010 – 2023). |
Name, Address, and Year of Birth |
Position(s) Held With Trust
|
Term
of Office and Length of Time Served
|
Principal
Occupation During Past Five Years and Relevant
Experience |
Number
of Funds in Fund Complex
Overseen by Trustee† |
Other
Directorships Held by Trustee During Past
Five Years |
| |
|
|
|
|
|
JEANNE LAPORTA(2)
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1965 |
|
Term: Indefinite Elected: 12/24 |
Chair and Director, SSGA Funds Management, Inc. (October 2024 – present); Senior Managing Director, State Street Investment Management (August 2024 – present); Head of Global Funds Management (August 2024 – Present); Chief Administrative Officer at ClearAlpha Technologies LP (FinTech startup) (January 2021 – August 2024); Senior Managing Director at State Street Investment Management (July 2016 – 2021); Manager of State Street Global Advisors Funds Distributors, LLC (May 2017 – 2021); Director of SSGA Funds Management, Inc. (March 2020 - 2021); President of State Street Institutional Funds and State Street Variable Insurance Series Funds, Inc. (April 2014 – March 2020). |
|
Interested Trustee, Select Sector SPDR
Trust, SPDR Series Trust, SPDR Index
Shares Funds and SSGA Active Trust
(November 2024 –
present); Interested Trustee, Elfun
Government Money Market Fund, Elfun Tax Exempt Income Fund, Elfun Income Fund,
Elfun Diversified Fund,
Elfun International Equity Fund, Elfun
Trusts (2016 – 2021). |
†
For the purpose of determining the number of portfolios overseen by the Trustees, “Fund Complex” comprises registered investment companies for which SSGA FM serves as investment adviser.
(1)
The individual listed
below is a Trustee who is an “interested person,” as defined in the 1940 Act, of the Trust
(“Interested Trustee”).
(2)
Ms. LaPorta is an Interested Trustee because of her employment with State Street Investment Management, an affiliate of the Trust.
The following lists the principal officers for the Trust, as well as their
mailing addresses and ages, positions with the Trust and length of time served, and present and principal occupations:
Name, Address, and Year of Birth |
Position(s)
Held With
Trust |
Term of Office and Length of Time
Served |
Principal
Occupation During Past Five Years |
| |
ANN M. CARPENTER
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1966 |
President and Principal Executive Officer; Deputy Treasurer |
Term: Indefinite Served: since 5/23 (with respect to President and Principal Executive Officer); Term: Indefinite Served: since 4/19 (with respect to Deputy Treasurer) |
Chief Operating Officer, SSGA Funds Management, Inc. (April 2005 – present)*; Managing Director, State Street Investment Management (April 2005 – present).* |
Name, Address, and Year of Birth |
Position(s)
Held With Trust |
Term of
Office and Length of Time Served
|
Principal
Occupation During Past Five Years |
BRUCE S. ROSENBERG
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1961 |
Treasurer and Principal Financial Officer |
Term: Indefinite Served: since 2/16 |
Managing Director, State Street Investment Management and SSGA Funds Management, Inc. (July 2015 – present). |
CHAD C. HALLETT
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1969 |
|
Term: Indefinite Served: since 2/16 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (November 2014 – present). |
DARLENE ANDERSON-VASQUEZ
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1968 |
|
Term: Indefinite Served: since 11/16 |
Managing Director, State Street Investment Management and SSGA Funds Management, Inc. (May 2016 – present). |
ARTHUR A. JENSEN
SSGA Funds Management, Inc.
400 Atlantic St.
Stamford, CT 06901
YOB: 1966 |
|
Term: Indefinite Served: since 11/16 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (July 2016 – present). |
DAVID LANCASTER
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1971 |
|
Term: Indefinite Served: since 11/20 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (July 2017 – present).* |
JOHN BETTENCOURT
SSGA Funds Management, Inc.
One Congress Street,
Boston, MA 02114 YOB:1976 |
|
Term: Indefinite Served: since 5/22 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (March 2020 – present); Assistant Vice President, State Street Investment Management (June 2007 – March 2020). |
BRIAN HARRIS
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1973 |
Chief Compliance Officer; Anti-Money Laundering Officer; Code of Ethics Compliance Officer |
Term: Indefinite Served: since 7/16 |
Managing Director, State Street Investment Management and SSGA Funds Management, Inc. (June 2013 – present).* |
ANDREW J. DELORME
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1975 |
|
Term: Indefinite Served: since 2/24 |
Managing Director and Managing Counsel, State Street Investment Management (March 2023 – present); Counsel, K&L Gates (February 2021 – March 2023). |
DAVID BARR
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1974 |
|
Term: Indefinite Served: since 9/20 |
Vice President and Senior Counsel, State Street Investment Management (October 2019 – present). |
E. GERARD MAIORANA, JR. SSGA Funds Management, Inc. One Congress Street Boston, MA 02114
YOB: 1971 |
|
Term: Indefinite Served: since 5/23 |
Assistant Vice President, State Street Investment Management (July 2014 – present). |
DAVID URMAN
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1985 |
|
Term: Indefinite Served: since 8/19 |
Vice President and Senior Counsel, State Street Investment Management (April 2019 – present). |
*
Served in various capacities and/or with various affiliated entities during noted time
period.
Summary of Trustees' Qualifications
Following is a brief discussion of the experience, qualifications, attributes or skills, which qualify each Trustee to serve on the Board, in light of the Trust's business and structure.
Patrick J. Riley: Mr. Riley is an experienced
business executive with over 48 years of experience in the legal and financial services industries; his experience includes service as a trustee or director of various investment
companies and Associate Justice of the Superior Court of the Commonwealth of Massachusetts. He has served on the Board of Trustees and related committees of the Trust for 36 years and possesses significant experience regarding the operations and history
of the Trust. Mr. Riley serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment Trust, State Street Master Funds, Elfun Funds, and State Street
Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Margaret K. McLaughlin: Ms. McLaughlin has over 28 years of experience she has gained in a variety of roles encompassing regulatory, operating, legal, and compliance functions, serving both firms and their boards. Ms. McLaughlin
formerly served as a founding member of the executive management team for Kramer Van Kirk Credit Strategies L.P. and its technology affiliate, Mariana Systems LLC, where she was integrally involved in corporate strategy, operational
oversight, risk management and board governance. Prior to Kramer Van Kirk, Ms. McLaughlin was Assistant General
Counsel to Harris Associates L.P., where she was responsible for legal, regulatory and compliance activities related to the Oakmark Mutual Funds. Ms. McLaughlin has an extensive understanding and perspective on governance, oversight, regulation,
policies and procedures from these positions as well as her prior experience with both the Securities and Exchange Commission and the Department of Justice. Ms. McLaughlin
currently serves on the Governing Council of the Independent Directors Council and the Board of Governors of the Investment Company Institute. Most recently, Ms. McLaughlin has held consulting positions at a major private equity firm and a management consulting firm. Ms. McLaughlin
serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment Trust, State Street Master Funds, Elfun Funds, and State Street Institutional Funds and a
Director of State Street Variable Insurance Series Funds, Inc.
George M. Pereira: Mr. Pereira has over 33 years of experience in executive management with financial institutions,
including extensive experience relating to financial reporting, operations, cybersecurity oversight, and enterprise risk management. Mr. Pereira retired from Charles Schwab Investment Management Inc., having served as Chief Operating Officer and
Chief Financial Officer during his tenure. Previously, Mr. Pereira also served as Head of Financial Reporting for Charles Schwab & Co., Inc. Earlier in his career, Mr. Pereira
gained valuable regulatory experience and perspective while serving as managing director at the New York Stock Exchange. With this professional experience, Mr. Pereira has developed wide-ranging expertise in building and managing financial, operational, technology and risk control platforms for
growth and scale within the financial services industry. Additionally, Mr. Pereira is a member of the Latino Corporate Directors Association. Mr. Pereira serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment
Trust, State Street Master Funds, Elfun Funds, and State Street Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Donna M. Rapaccioli: Ms. Rapaccioli has over 36 years of service as a full-time member of the business faculty at Fordham
University, where she developed and taught undergraduate and graduate courses, including International Accounting and Financial Statement Analysis, has taught at the executive MBA
level. Ms. Rapaccioli is dean emerita after serving as Dean of the Gabelli School of Business for 15 years. She has served on Association to Advance Collegiate Schools of Business accreditation team visits, as a director for the graduate management admissions council, as well as
trustee at Emmanuel College. Ms. Rapaccioli has lectured on accounting and finance topics and consulted for numerous investment banks. Ms. Rapaccioli also serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment
Trust, State Street Master Funds, Elfun Funds, and State Street Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Mark E. Swanson: Mr. Swanson has over 28 years of experience in executive management with financial services
institutions, including extensive experience relating to, fund operations, financial reporting, fund accounting, and fund services. Mr. Swanson recently retired from Russell Investments, having served most recently as the Global Head of Fund
Services. Additionally, Mr. Swanson served as Treasurer, Chief Accounting Officer and Chief Financial Officer of Russell Investment Company (“RIC”) and Russell Investment Funds (“RIF”). Previously, Mr. Swanson served as
Global Head of Fund Operations for Russell, as well as serving in different directorships with RIC, RIF and other Russell entities. Mr. Swanson serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment Trust, State Street
Master Funds, Elfun Funds, and State Street Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Jeanne LaPorta: Ms. LaPorta is a Senior Managing Director of State Street Investment Management and Head of Global Funds Management. Prior to joining State Street Investment Management, she was the Chief Administrative Officer of a Fintech
startup and served as a director of their flagship hedge fund. Ms. LaPorta previously worked at State Street
Investment Management from 2016 to 2021 as a
Senior Managing Director and at GE Asset Management (GEAM) from 1997 to July 2016 where she held various positions at GEAM, including Senior Vice President and Commercial Operations Leader, Senior Vice President and Commercial Administrative Officer, Senior Vice President and Deputy General
Counsel and Vice President and Associate General Counsel.
The discussion of
the experience, qualifications, attributes and skills of the Trustees above is provided as required by the federal securities laws and the regulations of the SEC promulgated
thereunder, does not constitute holding out of the Board or any Trustee as having any special expertise or experience, and shall not impose any greater responsibility or liability on any such person or on the Board by reason thereof.
The Board of Trustees has established various committees to facilitate the timely and efficient consideration of various
matters of importance to the Independent Trustees, the Trust, and the Portfolio's shareholders and to facilitate compliance with legal and regulatory requirements. Currently, the Board has created an Audit Committee, Governance Committee, Valuation
Committee, Nominating Committee and Qualified Legal Compliance Committee (the “QLCC”).
The Audit Committee is composed of all of the Independent Trustees. The Audit Committee meets twice a year, or more often as required, in conjunction with meetings of the Board of Trustees. The Audit Committee oversees and monitors the
Trust's internal accounting and control structure, its auditing function and its financial reporting process. The Audit Committee is responsible for selecting and retaining the independent accountants for the Trust. The Audit Committee is
responsible for approving the audit plans, fees and other material arrangements in respect of the engagement of the independent accountants, including non-audit services performed. The Audit Committee reviews the qualifications of the
independent accountant's key personnel involved in the foregoing activities and monitors the independent accountant's independence. During the Trust's fiscal year ended December 31, 2025, the Audit Committee held four meetings.
Each of the Governance Committee and Nominating Committee is composed of all the
Independent Trustees. The primary functions of the Governance Committee, and the Nominating Committee are to review and evaluate the composition and performance of the Board; make nominations for membership on the Board and committees; review the
responsibilities of each committee; and review governance procedures, compensation of Independent Trustees, and
independence of outside counsel to the Trustees. The Nominating Committee will consider nominees to the Board
recommended by shareholders. Recommendations should be submitted in accordance with the procedures set forth in the Nominating Committee Charter and should be submitted in writing to the Trust, to the attention of the Trust's Secretary, at
the address of the principal executive offices of the Trust. Shareholder recommendations must be delivered to, or mailed and received at, the principal executive offices of the Trust not less than sixty (60) calendar days nor more than ninety (90)
calendar days prior to the date of the Board or shareholder meeting at which the nominee candidate would be considered for election. The Governance Committee performs an annual self-evaluation of Board members. During the fiscal year ended
December 31, 2025, the Governance Committee and Nominating Committee held four combined meetings.
The Valuation Committee is composed of all the Independent Trustees. The Valuation Committee's primary purpose is to review
the actions and recommendations of the Adviser's Oversight Committee no less often than quarterly. The Trust has established procedures and guidelines for valuing portfolio
securities and making fair value determinations from time to time through the Valuation Committee, with the assistance of the Oversight Committee, State Street and SSGA FM. During the fiscal year ended December 31, 2025, the Valuation Committee held four meetings.
The QLCC is composed of all the Independent Trustees. The primary functions of the QLCC are to receive quarterly reports from the Trust's chief compliance officer (the “Chief Compliance Officer”); to oversee generally
the Trust's responses to regulatory inquiries; and to investigate matters referred to it by the Chief Legal Officer and make recommendations to the Board regarding the implementation of an appropriate response to evidence of a material violation of
the securities laws or breach of fiduciary duty or similar violation by the Trust, its officers or the Trustees. During the fiscal year ended December 31, 2025, the QLCC Committee
held four meetings.
Leadership Structure and
Risk Management Oversight
The Board has chosen to select different
individuals as Chairperson of the Board of the Trust, as Chairperson and Vice-Chairperson of the Committees of the Board, and as President of the Trust. Currently,
Mr. Riley, an Independent Trustee, serves as Chairperson of the Board, Ms. Rapaccioli serves as Chairperson of the Audit Committee, Ms. McLaughlin serves as Chairperson of the QLCC, Mr. Swanson serves as Chairperson of the Valuation Committee and
Mr. Pereira serves as Chairperson of each of the Governance Committee and Nominating Committee. Mr. Swanson serves as Vice-Chairperson of the Audit Committee, Ms. McLaughlin serves as Vice-Chairperson of the Valuation Committee, Mr.
Pereira serves as Vice-Chairperson of the QLCC,
and Ms. Rapaccioli serves as Vice-Chairperson of each of the Governance Committee and Nominating Committee. Ms. Carpenter, who is an employee of the Adviser, serves as President of the Trust. The Board believes that this leadership structure is appropriate. Ms. Carpenter is available to
provide the Board with insight regarding the Trust's day-to-day management when requested, while Mr. Riley provides an independent perspective on the Trust's overall operation and Ms. Rapaccioli provides a specialized perspective on audit
matters.
The Board has delegated management of the Trust to service providers who are responsible for the day-to-day management of risks applicable to the Trust. The Board oversees risk management for the Trust in several ways. The Board receives
regular reports from both the CCO and administrator for the Trust, detailing the results of the Trust's compliance with its Board-adopted policies and procedures, the
investment policies and limitations of the Portfolios, and applicable provisions of the federal securities laws and the Code. As needed, the Adviser discusses management issues regarding the Trust with the Board, soliciting the Board's input on many aspects of management,
including potential risks to the Portfolios. The Board's Audit Committee also receives reports on various aspects of risk that might affect the Trust and offers advice to management, as appropriate. The Trustees also meet in executive session
with the independent counsel to the Independent Trustees, the independent registered public accounting firm, counsel to the Trust, the CCO and representatives of management, as needed. Through these regular reports and interactions, the
Board oversees the risk management parameters for the Trust, which are effected on a day-to-day basis by service providers to the Trust.
Trustee Ownership of Securities of the Trust or Adviser
As of December 31, 2025, none of the Independent Trustees or their family members had any ownership of securities of the Adviser or any person directly or indirectly controlling, controlled by, or under common control with the Adviser.
The following table sets forth information describing the dollar range of the Trust's
equity securities beneficially owned by each Trustee as of December 31,
2025.
| |
Dollar Range Of Equity Securities In The Funds |
Aggregate Dollar Range Of Equity Securities In
All Registered Investment Companies
Overseen By
Trustees In Family of
Investment Companies |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
Independent Trustees are compensated on a calendar year basis. An Interested Trustee does not receive compensation from the
Portfolios for his or her service as a Trustee. Effective January 1, 2025, each Independent Trustee receives for his or her services to the State Street Master Funds, State Street
Institutional Investment Trust, the SSGA Funds, the Elfun Funds, the Trust, State Street Institutional Funds and State Street Variable Insurance Series Funds, Inc. (together,
the “Fund Entities”) a $400,000 annual base retainer. In addition, the Chairperson of each of the Valuation Committee, QLCC, Nominating Committee and Governance Committee will receive an additional $25,000 stipend and the Chairperson of the
Audit Committee will receive an additional $40,000 stipend. As of January 1, 2024, each Independent Trustee receives an additional $25,000 for each special in-person meeting and
$5,000 for each special telephonic meeting. The Chairperson of the Board receives an additional $100,000 annual retainer. The Independent Trustees are reimbursed for travel and other out-of-pocket expenses in connection with meeting attendance. As of the date of this SAI, the Trustees were
not paid pension or retirement benefits as part of the Trust's expenses. The Trust's officers are compensated by the Adviser and its affiliates.
The table below shows the compensation that the
Trustees received during the Trust's fiscal year ended December 31, 2025.
| |
Aggregate Compensation from the
Trust |
Pension or Retirement Benefits
Accrued as Part of Trust Expenses
|
Estimated Annual Benefits Upon
Retirement |
Total Compensation from the Trust
and Fund Complex Paid to Trustees |
| |
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
| |
|
|
|
|
The total compensation from Portfolio II paid to
the Trustees for the Trust's fiscal year ended December 31, 2025 is as
follows:
| |
Aggregate Compensation from the
Portfolio |
Name of Independent Trustee |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
The Trust and the Adviser have each adopted a code of ethics (together, the “Codes of Ethics”) pursuant to Rule 17j-1 as required by applicable law, which is designed to prevent affiliated persons of the Trust and the
Adviser from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Portfolio (which may also be held by persons subject to the Codes of Ethics). The Codes of Ethics permit personnel, subject to the Codes of
Ethics and their provisions, to invest in securities for their personal investment accounts, subject to certain limitations, including securities that may be purchased or held by
the Trust, Adviser and State Street.
The Board has delegated to the Adviser the responsibility to
vote proxies on securities held by the Trust, subject to certain exceptions. The Board has retained authority to vote proxies for certain bank and bank holding company securities
(“Bank Securities”) that may be held by one or more Funds and Portfolios from time to time. The Board has adopted the Institutional Shareholder Services, Inc.'s
(“ISS”) benchmark proxy voting policy with respect to voting such Bank Securities' proxies. The Board has retained this authority
in order to permit the Adviser to utilize exemptions from limitations arising under the Bank Holding Company Act of 1956, as amended, that might otherwise prevent the Adviser
from investing a Fund's or Portfolio's assets in Bank Securities. Each of the Trust's and the Adviser's proxy voting policies, as well as ISS' benchmark proxy voting policy, are attached as an appendix to this SAI. Information regarding how a Fund or
Portfolio voted proxies relating to its portfolio securities during the most recent twelve-month period ended June 30 is available: (1) without charge by calling 1-866-787-2257;
(2) on the Funds' and Portfolios' website at www.statestreet.com/im; and (3) on the SEC's website at
www.sec.gov.
Reporting a Material Conflict of Interest
A material conflict of interest may arise in a situation where the proxy analyst, Portfolio Manager or Securities Analyst,
when voting the proxy, has knowledge of a situation where either SSGA FM or one of its affiliates would enjoy a
substantial or significant benefit from casting a vote in a particular way (“Material Conflict of Interest”). If a Material
Conflict of Interest does arise, such conflict will be documented by SSGA FM or each Sub-Adviser, as applicable, on a Material Conflict of Interest form and the Board will be notified of such Material Conflict of Interest at the next regular
board meeting after the Material Conflict of Interest occurs.
ITEM 18. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
In connection with State Street's Securities Lending Program, State Street holds certain collateral on behalf of its
securities lending clients to secure the return of loaned securities. Such collateral may be invested in Trust shares from time to time. Shares of Portfolio II will be registered with the Trust's transfer agent in the name of State Street, as agent for each Lending Fund, or in the name of the Lending Fund or the Lending Fund's custodian. Consequently, State Street will not
be a controlling person of the Trust for purposes of the 1940 Act.
Persons or organizations owning 25% or more of the
voting interests of the Portfolio may be presumed to “control” (as that term is defined in the 1940 Act) the
Portfolio. As a result, these persons or organizations could have the ability to approve or reject those matters submitted to the investors of the Portfolio for their
approval.
As of March 31, 2026, no shareholders of record, through one or more accounts, owned 25% or
more of the issued and outstanding shares of the Portfolio.
As of March 31, 2026, the following shareholders of record, through one or more accounts, owned 5% or more of the issued and
outstanding shares of the Portfolio:
| |
|
SPDR Bloomberg Barclays 1-3 Month T-Bill ETF One Congress Street
Boston, MA 02114 |
|
SPDR Portfolio Developed World EX- US ETF One Congress Street
Boston, MA 02114 |
|
SPDR Portfolio Small Cap ETF One Congress Street
Boston, MA 02114 |
|
As of March 31, 2026, the Trustees and officers of the Trust, as a group, did not own any of the Trust's voting securities.
ITEM 19. INVESTMENT ADVISORY AND OTHER
SERVICES
Most of the Portfolio's necessary day-to-day operations are performed by service providers
under contract to the Trust. The principal service providers for the Portfolio II
are:
Investment Adviser and Administrator: Custodian, Transfer Agent and Sub-Administrator: Independent Registered Public Accounting Firm: |
SSGA FM State
Street Bank and Trust Company Ernst & Young LLP |
SSGA FM serves as the investment adviser to the Portfolio pursuant to an Advisory
Agreement dated as of May 1, 2001, as amended (“Advisory Agreement”), by and between the Adviser
and the Trust. The Adviser is a wholly-owned subsidiary of State Street Global Advisors, Inc., which itself is a wholly-owned subsidiary of State Street Corporation, a publicly
held financial holding company. Prior to June 8, 2017, SSGA FM was a wholly-owned subsidiary of State Street Corporation. The Adviser's mailing address is One Congress Street, Boston, Massachusetts 02114.
Under the Advisory Agreement, the Adviser directs the Portfolio's investments in accordance with its investment objectives, policies and limitations. For these services, the Portfolio pays a fee to the Adviser at the rates stated in the Part A. The advisory fees paid by the Portfolio to SSGA FM for the fiscal years ended December 31, 2025, December 31, 2024, and
December 31, 2023 were $3,579,033, $2,969,120, and $2,739,028, respectively.
Total Annual Fund Operating Expense Waivers. The Adviser has contractually agreed with the Trust, through
April 30, 2026, (i) to waive up to the full amount of the advisory fee payable by the Portfolio, and/or (ii) to reimburse the Portfolio for expenses to the extent that Total Annual Fund Operating Expenses (subject to certain exclusions) exceed 0.042% of average
daily net assets on an annual basis.
The Advisory Agreement will
continue from year to year provided that such continuance is specifically approved at least annually by (a) the Trustees or by the vote of a majority of the outstanding voting
securities of the Portfolio, and (b) vote of a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement may be terminated by the Adviser or the Trust without penalty upon sixty days' notice and will terminate
automatically upon its assignment.
ADMINISTRATOR
SSGA FM serves as the Administrator (the “Administrator”) of the Portfolio pursuant to an Administration Agreement dated as of June 3, 2015, as amended (“Administration Agreement”) by and between SSGA FM and the Trust. Under the Administration Agreement, the Administrator will, among other things (i)
provide Portfolio II with administrative and clerical services, including the maintenance of certain of the Portfolio's books and records; (ii) arrange the periodic updating of
the Trust's Registration Statement and the Portfolio's Confidential Offering Memorandum; and (iii) provide proxy materials and reports to the Portfolio's shareholders and the SEC. For these services, the Portfolio pays an annual administration fee
equal to 0.00075% of the Portfolio's average daily net assets. The administration fees paid by the Portfolio to SSGA FM for the fiscal years ended December 31, 2025, December 31,
2024, and December 31, 2023 were $107,371, $89,074, and $82,171, respectively. The Portfolio reimburses SSGA FM for certain out-of-pocket travel expenses of the CCO and compliance team incurred on the Portfolio's behalf.
The Administration Agreement was approved initially for a one-year term by the Trustees, and will continue in effect from
year to year unless terminated in writing by either the Administrator or the Trust at the end of such period or thereafter on 60 days' prior written notice given by either party to the other party.
SUB-ADMINISTRATOR, CUSTODY, FUND ACCOUNTING AND TRANSFER AGENCY
State Street serves as the sub-administrator for the Trust, pursuant to a sub-administration agreement dated June 1, 2015 (the “Sub-Administration Agreement”). State Street serves as the custodian for the Trust, pursuant to a custody agreement dated April 11, 2012 (the “Custody
Agreement”). Under the Sub-Administration Agreement, State Street is obligated to provide certain sub-administrative services to the Trust. Under the Custody Agreement, State Street is obligated to provide
certain custody services to the Trust, as well as basic portfolio recordkeeping required by the Trust for regulatory and financial reporting purposes. State Street also serves as transfer agent for the Portfolio. State Street is a wholly owned
subsidiary of State Street Corporation, a publicly held financial holding company, and is affiliated with the Adviser. State Street's mailing address is One Congress Street, Boston, Massachusetts 02114.
As consideration for sub-administration, custody, fund accounting, and transfer agency services, the Portfolio pays State Street an annual fee (payable monthly) based on the average monthly net assets of the Portfolio. The Portfolio also pays
State Street transaction and service fees for these services and reimburses State Street for out-of-pocket expenses.
The custodian, sub-administration, fund accounting and transfer agent service fees paid by
the Portfolio to State Street for the fiscal years ended December 31, 2025, December 31, 2024, and December 31, 2023 were $1,719,986, $1,433,644, and $1,315,854, respectively.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ropes & Gray LLP serves as counsel to the Trust. The principal business address of Ropes & Gray LLP is 800 Boylston
Street, Boston, Massachusetts 02199. Sullivan & Worcester LLP, located at One Post Office Square, Boston,
Massachusetts, 02109, serves as independent counsel to the Independent Trustees.
The Audit Committee approved the appointment of Ernst & Young LLP (“E&Y”), 200 Clarendon Street, Boston, MA
02116, as the Portfolio's independent registered public accounting firm for the fiscal year ending December 31, 2025.
ITEM 20. PORTFOLIO MANAGERS
The Adviser manages the Funds using a team of investment professionals. The
following table lists the number and types of accounts managed by each of the key professionals involved in the day-to-day portfolio management for each Fund and assets under management in those accounts.
| |
Registered Investment Company
Accounts |
Assets Managed (billions)*
|
Other Pooled Investment Vehicle
Accounts |
Assets Managed (billions)*
|
|
Assets Managed (billions)*
|
Total Assets Managed
(billions) |
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
*
There are no performance-based fees associated with these accounts.
The portfolio managers did not
beneficially own any shares of the Portfolio as of December 31, 2025.
A portfolio manager that has responsibility for
managing more than one account may be subject to potential conflicts of interest because he or she is responsible for other accounts in addition to the Portfolio. Those conflicts
could include preferential treatment of one account over others in terms of: (a) the portfolio manager's execution of different investment strategies for various accounts; or (b) the allocation of resources or of investment opportunities.
Portfolio managers may manage numerous accounts for multiple clients. These accounts may include registered investment companies, other types of pooled accounts (e.g., collective investment funds), and separate accounts (i.e.,
accounts managed on behalf of individuals or public or private institutions). Portfolio managers make investment decisions for each account based on the investment objectives and policies and other relevant investment considerations applicable to
that portfolio. A potential conflict of interest may arise as a result of a portfolio manager's responsibility for multiple accounts with similar investment guidelines. Under these
circumstances, a potential investment may be suitable for more than one of the portfolio manager's accounts, but the quantity of the investment available for purchase is less than
the aggregate amount the accounts would ideally allocate to the opportunity. Similar conflicts may arise when multiple accounts seek to dispose of the same investment. The portfolio managers may also manage accounts whose objectives and
policies differ from that of the Portfolio. These differences may be such that under certain circumstances, trading activity appropriate for one account managed by the portfolio
manager may have adverse consequences for another account managed by the portfolio manager. For example, an account may sell a significant position in a security, which could cause the market price of that security to decrease, while a Portfolio maintained its position in that security.
A potential conflict may arise when the portfolio managers are responsible for accounts
that have different advisory fees— the difference in fees could create an incentive for the portfolio manager to favor one account over another, for example, in terms of access to investment opportunities. This conflict may be heightened if an account is subject to a performance-based
fee, as applicable. Another potential conflict may arise when the portfolio manager has a personal investment in one or more accounts that participate in transactions with other
accounts. His or her personal investment(s) may create an incentive for the portfolio manager to favor one account over another. The Adviser has adopted policies and procedures
reasonably designed to address these potential material conflicts. For instance, portfolio managers are normally
responsible for all accounts within a certain investment discipline and do not, absent special circumstances, differentiate among the various accounts when allocating resources. Additionally, the Adviser and its advisory affiliates have processes
and procedures for allocating investment opportunities among portfolios that are designed to provide a fair and equitable allocation. With respect to conflicts arising from personal investments, all employees, including portfolio managers, must
comply with personal trading controls established by each of the Adviser's and Trust's Code of Ethics.
Compensation. State Street Investment Management's (“State
Street IM”) culture is complemented and reinforced by a total rewards strategy that is based on a pay for performance philosophy which seeks to offer a competitive pay mix of base
salary, benefits, cash incentives and deferred compensation.
Salary is based on a number of factors, including external benchmarking data and market trends, and performance both at the business and individual level. State Street IM's Global Human Resources department regularly participates in
compensation surveys in order to provide State Street IM with market-based compensation information that helps support individual pay decisions.
Additionally, subject to State Street and State Street IM business results, an incentive pool
is allocated to State Street IM to reward its employees. The size of the incentive pool for most business units is based on the firm's overall profitability and other factors, including performance against risk-related goals. For most State Street IM investment teams, State Street
IM recognizes and rewards performance by linking annual incentive decisions for investment teams to the firm's or business unit's profitability and business unit investment
performance over a multi-year period.
Incentive pool funding for most active investment teams is driven in part by the post-tax investment performance of fund(s)
managed by the team versus the return levels of the benchmark index(es) of the fund(s) on a one-, three- and, in some cases, five-year basis. For most active investment teams, a material portion of incentive compensation for senior staff is
deferred over a four-year period into the State Street Investment Management Long-Term Incentive
(“State Street Investment Management
LTI”) program. For these teams, the State Street Investment Management LTI program indexes the performance of these deferred awards against the post-tax investment performance of fund(s) managed by the team. This is
intended to align State Street IM's investment team's compensation with client interests, both through annual incentive compensation awards and through the long-term value of
deferred awards in the State Street Investment Management LTI program.
For the index equity investment team, incentive pool funding is driven in part by the
post-tax 1- and 3-year tracking error of the funds managed by the team against the benchmark indexes of the funds.
The discretionary allocation of the incentive pool
to the business units within State Street IM is influenced by market-based compensation data, as well as the overall performance of each business unit. Individual compensation
decisions are made by the employee's manager, in conjunction with the senior management of the employee's business unit. These decisions are based on the overall performance of the employee and, as mentioned above, on the performance of the firm and
business unit. Depending on the job level, a portion of the annual incentive may be awarded in deferred compensation, which may include cash and/or Deferred Stock Awards (State
Street stock), which typically vest over a four-year period. This helps to retain staff and further aligns State Street IM employees' interests with State Street IM clients' and shareholders' long-term interests.
State Street IM recognizes and rewards outstanding performance by:
•Promoting employee ownership to connect employees directly to the
company's success.
•Using rewards to reinforce mission, vision, values and business
strategy.
•Seeking to recognize and preserve the firm's unique culture and team
orientation.
•Providing all employees the opportunity to share in the success of State
Street IM.
ITEM 21.
BROKERAGE ALLOCATION AND OTHER PRACTICES
All portfolio transactions are
placed on behalf of a Portfolio by the Adviser. Purchases and sales of securities on a securities exchange are affected through brokers who charge a commission for their services.
Ordinarily commissions are not charged on over-the-counter orders (e.g., fixed income securities) because the Portfolio pays a spread which is included in the cost of the security and represents the difference between the dealer's quoted price at which it is willing to
sell the security and the dealer's quoted price at which it is willing to buy the security. When a Portfolio executes an over-the-counter order with an electronic communications network or an alternative trading system, a commission is charged by such
electronic communications networks and alternative trading systems as they execute such orders on an agency basis. Securities may be purchased from underwriters at prices that
include underwriting fees.
In placing a portfolio transaction, the
Adviser seeks to achieve best execution. The Adviser's duty to seek best execution requires the Adviser to take reasonable steps to obtain for the client as favorable an overall
result as possible for portfolio transactions under the circumstances, taking into account various factors that are relevant to the particular transaction.
The Adviser refers to and selects from the list of approved trading counterparties maintained
by the Adviser's Credit Risk Management team. In selecting a trading counterparty for a particular trade, the Adviser seeks to weigh relevant factors including, but not limited to the following:
•Prompt and reliable execution;
•The competitiveness of commission rates and spreads, if applicable;
•The financial strength, stability
and/or reputation of the trading counterparty;
•The willingness and ability of the executing trading
counterparty to execute transactions (and commit capital) of size in liquid and illiquid markets without disrupting the market for the security;
•Local laws, regulations or restrictions;
•The ability of the trading counterparty to maintain
confidentiality;
•The availability and capability of execution venues,
including electronic communications networks for trading and execution management systems made available to Adviser;
•Execution related costs;
•History of execution of orders;
•Likelihood of execution and settlement;
•Clearance and settlement capabilities, especially in high volatility
market environments;
•Availability of lendable
securities;
•Sophistication
of the trading counterparty's trading capabilities and infrastructure/facilities;
•The operational efficiency with which transactions
are processed and cleared, taking into account the order size and complexity;
•Speed and responsiveness to the Adviser;
•Access to secondary markets;
•Counterparty exposure; and
•Depending upon the circumstances, the Adviser may
take other relevant factors into account if the Adviser believes that these are important in taking all sufficient steps to obtain the best possible result for execution of the
order.
In selecting a trading counterparty, the price of the
transaction and costs related to the execution of the transaction typically merit a high relative importance, depending on the circumstances. The Adviser does not necessarily
select a trading counterparty based upon price and costs but may take other relevant factors into account if it believes that these are important in taking reasonable steps to obtain the best possible result for a Portfolio under the circumstances.
Consequently, the Adviser may cause a client to pay a trading counterparty more than another trading counterparty might have charged for the same transaction in recognition of the value and quality of the brokerage services provided. The
following matters may influence the relative importance that the Adviser places upon the relevant factors:
(i)
The nature and characteristics of the order or transaction. For example, size of order, market
impact of order, limits, or other instructions relating to the order;
(ii)
The characteristics of the financial instrument(s) or other assets which are the subject of
that order. For example, whether the order pertains to an equity, fixed income, derivative or convertible instrument;
(iii)
The characteristics
of the execution venues to which that order can be directed, if relevant. For example, availability and capabilities of electronic trading systems;
(iv)
Whether the
transaction is a ‘delivery versus payment' or ‘over-the-counter' transaction. The creditworthiness of the trading counterparty, the amount of existing exposure to a
trading counterparty and trading counterparty settlement capabilities may be given a higher relative importance in the case of ‘over-the-counter' transactions; and/or
(v)
Any other circumstances that the Adviser believes are relevant at the time.
The process by which
trading counterparties are selected to effect transactions is designed to exclude consideration of the sales efforts conducted by broker-dealers in relation to the
Portfolio.
The Adviser does not currently use the Portfolio's assets in
connection with third-party soft dollar arrangements. While the Adviser does not currently use “soft” or commission dollars paid by the Portfolio
for the purchase of third-party research, the Adviser reserves the right to do so in the future.
ITEM 22. CAPITAL STOCK AND OTHER
SECURITIES
Under its Master Trust Agreement, the Trust is authorized to
issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share, which may be divided into one or more series, each of which evidences pro rata
ownership interest in a different investment portfolio. The Trustees may create additional portfolio series at any time without shareholder approval. The shares of the Portfolio may have such rights and preferences as the Trustees may establish
from time to time, including the right of redemption (including the price, manner and terms of redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions, conversion rights and conditions under which the Portfolio may have separate voting rights or no voting
rights.
This Part B covers Portfolio II, which commenced operations on
December 10, 2018. The Trust is authorized, without shareholder approval, to divide shares of any series into two or more classes of shares, each class having such different
dividend, liquidation, voting and other rights as the Trustees may determine without shareholder approval.
Any amendment to the Master Trust Agreement that would materially and adversely affect
shareholders of the Trust as a whole, or shareholders of a particular portfolio series, must be approved by the holders of a majority of the shares of the Trust or the portfolio series, respectively. All other amendments may be effected by the Board.
The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or obligations of the Portfolio and that every written agreement, obligation, or other undertaking of the
Portfolio shall contain a provision to the effect that the shareholders are not personally liable thereunder. If any present or past shareholder of the Portfolio is charged or held personally liable for any obligation or liability of the Trust solely by reason of being or
having been a shareholder and not because of such shareholder's acts or omissions or for some other reason, the
Portfolio series, upon request, shall assume the defense against such charge and satisfy any judgment thereon, and the shareholder or former shareholder shall be entitled out of the assets of the Portfolio to be held harmless from and
indemnified against all loss and expense arising from such liability. Thus, the risk to shareholders of incurring financial loss beyond their investments is limited to circumstances in which the Portfolio itself would be unable to meet its obligations.
The Trust will not have an Annual Meeting of Shareholders. Special Meetings may be convened
(i) by the Board (ii) upon written request to the Board by the holders of at least 10% of the outstanding shares of the Trust, or (iii) upon the Board's failure to honor the shareholders' request as described above, by holders of at least 10% of the outstanding shares giving
notice of the special meeting to the shareholders.
ITEM 23. PURCHASE, REDEMPTION, AND PRICING OF SHARES
MANNER IN WHICH SHARES ARE OFFERED
Shares of the Portfolio are being offered to Lending Funds in connection with State Street's Securities Lending Program.
Shares for the Portfolio are sold in private placement transactions that do not involve any
“public offering” within the meaning of Section (4)(a)(2) under the 1933 Act. Shares of the Portfolio are sold directly by the Trust without
a distributor and are not subject to a sales load or redemption fee. Additionally, assets of the Portfolio are not subject to fees permitted pursuant to Rule 12b-1 under the 1940 Act.
Pricing of shares of the Portfolio does not occur on New York Stock Exchange (“NYSE”) holidays. The NYSE is open for trading every weekday except for: (a) the following holidays: New Year's Day, Martin Luther King, Jr.'s Birthday,
Washington's Birthday (the third Monday in February), Good Friday, Memorial Day, Juneteenth National Independence
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day; and (b) the preceding Friday or the subsequent Monday when one of the calendar-determined holidays falls on a Saturday or Sunday, respectively. Purchases and withdrawals
will be effected at the time of determination of NAV next following the receipt of any purchase or withdrawal order, which is determined to be in good order. The Portfolio's
securities will be valued pursuant to guidelines established by the Board.
The Portfolio calculates its NAV per share to two decimal places. The Portfolio determines its NAV per share once each business day as of 3:30 pm on a scheduled trading day on the New York Stock Exchange (the “NYSE”), except for Columbus Day and Veterans Day. In unusual circumstances, such as an emergency or an unscheduled close or halt of trading on
the NYSE, the time at which share prices are determined may be changed. The NAV per share of the Portfolio is based on the market value of the investments held in the Portfolio.
The Portfolio values each security or other investment pursuant to guidelines adopted by the Board of Trustees. The Board has appointed the Adviser as the valuation designee to fair value securities or other investments pursuant to procedures approved by the Board, under certain
limited circumstances. For example, fair value pricing may be used when market quotations are not readily available or reliable, such as when (i) trading for a security is
restricted; or (ii) a significant event, as determined by the Adviser, that may affect the value of one or more securities or other investments held by the Portfolio occurs after
the close of a related exchange but before the determination of the Portfolio's NAV. Attempts to determine the fair value of securities or other investments introduce an element of subjectivity to the pricing of securities or other investments. As a
result, the price of a security or other investment determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately reflect the price the Portfolio would have received had it sold
the investment. To the extent that the Portfolio invests in the shares of other registered open-end investment companies that are not traded on an exchange (mutual funds), such shares are valued at their published NAV per share as reported by
the funds. The prospectuses of these funds explain the circumstances under which the funds will use fair value pricing and the effects of using fair value pricing.
In accordance with certain federal regulations, the Trust is required to obtain,
verify and record information that identifies each entity that applies to open an account, including, in certain cases, information concerning such entity's beneficial owners. For this reason, when you open (or change ownership of) an account, the Trust will request certain information,
including your name, address and taxpayer
identification number, which will be used to verify your identity. If you are unable to provide sufficient information to verify your identity, the Trust will not open an account
for you. As required by law, the Trust may employ various procedures, such as comparing your information to fraud databases or requesting additional information and documentation from you, to ensure that the information supplied by you is correct. The Trust reserves the
right to reject any purchase for any reason, including failure to provide the Trust with information necessary to confirm your identity as required by law.
U.S. FEDERAL INCOME TAXES
The following discussion of certain U.S. federal income tax consequences of an investment in the Portfolio is based on the
Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations, and other
applicable authority, as of the date of this Part B. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of the important U.S. federal income tax
considerations generally applicable to investments in the Portfolio. This summary does not purport to be a complete description of the U.S. federal income tax considerations applicable to an investment in shares of the Portfolio. There may
be other tax considerations applicable to particular shareholders.
Shareholders should consult their own tax advisors regarding their particular situation and the possible application of foreign, state and local tax laws.
Special tax rules apply to investments through defined contribution plans and other tax-qualified plans or tax-advantaged
arrangements. Shareholders should consult their tax advisers to determine the suitability of shares of the Portfolio as an investment through such plans and arrangements and the precise effect of an investment on their particular tax situations.
Qualification as a Regulated Investment Company
The Portfolio has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Code and intends each year to qualify and be eligible to be treated as such. In order to qualify
for the special tax treatment accorded RICs and their shareholders, the Portfolio must, among other things, (a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, gains from the sale of securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or currencies and (ii) net income derived from interests in “qualified publicly traded
partnerships” (as defined below); (b) diversify its holdings so that, at the end of each quarter of the Portfolio's taxable year, (i) at least 50% of the value of the Portfolio's total assets consists of cash and cash items (including receivables), U.S. Government securities, securities of other RICs, and other securities limited in respect
of any one issuer to a value not greater than 5% of the value of the Portfolio's total assets and no more than 10% of the outstanding voting securities of such issuer, and (ii) no more than 25% of its assets are invested, including through
corporations in which the Portfolio owns a 20% or more voting stock interest, (x) in the securities (other than those of the U.S. Government or other RICs) of any one issuer or of two or more issuers, which the Portfolio controls and which are
engaged in the same, similar or related trades and businesses, or (y) in the securities of one or more qualified publicly traded partnerships (as defined below); and (c) distribute with respect to each taxable year at least 90% of the sum of its
investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid — generally taxable ordinary income and the excess, if any, of net short-term capital gains over net long-term capital
losses) and net tax-exempt income, for such year.
In general, for purposes of the 90% gross income requirement described in (a) above, income derived from a partnership will
be treated as qualifying income only to the extent such income is attributable to items of income of the partnership, which would be qualifying income if realized directly by the
RIC. However, 100% of the net income derived from an interest in a qualified publicly traded partnership (a partnership (x) the interests in which are traded on an established
securities market or are readily tradable on a secondary market or the substantial equivalent thereof, and (y) that derives less than 90% of its income from the qualifying income described in section (a)(i) of the preceding paragraph), will be treated as
qualifying income. In general, qualified publicly traded partnerships will be treated as partnerships for U.S. federal income tax purposes, because they meet the passive income requirement under Code Section 7704(c)(2). Further, although in general
the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to items attributable to an interest in a qualified publicly traded
partnership.
For purposes of the diversification test in (b)
above, the term “outstanding voting securities of such issuer” will include the equity securities of a
qualified publicly traded partnership. Also, for purposes of the diversification test in (b) above, the identification of the issuer (or, in some cases, issuers) of a particular
investment can depend on the terms and conditions of that investment. In some cases, identification of the issuer (or issuers) is uncertain under current law, and an adverse
determination or future guidance by the Internal Revenue Service (“IRS”) with respect to issuer identification for a
particular type of investment may adversely affect the Portfolio's ability to meet the diversification test in (b) above.
If the Portfolio qualifies as a RIC that is accorded special tax treatment, the Portfolio
will not be subject to U.S. federal income tax on income or gains distributed in a timely manner to its shareholders in the form of dividends (including Capital Gain Dividends, as defined below). If the Portfolio were to fail to meet the income, diversification or distribution test
described above, the Portfolio could in some cases cure such failure, including by paying a Portfolio-level tax, paying interest, making additional distributions, or disposing of certain assets. If the Portfolio were ineligible to or otherwise did not cure such failure for any year, or if the Portfolio were otherwise to fail to qualify as a RIC accorded special tax
treatment in any taxable year, the Portfolio would be subject to tax at the Portfolio level on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income (if any) and long-term net capital gains, would be taxable to shareholders as ordinary income. Some portions of such distributions may be eligible
for the dividends received deduction in the case of corporate shareholders and may be eligible to be treated as “qualified dividend income” in the case of
shareholders taxed as individuals, provided, in both cases, the shareholder meets certain holding period and other requirements in respect of the Portfolio's shares (as described
below). In addition, the Portfolio could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before re-qualifying as a RIC that is accorded special tax treatment.
The Portfolio intends to distribute at least annually to its shareholders all or substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction) and its net tax-exempt income (if any), and may
distribute its net capital gain (that is, the excess of net long-term capital gain over net short-term capital loss, in each case determined with reference to any loss
carryforwards). Any taxable income retained by the Portfolio will be subject to tax at the Portfolio level at regular corporate rates. In the case of net capital gain, the
Portfolio is permitted to designate the retained amount as undistributed capital gain in a timely notice to its shareholders who would then, in turn, be (a) required to include in income for U.S. federal income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (b) entitled to credit their proportionate shares of the tax paid by the Portfolio on such undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds on a properly-filed U.S. tax return to the extent the credit exceeds such liabilities. If the Portfolio makes this designation, for U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder of the Portfolio will be increased by an amount equal to the difference between the amount of undistributed capital gains included in the shareholder's gross income under clause (a) of
the preceding sentence and the tax deemed paid by the shareholder under clause (b) of the preceding sentence. The Portfolio is not required to, and there can be no assurance the
Portfolio will, make this designation if it retains all or a portion of its net capital gain in a taxable year.
In determining its net capital gain, including in connection with determining the amount
available to support a Capital Gain Dividend (as defined below), its taxable income, and its earnings and profits, a RIC generally may elect to treat part or all of any post-October capital loss (defined as any net capital loss attributable to the portion, if any, of the taxable year after October 31 or, if there is no such loss, the net long-term capital loss or net short-term capital loss attributable to any such portion of the taxable year) or late-year ordinary loss (generally, the sum of its (i) net ordinary loss, if any, from the sale, exchange or other taxable disposition of property, attributable to the portion, if any, of the taxable year after October 31,
and its (ii) other net ordinary loss, if any, attributable to the portion of the taxable year, if any, after December 31) as if incurred in the succeeding taxable year.
If the Portfolio were to fail to distribute in a calendar year at least an amount equal to the sum of 98% of its ordinary
income for such year and 98.2% of its capital gain net income for the one-year period ending October 31 of such year (or for the one-year period ending November 30 or December 31, if the Portfolio is eligible to elect and so elects), plus any
such amounts retained from the prior year, the Portfolio would be subject to a nondeductible 4% excise tax on the
undistributed amounts. For purposes of the required excise tax distribution, a RIC's ordinary gains and losses from the sale, exchange or other taxable disposition of property that would otherwise be taken into account after October 31 of a
calendar year (or November 30 of that year, if the RIC makes the election described above) generally are treated as arising on January 1 of the following calendar year; in the case of a RIC with a December 31 year end that makes the
election described above, no such gains or losses will be so treated. Also, for these purposes, the Portfolio will be treated as having distributed any amount on which it is subject to corporate income tax for the taxable year ending within the
calendar year. The Portfolio intends generally to make distributions sufficient to avoid imposition of the 4% excise tax
although there can be no assurance it will do so.
Distributions declared by the Portfolio during October, November and December to shareholders of record on a date in any such month and paid by the Portfolio during the following
January will be treated for U.S. federal tax purposes as paid by the Portfolio and received by shareholders on December 31 of the year in which declared. In addition, if the Portfolio were to qualify as a “personal holding company,” it might have to
comply with additional requirements with respect to its distributions to shareholders in order to avoid the fund-level tax under the personal holding company rules of the Code.
Capital losses in excess of capital gains (“net
capital losses”) are not permitted to be deducted against the Portfolio's net investment income. Instead, potentially subject to certain limitations, the Portfolio may carry net capital losses from any
taxable year forward to subsequent taxable years to offset capital gains, if any, realized during such subsequent taxable years. Distributions from capital gains are generally made after applying any available capital loss carryforwards. Capital
loss carryforwards are reduced to the extent they offset current-year net realized capital gains, whether the Portfolio retains or distributes such gains. The Portfolio may carry net capital losses forward to one or more subsequent taxable
years without expiration; any such carryforward losses will retain their character as short-term or long-term. The Portfolio must apply such carryforwards first against gains of the same character.
Taxation of Distributions Received by Shareholders
For U.S. federal income tax purposes, distributions of investment income are generally taxable to shareholders as ordinary
income. Taxes on distributions of capital gains are determined by how long the Portfolio owned (or is deemed to have owned) the investments that generated them, rather than how long a shareholder has owned his or her Portfolio shares. In
general, the Portfolio will recognize long-term capital gain or loss on the disposition of assets the Portfolio has owned (or is deemed to have owned) for more than one year, and short-term capital gain or loss on the disposition of investments the
Portfolio has owned (or is deemed to have owned) for one year or less. Tax rules can alter the Portfolio's holding period in investments and thereby affect the tax treatment of gain or loss on such investments. Distributions of net capital gain
properly reported by the Portfolio as capital gain dividends (“Capital Gain Dividends”) generally will be
taxable to a shareholder receiving such distributions as long-term capital gains includible in net capital gain and taxed to individuals at reduced rates relative to ordinary income. The IRS and the Department of the Treasury have issued regulations that impose
special rules in respect of Capital Gain Dividends received through partnership interests constituting
“applicable partnership
interests” under Section 1061 of the Code. Distributions of net short-term capital gain (as reduced by
any net long-term capital loss for the taxable year) will be taxable to shareholders as ordinary income. Distributions of investment income properly reported by the Portfolio as derived from “qualified dividend income” will be taxed in the
hands of individuals at the rates applicable to long-term net capital gain, provided holding period and other requirements are met at both the shareholder and Portfolio level. The Portfolio does not expect to realize any significant long-term capital gains or
losses or qualified dividend income.
The Code generally imposes a 3.8% Medicare contribution tax on the net investment income of certain individuals, trusts and
estates to the extent their income exceeds certain threshold amounts. For these purposes, “net investment
income” generally
includes, among other things, (i) distributions paid by the Portfolio of net investment income and capital gains, and (ii) any net gain from the sale, redemption, exchange or other
taxable disposition of Portfolio shares. Shareholders are advised to consult their tax advisors regarding the possible implications of this additional tax on their investment in
the Portfolio.
Shareholders of the Portfolio will be subject to U.S. federal income taxes as described herein on distributions made by the
Portfolio whether received in cash or reinvested in additional shares of the Portfolio.
If, in respect to any taxable year, the Portfolio makes a distribution to a shareholder in excess of the Portfolio's current and accumulated earnings and profits in any taxable year, the excess distribution will be treated as a return of capital to the
extent of such shareholder's tax basis in its shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a shareholder's tax basis in its shares, thus reducing any loss or increasing any gain on a subsequent taxable
disposition by the shareholder of its shares.
Distributions with respect to the Portfolio's shares are generally subject to U.S. federal income tax as described herein to
the extent they do not exceed the Portfolio's realized income and gains, even though such distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares
purchased at a time when the Portfolio's NAV includes either unrealized gains, or realized but undistributed income or gains that were therefore included in the price the shareholder paid. Such distributions may reduce the fair market value of
the Portfolio's shares below the shareholder's cost basis in those shares. As described above, the Portfolio is required to distribute realized income and gains regardless of whether the Portfolio's NAV also reflects unrealized losses.
In order for some portion of the dividends
received by the Portfolio shareholder to be “qualified dividend income” that is eligible for taxation at long-term
capital gain rates, the Portfolio must meet holding period and other requirements with respect to the dividend-paying stocks held by the Portfolio and the shareholder must meet
holding period and other requirements with respect to some portion of the Portfolio's shares. In general, a dividend will not be treated as qualified dividend income (at either the Portfolio or shareholder level) (a) if the dividend is received with respect to any share of
stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days
during the 181-day period beginning 90 days before such date), (b) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar
or related property, (c) if the recipient elects to have the dividend income treated as investment income for purposes of the limitation on deductibility of investment interest, or (d) if the dividend is received from a foreign corporation that is (i) not eligible for the benefits of a comprehensive income tax treaty with the United States (with the exception of dividends paid
on stock of such a foreign corporation readily tradable on an established securities market in the United States) or (ii) treated as a passive foreign investment company.
In general, distributions of investment income properly reported by the Portfolio as derived from qualified dividend income
will be treated as qualified dividend income in the hands of a shareholder taxed as an individual, provided the shareholder meets the holding period and other requirements described above with respect to the Portfolio's shares. If the aggregate
qualified dividends received by the Portfolio during any taxable year are 95% or more of the Portfolio's gross income (excluding net long-term capital gain over net short-term capital loss), then 100% of the Portfolio's dividends (other than
dividends properly reported as Capital Gain Dividends) will be eligible to be treated as qualified dividend income. Since the Portfolio primarily holds investments that do not pay dividends, it is not expected that a substantial portion (if any) of
the dividends paid by the Portfolio will qualify for the favorable income tax rates available to individuals on qualified dividend income.
In general, dividends of net investment income received by corporate shareholders of the Portfolio will qualify for the dividends-received deduction generally available to corporations to the extent of the amount of eligible dividends received
by the Portfolio from domestic corporations for the taxable year. A dividend will not be treated as a dividend eligible for the dividends-received deduction (a) if it has been received with respect to any share of stock that the Portfolio has held for
less than 46 days (91 days in the case of certain preferred stock) during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend (during the 181-day period
beginning 90 days before such date in the case of certain preferred stock) or (b) to the extent that the Portfolio is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or related property. Moreover, the dividends-received deduction may otherwise be disallowed or reduced (x) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of the
Portfolio or (y) by application of various provisions of the Code (for instance, the dividends-received deduction is reduced in the case of a dividend received on debt-financed portfolio stock (generally, stock acquired with borrowed funds)). Since
the Portfolio primarily holds investments that do not pay dividends, it is not expected that a substantial portion (if any) of the dividends paid by the Portfolio will qualify for the dividends-received deduction for corporations.
Any distribution of income that is attributable to (i) income received by the Portfolio in lieu of dividends with respect to securities on loan pursuant to a securities lending transaction or (ii) dividend income received by the Portfolio on securities it temporarily purchased from a counterparty pursuant to a repurchase agreement that is treated for U.S. federal income tax
purposes as a loan by the Portfolio, will not constitute qualified dividend income to individual shareholders and will not be eligible for the dividends received deduction for
corporate shareholders.
As required by federal law, detailed federal
tax information with respect to each calendar year will be furnished to each shareholder early in the succeeding year.
Redemptions and Exchanges
Redemptions and exchanges of the Portfolio's shares are taxable events. Gain, if any,
resulting from the redemption of Portfolio shares generally will also be taxable to you as either short-term or long-term capital gain, depending upon how long you held such Portfolio shares, except that, as and where the Portfolio is not a “publicly offered” RIC (as described below), in certain circumstances it is possible that the proceeds of a redemption of Portfolio shares may be taxable as
dividend income or a return of capital.
A RIC is considered “publicly offered” if its shares are continuously offered pursuant to a public offering, its shares are regularly traded on an established
securities exchange, or it has at least 500 shareholders at all times during a taxable year. Because shares of the Portfolio are not so registered or traded, and the Portfolio is
not expected to have at least 500 shareholders at all times during the taxable year, a portion or all the proceeds of redemptions of Portfolio shares may be treated as dividends. If a shareholder redeems fewer than all of its shares, such shareholder may be treated as having
received a distribution under Section 301 of the Code (a “Section 301 distribution”) unless the redemption
is treated as being either (i)
“substantially
disproportionate” with respect to such shareholder by satisfying certain numerical tests relating to the reduction in the redeeming shareholder's percentage interest, and percentage voting interest, in the
Portfolio, or (ii) otherwise “not
essentially equivalent to a dividend” under the relevant rules of the Code. For any period during which the Portfolio has a single shareholder, all redemption distributions will be treated as Section 301 distributions. A Section 301 distribution is not treated as a sale or exchange giving rise to a capital gain or loss, but rather is treated as a dividend to the extent supported by the Portfolio's current and accumulated earnings and profits, with the excess treated as
a return of capital reducing the shareholder's tax basis in the Portfolio shares, and thereafter as capital gain.
In addition, as and where the Portfolio is not considered so publicly offered, certain shareholders will be deemed to
receive distributions equal to their allocable shares of certain expenses paid by the Portfolio. Very generally, expenses that are deemed distributed by the Portfolio include those paid or incurred during a calendar year that are deductible in
determining the Portfolio's investment company taxable income for a taxable year beginning or ending within that calendar year, including in particular its advisory fee, but excluding those expenses incurred by virtue of the Portfolio's organization as a registered investment company (such as its registration fees, trustees' fees, expenses of periodic trustees' and
shareholders' meetings, transfer agent fees, certain legal and accounting fees, the expenses of shareholder
communications required by law, and certain other expenses). Shareholders of the Portfolio that will be deemed to have received distributions of such expenses include (i) individuals taxable in the U.S. or persons calculating their taxable
income in the same way as do such individuals and (ii) pass-through entities having such an individual or person or another pass-through entity as an interest holder or beneficiary. Such deemed distributions of expenses are not deductible
under current law by those direct or indirect shareholders who are individuals (or entities that compute their taxable income in the same manner as an individual). The deemed distributions of expenses could as a result increase a shareholder's
net taxes owed, lowering the Portfolio's effective yield with respect to such a shareholder.
Further, all or a portion of any loss realized upon a taxable disposition of Portfolio shares will generally be disallowed
under the Code's “wash sale” rule if other substantially identical shares are purchased, including by means of dividend reinvestment, within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will
be adjusted to reflect the disallowed loss.
Tax Implications of Certain Portfolio Investments
Special Rules for Debt Obligations. Some debt obligations with a fixed maturity date of more than one year
from the date of issuance (and zero-coupon debt obligations with a fixed maturity date of more than one year from the date of issuance) will be treated as debt obligations that are issued originally at a discount. Generally, OID is treated as interest income and
is included in the Portfolio's income and required to be distributed by the Portfolio over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt
obligation. In addition, payment-in-kind securities will give rise to income, which is required to be distributed and is taxable even though the Portfolio holding the security receives no interest payment in cash on the security during the year. An
investor that receives an in-kind distribution of property from a Portfolio may be required to recognize taxable gain or loss upon a subsequent taxable disposition of that property.
Some debt obligations with a fixed maturity date of more than one year from the date of issuance that are acquired in the
secondary market by the Portfolio may be treated as having “market discount.” Very generally, market discount
is the excess of the stated redemption price of a debt obligation (or in the case of an obligation issued with OID, its “revised issue price”) over the purchase price of such obligation. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt obligation having market discount is treated as ordinary income to the extent the
gain, or principal payment, does not exceed the “accrued market discount” on such debt obligation.
Alternatively, the Portfolio may elect to accrue market discount currently, in which case the Portfolio will be required to include the accrued market discount in income (as ordinary income) and thus distribute it over the term of the debt obligation, even though
payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt obligation. If the Portfolio makes the election referred to in the preceding sentence, then the rate at which the market
discount accrues, and thus is included in the Portfolio's income, will depend upon which of the permitted accrual methods the Portfolio elects.
Some debt obligations with a fixed maturity date
of one year or less from the date of issuance may be treated as having OID or, in certain cases, “acquisition discount” (very generally, the excess
of the stated redemption price over the purchase price). The Portfolio will be required to include the OID or acquisition discount in income (as ordinary income) and thus distribute it over the term of the debt security, even though payment of that amount is not received until a later
time, upon partial or full repayment or disposition of the debt security. The rate at which OID or acquisition discount accrues, and thus is included in the Portfolio's income, will depend upon which of the permitted accrual methods the
Portfolio elects.
If the Portfolio holds the foregoing kinds of obligations or other obligations subject to special rules under the Code, the
Portfolio may be required to pay out as an income distribution each year an amount which is greater than the total amount of cash interest the Portfolio actually received. Such distributions may be made from the cash assets of the Portfolio or, if
necessary, by disposition of portfolio securities, including at a time when it may not be advantageous to do so. These dispositions may cause the Portfolio to realize higher amounts of short-term capital gains (generally taxed to shareholders
at ordinary income tax rates) and, in the event the Portfolio realizes net capital gains from such transactions, its shareholders may receive a larger Capital Gain Dividend than they would have if the Portfolio had not held such
obligations.
A portion of the OID accrued on certain high yield discount obligations may not be deductible to the issuer and will instead
be treated as a dividend paid by the issuer for purposes of the dividends-received deduction. In such cases, if the issuer of the high yield discount obligations is a domestic corporation, dividend payments by the Portfolio may be eligible for the
dividends-received deduction to the extent attributable to the deemed dividend portion of such OID.
Securities Purchased at a Premium. Very generally, where the Portfolio purchases a bond at a price that exceeds the redemption price at maturity — that
is, at a premium — the premium is amortizable over the remaining term of the bond. In the case of a taxable bond, if the Portfolio makes an election applicable to all such
bonds it purchases, which election is irrevocable without consent of the IRS, the Portfolio reduces the current taxable income from the bond by the amortized premium and reduces its tax basis in the bond by the amount of such offset; upon the disposition or maturity of such bonds
acquired on or after January 4, 2013, the Portfolio is permitted to deduct any remaining premium allocable to a prior period.
At-risk or Defaulted Debt Obligations. Investments in debt obligations that are at risk of or in default present special tax issues for the Portfolio. Tax rules
are not entirely clear about issues such as when the Portfolio may cease to accrue interest, OID or market discount; whether, when or to what extent the Portfolio should recognize
market discount on such debt obligations; when and to what extent the Portfolio may take deductions for bad debts or worthless securities; and how the Portfolio should allocate payments received on obligations in default between principal and income. These and other
related issues will be addressed by the Portfolio when, as and if it invests in such obligations, in order to seek to ensure that it distributes sufficient income to preserve its status as a RIC and does not become subject to U.S. federal income or
excise tax.
Certain Investments in REITs. Any investment by the Portfolio in equity securities of real estate
investment trusts qualifying as such under Subchapter M of the Code (“REITs”) may result in the Portfolio's receipt of
cash in excess of the REIT's earnings; if the Portfolio distributes these amounts, these distributions could constitute a return of capital to Portfolio shareholders for U.S. federal income tax purposes. Dividends received by the Portfolio from a REIT will not qualify
for the corporate dividends-received deduction and generally will not constitute qualified dividend income.
Distributions by the Portfolio to its shareholders that the Portfolio properly reports as
“Section 199A
dividends,” as defined and subject
to certain conditions described below, are treated as qualified REIT dividends in the hands of non-corporate shareholders. Non-corporate shareholders are permitted a U.S. federal
income tax deduction equal to 20% of qualified REIT dividends received by them, subject to certain limitations. Very generally, a “Section 199A dividend” is any dividend or portion thereof that is attributable to certain dividends received by a RIC from REITs, to the extent
such dividends are properly reported as such by the RIC in a written notice to its shareholders. A Section 199A dividend is treated as a qualified REIT dividend only if the shareholder receiving such dividend holds the dividend-paying RIC shares for at least 46
days of the 91-day period beginning 45 days before the shares become ex-dividend, and is not under an obligation to make related payments with respect to a position in
substantially similar or related property. The Portfolio is permitted to report such part of its dividends as Section 199A dividends as are eligible, but it is not required to do
so. It is not expected that a substantial portion (if any) of the dividends paid by the Portfolio will qualify as Section 199A dividends.
Certain Investments in Mortgage
Pooling Vehicles. Special rules may apply if the Portfolio invests, directly or indirectly, in residual
interests in real estate mortgage investment conduits (“REMICs”) (including by investing in residual interests in
CMOs with respect to which an election to be treated as a REMIC is in effect) or equity interests in taxable mortgage pools (“TMPs”). Under a notice issued by the IRS in October 2006 and Treasury regulations that have yet to be issued but may apply retroactively, a portion of the Portfolio's income (including income allocated to the Portfolio from certain pass-through entities) that is attributable to a residual interest in a REMIC or an equity interest in a TMP (referred to in the Code as
an “excess inclusion”) will be subject to U.S. federal income tax in all events. This notice also provides, and the regulations are expected to
provide, that excess inclusion income of a RIC, such as the Portfolio, will be allocated to shareholders of the RIC in proportion to the dividends received by such shareholders,
with the same consequences as if the shareholders held the related interest directly. As a result, a RIC investing in such securities may not be a suitable investment for charitable remainder trusts
(“CRTs”), as noted below.
In
general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions), (ii) will
constitute unrelated business taxable income (“UBTI”) to entities (including a qualified pension
plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on UBTI, thereby potentially requiring such an entity that is
allocated excess inclusion income, and that otherwise might not be required to file a tax return, to file a tax return and pay tax on such income, and (iii) in the case of a foreign shareholder will not qualify for any reduction in U.S. federal withholding tax. A shareholder will be subject to
U.S. federal income tax on such inclusions notwithstanding any exemption from such income tax otherwise available under the Code.
Foreign Currency Transactions. Any transaction by the Portfolio in foreign currencies, foreign
currency-denominated debt obligations or certain foreign currency options, futures contracts or forward contracts (or similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency
concerned. Any such net gains could require a larger dividend toward the end of the calendar year. Any such net losses will generally reduce and potentially require the recharacterization of prior ordinary income distributions. Such ordinary
income treatment may accelerate the Portfolio's distributions to shareholders and increase the distributions taxed to shareholders as ordinary income. Any net ordinary losses so created cannot be carried forward by the Portfolio to offset
income or gains earned in subsequent taxable years.
Options and Futures. In general, option premiums received by the Portfolio are not immediately included in
the income of the Portfolio. Instead, the premiums are recognized when the option contract expires, the option is exercised by the holder, or the Portfolio transfers or otherwise terminates the option (e.g., through a closing transaction). If a call option written by the Portfolio is exercised and the Portfolio sells or delivers
the underlying stock, the Portfolio generally will recognize capital gain or loss equal to (a) the sum of the strike price and the option premium received by the Portfolio minus
(b) the Portfolio's basis in the stock. Such gain or loss generally will be short-term or long-term depending upon the holding period of the underlying stock. If securities are purchased by the Portfolio pursuant to the exercise of a put option written
by it, the Portfolio generally will subtract the premium received for purposes of computing its cost basis in the securities purchased. Gain or loss arising in respect of a termination of the Portfolio's obligation under an option other than through
the exercise of the option will be short-term gain or loss depending on whether the premium income received by the Portfolio is greater or less than the amount paid by the Portfolio (if any) in terminating the transaction. Subject to certain
exceptions, some of which are described below, such gain or loss will be short-term. Thus, for example, if an option written by the Portfolio expires unexercised, the Portfolio generally will recognize short-term gain equal to the premium
received.
The Portfolio's options activities may include transactions constituting straddles for U.S. federal income tax purposes, that
is, that trigger the U.S. federal income tax straddle rules contained primarily in Section 1092 of the Code. Such straddles include, for example, positions in a particular security, or an index of securities, and one or more options that offset the
former position, including options that are “covered” by the Portfolio's long position in the
subject security. Very generally, where applicable, Section 1092 requires (i) that losses be deferred on positions deemed to be offsetting positions with respect to “substantially similar or related
property,” to the extent of unrealized gain in the latter, and (ii) that the holding period of such a straddle position that has not already been held for the long-term holding period be terminated and begin
anew once the position is no longer part of a straddle. Options on single stocks that are not “deep in the money” may constitute qualified covered calls, which generally are not subject to the straddle rules; the holding period on stock
underlying qualified covered calls that are “in the money” although not “deep in the money” will be suspended during the period that such calls are outstanding. Thus, the straddle rules and the rules governing
qualified covered calls could cause
gains that would otherwise constitute long-term
capital gains to be treated as short-term capital gains, and distributions that would otherwise constitute
“qualified dividend
income” or qualify for the dividends-received deduction to fail to satisfy the holding period requirements and therefore to be taxed as ordinary income or fail to qualify for the dividends-received
deduction, as the case may be.
The tax treatment of certain positions entered into by the Portfolio, including regulated futures contracts, certain foreign
currency positions and certain listed non-equity options, will be governed by Section 1256 of the Code
(“Section 1256 contracts”). Gains or losses on Section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses (“60/40”), although certain foreign currency gains and losses from such contracts may be treated as ordinary in character. Also, Section 1256 contracts held by the Portfolio at the end of each taxable year (and, for
purposes of the 4% excise tax, on certain other dates as prescribed under the Code) are “marked to market” with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as
ordinary or 60/40 gain or loss, as applicable.
Other Derivatives, Hedging, and Related Transactions. In addition to the special rules described above in
respect of futures and options transactions, the Portfolio's transactions in other derivative instruments (e.g., forward contracts and swap agreements), as well as any of its hedging, short sale, securities loan or similar transactions, may be subject to one
or more special tax rules (e.g., notional principal contract, straddle, constructive sale, wash sale and short sale rules). These rules may affect whether gains and losses recognized by the Portfolio are treated as ordinary or capital, accelerate
the recognition of income or gains to the Portfolio, defer losses to the Portfolio, and cause adjustments in the holding periods of the Portfolio's securities, thereby affecting, among other things, whether capital gains and losses are treated as
short-term or long-term. These rules could therefore affect the amount, timing and/or character of distributions to shareholders.
Because these and other tax rules applicable to these types of transactions are in some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance
could be retroactive) may affect whether the Portfolio has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a RIC and avoid a Portfolio-level tax.
Commodity-Linked Instruments. The Portfolio's direct or indirect
investments in commodities and commodity-linked instruments can be limited by the Portfolio's intention to qualify as a RIC, and can bear on the Portfolio's ability to qualify
as such. Income and gains from commodities and certain commodity-linked instruments do not constitute qualifying
income to a RIC for purposes of the 90% gross income test described above. The tax treatment of some other
commodity-linked instruments in which the Portfolio might invest is not certain, in particular with respect to whether income or gains from such instruments constitute qualifying income to a RIC. If the Portfolio were to treat income or gain
from a particular instrument as qualifying income and the income or gain were later determined not to constitute qualifying income and, together with any other nonqualifying income, caused the Portfolio's nonqualifying income to exceed 10% of its
gross income in any taxable year, the Portfolio would fail to qualify as a RIC unless it is eligible to and does pay a tax at the Portfolio level.
Book-Tax Differences. Certain of the Portfolio's investments in derivative instruments and foreign currency-denominated instruments, and any of
the Portfolio's transactions in foreign currencies and hedging activities, are likely to produce a difference between its book income and the sum of its taxable income and net
tax-exempt income (if any). If such a difference arises, and the Portfolio's book income is less than the sum of its taxable income and net tax-exempt income, the Portfolio could be required to make distributions exceeding book income to qualify as a RIC that is accorded special tax
treatment and to avoid an entity-level tax. In the alternative, if the Portfolio's book income exceeds the sum of its taxable income (including realized capital gains) and net
tax-exempt income, the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of the Portfolio's remaining earnings and profits (including
earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the recipient's basis in its shares, and (iii) thereafter as gain from the sale or exchange of a capital asset.
The Portfolio's income, proceeds and gains from sources within foreign countries may be subject to non-U.S. withholding or other taxes, which will reduce the yield on those investments. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. If, at the close of the Portfolio's taxable year, more than 50% of the assets of the Portfolio consists of the securities of foreign corporations, the Portfolio may elect to permit shareholders to claim a
credit or deduction (but not both) on their income
tax returns for their pro rata portions of qualified taxes paid by the Portfolio to foreign countries in respect of foreign securities that the Portfolio has held for at least the
minimum period specified in the Code. In such a case, shareholders will include in gross income from foreign sources their pro rata shares of such taxes paid by the Portfolio.
A shareholder's ability to claim an offsetting foreign tax credit or deduction in respect of foreign taxes paid by the Portfolio is subject to certain limitations imposed by the Code, which may result in the shareholder's not receiving a full credit or
deduction (if any) for the amount of such taxes. Shareholders who do not itemize on their U.S. federal income tax returns may claim a credit (but not a deduction) for such foreign taxes. Even if the Portfolio is eligible to make such an election for a given year, it may determine not to do so.
Under certain circumstances, if the Portfolio receives a refund of foreign taxes paid in respect of a prior year, the value of
Portfolio Shares could be affected or any foreign tax credits or deductions passed through to shareholders in respect of the Portfolio's foreign taxes for the current year could be reduced.
The Portfolio generally is required to withhold and remit to the U.S. Treasury a percentage of the taxable distributions and
redemption proceeds paid to any individual shareholder who fails to properly furnish the Portfolio with a correct taxpayer identification number (“TIN”), who has under-reported dividend or interest income, or who fails to certify to the Portfolio that he or she is not subject to such withholding.
Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal
income tax liability, provided the appropriate information is furnished to the IRS.
Income of a RIC that would be UBTI if earned directly by a tax-exempt entity generally will not constitute UBTI when distributed to a tax-exempt shareholder of the RIC. Notwithstanding this “blocking” effect, a tax-exempt shareholder could
realize UBTI by virtue of its investment in the Portfolio if shares in the Portfolio constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).
A tax-exempt shareholder may also recognize UBTI if the Portfolio recognizes
“excess inclusion
income” derived from direct or
indirect investments in residual interests in REMICs or equity interests in TMPs as described above if the amount of such income recognized by the Portfolio exceeds the Portfolio's
investment company taxable income (after taking into account deductions for dividends paid by the Portfolio).
In addition, special tax consequences apply to CRTs that invest in RICs that invest
directly or indirectly in residual interests in REMICs or equity interests in TMPs. Under legislation enacted in December 2006, a CRT (as defined in Section 664 of the Code) that realizes any UBTI for a taxable year must pay an excise tax annually of an amount equal to such UBTI. Under
IRS guidance issued in October 2006, a CRT will not recognize UBTI as a result of investing in a RIC that recognizes “excess inclusion income.” Rather, if at any time during any taxable year a CRT (or one of certain other tax-exempt shareholders, such as the United
States, a state or political subdivision, or an agency or instrumentality thereof, and certain energy cooperatives) is a record holder of a share in a RIC that recognizes “excess inclusion income,” then the RIC will be subject to a tax on that portion of its “excess inclusion income” for the taxable year that is allocable to such shareholders at the highest U.S. federal corporate income tax rate. The
extent to which this IRS guidance remains applicable in light of the December 2006 legislation is unclear. To the extent permitted under the 1940 Act, the Portfolio may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such shareholder's
distributions for the year by the amount of the tax that relates to such shareholder's interest in the Portfolio. CRTs and other tax-exempt investors are urged to consult their tax
advisors concerning the consequences of investing in the Portfolio.
Under U.S. Treasury regulations, if a shareholder recognizes a loss of at least $2 million in any single taxable year or $4 million in any combination of taxable years for an individual shareholder or at least $10 million in any taxable year or $20
million in any combination of taxable years for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC are not excepted. Future guidance may extend the
current exception from this reporting requirement
to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the
loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Non-U.S. shareholders in the Portfolio should consult their tax advisors concerning the tax consequences of ownership of
shares in the Portfolio. Distributions by the Portfolio to shareholders that are not “U.S. persons” within the meaning of the Code (“foreign shareholders”) properly reported by the Portfolio as (1) Capital Gain Dividends, (2) short-term capital gain dividends, and (3) interest-related dividends, each as defined and subject to certain conditions described below, generally
are not subject to withholding of U.S. federal income tax.
In general, the Code defines (1) “short-term
capital gain dividends” as distributions of net short-term capital gains in excess of net long-term capital losses and (2)
“interest-related
dividends” as distributions from U.S.-source interest income of types similar to those not subject to U.S. federal income tax if earned directly by an individual foreign shareholder, in
each case to the extent such distributions are properly reported as such by the Portfolio in a written notice to
shareholders. The exceptions to withholding for Capital Gain Dividends and short-term capital gain dividends do not apply to (A) distributions to an individual foreign shareholder who is present in the United States for a period or periods
aggregating 183 days or more during the year of the distribution and (B) distributions attributable to gain that is treated as effectively connected with the conduct by the foreign shareholder of a trade or business within the United States under
special rules regarding the disposition of “U.S. real property interests” (“USRPIs”) as described below. The exception to withholding for interest-related dividends does not apply to distributions to a
foreign shareholder (i) that has not provided a satisfactory statement that the beneficial owner is not a U.S. person, (ii) to the extent that the dividend is attributable to
certain interest on an obligation if the foreign shareholder is the issuer or is a 10% shareholder of the issuer, (iii) that is within certain foreign countries that have inadequate information exchange with the United States, or (iv) to the extent the
dividend is attributable to interest paid by a person that is a related person of the foreign shareholder and the foreign shareholder is a controlled foreign corporation. If the Portfolio invests in a RIC that pays Capital Gain Dividends to the
Portfolio, such distributions retain their character as not subject to withholding if properly reported when paid by the Portfolio to foreign shareholders. The Portfolio is permitted to report such parts of its dividends as are eligible to be
treated as interest-related or short-term capital gain dividends, but it is not required to do so. In the case of shares held through an intermediary, the intermediary may withhold even if the Portfolio reports all or a portion of a payment as an
interest-related or short-term capital gain dividend to shareholders.
Foreign shareholders should contact their intermediaries regarding the application of withholding rules to their accounts.
Distributions by the Portfolio to foreign shareholders other than Capital Gain Dividends,
short-term capital gain dividends and interest-related dividends (e.g., dividends attributable to dividend and foreign-source interest income or to short-term capital gains or U.S. source interest income to which the exception from withholding described above does not apply) are
generally subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate).
A foreign shareholder is not, in general, subject to U.S. federal income tax on gains (and
is not allowed a deduction for losses) realized on the sale of shares of the Portfolio unless (a) such gain is effectively connected with the conduct of a trade or business carried on by such holder within the United States, (b) in the case of an individual holder, the holder is
present in the United States for a period or periods aggregating 183 days or more during the year of the sale and certain other conditions are met, or (c) the special rules relating to gain attributable to the sale or exchange of USRPIs apply to
the foreign shareholder's sale of shares of the Portfolio (as described below).
Foreign shareholders with respect to whom income from the Portfolio is effectively connected with a trade or business conducted by the foreign person within the United States will in general be subject to U.S. federal income tax on the income
derived from the Portfolio at the graduated rates applicable to U.S. citizens, residents or domestic corporations, whether such income is received in cash or reinvested in shares
of the Portfolio and, in the case of a foreign corporation, may also be subject to a branch profits tax. If a foreign shareholder is eligible for the benefits of a tax treaty, any
effectively connected income or gain will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by the shareholder in the United States. More generally, foreign shareholders who are
residents in a country with an income tax treaty with the United States may obtain different tax results than those described herein, and are urged to consult their tax
advisors.
Special rules would apply if the Portfolio were a
qualified investment entity
(“QIE”) because it is either a “U.S. real property
holding corporation” (“USRPHC”) or would be a USRPHC but for the operation of certain exceptions to the definition of USRPIs described below. Very
generally, a USRPHC is a domestic corporation that holds USRPIs the fair market value of which equals or exceeds 50% of the sum of the fair market values of the corporation's
USRPIs, interests in real property located outside the United States, and other trade or business assets. USRPIs are generally defined as any interest in U.S. real property and any interest (other than solely as a creditor) in a USRPHC or, very generally, an entity that has been
a USRPHC in the last five years. A fund that holds, directly or indirectly, significant interests in REITs may be a USRPHC. Interests in domestically controlled QIEs, including REITs and RICs that are QIEs, not-greater-than-10% interests in
publicly traded classes of stock in REITs and not-greater-than-5% interests in publicly traded classes of stock in RICs generally are not USRPIs, but these exceptions do not apply for purposes of determining whether the Portfolio is a QIE. If
an interest in the Portfolio were a USRPI, the Portfolio would be required to withhold U.S. tax on the proceeds of a share redemption by a greater-than-5% foreign shareholder, in which case such foreign shareholder generally would also be required
to file U.S. tax returns and pay any additional taxes due in connection with the redemption.
If the Portfolio were a QIE under a special
“look-through” rule, any distributions by the Portfolio to a foreign shareholder attributable directly or indirectly to (i) distributions
received by the Portfolio from a lower-tier RIC or REIT that the Portfolio is required to treat as USRPI gain in its hands and (ii) gains realized on the disposition of USRPIs by
the Portfolio, would retain their character as gains realized from USRPIs in the hands of the Portfolio's foreign shareholders and would be subject to U.S. tax withholding. In addition, such distributions could result in the foreign shareholder being required to file a U.S. tax return and pay tax on the distributions at regular U.S. federal income tax rates. The consequences to a foreign
shareholder, including the rate of such withholding and character of such distributions (e.g., as ordinary income or USRPI gain), would vary depending upon the extent of the foreign shareholder's current and past ownership of the Portfolio. The
Portfolio generally does not expect that it will be a QIE.
Foreign shareholders of the Portfolio also may be subject to “wash sale” rules to prevent the avoidance of the
tax-filing and –payment obligations discussed above through the sale and repurchase of Portfolio shares.
Foreign shareholders should consult their tax advisers and, if holding shares through
intermediaries, their intermediaries, concerning the application of these rules to their investment in the Portfolio.
In order for a foreign shareholder to qualify for any exemptions from withholding described
above or from lower withholding tax rates under income tax treaties, or to establish an exemption from back-up withholding, the foreign shareholder must comply with special certification and filing requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, IRS Form W-8BEN-E or substitute form). Foreign shareholders in the Portfolio should consult their tax
advisers in this regard.
Special rules (including withholding and reporting requirements) apply to foreign partnerships and those holding Portfolio
shares through foreign partnerships. Additional considerations may apply to foreign trusts and estates. Investors holding Portfolio shares through foreign entities should consult their tax advisers about their particular situation.
A foreign shareholder may be subject to state and local tax and to the U.S. federal estate
tax in addition to the U.S. federal income tax on income referred to above.
Shareholder Reporting Obligations with Respect To Foreign Bank and Financial Accounts
Shareholders that are U.S. persons and own, directly or indirectly, more than 50% of the
Portfolio by vote or value could be required to report annually their “financial interest” in the Portfolio's “foreign financial accounts,” if any, on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). Shareholders should consult a tax advisor, and persons investing in the Portfolio through an intermediary should contact
their intermediary, regarding the applicability to them of this reporting requirement.
Other Reporting and Withholding Requirements
Sections 1471-1474 of the Code and the U.S. Treasury and IRS guidance issued thereunder (collectively, “FATCA”) generally require the Portfolio to obtain information sufficient to identify the status of each of its shareholders under
FATCA or under an applicable intergovernmental agreement (an “IGA”) between the United States and a foreign
government. If a shareholder fails to provide the requested information or otherwise fails to comply with FATCA or an IGA, the Portfolio may be required to withhold under FATCA at a rate of 30% with respect to that shareholder on ordinary
dividends it pays. The IRS and the Department of Treasury have issued proposed regulations providing that these
withholding rules will not apply to the gross proceeds of share redemptions or Capital Gain Dividends the Portfolio pays. If
a payment by the Portfolio is subject to FATCA
withholding, the Portfolio is required to withhold even if such payment would otherwise be exempt from withholding under the rules applicable to foreign shareholders described
above (e.g., short-term capital gain dividends and interest-related dividends).
Each prospective investor is urged to consult its tax adviser regarding the applicability of FATCA and any other reporting requirements with respect to the prospective investor's own situation, including investments through an intermediary.
U.S. Treasury regulations mandate cost basis reporting to shareholders and the IRS for
redemptions of Portfolio shares. With respect to shares acquired and held directly through the Portfolio and not through a financial intermediary, the Portfolio will use a default average cost basis methodology for tracking and reporting cost basis on Portfolio shares, unless
another cost basis reporting methodology is requested in writing.
The U.S. federal income tax discussion set forth above is for general information only. Prospective investors should consult
their tax advisers regarding the specific U.S. federal income tax consequences of purchasing, holding, and disposing of shares of the Portfolio, as well as the effects of state, local, foreign, and other tax laws and any proposed tax law
changes.
ITEM 26. CALCULATION OF PERFORMANCE DATA
ITEM 27. FINANCIAL STATEMENTS
The audited financial statements for the fiscal year ended December 31, 2025 for the Portfolio, including E&Y's report for
the Portfolio thereon, are included in the Portfolio's Form N-CSR filing, which was filed with the SEC on March 9, 2026 (SEC Accession No. 0001193125-26-098723), and are incorporated into this Part B by reference. The Portfolio's Form N-CSR
filing is available, without charge, upon request, by calling (800) 242-0134 or through the Portfolio's website at www.statestreet.com/im.
APPENDIX A
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. (“MOODY'S”)
GLOBAL LONG-TERM RATING SCALE
Ratings assigned on Moody's global long-term rating scale are forward-looking opinions of the
relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of
one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
Aaa: Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit
risk.
Aa: Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A: Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa: Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain
speculative characteristics.
Ba: Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B: Obligations rated B are considered speculative and are subject to
high credit risk.
Caa: Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Additionally, a
“(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities
firms.*
*
By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
GLOBAL SHORT-TERM RATING SCALE
Ratings assigned on Moody's global short-term rating scale are forward-looking opinions of the relative credit risks of
financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen
months or less and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
P-1: Ratings of Prime-1 reflect a superior ability to repay short-term obligations.
P-2:
Ratings of Prime-2 reflect a strong ability to repay short-term obligations.
P-3: Ratings of Prime-3 reflect an acceptable ability to repay short-term obligations.
NP:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P
GLOBAL RATINGS
(“S&P”)
ISSUE CREDIT RATING DEFINITIONS
An S&P Global Ratings issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of
guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects
S&P Global Ratings' view of the obligor's capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral
security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS*
AAA: An
obligation rated ‘AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely
strong.
AA: An obligation rated ‘AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to
meet its financial commitments on the obligation is very strong.
A: An obligation rated ‘A' is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the obligation is strong.
BBB: An obligation rated ‘BBB' exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to weaken the obligor's capacity to meet its financial commitments on the obligation.
BB; B; CCC; CC; and C: Obligations rated ‘BB', ‘B', ‘CCC', ‘CC', and ‘C' are
regarded as having significant speculative characteristics. ‘BB' indicates the least degree of speculation and ‘C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
BB: An obligation rated ‘BB' is less vulnerable to nonpayment than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate capacity to meet its financial commitments on the obligation.
B: An obligation rated ‘B' is more vulnerable to nonpayment than obligations rated ‘BB', but
the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments on the obligation.
CCC: An obligation rated ‘CCC' is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
CC: An obligation rated ‘CC' is currently highly vulnerable to nonpayment. The ‘CC' rating is
used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default.
C: An
obligation rated ‘C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with
obligations that are rated higher.
D: An obligation rated ‘D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D' rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that
such payments will be made within the next five business days in the absence of a stated grace period or within the earlier of the stated grace period or the next 30 calendar days. The ‘D' rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to
automatic stay provisions. A rating on an obligation is lowered to 'D' if it is subject to a distressed debt restructuring.
NR:
This indicates that a rating has not been assigned or is no longer assigned.
*
Ratings from 'AA' to
'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1:
A short-term obligation rated ‘A-1' is rated in the highest category by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is
strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitments on these
obligations is extremely strong.
A-2: A short-term obligation rated ‘A-2' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitments on the obligation is satisfactory.
A-3: A short-term obligation rated ‘A-3' exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to weaken an obligor's capacity to meet its financial commitments on the obligation.
B: A short-term obligation rated ‘B' is regarded as vulnerable and has significant speculative
characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the obligor's inadequate capacity to meet its financial commitments.
C: A short-term obligation rated ‘C' is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.
D: A
short-term obligation rated ‘D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D' rating category is used when payments on
an obligation are not made on the date due, unless S&P Global Ratings believes that such payments will be made within any stated grace period. However, any stated grace period
longer than five business days will be treated as five business days. The ‘D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to
automatic stay provisions. A rating on an obligation's rating is lowered to ‘D' if it is subject to a distressed exchange offer.
Rated entities in several sectors, including financial and non-financial corporations,
sovereigns, insurance companies and some sectors within public finance, are generally assigned Issuer Default Ratings (IDRs). IDRs are also assigned to certain entities or enterprises in global infrastructure, project and public finance. IDRs opine on an entity's relative
vulnerability to default including by way of a distressed debt exchange (DDE) on financial obligations. The threshold default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the
uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts.
In aggregate, IDRs provide an ordinal ranking of issuers based on the agency's view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of default.
AAA: Highest credit quality.
‘AAA' ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable
events.
AA: Very high credit quality.
‘AA' ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable events.
‘A' ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB: Good credit
quality.
‘BBB' ratings indicate that expectations of default risk are
currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this
capacity.
‘BB' ratings indicate an elevated vulnerability to default risk, particularly in the
event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists that supports the servicing of financial commitments.
‘B' ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic
environment.
CCC: Substantial credit risk.
Very low margin for safety. Default is a real possibility.
CC: Very high levels of credit risk.
Default of some kind appears probable.
A default or default-like process has begun, or the issuer is in standstill, or for a closed funding vehicle, payment capacity
is irrevocably impaired. Conditions that are indicative of a ‘C' category rating for an issuer include:
a.
the issuer has entered into a grace or cure period following non-payment of a material
financial obligation;
b.
the issuer has entered into a temporary negotiated waiver or standstill agreement following a
payment default on a material financial obligation;
c.
the formal announcement by the issuer or their agent of a distressed debt
exchange;
d.
a closed financing vehicle where payment capacity is irrevocably impaired such that it is not
expected to pay interest and/or principal in full during the life of the transaction, but where no payment default is imminent.
‘RD' ratings indicate an issuer that in Fitch's opinion
has experienced:
a.
an uncured payment
default or distressed debt exchange on a bond, loan or other material financial obligation, but
b.
has not entered into bankruptcy filings, administration, receivership, liquidation, or other
formal winding-up procedure, and
c.
has not otherwise ceased operating.
i.
the selective payment default on a specific class or currency of debt;
ii.
the uncured expiry of
any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial
obligation;
iii.
the extension of multiple waivers or forbearance periods upon a payment default on one or more
material financial obligations, either in series or in parallel; ordinary execution of a distressed debt exchange on one or more material financial obligations.
‘D' ratings indicate an issuer that in Fitch's opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure or that has otherwise ceased business.
Default ratings are not assigned prospectively to
entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until
after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
In all cases, the assignment of a default rating reflects the agency's opinion as to the most appropriate rating category
consistent with the rest of its universe of ratings and may differ from the definition of default under the terms of an issuer's financial obligations or local commercial practice.
SHORT-TERM RATINGS ASSIGNED TO ISSUERS AND OBLIGATIONS
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity
and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-term deposit ratings may be adjusted for loss severity. Short-Term Ratings are assigned to obligations
whose initial maturity is viewed as
“short term” based on market convention (a long term rating can also be used to rate an issue with short maturity). Typically, this
means a timeframe of up to 13 months for corporate, sovereign, and structured obligations and up to 36 months for obligations in U.S. public finance markets.
F1: Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.
F2: Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of financial
commitments.
F3: Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B: Speculative Short-Term Credit Quality. Minimal capacity for timely
payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
C: High Short-Term Default risk. Default is a real possibility.
RD: Restricted Default. Indicates an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. Typically applicable to entity ratings only.
D: Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
Note: The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. For
example, the rating category ‘AA' has three notch-specific rating levels (‘AA+'; ‘AA'; ‘AA-'; each a rating level). Such suffixes are not added to ‘AAA' ratings and ratings below the 'CCC' category. For the short-term rating category of ‘F1', a ‘+' may be appended. For Viability Ratings, the modifiers “+” or “–” may be appended to a rating to denote relative status within categories from ‘AA'
to ‘CCC'. For derivative counterparty ratings the modifiers
“+” or “–” may be appended to the ratings within ‘AA(dcr)' to ‘CCC(dcr)' categories.
APPENDIX B
SSGA FUNDS
STATE STREET MASTER FUNDS
STATE STREET INSTITUTIONAL INVESTMENT TRUST
ELFUN GOVERNMENT MONEY MARKET FUND
ELFUN TAX EXEMPT INCOME FUND
ELFUN INCOME FUND
ELFUN DIVERSIFIED FUND
ELFUN INTERNATIONAL EQUITY FUND
ELFUN TRUSTS
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
PROXY VOTING POLICY AND
PROCEDURES
The Boards of Trustees of the SSGA Funds, State Street Master Funds, State Street
Institutional Investment Trust, State Street Navigator Securities Lending Trust, Elfun Government Money Market Fund, Elfun Tax Exempt Income Fund, Elfun Income Fund, Elfun Diversified Fund, Elfun International Equity Fund and Elfun Trusts (each a “Trust,” and each series thereof, a “Fund”)1 have adopted the following policy and procedures with respect to voting proxies relating to portfolio securities held by
the Trust's investment portfolios.
The policy of the Trust is to delegate the responsibility for
voting proxies relating to portfolio securities held by the Trust to SSGA Funds Management, Inc., the Trust's investment adviser (the “Adviser”), subject to the Trustees' continuing oversight.
The right to vote proxies with respect to a portfolio security held by the Trust is an
asset of the Trust. The Adviser acts as a fiduciary of the Trust and must vote proxies in a manner consistent with the best interest of the Trust and its shareholders.
3. Proxy Voting Procedures
A. At least annually, the Adviser shall present to the Boards of Trustees its policies,
procedures and other guidelines for voting proxies (“Policy”) and the policy of any Sub-adviser (as
defined below) to which proxy voting authority has been delegated (see Section 9 below). In addition, the Adviser shall notify the Trustees of material changes to its Policy or the
policy of any Sub-adviser promptly and not later than the next regular meeting of the Board of Trustees after such amendment is implemented.
1
Unless otherwise noted, the singular term
“Trust” used throughout this document means each of SSGA Funds, State Street Master Funds, State Street Institutional Investment
Trust, State Street Navigator Securities Lending Trust, Elfun Government Money Market Fund, Elfun Tax Exempt Income Fund, Elfun Income Fund, Elfun Diversified Fund, Elfun
International Equity Fund and Elfun Trusts.
B. At least annually, the Adviser shall present to the Boards of Trustees its policy for managing conflicts of interests that
may arise through the Adviser's proxy voting activities. In addition, the Adviser shall report any Policy overrides involving portfolio securities held by a Fund to the Trustees at the next regular meeting of the Board of Trustees after such
override(s) occur.
C. At least annually, the Adviser shall inform the Trustees that a record is available with respect to each proxy voted with
respect to portfolio securities of the Trust during the year. Also see Section 5 below.
4. Revocation of Authority to Vote
The delegation by the Trustees of the authority to vote proxies relating to portfolio securities of the Trust may be revoked by the Trustees, in whole or in part, at any time.
5. Annual Filing of Proxy Voting
Record
The Adviser shall provide the required data for each proxy voted with
respect to portfolio securities of the Trust to the Trust or its designated service provider in a timely manner and in a format acceptable to be filed in the Trust's annual proxy
voting report on Form N-PX for the twelve-month period ended June 30. Form N-PX is required to be filed not later than August 31 of each year.
6. Retention and Oversight of Proxy Advisory Firms
A. In considering whether to retain or continue retaining a particular proxy advisory firm, the Adviser will ascertain whether
the proxy advisory firm has the capacity and competency to adequately analyze proxy issues, act as proxy voting agent as requested, and implement the Policy. In this regard, the Adviser will consider, at least annually, among other things, the
adequacy and quality of the proxy advisory firm's staffing and personnel and the robustness of its policies and procedures regarding its ability to identify and address any conflicts of interest. The Adviser shall, at least annually, report to Boards of Trustees regarding the results of this review.
B. The Adviser will request quarterly and annual reporting from any proxy advisory firm retained by the Adviser, and hold ad
hoc meetings with such proxy advisory firm, in order to determine whether there has been any business changes that might impact the proxy advisory firm's capacity or competency to
provide proxy voting advice or services or changes to the proxy advisory firm's conflicts policies or procedures. The Adviser will also take reasonable steps to investigate any
material factual error, notified to the Adviser by the proxy advisory firm or identified by the Adviser, made by the proxy advisory firm in providing proxy voting services.
The Adviser will periodically sample proxy votes to review whether they complied with the Policy. The Adviser shall, at least
annually, report to the Boards of Trustees regarding the frequency and results of the sampling performed.
A.
The Trust shall include in its registration statement:
1. A description
of this policy and of the policies and procedures used by the Adviser to determine how to vote proxies relating to portfolio securities; and
1. A statement disclosing that information regarding how the Trust voted
proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge, upon request, by calling the Trust's toll-free telephone number; or through a specified Internet address; or both; and on the Securities and Exchange
Commission's (the “SEC”) website.
B.
The Trust shall include in its annual and semi-annual reports to shareholders:
1. A
statement disclosing that a description of the policies and procedures used by or on behalf of the Trust to determine how to vote proxies relating to portfolio securities of the
Funds is available without charge, upon request, by calling the Trust's toll-free telephone number; through a specified Internet address, if applicable; and on the SEC's website; and
2. A statement disclosing that information regarding how the Trust voted proxies relating to portfolio securities during the
most recent twelve-month period ended June 30 is available without charge, upon request, by calling the Trust's toll-free telephone number; or through a specified Internet address;
or both; and on the SEC's website.
For certain Funds, the Adviser may retain investment
management firms
(“Sub-advisers”) to provide day-to-day investment management services to the Funds pursuant to sub-advisory agreements. It is the policy of
the Trust that the Adviser may delegate proxy voting authority with respect to a Fund to a Sub-adviser. Pursuant to such delegation, a Sub-adviser is authorized to vote proxies on behalf of the applicable Fund or Funds for which it serves as sub-adviser, in accordance with
the Sub-adviser's proxy voting policies and procedures.
The Trustees shall review this policy to determine its continued sufficiency as necessary from time to time.
APPENDIX C—ADVISER'S PROXY VOTING PROCEDURES AND GUIDELINES
Adviser's Proxy Voting Policies and Procedures
Global Proxy Voting and Engagement Policy
State Street Investment Management is the investment management arm of State Street Corporation, a leading provider of
financial services to institutional investors. As an asset manager, State Street Investment Management votes its clients' proxies where the client has delegated proxy voting
authority to it, and State Street Investment Management votes these proxies and engages with companies in the manner that we believe will most likely protect and promote the
long-term economic value of client investments, as described in this
document.1
When engaging with and voting proxies with respect to the portfolio companies in which we invest our clients' assets, we do
so on behalf of and in the best interests of the client accounts we manage and do not seek to change or influence control of any such portfolio companies. The State Street
Investment Management Global Proxy Voting and Engagement Policy (the “Policy”) contains certain policies that State
Street Investment Management will only apply in jurisdictions where permitted by local law and regulations. State Street Investment Management will not apply any policies contained
herein in any jurisdictions where State Street Investment Management believes that implementing or following such
policies would be deemed to constitute seeking to change or influence control of a portfolio company.
At State Street Investment Management, we take our fiduciary duties as an asset manager
very seriously. One of our fiduciary obligations to our clients is to always act in their best interest, including when making investment decisions, voting proxies, and conducting other shareholder engagement activities. State Street Investment Management focuses on risks
and opportunities that may impact long-term value creation for our clients' investments. We rely on the elected representatives of the companies in which we invest—the board
of directors—to oversee these firms' strategies. We expect effective independent board oversight of the material risks and opportunities to a firm's business and operations.
We believe that appropriate consideration of these risks and opportunities is an essential component of a firm's long-term business strategy, and expect boards to actively oversee the management of the firm's strategy.
Our Asset Stewardship program
State Street Investment Management's Asset Stewardship Team is responsible for developing and implementing this Policy, the implementation of third-party proxy voting guidelines where applicable, case-by-case voting items, issuer
engagement activities, and research and analysis of corporate governance issues and proxy voting items. All engagement activities conducted with U.S. public company issuers held in our clients' portfolios are conducted in accordance with
Appendix A to this Policy.
The Asset Stewardship Team's activities are overseen by State Street Investment Management's Global Fiduciary and Conduct
Committee (“GFCC”). The GFCC is responsible for overseeing State Street Investment Management's stewardship strategy, engagement priorities,
and the implementation of this Policy.
State Street Investment
Management has independently developed the Policy and all voting decisions and engagement activities for which State Street Investment Management has been given voting discretion
are undertaken in accordance with the principles and viewpoints set forth in this Policy. Exceptions to this Policy include the use of an independent third party to vote on State Street Corporation (“State
Street”) stock and the stock of other State Street affiliated entities, to mitigate a conflict of interest of voting on our parent company or affiliated entities, and other situations where we believe
we may be conflicted from voting (for example, stock of a public company for which a State Street director also serves as a director, or due to an outside business interest). In such cases, delegated third parties exercise vote decisions based on
their independent voting policy.
1
This Policy is applicable to SSGA Funds Management, Inc., State Street Global Advisors Trust
Company, and other investment advisory affiliates of State Street Corporation.
We aim to vote at all shareholder meetings where
our clients have given us the authority to vote their shares and where it is feasible to do so. However, when we deem appropriate, we may refrain from voting at meetinqs in cases
where:
•Power of attorney documentation is required.
•Voting would have a material impact on our ability to trade the
security.
•Voting is not permissible due to sanctions affecting a company or individual.
•Issuer-specific special documentation
is required or various market or issuer certifications are required.
•Certain market limitations would prohibit voting (e.g., partial/split
voting prohibitions or residency restrictions).
•Unless a client directs otherwise in so-called
“share blocking” markets (markets where proxy voters have their securities blocked from trading during the period of the annual
meeting).
Additionally, we are unable to vote proxies when certain
custodians used by our clients do not offer proxy voting in a jurisdiction or when they charge a meeting-specific fee in excess of the typical custody service
agreement.
Voting authority attached to certain securities held by State
Street Investment Management's pooled funds may be delegated to an independent third party as required by regulatory or other requirements. Under such arrangements, voting will be conducted by the independent third party pursuant to its proxy voting policy and not pursuant to this Policy.
The State Street Investment Management proxy voting choice
program
In addition to the option of delegating proxy voting authority to
State Street Investment Management pursuant to this Policy, clients may alternatively choose to participate in the State Street Investment Management Proxy Voting Choice Program (the “Proxy Voting Choice Program”), which empowers clients to direct the proxy voting of shares held by the eligible fund or segregated account² they own. Clients that participate in the Proxy Voting Choice Program have the option of selecting a third-party proxy voting guideline from the policies included in the Proxy Voting Choice Program to apply to
the vote of the client's pro rata share of the securities held by the eligible fund or segregated account they own. This Policy does not apply to shares voted under the Proxy Voting Choice Program.
Securities not voted pursuant to the policy
Where clients have asked State Street Investment Management to vote the client's shares on their behalf, including where a
pooled fund fiduciary has delegated the responsibility to vote the fund's securities to State Street Investment Management, State Street Investment Management votes those
securities in a unified manner, consistent with the principles described in this Policy. Exceptions to this unified voting policy are: (1) where State Street Investment Management has made its Proxy Voting Choice Program available to its separately managed account clients and investors within
a fund managed by State Street Investment Management, in which case a pro rata portion of shares held by the fund or segregated account attributable to clients who choose to
participate in the Proxy Voting Choice Program will be voted consistent with the third-party proxy voting guidelines selected by the clients, (2) where a pooled investment vehicle managed by State Street Investment Management utilizes a third party proxy voting guideline as set forth in that
fund's organizational and/or offering documents, and (3) where voting authority with respect to certain securities held by State Street Investment Management pooled funds may be delegated to an independent third party as required by regulatory or
other requirements. With respect to such funds and separately managed accounts utilizing third-party proxy voting guidelines, the terms of the applicable third-party proxy voting
guidelines shall apply in place of the Policy described herein and the proxy votes implemented with respect to such a fund or account may differ from and be contrary to the votes implemented for other portfolios managed by State Street Investment Management pursuant to this Policy.
When voting and engaging with companies, we may consider regional nuances that may be
relevant to companies in a particular jurisdiction. We expect companies to observe the relevant laws and regulations of their respective markets, as well as country-specific best practice guidelines and corporate governance codes.
Our proxy voting and engagement principles
State Street Investment Management's proxy voting and engagement program focuses on three broad principles:
2
“Eligible funds and
segregated accounts” include all fund and client accounts managed by State Street Investment Management
that employ an equity index strategy and which have granted, or are able to grant, proxy voting authority to State Street Investment Management.
1.
Effective board oversight: We believe that well-governed companies are best placed to protect and pursue shareholder interests. Principally, a board
acts on behalf of shareholders by protecting their interests and preserving their rights. In order to carry out their primary responsibilities, directors undertake activities that
include setting strategy and providing guidance on strategic matters, selecting the CEO and other senior executives, overseeing executive management, creating a succession plan for the board and management, and providing effective oversight of material
risks and opportunities relevant to their business. Further, good corporate governance necessitates the existence of effective internal controls and risk management systems, which
should be governed by the board.
We view board quality as a measure of director independence, director succession planning, board composition, evaluations and refreshment, and company governance practices.
2.
Disclosure: It
is important for shareholders to receive timely and accurate reporting of a company's financial performance and strategy so that they are able to assess both the value and risk of
their investment. In addition to information related to strategy and performance, companies should also provide disclosure relating to their approach to corporate governance and shareholder rights. Such information allows investors to determine whether their economic
interests have been safeguarded by the board and provides insights into the quality of the board's oversight of management. Ultimately, the board of directors is accountable for
the oversight and disclosure of the material risks and opportunities faced by the company.
3.
Shareholder protection: State Street Investment Management believes it is in the best interest of shareholders for companies to have appropriate
shareholder rights and accountability mechanisms in place. As a starting place for voting rights, it is necessary for ownership rights to reflect one vote for one share to ensure
that economic interests and proxy voting power are aligned. This share structure best supports the shareholders' right to exercise their proxy vote on matters that are important to the protection of their investment, such as share issuances and other dilutive events,
authorization of strategic transactions, approval of a shareholder rights plan, and changes to the corporate bylaws or charter, among others. In terms of accountability to
shareholders and appropriate checks and balances, we believe there should be annual elections of the full board of directors.
Application of
principles
These three principles of effective board oversight,
disclosure and shareholder protection apply across all of State Street Investment Management's proxy voting decisions and engagements. When engaging with or voting at portfolio
companies in different markets, State Street Investment Management may apply the principles in ways that are specific to a given market based on factors such as regulatory and/or legal requirements, availability of data, resources, disclosure practices,
and size of holdings in our clients' accounts.
When voting our clients' proxies, we may be presented with shareholder proposals at portfolio companies that must be
evaluated on a case-by-case basis and in accordance with the principles set forth above. Where a company has received a shareholder proposal on a commonly requested disclosure topic and the company has determined that the topic is material to
its business, we assess the effectiveness of the company's disclosure on such topic in connection with the proposal.
We conduct engagements with individual issuers to communicate the principles set forth in
this Policy and to learn more about companies' strategy, board oversight and disclosure practices. Engagements with US public companies held in our clients' accounts are conducted in accordance with Appendix A. In addition, we encourage issuers to increase the amount of
direct communication board members have with shareholders. We believe direct communication with executive board members and independent non-executive directors is critical to
helping companies understand shareholder concerns.
Section I. Effective board oversight
We believe independent directors are crucial to good corporate governance because we believe that independent perspectives
contribute to establishing and maintaining more sound corporate governance practices.
We have developed criteria for evaluating director
independence, which vary by region and/or local jurisdiction. These criteria generally follow relevant listing standards, local regulatory requirements and/or local market practice
standards. Such criteria may include:
•Participation in related-party transactions or other material business
relations with the company
•Employment history with the company
•Status as founder or member of the founding family
•Government representative
•Excessive tenure and preponderance of long-tenured directors
•Relations with significant shareholders
•Close family ties with any of the company's advisers, directors or senior
employees
•Receipt of non-board related compensation from the issuer, its auditors or
advisors
•Company's own classification of a director as non-independent
In some cases, State Street Investment Management's criteria may be more rigorous than applicable local or listing requirements.
Majority independent board
We believe a sufficiently independent board is key to effectively monitoring management performance and providing strategic
oversight.
We believe there needs to be strong independent leadership of the board, in accordance with
the principles discussed above. We believe the board is best placed to choose the governance structure that is most appropriate for that company.
We believe that board committees are crucial to robust corporate governance and should be
composed of a sufficient number of independent directors. We use the same criteria for evaluating committee independence as we do for evaluating director independence, which varies by region and/or local jurisdiction. Although we recognize that board
structures may vary by jurisdiction, where a board has established an audit committee and/or compensation/remuneration committee, we generally expect the committee to be primarily, and in some cases, fully independent.
We believe that average board tenure should broadly align with the length of the business cycle of the respective industry
in which a company operates. In assessing excessive tenure, we consider factors such as the preponderance of long
tenured directors, board refreshment practices, classified board structures and the business cycle for the industry in which a company operates.
Director time commitments
We believe a company's nominating committee is best placed to determine appropriate time commitments for the company's
directors. We consider if a company publicly discloses its director time commitment policy (e.g., within corporate governance guidelines, proxy statement, annual report, company
website, etc.) and if this policy or associated disclosure outlines the factors that the nominating committee considers to assess director time commitments during the annual policy review process.
We believe effective board oversight of a company's long-term business strategy necessitates a board composition with a
range of knowledge, expertise, experience, and perspectives. We recognize that many factors may influence board
composition, including board size, geographic location, and local regulations. We believe board members should have adequate knowledge and expertise to provide effective oversight of corporate strategy, operations, and risks and
opportunities. Further, we believe that a robust
nominating and governance process is essential to achieving a board composition that is designed to facilitate effective and independent oversight of a company's long-term
strategy. We believe nominating committees are best placed to determining the most effective board composition and to ensure that adequate knowledge, expertise, experience and perspectives are represented in the boardroom. Boards should also have a
regular evaluation process in place to assess the effectiveness of the board and the knowledge and expertise of board members to address material issues such as emerging risks,
changes to corporate strategy, and diversification of operations and geographic footprint.
Non-US companies in certain non-US indexes that do not meet established board diversity thresholds will be flagged for case-by-case review of the company's disclosures related to board composition. In addition, companies in certain established
markets demonstrating underperformance relative to their Global Industry Classification Standard (GICS) sector (based on a total shareholder return metric), will be flagged for
review of the company's disclosures related to board composition.
When evaluating board composition, we assess a company's financial performance relative to its GICS sector (based on a total
shareholder return metric) and relevant disclosures.
1. Oversight of strategy and risk
We believe that risk management is a key function of the board, which
is responsible for setting the overall risk appetite of a company and for providing oversight on the risk management process established by senior executives at a company. We recognize that boards are responsible for determining the ways in which they provide oversight in this area. However, we
expect companies to disclose how the board provides oversight of its risk management system and risk identification. Boards should also review existing and emerging risks that
evolve in tandem with the changing political and economic landscape or as companies diversify or expand their operations into new areas.
As responsible stewards, we believe in the importance of effective risk management and
oversight of issues that are material to a company. To effectively manage and assess the risk of our clients' portfolios, we expect our portfolio companies to manage risks and opportunities that are material, market specific and industry-specific and that have a
demonstrated link to long-term value creation, and to provide high-quality disclosure of this process to shareholders.
When evaluating a board's oversight of risks and opportunities, we assess the following
factors, based on various criteria including a company's financial performance relative to its sector (based on a total shareholder return metric), relevant disclosures by, and engagements with, portfolio companies:
•Oversees long-term strategy
–Articulates the material risks and opportunities and how those risks and opportunities fit into the firm's long-term business strategy
–Regularly assesses the effectiveness of the company's long-term strategy, and
management's execution of this strategy
•Demonstrates an effective oversight process
–Describes which committee(s) have oversight over specific risks and opportunities, as well as which topics are overseen and/or discussed at the full-board level
–Includes risks and opportunities in board and/or committee agendas, and
articulates how often specific topics are discussed at the committee and/or full- board level
–Utilizes KPIs or metrics to assess the effectiveness of risk management processes
–Engages with key stakeholders including employees and investors
•Ensures effective
leadership
–Holds management accountable for progress on relevant metrics and targets
–Integrates necessary knowledge and expertise into the board nominating and executive hiring processes, and
provides training to directors and executives on topics material to the company's business
–Conducts a periodic effectiveness review
•Ensures disclosures of material information
–Ensures publication of relevant disclosures, including those regarding material topics to the company's business
2. Compliance with corporate
governance principles
Our minimum expectation is that companies will comply with their respective market governance codes and/or stewardship principles. Issuers are encouraged to provide explanations of their level of compliance with their local market code and why
their preferred governance structure (if not compliant with the code) serves shareholders' long-term interests.
We will review governance practices at companies in selected indexes for their adherence to
market governance codes and/or stewardship principles.
3. Proxy contests
We believe nominating committees that are comprised of independent directors are best
placed to assess which individuals are adequately equipped with the knowledge and expertise to fulfill the duties of board members, and to act as effective fiduciaries. While our default position is to support the committees' judgement, we consider the following factors
when evaluating dissident nominees:
•Strategy presented by dissident nominees versus that of current
management, as overseen by the incumbent board
•Effectiveness, quality, and experience
of the management slate
•Material governance failures and the level of
responsiveness to shareholder concerns and market signals by the incumbent board
•Quality of disclosure and engagement practices to support changes to shareholder rights, capital allocation and/or governance structure
•Company performance and, if applicable, the merit of a recovery
plan
•Expertise of board members with respect to company industry and strategy
4. Compensation and remuneration
We consider it the board's
responsibility to determine the appropriate level of executive compensation. Despite the differences among the possible types of plans and awards, there is a simple underlying
philosophy that guides our analysis of executive compensation: we believe that there should be a direct relationship between executive compensation and company performance over the long term.
Shareholders should have the opportunity to assess whether pay structures and levels are aligned with business performance.
When assessing remuneration reports, we consider factors such as adequate disclosure of various remuneration elements, absolute and relative pay levels, peer selection and
benchmarking, the mix of long-term and short-term incentives, alignment of pay structures with shareholder interests, as well as with corporate strategy and performance.
For example, criteria we may consider include the following:
•The company's financial performance
relative to its GICS sector, based on a total shareholder return metric
•Overall quantum relative to company performance
•Vesting periods and length of performance targets
•Mix of performance, time and options-based stock units
•Use of special grants and one-time awards
•Retesting and repricing features
•Disclosure and transparency
5. Board meeting attendance
We expect directors to attend at least 75 percent of board meetings in the
last financial year or provide an appropriate explanation for why they were unable to meet this attendance threshold.
It is important for shareholders to receive timely and accurate reporting of a company's
financial performance and strategy so that they are able to assess both the value and risk of their investment. In addition to information related to strategy and performance, companies should provide disclosure relating to their approach to corporate governance and shareholder
rights. Such information allows investors to determine whether their financial interests have been protected by the board and provides insights into the board's oversight of
management. Ultimately, the board of directors is accountable for the oversight and disclosure of the material risks and opportunities faced by the company.
Reporting
1. Financial statements
We believe the disclosure and availability of reliable financial statements in a timely manner is imperative for investment
analysis. We expect external auditors to provide assurance of a company's financial condition.
2. Disclosures of material risks and opportunities faced by the
company
We believe in the importance of effective risk management and governance of issues that are material to a company. This may include sustainability-related risks and opportunities where a company has identified such risks and opportunities as
material to its business. Such disclosure allows shareholders to effectively assess companies' oversight, strategy, and business practices related to these issues identified as material.
Where a company has determined a topic is material to its business, we will assess the company's disclosure in accordance
with our evaluation criteria that we believe represent quality disclosure on common disclosure topics. We may also review the company's relevant disclosures against industry and
market practice (e.g., peer disclosure, relevant frameworks, relevant industry guidance).
We look to companies to provide disclosure on the risks and
opportunities relevant to their businesses, and on the board's oversight of these risks and opportunities, in line with applicable local regulatory requirements and any voluntary
standards and frameworks adopted by the company.
Section III. Shareholder protection
1. Share capital structure
The ability to raise capital is critical for companies to carry out strategy, to grow, and to achieve returns above their cost of capital. The approval of capital raising activities is fundamental to a shareholder's ability to monitor the amounts of
proceeds and to ensure capital is deployed efficiently. Altering the capital structure of a company is a critical decision for boards. When making such a decision, we believe the company should disclose a comprehensive business rationale that is
consistent with corporate strategy and not overly dilutive to its shareholders.
Our approach to share capital structure matters may vary by local market and jurisdiction,
due to regional nuances. Such proposals may include:
•Increase in authorized common shares
•Increase in authorized preferred shares
•Introduction of unequal voting rights
•Share repurchase programs
2. Reorganization, mergers and acquisitions
The reorganization of the structure of a company or mergers
often involve proposals relating to reincorporation, restructurings, liquidations, and other major changes to the corporation.
We expect proposals to be in the best interests of shareholders, demonstrated by enhancing
share value or improving the effectiveness of the company's operations.
We evaluate structural reorganizations and mergers on a case-by-case basis and expect transactions to maximize shareholder value. Some of the considerations include the following:
•Board oversight of the process for the recommended
transaction, including director and/or management conflicts of interest
•Offers made at a premium and where
there are no other higher bidders
•Offers in which the secondary market
price is substantially lower than the net asset value
We also may
consider other factors, such as:
•Offers with potentially negative consequences for minority shareholders because of illiquid stock
•Offers where we believe there is a reasonable prospect for an enhanced bid or other bidders
•Cases where the current market price of
the security exceeds the bid price at the time of voting
3. Related-party transactions
Some companies have a controlled
ownership structure and complex cross-shareholdings between subsidiaries and parent companies (“related companies”). Such structures may result
in the prevalence of related-party transactions between the company and its various stakeholders, such as directors and management, subsidiaries and shareholders. In markets where shareholders are required to approve such transactions, we expect companies to disclose details of the
transaction, such as the nature, the value and the purpose of such a transaction. We also believe independent directors should ratify such transactions. Further, we believe companies should describe the level of independent board oversight and
the approval process, including details of any independent valuations provided by financial advisors on related-party transactions.
1. Proxy access
In general, we believe that proxy access is a fundamental right and an accountability mechanism for all long-term
shareholders. We consider proposals relating to proxy access on a case-by-case basis and consider a balance between providing long-term shareholders accountability while preserving the flexibility for management to design a process that is
appropriate for the company's circumstances.
a.
Annual elections: We believe the establishment of annual elections of the board of directors is appropriate. We also consider the overall
level of board independence and the independence of the key committees, as well as the existence of a shareholder rights plan.
b.
Majority voting: We believe a majority vote standard based on votes cast for the election of directors is
appropriate.
a.
Special meetings and written consent: We believe the ability for shareholders to call special meetings, as well as act by written consent is
appropriate.
b.
Notice period to convene a general meeting: We expect companies to give as much notice as is practicable
when calling a general meeting, generally at least 14 days.
c.
Virtual/hybrid shareholder meetings: We believe the right to hold shareholder meetings in a virtual or hybrid format is appropriate provided the
company:
–Affords virtual attendee shareholders the same rights as would normally be
granted to in-person attendee shareholders
–Commit to time-bound renewal (five years or less) of meeting format
authorization by shareholders
–Provides a written record of all questions
posed during the meeting, and
–Complies with local market laws and
regulations relating to virtual and hybrid shareholder meeting practices
In evaluating these proposals we also consider the operating environment of the company, including local regulatory developments and specific market circumstances impacting virtual meeting practices.
Governance documents & miscellaneous items
1. Article amendments
We believe amendments to company bylaws that
may negatively impact shareholder rights (such as fee-shifting, forum selection, and exclusion service bylaws) should be put to a shareholder vote. We believe a majority voting
standard is generally appropriate.
We generally believe companies should have a fixed board size, or designate a range for the board size.
2. Anti-takeover issues
Occasionally, companies add anti-takeover provisions that reduce the chances of a potential acquirer to make an offer, or to reduce the likelihood of a successful offer. We generally believe shareholders should have the right to vote on
reasonable offers. Our approach to anti-takeover issues may vary by local market and jurisdiction, due to regional nuances.
3. Accounting and audit-related issues
Companies should have robust internal audit and internal control
systems designed for effective management of any potential and emerging risks to company operations and strategy. The responsibility of setting out an internal audit function lies with the audit committee, which should have independent non-executive directors designated as members.
We believe the disclosure and availability of reliable financial statements in a timely manner is imperative for investment
analysis. As a result, board oversight of the internal controls and the independence of the audit process are essential if investors are to rely upon financial statements. It is important for the audit committee to appoint external auditors who are
independent from management, as we expect auditors to provide assurance of a company's financial condition.
State Street Investment Management believes that a company's external auditor is an
essential feature of an effective and transparent system of external independent assurance. Shareholders should be given the opportunity to vote on their (re-)appointment at the annual meeting. When appointing external auditors and approving audit fees, we will take into consideration the
level of detail in company disclosures.
In circumstances where “other” fees include fees related to initial public offerings, bankruptcy emergence, and spin-offs, and the company makes public
disclosure of the amount and nature of those fees which are determined to be an exception to the standard
“non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to
audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
We believe that a company should be able to discharge its auditors in the absence of
pending litigation, governmental investigation, charges or fraud or other indication of significant concern. Further, we believe that auditors should attend the annual meeting of shareholders.
4. Indemnification and liability
Generally, we believe directors3 should be able to limit their liability and/or expand indemnification and liability
protection if a director has not acted in bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.
Section IV. Shareholder Proposals
We believe that company boards do right by investors and are responsible for overseeing strategy and company management. To
that end, we do not support shareholder proposals that are on a topic that the company has not determined to be material to its business or that appear to impose changes to
business strategy or operations, such as increasing or decreasing investment in certain products or businesses or phasing out a product or business line.
When assessing shareholder proposals, we fundamentally consider whether the adoption of the
resolution would promote long-term shareholder value in the context of our core governance principles:
1.
Effective board oversight
3.
Shareholder protection
State Street Investment Management takes a comprehensive approach to engaging with
portfolio companies. Through engagement, we aim to learn more about portfolio companies' strategy, board oversight and disclosure practices, and to better understand topics that companies deem material to their business.
3 In Japan, this includes statutory auditors.
Engagements with US portfolio
companies: Engagements with US public companies in our clients' portfolios are conducted in accordance with
Appendix A. We do not seek to change or influence control of any portfolio company through engagement.
Equity engagements: In these conversations State Street Investment Management may express viewpoints
regarding what constitutes best practices supporting effective board oversight, disclosure, and shareholder protection consistent with the Policy. Engagements may be held with portfolio companies to discuss a ballot item, event or other established topic
found in our Policy.
Fixed income engagements: From time-to-time, certain corporate action election events, reclassifications or
other changes to the investment terms of debt holdings may occur or an issuer may seek to engage with State Street Investment Management to discuss matters pertaining to the debt instruments that State Street Investment Management holds on
behalf of its clients. In such instances, State Street Investment Management may engage with the issuer to obtain further information about the matter for purposes of its
investment decision making. Such engagements are the responsibility of the Fixed Income portfolio management team, but may be supported by State Street Investment Management's Asset Stewardship Team. All election decisions are the responsibility of the relevant portfolio management
team.
Engaging with other investors soliciting State Street Investment Management's votes in connection with contested shareholder meetings, vote-no campaigns, or shareholder proposals
While it may be helpful to speak to other investors that are running proxy contests, putting forth vote-no campaigns, or proposing shareholder proposals at portfolio companies, we limit such discussions to investors who have filed necessary
documentation with regulators and engage in these discussions at our own discretion.
Our primary purpose of engaging with investors is:
•To gain a better understanding of their
position or concerns at portfolio companies.
•In proxy contest
situations:
–To assess possible director candidates where investors are seeking board representation in proxy contest
situations
–To understand the investor's proposed strategy for the company and investment
time horizon to assess their alignment with State Street Investment Management's views and interests as a long-term shareholder
Any information about our vote decisions are available in this document and on our
website.
All requests for engagement should be sent to GovernanceTeam@ssga.com.
Section VI. Other matters
As a responsible investor and fiduciary, we recognize the importance of balancing the benefits of voting shares and the
incremental lending revenue for the pooled funds that participate in State Street Investment Management's securities lending program (the “Funds”). Our objective is to recall securities on loan and restrict future lending until after the record date for the respective vote in instances where we believe that a particular vote could have a material impact on the Funds'
long-term financial performance and the benefit of voting shares will outweigh the forgone lending income.
Accordingly, we have set systematic recall and lending restriction criteria for shareholder meetings involving situations with
the highest potential financial implications (such as proxy contests and strategic transactions including mergers and acquisitions, going dark transactions, change of corporate form, or bankruptcy and liquidation). Generally, these criteria for
recall and restriction for lending only apply to certain large cap indices in developed
markets.
State Street Investment Management monitors the forgone lending revenue associated with each recall to determine if the
impact on the Funds' long-term financial performance and the benefit of voting shares will outweigh the forgone lending income.
Although
our objective is to systematically recall securities based on the aforementioned criteria, we must receive notice of the vote in sufficient time to recall the shares on or before
the record date. When we do not receive timely notice, we may be unable to recall the shares on or before the record date.
Reporting
We provide transparency for our stewardship activities through our regular client reports and
relevant information reported online in accordance with applicable legal and regulatory requirements. We publish an annual stewardship report that provides details of our stewardship approach, engagement and voting policies, and activities during the year. The annual
stewardship report is complemented by quarterly stewardship activity reports as well as the publication of thought leadership on governance and other topics . Our voting record information is available on Vote View, an interactive platform
that provides relevant company details, proposal types, resolution descriptions, and records of our votes cast.
Appendix A:
Policy guidelines for engagement with portfolio companies that are U.S. public companies
These policy guidelines apply to all stewardship engagement activities conducted by the State Street Investment Management's Asset Stewardship Team with portfolio companies that are U.S. public companies (“U.S. portfolio companies”). “U.S. public companies” is defined for purposes of the Policy and this Appendix A as any issuer that has registered one or more classes of securities under the U.S. Securities Exchange Act of 1934, as amended. These policy
guidelines apply to engagements related to voting matters at U.S. portfolio companies as well as offseason engagements with US portfolio companies.
As a matter of policy, State Street Investment Management does not seek to influence or
change control of any issuer, including U.S. portfolio companies.
When engaging with U.S. portfolio companies, the Asset Stewardship Team may discuss State
Street Investment Management's viewpoints regarding what constitutes best practices supporting effective board oversight of material risks, disclosure of material risks, and shareholder protection consistent with the Policy, including this Appendix A. However, the
Asset Stewardship Team will not discuss how it intends to cast its vote on any ballot item, nor its rationale for any vote it has made. Additionally, the Asset Stewardship Team will not dictate or pressure U.S. portfolio companies to adopt or change
any policies (including but not limited to policies related to climate, diversity, equity and inclusion, or sustainability) or fundamental business choices like capital allocation.
The Asset Stewardship Team will not engage in discussions with U.S. portfolio companies that explicitly or implicitly suggest contingent voting or divestment if a company does not
adopt State Street Investment Management's viewpoint on a particular item, or that suggest that any particular factor, policy or practice is dispositive in making engagement or voting decisions.
All meeting agendas with U.S. portfolio companies are set by the U.S. portfolio company. If requested by the U.S. portfolio
company, State Street Investment Management may engage with the company on topics that the U.S. portfolio company
has determined to be material to its business, at all times in accordance with the principles set forth in the Policy. However, the Asset Stewardship Team does not discuss, and will remain in listen-only mode during all discussions of, the following
topics with U.S. portfolio companies or other investors soliciting State Street Investment Management's votes in
connection with contested shareholder meetings, vote-no campaigns, or shareholder proposals:
•Contested director
elections
•Adoption of a climate transition plan
•Adoption of specific targets for emissions reductions
•Scope 3 emissions, including without limitation adoption of a Scope 3 emissions policy, disclosure of Scope 3
emissions, and any reduction of Scope 3 emissions
•Changes to the U.S. portfolio company's capital allocation
When engaging with U.S. portfolio companies on issues or matters relating to gender,
racial or ethnic diversity, the Asset Stewardship Team may discuss State Street Investment Management's belief that effective board oversight of a company's long-term business strategy necessitates a board composition with a range of knowledge, expertise, experience, and
perspectives. However, State Street Investment Management does not apply, nor will it discuss, specific targets or thresholds of gender, racial or ethnic diversity in connection
with U.S. portfolio companies.
About State Street Investment
Management
At State Street Investment Management, we have been helping create
better outcomes for institutions, financial intermediaries, and investors for nearly half a century. Starting with our early innovations in indexing and ETFs, our rigorous approach continues to be driven by market-tested expertise and a relentless commitment to those we serve. With over
$5 trillion in assets managed*, clients in over 60 countries, and a global network of strategic partners, we use our scale to deliver a comprehensive and cost-effective suite of
investment solutions that help investors get wherever they want to go.
*
This figure is presented as of December 31, 2025 and includes ETF AUM of $1,950.80 billion USO of which approximately $173.02 billion USO in gold assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Investment Management are affiliated. Please note all AUM is unaudited.
statestreet.com/investment-management
© 2026 State Street Corporation. All Rights Reserved.
ID3984850 0326. Exp. Date: 31/03/2027
TABLE OF CONTENTS
|
|
|
|
|
|
|
| Coverage |
|
|
9 |
|
|
|
| 1. Board of Directors |
|
|
10 |
|
|
|
| Voting on Director Nominees in Uncontested Elections |
|
|
10 |
|
|
|
| Independence |
|
|
10 |
|
|
|
| ISS Classification of Directors – U.S. |
|
|
11 |
|
|
|
| Composition |
|
|
13 |
|
|
|
| Attendance |
|
|
13 |
|
|
|
| Overboarded Directors |
|
|
13 |
|
|
|
| Gender Diversity |
|
|
14 |
|
|
|
| Racial and/or Ethnic Diversity |
|
|
14 |
|
|
|
| Responsiveness |
|
|
14 |
|
|
|
| Accountability |
|
|
15 |
|
|
|
| Poison Pills |
|
|
15 |
|
|
|
| Unequal Voting Rights |
|
|
15 |
|
|
|
| Classified Board Structure |
|
|
16 |
|
|
|
| Removal of Shareholder Discretion on Classified Boards |
|
|
16 |
|
|
|
| Problematic Governance Structure |
|
|
16 |
|
|
|
| Unilateral Bylaw/Charter Amendments |
|
|
16 |
|
|
|
| Restricting Binding Shareholder Proposals |
|
|
17 |
|
|
|
| Director Performance Evaluation |
|
|
17 |
|
|
|
| Management Proposals to Ratify Existing Charter or Bylaw Provisions |
|
|
17 |
|
|
|
| Problematic Audit-Related Practices |
|
|
17 |
|
|
|
| Problematic Compensation Practices |
|
|
18 |
|
|
|
| Problematic Pledging of Company Stock |
|
|
18 |
|
|
|
| Climate Accountability |
|
|
18 |
|
|
|
| Governance Failures |
|
|
19 |
|
|
|
| Voting on Director Nominees in Contested Elections |
|
|
19 |
|
|
|
| Vote-No Campaigns |
|
|
19 |
|
|
|
| Proxy Contests/Proxy Access |
|
|
19 |
|
|
|
| Other Board-Related Proposals |
|
|
20 |
|
|
|
| Adopt Anti-Hedging/Pledging/Speculative Investments Policy |
|
|
20 |
|
|
|
| Board Refreshment |
|
|
20 |
|
|
|
| Term/Tenure Limits |
|
|
20 |
|
|
|
| Age Limits |
|
|
20 |
|
|
|
| Board Size |
|
|
20 |
|
|
|
| Classification/Declassification of the Board |
|
|
20 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
2 of 82 |
|
|
|
|
|
|
|
|
| CEO Succession Planning |
|
|
21 |
|
|
|
| Cumulative Voting |
|
|
21 |
|
|
|
| Director and Officer Indemnification, Liability Protection, and Exculpation |
|
|
21 |
|
|
|
| Establish/Amend Nominee Qualifications |
|
|
22 |
|
|
|
| Establish Other Board Committee Proposals |
|
|
22 |
|
|
|
| Filling Vacancies/Removal of Directors |
|
|
22 |
|
|
|
| Independent Board Chair |
|
|
22 |
|
|
|
| Majority of Independent Directors/Establishment of Independent Committees |
|
|
23 |
|
|
|
| Majority Vote Standard for the Election of Directors |
|
|
23 |
|
|
|
| Proxy Access |
|
|
23 |
|
|
|
| Require More Nominees than Open Seats |
|
|
24 |
|
|
|
| Shareholder Engagement Policy (Shareholder Advisory Committee) |
|
|
24 |
|
|
|
| 2. Audit-Related |
|
|
25 |
|
|
|
| Auditor Indemnification and Limitation of Liability |
|
|
25 |
|
|
|
| Auditor Ratification |
|
|
25 |
|
|
|
| Shareholder Proposals Limiting Non-Audit Services |
|
|
25 |
|
|
|
| Shareholder Proposals on Audit Firm Rotation |
|
|
25 |
|
|
|
| 3. Shareholder Rights & Defenses |
|
|
27 |
|
|
|
| Advance Notice Requirements for Shareholder Proposals/Nominations |
|
|
27 |
|
|
|
| Amend Bylaws without Shareholder Consent |
|
|
27 |
|
|
|
| Control Share Acquisition Provisions |
|
|
27 |
|
|
|
| Control Share Cash-Out Provisions |
|
|
27 |
|
|
|
| Disgorgement Provisions |
|
|
28 |
|
|
|
| Fair Price Provisions |
|
|
28 |
|
|
|
| Freeze-Out Provisions |
|
|
28 |
|
|
|
| Greenmail |
|
|
28 |
|
|
|
| Shareholder Litigation Rights |
|
|
28 |
|
|
|
| Federal Forum Selection Provisions |
|
|
28 |
|
|
|
| Exclusive Forum Provisions for State Law Matters |
|
|
29 |
|
|
|
| Fee shifting |
|
|
29 |
|
|
|
| Net Operating Loss (NOL) Protective Amendments |
|
|
29 |
|
|
|
| Poison Pills (Shareholder Rights Plans) |
|
|
30 |
|
|
|
| Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy |
|
|
30 |
|
|
|
| Management Proposals to Ratify a Poison Pill |
|
|
30 |
|
|
|
| Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs) |
|
|
30 |
|
|
|
| Proxy Voting Disclosure, Confidentiality, and Tabulation |
|
|
31 |
|
|
|
| Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions |
|
|
31 |
|
|
|
| Reimbursing Proxy Solicitation Expenses |
|
|
32 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
3 of 82 |
|
|
|
|
|
|
|
|
| Reincorporation Proposals |
|
|
32 |
|
|
|
| Shareholder Ability to Act by Written Consent |
|
|
32 |
|
|
|
| Shareholder Ability to Call Special Meetings |
|
|
33 |
|
|
|
| Stakeholder Provisions |
|
|
33 |
|
|
|
| State Antitakeover Statutes |
|
|
33 |
|
|
|
| Supermajority Vote Requirements |
|
|
33 |
|
|
|
| Virtual Shareholder Meetings |
|
|
33 |
|
|
|
| 4. Capital/Restructuring |
|
|
34 |
|
|
|
| Capital |
|
|
34 |
|
|
|
| Adjustments to Par Value of Common Stock |
|
|
34 |
|
|
|
| Common Stock Authorization |
|
|
34 |
|
|
|
| General Authorization Requests |
|
|
34 |
|
|
|
| Specific Authorization Requests |
|
|
35 |
|
|
|
| Dual Class Structure |
|
|
35 |
|
|
|
| Issue Stock for Use with Rights Plan |
|
|
35 |
|
|
|
| Preemptive Rights |
|
|
35 |
|
|
|
| Preferred Stock Authorization |
|
|
35 |
|
|
|
| General Authorization Requests |
|
|
35 |
|
|
|
| Recapitalization Plans |
|
|
37 |
|
|
|
| Reverse Stock Splits |
|
|
37 |
|
|
|
| Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S. |
|
|
37 |
|
|
|
| Share Repurchase Programs |
|
|
37 |
|
|
|
| Share Repurchase Programs Shareholder Proposals |
|
|
38 |
|
|
|
| Stock Distributions: Splits and Dividends |
|
|
38 |
|
|
|
| Tracking Stock |
|
|
38 |
|
|
|
| Restructuring |
|
|
38 |
|
|
|
| Appraisal Rights |
|
|
38 |
|
|
|
| Asset Purchases |
|
|
38 |
|
|
|
| Asset Sales |
|
|
39 |
|
|
|
| Bundled Proposals |
|
|
39 |
|
|
|
| Conversion of Securities |
|
|
39 |
|
|
|
| Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans |
|
|
39 |
|
|
|
| Formation of Holding Company |
|
|
40 |
|
|
|
| Going Private and Going Dark Transactions (LBOs and Minority
Squeeze-outs) |
|
|
40 |
|
|
|
| Joint Ventures |
|
|
40 |
|
|
|
| Liquidations |
|
|
41 |
|
|
|
| Mergers and Acquisitions |
|
|
41 |
|
|
|
| Private Placements/Warrants/Convertible Debentures |
|
|
42 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
4 of 82 |
|
|
|
|
|
|
|
|
| Reorganization/Restructuring Plan (Bankruptcy) |
|
|
43 |
|
|
|
| Special Purpose Acquisition Corporations (SPACs) |
|
|
43 |
|
|
|
| Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions |
|
|
43 |
|
|
|
| Spin-offs |
|
|
44 |
|
|
|
| Value Maximization Shareholder Proposals |
|
|
44 |
|
|
|
| 5. Compensation |
|
|
45 |
|
|
|
| Executive Pay Evaluation |
|
|
45 |
|
|
|
| Advisory Votes on Executive Compensation—Management Proposals (Say-on-Pay) |
|
|
45 |
|
|
|
| Pay-for-Performance
Evaluation |
|
|
46 |
|
|
|
| Problematic Pay Practices |
|
|
47 |
|
|
|
| Compensation Committee Communications and Responsiveness |
|
|
48 |
|
|
|
| Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”) |
|
|
48 |
|
|
|
| Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale |
|
|
48 |
|
|
|
| Equity-Based and Other Incentive Plans |
|
|
49 |
|
|
|
| Shareholder Value Transfer (SVT) |
|
|
50 |
|
|
|
| Three-Year Value-Adjusted Burn Rate |
|
|
50 |
|
|
|
| Egregious Factors |
|
|
50 |
|
|
|
| Liberal Change in Control Definition |
|
|
50 |
|
|
|
| Repricing Provisions |
|
|
51 |
|
|
|
| Problematic Pay Practices or Significant
Pay-for-Performance Disconnect |
|
|
51 |
|
|
|
| Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)) |
|
|
51 |
|
|
|
| Specific Treatment of Certain Award Types in Equity Plan Evaluations |
|
|
52 |
|
|
|
| Dividend Equivalent Rights |
|
|
52 |
|
|
|
| Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs) |
|
|
52 |
|
|
|
| Other Compensation Plans |
|
|
52 |
|
|
|
| 401(k) Employee Benefit Plans |
|
|
52 |
|
|
|
| Employee Stock Ownership Plans (ESOPs) |
|
|
52 |
|
|
|
| Employee Stock Purchase Plans—Qualified Plans |
|
|
53 |
|
|
|
| Employee Stock Purchase Plans—Non-Qualified Plans |
|
|
53 |
|
|
|
| Option Exchange Programs/Repricing Options |
|
|
53 |
|
|
|
| Stock Plans in Lieu of Cash |
|
|
54 |
|
|
|
| Transfer Stock Option (TSO) Programs |
|
|
54 |
|
|
|
| Director Compensation |
|
|
55 |
|
|
|
| Shareholder Ratification of Director Pay Programs |
|
|
55 |
|
|
|
| Equity Plans for Non-Employee Directors |
|
|
55 |
|
|
|
| Non-Employee Director Retirement Plans |
|
|
55 |
|
|
|
| Shareholder Proposals on Compensation |
|
|
56 |
|
|
|
| Bonus Banking/Bonus Banking “Plus” |
|
|
56 |
|
|
|
| Compensation Consultants—Disclosure of Board or Company’s Utilization |
|
|
56 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
5 of 82 |
|
|
|
|
|
|
|
|
| Disclosure/Setting Levels or Types of Compensation for Executives and Directors |
|
|
56 |
|
|
|
| Golden Coffins/Executive Death Benefits |
|
|
56 |
|
|
|
| Hold Equity Past Retirement or for a Significant Period of Time |
|
|
56 |
|
|
|
| Pay Disparity |
|
|
57 |
|
|
|
| Pay for Performance/Performance-Based Awards |
|
|
57 |
|
|
|
| Pay for Superior Performance |
|
|
57 |
|
|
|
| Pre-Arranged Trading Plans
(10b5-1 Plans) |
|
|
58 |
|
|
|
| Prohibit Outside CEOs from Serving on Compensation Committees |
|
|
58 |
|
|
|
| Recoupment of Incentive or Stock Compensation in Specified Circumstances |
|
|
58 |
|
|
|
| Severance and Golden Parachute Agreements |
|
|
59 |
|
|
|
| Share Buyback Impact on Incentive Program Metrics |
|
|
59 |
|
|
|
| Supplemental Executive Retirement Plans (SERPs) |
|
|
59 |
|
|
|
| Tax Gross-Up Proposals |
|
|
59 |
|
|
|
| Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested
Equity |
|
|
60 |
|
|
|
| 6. Routine/Miscellaneous |
|
|
61 |
|
|
|
| Adjourn Meeting |
|
|
61 |
|
|
|
| Amend Quorum Requirements |
|
|
61 |
|
|
|
| Amend Minor Bylaws |
|
|
61 |
|
|
|
| Change Company Name |
|
|
61 |
|
|
|
| Change Date, Time, or Location of Annual Meeting |
|
|
62 |
|
|
|
| Other Business |
|
|
62 |
|
|
|
| 7. Social and Environmental Issues |
|
|
63 |
|
|
|
| Global Approach – E&S Shareholder Proposals |
|
|
63 |
|
|
|
| Endorsement of Principles |
|
|
63 |
|
|
|
| Animal Welfare |
|
|
63 |
|
|
|
| Animal Welfare Policies |
|
|
63 |
|
|
|
| Animal Testing |
|
|
64 |
|
|
|
| Animal Slaughter |
|
|
64 |
|
|
|
| Consumer Issues |
|
|
64 |
|
|
|
| Genetically Modified Ingredients |
|
|
64 |
|
|
|
| Reports on Potentially Controversial Business/Financial Practices |
|
|
65 |
|
|
|
| Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation |
|
|
65 |
|
|
|
| Product Safety and Toxic/Hazardous Materials |
|
|
65 |
|
|
|
| Tobacco-Related Proposals |
|
|
66 |
|
|
|
| Climate Change |
|
|
66 |
|
|
|
| Say on Climate (SoC) Management Proposals |
|
|
66 |
|
|
|
| Say on Climate (SoC) Shareholder Proposals |
|
|
67 |
|
|
|
| Climate Change/Greenhouse Gas (GHG) Emissions |
|
|
67 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
6 of 82 |
|
|
|
|
|
|
|
|
| Energy Efficiency |
|
|
68 |
|
|
|
| Renewable Energy |
|
|
68 |
|
|
|
| Diversity |
|
|
68 |
|
|
|
| Board Diversity |
|
|
68 |
|
|
|
| Equality of Opportunity |
|
|
69 |
|
|
|
| Gender Identity, Sexual Orientation, and Domestic Partner Benefits |
|
|
69 |
|
|
|
| Gender, Race/Ethnicity Pay Gap |
|
|
69 |
|
|
|
| Racial Equity and/or Civil Rights Audit Guidelines |
|
|
70 |
|
|
|
| Environment and Sustainability |
|
|
70 |
|
|
|
| Facility and Workplace Safety |
|
|
70 |
|
|
|
| Natural Capital- Related and/or Community Impact Assessment Proposals |
|
|
70 |
|
|
|
| Hydraulic Fracturing |
|
|
71 |
|
|
|
| Operations in Protected Areas |
|
|
71 |
|
|
|
| Recycling |
|
|
71 |
|
|
|
| Sustainability Reporting |
|
|
71 |
|
|
|
| Water Issues |
|
|
71 |
|
|
|
| General Corporate Issues |
|
|
72 |
|
|
|
| Charitable Contributions |
|
|
72 |
|
|
|
| Data Security, Privacy, and Internet Issues |
|
|
72 |
|
|
|
| ESG Compensation-Related Proposals |
|
|
72 |
|
|
|
| Human Rights, Human Capital Management, and International Operations |
|
|
73 |
|
|
|
| Human Rights Proposals |
|
|
73 |
|
|
|
| Mandatory Arbitration |
|
|
73 |
|
|
|
| Operations in High-Risk Markets |
|
|
73 |
|
|
|
| Outsourcing/Offshoring |
|
|
74 |
|
|
|
| Sexual Harassment |
|
|
74 |
|
|
|
| Weapons and Military Sales |
|
|
74 |
|
|
|
| Political Activities |
|
|
75 |
|
|
|
| Lobbying |
|
|
75 |
|
|
|
| Political Contributions |
|
|
75 |
|
|
|
| Political Expenditures and Lobbying Congruency |
|
|
75 |
|
|
|
| Political Ties |
|
|
76 |
|
|
|
| 8. Mutual Fund Proxies |
|
|
77 |
|
|
|
| Election of Directors |
|
|
77 |
|
|
|
| Closed End Funds- Unilateral Opt-In to Control Share Acquisition
Statutes |
|
|
77 |
|
|
|
| Converting Closed-end Fund to
Open-end Fund |
|
|
77 |
|
|
|
| Proxy Contests |
|
|
77 |
|
|
|
| Investment Advisory Agreements |
|
|
77 |
|
|
|
| Approving New Classes or Series of Shares |
|
|
78 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
7 of 82 |
|
|
|
|
|
|
|
|
| Preferred Stock Proposals |
|
|
78 |
|
|
|
| 1940 Act Policies |
|
|
78 |
|
|
|
| Changing a Fundamental Restriction to a Nonfundamental Restriction |
|
|
78 |
|
|
|
| Change Fundamental Investment Objective to Nonfundamental |
|
|
78 |
|
|
|
| Name Change Proposals |
|
|
78 |
|
|
|
| Change in Fund’s Subclassification |
|
|
79 |
|
|
|
| Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value |
|
|
79 |
|
|
|
| Disposition of Assets/Termination/Liquidation |
|
|
79 |
|
|
|
| Changes to the Charter Document |
|
|
79 |
|
|
|
| Changing the Domicile of a Fund |
|
|
80 |
|
|
|
| Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval |
|
|
80 |
|
|
|
| Distribution Agreements |
|
|
80 |
|
|
|
| Master-Feeder Structure |
|
|
80 |
|
|
|
| Mergers |
|
|
80 |
|
|
|
| Shareholder Proposals for Mutual Funds |
|
|
80 |
|
|
|
| Establish Director Ownership Requirement |
|
|
80 |
|
|
|
| Reimburse Shareholder for Expenses Incurred |
|
|
81 |
|
|
|
| Terminate the Investment Advisor |
|
|
81 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
8 of 82 |
|
Coverage
The U.S. research team provides proxy analyses and voting recommendations for the common shareholder meetings of U.S. - incorporated
companies that are publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are held in our institutional investor clients’ portfolios. Coverage generally includes corporate actions for common equity holders, such as
written consents and bankruptcies. ISS’ U.S. coverage includes investment companies (including open-end funds, closed-end funds, exchange-traded funds, and unit
investment trusts), limited partnerships (“LPs”), master limited partnerships (“MLPs”), limited liability companies (“LLCs”), and business development companies. ISS reviews its universe of coverage on an annual
basis, and the coverage is subject to change based on client need and industry trends.
Foreign-incorporated companies
In addition to U.S.- incorporated, U.S.- listed companies, ISS’ U.S. policies are applied to certain foreign-incorporated company analyses. Like
the SEC, ISS distinguishes two types of companies that list but are not incorporated in the U.S.:
| |
◾ |
|
U.S. Domestic Issuers – which have a majority of outstanding shares held in the U.S. and meet other criteria, as
determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies (e.g. they are required to file DEF14A proxy statements) – are generally covered under standard U.S. policy guidelines.
|
| |
◾ |
|
Foreign Private Issuers (FPIs) – which are allowed to take exemptions from most
disclosure requirements (e.g., they are allowed to file 6-K for their proxy materials) and U.S. listing standards – are generally covered under a combination of policy guidelines: |
| |
◾ |
|
FPI Guidelines (see the Americas Regional Proxy Voting
Guidelines), may apply to companies incorporated in governance havens, and apply certain minimum independence and disclosure standards in the evaluation of key proxy ballot items, such as the election of
directors; and/or |
| |
◾ |
|
Guidelines for the market that is responsible for, or most relevant to, the item on the ballot. |
U.S. incorporated companies listed only on non-U.S. exchanges are generally covered under the ISS guidelines for
the market on which they are traded.
An FPI is generally covered under ISS’ approach to FPIs outlined above, even if such FPI voluntarily
files a proxy statement and/or other filing normally required of a U.S. Domestic Issuer, so long as the company retains its FPI status.
In all
cases – including with respect to other companies with cross-market features that may lead to ballot items related to multiple markets – items that are on the ballot solely due to the requirements of another market (listing,
incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” primary market coverage.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
9 of 82 |
|
1. Board of
Directors
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
Independence: Boards should be sufficiently independent from management (and
significant shareholders) to ensure that they are able and motivated to effectively supervise management’s performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with
appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership
position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of
directors.
Composition: Companies should ensure that
directors add value to the board through their specific skills and expertise and by having sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence,
while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.
Responsiveness: Directors should respond to investor
input, such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority
of shares are tendered.
Accountability:
Boards should be sufficiently accountable to shareholders, including through transparency of the company’s governance practices and regular board elections, by the provision of sufficient information for shareholders to be able to
assess directors and board composition, and through the ability of shareholders to remove directors.
General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1
considered on case-by-case basis):
Independence
Vote against2
or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per ISS’ Classification of
Directors) when:
| |
◾ |
|
Independent directors comprise 50 percent or less of the board; |
| |
◾ |
|
The non-independent director serves on the audit, compensation, or nominating
committee; |
| |
◾ |
|
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or
|
1 A “new nominee” is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made
on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question.
2 In general, companies with a plurality vote standard use “Withhold” as the
contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
10 of 82 |
|
ISS
Classification of Directors – U.S.
| |
1.1. |
Current officer1 of the company or one of its
affiliates2. |
| |
2. |
Non-Independent Non-Executive Director
|
Board Identification
| |
2.1. |
Director identified as not independent by the board. |
Controlling/Significant Shareholder
| |
2.2. |
Beneficial owner of more than 50 percent of the company’s voting power (this may be aggregated if voting power
is distributed among more than one member of a group). |
Current Employment at Company or Related Company
| |
2.3. |
Non-officer employee of the firm (including employee representatives).
|
| |
2.4. |
Officer1, former officer, or general or limited
partner of a joint venture or partnership with the company. |
Former Employment
| |
2.5. |
Former CEO of the company.3, 4 |
| |
2.6. |
Former non-CEO
officer1 of the company or an affiliate2 within the past five years. |
| |
2.7. |
Former officer1 of an acquired company within the past
five years.4 |
| |
2.8. |
Officer1 of a former parent or predecessor firm at the
time the company was sold or split off within the past five years. |
| |
2.9. |
Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an
assessment of the interim officer’s employment agreement will be made.5 |
Family Members
| |
2.10. |
Immediate family member6 of a current or former
officer1 of the company or its affiliates2 within the last five years. |
| |
2.11. |
Immediate family member6 of a current employee of
company or its affiliates2 where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or
its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role). |
Professional, Transactional, and Charitable Relationships
| |
2.12. |
Director who (or whose immediate family member6)
currently provides professional services7 in excess of $10,000 per year to: the company, an affiliate2, or an
individual officer of the company or an affiliate; or who is (or whose immediate family member6 is) a partner, employee, or controlling shareholder of an organization which provides
the services. |
| |
2.13. |
Director who (or whose immediate family member6)
currently has any material transactional relationship8 with the company or its affiliates2; or who is (or whose
immediate family member6 is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship8 (excluding investments in the company through a private placement). |
| |
2.14. |
Director who (or whose immediate family
member6) is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or
endowments8 from the company or its affiliates2. |
Other Relationships
| |
2.15. |
Party to a voting agreement9 to vote in line with
management on proposals being brought to shareholder vote. |
| |
2.16. |
Has (or an immediate family member6 has) an
interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee.10 |
| |
2.17. |
Founder11 of the company but not currently an
employee. |
| |
2.18. |
Director with pay comparable to Named Executive Officers. |
| |
2.19. |
Any material12 relationship with the company.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
11 of 82 |
|
| |
3.1. |
No material12 connection to the company other than a
board seat. |
Footnotes:
1. The definition of officer will generally follow that of a “Section 16 officer” (officers subject to Section 16 of the
Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a
principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving
as an officer due to statutory requirements (e.g. corporate secretary) will generally be classified as a Non-Independent Non-Executive Director under “Any material
relationship with the company.” However, if the company provides explicit disclosure that the director is not receiving additional compensation exceeding $10,000 per year for serving in that capacity, then the director will be classified as an
Independent Director.
2. “Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control
ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate.
3. Includes any former CEO of the company prior to the company’s initial public offering (IPO).
4. When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, ISS will generally
classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the existence of
any other conflicting relationships or related party transactions.
5. ISS will look at the terms of the interim officer’s employment
contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also
consider if a formal search process was under way for a full-time officer at the time.
6. “Immediate family member” follows the
SEC’s definition of such and covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director,
nominee for director, executive officer, or significant shareholder of the company.
7. Professional services can be characterized as advisory
in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include
but are not limited to the following: investment banking/financial advisory services, commercial banking (beyond deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing services, legal
services, property management services, realtor services, lobbying services, executive search services, and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit
services, IT tech support services, educational services, and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject
to the associated materiality test) rather than a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or
is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional
rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory.
8. A material transactional relationship, including grants to non-profit organizations, exists if the
company makes annual payments to, or receives annual payments from, another entity, exceeding the greater of: $200,000 or 5 percent of the recipient’s gross revenues, for a company that follows NASDAQ listing standards; or the greater of
$1,000,000 or 2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows neither of the preceding standards, ISS will apply the NASDAQ-based materiality test. (The recipient
is the party receiving the financial proceeds from the transaction).
9. Dissident directors who are parties to a voting
agreement pursuant to a settlement or similar arrangement may be classified as Independent Directors if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’
interests: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any
conflicting relationships or related party transactions.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
12 of 82 |
|
10. Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in
the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).
11. The operating involvement of the founder with the company will be considered; if the founder was never employed by the company, ISS may
deem him or her an Independent Director.
12. For purposes of ISS’s director independence classification,
“material” will be defined as a standard of relationship (financial, personal, or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have
a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
Composition
Attendance at Board and Committee Meetings: Generally vote against or withhold from
directors (except nominees who served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for
which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
| |
◾ |
|
Medical issues/illness; |
| |
◾ |
|
Family emergencies; and |
| |
◾ |
|
Missing only one meeting (when the total of all meetings is three or fewer). |
In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote
against or withhold from appropriate members of the nominating/governance committees or the full board.
If the proxy disclosure is unclear and
insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
Overboarded Directors: Generally vote against or withhold from individual directors who:
| |
◾ |
|
Sit on more than five public company boards; or |
| |
◾ |
|
Are CEOs of public companies who sit on the boards of more than two public companies besides their own— withhold only
at their outside boards4. |
NOTE: For shareholder meeting reports
published on or after February 25th, 2025, Institutional Shareholder Services (ISS) has indefinitely halted the consideration of the gender diversity of a company’s board when making vote recommendations with respect to the election or re-election of directors at U.S. companies covered by these guidelines under its proprietary ISS U.S. Benchmark policy.
3 Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.
4 Although all of a CEO’s subsidiary boards with publicly-traded common stock will be
counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than
50 percent controlled and boards outside the parent/subsidiary relationships.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
13 of 82 |
|
Gender Diversity: Generally vote against or withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) at companies where there are no women on the company’s board. An exception will be made if there was at least one woman on the board at the
preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.
NOTE: For shareholder meeting
reports published on or after February 25th, 2025, Institutional Shareholder Services (ISS) has indefinitely halted the consideration of the racial and/or ethnic diversity of a company’s board when making vote recommendations with respect to
the election or re-election of directors at U.S. companies covered under these guidelines under its proprietary ISS U.S. Benchmark policy.
Racial and/or Ethnic Diversity: For
companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) where the board has no apparent racially or ethnically diverse members5. An exception
will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
Responsiveness
Vote case-by-case on individual directors, committee members, or the
entire board of directors as appropriate if:
| |
◾ |
|
The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the
previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are: |
| |
◾ |
|
Disclosed outreach efforts by the board to shareholders in the wake of the vote; |
| |
◾ |
|
Rationale provided in the proxy statement for the level of implementation; |
| |
◾ |
|
The subject matter of the proposal; |
| |
◾ |
|
The level of support for and opposition to the resolution in past meetings; |
| |
◾ |
|
Actions taken by the board in response to the majority vote and its engagement with shareholders; |
| |
◾ |
|
The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals);
and |
| |
◾ |
|
Other factors as appropriate. |
| |
◾ |
|
The board failed to act on takeover offers where the majority of shares are tendered; or |
| |
◾ |
|
At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast
and the company has failed to address the issue(s) that caused the high withhold/against vote. |
Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
| |
◾ |
|
The company’s previous say-on-pay
received the support of less than 70 percent of votes cast. Factors that will be considered are: |
| |
◾ |
|
The company’s response, including: |
| |
◾ |
|
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated); |
| |
◾ |
|
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; and |
| |
◾ |
|
Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
| |
◾ |
|
Other recent compensation actions taken by the company; |
| |
◾ |
|
Whether the issues raised are recurring or isolated; |
| |
◾ |
|
The company’s ownership structure; and
|
5 Aggregate diversity statistics provided by the board will only be considered if specific to
racial and/or ethnic diversity.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
14 of 82 |
|
| |
◾ |
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
| |
◾ |
|
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received
the plurality of votes cast. |
Accountability
PROBLEMATIC TAKEOVER DEFENSES, CAPITAL
STRUCTURE, AND GOVERNANCE STRUCTURE
Poison Pills: Generally vote against or withhold from all nominees (except new nominees 1,
who should be considered case-by-case) if:
| |
◾ |
|
The company has a poison pill with a deadhand or slowhand
feature6; |
| |
◾ |
|
The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or
lowering the trigger, without shareholder approval; or |
| |
◾ |
|
The company has a long-term poison pill (with a term of over one year) that was not approved by the public shareholders7. |
Vote
case-by-case on nominees if the board adopts an initial short-term pill6 (with a term of one year or less) without
shareholder approval, taking into consideration:
| |
◾ |
|
The trigger threshold and other terms of the pill; |
| |
◾ |
|
The disclosed rationale for the adoption; |
| |
◾ |
|
The context in which the pill was adopted, (e.g., factors such as the company’s size and stage of development, sudden
changes in its market capitalization, and extraordinary industry-wide or macroeconomic events); |
| |
◾ |
|
A commitment to put any renewal to a shareholder vote; |
| |
◾ |
|
The company’s overall track record on corporate governance and responsiveness to shareholders; and
|
| |
◾ |
|
Other factors as relevant. |
Unequal Voting Rights: Generally vote withhold or against directors individually, committee members, or the entire board (except new nominees 1, who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights8.
Exceptions to this policy will generally be limited to:
| |
◾ |
|
Newly-public companies9 with a sunset provision of no more than
seven years from the date of going public; |
| |
◾ |
|
Limited Partnerships and the Operating Partnership (OP) unit structure of REITs; |
| |
◾ |
|
Situations where the super-voting shares represent less than 5% of total voting power and therefore considered to be de
minimis; or |
| |
◾ |
|
The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular
binding vote on whether the capital structure should be maintained. |
6 If a short-term pill with a deadhand or slowhand feature is enacted but expires before the
next shareholder vote, ISS will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption.
7 Approval prior to, or in connection, with a company’s becoming publicly-traded, or in connection with a de-SPAC transaction, is insufficient.
8 This generally includes classes of common stock that have additional votes per share than
other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”).
9 Includes companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct
listings, and those who complete a traditional initial public offering.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
15 of 82 |
|
Classified Board Structure: The board is classified, and a
continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.
Problematic Governance Structure: For companies that hold or held their first annual
meeting 9 of public shareholders after Feb. 1, 2015, generally vote against or withhold from directors individually, committee members, or the entire board
(except new nominees 1, who should be considered case-by-case) if, prior to or in connection with the
company’s public offering, the company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:
| |
◾ |
|
Supermajority vote requirements to amend the bylaws or charter; |
| |
◾ |
|
A classified board structure; or |
| |
◾ |
|
Other egregious provisions. |
A provision which specifies that the problematic structure(s) will be sunset within seven years of the date of going public will be considered a
mitigating factor.
Unless the adverse provision is reversed or removed, vote
case-by-case on director nominees in subsequent years.
Unilateral Bylaw/Charter Amendments: Generally vote against or withhold from directors individually, committee members, or the entire
board (except new nominees 1, who should be considered case-by-case) if the board amends the company’s
bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors:
| |
◾ |
|
The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification;
|
| |
◾ |
|
Disclosure by the company of any significant engagement with shareholders regarding the amendment; |
| |
◾ |
|
The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the
bylaws/charter; |
| |
◾ |
|
The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment
provisions; |
| |
◾ |
|
The company’s ownership structure; |
| |
◾ |
|
The company’s existing governance provisions; |
| |
◾ |
|
The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and
|
| |
◾ |
|
Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
|
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees 1, who should be considered case-by-case) if the directors:
| |
◾ |
|
Adopted supermajority vote requirements to amend the bylaws or charter; |
| |
◾ |
|
Eliminated shareholders’ ability to amend bylaws; |
| |
◾ |
|
Adopted a fee-shifting provision; or
|
| |
◾ |
|
Adopted another provision deemed egregious. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
16 of 82 |
|
Restricting Binding Shareholder Proposals: Generally vote
against or withhold from the members of the governance committee if:
| |
◾ |
|
The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such
restrictions include but are not limited to: outright prohibition on the submission of binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis. |
Submission of management proposals to
approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Generally
continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Director Performance Evaluation: The board lacks
mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder
returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not
limited to:
| |
◾ |
|
A classified board structure; |
| |
◾ |
|
A supermajority vote requirement; |
| |
◾ |
|
Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;
|
| |
◾ |
|
The inability of shareholders to call special meetings; |
| |
◾ |
|
The inability of shareholders to act by written consent; |
| |
◾ |
|
A multi-class capital structure; and/or |
| |
◾ |
|
A non-shareholder-approved poison pill. |
Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
| |
◾ |
|
The presence of a shareholder proposal addressing the same issue on the same ballot; |
| |
◾ |
|
The board’s rationale for seeking ratification; |
| |
◾ |
|
Disclosure of actions to be taken by the board should the ratification proposal fail; |
| |
◾ |
|
Disclosure of shareholder engagement regarding the board’s ratification request; |
| |
◾ |
|
The level of impairment to shareholders’ rights caused by the existing provision; |
| |
◾ |
|
The history of management and shareholder proposals on the provision at the company’s past meetings;
|
| |
◾ |
|
Whether the current provision was adopted in response to the shareholder proposal; |
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Previous use of ratification proposals to exclude shareholder proposals. |
Problematic Audit-Related Practices
Generally vote against or withhold from the members of the Audit Committee if:
| |
◾ |
|
The non-audit fees paid to the auditor are
excessive; |
| |
◾ |
|
The company receives an adverse opinion on the company’s financial statements from its auditor; or
|
| |
◾ |
|
There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its
auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
17 of 82 |
|
Vote case-by-case on members of the Audit Committee and potentially the full board if:
| |
◾ |
|
Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP;
and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether
withhold/against votes are warranted. |
Problematic Compensation Practices
In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the
members of the Compensation Committee and potentially the full board if:
| |
◾ |
|
There is an unmitigated misalignment between CEO pay and company performance
(pay for performance); |
| |
◾ |
|
The company maintains significant problematic pay practices; or |
| |
◾ |
|
The board exhibits a significant level of poor communication and responsiveness to
shareholders. |
Generally vote against or withhold from the Compensation Committee chair, other committee members, or potentially
the full board if:
| |
◾ |
|
The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s
declared frequency of say on pay; or |
| |
◾ |
|
The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.
|
Generally vote against members of the board committee responsible for approving/setting
non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a
compelling rationale or other mitigating factors.
Problematic Pledging of Company
Stock: Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of
pledged company stock by executives or directors raises concerns. The following factors will be considered:
| |
◾ |
|
The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;
|
| |
◾ |
|
The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume;
|
| |
◾ |
|
Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
|
| |
◾ |
|
Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged
company stock; and |
| |
◾ |
|
Any other relevant factors. |
Climate Accountability
For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain10, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a
case-by-case basis) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate
change to the company and the larger economy.
Minimum steps to understand and mitigate those risks are considered to be the following. Both minimum
criteria will be required to be in alignment with the policy :
10 Companies defined as “significant GHG emitters” will be those on the current
Climate Action 100+ Focus Group list.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
18 of 82 |
|
| |
◾ |
|
Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on
Climate-related Financial Disclosures (TCFD), including: |
| |
◾ |
|
Board governance measures; |
| |
◾ |
|
Risk management analyses; and |
| |
◾ |
|
Appropriate GHG emissions reduction targets. |
At this time, “appropriate GHG emissions reductions targets” will be medium-term GHG reduction targets or Net
Zero-by-2050 GHG reduction targets for a company’s operations (Scope 1) and electricity use (Scope 2). Targets should cover the vast majority of the
company’s direct emissions.
Governance Failures
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
| |
◾ |
|
Material failures of governance, stewardship, risk oversight11,
or fiduciary responsibilities at the company; |
| |
◾ |
|
Failure to replace management as appropriate; or |
| |
◾ |
|
Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her
ability to effectively oversee management and serve the best interests of shareholders at any company. |
Voting on Director Nominees in Contested Elections
Vote-No Campaigns
General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by
shareholders and other publicly available information.
Proxy Contests/Proxy Access
General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:
| |
◾ |
|
Long-term financial performance of the company relative to its industry; |
| |
◾ |
|
Management’s track record; |
| |
◾ |
|
Background to the contested election; |
| |
◾ |
|
Nominee qualifications and any compensatory arrangements; |
| |
◾ |
|
Strategic plan of dissident slate and quality of the critique against management; |
| |
◾ |
|
Likelihood that the proposed goals and objectives can be achieved (both slates); and |
| |
◾ |
|
Stock ownership positions. |
In the case of candidates nominated pursuant to proxy access, vote
case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the
nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).
11 Examples of failure of risk oversight include but are not limited to: bribery; large or
serial fines or sanctions from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant adverse legal judgments or settlement; or hedging of company stock.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
19 of 82 |
|
Other Board-Related
Proposals
Adopt Anti-Hedging/Pledging/Speculative Investments Policy
General Recommendation: Generally vote for proposals
seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan.
However, the company’s existing policies regarding responsible use of company stock will be considered.
Board
Refreshment
Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to
ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed.
Term/Tenure Limits
General Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits,
considering:
| |
◾ |
|
The rationale provided for adoption of the term/tenure limit; |
| |
◾ |
|
The robustness of the company’s board evaluation process; |
| |
◾ |
|
Whether the limit is of sufficient length to allow for a broad range of director tenures; |
| |
◾ |
|
Whether the limit would disadvantage independent directors compared to
non-independent directors; and |
| |
◾ |
|
Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner.
|
| |
◾ |
|
Vote case-by-case on shareholder proposals
asking for the company to adopt director term/tenure limits, considering: |
| |
◾ |
|
The scope of the shareholder proposal; and |
| |
◾ |
|
Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.
|
Age Limits
General Recommendation: Generally vote against management
and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits.
Board Size
General Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size.
Vote against proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
General Recommendation: Vote against proposals to classify
(stagger) the board.
Vote for proposals to repeal classified boards and to elect all directors annually.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
20 of 82 |
|
CEO Succession
Planning
General Recommendation: Generally
vote for proposals seeking disclosure on a CEO succession planning policy, considering, at a minimum, the following factors:
| |
◾ |
|
The reasonableness/scope of the request; and |
| |
◾ |
|
The company’s existing disclosure on its current CEO succession planning process. |
Cumulative Voting
General Recommendation: Generally vote against management
proposals to eliminate cumulate voting, and for shareholder proposals to restore or provide for cumulative voting, unless:
| |
◾ |
|
The company has proxy access12, thereby allowing shareholders
to nominate directors to the company’s ballot; and |
| |
◾ |
|
The company has adopted a majority vote standard, with a carve-out for plurality
voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections. |
Vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).
Director and Officer Indemnification, Liability Protection, and Exculpation
General Recommendation: Vote case-by-case on proposals on director and officer indemnification, liability protection, and exculpation13.
Consider the stated rationale for the proposed change. Also consider, among other factors, the extent to which the proposal would:
| |
◾ |
|
Eliminate directors’ and officers’ liability for monetary damages for violating the duty of care;
|
| |
◾ |
|
Eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalt;
|
| |
◾ |
|
Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation
than mere carelessness; and |
| |
◾ |
|
Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts
that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify.
|
Vote for those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was
unsuccessful if both of the following apply:
| |
◾ |
|
If the individual was found to have acted in good faith and in a manner that the individual reasonably believed was in the
best interests of the company; and |
| |
◾ |
|
If only the individual’s legal expenses would be covered.
|
12 A proxy access right that meets the recommended guidelines.
13 Indemnification: the condition of being secured against loss or damage.
Limited
liability: a person’s financial liability is limited to a fixed sum, or personal financial assets are not at risk if the individual loses a lawsuit that results in financial award/damages to the plaintiff.
Exculpation: to eliminate or limit the personal liability of a director or officer to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director or officer.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
21 of 82 |
|
Establish/Amend
Nominee Qualifications
General Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the
criteria and the degree to which they may preclude dissident nominees from joining the board.
Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
| |
◾ |
|
The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative
to that of its peers; |
| |
◾ |
|
The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is
sought; |
| |
◾ |
|
The company’s disclosure and performance relating to the issue for which board oversight is sought and any
significant related controversies; and |
| |
◾ |
|
The scope and structure of the proposal. |
Establish Other Board Committee Proposals
General Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such proposals seek a specific
oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:
| |
◾ |
|
Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is
sought; |
| |
◾ |
|
Level of disclosure regarding the issue for which board oversight is sought; |
| |
◾ |
|
Company performance related to the issue for which board oversight is sought; |
| |
◾ |
|
Board committee structure compared to that of other companies in its industry sector; and |
| |
◾ |
|
The scope and structure of the proposal. |
Filling Vacancies/Removal of Directors
General Recommendation: Vote against proposals that
provide that directors may be removed only for cause. Vote for proposals to restore shareholders’ ability to remove directors with or without cause.
Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.
Vote for proposals that permit shareholders to elect directors to fill board vacancies.
Independent Board Chair
General Recommendation: Generally vote for shareholder
proposals requiring that the board chair position be filled by an independent director, taking into consideration the following:
| |
◾ |
|
The scope and rationale of the proposal; |
| |
◾ |
|
The company’s current board leadership structure; |
| |
◾ |
|
The company’s governance structure and practices; |
| |
◾ |
|
Company performance; and |
| |
◾ |
|
Any other relevant factors that may be applicable. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
22 of 82 |
|
The following factors will increase the
likelihood of a “for” recommendation:
| |
◾ |
|
A majority non-independent board and/or the presence of non-independent directors on key board committees; |
| |
◾ |
|
A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined
CEO/chair role; |
| |
◾ |
|
The presence of an executive or non-independent chair in addition to the CEO, a
recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair; |
| |
◾ |
|
Evidence that the board has failed to oversee and address material risks facing the company; |
| |
◾ |
|
A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the
board has materially diminished shareholder rights; or |
| |
◾ |
|
Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’
interests. |
Majority of Independent Directors/Establishment of Independent Committees
General Recommendation: Vote for shareholder proposals
asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS’ definition of Independent Director (See ISS’ Classification of Directors.)
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors
unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
General Recommendation: Generally vote for management
proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included.
Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors
need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a
plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
Proxy Access
General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:
| |
◾ |
|
Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
|
| |
◾ |
|
Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each
member of the nominating group; |
| |
◾ |
|
Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; and
|
| |
◾ |
|
Cap: cap on nominees of generally twenty-five percent (25%) of the board. |
Review for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are more restrictive than these
guidelines.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
23 of 82 |
|
Require More Nominees
than Open Seats
General Recommendation:
Vote against shareholder proposals that would require a company to nominate more candidates than the number of open board seats.
Shareholder Engagement Policy (Shareholder Advisory Committee)
General Recommendation: Generally vote for shareholder
proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:
| |
◾ |
|
Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information
between shareholders and members of the board; |
| |
◾ |
|
Effectively disclosed information with respect to this structure to its shareholders; |
| |
◾ |
|
Company has not ignored majority-supported shareholder proposals, or a majority withhold vote on a director nominee; and
|
| |
◾ |
|
The company has an independent chair or a lead director, according to ISS’
definition. This individual must be made available for periodic consultation and direct communication with major shareholders. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
24 of 82 |
|
2. Audit-Related
Auditor Indemnification and Limitation of Liability
General Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to:
| |
◾ |
|
The terms of the auditor agreement—the degree to which these agreements impact shareholders’ rights;
|
| |
◾ |
|
The motivation and rationale for establishing the agreements; |
| |
◾ |
|
The quality of the company’s disclosure; and |
| |
◾ |
|
The company’s historical practices in the audit area. |
Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Auditor Ratification
General Recommendation: Vote for proposals to ratify
auditors unless any of the following apply:
| |
◾ |
|
An auditor has a financial interest in or association with the company, and is therefore not independent;
|
| |
◾ |
|
There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of
the company’s financial position; |
| |
◾ |
|
Poor accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP;
or |
| |
◾ |
|
Fees for non-audit services (“Other” fees) are excessive.
|
Non-audit fees are excessive if:
| |
◾ |
|
Non-audit (“other”) fees > audit fees + audit-related fees +
tax compliance/preparation fees |
Tax compliance and preparation include the preparation of original and amended tax returns and
refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to
“Other” fees.
In circumstances where “Other” fees include fees related to significant
one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to
the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
Shareholder Proposals Limiting Non-Audit Services
General Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.
Shareholder Proposals on Audit Firm Rotation
General Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account:
| |
◾ |
|
The tenure of the audit firm; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
25 of 82 |
|
| |
◾ |
|
The length of rotation specified in the proposal; |
| |
◾ |
|
Any significant audit-related issues at the company; |
| |
◾ |
|
The number of Audit Committee meetings held each year; |
| |
◾ |
|
The number of financial experts serving on the committee; and |
| |
◾ |
|
Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive
price. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
26 of 82 |
|
3. Shareholder
Rights & Defenses
Advance Notice Requirements for Shareholder Proposals/Nominations
General Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as
reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.
To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the
anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a
90-120-day window). The submittal window is the period under which shareholders must file their proposals/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the
company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
General Recommendation: Vote against proposals giving the
board exclusive authority to amend the bylaws.
Vote
case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into account the following:
| |
◾ |
|
Any impediments to shareholders’ ability to amend the bylaws (i.e. supermajority voting requirements);
|
| |
◾ |
|
The company’s ownership structure and historical voting turnout; |
| |
◾ |
|
Whether the board could amend bylaws adopted by shareholders; and |
| |
◾ |
|
Whether shareholders would retain the ability to ratify any board-initiated amendments. |
Control Share Acquisition Provisions
General Recommendation: Vote for proposals to opt out of
control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders.
Vote against proposals to amend the charter to include control share acquisition provisions.
Vote for proposals to restore voting rights to the control shares.
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds.
Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer
to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Control
Share Cash-Out Provisions
General
Recommendation: Vote for proposals to opt out of control share cash-out statutes.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
27 of 82 |
|
Control share
cash-out statutes give dissident shareholders the right to “cash-out” of their position in a company at the expense of the shareholder who has taken a
control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
Disgorgement Provisions
General Recommendation: Vote for proposals to opt out of
state disgorgement provisions.
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a
company’s stock to disgorge, or pay back, to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a
certain period of time (between 18 months and 24 months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.
Fair Price Provisions
General Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire
the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.
Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
Freeze-Out Provisions
General Recommendation: Vote for proposals to opt out of
state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time
before gaining control of the company.
Greenmail
General Recommendation: Vote for proposals to adopt
anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments.
Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only
the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Shareholder Litigation Rights
Federal Forum Selection Provisions
Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal
securities law.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
28 of 82 |
|
General Recommendation: Generally vote for federal forum
selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or
board responsiveness to shareholders.
Vote against provisions that restrict the forum to a particular federal district court; unilateral
adoption (without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments
policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims
arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
General Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the state of Delaware as the exclusive forum for
corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
For states other than Delaware, vote case-by-case on exclusive forum
provisions, taking into consideration:
| |
◾ |
|
The company’s stated rationale for adopting such a provision; |
| |
◾ |
|
Disclosure of past harm from duplicative shareholder lawsuits in more than one forum; |
| |
◾ |
|
The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and
the definition of key terms; and |
| |
◾ |
|
Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote
standard applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections. |
Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that
specify a particular local court within the state; unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee shifting
Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.
General Recommendation: Generally vote against provisions
that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful).
Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments policy.
Net Operating Loss (NOL) Protective Amendments
General
Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of protecting a company’s net operating losses (NOL) if the effective term of the protective
amendment would exceed the shorter of three years and the exhaustion of the NOL.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
29 of 82 |
|
Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the
NOL:
| |
◾ |
|
The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder); |
| |
◾ |
|
Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon
exhaustion or expiration of the NOL); |
| |
◾ |
|
The company’s existing governance structure including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and |
| |
◾ |
|
Any other factors that may be applicable. |
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
General Recommendation: Vote for shareholder proposals
requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill
in the future specifying that the board will only adopt a shareholder rights plan if either:
| |
◾ |
|
Shareholders have approved the adoption of the plan; or |
| |
◾ |
|
The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders
under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder
ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate. |
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add
the caveat that a vote within 12 months would be considered sufficient implementation.
Management Proposals to Ratify a
Poison Pill
General Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following
attributes:
| |
◾ |
|
No lower than a 20 percent trigger, flip-in or flip-over;
|
| |
◾ |
|
A term of no more than three years; |
| |
◾ |
|
No deadhand, slowhand, no-hand, or similar feature that limits the ability of a
future board to redeem the pill; and |
| |
◾ |
|
Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a
qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill. |
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into
consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
General Recommendation: Vote against proposals to adopt a
poison pill for the stated purpose of protecting a company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
30 of 82 |
|
Vote case-by-case on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
| |
◾ |
|
The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent); |
| |
◾ |
|
Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or
expiration of NOLs); |
| |
◾ |
|
The company’s existing governance structure, including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and |
| |
◾ |
|
Any other factors that may be applicable. |
Proxy Voting Disclosure, Confidentiality, and Tabulation
General Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder
rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company’s vote-counting methodology.
While a variety of factors may be considered
in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
| |
◾ |
|
The scope and structure of the proposal; |
| |
◾ |
|
The company’s stated confidential voting policy (or other relevant policies) and whether it ensures a “level
playing field” by providing shareholder proponents with equal access to vote information prior to the annual meeting; |
| |
◾ |
|
The company’s vote standard for management and shareholder proposals and whether it ensures consistency and fairness
in the proxy voting process and maintains the integrity of vote results; |
| |
◾ |
|
Whether the company’s disclosure regarding its vote counting method and other relevant voting policies with respect
to management and shareholder proposals are consistent and clear; |
| |
◾ |
|
Any recent controversies or concerns related to the company’s proxy voting mechanics; |
| |
◾ |
|
Any unintended consequences resulting from implementation of the proposal; and |
| |
◾ |
|
Any other factors that may be relevant. |
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
General Recommendation: Generally vote against management
proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best practice.
In addition, voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
| |
◾ |
|
The presence of a shareholder proposal addressing the same issue on the same ballot; |
| |
◾ |
|
The board’s rationale for seeking ratification; |
| |
◾ |
|
Disclosure of actions to be taken by the board should the ratification proposal fail; |
| |
◾ |
|
Disclosure of shareholder engagement regarding the board’s ratification request; |
| |
◾ |
|
The level of impairment to shareholders’ rights caused by the existing provision; |
| |
◾ |
|
The history of management and shareholder proposals on the provision at the company’s past meetings;
|
| |
◾ |
|
Whether the current provision was adopted in response to the shareholder proposal; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
31 of 82 |
|
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Previous use of ratification proposals to exclude shareholder proposals. |
Reimbursing Proxy Solicitation Expenses
General Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses.
When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with
the election.
Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one
or more candidates in a contested election where the following apply:
| |
◾ |
|
The election of fewer than 50 percent of the directors to be elected is contested in the election;
|
| |
◾ |
|
One or more of the dissident’s candidates is elected; |
| |
◾ |
|
Shareholders are not permitted to cumulate their votes for directors; and |
| |
◾ |
|
The election occurred, and the expenses were incurred, after the adoption of this bylaw. |
Reincorporation Proposals
General Recommendation: Management or shareholder
proposals to change a company’s state of incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance
concerns including the following:
| |
◾ |
|
Reasons for reincorporation; |
| |
◾ |
|
Comparison of company’s governance practices and provisions prior to and following the reincorporation; and
|
| |
◾ |
|
Comparison of corporation laws of original state and destination state. |
Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.
Shareholder Ability to Act by Written Consent
General Recommendation: Generally vote against management
and shareholder proposals to restrict or prohibit shareholders’ ability to act by written consent.
Generally vote for
management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
| |
◾ |
|
Shareholders’ current right to act by written consent; |
| |
◾ |
|
The inclusion of exclusionary or prohibitive language; |
| |
◾ |
|
Investor ownership structure; and |
| |
◾ |
|
Shareholder support of, and management’s response to, previous shareholder proposals. |
Vote case-by-case on shareholder proposals if, in addition to the
considerations above, the company has the following governance and antitakeover provisions:
| |
◾ |
|
An unfettered14 right for shareholders to call special meetings at a 10 percent threshold; |
| |
◾ |
|
A majority vote standard in uncontested director elections;
|
14 quality of the company’s disclosure; and “Unfettered” means no restrictions on
agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no
greater than 90 prior to the next annual meeting.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
32 of 82 |
|
| |
◾ |
|
No non-shareholder-approved pill; and |
| |
◾ |
|
An annually elected board. |
Shareholder Ability to Call Special Meetings
General Recommendation: Vote against management or
shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings.
Generally vote for management or
shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:
| |
◾ |
|
Shareholders’ current right to call special meetings; |
| |
◾ |
|
Minimum ownership threshold necessary to call special meetings (10 percent preferred); |
| |
◾ |
|
The inclusion of exclusionary or prohibitive language; |
| |
◾ |
|
Investor ownership structure; and |
| |
◾ |
|
Shareholder support of, and management’s response to, previous shareholder proposals. |
Stakeholder Provisions
General Recommendation: Vote against proposals that ask
the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
State Antitakeover Statutes
General Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and
labor contract provisions, and anti-greenmail provisions).
Supermajority Vote Requirements
General Recommendation: Vote against proposals to require
a supermajority shareholder vote.
Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for
companies with shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:
| |
◾ |
|
Quorum requirements; and |
Virtual Shareholder Meetings
General Recommendation: Generally vote for management
proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which
virtual-only15 meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting.
15 Virtual-only shareholder meeting” refers to a meeting of shareholders that is held
exclusively using technology without a corresponding in-person meeting.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
33 of 82 |
|
Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:
| |
◾ |
|
Scope and rationale of the proposal; and |
| |
◾ |
|
Concerns identified with the company’s prior meeting practices. |
4. Capital/Restructuring
Capital
Adjustments to Par Value of Common Stock
General Recommendation:
Vote for management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action.
Vote for management proposals to eliminate par value.
Common Stock Authorization
General Authorization Requests
General Recommendation: Vote
case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes:
| |
◾ |
|
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized share; |
| |
◾ |
|
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares; |
| |
◾ |
|
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage; or
|
| |
◾ |
|
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the
company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| |
◾ |
|
The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights
to other share classes; |
| |
◾ |
|
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization; |
| |
◾ |
|
The company has a non-shareholder approved poison pill (including an NOL pill); or
|
| |
◾ |
|
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| |
◾ |
|
In, or subsequent to, the company’s most recent 10-K filing, the company
discloses that there is substantial doubt about its ability to continue as a going concern; |
| |
◾ |
|
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or |
| |
◾ |
|
A government body has in the past year required the company to increase its capital ratios. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
34 of 82 |
|
For companies incorporated in states that allow
increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to
increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same
ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| |
◾ |
|
twice the amount needed to support the transactions on the ballot, and |
| |
◾ |
|
the allowable increase as calculated for general issuances above. |
Dual Class Structure
General Recommendation: Generally vote against proposals
to create a new class of common stock unless:
| |
◾ |
|
The company discloses a compelling rationale for the dual-class capital structure, such as: |
| |
◾ |
|
The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as
a going concern; or |
| |
◾ |
|
The new class of shares will be transitory; |
| |
◾ |
|
The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term
and long term; and |
| |
◾ |
|
The new class is not designed to preserve or increase the voting power of an insider or significant shareholder.
|
Issue Stock for Use with Rights Plan
General Recommendation: Vote against proposals that
increase authorized common stock for the explicit purpose of implementing a non-shareholder-approved shareholder rights plan (poison pill).
Preemptive Rights
General Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into consideration:
| |
◾ |
|
The size of the company; |
| |
◾ |
|
The shareholder base; and |
| |
◾ |
|
The liquidity of the stock. |
Preferred Stock Authorization
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes:
| |
◾ |
|
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized shares; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
35 of 82 |
|
| |
◾ |
|
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares; |
| |
◾ |
|
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.
|
| |
◾ |
|
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization; or |
| |
◾ |
|
If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a
specific use for the shares. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the
company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| |
◾ |
|
If the shares requested are blank check preferred shares that can be used for antitakeover purposes;16 |
| |
◾ |
|
The company seeks to increase a class of non-convertible preferred shares entitled
to more than one vote per share on matters that do not solely affect the rights of preferred stockholders “supervoting shares”); |
| |
◾ |
|
The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number
of common shares into which they are convertible (“supervoting shares”) on matters that do not solely affect the rights of preferred stockholders; |
| |
◾ |
|
The stated intent of the increase in the general authorization is to allow the company to increase an existing designated
class of supervoting preferred shares; |
| |
◾ |
|
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization; |
| |
◾ |
|
The company has a non-shareholder approved poison pill (including an NOL pill); and
|
| |
◾ |
|
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| |
◾ |
|
In, or subsequent to, the company’s most recent 10-K filing, the company
discloses that there is substantial doubt about its ability to continue as a going concern; |
| |
◾ |
|
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or |
| |
◾ |
|
A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all
nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to
increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the
same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| |
◾ |
|
twice the amount needed to support the transactions on the ballot, and |
| |
◾ |
|
the allowable increase as calculated for general issuances above.
|
16 To be acceptable, appropriate disclosure would be needed that the shares are
“declawed”: i.e., representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights
plan.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
36 of 82 |
|
Recapitalization Plans
General Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into account the following:
| |
◾ |
|
More simplified capital structure; |
| |
◾ |
|
Fairness of conversion terms; |
| |
◾ |
|
Impact on voting power and dividends; |
| |
◾ |
|
Reasons for the reclassification; |
| |
◾ |
|
Conflicts of interest; and |
| |
◾ |
|
Other alternatives considered. |
Reverse Stock Splits
General Recommendation: Vote for management proposals to
implement a reverse stock split if:
| |
◾ |
|
The number of authorized shares will be proportionately reduced; or |
| |
◾ |
|
The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with
ISS’ Common Stock Authorization policy. |
Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:
| |
◾ |
|
Stock exchange notification to the company of a potential delisting; |
| |
◾ |
|
Disclosure of substantial doubt about the company’s ability to continue as a going concern without additional
financing; |
| |
◾ |
|
The company’s rationale; or |
| |
◾ |
|
Other factors as applicable. |
Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S.
General Recommendation: For U.S. domestic issuers
incorporated outside the U.S. and listed solely on a U.S. exchange, generally vote for resolutions to authorize the issuance of common shares up to 20 percent of currently issued common share capital, where not tied
to a specific transaction or financing proposal.
For pre-revenue or other early-stage companies that
are heavily reliant on periodic equity financing, generally vote for resolutions to authorize the issuance of common shares up to 50 percent of currently issued common share capital. The burden of proof will be on the company to establish that
it has a need for the higher limit.
Renewal of such mandates should be sought at each year’s annual meeting.
Vote case-by-case on share issuances for a specific transaction or
financing proposal.
Share Repurchase Programs
General Recommendation: For U.S.-incorporated companies,
and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the
board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding:
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
37 of 82 |
|
| |
◾ |
|
The use of buybacks to inappropriately manipulate incentive compensation metrics; |
| |
◾ |
|
Threats to the company’s long-term viability; or |
| |
◾ |
|
Other company-specific factors as warranted. |
Vote case-by-case on proposals to repurchase shares directly from
specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
General Recommendation: Generally vote against shareholder
proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by
executives exercising options or selling shares during periods of share buybacks.
Stock Distributions: Splits and
Dividends
General Recommendation:
Generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less
than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.
Tracking
Stock
General Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:
| |
◾ |
|
Adverse governance changes; |
| |
◾ |
|
Excessive increases in authorized capital stock; |
| |
◾ |
|
Unfair method of distribution; |
| |
◾ |
|
Diminution of voting rights; |
| |
◾ |
|
Adverse conversion features; |
| |
◾ |
|
Negative impact on stock option plans; and |
| |
◾ |
|
Alternatives such as spin-off. |
Restructuring
Appraisal Rights
General Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal.
Asset
Purchases
General Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors:
| |
◾ |
|
Financial and strategic benefits; |
| |
◾ |
|
How the deal was negotiated; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
38 of 82 |
|
| |
◾ |
|
Other alternatives for the business; and |
Asset Sales
General Recommendation: Vote case-by-case on asset sales, considering the
following factors:
| |
◾ |
|
Impact on the balance sheet/working capital; |
| |
◾ |
|
Potential elimination of diseconomies; |
| |
◾ |
|
Anticipated financial and operating benefits; |
| |
◾ |
|
Anticipated use of funds; |
| |
◾ |
|
Value received for the asset; |
| |
◾ |
|
How the deal was negotiated; and |
Bundled Proposals
General Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the
packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals.
Conversion of Securities
General Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the
conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.
Vote for the
conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy
Plans/Reverse Leveraged Buyouts/Wrap Plans
General Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating:
| |
◾ |
|
Dilution to existing shareholders’ positions; |
| |
◾ |
|
Terms of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties;
exit strategy; |
| |
◾ |
|
Financial issues - company’s financial situation; degree of need for capital; use of proceeds; effect of the
financing on the company’s cost of capital; |
| |
◾ |
|
Management’s efforts to pursue other alternatives; |
| |
◾ |
|
Control issues - change in management; change in control, guaranteed board and committee seats; standstill provisions;
voting agreements; veto power over certain corporate actions; and |
| |
◾ |
|
Conflict of interest - arm’s length transaction, managerial incentives. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
39 of 82 |
|
Vote for the debt restructuring if it is
expected that the company will file for bankruptcy if the transaction is not approved.
Formation of Holding Company
General Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into consideration the following:
| |
◾ |
|
The reasons for the change; |
| |
◾ |
|
Any financial or tax benefits; |
| |
◾ |
|
Increases in capital structure; and |
| |
◾ |
|
Changes to the articles of incorporation or bylaws of the company. |
Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include
either of the following:
| |
◾ |
|
Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or
|
| |
◾ |
|
Adverse changes in shareholder rights. |
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
General Recommendation: Vote case-by-case on going private transactions, taking into account the following:
| |
◾ |
|
How the deal was negotiated; |
| |
◾ |
|
Other alternatives/offers considered; and |
Vote case-by-case on going dark transactions, determining whether the
transaction enhances shareholder value by taking into consideration:
| |
◾ |
|
Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market
research of the stock); and |
| |
◾ |
|
Balanced interests of continuing vs. cashed-out shareholders, taking into account
the following: |
| |
◾ |
|
Are all shareholders able to participate in the transaction? |
| |
◾ |
|
Will there be a liquid market for remaining shareholders following the transaction? |
| |
◾ |
|
Does the company have strong corporate governance? |
| |
◾ |
|
Will insiders reap the gains of control following the proposed transaction? and |
| |
◾ |
|
Does the state of incorporation have laws requiring continued reporting that may benefit shareholders?
|
Joint Ventures
General Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following:
| |
◾ |
|
Percentage of assets/business contributed; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
40 of 82 |
|
| |
◾ |
|
Financial and strategic benefits; |
| |
◾ |
|
Other alternatives; and |
Liquidations
General Recommendation: Vote case-by-case on liquidations, taking into account
the following:
| |
◾ |
|
Management’s efforts to pursue other alternatives; |
| |
◾ |
|
Appraisal value of assets; and |
| |
◾ |
|
The compensation plan for executives managing the liquidation. |
Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
Mergers and Acquisitions
General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing
factors including:
| |
◾ |
|
Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While
the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale. |
| |
◾ |
|
Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause
closer scrutiny of a deal. |
| |
◾ |
|
Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and
revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
| |
◾ |
|
Negotiations and process - Were the terms of the transaction negotiated at
arm’s-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation “wins” can also signify the deal makers’
competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. |
| |
◾ |
|
Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as
compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these
interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the “ISS Transaction Summary” section of this report is an aggregate figure that
can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
|
| |
◾ |
|
Governance - Will the combined company have a better or worse governance profile than the current governance
profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
41 of 82 |
|
Private
Placements/Warrants/Convertible Debentures
General Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration:
| |
◾ |
|
Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be
weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event
to trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to
trigger the dilutive event. |
| |
◾ |
|
Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features,
termination penalties, exit strategy): |
| |
◾ |
|
The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial
condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement. |
| |
◾ |
|
When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or
premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry, and anticipation of future performance. |
| |
◾ |
|
The company’s financial condition; |
| |
◾ |
|
Degree of need for capital; |
| |
◾ |
|
Effect of the financing on the company’s cost of capital; |
| |
◾ |
|
Current and proposed cash burn rate; and |
| |
◾ |
|
Going concern viability and the state of the capital and credit markets. |
| |
◾ |
|
Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A
fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger, or sale of part or all of the company. |
| |
◾ |
|
Guaranteed board and committee seats; |
| |
◾ |
|
Veto power over certain corporate actions; and |
| |
◾ |
|
Minority versus majority ownership and corresponding minority discount or majority control premium. |
| |
◾ |
|
Conflicts of interest should be viewed from the perspective of the company and the investor; and |
| |
◾ |
|
Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder
interests? |
| |
◾ |
|
The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be
addressed by analyzing the one-day impact on the unaffected stock price. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
42 of 82 |
|
Vote for the private placement, or for the
issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan (Bankruptcy)
General Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to:
| |
◾ |
|
Estimated value and financial prospects of the reorganized company; |
| |
◾ |
|
Percentage ownership of current shareholders in the reorganized company; |
| |
◾ |
|
Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an
Official Equity Committee); |
| |
◾ |
|
The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);
|
| |
◾ |
|
Existence of a superior alternative to the plan of reorganization; and |
| |
◾ |
|
Governance of the reorganized company. |
Special Purpose Acquisition Corporations (SPACs)
General Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following:
| |
◾ |
|
Valuation - Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness
opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to
the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target if it is a private entity. |
| |
◾ |
|
Market reaction - How has the market responded to the proposed deal? A negative market reaction may be a
cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
| |
◾ |
|
Deal timing - A main driver for most transactions is that the SPAC charter typically requires the deal to be
complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date. |
| |
◾ |
|
Negotiations and process - What was the process undertaken to identify potential target companies within
specified industry or location specified in charter? Consider the background of the sponsors. |
| |
◾ |
|
Conflicts of interest - How are sponsors benefiting from the transaction compared to IPO shareholders?
Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter
requires that the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a
transaction to be completed within the 18-24-month timeframe. |
| |
◾ |
|
Voting agreements - Are the sponsors entering into enter into any voting agreements/tender offers with
shareholders who are likely to vote against the proposed merger or exercise conversion rights? |
| |
◾ |
|
Governance - What is the impact of having the SPAC CEO or founder on key committees following the proposed
merger? |
Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions
The main purpose of SPACs is to identify and acquire a viable target within a specified timeframe, and failure to achieve this objective within the
allotted time calls into question management’s ability to execute its primary objective. The end of that timeframe is generally referred to as the termination date.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
43 of 82 |
|
General Recommendation: Generally
support requests to extend the termination date by up to one year from the SPAC’s original termination date (inclusive of any built-in extension options, and accounting for prior extension
requests).
Other factors that may be considered include: any added incentives, business combination status, other amendment terms, and, if
applicable, use of money in the trust fund to pay excise taxes on redeemed shares.
Spin-offs
General Recommendation: Vote case-by-case on spin-offs, considering:
| |
◾ |
|
Tax and regulatory advantages; |
| |
◾ |
|
Planned use of the sale proceeds; |
| |
◾ |
|
Benefits to the parent company; |
| |
◾ |
|
Corporate governance changes; and |
| |
◾ |
|
Changes in the capital structure. |
Value Maximization Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by:
| |
◾ |
|
Hiring a financial advisor to explore strategic alternatives; |
| |
◾ |
|
Selling the company; or |
| |
◾ |
|
Liquidating the company and distributing the proceeds to shareholders. |
These proposals should be evaluated based on the following factors:
| |
◾ |
|
Prolonged poor performance with no turnaround in sight; |
| |
◾ |
|
Signs of entrenched board and management (such as the adoption of takeover defenses); |
| |
◾ |
|
Strategic plan in place for improving value; |
| |
◾ |
|
Likelihood of receiving reasonable value in a sale or dissolution; and |
| |
◾ |
|
The company actively exploring its strategic options, including retaining a financial advisor. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
44 of 82 |
|
5. Compensation
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and
director compensation programs:
| |
1. |
Maintain appropriate pay-for-performance
alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over
the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; |
| |
2. |
Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or
indefinite contracts, excessive severance packages, and guaranteed compensation; |
| |
3. |
Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs
by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); |
| |
4. |
Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of
informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; and |
| |
5. |
Avoid inappropriate pay to non-executive directors: This principle recognizes the
interests of shareholders in ensuring that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level,
it may incorporate a variety of generally accepted best practices. |
Advisory Votes on Executive
Compensation—Management Proposals (Say-on-Pay)
General Recommendation: Vote case-by-case on ballot items related to executive
pay and practices, as well as certain aspects of outside director compensation.
Vote against Advisory Votes on Executive Compensation
(Say-on-Pay or “SOP”) if:
| |
◾ |
|
There is an unmitigated misalignment between CEO pay and company performance ( pay for
performance); |
| |
◾ |
|
The company maintains significant problematic pay practices; or |
| |
◾ |
|
The board exhibits a significant level of poor communication and responsiveness to
shareholders. |
Vote against or withhold from the members of the Compensation Committee and potentially the full board if:
| |
◾ |
|
There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;
|
| |
◾ |
|
The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes
cast; |
| |
◾ |
|
The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or
|
| |
◾ |
|
The situation is egregious. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
45 of 82 |
|
Primary Evaluation Factors for Executive
Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to
identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the S&P1500, Russell 3000, or Russell 3000E Indices17, this
analysis considers the following:
| |
1. |
Peer Group18 Alignment: |
| |
◾ |
|
The degree of alignment between the company’s annualized TSR rank and the CEO’s annualized total pay rank
within a peer group, each measured over a three-year period. |
| |
◾ |
|
The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year
period. |
| |
◾ |
|
The multiple of the CEO’s total pay relative to the peer group median in the most recent fiscal year.
|
| |
2. |
Absolute Alignment19 – the absolute alignment between
the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period. |
If the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our analysis
may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
| |
◾ |
|
The ratio of performance- to time-based incentive awards; |
| |
◾ |
|
The overall ratio of performance-based compensation to fixed or discretionary pay; |
| |
◾ |
|
The rigor of performance goals; |
| |
◾ |
|
The complexity and risks around pay program design; |
| |
◾ |
|
The transparency and clarity of disclosure; |
| |
◾ |
|
The company’s peer group benchmarking practices; |
| |
◾ |
|
Financial/operational results, both absolute and relative to peers; |
| |
◾ |
|
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards); |
| |
◾ |
|
Realizable pay20 compared to grant pay; and
|
| |
◾ |
|
Any other factors deemed relevant. |
17 The Russell
3000E Index includes approximately 4,000 of the largest U.S. equity securities.
18 The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company’s
selected peers’ GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of
the company’s market cap. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
19 Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
20 ISS research reports include realizable pay for S&P1500 companies.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
46 of 82 |
|
Problematic Pay
Practices
Problematic pay elements are generally evaluated
case-by-case considering the context of a company’s overall pay program and demonstrated
pay-for-performance philosophy. The focus is on executive compensation practices that contravene the global pay principles, including:
| |
◾ |
|
Problematic practices related to non-performance-based compensation elements;
|
| |
◾ |
|
Incentives that may motivate excessive risk-taking or present a windfall risk; and |
| |
◾ |
|
Pay decisions that circumvent
pay-for-performance, such as options backdating or waiving performance requirements. |
The list of examples below highlights certain problematic practices that carry significant weight in this overall consideration and may result
in adverse vote recommendations:
| |
◾ |
|
Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and
voluntary surrender of underwater options); |
| |
◾ |
|
Extraordinary perquisites or tax gross-ups; |
| |
◾ |
|
New or materially amended agreements that provide for: |
| |
◾ |
|
Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent
bonus); |
| |
◾ |
|
CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or
“modified single” triggers) or in connection with a problematic Good Reason definition; |
| |
◾ |
|
CIC excise tax gross-up entitlements (including “modified” gross-ups); and/or |
| |
◾ |
|
Multi-year guaranteed awards that are not at risk due to rigorous performance conditions; |
| |
◾ |
|
Liberal CIC definition combined with any single-trigger CIC benefits; |
| |
◾ |
|
Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of
pay programs and practices applicable to the EMI’s executives is not possible; |
| |
◾ |
|
Severance payments made when the termination is not clearly disclosed as involuntary (for example, a termination without
cause or resignation for good reason); and/or |
| |
◾ |
|
Any other provision or practice deemed to be egregious and present a significant risk to investors. |
The above examples are not an exhaustive list. Please refer to ISS’ U.S.
Compensation Policies FAQ document for additional detail on specific pay practices that have been identified as problematic and may lead to negative vote recommendations.
Options Backdating
The following
factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
| |
◾ |
|
Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;
|
| |
◾ |
|
Duration of options backdating; |
| |
◾ |
|
Size of restatement due to options backdating; |
| |
◾ |
|
Corrective actions taken by the board or compensation committee, such as canceling or
re-pricing backdated options, the recouping of option gains on backdated grants; and |
| |
◾ |
|
Adoption of a grant policy that prohibits backdating and creates a fixed grant schedule or window period for equity grants
in the future. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
47 of 82 |
|
Compensation Committee
Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
| |
◾ |
|
Failure to respond to majority-supported shareholder proposals on executive pay topics; or |
| |
◾ |
|
Failure to adequately respond to the company’s previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account: |
| |
◾ |
|
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated); |
| |
◾ |
|
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
| |
◾ |
|
Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
| |
◾ |
|
Other recent compensation actions taken by the company; |
| |
◾ |
|
Whether the issues raised are recurring or isolated; |
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)
General Recommendation: Vote for annual advisory votes on
compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
General Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of existing
change-in-control arrangements maintained with named executive officers but also considering new or extended arrangements.
Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude,
and/or timing of issue(s):
| |
◾ |
|
Single- or modified-single-trigger cash severance; |
| |
◾ |
|
Single-trigger acceleration of unvested equity awards; |
| |
◾ |
|
Full acceleration of equity awards granted shortly before the change in control; |
| |
◾ |
|
Acceleration of performance awards above the target level of performance without compelling rationale;
|
| |
◾ |
|
Excessive cash severance (generally >3x base salary and bonus); |
| |
◾ |
|
Excise tax gross-ups triggered and payable; |
| |
◾ |
|
Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or
|
| |
◾ |
|
Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary
equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or |
| |
◾ |
|
The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute
advisory vote. |
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis.
However, the presence of multiple legacy problematic features will also be closely scrutinized.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
48 of 82 |
|
In cases where the golden parachute vote is
incorporated into a company’s advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
Please refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
General Recommendation: Vote case-by-case on certain equity-based
compensation plans21 depending on a
combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an “Equity Plan
Scorecard” (EPSC) approach with three pillars:
| |
◾ |
|
Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap
peers, measured by the company’s estimated Shareholder Value Transfer (SVT) in relation to peers and considering both: |
| |
◾ |
|
SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;
and |
| |
◾ |
|
SVT based only on new shares requested plus shares remaining for future grants. |
| |
◾ |
|
Quality of disclosure around vesting upon a change in control (CIC); |
| |
◾ |
|
Discretionary vesting authority; |
| |
◾ |
|
Liberal share recycling on various award types; |
| |
◾ |
|
Lack of minimum vesting period for grants made under the plan; and |
| |
◾ |
|
Dividends payable prior to award vesting. |
| |
◾ |
|
The company’s three-year burn rate relative to its industry/market cap peers; |
| |
◾ |
|
Vesting requirements in CEO’s recent equity grants (3-year look-back);
|
| |
◾ |
|
The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by
the average annual shares granted in the prior three years); |
| |
◾ |
|
The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
|
| |
◾ |
|
Whether the company maintains a sufficient claw-back policy; and |
| |
◾ |
|
Whether the company maintains sufficient post-exercise/vesting share-holding requirements. |
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’
interests, or if any of the following egregious factors (“overriding factors”) apply:
| |
◾ |
|
Awards may vest in connection with a liberal
change-of-control definition; |
| |
◾ |
|
The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly
permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing – for non-listed companies); |
| |
◾ |
|
The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; |
| |
◾ |
|
The plan is excessively dilutive to shareholders’ holdings; |
| |
◾ |
|
The plan contains an evergreen (automatic share replenishment) feature; or |
| |
◾ |
|
Any other plan features are determined to have a significant negative impact on shareholder interests.
|
21 Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock
option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further
evaluated case-by-case.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
49 of 82 |
|
Further Information on certain EPSC
Factors:
Shareholder Value Transfer (SVT)
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the
amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans,
and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types
of awards (for example, full-value awards), the assumption is made that all awards to be granted will be the most expensive types.
For proposals
that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using
the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables
most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size, and cash compensation into the industry cap equations to
arrive at the company’s benchmark.22
Three-Year
Value-Adjusted Burn Rate
A “Value-Adjusted Burn Rate” is used for stock plan evaluations. Value-Adjusted Burn Rate
benchmarks are calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company’s GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year’s burn-rate benchmark.
The Value-Adjusted Burn Rate is calculated as follows:
Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) /
(Weighted average common shares * stock price).
Egregious Factors
Liberal Change in Control Definition
Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal
definition of change in control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a
“potential” takeover, shareholder approval of a merger or other transactions, or similar language.
22 For plans evaluated under the Equity Plan Scorecard policy, the company’s SVT benchmark is
considered along with other factors.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
50 of 82 |
|
Repricing Provisions
Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without
prior shareholder approval. “Repricing” typically includes the ability to do any of the following:
| |
◾ |
|
Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;
|
| |
◾ |
|
Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise
price of the original options or SARs; |
| |
◾ |
|
Cancel underwater options in exchange for stock awards; or |
| |
◾ |
|
Provide cash buyouts of underwater options. |
While the above cover most types of repricing, ISS may view other provisions as akin to repricing depending on the facts and circumstances.
Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by ISS),
without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote against plans that do not expressly prohibit
repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.
Problematic Pay Practices or Significant
Pay-for-Performance Disconnect
If the equity plan on the
ballot is a vehicle for problematic pay practices, vote against the plan.
ISS may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment. Considerations in voting against the equity plan may include, but are not limited to:
| |
◾ |
|
Severity of the pay-for-performance
misalignment; |
| |
◾ |
|
Whether problematic equity grant practices are driving the misalignment; and/or |
| |
◾ |
|
Whether equity plan awards have been heavily concentrated to the CEO and/or the other NEOs. |
Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
General Recommendation: Vote case-by-case on amendments to cash and equity incentive plans.
Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| |
◾ |
|
Addresses administrative features only; or |
| |
◾ |
|
Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of
independent directors, per ISS’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time for any reason (including after the company’s initial public
offering), or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below). |
Vote against proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| |
◾ |
|
Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of
independent directors, per ISS’ Classification of Directors. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
51 of 82 |
|
Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company’s IPO and/or proposals that bundle material
amendment(s) other than those for Section 162(m) purposes.
Vote
case-by-case on all other proposals to amend equity incentive plans, considering the following:
| |
◾ |
|
If the proposal requests additional shares and/or the amendments include a term extension or addition of full value awards
as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments; |
| |
◾ |
|
If the plan is being presented to shareholders for the first time (including after the company’s IPO), whether or not
additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments; and |
| |
◾ |
|
If there is no request for additional shares and the amendments do not include a term extension or addition of full value
awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown only for informational purposes. |
In the first two case-by-case evaluation scenarios, the EPSC
evaluation/score is the more heavily weighted consideration.
Specific Treatment of Certain Award Types in Equity Plan
Evaluations
Dividend Equivalent Rights
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the
binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder
equity to employees and non-employee directors and this cost should be captured.
Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the
share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Other Compensation Plans
401(k) Employee Benefit Plans
General Recommendation: Vote for proposals to implement a 401(k) savings plan for
employees.
Employee Stock Ownership Plans (ESOPs)
General Recommendation: Vote for proposals to implement an ESOP or increase authorized
shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
52 of 82 |
|
Employee Stock
Purchase Plans—Qualified Plans
General Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply:
| |
◾ |
|
Purchase price is at least 85 percent of fair market value; |
| |
◾ |
|
Offering period is 27 months or less; and |
| |
◾ |
|
The number of shares allocated to the plan is 10 percent or less of the outstanding shares. |
Vote against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.
Employee Stock Purchase Plans—Non-Qualified Plans
General
Recommendation: Vote case-by-case on nonqualified
employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features:
| |
◾ |
|
Broad-based participation; |
| |
◾ |
|
Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;
|
| |
◾ |
|
Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of
20 percent from market value; and |
| |
◾ |
|
No discount on the stock price on the date of purchase when there is a company matching contribution.
|
Vote against nonqualified employee stock purchase plans when the plan features do not meet all of the above criteria. If the
matching contribution or effective discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of the assessment.
Option Exchange Programs/Repricing Options
General Recommendation: Vote case-by-case on management proposals
seeking approval to exchange/reprice options taking into consideration:
| |
◾ |
|
Historic trading patterns--the stock price should not be so volatile that the
options are likely to be back “in-the-money” over the near term; |
| |
◾ |
|
Rationale for the re-pricing--was the stock
price decline beyond management’s control?; |
| |
◾ |
|
Is this a value-for-value exchange?;
|
| |
◾ |
|
Are surrendered stock options added back to the plan reserve?; |
| |
◾ |
|
Timing—repricing should occur at least one year out from any precipitous drop in company’s stock price;
|
| |
◾ |
|
Option vesting—does the new option vest immediately or is there a black-out
period?; |
| |
◾ |
|
Term of the option--the term should remain the same as that of the replaced option;
|
| |
◾ |
|
Exercise price—should be set at fair market or a premium to market; and |
| |
◾ |
|
Participants—executive officers and directors must be excluded. |
If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration
the company’s total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent,
rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the
company’s stock price demonstrates poor timing
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
53 of 82 |
|
and warrants additional scrutiny. Also,
consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take
advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder vote.
Stock Plans in Lieu of Cash
General Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.
Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not
dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture
the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
General Recommendation: One-time Transfers: Vote
against or withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval.
Vote case-by-case on one-time
transfers. Vote for if:
| |
◾ |
|
Executive officers and non-employee directors are excluded from participating;
|
| |
◾ |
|
Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing
models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and |
| |
◾ |
|
There is a two-year minimum holding period for sale proceeds (cash or stock) for
all participants. |
Additionally, management should provide a clear explanation of why options are being transferred to a
third-party institution and whether the events leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote
against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure, and mechanics must be disclosed to shareholders.
The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
| |
◾ |
|
Cost of the program and impact of the TSOs on company’s total option expense; and |
| |
◾ |
|
Option repricing policy. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
54 of 82 |
|
Amendments to existing plans that allow for
introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.
Director Compensation
Shareholder Ratification of Director Pay Programs
General Recommendation: Vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:
| |
◾ |
|
If the equity plan under which non-employee director grants are made is on the
ballot, whether or not it warrants support; and |
| |
◾ |
|
An assessment of the following qualitative factors: |
| |
◾ |
|
The relative magnitude of director compensation as compared to companies of a similar profile; |
| |
◾ |
|
The presence of problematic pay practices relating to director compensation; |
| |
◾ |
|
Director stock ownership guidelines and holding requirements; |
| |
◾ |
|
Equity award vesting schedules; |
| |
◾ |
|
The mix of cash and equity-based compensation; |
| |
◾ |
|
Meaningful limits on director compensation; |
| |
◾ |
|
The availability of retirement benefits or perquisites; and |
| |
◾ |
|
The quality of disclosure surrounding director compensation. |
Equity Plans for Non-Employee Directors
General Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on:
| |
◾ |
|
The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the
company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; |
| |
◾ |
|
The company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and
|
| |
◾ |
|
The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk).
|
On occasion, non-employee director stock plans will exceed the plan cost or burn-rate
benchmarks when combined with employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative
factors:
| |
◾ |
|
The relative magnitude of director compensation as compared to companies of a similar profile; |
| |
◾ |
|
The presence of problematic pay practices relating to director compensation; |
| |
◾ |
|
Director stock ownership guidelines and holding requirements; |
| |
◾ |
|
Equity award vesting schedules; |
| |
◾ |
|
The mix of cash and equity-based compensation; |
| |
◾ |
|
Meaningful limits on director compensation; |
| |
◾ |
|
The availability of retirement benefits or perquisites; and |
| |
◾ |
|
The quality of disclosure surrounding director compensation. |
Non-Employee Director Retirement Plans
General Recommendation: Vote
against retirement plans for non-employee directors. Vote for shareholder proposals to eliminate retirement plans for non-employee directors.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
55 of 82 |
|
Shareholder Proposals on
Compensation
Bonus Banking/Bonus Banking “Plus”
General Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the
named executive officers or a wider group of employees), taking into account the following factors:
| |
◾ |
|
The company’s past practices regarding equity and cash compensation; |
| |
◾ |
|
Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at
least 50 percent for full tenure); and |
| |
◾ |
|
Whether the company has a rigorous claw-back policy in place. |
Compensation Consultants—Disclosure of Board or Company’s Utilization
General Recommendation: Generally
vote for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid.
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
General Recommendation: Generally vote for shareholder proposals seeking additional
disclosure of executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome
to the company.
Generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form
of compensation (such as types of compensation elements or specific metrics) to be used for executive or directors.
Generally vote against
shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Vote case-by-case on all other shareholder proposals regarding executive
and director pay, taking into account relevant factors, including but not limited to: company performance, pay level and design versus peers, history of compensation concerns or
pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.
Golden Coffins/Executive Death Benefits
General Recommendation: Generally vote for proposals calling for companies to adopt a
policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses,
accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based
employee population is eligible.
Hold Equity Past Retirement or for a Significant Period of Time
General Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors
will be taken into account:
| |
◾ |
|
The percentage/ratio of net shares required to be retained; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
56 of 82 |
|
| |
◾ |
|
The time period required to retain the shares; |
| |
◾ |
|
Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness
of such requirements; |
| |
◾ |
|
Whether the company has any other policies aimed at mitigating risk taking by executives; |
| |
◾ |
|
Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested
holding period/retention ratio or the company’s existing requirements; and |
| |
◾ |
|
Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus.
|
Pay Disparity
General Recommendation: Vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The following factors will
be considered:
| |
◾ |
|
The company’s current level of disclosure of its executive compensation setting process, including how the company
considers pay disparity; |
| |
◾ |
|
If any problematic pay practices or
pay-for-performance concerns have been identified at the company; and |
| |
◾ |
|
The level of shareholder support for the company’s pay programs. |
Generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio in a specific way to set or limit executive pay.
Pay for Performance/Performance-Based Awards
General Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the
board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
| |
◾ |
|
First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent
options or restricted stock, indexed options, or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top
executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards;
and |
| |
◾ |
|
Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based
program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor
design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test. |
In general, vote for the shareholder proposal if the company does not meet both of the above two steps.
Pay for Superior Performance
General Recommendation: Vote case-by-case on shareholder proposals that request the board establish a pay-for-superior
performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles:
| |
◾ |
|
Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group
median; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
57 of 82 |
|
| |
◾ |
|
Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested,
equity awards; |
| |
◾ |
|
Provide the strategic rationale and relative weightings of the financial and
non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan; |
| |
◾ |
|
Establish performance targets for each plan financial metric relative to the performance of the company’s peer
companies; and |
| |
◾ |
|
Limit payment under the annual and performance-vested long-term incentive components of the plan to when the
company’s performance on its selected financial performance metrics exceeds peer group median performance. |
Consider the
following factors in evaluating this proposal:
| |
◾ |
|
What aspects of the company’s annual and long-term equity incentive programs are performance driven?
|
| |
◾ |
|
If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates
disclosed to shareholders or are they benchmarked against a disclosed peer group? |
| |
◾ |
|
Can shareholders assess the correlation between pay and performance based on the current disclosure? and
|
| |
◾ |
|
What type of industry and stage of business cycle does the company belong to? |
Pre-Arranged Trading Plans (10b5-1 Plans)
General Recommendation: Generally vote for shareholder proposals calling
for the addition of certain safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include:
| |
◾ |
|
Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K; |
| |
◾ |
|
Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary
circumstances, as determined by the board; |
| |
◾ |
|
Request that a certain number of days that must elapse between adoption or amendment of a
10b5-1 Plan and initial trading under the plan; |
| |
◾ |
|
Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
|
| |
◾ |
|
An executive may not trade in company stock outside the 10b5-1 Plan; and
|
| |
◾ |
|
Trades under a 10b5-1 Plan must be handled by a broker who does not handle other
securities transactions for the executive. |
Prohibit Outside CEOs from Serving on Compensation Committees
General Recommendation: Generally vote against proposals seeking a policy
to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.
Recoupment of Incentive or Stock Compensation in Specified Circumstances
General Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to
have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company’s financial position or reputation, or if the senior executive failed to manage or
monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies that permit recoupment in cases where an executive’s fraud, misconduct, or negligence significantly
contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant financial restatements.
Misconduct, negligence, or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
58 of 82 |
|
In considering whether to support such
shareholder proposals, ISS will take into consideration the following factors:
| |
◾ |
|
If the company has adopted a formal recoupment policy; |
| |
◾ |
|
The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock
compensation; |
| |
◾ |
|
Whether the company has chronic restatement history or material financial problems; |
| |
◾ |
|
Whether the company’s policy substantially addresses the concerns raised by the proponent; |
| |
◾ |
|
Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; and
|
| |
◾ |
|
Any other relevant factors. |
Severance and Golden Parachute Agreements
General Recommendation: Vote case-by-case on shareholder proposals requiring that executive severance (including change-in-control related)
arrangements or payments be submitted for shareholder ratification.
Factors that will be considered include, but are not limited to:
| |
◾ |
|
The company’s severance or
change-in-control agreements in place, and the presence of problematic features (such as excessive severance entitlements, single triggers, excise tax gross-ups, etc.); |
| |
◾ |
|
Any existing limits on cash severance payouts or policies which require shareholder ratification of severance payments
exceeding a certain level; |
| |
◾ |
|
Any recent severance-related controversies; and |
| |
◾ |
|
Whether the proposal is overly prescriptive, such as requiring shareholder approval of severance that does not exceed
market norms. |
Share Buyback Impact on Incentive Program Metrics
General Recommendation: Vote case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following factors:
| |
◾ |
|
The frequency and timing of the company’s share buybacks; |
| |
◾ |
|
The use of per-share metrics in incentive plans; |
| |
◾ |
|
The effect of recent buybacks on incentive metric results and payouts; and |
| |
◾ |
|
Whether there is any indication of metric result manipulation. |
Supplemental Executive Retirement Plans (SERPs)
General Recommendation: Generally vote for shareholder proposals requesting to put
extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement
plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.
Tax Gross-Up Proposals
General Recommendation: Generally vote for proposals calling for companies to adopt a
policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement
applicable to management employees of the company, such as a relocation or expatriate tax equalization policy.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
59 of 82 |
|
Termination of
Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
General Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of
employment prior to severance payment and/or eliminating accelerated vesting of unvested equity.
The following factors will be considered:
| |
◾ |
|
The company’s current treatment of equity upon employment termination and/or in change-in-control situations (i.e., vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.); and
|
| |
◾ |
|
Current employment agreements, including potential poor pay practices such as
gross-ups embedded in those agreements. |
Generally vote for proposals seeking a policy
that prohibits automatic acceleration of the vesting of equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of
any related performance goals between the award date and the change in control).
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
60 of 82 |
|
6.
Routine/Miscellaneous
Adjourn Meeting
General Recommendation: Generally vote against proposals
to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.
Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against
proposals if the wording is too vague or if the proposal includes “other business.”
Amend Quorum Requirements
General
Recommendation: Vote case-by-case on proposals to reduce quorum requirements for shareholder meetings below a majority
of the shares outstanding, taking into consideration:
| |
◾ |
|
The new quorum threshold requested; |
| |
◾ |
|
The rationale presented for the reduction; |
| |
◾ |
|
The market capitalization of the company (size, inclusion in indices); |
| |
◾ |
|
The company’s ownership structure; |
| |
◾ |
|
Previous voter turnout or attempts to achieve quorum; |
| |
◾ |
|
Any provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve
sufficiently; and |
| |
◾ |
|
Other factors as appropriate. |
In general, a quorum threshold kept as close to a majority of shares outstanding as is achievable is preferred.
Vote case-by-case on directors who unilaterally lower the quorum
requirements below a majority of the shares outstanding, taking into consideration the factors listed above.
Amend Minor Bylaws
General
Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections).
Change Company Name
General Recommendation: Vote for proposals to change the
corporate name unless there is compelling evidence that the change would adversely impact shareholder value.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
61 of 82 |
|
Change Date, Time, or Location of Annual Meeting
General Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is
unreasonable.
Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling
or location is unreasonable.
Other Business
General Recommendation: Vote against proposals to approve
other business when it appears as a voting item.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
62 of 82 |
|
7. Social and
Environmental Issues
Global Approach – E&S Shareholder Proposals
ISS applies a common approach globally to evaluating social and environmental proposals which cover a wide range of topics, including consumer and
product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations
focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
General Recommendation: Generally vote case-by-case, examining
primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors will be considered:
| |
◾ |
|
If the issues presented in the proposal are being appropriately or effectively dealt with through legislation or government
regulation; |
| |
◾ |
|
If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
|
| |
◾ |
|
Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive;
|
| |
◾ |
|
The company’s approach compared with any industry standard practices for addressing the issue(s) raised by the
proposal; |
| |
◾ |
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s practices
related to the issue(s) raised in the proposal; |
| |
◾ |
|
If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is
currently available to shareholders from the company or from other publicly available sources; and |
| |
◾ |
|
If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or
confidential information that could place the company at a competitive disadvantage. |
Endorsement of
Principles
General Recommendation: Generally
vote against proposals seeking a company’s endorsement of principles that support a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue that is beyond its own control and
may limit its flexibility with respect to future developments.
Management and the board should be afforded the flexibility to make decisions
on specific public policy positions based on their own assessment of the most beneficial strategies for the company.
Animal
Welfare
Animal Welfare Policies
General Recommendation: Generally vote
for proposals seeking a report on a company’s animal welfare standards, or animal welfare-related risks, unless:
| |
◾ |
|
The company has already published a set of animal welfare standards and monitors compliance; |
| |
◾ |
|
The company’s standards are comparable to industry peers; and |
| |
◾ |
|
There are no recent significant fines, litigation, or controversies related to the company’s and/or its
suppliers’ treatment of animals. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
63 of 82 |
|
Animal Testing
General
Recommendation: Generally vote against proposals to phase out the use of animals in product testing,
unless:
| |
◾ |
|
The company is conducting animal testing programs that are unnecessary or not required by regulation;
|
| |
◾ |
|
The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or
|
| |
◾ |
|
There are recent, significant fines or litigation related to the company’s treatment of animals.
|
Animal Slaughter
General Recommendation: Generally vote against proposals
requesting the implementation of Controlled Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.
Vote case-by-case on proposals requesting a report on the feasibility of
implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at
the company.
Consumer Issues
Genetically Modified Ingredients
General Recommendation: Generally vote against proposals
requesting that a company voluntarily label genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities.
Vote case-by-case on proposals asking for a report on the
feasibility of labeling products containing GE ingredients, taking into account:
| |
◾ |
|
The potential impact of such labeling on the company’s business; |
| |
◾ |
|
The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this
disclosure compares with industry peer disclosure; and |
| |
◾ |
|
Company’s current disclosure on the feasibility of GE product labeling. |
Generally vote against proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of
this sort are better undertaken by regulators and the scientific community.
Generally vote against proposals to eliminate GE ingredients from the
company’s products, or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current
regulations.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
64 of 82 |
|
Reports on Potentially Controversial Business/Financial Practices
General Recommendation: Vote case-by-case on requests for reports on a
company’s potentially controversial business or financial practices or products, taking into account:
| |
◾ |
|
Whether the company has adequately disclosed mechanisms in place to prevent abuses; |
| |
◾ |
|
Whether the company has adequately disclosed the financial risks of the products/practices in question;
|
| |
◾ |
|
Whether the company has been subject to violations of related laws or serious controversies; and |
| |
◾ |
|
Peer companies’ policies/practices in this area. |
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug
Reimportation
General Recommendation:
Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry
norms in its product pricing practices.
Vote
case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
| |
◾ |
|
The potential for reputational, market, and regulatory risk exposure; |
| |
◾ |
|
Existing disclosure of relevant policies; |
| |
◾ |
|
Deviation from established industry norms; |
| |
◾ |
|
Relevant company initiatives to provide research and/or products to disadvantaged consumers; |
| |
◾ |
|
Whether the proposal focuses on specific products or geographic regions; |
| |
◾ |
|
The potential burden and scope of the requested report; and |
| |
◾ |
|
Recent significant controversies, litigation, or fines at the company. |
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless
such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or
constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
Product Safety and Toxic/Hazardous Materials
General Recommendation: Generally vote
for proposals requesting that a company report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or
product safety in its supply chain, unless:
| |
◾ |
|
The company already discloses similar information through existing reports such as a supplier code of conduct and/or a
sustainability report; |
| |
◾ |
|
The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply
chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; or |
| |
◾ |
|
The company has not been recently involved in relevant significant controversies, fines, or litigation.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
65 of 82 |
|
Vote
case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous
materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:
| |
◾ |
|
The company’s current level of disclosure regarding its product safety policies, initiatives, and oversight
mechanisms; |
| |
◾ |
|
Current regulations in the markets in which the company operates; and |
| |
◾ |
|
Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company.
|
Generally vote against resolutions requiring that a company reformulate its products.
Tobacco-Related Proposals
General Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products,
considering:
| |
◾ |
|
Recent related fines, controversies, or significant litigation; |
| |
◾ |
|
Whether the company complies with relevant laws and regulations on the marketing of tobacco; |
| |
◾ |
|
Whether the company’s advertising restrictions deviate from those of industry peers; |
| |
◾ |
|
Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and
|
| |
◾ |
|
Whether restrictions on marketing to youth extend to foreign countries. |
Vote case-by-case on proposals regarding second-hand smoke, considering;
| |
◾ |
|
Whether the company complies with all laws and regulations; |
| |
◾ |
|
The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and
|
| |
◾ |
|
The risk of any health-related liabilities. |
Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
Climate Change
Say on Climate (SoC) Management Proposals
General Recommendation:
Vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action
plan23, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:
| |
◾ |
|
The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other
market standards; |
23 Variations of this request also include climate transition related ambitions, or commitment
to reporting on the implementation of a climate plan.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
66 of 82 |
|
| |
◾ |
|
Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3); |
| |
◾ |
|
The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply
chain GHG emissions (Scopes 1, 2, and 3 if relevant); |
| |
◾ |
|
Whether the company has sought and received third-party approval that its targets are science-based; |
| |
◾ |
|
Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes
1, 2, and 3) by 2050; |
| |
◾ |
|
Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;
|
| |
◾ |
|
Whether the company’s climate data has received third-party assurance; |
| |
◾ |
|
Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;
|
| |
◾ |
|
Whether there are specific industry decarbonization challenges; and |
| |
◾ |
|
The company’s related commitment, disclosure, and performance compared to its industry peers. |
Say on Climate (SoC) Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its
upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following:
| |
◾ |
|
The completeness and rigor of the company’s climate-related disclosure; |
| |
◾ |
|
The company’s actual GHG emissions performance; |
| |
◾ |
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
its GHG emissions; and |
| |
◾ |
|
Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.
|
Climate Change/Greenhouse Gas (GHG) Emissions
General Recommendation: Generally vote for resolutions
requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks,
considering:
| |
◾ |
|
Whether the company already provides current, publicly-available information on the impact that climate change may have on
the company as well as associated company policies and procedures to address related risks and/or opportunities; |
| |
◾ |
|
The company’s level of disclosure compared to industry peers; and |
| |
◾ |
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate
change-related performance. |
Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company
operations and/or products and operations, unless:
| |
◾ |
|
The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the
company as well as associated company policies and procedures to address related risks and/or opportunities; |
| |
◾ |
|
The company’s level of disclosure is comparable to that of industry peers; or |
| |
◾ |
|
There are no significant, controversies, fines, penalties, or litigation associated with the company’s GHG emissions.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
67 of 82 |
|
Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
| |
◾ |
|
Whether the company provides disclosure of year-over-year GHG emissions performance data; |
| |
◾ |
|
Whether company disclosure lags behind industry peers; |
| |
◾ |
|
The company’s actual GHG emissions performance; |
| |
◾ |
|
The company’s current GHG emission policies, oversight mechanisms, and related initiatives; and
|
| |
◾ |
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
GHG emissions. |
Energy Efficiency
General Recommendation: Generally vote for proposals
requesting that a company report on its energy efficiency policies, unless:
| |
◾ |
|
The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy
efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or |
| |
◾ |
|
The proponent requests adoption of specific energy efficiency goals within specific timelines. |
Renewable Energy
General Recommendation: Generally vote for requests for
reports on the feasibility of developing renewable energy resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business.
Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s
evaluation of the feasibility and financial impact that such programs may have on the company.
Generally vote against proposals that call
for the adoption of renewable energy goals, taking into account:
| |
◾ |
|
The scope and structure of the proposal; |
| |
◾ |
|
The company’s current level of disclosure on renewable energy use and GHG emissions; and |
| |
◾ |
|
The company’s disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate
climate change risks. |
Diversity
Board Diversity
General Recommendation: Generally vote for requests for
reports on a company’s efforts to diversify the board, unless:
| |
◾ |
|
The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies
of similar size and business; or |
| |
◾ |
|
The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within
the company. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
68 of 82 |
|
Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
| |
◾ |
|
The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
|
| |
◾ |
|
The level of gender and racial minority representation that exists at the company’s industry peers;
|
| |
◾ |
|
The company’s established process for addressing gender and racial minority board representation;
|
| |
◾ |
|
Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
|
| |
◾ |
|
The independence of the company’s nominating committee; |
| |
◾ |
|
Whether the company uses an outside search firm to identify potential director nominees; and |
| |
◾ |
|
Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.
|
Equality of Opportunity
General Recommendation: Generally vote for proposals
requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data,
unless:
| |
◾ |
|
The company publicly discloses equal opportunity policies and initiatives in a comprehensive manner; |
| |
◾ |
|
The company already publicly discloses comprehensive workforce diversity data; or |
| |
◾ |
|
The company has no recent significant EEO-related violations or litigation.
|
Generally vote against proposals seeking information on the diversity efforts of suppliers and service providers. Such requests
may pose a significant burden on the company.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
General Recommendation: Generally vote
for proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome.
Generally vote against proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions regarding benefits should be
left to the discretion of the company.
Gender, Race/Ethnicity Pay Gap
General Recommendation: Vote case-by-case on requests for reports on a company’s pay data by gender or race/ ethnicity, or a report on a company’s policies and goals to reduce any
gender or race/ethnicity pay gaps, taking into account:
| |
◾ |
|
The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and
its compensation philosophy on fair and equitable compensation practices; |
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race,
or ethnicity pay gap issues; |
| |
◾ |
|
The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its
industry peers; and |
| |
◾ |
|
Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
69 of 82 |
|
Racial Equity and/or
Civil Rights Audit Guidelines
General Recommendation: Vote case-by-case on proposals asking a company to conduct an independent racial equity and/or civil rights audit, taking into account:
| |
◾ |
|
The company’s established process or framework for addressing racial inequity and discrimination internally;
|
| |
◾ |
|
Whether the company adequately discloses workforce diversity and inclusion metrics and goals; |
| |
◾ |
|
Whether the company has issued a public statement related to its racial justice efforts in recent years, or has committed
to internal policy review; |
| |
◾ |
|
Whether the company has engaged with impacted communities, stakeholders, and civil rights experts; |
| |
◾ |
|
The company’s track record in recent years of racial justice measures and outreach externally; and
|
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial
inequity or discrimination. |
Environment and Sustainability
Facility and Workplace Safety
General Recommendation: Vote case-by-case on requests for workplace safety reports, including reports on accident risk reduction efforts, taking into account:
| |
◾ |
|
The company’s current level of disclosure of its workplace health and safety performance data, health and safety
management policies, initiatives, and oversight mechanisms; |
| |
◾ |
|
The nature of the company’s business, specifically regarding company and employee exposure to health and safety
risks; |
| |
◾ |
|
Recent significant controversies, fines, or violations related to workplace health and safety; and |
| |
◾ |
|
The company’s workplace health and safety performance relative to industry peers. |
Vote case-by-case on resolutions requesting that a company report on
safety and/or security risks associated with its operations and/or facilities, considering:
| |
◾ |
|
The company’s compliance with applicable regulations and guidelines; |
| |
◾ |
|
The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance
monitoring; and |
| |
◾ |
|
The existence of recent, significant violations, fines, or controversy regarding the safety and security of the
company’s operations and/or facilities. |
Natural Capital- Related and/or Community Impact
Assessment Proposals
General Recommendation:
Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental
impact of company operations, considering:
| |
◾ |
|
Alignment of current disclosure of applicable company policies, metrics, risk assessment report(s) and risk management
procedures with any relevant, broadly accepted reporting frameworks; |
| |
◾ |
|
The impact of regulatory non-compliance, litigation, remediation, or reputational
loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations; |
| |
◾ |
|
The nature, purpose, and scope of the company’s operations in the specific region(s); |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
70 of 82 |
|
| |
◾ |
|
The degree to which company policies and procedures are consistent with industry norms; and |
| |
◾ |
|
The scope of the resolution. |
Hydraulic Fracturing
General Recommendation: Generally vote for proposals
requesting greater disclosure of a company’s (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations,
considering:
| |
◾ |
|
The company’s current level of disclosure of relevant policies and oversight mechanisms; |
| |
◾ |
|
The company’s current level of such disclosure relative to its industry peers; |
| |
◾ |
|
Potential relevant local, state, or national regulatory developments; and |
| |
◾ |
|
Controversies, fines, or litigation related to the company’s hydraulic fracturing operations. |
Operations in Protected Areas
General Recommendation: Generally vote for requests for
reports on potential environmental damage as a result of company operations in protected regions, unless:
| |
◾ |
|
Operations in the specified regions are not permitted by current laws or regulations; |
| |
◾ |
|
The company does not currently have operations or plans to develop operations in these protected regions; or
|
| |
◾ |
|
The company’s disclosure of its operations and environmental policies in these regions is comparable to industry
peers. |
Recycling
General Recommendation: Vote case-by-case on proposals to report on an existing recycling program, or adopt a new recycling program, taking into account:
| |
◾ |
|
The nature of the company’s business; |
| |
◾ |
|
The current level of disclosure of the company’s existing related programs; |
| |
◾ |
|
The timetable and methods of program implementation prescribed by the proposal; |
| |
◾ |
|
The company’s ability to address the issues raised in the proposal; and |
| |
◾ |
|
How the company’s recycling programs compare to similar programs of its industry peers. |
Sustainability Reporting
General Recommendation: Generally vote for proposals
requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:
| |
◾ |
|
The company already discloses similar information through existing reports or policies such as an environment, health, and
safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or |
| |
◾ |
|
The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified time frame. |
Water Issues
General Recommendation: Vote case-by-case on proposals requesting a company report on, or adopt a new policy on, water-related risks and concerns, taking into account:
| |
◾ |
|
The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
71 of 82 |
|
| |
◾ |
|
Whether or not the company’s existing water-related policies and practices are consistent with relevant
internationally recognized standards and national/local regulations; |
| |
◾ |
|
The potential financial impact or risk to the company associated with water-related concerns or issues; and
|
| |
◾ |
|
Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers.
|
General Corporate Issues
Charitable Contributions
General Recommendation: Vote against proposals restricting
a company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence,
management should determine which, and if, contributions are in the best interests of the company.
Data Security,
Privacy, and Internet Issues
General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and
management policies and procedures, considering:
| |
◾ |
|
The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech,
information access and management, and Internet censorship; |
| |
◾ |
|
Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of
information on the Internet; |
| |
◾ |
|
The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other
telecommunications; |
| |
◾ |
|
Applicable market-specific laws or regulations that may be imposed on the company; and |
| |
◾ |
|
Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship.
|
ESG Compensation-Related Proposals
General Recommendation: Vote case-by-case on proposals seeking a report or additional disclosure on the
company’s approach, policies, and practices on incorporating environmental and social criteria into its executive compensation strategy, considering:
| |
◾ |
|
The scope and prescriptive nature of the proposal; |
| |
◾ |
|
The company’s current level of disclosure regarding its environmental and social performance and governance;
|
| |
◾ |
|
The degree to which the board or compensation committee already discloses information on whether it has considered related
E&S criteria; and |
| |
◾ |
|
Whether the company has significant controversies or regulatory violations regarding social or environmental issues.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
72 of 82 |
|
Human Rights, Human
Capital Management, and International Operations
Human Rights Proposals
General Recommendation: Generally vote for proposals
requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed.
Vote case-by-case on proposals to implement company or company
supplier labor and/or human rights standards and policies, considering:
| |
◾ |
|
The degree to which existing relevant policies and practices are disclosed; |
| |
◾ |
|
Whether or not existing relevant policies are consistent with internationally recognized standards; |
| |
◾ |
|
Whether company facilities and those of its suppliers are monitored and how; |
| |
◾ |
|
Company participation in fair labor organizations or other internationally recognized human rights initiatives;
|
| |
◾ |
|
Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;
|
| |
◾ |
|
Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;
|
| |
◾ |
|
The scope of the request; and |
| |
◾ |
|
Deviation from industry sector peer company standards and practices. |
Vote case-by-case on proposals requesting that a company conduct an
assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering:
| |
◾ |
|
The degree to which existing relevant policies and practices are disclosed, including information on the implementation of
these policies and any related oversight mechanisms; |
| |
◾ |
|
The company’s industry and whether the company or its suppliers operate in countries or areas where there is a
history of human rights concerns; |
| |
◾ |
|
Recent significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and
whether the company has taken remedial steps; and |
| |
◾ |
|
Whether the proposal is unduly burdensome or overly prescriptive. |
Mandatory Arbitration
General Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory
arbitration on employment-related claims, taking into account:
| |
◾ |
|
The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace
claims; |
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of
mandatory arbitration agreements on workplace claims; and |
| |
◾ |
|
The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements
compared to its peers. |
Operations in High-Risk Markets
General Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk”
markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account:
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
73 of 82 |
|
| |
◾ |
|
The nature, purpose, and scope of the operations and business involved that could be affected by social or political
disruption; |
| |
◾ |
|
Current disclosure of applicable risk assessment(s) and risk management procedures; |
| |
◾ |
|
Compliance with U.S. sanctions and laws; |
| |
◾ |
|
Consideration of other international policies, standards, and laws; and |
| |
◾ |
|
Whether the company has been recently involved in recent, significant controversies, fines, or litigation related to its
operations in “high-risk” markets. |
Outsourcing/Offshoring
General Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated
with outsourcing/plant closures, considering:
| |
◾ |
|
Controversies surrounding operations in the relevant market(s); |
| |
◾ |
|
The value of the requested report to shareholders; |
| |
◾ |
|
The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and
|
| |
◾ |
|
The company’s existing human rights standards relative to industry peers. |
Sexual Harassment
General Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed
by a company’s failure to prevent workplace sexual harassment, taking into account:
| |
◾ |
|
The company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment;
|
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace
sexual harassment issues; and |
| |
◾ |
|
The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry
peers. |
Weapons and Military Sales
General Recommendation: Vote against reports on foreign
military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.
Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or
nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses,
and withdrawal from these contracts could have a negative impact on the company’s business.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
74 of 82 |
|
Political Activities
Lobbying
General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures,
considering:
| |
◾ |
|
The company’s current disclosure of relevant lobbying policies, and management and board oversight;
|
| |
◾ |
|
The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that
engage in lobbying activities; and |
| |
◾ |
|
Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities.
|
Political Contributions
General Recommendation: Generally vote for proposals
requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering:
| |
◾ |
|
The company’s policies, and management and board oversight related to its direct political contributions and payments
to trade associations or other groups that may be used for political purposes; |
| |
◾ |
|
The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may
make political contributions; and |
| |
◾ |
|
Recent significant controversies, fines, or litigation related to the company’s political contributions or political
activities. |
Vote against proposals barring a company from making political contributions. Businesses are affected by legislation
at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote against proposals
to publish in newspapers and other media a company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Political Expenditures and Lobbying Congruency
General Recommendation: Generally vote case-by-case on proposals requesting greater disclosure of a company’s alignment of political contributions, lobbying, and electioneering spending with a
company’s publicly stated values and policies, considering:
| |
◾ |
|
The company’s policies, management, board oversight, governance processes, and level of disclosure related to direct
political contributions, lobbying activities, and payments to trade associations, political action committees, or other groups that may be used for political purposes; |
| |
◾ |
|
The company’s disclosure regarding: the reasons for its support of candidates for public offices; the reasons for
support of and participation in trade associations or other groups that may make political contributions; and other political activities; |
| |
◾ |
|
Any incongruencies identified between a company’s direct and indirect political expenditures and its publicly stated
values and priorities; and |
| |
◾ |
|
Recent significant controversies related to the company’s direct and indirect lobbying, political contributions, or
political activities. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
75 of 82 |
|
Generally vote
case-by-case on proposals requesting comparison of a company’s political spending to objectives that can mitigate material risks for the company, such as limiting
global warming.
Political Ties
General Recommendation: Generally vote against proposals
asking a company to affirm political nonpartisanship in the workplace, so long as:
| |
◾ |
|
There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions
or trade association spending; and |
| |
◾ |
|
The company has procedures in place to ensure that employee contributions to company-sponsored political action committees
(PACs) are strictly voluntary and prohibit coercion. |
Vote against proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful
information to shareholders.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
76 of 82 |
|
8. Mutual Fund Proxies
Election of Directors
General Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual
fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
Closed
End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
General Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from
nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote.
Converting Closed-end Fund to Open-end Fund
General Recommendation: Vote case-by-case on conversion proposals, considering the following factors:
| |
◾ |
|
Past performance as a closed-end fund; |
| |
◾ |
|
Market in which the fund invests; |
| |
◾ |
|
Measures taken by the board to address the discount; and |
| |
◾ |
|
Past shareholder activism, board activity, and votes on related proposals. |
Proxy Contests
General Recommendation: Vote case-by-case on proxy contests, considering the following factors:
| |
◾ |
|
Past performance relative to its peers; |
| |
◾ |
|
Market in which the fund invests; |
| |
◾ |
|
Measures taken by the board to address the issues; |
| |
◾ |
|
Past shareholder activism, board activity, and votes on related proposals; |
| |
◾ |
|
Strategy of the incumbents versus the dissidents; |
| |
◾ |
|
Independence of directors; |
| |
◾ |
|
Experience and skills of director candidates; |
| |
◾ |
|
Governance profile of the company; and |
| |
◾ |
|
Evidence of management entrenchment. |
Investment Advisory Agreements
General Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors:
| |
◾ |
|
Proposed and current fee schedules; |
| |
◾ |
|
Fund category/investment objective; |
| |
◾ |
|
Performance benchmarks; |
| |
◾ |
|
Share price performance as compared with peers; |
| |
◾ |
|
Resulting fees relative to peers; and |
| |
◾ |
|
Assignments (where the advisor undergoes a change of control). |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
77 of 82 |
|
Approving New Classes
or Series of Shares
General Recommendation:
Vote for the establishment of new classes or series of shares.
Preferred
Stock Proposals
General Recommendation:
Vote case-by-case on the authorization for or increase in preferred shares, considering the following factors:
| |
◾ |
|
Stated specific financing purpose; |
| |
◾ |
|
Possible dilution for common shares; and |
| |
◾ |
|
Whether the shares can be used for antitakeover purposes. |
1940 Act Policies
General Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors:
| |
◾ |
|
Potential competitiveness; |
| |
◾ |
|
Regulatory developments; |
| |
◾ |
|
Current and potential returns; and |
| |
◾ |
|
Current and potential risk. |
Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
General Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:
| |
◾ |
|
The fund’s target investments; |
| |
◾ |
|
The reasons given by the fund for the change; and |
| |
◾ |
|
The projected impact of the change on the portfolio. |
Change Fundamental Investment Objective to Nonfundamental
General Recommendation: Vote against proposals to change a
fund’s fundamental investment objective to non-fundamental.
Name
Change Proposals
General Recommendation:
Vote case-by-case on name change proposals, considering the following factors:
| |
◾ |
|
Political/economic changes in the target market; |
| |
◾ |
|
Consolidation in the target market; and |
| |
◾ |
|
Current asset composition. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
78 of 82 |
|
Change in Fund’s
Subclassification
General Recommendation:
Vote case-by-case on changes in a fund’s sub-classification, considering the
following factors:
| |
◾ |
|
Potential competitiveness; |
| |
◾ |
|
Current and potential returns; |
| |
◾ |
|
Risk of concentration; and |
| |
◾ |
|
Consolidation in target industry. |
Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value
General Recommendation: Vote for proposals
authorizing the board to issue shares below Net Asset Value (NAV) if:
| |
◾ |
|
The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders
approve the underlying proposal, as required under the Investment Company Act of 1940; |
| |
◾ |
|
The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent
directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and |
| |
◾ |
|
The company has demonstrated responsible past use of share issuances by either: |
| |
◾ |
|
Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or |
| |
◾ |
|
Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts
to NAV and economic dilution to existing non-participating shareholders. |
Disposition of Assets/Termination/Liquidation
General
Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the
following factors:
| |
◾ |
|
Strategies employed to salvage the company; |
| |
◾ |
|
The fund’s past performance; and |
| |
◾ |
|
The terms of the liquidation. |
Changes to the Charter Document
General Recommendation: Vote case-by-case on changes to the charter document, considering the following factors:
| |
◾ |
|
The degree of change implied by the proposal; |
| |
◾ |
|
The efficiencies that could result; |
| |
◾ |
|
The state of incorporation; and |
| |
◾ |
|
Regulatory standards and implications. |
Vote against any of the following changes:
| |
◾ |
|
Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series;
|
| |
◾ |
|
Removal of shareholder approval requirement for amendments to the new declaration of trust; |
| |
◾ |
|
Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be
modified by the investment manager and the trust management, as permitted by the 1940 Act; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
79 of 82 |
|
| |
◾ |
|
Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales
charges and redemption fees that may be imposed upon redemption of a fund’s shares; |
| |
◾ |
|
Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements; or |
| |
◾ |
|
Removal of shareholder approval requirement to change the domicile of the fund. |
Changing the Domicile of a Fund
General Recommendation: Vote case-by-case on re-incorporations, considering the following factors:
| |
◾ |
|
Regulations of both states; |
| |
◾ |
|
Required fundamental policies of both states; and |
| |
◾ |
|
The increased flexibility available. |
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
General Recommendation: Vote against proposals authorizing
the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser.
Distribution Agreements
General Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors:
| |
◾ |
|
Fees charged to comparably sized funds with similar objectives; |
| |
◾ |
|
The proposed distributor’s reputation and past performance; |
| |
◾ |
|
The competitiveness of the fund in the industry; and |
| |
◾ |
|
The terms of the agreement. |
Master-Feeder Structure
General Recommendation: Vote for the establishment of a
master-feeder structure.
Mergers
General Recommendation: Vote case-by-case on merger proposals, considering the following factors:
| |
◾ |
|
Resulting fee structure; |
| |
◾ |
|
Performance of both funds; |
| |
◾ |
|
Continuity of management personnel; and |
| |
◾ |
|
Changes in corporate governance and their impact on shareholder rights. |
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
General Recommendation: Generally vote against shareholder
proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
80 of 82 |
|
Reimburse Shareholder
for Expenses Incurred
General Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the
reimbursement of the proxy solicitation expenses.
Terminate the Investment Advisor
General Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the following factors:
| |
◾ |
|
Performance of the fund’s Net Asset Value (NAV); |
| |
◾ |
|
The fund’s history of shareholder relations; and |
| |
◾ |
|
The performance of other funds under the advisor’s management. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
81 of 82 |
|
We empower investors and
companies to build for long-term and sustainable growth by providing
high-quality data, analytics, and insight.
G E T S T A R T E D W I T H I S S S O L U T I O N S
Email sales@issgovernance.com or
visit www.issgovernance.com for more information.
Founded in 1985, Institutional Shareholder Services group of companies (ISS) empowers investors and companies to build for long-term and sustainable
growth by providing high-quality data, analytics and insight. ISS, which is majority owned by Deutsche Bourse Group, along with Genstar Capital and ISS management, is a leading provider of corporate governance and responsible investment solutions,
market intelligence, fund services, and events and editorial content for institutional investors and corporations, globally. ISS’ 2,600 employees operate worldwide across 29 global locations in 15 countries. Its approximately 3,400 clients
include many of the world’s leading institutional investors who rely on ISS’ objective and impartial offerings, as well as public companies focused on ESG and governance risk mitigation as a shareholder value enhancing measure. Clients
rely on ISS’ expertise to help them make informed investment decisions. This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the “Information”) is
the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.
The Information has not
been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or
recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or
trading strategies.
The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the
Information for any direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
© 2025 | Institutional Shareholder Services and/or its affiliates
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
82 of 82 |
|
PART B
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
State Street Navigator Securities Lending Government Money Market
Portfolio
One Congress Street
Boston, Massachusetts 02114
(877) 521-4083
ITEM 14. COVER PAGE AND TABLE OF CONTENTS
State Street Navigator Securities Lending Trust (the “Trust”) is a registered open-end management investment company organized as a Massachusetts business trust offering shares of
beneficial interest in separate investment portfolios. Each series of the Trust is diversified as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) and is subject to the procedural and substantive requirements of the 1940 Act.
This Part B of the Registration Statement (the “Part B”) relates to the information contained in Part A of the Trust's Registration Statement dated April 30, 2026 as further
amended from time to time thereafter for the State Street Navigator Securities Lending Government Money Market Portfolio (the “Government Money Market Portfolio” or the “Portfolio”).
This Part B is not a Prospectus and should be read in conjunction with the Part A and the Confidential Offering Memorandum
relating to the Portfolio, which may be obtained by telephoning or writing the Trust at the number or address shown above.
The Portfolio's audited financial statements for the fiscal year ended December 31, 2025,
including the independent registered public accounting firm's report thereon, are included in the Portfolio's
Form N-CSR filing, which was filed with the U.S. Securities
and Exchange Commission (the
“SEC”) on March 9, 2026, and are incorporated into this Part B by reference. Copies of the Portfolio's annual reports,
semi-annual reports and other information such as the Portfolio's financial statements are available, without charge, upon request, by calling (collect calls are accepted) the
number shown above.
ITEM
15. TRUST HISTORY
The Trust was organized as a Massachusetts business trust on
June 15, 1995. Effective October 5, 2016, State Street Navigator Securities Lending Prime Portfolio was renamed State Street Navigator Securities Lending Government Money Market Portfolio.
ITEM 16. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
The Portfolio is an open-end, diversified, management investment company. The Portfolio's investment adviser is SSGA Fund's
Management, Inc. (the
“Adviser” or “SSGA FM”). The Portfolio's Part A contains information about the investment objective and policies of the Portfolio. This Part B should only be read in conjunction with the Part A of the Portfolio. In
addition to the principal investment strategies and the principal risks of the Portfolio described in Part A, the Portfolio may employ other investment practices and may be subject to additional risks, which are described below.
ADDITIONAL INVESTMENTS AND RISKS
To the extent consistent with its investment objective and restrictions, the Portfolio may invest in the following instruments and use the following techniques, and is subject to the following additional risks.
There are risks involved in dealing with the custodians or brokers who hold the Portfolio's investments or settle the
Portfolio's trades. It is possible that, in the event of the insolvency or bankruptcy of a custodian or broker, the Portfolio would be delayed or prevented from recovering its assets from the custodian or broker, or its estate, and may have only a
general unsecured claim against the custodian or broker for those assets. In recent insolvencies of brokers or other financial institutions, the ability of certain customers to recover their assets from the insolvent's estate has been delayed,
limited, or prevented, often unpredictably, and there is no assurance that any assets held by the Portfolio with a custodian or broker will be readily recoverable by the Portfolio. In addition, there may be limited recourse against non-U.S. sub-custodians in those situations in which the Portfolio invests in markets where custodial and/or settlement systems and regulations are
not fully developed, including emerging markets, and the assets of the Portfolio have been entrusted to such sub-custodians. SSGA FM or an affiliate may serve as the custodian of
the Portfolio.
The Portfolio may enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time (“forward commitments”), consistent with the
Portfolio's ability to manage its investment portfolio, meet redemption requests, and maintain a stable net asset value (“NAV”). Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Portfolio's other assets. Where such purchases are made
through dealers, the Portfolio relies on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the Portfolio of an advantageous yield or price.
Although the Portfolio will generally enter into forward commitments with the intention of acquiring securities for its
portfolio or for delivery pursuant to options contracts it has entered into, the Portfolio may dispose of a commitment prior to settlement if the Adviser deems it appropriate to do so. The Portfolio may realize short-term profits or losses upon the
sale of forward commitments. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, or if the other party fails to complete the transaction.
Government Mortgage-Related Securities
The Government National Mortgage Association (“GNMA” or “Ginnie Mae”) is the principal federal government guarantor of mortgage-related securities. GNMA is a wholly owned U.S. Government
corporation within the Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-related securities. GNMA pass-through securities are considered to have a
relatively low risk of default in that (1) the underlying mortgage loan portfolio is comprised entirely of government-backed loans and (2) the timely payment of both principal and interest on the securities is guaranteed by the full faith and credit of
the U.S. Government, regardless of whether they
have been collected. GNMA pass-through securities are, however, subject to the same interest rate risk as comparable privately issued mortgage-related securities. Therefore, the
effective maturity and market value of the Portfolio's GNMA securities can be expected to fluctuate in response to changes in interest rate levels.
Residential mortgage loans are also pooled by the Federal Home Loan Mortgage Corporation
(“FHLMC” or “Freddie Mac”), a corporate instrumentality of the U.S.
Government. The mortgage loans in FHLMC's portfolio are not government backed; FHLMC, not the U.S. Government, guarantees the timely payment of interest and ultimate collection of
principal on FHLMC securities. FHLMC also issues guaranteed mortgage certificates, on which it guarantees semiannual interest payments and a specified minimum annual payment of principal.
The Federal National Mortgage Association
(“FNMA” or “Fannie Mae”) is a government-sponsored corporation owned
entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases residential mortgages from a list of approved seller/servicers, which include savings and loan associations,
savings banks, commercial banks, credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest only by
FNMA, not the U.S. Government.
The Portfolio may invest in illiquid securities. The absence
of a regular trading market for illiquid securities imposes additional risks on investments in these securities. Illiquid securities may be difficult to value and may often be
disposed of only after considerable expense and delay. The Portfolio is managed in accordance with Rule 2a-7 under the Investment Company Act of 1940, as amended (the “1940
Act”). As a result, the Portfolio has adopted the following liquidity policies (except as noted):
1. The Portfolio may not purchase an illiquid security if, immediately after purchase, the Portfolio would have invested more
than 5% of its total assets in illiquid securities (securities that cannot be sold or disposed of in the ordinary course of business within seven days at approximately the market value ascribed to them by the Portfolio);
2. The Portfolio may not purchase a security other than a security offering daily liquidity if, immediately after purchase, the Portfolio would have invested less than 25% of its total assets in securities offering daily liquidity (includes securities that mature or are subject to demand within one business day, cash, direct U.S. Government obligations or amounts receivable and
due unconditionally within one business day on pending sales of portfolio securities); and
3. The Portfolio may not purchase a security other than a security offering weekly liquidity if, immediately after purchase,
the Portfolio would have invested less than 50% of its total assets in securities offering weekly liquidity (includes securities that mature or are subject to demand within five business days, cash, direct U.S. Government obligations, Government agency
discount notes with remaining maturities of 60 days or less or amounts receivable and due unconditionally within five business days on pending sales of portfolio
securities).
Market Disruption and Geopolitical
Risk
The Portfolio is subject to the risk that geopolitical events will
disrupt securities markets and adversely affect global economies and markets. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased
short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, trade policy changes or disputes, the threat of or actual imposition of tariffs, the threat or actual imposition of
tariffs, natural and environmental disasters, epidemics or pandemics, and systemic market dislocations may be highly disruptive to economies and markets. Those events, as well as other changes in non-U.S. and domestic economic and political
conditions, also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment, and
other factors affecting the value of the Portfolio's investments. Given the increasing interdependence between global economies and markets, conditions in one country, market, or
region might adversely impact markets, issuers and/or foreign exchange rates in other countries, including the U.S. Continuing uncertainty as to the status of the euro and the Economic and Monetary Union of the European Union (the “EMU”) has created significant volatility in currency and financial markets generally. Any partial or complete dissolution of the EMU, or
any increased uncertainty as to its status, could have significant adverse effects on currency and financial markets, and on the values of a Fund's investments. On January 31, 2020, the United Kingdom (“UK”) formally withdrew from the European Union (“EU”) (commonly known as “Brexit”). An agreement between the UK and the EU
governing their future trade relationship became effective January 1, 2021, but that agreement does not include an agreement on financial services, and it is unlikely that such agreement will be concluded. Moreover, the UK government has started a program of
financial services law reform with the ultimate aim of repealing many EU financial services laws that were assimilated into
UK law from January 1, 2021, and replacing them
with legislation or rules made by the UK government or financial services regulators. Accordingly, uncertainty remains in certain areas as to the future relationship between the UK
and the EU. Brexit has already had a significant impact on the UK, Europe, and global economies, and could continue to result in volatility and illiquidity, legal, political, economic and regulatory uncertainties and lower economic growth for these
economies that could in turn have an adverse effect on the value of the Funds' investments. Any further exits from the EU, or the possibility of such exits, or the abandonment of the euro, may cause additional market disruption globally and
introduce new legal and regulatory uncertainties.
Securities markets may be susceptible to market manipulation or other fraudulent trade
practices, which could disrupt the orderly functioning of these markets or adversely affect the value of investments traded in these markets, including investments of the Portfolio.
Recent political activity in the U.S. has increased the risk that the U.S. could default on some or any of its obligations.
While it is impossible to predict the consequences of such an unprecedented event, it is likely that a default by the U.S. would be highly disruptive to the U.S. and global securities markets and could significantly impair the value of the
Portfolio's investments. Similarly, political events within the U.S. at times have resulted, and may in the future result, in a shutdown of government services, which could negatively affect the U.S. economy, decrease the value of the Portfolio
investments, and increase uncertainty in or impair the operation of the U.S. or other securities markets.
To the extent the Portfolio has focused its investments in the stock market index of a
particular region, adverse geopolitical and other events could have a disproportionate impact on the Portfolio.
Market Turbulence Resulting from Infectious Illness
A widespread outbreak of an infectious illness may lead to governments and businesses
world-wide taking aggressive measures, including closing borders, restricting international and domestic travel, and the imposition of prolonged quarantines of large populations. The spread of such an illness may result in the disruption of and delays in the delivery of
healthcare services and processes, the cancellation of organized events and educational institutions, the disruption of production and supply chains, a decline in consumer demand for certain goods and services, and general concern and
uncertainty, all of which may contribute to increased volatility in global markets. Epidemics and pandemics that may arise in the future could adversely affect the economies of many nations, the global economy, individual companies, economic
sectors and industries, and capital markets in ways that cannot be foreseen at the present time. In addition, the impact of infectious diseases in developing or emerging market countries may be greater due to limited healthcare resources.
Political, economic and social stresses caused by an infectious illness also may exacerbate other pre-existing political, social and economic risks in certain countries. The duration of such an illness and its effects cannot be determined at this
time, but the effects could be present for an extended period of time.
Mortgage-Related Securities
The Portfolio may invest in mortgage-related securities. Mortgage-related securities represent an interest in a pool of, or are secured by, mortgage loans. Mortgage-related securities may be issued or guaranteed by (i) U.S. Government agencies or
instrumentalities such as GNMA, FNMA and FHLMC or (ii) other issuers, including private companies.
Many mortgage-related securities provide regular payments, which consist of interest and, in most cases, principal. In
contrast, other forms of debt securities normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. In effect, payments on many mortgage-related securities are a “pass-through” of the payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of
such securities.
Besides the scheduled repayment of principal, repayments
of principal may result from the voluntary prepayment, refinancing or foreclosure of the underlying mortgage loans. If property owners make unscheduled prepayments of their mortgage loans, these prepayments will typically result in early payment of the applicable mortgage-related securities. The
occurrence of mortgage prepayments is affected by a variety of factors, including the level of interest rates, general economic conditions, the location and age of the mortgage,
and other social and demographic conditions. During periods of falling interest rates, the rate of mortgage prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. During periods of rising interest rates, the rate of mortgage prepayments usually decreases, thereby tending to increase the life of mortgage-related securities.
Because of the possibility of prepayments (and due to scheduled repayments of principal), mortgage-related securities are
less effective than other types of securities as a means of “locking in” attractive long-term interest rates. Prepayments
would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation
during periods of declining interest rates than
other securities of comparable maturities, although they may have a similar risk of decline in market value during periods of rising interest rates. Prepayments may also
significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them
to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the Portfolio.
Collateralized mortgage obligations (“CMOs”) may be issued by a U.S. Government agency or instrumentality or by a private issuer. CMOs are typically structured with classes or series that have different maturities and are generally retired
in sequence. Each class of obligations receives periodic interest payments according to its terms. However, monthly principal payments and any prepayments from the collateral pool are generally paid first to the holders of the most senior
class. Thereafter, payments of principal are generally allocated to the next most senior class of obligations until that class of obligations has been fully repaid. Any or all classes of obligations of a CMO may be paid off sooner than expected
because of an increase in the payoff speed of the pool. Changes in prepayment rates may have significant effects on the values and the volatility of the various classes and series of a CMO. Payment of interest or principal on some classes or
series of a CMO may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages.
Ongoing developments in the residential and commercial mortgage markets may have additional consequences for the market for
mortgage-backed securities. During the periods of deteriorating economic conditions, such as recessions or periods of rising unemployment, delinquencies and losses generally
increase, sometimes dramatically, with respect to securitizations involving mortgage loans. Many sub-prime mortgage pools have become distressed during the periods of economic distress and may trade at significant discounts to their face value during such period.
Stripped mortgage-related securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. The yield to maturity on an interest only or “IO” class of stripped mortgage-related securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of
principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurable adverse effect on a Portfolio's yield to maturity to the extent it invests in IOs. If the assets underlying the IO
experience greater than anticipated prepayments of principal, a Portfolio may fail to recoup fully, or at all, its initial investment in these securities. Conversely, principal only securities or “POs” tend to increase in value if prepayments are
greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for stripped mortgage-related securities may be more volatile and less liquid than that for other mortgage-related securities, potentially
limiting a Portfolio's ability to buy or sell those securities at any particular time.
Purchase of Other Investment Company Shares
The Portfolio may, to the extent permitted under the 1940 Act and rules thereunder, invest in shares of other investment companies, which include funds managed by SSGA FM, which invest exclusively in money market instruments or in investment
companies with investment policies and objectives which are substantially similar to those of the Portfolio. These investments may be made temporarily, for example, to invest
uncommitted cash balances or, in limited circumstances, to assist in meeting shareholder redemptions, or as long-term investments. In general, the 1940 Act prohibits the Portfolio from acquiring more than 3% of the voting shares of any one other investment company, and prohibits
the Portfolio investing more than 5% of its total assets in the securities of any one other investment company or more than 10% of its total assets in securities of other
investment companies in the aggregate. The percentage limitations above apply to investments in any investment company. Pursuant to rules adopted by the SEC, the Portfolio may
invest in excess of these limitations if the Portfolio and the investment company in which the Portfolio would like to invest comply with certain conditions. Certain of the conditions do not apply if the Portfolio is investing in shares issued by affiliated
funds. In addition, the Portfolio may invest in shares issued by money market funds, including certain unregistered money market funds, in excess of the limitations. The Portfolio's investments in another investment company will be subject to the
risks of the purchased investment company's portfolio securities. The Portfolio's shareholders must bear not only their proportionate share of the Portfolio's fees and expenses, but they also must bear indirectly the fees and expenses of the
other investment company.
The Portfolio may enter into repurchase agreements with banks, other financial institutions, such as broker-dealers, and
other institutional counterparties. Under a repurchase agreement, the Portfolio purchases securities from a financial institution that agrees to repurchase the securities at the Portfolio's original purchase price plus interest within a specified
time. The Portfolio will limit repurchase
transactions to those member banks of the Federal Reserve System, broker-dealers and other financial institutions whose creditworthiness the Adviser considers satisfactory. Should
the counterparty to a transaction fail financially, the Portfolio may encounter delay and incur costs before being able to sell the securities, or may be prevented from realizing on the securities. Further, the amount realized upon the sale of the securities may be less
than that necessary to fully compensate the Portfolio. The SEC has finalized new rules requiring the central clearing of certain repurchase transactions involving U.S. Treasuries. Historically, such transactions have not been required to be
cleared and voluntary clearing of such transactions has generally been limited. Compliance with the new rules is currently expected to be required in the middle of 2027. While it is currently difficult to predict the full impact of these new rules
particularly because the compliance date has not yet occurred, the new clearing requirements could make it more difficult for the Portfolio to execute certain investment strategies, may reduce the availability or increase the costs of such
transactions and may adversely affect a Portfolio's performance. See “Risks Associated with Derivatives Regulation” for
additional information.
Reverse Repurchase Agreements
The Portfolio may enter into reverse repurchase agreements, which are a form of borrowing, under the circumstances described
in “Fundamental Investment Restrictions.” Under reverse repurchase agreements, the Portfolio transfers possession of portfolio securities to financial institutions in return for cash in an amount equal to a percentage of the
portfolio securities' market value and agrees to repurchase the securities at a future date by repaying the cash with interest. The Portfolio retains the right to receive interest and principal payments from the securities. Reverse repurchase
agreements involve the risk that the market value of securities sold by the Portfolio may decline below the price at which it is obligated to repurchase the securities. If the other party or “seller” defaults, a Portfolio might suffer a loss
to the extent that the proceeds from the sale of the underlying securities and other collateral held by the Portfolio are less than the repurchase price and the Portfolio's cost associated with delay and enforcement of the repurchase agreement. In addition, in
the event of bankruptcy of the seller, the Portfolio could suffer additional losses if a court determines that the Portfolio's interest in the collateral is not enforceable. The
SEC has finalized new rules requiring the central clearing of certain repurchase transactions involving U.S. Treasuries. Historically, such transactions have not been required to
be cleared and voluntary clearing of such transactions has generally been limited. Compliance with the new rules is currently expected to be required in the middle of 2027. While it is currently difficult to predict the full impact of these new rules particularly
because the compliance date has not yet occurred, new clearing requirements could make it more difficult for the Portfolio to execute certain investment strategies, may reduce the availability or increase the costs of such transactions and may
adversely affect a Portfolio's performance. See “Risks Associated with Derivatives Regulation” for
additional information.
Risks Associated with
Derivatives Regulation
The Securities and Exchange Commission (“SEC”) adopted Rule 18f-4 under the 1940 Act providing for the regulation of registered investment companies' use of derivatives
and certain related instruments. The rule, among other things, limits derivatives exposure through one of two value-at-risk tests and in connection with adopting the rule, the SEC
eliminated the asset segregation framework for covering derivatives and certain financial instruments arising from the SEC's Release 10666 and ensuing staff guidance. The rule also requires funds to adopt and implement a derivatives risk management program
(including the appointment of a derivatives risk manager and the implementation of certain testing requirements) and subjects funds to certain reporting requirements in respect of
derivatives. Limited derivatives users (as determined by Rule 18f-4) are not, however, subject to the full requirements under the rule.
In the event of a counterparty's (or its affiliate's) insolvency, the Portfolio's ability
to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral, could be stayed or eliminated under special resolution regimes adopted in the United States, the EU, the UK and various other jurisdictions. Such regimes provide
government authorities with broad authority to intervene when a financial institution is experiencing financial difficulty. In particular, with respect to counterparties who are subject to such proceedings in the EU and the U.S., the liabilities of such
counterparties to the Portfolio could be reduced, eliminated, or converted to equity in such counterparties (sometimes referred to as a “bail in”).
These and other regulations are evolving, so their full impact on the Portfolios and the financial system are not yet known.
Rule 144A
Securities
The Portfolio may invest in Rule 144A securities. Rule 144A
securities generally must be sold only to other institutional investors. Rule 144A securities will not be considered illiquid for purposes of the Portfolio's percentage limitations
on illiquid securities when the Adviser (pursuant to guidelines adopted by the Portfolio's Board of Trustees (the
“Board” and each member thereof, a “Trustee”)) determines that a liquid trading
market exists for the securities in question. There can be no assurance that a liquid trading market will exist at any time for any particular Rule 144A securities.
Following Russia's invasion of Ukraine in late February 2022, various countries, including
the U.S. and the UK, as well as the E.U., issued broad-ranging economic sanctions against Russia. The U.S. and other countries have also imposed economic sanctions on Belarus and may impose sanctions on other countries that support Russia's invasion. A large number of
corporations and U.S. states have also announced plans to divest interests or otherwise curtail business dealings with certain Russian businesses. These sanctions and any
additional sanctions or other intergovernmental actions that have been or may be undertaken in the future, against Russia, Russian entities or Russian individuals, or other countries that support Russia's military invasion, may result in the devaluation of Russian currency, a downgrade in
the country's credit rating, an immediate freeze of Russian assets, a decline in the value and liquidity of Russian securities, property or interests, and/or other adverse consequences to the Russian economy or a Portfolio. The scope and
scale of sanctions in place at a particular time may be expanded or otherwise modified in a way that have negative effects on a Portfolio. Sanctions, or the threat of new or
modified sanctions, could impair the ability of a Portfolio to buy, sell, hold, receive, deliver or otherwise transact in certain affected securities or other investment
instruments. Sanctions could also result in Russia taking counter measures or other actions in response (including cyberattacks and espionage), which may further impair the value and liquidity of Russian securities. These sanctions, and the resulting disruption of the
Russian economy, may cause volatility in other regional and global markets and may negatively impact the performance of various sectors and industries, as well as companies in other countries, which could have a negative effect on the
performance of a Portfolio, even if a Portfolio does not have direct exposure to securities of Russian issuers. As a collective result of the imposition of sanctions, Russian government countermeasures and the impact that they have had on
the trading markets for Russian securities, certain Portfolios have used, and may in the future use, fair valuation procedures approved by the Portfolio's Board to value certain
Russian securities, which could result in such securities being deemed to have a zero value.
Treasury Inflation-Protected Securities
The Portfolio may invest in Inflation-Protection Securities (“TIPSs”), a type of inflation-indexed Treasury
security. TIPSs typically provide for semiannual payments of interest and a payment of principal at maturity. In general, each payment will be adjusted to take into account any inflation or deflation that occurs between the issue date of the security and the
payment date based on the Consumer Price Index for All Urban Consumers (“CPI-U”).
Each semiannual payment of interest will be determined by multiplying a single fixed rate
of interest by the inflation-adjusted principal amount of the security for the date of the interest payment. Thus, although the interest rate will be fixed, the amount of each interest payment will vary with changes in the principal of the security as adjusted for inflation and
deflation.
TIPSs also provide for an additional payment (a
“minimum guarantee
payment”) at maturity if the security's inflation-adjusted principal amount for the maturity date is less than the security's principal amount at issuance. The amount of the
additional payment will equal the excess of the security's principal amount at issuance over the security's inflation-adjusted principal amount for the maturity date.
U.S. Government Securities
The Portfolio may purchase U.S. Government securities. The types of U.S. Government obligations in which the Portfolio may
at times invest include: (1) U.S. Treasury obligations and (2) obligations issued or guaranteed by U.S. Government agencies and instrumentalities which are supported by any of the
following: (a) the full faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government agency or instrumentality, or (d) the credit of the instrumentality (examples of agencies and instrumentalities are: Federal Land Banks, Federal Housing Administration, Federal Farm Credit Bank, Farmers
Home Administration, Export-Import Bank of the United States, Central Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks, General Services
Administration, Maritime Administration,
Tennessee Development Bank, Asian-American
Development Bank, International Bank for Reconstruction and Development and Federal National Mortgage Association). No assurance can be given that in the future the U.S. Government will provide financial support to U.S. Government securities it is not obligated to support.
The Portfolio may purchase U.S. Government obligations on a forward commitment basis.
Variable Amount Master Demand Notes
The Portfolio may invest in variable amount master demand notes, which are unsecured
obligations that are redeemable upon demand and are typically unrated. These instruments are issued pursuant to written agreements between their issuers and holders. The agreements permit the holders to increase (subject to an agreed maximum) and the holders and
issuers to decrease the principal amount of the notes, and specify that the rate of interest payable on the principal fluctuates according to an agreed formula. Generally, changes in interest rates will have a smaller effect on the market
value of these securities than on the market value of comparable fixed income obligations. Thus, investing in these securities generally allows less opportunity for capital appreciation and depreciation than investing in comparable fixed
income securities. There may be no active secondary market with respect to a particular variable rate instrument.
Variable and Floating Rate Securities
The Portfolio may invest in variable and floating rate securities. In general, variable
rate securities are instruments issued or guaranteed by entities such as (1) U.S. Government, or an agency or instrumentality thereof, (2) corporations, (3) financial institutions, (4) insurance companies or (5) trusts that have a rate of interest subject to adjustment at regular
intervals. A variable rate security provides for the automatic establishment of a new interest rate on set dates. Interest rates on these securities are ordinarily tied to widely recognized market rates, which are typically set once a day.
Generally, changes in interest rates will have a smaller effect on the market value of variable and floating rate securities than on the market value of comparable fixed income obligations. Variable rate obligations will be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate.
The Portfolio may purchase securities on a when-issued basis. Delivery of and payment for these securities may take place as
long as a month or more after the date of the purchase commitment. The value of these securities is subject to market fluctuation during this period, and no income accrues to the
Portfolio until settlement takes place. When entering into a when-issued transaction, the Portfolio will rely on the other party to consummate the transaction; if the other party
fails to do so, the Portfolio may be disadvantaged. The Portfolio will not invest more than 25% of its respective net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Portfolio are subject to changes in market value based upon
actual or perceived changes in the level of interest rates. Generally, the value of such securities will fluctuate inversely to changes in interest rates — i.e., they will appreciate in value when interest rates decline and decrease in value when
interest rates rise. Therefore, if, in order to achieve higher interest income, the Portfolio remains substantially fully invested at the same time that it has purchased securities on a “when-issued” basis, there will be a greater
possibility of fluctuation in the Portfolio's NAV.
The Portfolio may invest in zero-coupon securities. Zero-coupon securities are notes, bonds and debentures that: (1) do not
pay current interest and are issued at a substantial discount from par value; (2) have been stripped of their unmatured interest coupons and receipts; or (3) pay no interest until
a stated date one or more years into the future. These securities also include certificates representing interests in such stripped coupons and receipts. Generally, changes in
interest rates will have a greater impact on the market value of a zero-coupon security than on the market value of the comparable securities that pay interest periodically during the life of the instrument. In the case of any zero-coupon debt obligations
with a fixed maturity date of more than one year from the date of issuance that are treated as issued originally at a discount, the Portfolio will be required to accrue original issue discount (“OID”) for U.S. federal income tax purposes and
may as a result be required to pay out as an income distribution an amount which is greater than the total amount of cash interest the Portfolio actually received. The Portfolio may be required to sell investments in order to meet such distribution
requirements, including at a time when it may not be advantageous to do so.
The Portfolio may invest no more than 25% of its
total assets in stripped securities that have been stripped by their holder, typically a custodian bank or investment brokerage firm. A number of securities firms and banks have
stripped the interest coupons and resold them in custodian receipt programs with different names. Privately-issued stripped securities are not themselves guaranteed by the U.S. Government, but the future payment of principal or interest on U.S. Treasury obligations,
which they represent, is so guaranteed.
Fundamental
Investment Restrictions
The Trust has adopted the following fundamental
investment policies with respect to the Portfolio, which may not be changed without the affirmative vote of a
“majority of the outstanding voting securities” of the shareholders of the Portfolio. A “majority of the outstanding voting
securities” is defined in the 1940 Act to mean the affirmative vote of the lesser of: (1) more than 50% of the outstanding shares of a portfolio; and (2) 67% or more of the shares present at a
meeting if more than 50% of the outstanding shares are present at the meeting in person or by proxy. The Portfolio may not:
1.
Borrow money, except as a temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that borrowing does not exceed an amount equal to 33 1/3% of the current value of the Portfolio's assets taken at market value, less liabilities, other than borrowings.
If, at any time, the Portfolio's borrowings exceed this limitation due to a decline in net assets, such borrowings will, within three days, be reduced to the extent necessary to comply with this limitation. The Portfolio will not purchase
investments once borrowed funds (including reverse repurchase agreements) exceed 5% of its total assets.
2.
Make loans to any person or firm; provided, however, that the making of a loan shall not
include (i) the acquisition for investment of bonds, debentures, notes or other evidence of indebtedness that is publicly distributed or of a type customarily purchased by institutional investors, or (ii) entering into repurchase agreements, and provided further
that the Portfolio may lend its portfolio securities to broker-dealers or other institutional investors if the aggregate value of all securities loaned does not exceed 33 1/3% of
the value of the Portfolio's total assets.
3.
Engage in the business of underwriting securities issued by others, except that the Portfolio
will not be deemed to be an underwriter or to be underwriting on account of the purchase or sale of securities subject to legal or contractual restrictions on disposition.
4.
Issue senior securities, except as permitted by its investment objective, policies and
restrictions, and except as permitted by the 1940 Act.
5.
Invest 25% or more of the value of its total assets in securities of companies primarily
engaged in any one industry (other than the U.S. Government, its agencies and instrumentalities); provided, however, that concentration may occur as a result of changes in the market value of portfolio securities and from investments in bankers'
acceptances, certificates of deposit, time deposits and other similar instruments issued by foreign and domestic branches of U.S. and foreign banks.
6.
With respect to 75% of
its total assets, invest in securities of any one issuer (other than securities issued by the U.S. Government, its agencies and instrumentalities and shares of investment
companies), if immediately thereafter and as a result of such investment (i) the current market value of the Portfolio's holdings in the securities of such issuer exceeds 5% of the value of the Portfolio's assets or (ii) the Portfolio owns more than 10% of the
outstanding voting securities of the issuer.
7.
Purchase or sell real estate or real estate mortgage loans; provided, however, that the
Portfolio may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein.
8.
Invest in commodities, except that the Portfolio may purchase and sell financial futures
contracts and options thereon.
The concentration policy of the Portfolio (as set forth in Investment Restriction No. 5, above) permits the Portfolio to invest, without limit (other than any investment limitation described herein), in bankers' acceptances, certificates of deposit, time
deposits and similar instruments issued by (i) U.S. banks, (ii) U.S. branches of foreign banks (in circumstances in which the U.S. branches of foreign banks are subject to the same regulation as U.S. banks), (iii) foreign branches of U.S. banks
(in circumstances in which the Portfolio will have recourse to the U.S. bank for the obligations of the foreign branch), and (iv) foreign branches of foreign banks to the extent that the Adviser determines that the foreign branches of foreign banks
are subject to the same or substantially similar
regulations as U.S. banks. The Portfolio may concentrate in such instruments when, in the opinion of the Adviser, the yield, marketability and availability of investments meeting
the Portfolio's quality standards in the banking industry justify any additional risks associated with the concentration of the Portfolio's assets in such industry.
If concentration in an industry (other than as contemplated by Investment Restriction No. 5) occurs as a result of changes
in the market value of securities held by the Portfolio (including as a result of reductions in the net assets of the Portfolio in connection with the redemptions of shares of the Portfolio), future purchases of securities will be made in a manner that
does not increase such concentration and, over time, can be expected to eliminate such concentration.
Disclosure of Portfolio Holdings
The Trust's Policies on Disclosure of Portfolio Holdings (“Disclosure Policy”) are intended to ensure
compliance by the Trust's service providers and the Trust with (1) applicable regulations of the federal securities laws, including the 1940 Act, and the Investment Advisers Act of 1940 and (2) general principles of fiduciary duty relating to client accounts. The Board
must approve all material amendments to this policy and may amend this policy from time to time.
The Trust may disclose the securities holdings of the Portfolio on a daily basis to
shareholders and to investors eligible to invest in the Portfolio, provided that those investors
(“Eligible Investors”) are a party to a currently effective securities lending agency agreement with State Street Bank and Trust Company (“State Street”). Information regarding holdings of the Portfolio and other online reports are available electronically on a daily basis to
shareholders of the Trust and Eligible Investors with a one-day lag through State Street's web portal, www.my.statestreet.com. The Trust may also disclose holdings of the Portfolio (i) to the extent required by law; (ii) to the Trust's service providers who generally need access to such information in the performance of their contractual duties and responsibilities, such as the Trustees of the Trust, the
Trust's investment adviser, custodian, fund accountant, administrator, independent public accountants, attorneys, and each of their respective affiliates and advisers, and are subject to duties of confidentiality imposed by law and/or contract; and
(iii) to broker-dealers to facilitate trading.
Notwithstanding anything contained herein to the contrary, the Board and SSGA FM may, on a case-by-case basis, impose
restrictions on the disclosure of portfolio holdings information, including, without limitation, suspension or cessation of disclosure of holdings information of the Trust or the Portfolio.
The Disclosure Policy may not be waived, or exceptions made, without the written consent of an officer of the Trust. No
waiver or exception may be granted unless the person or entity benefiting thereby agrees in writing to maintain the confidentiality of information disclosed and to use such information solely in connection with its decisions relating to
participation in a Securities Lending Program. All waivers and exceptions involving the Trust will be disclosed to the Board no later than its next regularly scheduled quarterly meeting.
ITEM
17. MANAGEMENT OF THE TRUST
The Board is responsible for overseeing generally
the management, activities and affairs of the Portfolio and has approved contracts with various organizations to provide, among other services, day-to-day management required by
the Trust (see the section called
“Investment Advisory and Other
Services”). The Board has engaged the Adviser to manage the Portfolio on a day-to day basis. The Board is responsible for overseeing the Adviser and other service providers in the
operation of the Trust in accordance with the provisions of the 1940 Act, applicable Massachusetts law and regulation, other applicable laws and regulations, and the Second Amended and Restated Master Trust Agreement. The Trustees listed below
are also Trustees of SSGA Funds, State Street Master Funds, State Street Institutional Investment Trust, Elfun Diversified Fund, Elfun Government Money Market Fund, Elfun
Tax-Exempt Income Fund, Elfun Income Fund, Elfun International Equity Fund and Elfun Trusts (collectively, the
“Elfun Funds”), State Street Institutional Funds and State Street Variable Insurance Series Funds, Inc., and their respective series. The
following table provides information with respect to each Trustee, including those Trustees who are not considered to be “interested” as that term is defined in the 1940 Act (the
“Independent Trustees”), and each officer of the Trust.
Name, Address, and Year of Birth |
Position(s) Held With Trust
|
Term
of Office and Length of Time Served
|
Principal
Occupation During Past Five Years and Relevant
Experience |
Number
of Funds in Fund Complex
Overseen by Trustee† |
Other
Directorships Held by Trustee During Past
Five Years |
| |
|
PATRICK J. RILEY
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1948 |
Trustee and Chairperson of the Board |
Term: Indefinite Elected: 1/14 |
Independent Director, State Street Global Advisers Europe Limited (investment company) (1998 – 2023); Independent Director, SSGA Liquidity plc (formerly, SSGA Cash Management Fund plc) (1998 – 2023); and Independent Director, SSGA Fixed Income plc (January 2009 – 2023). |
|
Board Director and
Chairman, SSGA SPDR ETFs Europe I plc (2011 – March 2023); Board Director and Chairman, SSGA SPDR ETFs
Europe II plc (2013 –
March 2023); Board Director, State Street Liquidity plc (1998 – March 2023). |
MARGARET K.
MCLAUGHLIN
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1967 |
Trustee, Chairperson of the Qualified Legal Compliance Committee, and Vice-Chairperson of the Valuation Committee |
Term: Indefinite Elected: 12/24 |
Consultant, Bates Group (consultants) (September 2020 – January 2023); Consultant, Madison Dearborn Partners (private equity) (2019 – 2020). |
|
Director, Manning & Napier Fund Inc (2021 – 2022). |
GEORGE M. PEREIRA
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1964 |
Trustee, Chairperson of the Nominating Committee, Chairperson of the Governance Committee, and Vice-Chairperson of the Qualified Legal Compliance Committee |
Term: Indefinite Elected: 12/24 |
Chief Operating Officer (January 2011 – September 2020) and Chief Financial Officer (November 2004 – September 2020), Charles Schwab Investment Management. |
|
Director, Pave Finance Inc. (May 2023 – present); Director, Pacific Premier Bancorp and Pacific Premier Bank (2021 – August 2025). |
DONNA M. RAPACCIOLI
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1962 |
Trustee, Chairperson of the Audit Committee, Vice-Chairperson of the Nominating Committee, and Vice-Chairperson of the |
Term: Indefinite Elected: 12/18 |
Dean of the Gabelli School of Business (2007 – June 2022) and Accounting Professor (1987 – present) at Fordham University. |
|
Director- Graduate
Management Admissions Council
(2015 – 2022). |
Name, Address, and Year of Birth |
Position(s) Held With Trust
|
Term
of Office and Length of Time Served
|
Principal
Occupation During Past Five Years and Relevant
Experience |
Number
of Funds in Fund Complex
Overseen by Trustee† |
Other
Directorships Held by Trustee During Past
Five Years |
| |
|
|
|
|
|
MARK E. SWANSON
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1963 |
Trustee, Chairperson of the Valuation Committee, and Vice-Chairperson of the Audit Committee |
Term: Indefinite Elected: 12/24 |
Treasurer, Chief Accounting Officer and Chief Financial Officer, Russell Investment Funds (“RIF”) (1998 – 2022); Global Head of Fund Services, Russell Investments (2013 – 2022); Treasurer, Chief Accounting Officer and Chief Financial Officer, Russell Investment Company (“RIC”) (1998 – 2022); President and Chief Executive Officer, RIF (2016 – 2017 and 2020 to 2022); President and Chief Executive Officer, RIC (2016 – 2017 and 2020 – 2022). |
|
Director and President, Russell Investments Fund Services, LLC
(2010 – 2023); Director,
Russell Investment Management, LLC,
Russell Investments Trust Company and
Russell Investments Financial Services, LLC (2010 – 2023). |
| |
|
|
|
|
|
JEANNE LAPORTA(2)
c/o SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1965 |
|
Term: Indefinite Elected: 12/24 |
Chair and Director, SSGA Funds Management, Inc. (October 2024 – present); Senior Managing Director, State Street Investment Management (August 2024 – present); Head of Global Funds Management (August 2024 – Present); Chief Administrative Officer at ClearAlpha Technologies LP (FinTech startup) (January 2021 – August 2024); Senior Managing Director at State Street Investment Management (July 2016 – 2021); Manager of State Street Global Advisors Funds Distributors, LLC (May 2017 – 2021); Director of SSGA Funds Management, Inc. (March 2020 - 2021); President of State Street Institutional Funds and State Street Variable Insurance Series Funds, Inc. (April 2014 – March 2020). |
|
Interested Trustee, Select Sector SPDR
Trust, SPDR Series Trust, SPDR Index
Shares Funds and SSGA Active Trust
(November 2024 –
present); Interested Trustee, Elfun
Government Money Market Fund, Elfun Tax Exempt Income Fund, Elfun Income Fund,
Elfun Diversified Fund,
Elfun International Equity Fund, Elfun
Trusts (2016 – 2021). |
†
For the purpose of determining the number of portfolios overseen by the Trustees, “Fund Complex” comprises registered investment companies for which SSGA FM serves as investment adviser.
(1)
The individual listed
below is a Trustee who is an “interested person,” as defined in the 1940 Act, of the Trust
(“Interested Trustee”).
(2)
Ms. LaPorta is an Interested Trustee because of her employment with State Street Investment Management, an affiliate of the Trust.
The following lists the principal officers for the
Trust, as well as their mailing addresses and ages, positions with the Trust and length of time served, and present and principal occupations:
Name, Address, and Year of Birth |
Position(s)
Held With
Trust |
Term of Office and Length of Time
Served |
Principal
Occupation During Past Five Years |
| |
ANN M. CARPENTER
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1966 |
President and Principal Executive Officer; Deputy Treasurer |
Term: Indefinite Served: since 5/23 (with respect to President and Principal Executive Officer); Term: Indefinite Served: since 4/19 (with respect to Deputy Treasurer) |
Chief Operating Officer, SSGA Funds Management, Inc. (April 2005 – present)*; Managing Director, State Street Investment Management (April 2005 – present).* |
BRUCE S. ROSENBERG
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1961 |
Treasurer and Principal Financial Officer |
Term: Indefinite Served: since 2/16 |
Managing Director, State Street Investment Management and SSGA Funds Management, Inc. (July 2015 – present). |
CHAD C. HALLETT
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1969 |
|
Term: Indefinite Served: since 2/16 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (November 2014 – present). |
DARLENE ANDERSON-VASQUEZ
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1968 |
|
Term: Indefinite Served: since 11/16 |
Managing Director, State Street Investment Management and SSGA Funds Management, Inc. (May 2016 – present). |
ARTHUR A. JENSEN
SSGA Funds Management, Inc.
400 Atlantic St.
Stamford, CT 06901
YOB: 1966 |
|
Term: Indefinite Served: since 11/16 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (July 2016 – present). |
DAVID LANCASTER
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1971 |
|
Term: Indefinite Served: since 11/20 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (July 2017 – present).* |
JOHN BETTENCOURT
SSGA Funds Management, Inc.
One Congress Street,
Boston, MA 02114 YOB:1976 |
|
Term: Indefinite Served: since 5/22 |
Vice President, State Street Investment Management and SSGA Funds Management, Inc. (March 2020 – present); Assistant Vice President, State Street Investment Management (June 2007 – March 2020). |
BRIAN HARRIS
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1973 |
Chief Compliance Officer; Anti-Money Laundering Officer; Code of Ethics Compliance Officer |
Term: Indefinite Served: since 7/16 |
Managing Director, State Street Investment Management and SSGA Funds Management, Inc. (June 2013 – present).* |
ANDREW J. DELORME
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1975 |
|
Term: Indefinite Served: since 2/24 |
Managing Director and Managing Counsel, State Street Investment Management (March 2023 – present); Counsel, K&L Gates (February 2021 – March 2023). |
Name, Address, and Year of Birth |
Position(s)
Held With Trust |
Term of
Office and Length of Time Served
|
Principal
Occupation During Past Five Years |
DAVID BARR
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1974 |
|
Term: Indefinite Served: since 9/20 |
Vice President and Senior Counsel, State Street Investment Management (October 2019 – present). |
E. GERARD MAIORANA, JR. SSGA Funds Management, Inc. One Congress Street Boston, MA 02114
YOB: 1971 |
|
Term: Indefinite Served: since 5/23 |
Assistant Vice President, State Street Investment Management (July 2014 – present). |
DAVID URMAN
SSGA Funds Management, Inc.
One Congress Street
Boston, MA 02114
YOB: 1985 |
|
Term: Indefinite Served: since 8/19 |
Vice President and Senior Counsel, State Street Investment Management (April 2019 – present). |
*
Served in various capacities and/or with various affiliated entities during noted time
period.
Summary of Trustees' Qualifications
Following is a brief discussion of the experience, qualifications, attributes or skills, which qualify each Trustee to serve on the Board, in light of the Trust's business and structure.
Patrick J. Riley: Mr. Riley is an experienced business executive with over 48 years of experience in the legal and financial
services industries; his experience includes service as a trustee or director of various investment companies and
Associate Justice of the Superior Court of the Commonwealth of Massachusetts. He has served on the Board of Trustees and related committees of the Trust for 36 years and possesses significant experience regarding the operations and history
of the Trust. Mr. Riley serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment Trust, State Street Master Funds, Elfun Funds, and State Street
Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Margaret K. McLaughlin: Ms. McLaughlin has over 28 years of experience she has gained in a variety of roles encompassing regulatory, operating, legal, and compliance functions, serving both firms and their boards. Ms. McLaughlin
formerly served as a founding member of the executive management team for Kramer Van Kirk Credit Strategies L.P. and its technology affiliate, Mariana Systems LLC, where she was integrally involved in corporate strategy, operational
oversight, risk management and board governance. Prior to Kramer Van Kirk, Ms. McLaughlin was Assistant General
Counsel to Harris Associates L.P., where she was responsible for legal, regulatory and compliance activities related to the Oakmark Mutual Funds. Ms. McLaughlin has an extensive understanding and perspective on governance, oversight, regulation,
policies and procedures from these positions as well as her prior experience with both the Securities and Exchange Commission and the Department of Justice. Ms. McLaughlin
currently serves on the Governing Council of the Independent Directors Council and the Board of Governors of the Investment Company Institute. Most recently, Ms. McLaughlin has held consulting positions at a major private equity firm and a management consulting firm. Ms. McLaughlin
serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment Trust, State Street Master Funds, Elfun Funds, and State Street Institutional Funds and a
Director of State Street Variable Insurance Series Funds, Inc.
George M. Pereira: Mr. Pereira has over 33 years of experience in executive management with financial institutions,
including extensive experience relating to financial reporting, operations, cybersecurity oversight, and enterprise risk management. Mr. Pereira retired from Charles Schwab Investment Management Inc., having served as Chief Operating Officer and
Chief Financial Officer during his tenure. Previously, Mr. Pereira also served as Head of Financial Reporting for Charles Schwab & Co., Inc. Earlier in his career, Mr. Pereira
gained valuable regulatory experience and perspective while serving as managing director at the New York Stock Exchange. With this professional experience, Mr. Pereira has developed wide-ranging expertise in building and managing financial, operational, technology and risk control platforms for
growth and scale within the financial services industry. Additionally, Mr. Pereira is a member of the Latino Corporate Directors Association. Mr. Pereira serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment
Trust, State Street Master Funds, Elfun Funds, and State Street Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Donna M. Rapaccioli: Ms. Rapaccioli has over 36
years of service as a full-time member of the business faculty at Fordham University, where she developed and taught undergraduate and graduate courses, including International
Accounting and Financial Statement Analysis, has taught at the executive MBA level. Ms. Rapaccioli is dean emerita after serving as Dean of the Gabelli School of Business for 15 years. She has served on Association to Advance Collegiate Schools
of Business accreditation team visits, as a director for the graduate management admissions council, as well as trustee at Emmanuel College. Ms. Rapaccioli has lectured on
accounting and finance topics and consulted for numerous investment banks. Ms. Rapaccioli also serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment
Trust, State Street Master Funds, Elfun Funds, and State Street Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Mark E. Swanson: Mr. Swanson has over 28 years of experience in executive management with financial services
institutions, including extensive experience relating to, fund operations, financial reporting, fund accounting, and fund services. Mr. Swanson recently retired from Russell Investments, having served most recently as the Global Head of Fund
Services. Additionally, Mr. Swanson served as Treasurer, Chief Accounting Officer and Chief Financial Officer of Russell Investment Company (“RIC”) and Russell Investment Funds (“RIF”). Previously, Mr. Swanson served as
Global Head of Fund Operations for Russell, as well as serving in different directorships with RIC, RIF and other Russell entities. Mr. Swanson serves as a Trustee of the Trust, SSGA Funds, State Street Institutional Investment Trust, State Street
Master Funds, Elfun Funds, and State Street Institutional Funds and a Director of State Street Variable Insurance Series Funds, Inc.
Jeanne LaPorta: Ms. LaPorta is a Senior Managing Director of State Street Investment Management and Head of Global Funds Management. Prior to joining State Street Investment Management, she was the Chief Administrative Officer of a Fintech
startup and served as a director of their flagship hedge fund. Ms. LaPorta previously worked at State Street Investment Management from 2016 to 2021 as a Senior Managing Director
and at GE Asset Management (GEAM) from 1997 to July 2016 where she held various positions at GEAM, including Senior Vice President and Commercial Operations Leader, Senior Vice President and Commercial Administrative Officer, Senior Vice President and Deputy General
Counsel and Vice President and Associate General Counsel.
The
discussion of the experience, qualifications, attributes and skills of the Trustees above is provided as required by the federal securities laws and the regulations of the SEC
promulgated thereunder, does not constitute holding out of the Board or any Trustee as having any special expertise or experience, and shall not impose any greater responsibility
or liability on any such person or on the Board by reason thereof.
The Board of Trustees has established various committees to facilitate the timely and efficient consideration of various matters of importance to the Independent Trustees, the Trust, and the Portfolio's shareholders and to facilitate compliance
with legal and regulatory requirements. Currently, the Board has created an Audit Committee, Governance Committee, Valuation Committee, Nominating Committee and Qualified Legal Compliance Committee (the “QLCC”).
The Audit Committee is composed of all of the Independent Trustees. The Audit Committee
meets twice a year, or more often as required, in conjunction with meetings of the Board of Trustees. The Audit Committee oversees and monitors the Trust's internal accounting and control structure, its auditing function and its financial reporting process. The Audit
Committee is responsible for selecting and retaining the independent accountants for the Trust. The Audit Committee is responsible for approving the audit plans, fees and other material arrangements in respect of the engagement of the
independent accountants, including non-audit services performed. The Audit Committee reviews the qualifications of the independent accountant's key personnel involved in the foregoing activities and monitors the independent accountant's
independence. During the Trust's fiscal year ended December 31, 2025, the Audit Committee held four meetings.
Each of the Governance Committee and Nominating Committee is composed of all the
Independent Trustees. The primary functions of the Governance Committee, and the Nominating Committee are to review and evaluate the composition and performance of the Board; make nominations for membership on the Board and committees; review the
responsibilities of each committee; and review governance procedures, compensation of Independent Trustees, and
independence of outside counsel to the Trustees. The Nominating Committee will consider nominees to the Board
recommended by shareholders. Recommendations should be submitted in accordance with the procedures set forth in the Nominating Committee Charter and should be submitted in writing to the Trust, to the attention of the Trust's Secretary, at
the address of the principal executive offices of the Trust. Shareholder recommendations must be delivered to, or mailed and received at, the principal executive offices of the Trust not less than sixty (60) calendar days nor more than ninety (90)
calendar days prior to the date of the Board or
shareholder meeting at which the nominee candidate would be considered for election. The Governance Committee performs an annual self-evaluation of Board members. During the fiscal
year ended December 31, 2025, the Governance Committee and Nominating Committee held four combined meetings.
The Valuation Committee is composed of all the Independent Trustees. The Valuation
Committee's primary purpose is to review the actions and recommendations of the Adviser's Oversight Committee no less often than quarterly. The Trust has established procedures and guidelines for valuing portfolio securities and making fair value determinations from time to
time through the Valuation Committee, with the assistance of the Oversight Committee, State Street and SSGA FM.
During the fiscal year ended December 31, 2025, the Valuation Committee held four meetings.
The QLCC is composed of all the Independent Trustees. The primary functions of the QLCC are to receive quarterly reports from the Trust's chief compliance officer (the “Chief Compliance Officer”); to oversee generally
the Trust's responses to regulatory inquiries; and to investigate matters referred to it by the Chief Legal Officer and make recommendations to the Board regarding the implementation of an appropriate response to evidence of a material violation of
the securities laws or breach of fiduciary duty or similar violation by the Trust, its officers or the Trustees. During the fiscal year ended December 31, 2025, the QLCC Committee
held four meetings.
Leadership Structure and
Risk Management Oversight
The Board has chosen to select different
individuals as Chairperson of the Board of the Trust, as Chairperson and Vice-Chairperson of the Committees of the Board, and as President of the Trust. Currently,
Mr. Riley, an Independent Trustee, serves as Chairperson of the Board, Ms. Rapaccioli serves as Chairperson of the Audit Committee, Ms. McLaughlin serves as Chairperson of the QLCC, Mr. Swanson serves as Chairperson of the Valuation Committee and
Mr. Pereira serves as Chairperson of each of the Governance Committee and Nominating Committee. Mr. Swanson serves as Vice-Chairperson of the Audit Committee, Ms. McLaughlin serves as Vice-Chairperson of the Valuation Committee, Mr.
Pereira serves as Vice-Chairperson of the QLCC, and Ms. Rapaccioli serves as Vice-Chairperson of each of the
Governance Committee and Nominating Committee. Ms. Carpenter, who is an employee of the Adviser, serves as
President of the Trust. The Board believes that this leadership structure is appropriate. Ms. Carpenter is available to provide the Board with insight regarding the Trust's day-to-day management when requested, while Mr. Riley provides an independent perspective on the Trust's overall operation and Ms. Rapaccioli provides a specialized perspective on audit
matters.
The Board has delegated management of the Trust to service providers who are responsible for the day-to-day management of risks applicable to the Trust. The Board oversees risk management for the Trust in several ways. The Board receives
regular reports from both the CCO and administrator for the Trust, detailing the results of the Trust's compliance with its Board-adopted policies and procedures, the
investment policies and limitations of the Portfolios, and applicable provisions of the federal securities laws and the Code. As needed, the Adviser discusses management issues regarding the Trust with the Board, soliciting the Board's input on many aspects of management,
including potential risks to the Portfolios. The Board's Audit Committee also receives reports on various aspects of risk that might affect the Trust and offers advice to management, as appropriate. The Trustees also meet in executive session
with the independent counsel to the Independent Trustees, the independent registered public accounting firm, counsel to the Trust, the CCO and representatives of management, as needed. Through these regular reports and interactions, the
Board oversees the risk management parameters for the Trust, which are effected on a day-to-day basis by service providers to the Trust.
Trustee Ownership of Securities of the Trust or Adviser
As of December 31, 2025, none of the Independent Trustees or their family members had any ownership of securities of the Adviser or any person directly or indirectly controlling, controlled by, or under common control with the Adviser.
The following table sets forth information describing the dollar range of the Trust's
equity securities beneficially owned by each Trustee as of December 31,
2025.
| |
Dollar Range Of Equity Securities In The Funds |
Aggregate Dollar Range Of Equity Securities In
All Registered Investment Companies
Overseen By
Trustees In Family of
Investment Companies |
| |
|
|
| |
|
|
| |
Dollar Range Of Equity Securities In The Funds |
Aggregate Dollar Range Of Equity Securities In
All Registered Investment Companies
Overseen By Trustees In Family of
Investment Companies |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
Independent Trustees are compensated on a calendar year basis. An Interested Trustee does not receive compensation from the
Portfolios for his or her service as a Trustee. Effective January 1, 2025, each Independent Trustee receives for his or her services to the State Street Master Funds, State Street
Institutional Investment Trust, the SSGA Funds, the Elfun Funds, the Trust, State Street Institutional Funds and State Street Variable Insurance Series Funds, Inc. (together,
the “Fund Entities”) a $400,000 annual base retainer. In addition, the Chairperson of each of the Valuation Committee, QLCC, Nominating Committee and Governance Committee will receive an additional $25,000 stipend and the Chairperson of the
Audit Committee will receive an additional $40,000 stipend. As of January 1, 2024, each Independent Trustee receives an additional $25,000 for each special in-person meeting and
$5,000 for each special telephonic meeting. The Chairperson of the Board receives an additional $100,000 annual retainer. The Independent Trustees are reimbursed for travel and other out-of-pocket expenses in connection with meeting attendance. As of the date of this SAI, the Trustees were
not paid pension or retirement benefits as part of the Trust's expenses. The Trust's officers are compensated by the Adviser and its affiliates.
The table below shows the compensation that the Trustees received during the Trust's fiscal
year ended December 31, 2025.
| |
Aggregate Compensation from the
Trust |
Pension or Retirement Benefits
Accrued as Part of Trust Expenses
|
Estimated Annual Benefits Upon
Retirement |
Total Compensation from the Trust
and Fund Complex Paid to Trustees |
| |
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
| |
|
|
|
|
The total compensation from the Government Money Market Portfolio paid to the Trustees for
the Trust's fiscal year ended December 31, 2025 is as follows:
| |
Aggregate Compensation from
the Portfolio |
Name of Independent Trustee |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Aggregate Compensation from
the Portfolio |
| |
|
| |
|
The Trust and the Adviser have each adopted a code of ethics (together, the “Codes of Ethics”) pursuant to Rule 17j-1 as
required by applicable law, which is designed to prevent affiliated persons of the Trust and the Adviser from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Portfolio (which
may also be held by persons subject to the Codes of Ethics). The Codes of Ethics permit personnel, subject to the Codes of Ethics and their provisions, to invest in securities for their personal investment accounts, subject to certain limitations, including securities that may be purchased or held by the Trust, Adviser and State Street.
The Board has delegated to the Adviser the responsibility to vote proxies on securities held by the Trust, subject to certain
exceptions. The Board has retained authority to vote proxies for certain bank and bank holding company securities (“Bank Securities”) that may be held by one or more Funds and Portfolios from time to time. The Board has adopted the Institutional Shareholder Services, Inc.'s
(“ISS”) benchmark proxy voting policy with respect to voting such Bank Securities' proxies. The Board has retained this authority
in order to permit the Adviser to utilize exemptions from limitations arising under the Bank Holding Company Act of 1956, as amended, that might otherwise prevent the Adviser
from investing a Fund's or Portfolio's assets in Bank Securities. Each of the Trust's and the Adviser's proxy voting policies, as well as ISS' benchmark proxy voting policy, are attached as an appendix to this SAI. Information regarding how a Fund or
Portfolio voted proxies relating to its portfolio securities during the most recent twelve-month period ended June 30 is available: (1) without charge by calling 1-866-787-2257;
(2) on the Funds' and Portfolios' website at www.statestreet.com/im; and (3) on the SEC's website at
www.sec.gov.
Reporting a Material Conflict of
Interest
A material conflict of interest may arise in a situation where
the proxy analyst, Portfolio Manager or Securities Analyst, when voting the proxy, has knowledge of a situation where either SSGA FM or one of its affiliates would enjoy a substantial or significant benefit from casting a vote in a particular way (“Material Conflict of Interest”). If a Material
Conflict of Interest does arise, such conflict will be documented by SSGA FM or each Sub-Adviser, as applicable, on a Material Conflict of Interest form and the Board will be notified of such Material Conflict of Interest at the next regular
board meeting after the Material Conflict of Interest occurs.
ITEM 18. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
In connection with State Street's Securities Lending Program, State Street holds certain collateral on behalf of its
securities lending clients to secure the return of loaned securities. Such collateral may be invested in Trust shares from time to time. Shares of the Portfolio will be registered with the Trust's transfer agent in the name of State Street, as agent
for each Lending Fund, or in the name of the Lending Fund or the Lending Fund's custodian. Consequently, State Street will not be a controlling person of the Trust for purposes of the 1940 Act.
Persons or organizations owning 25% or more of the voting interests of the Portfolio may be presumed to “control” (as that term is defined in the 1940 Act) the Portfolio. As a result, these persons or organizations could have the ability to approve
or reject those matters submitted to the investors of the Portfolio for their approval.
As of March 31, 2026, no shareholders of record, through one or more accounts, owned 25% or more of the issued and
outstanding shares of the Portfolio.
As of March 31, 2026, no shareholders of record, through one or more accounts, owned 5% or more of the issued and
outstanding shares of the Portfolio:
As of March 31, 2026, the Trustees and officers of the Trust, as a group, did not own any of the Trust's voting securities.
ITEM
19. INVESTMENT ADVISORY AND OTHER SERVICES
Most of the Portfolio's necessary day-to-day operations are
performed by service providers under contract to the Trust. The principal service providers for the Portfolio are:
Investment Adviser and Administrator: Custodian, Transfer Agent and Sub-Administrator: Independent Registered Public Accounting Firm: |
SSGA FM State
Street Bank and Trust Company Ernst & Young LLP |
SSGA FM serves as the investment adviser to the Portfolio pursuant to an Advisory Agreement
dated as of May 1, 2001, as amended
(“Advisory Agreement”), by and between the Adviser and the Trust. The Adviser is a wholly owned subsidiary of State Street Global Advisors, Inc.,
which itself is a wholly-owned subsidiary of State Street Corporation, a publicly held financial holding company. Prior to June 8, 2017, SSGA FM was a wholly owned subsidiary of
State Street Corporation. The Adviser's mailing address is One Congress Street, Boston, Massachusetts 02114.
Under the Advisory Agreement, the Adviser directs the Portfolio's investments in accordance
with its investment objectives, policies and limitations. For these services, the Portfolio pays a fee to the Adviser at the rates stated in the Part A. The advisory fees paid by the Portfolio to SSGA FM for the fiscal years ended December 31, 2025, December 31,2024 and
December 31, 2023 were $1,482,647, $1,324,580, and $1,490,728, respectively.
Total Annual Fund Operating Expense Waivers. The Adviser has contractually agreed with the Trust, through
April 30, 2026, (i) to waive up to the full amount of the advisory fee payable by the Portfolio, and/or (ii) to reimburse the Portfolio for expenses to the extent that Total Annual Fund Operating Expenses (subject to certain exclusions) exceed 0.042% of average
daily net assets on an annual basis.
Voluntary Yield
Waiver. SSGA FM and certain of its affiliates (each a “Service Provider”) may reimburse expenses or
waive fees to avoid negative yield (the “Voluntary Reduction”), or a yield below a
specified level, for the Portfolio. Any such waiver or reimbursement would be voluntary and may be revised or cancelled at any time without notice. The Portfolio has agreed, subject to certain limitations, to reimburse the Service Provider for the full dollar amount of any Voluntary
Reduction incurred after May 1, 2020. Each Service Provider may, in its sole discretion, irrevocably waive receipt of any or all reimbursement amounts due from the Portfolio, without limitation.
The Advisory Agreement will continue from year to year provided that such continuance is specifically approved at least
annually by (a) the Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio, and (b) vote of a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated by the Adviser or the Trust without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
SSGA FM serves as the Administrator (the
“Administrator”) of the Portfolio pursuant to an Administration Agreement dated as of June 3, 2015, as amended (“Administration Agreement”) by and between SSGA FM and the Trust. Under the Administration Agreement, the Administrator will, among other things (i)
provide the Portfolio with administrative and clerical services, including the maintenance of certain of the Portfolio's books and records; (ii) arrange the periodic updating of the Trust's Registration Statement and the Portfolio's Confidential Offering Memorandum; and (iii) provide proxy
materials and reports to the Portfolio's shareholders and the SEC. For these services, the Portfolio pays an annual administration fee equal to 0.00075% of the Portfolio's average
daily net assets. The administration fees paid by the Portfolio to SSGA FM for the fiscal years ended December 31, 2025, December 31, 2024, and December 31, 2023 were $63,542, $56,768, and $63,888, respectively. The Portfolio reimburses SSGA FM for certain out-of-pocket travel expenses of
the CCO and compliance team incurred on the Portfolio's behalf.
The
Administration Agreement was approved initially for a one-year term by the Trustees, and will continue in effect from year to year unless terminated in writing by either the
Administrator or the Trust at the end of such period or thereafter on 60 days' prior written notice given by either party to the other party.
SUB-ADMINISTRATOR, CUSTODY, FUND
ACCOUNTING AND TRANSFER AGENCY
State Street serves as the sub-administrator for
the Trust, pursuant to a sub-administration agreement dated June 1, 2015 (the “Sub-Administration Agreement”). State Street
serves as the custodian for the Trust, pursuant to a custody agreement dated April 11, 2012 (the “Custody Agreement”). Under the Sub-Administration
Agreement, State Street is obligated to provide certain sub-administrative services to the Trust. Under the Custody Agreement, State Street is obligated to provide certain custody services to the Trust, as well as basic portfolio recordkeeping required by the Trust for regulatory and
financial reporting purposes. State Street also serves as transfer agent for the Portfolio. State Street is a wholly owned subsidiary of State Street Corporation, a publicly held financial holding company, and is affiliated with the Adviser. State
Street's mailing address is One Congress Street, Boston, Massachusetts 02114.
As consideration for sub-administration, custody, fund accounting, and transfer agency services, the Portfolio pays State Street an annual fee (payable monthly) based on the average monthly net assets of the Portfolio. The Portfolio also pays
State Street transaction and service fees for these services and reimburses State Street for out-of-pocket expenses.
The custodian, sub-administration, fund accounting and transfer agent service fees paid by
the Portfolio to State Street for the fiscal years ended December 31, 2025, December 31, 2024 and December 31, 2023 were $1,039,481, $930,087, and $1,100,782, respectively.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ropes & Gray LLP serves as counsel to the Trust. The principal business address of Ropes & Gray LLP is 800 Boylston
Street, Boston, Massachusetts 02199. Sullivan & Worcester LLP, located at One Post Office Square, Boston,
Massachusetts, 02109, serves as independent counsel to the Independent Trustees.
The Audit Committee approved the appointment of Ernst & Young LLP (“E&Y”), 200 Clarendon Street, Boston, MA
02116, as the Portfolio's independent registered public accounting firm for the fiscal year ending December 31, 2025.
ITEM
20. PORTFOLIO MANAGERS
ITEM 21. BROKERAGE ALLOCATION AND OTHER
PRACTICES
All portfolio transactions are placed on behalf of a
Portfolio by the Adviser. Purchases and sales of securities on a securities exchange are affected through brokers who charge a commission for their services. Ordinarily commissions
are not charged on over-the-counter orders (e.g., fixed income securities) because the Portfolio pays a spread which is included in the cost of the security and represents the difference between the dealer's quoted price at which it is willing to
sell the security and the dealer's quoted price at which it is willing to buy the security. When a Portfolio executes an over-the-counter order with an electronic communications network or an alternative trading system, a commission is charged by such
electronic communications networks and alternative trading systems as they execute such orders on an agency basis. Securities may be purchased from underwriters at prices that
include underwriting fees.
In placing a portfolio transaction, the
Adviser seeks to achieve best execution. The Adviser's duty to seek best execution requires the Adviser to take reasonable steps to obtain for the client as favorable an overall
result as possible for portfolio transactions under the circumstances, taking into account various factors that are relevant to the particular transaction.
The Adviser refers to and selects from the list of approved trading counterparties
maintained by the Adviser's Credit Risk Management team. In selecting a trading counterparty for a particular trade, the Adviser seeks to weigh relevant factors including, but not limited to the following:
•Prompt and reliable execution;
•The competitiveness of commission rates and spreads, if applicable;
•The financial strength, stability
and/or reputation of the trading counterparty;
•The willingness and ability of the executing trading
counterparty to execute transactions (and commit capital) of size in liquid and illiquid markets without disrupting the market for the security;
•Local laws, regulations or restrictions;
•The ability of the trading counterparty to maintain
confidentiality;
•The availability and capability of execution venues,
including electronic communications networks for trading and execution management systems made available to Adviser;
•Execution related costs;
•History of execution of orders;
•Likelihood of execution and settlement;
•Clearance and settlement capabilities, especially in high volatility
market environments;
•Availability of lendable
securities;
•Sophistication of the trading counterparty's trading capabilities and infrastructure/facilities;
•The operational efficiency with which transactions are processed and cleared, taking into account the order size and complexity;
•Speed and responsiveness to the Adviser;
•Access to secondary markets;
•Counterparty exposure; and
•Depending upon the circumstances, the Adviser may take other relevant factors into account if the Adviser believes that these are important in taking all sufficient steps to obtain the best possible result for execution of the order.
In selecting a trading counterparty, the price of
the transaction and costs related to the execution of the transaction typically merit a high relative importance, depending on the circumstances. The Adviser does not necessarily
select a trading counterparty based upon price and costs but may take other relevant factors into account if it believes that these are important in taking reasonable steps to obtain the best possible result for a Portfolio under the circumstances.
Consequently, the Adviser may cause a client to pay a trading counterparty more than another trading counterparty might have charged for the same transaction in recognition of the value and quality of the brokerage services provided. The
following matters may influence the relative importance that the Adviser places upon the relevant factors:
(i)
The nature and characteristics of the order or transaction. For example, size of order, market
impact of order, limits, or other instructions relating to the order;
(ii)
The characteristics of the financial instrument(s) or other assets which are the subject of
that order. For example, whether the order pertains to an equity, fixed income, derivative or convertible instrument;
(iii)
The characteristics
of the execution venues to which that order can be directed, if relevant. For example, availability and capabilities of electronic trading systems;
(iv)
Whether the
transaction is a ‘delivery versus payment' or ‘over-the-counter' transaction. The creditworthiness of the trading counterparty, the amount of existing exposure to a
trading counterparty and trading counterparty settlement capabilities may be given a higher relative importance in the case of ‘over-the-counter' transactions; and/or
(v)
Any other circumstances that the Adviser believes are relevant at the time.
The process by which
trading counterparties are selected to effect transactions is designed to exclude consideration of the sales efforts conducted by broker-dealers in relation to the
Portfolio.
The Adviser does not currently use the Portfolio's assets in
connection with third-party soft dollar arrangements. While the Adviser does not currently use “soft” or commission dollars paid by the Portfolio
for the purchase of third-party research, the Adviser reserves the right to do so in the future.
ITEM 22. CAPITAL STOCK AND OTHER
SECURITIES
Under its Master Trust Agreement, the Trust is authorized to
issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share, which may be divided into one or more series, each of which evidences pro rata
ownership interest in a different investment portfolio. The Trustees may create additional portfolio series at any time without shareholder approval. The shares of the Portfolio may have such rights and preferences as the Trustees may establish
from time to time, including the right of redemption (including the price, manner and terms of redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions, conversion rights and conditions under which the Portfolio may have separate voting rights or no voting
rights.
This Part B covers the Portfolio, which commenced operations on
May 15, 1996. The Trust is authorized, without shareholder approval, to divide shares of any series into two or more classes of shares, each class having such different dividend, liquidation, voting and other rights as the Trustees may determine without shareholder approval.
Any amendment to the Master Trust Agreement that would materially and adversely affect shareholders of the Trust as a whole, or shareholders of a particular portfolio series, must be approved by the holders of a majority of the shares of the
Trust or the portfolio series, respectively. All other amendments may be effected by the Board.
The Master Trust Agreement provides that shareholders shall not be subject to any personal
liability for the acts or obligations of the Portfolio and that every written agreement, obligation, or other undertaking of the Portfolio shall contain a provision to the effect that the shareholders are not personally liable thereunder. If any present or past shareholder of
the Portfolio is charged or held personally liable for any obligation or liability of the Trust solely by reason of being or having been a shareholder and not because of such shareholder's acts or omissions or for some other reason, the Portfolio
series, upon request, shall assume the defense against such charge and satisfy any judgment thereon, and the shareholder or former shareholder shall be entitled out of the assets
of the Portfolio to be held harmless from and indemnified against all loss and expense arising from such liability. Thus, the risk to shareholders of incurring financial loss
beyond their investments is limited to circumstances in which the Portfolio itself would be unable to meet its obligations.
The Trust will not have an Annual Meeting of
Shareholders. Special Meetings may be convened (i) by the Board (ii) upon written request to the Board by the holders of at least 10% of the outstanding shares of the Trust, or
(iii) upon the Board's failure to honor the shareholders' request as described above, by holders of at least 10% of the outstanding shares giving notice of the special meeting to the shareholders.
ITEM 23. PURCHASE, REDEMPTION, AND PRICING OF SHARES
MANNER IN WHICH SHARES ARE OFFERED
Shares of the Portfolio are being offered to Lending Funds in connection with State Street's Securities Lending Program. Shares for the Portfolio are sold in private placement transactions that do not involve any “public offering” within the meaning of Section (4)(a)(2) under the 1933 Act. Shares of the Portfolio are sold directly by the Trust without a distributor
and are not subject to a sales load or redemption fee. Additionally, assets of the Portfolio are not subject to fees permitted pursuant to Rule 12b-1 under the 1940 Act.
Pricing of shares of the Portfolio does not occur on New York Stock Exchange (“NYSE”) holidays. The NYSE is open for trading every weekday except for: (a) the following holidays: New Year's Day, Martin Luther King, Jr.'s Birthday,
Washington's Birthday (the third Monday in February), Good Friday, Memorial Day, Juneteenth National Independence
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day; and (b) the preceding Friday or the subsequent Monday when one of the calendar-determined holidays falls on a Saturday or Sunday, respectively. Purchases and withdrawals
will be effected at the time of determination of NAV next following the receipt of any purchase or withdrawal order, which is determined to be in good order. The Portfolio's
securities will be valued pursuant to guidelines established by the Board.
The Portfolio seeks to maintain a constant price per share of $1.00 for purposes of sales and redemptions of shares by using the amortized cost valuation method to value its portfolio instruments in accordance with Rule 2a-7 under the 1940
Act. There can be no assurance that the $1.00 NAV per share will be maintained. The amortized cost method involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium,
even though the portfolio security may increase or decrease in market value, generally in response to changes in interest rates. While this method provides certainty in valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Portfolio would receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on the Portfolio's
shares computed by dividing the annualized daily income on the Portfolio's portfolio by the NAV based upon the amortized cost valuation technique may tend to be higher than a similar computation made by using a method of valuation based upon market prices and estimates
thereof. In periods of rising interest rates, the daily yield on the Portfolio's shares computed the same way may tend to be lower than a similar computation made by using a method
of calculation based upon market prices and estimates.
The Board has determined, in good faith, that it is in the best interests of the Portfolio and its shareholders to maintain a
stable NAV per share by virtue of the amortized cost method. The Trustees have established procedures reasonably
designed to stabilize the Portfolio's price per share at $1.00. These procedures include: (1) the determination of the deviation from $1.00, if any, of the Portfolio's NAV using market values; (2) periodic review by the Trustees of the amount
of and the methods used to calculate the deviation; and (3) maintenance of records of such determination. The Trustees will promptly consider what action, if any, should be taken if such deviation exceeds 1/2 of one percent.
In accordance with certain federal regulations, the Trust is required to obtain, verify and record information that identifies each entity that applies to open an account, including, in certain cases, information concerning such entity's beneficial
owners. For this reason, when you open (or change ownership of) an account, the Trust will request certain information, including your name, address and taxpayer identification number, which will be used to verify your identity. If you are
unable to provide sufficient information to verify your identity, the Trust will not open an account for you. As required by law, the Trust may employ various procedures, such as comparing your information to fraud databases or requesting additional
information and documentation from you, to ensure that the information supplied by you is correct. The Trust reserves the right to reject any purchase for any reason, including failure to provide the Trust with information necessary to confirm your
identity as required by law.
Negative Interest Rate Environments
In the event of a negative interest rate
environment, the net income of the Portfolio may fall below zero (i.e., become negative). If this occurs, the Trustees may enact certain measures to seek to maintain a stable NAV
per share at $1.00 for the Portfolio. These measures may include the reduction or suspension of the issuance of dividends, the implementation of reverse distributions, or periodic reverse share splits, as necessary in the Trustees' judgment, to seek to maintain a
stable NAV per share at $1.00. The measures taken by the Trustees in an effort to stabilize the NAV per share at $1.00 are subject to applicable law and the provisions of the Portfolio's organizational documents. Investments in the Portfolio
are subject to the potential that the Trustees may enact such measures.
The Portfolio may also effect reverse distributions to offset the impact of the negative income on the Portfolio's NAV per
share, thereby reducing the number of shares outstanding and maintaining a stable NAV per share at $1.00. In a reverse distribution, the number of shares would be reduced on a pro rata basis from each shareholder. If there is a reverse share
split, the number of shares of the Portfolio will decrease, on a pro rata basis, as necessary to reflect the negative income of the Portfolio and maintain a stable NAV per share at $1.00.
Depending on the specific measure(s) taken, these measures would result in shareholders not receiving a dividend, holding
fewer shares of the Portfolio and/or experiencing a loss in the aggregate value of their investment in the Portfolio. There is no assurance that the Trustees will take such actions
or that such measures will result in a stable NAV per share of $1.00.
If the Trustees determine that it is no longer in the best interests of the Trust and its shareholders to maintain a stable price of $1.00 per share or if the Trustees believe that maintaining such price no longer reflects a market based NAV, the
Trustees have the right to change from an amortized cost basis of valuation to valuation based on market quotations. If the Portfolio changes from an amortized cost basis of valuation to valuation based on market quotations, the Portfolio's
losses would be reflected in the Portfolio's share price. The Trust will notify shareholders of an applicable Portfolio of any such change from using an amortized cost basis of valuation to valuation based on market quotations.
U.S. FEDERAL INCOME TAXES
The following discussion of certain U.S. federal income tax consequences of an investment in the Portfolio is based on the
Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations, and other
applicable authority, as of the date of this Part B. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of the important U.S. federal income tax
considerations generally applicable to investments in the Portfolio. This summary does not purport to be a complete description of the U.S. federal income tax considerations applicable to an investment in shares of the Portfolio. There may
be other tax considerations applicable to particular shareholders.
Shareholders should consult their own tax advisors regarding their particular situation and the possible application of foreign, state and local tax laws.
Special tax rules apply to investments through defined contribution plans and other tax-qualified plans or tax-advantaged
arrangements. Shareholders should consult their tax advisers to determine the suitability of shares of the Portfolio as an investment through such plans and arrangements and the precise effect of an investment on their particular tax situations.
Qualification as a Regulated Investment Company
The Portfolio has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Code and intends each year to qualify and be eligible to be treated as such. In order to qualify
for the special tax treatment accorded RICs and their shareholders, the Portfolio must, among other things, (a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, gains from the sale of securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or currencies and (ii) net income derived from interests in “qualified publicly traded
partnerships” (as defined below); (b) diversify its holdings so that, at the end of each quarter of the Portfolio's taxable year, (i) at least 50% of the value of the Portfolio's total assets consists of cash and cash items (including receivables), U.S. Government securities, securities of other RICs, and other securities limited in respect
of any one issuer to a value not greater than 5% of the value of the Portfolio's total assets and no more than 10% of the outstanding voting securities of such issuer, and (ii) no more than 25% of its assets are invested, including through
corporations in which the Portfolio owns a 20% or more voting stock interest, (x) in the securities (other than those of the U.S. Government or other RICs) of any one issuer or of two or more issuers which the Portfolio controls and which are
engaged in the same, similar or related trades and
businesses, or (y) in the securities of one or more qualified publicly traded partnerships (as defined below); and (c) distribute with respect to each taxable year at least 90% of
the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid — generally taxable ordinary income and the excess, if any, of net short-term capital gains over net long-term capital
losses) and net tax-exempt income, for such year.
In general, for purposes of the 90% gross income requirement described in (a) above, income derived from a partnership will
be treated as qualifying income only to the extent such income is attributable to items of income of the partnership which would be qualifying income if realized directly by the
RIC. However, 100% of the net income derived from an interest in a qualified publicly traded partnership (a partnership (x) the interests in which are traded on an established
securities market or are readily tradable on a secondary market or the substantial equivalent thereof, and (y) that derives less than 90% of its income from the qualifying income described in section (a)(i) of the preceding paragraph), will be treated as
qualifying income. In general, qualified publicly traded partnerships will be treated as partnerships for U.S. federal income tax purposes, because they meet the passive income requirement under Code Section 7704(c)(2). Further, although in general
the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to items attributable to an interest in a qualified publicly traded
partnership.
For purposes of the diversification test in (b) above, the
term “outstanding voting securities of such issuer” will include the equity securities of a
qualified publicly traded partnership. Also, for purposes of the diversification test in (b) above, the identification of the issuer (or, in some cases, issuers) of a particular
investment can depend on the terms and conditions of that investment. In some cases, identification of the issuer (or issuers) is uncertain under current law, and an adverse
determination or future guidance by the Internal Revenue Service (“IRS”) with respect to issuer identification for a
particular type of investment may adversely affect the Portfolio's ability to meet the diversification test in (b) above.
If the Portfolio qualifies as a RIC that is accorded special tax treatment, the Portfolio
will not be subject to U.S. federal income tax on income or gains distributed in a timely manner to its shareholders in the form of dividends (including Capital Gain Dividends, as defined below). If the Portfolio were to fail to meet the income, diversification or distribution test
described above, the Portfolio could in some cases cure such failure, including by paying a Portfolio-level tax, paying interest, making additional distributions, or disposing of certain assets. If the Portfolio were ineligible to or otherwise did not cure such failure for any year, or if the Portfolio were otherwise to fail to qualify as a RIC accorded special tax
treatment in any taxable year, the Portfolio would be subject to tax at the Portfolio level on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income (if any) and net
long-term capital gains, would be taxable to shareholders as ordinary income. Some portions of such distributions may be eligible for the dividends-received deduction in the case of corporate shareholders and may be eligible to be treated as
“qualified dividend
income” in the case of shareholders taxed as individuals, provided, in both cases, the shareholder
meets certain holding period and other requirements in respect of the Portfolio's shares (as described below). In addition, the Portfolio could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial
distributions before re-qualifying as a RIC that is accorded special tax treatment.
The Portfolio intends to distribute at least annually to its shareholders all or substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction) and its net tax-exempt income (if any), and may
distribute its net capital gain (that is, the excess of net long-term capital gain over net short-term capital loss, in each case determined with reference to any loss
carryforwards). Any taxable income retained by the Portfolio will be subject to tax at the Portfolio level at regular corporate rates. In the case of net capital gain, the
Portfolio is permitted to designate the retained amount as undistributed capital gain in a timely notice to its shareholders who would then, in turn, be (a) required to include in income for U.S. federal income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (b) entitled to credit their proportionate shares of the tax paid by the Portfolio on such undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds on a properly-filed U.S. tax return to the extent the credit exceeds such liabilities. If the Portfolio makes this designation, for U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder of the Portfolio will be increased by an amount equal to the difference between the amount of undistributed capital gains included in the shareholder's gross income under clause (a) of
the preceding sentence and the tax deemed paid by the shareholder under clause (b) of the preceding sentence. The Portfolio is not required to, and there can be no assurance the
Portfolio will, make this designation if it retains all or a portion of its net capital gain in a taxable year.
In determining its net capital gain, including in connection with determining the amount
available to support a Capital Gain Dividend (as defined below), its taxable income, and its earnings and profits, a RIC generally may elect to treat part or all of any post-October capital loss (defined as any net capital loss attributable to the portion, if any, of the taxable year after
October 31 or, if there is no such loss, the net
long-term capital loss or net short-term capital loss attributable to any such portion of the taxable year) or late-year ordinary loss (generally, the sum of its (i) net ordinary
loss, if any, from the sale, exchange or other taxable disposition of property, attributable to the portion, if any, of the taxable year after October 31, and its (ii) other net ordinary loss, if any, attributable to the portion of the taxable year, if any, after December 31) as if incurred in the succeeding taxable year.
If the Portfolio were to fail to distribute in a calendar year at least an amount equal to the sum of 98% of its ordinary
income for such year and 98.2% of its capital gain net income for the one-year period ending October 31 of such year (or for the one-year period ending November 30 or December 31, if the Portfolio is eligible to elect and so elects), plus any
such amounts retained from the prior year, the Portfolio would be subject to a nondeductible 4% excise tax on the
undistributed amounts. For purposes of the required excise tax distribution, a RIC's ordinary gains and losses from the sale, exchange or other taxable disposition of property that would otherwise be taken into account after October 31 of a
calendar year (or November 30 of that year, if the RIC makes the election described above) generally are treated as arising on January 1 of the following calendar year; in the case of a RIC with a December 31 year end that makes the
election described above, no such gains or losses will be so treated. Also, for these purposes, the Portfolio will be treated as having distributed any amount on which it is subject to corporate income tax for the taxable year ending within the
calendar year. The Portfolio intends generally to make distributions sufficient to avoid imposition of the 4% excise tax although there can be no assurance it will do so. Distributions declared by the Portfolio during October, November and
December to shareholders of record on a date in any such month and paid by the Portfolio during the following January will be treated for U.S. federal tax purposes as paid by the Portfolio and received by shareholders on December 31 of the
year in which declared. In addition, if the Portfolio were to qualify as a “personal holding company,” it might have to
comply with additional requirements with respect to its distributions to shareholders in order to avoid the fund-level tax under the personal holding company rules of the Code.
Capital losses in excess of capital gains (“net
capital losses”) are not permitted to be deducted against the Portfolio's net investment income. Instead, potentially subject to certain limitations, the Portfolio may carry net capital losses from any
taxable year forward to subsequent taxable years to offset capital gains, if any, realized during such subsequent taxable years. Capital loss carryforwards are reduced to the extent they offset current-year net realized capital gains, whether the
Portfolio retains or distributes such gains. The Portfolio may carry net capital losses forward to one or more subsequent taxable years without expiration; any such carryforward losses will retain their character as short-term or long-term. The
Portfolio must apply such carryforwards first against gains of the same character.
Taxation of Distributions Received by Shareholders
For U.S. federal income tax purposes, distributions of investment income are generally
taxable to shareholders as ordinary income. Taxes on distributions of capital gains are determined by how long the Portfolio owned (or is deemed to have owned) the investments that generated them, rather than how long a shareholder has owned his or her Portfolio shares. In
general, the Portfolio will recognize long-term capital gain or loss on the disposition of assets the Portfolio has owned (or is deemed to have owned) for more than one year, and short-term capital gain or loss on the disposition of investments the
Portfolio has owned (or is deemed to have owned) for one year or less. Tax rules can alter the Portfolio's holding period in investments and thereby affect the tax treatment of gain or loss on such investments. Distributions of net capital gain
properly reported by the Portfolio as capital gain dividends (“Capital Gain Dividends”) generally will be
taxable to a shareholder receiving such distributions as long-term capital gains includible in net capital gain and taxed to individuals at reduced rates relative to ordinary income. The IRS and the Department of the Treasury have issued regulations that impose
special rules in respect of Capital Gain Dividends received through partnership interests constituting
“applicable partnership
interests” under Section 1061 of the Code. Distributions of net short-term capital gain (as reduced by
any net long-term capital loss for the taxable year) will be taxable to shareholders as ordinary income. Distributions of investment income properly reported by the Portfolio as derived from “qualified dividend income” will be taxed in the
hands of individuals at the rates applicable to net long-term capital gain, provided holding period and other requirements are met at both the shareholder and Portfolio level. The Portfolio does not expect to realize any significant long-term capital gains or
losses or qualified dividend income.
The Code generally imposes a 3.8% Medicare contribution tax on the net investment income of certain individuals, trusts and
estates to the extent their income exceeds certain threshold amounts. For these purposes, “net investment
income” generally
includes, among other things, (i) distributions paid by the Portfolio of net investment income and capital gains, and (ii) any net gain from the sale, redemption, exchange or other
taxable disposition of Portfolio shares. Shareholders are advised to consult their tax advisors regarding the possible implications of this additional tax on their investment in
the Portfolio.
Shareholders of the Portfolio will be subject to
U.S. federal income taxes as described herein on distributions made by the Portfolio whether received in cash or reinvested in additional shares of the Portfolio.
If, in respect to any taxable year, the Portfolio makes a distribution to a shareholder in
excess of the Portfolio's current and accumulated earnings and profits in any taxable year, the excess distribution will be treated as a return of capital to the extent of such shareholder's tax basis in its shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a shareholder's tax basis in its shares, thus reducing any loss or increasing any gain on a subsequent taxable
disposition by the shareholder of its shares.
Distributions with respect to the Portfolio's shares are generally subject to U.S. federal income tax as described herein to
the extent they do not exceed the Portfolio's realized income and gains, even though such distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares
purchased at a time when the Portfolio's NAV includes either unrealized gains, or realized but undistributed income or gains that were therefore included in the price the shareholder paid. Such distributions may reduce the fair market value of
the Portfolio's shares below the shareholder's cost basis in those shares. As described above, the Portfolio is required to distribute realized income and gains regardless of whether the Portfolio's NAV also reflects unrealized losses.
In order for some portion of the dividends received by the Portfolio shareholder to be
“qualified dividend
income” that is eligible for
taxation at long-term capital gain rates, the Portfolio must meet holding period and other requirements with respect to the dividend-paying stocks held by the Portfolio and the
shareholder must meet holding period and other requirements with respect to some portion of the Portfolio's shares. In general, a dividend will not be treated as qualified dividend income (at either the Portfolio or shareholder level) (a) if the dividend is received with respect to any share of
stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days
during the 181-day period beginning 90 days before such date), (b) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar
or related property, (c) if the recipient elects to have the dividend income treated as investment income for purposes of the limitation on deductibility of investment interest, or (d) if the dividend is received from a foreign corporation that is (i) not eligible for the benefits of a comprehensive income tax treaty with the United States (with the exception of dividends paid
on stock of such a foreign corporation readily tradable on an established securities market in the United States) or (ii) treated as a passive foreign investment company.
In general, distributions of investment income properly reported by the Portfolio as derived from qualified dividend income
will be treated as qualified dividend income in the hands of a shareholder taxed as an individual, provided the shareholder meets the holding period and other requirements described above with respect to the Portfolio's shares. If the aggregate
qualified dividends received by the Portfolio during any taxable year are 95% or more of the Portfolio's gross income (excluding net long-term capital gain over net short-term capital loss), then 100% of the Portfolio's dividends (other than
dividends properly reported as Capital Gain Dividends) will be eligible to be treated as qualified dividend income. Since the Portfolio primarily holds investments that do not pay dividends, it is not expected that a substantial portion (if any) of
the dividends paid by the Portfolio will qualify for the favorable income tax rates available to individuals on qualified dividend income.
In general, dividends of net investment income received by corporate shareholders of the Portfolio will qualify for the dividends-received deduction generally available to corporations to the extent of the amount of eligible dividends received
by the Portfolio from domestic corporations for the taxable year. A dividend will not be treated as a dividend eligible for the dividends-received deduction (a) if it has been received with respect to any share of stock that the Portfolio has held for
less than 46 days (91 days in the case of certain preferred stock) during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend (during the 181-day period
beginning 90 days before such date in the case of certain preferred stock) or (b) to the extent that the Portfolio is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or related property. Moreover, the dividends-received deduction may otherwise be disallowed or reduced (x) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of the
Portfolio or (y) by application of various provisions of the Code (for instance, the dividends-received deduction is reduced in the case of a dividend received on debt-financed portfolio stock (generally, stock acquired with borrowed funds)). Since
the Portfolio primarily holds investments that do not pay dividends, it is not expected that a substantial portion (if any) of the dividends paid by the Portfolio will qualify for the dividends-received deduction for corporations.
Any distribution of income that is attributable to
(i) income received by the Portfolio in lieu of dividends with respect to securities on loan pursuant to a securities lending transaction or (ii) dividend income received by the
Portfolio on securities it temporarily purchased from a counterparty pursuant to a repurchase agreement that is treated for U.S. federal income tax purposes as a loan by the Portfolio, will not constitute qualified dividend income to individual shareholders and will not
be eligible for the dividends-received deduction for corporate shareholders.
As required by federal law, detailed federal tax information with respect to each calendar year will be furnished to each shareholder early in the succeeding year.
Redemptions and Exchanges
Redemptions and exchanges of the Portfolio's shares are taxable events. If the NAV of Portfolio shares were to vary from
$1.0000 per share, shareholders generally would realize a gain or loss upon the redemption or other taxable disposition of such Portfolio shares. Any such gain would be taxable to you as either short-term or long-term capital gain, depending upon
how long you held such Portfolio shares, except that, as and where the Portfolio is not a “publicly
offered” RIC (as described below),
in certain circumstances it is possible that the proceeds of a redemption of Portfolio shares may be taxable as dividend income or a return of capital.
A RIC is considered
“publicly offered” if its shares are continuously offered pursuant to a public offering, its shares are regularly traded on an established
securities exchange, or it has at least 500 shareholders at all times during a taxable year. Because shares of the Portfolio are not so registered or traded, and the Portfolio is
not expected to have at least 500 shareholders at all times during the taxable year, a portion or all the proceeds of redemptions of Portfolio shares may be treated as dividends. If a shareholder redeems fewer than all of its shares, such shareholder may be treated as having
received a distribution under Section 301 of the Code (a “Section 301 distribution”) unless the redemption
is treated as being either (i)
“substantially
disproportionate” with respect to such shareholder by satisfying certain numerical tests relating to the reduction in the redeeming shareholder's percentage interest, and percentage voting interest, in the
Portfolio, or (ii) otherwise “not
essentially equivalent to a dividend” under the relevant rules of the Code. For any period during which the Portfolio has a single shareholder, all redemption distributions will be treated as Section 301 distributions. A Section 301 distribution is not treated as a sale or exchange giving rise to a capital gain or loss, but rather is treated as a dividend to the extent supported by the Portfolio's current and accumulated earnings and profits, with the excess treated as
a return of capital reducing the shareholder's tax basis in the Portfolio shares, and thereafter as capital gain.
In addition, as and where the Portfolio is not considered so publicly offered, certain shareholders will be deemed to
receive distributions equal to their allocable shares of certain expenses paid by the Portfolio. Very generally, expenses that are deemed distributed by the Portfolio include those paid or incurred during a calendar year that are deductible in
determining the Portfolio's investment company taxable income for a taxable year beginning or ending within that calendar year, including in particular its advisory fee, but excluding those expenses incurred by virtue of the Portfolio's organization as a registered investment company (such as its registration fees, trustees' fees, expenses of periodic trustees' and
shareholders' meetings, transfer agent fees, certain legal and accounting fees, the expenses of shareholder
communications required by law, and certain other expenses). Shareholders of the Portfolio that will be deemed to have received distributions of such expenses include (i) individuals taxable in the U.S. or persons calculating their taxable
income in the same way as do such individuals and (ii) pass-through entities having such an individual or person or another pass-through entity as an interest holder or beneficiary. Such deemed distributions of expenses are not deductible
under current law by those direct or indirect shareholders who are individuals (or entities that compute their taxable income in the same manner as an individual). The deemed distributions of expenses could as a result increase a shareholder's
net taxes owed, lowering the Portfolio's effective yield with respect to such a shareholder.
The IRS permits a simplified method of accounting for gains and losses realized upon the disposition of shares of a RIC that
is a money market fund. Very generally, rather than realizing gain or loss upon each redemption of a share, a Portfolio shareholder using such method of accounting will recognize
gain or loss with respect to Portfolio shares for a given computation period (the shareholder's taxable year or shorter period selected by the shareholder) equal to the value of
all the Portfolio shares held by the shareholder on the last day of the computation period, less the value of all Portfolio shares held by the shareholder on the last day of the preceding computation period, less the shareholder's net investment in
the Portfolio (generally, purchases minus redemptions) made during the computation period. Under this simplified method, any resulting net capital gain or loss would be treated as
short-term capital gain or loss.
Tax Implications of
Certain Portfolio Investments
Special Rules for Debt
Obligations. Some debt obligations with a fixed maturity date of more than one year from the date of issuance
(and zero-coupon debt obligations with a fixed maturity date of more than one year from the date of issuance) will be treated as debt obligations that are issued originally at a
discount. Generally, OID is treated as interest income and is included in the Portfolio's income and required to be distributed by the Portfolio over the term of the debt security,
even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt obligation. In addition, payment-in-kind securities will give rise to income which is required to be distributed and is taxable even though the Portfolio holding the security receives no interest payment in cash on the security during the year. An
investor that receives an in-kind distribution of property from a Portfolio may be required to recognize taxable gain or loss upon a subsequent taxable disposition of that property.
Some debt obligations with a fixed maturity date of more than one year from the date of issuance that are acquired in the
secondary market by the Portfolio may be treated as having “market discount.” Very generally, market discount
is the excess of the stated redemption price of a debt obligation (or in the case of an obligation issued with OID, its “revised issue price”) over the purchase price of such obligation. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt obligation having market discount is treated as ordinary income to the extent the
gain, or principal payment, does not exceed the “accrued market discount” on such debt obligation.
Alternatively, the Portfolio may elect to accrue market discount currently, in which case the Portfolio will be required to include the accrued market discount in income (as ordinary income) and thus distribute it over the term of the debt obligation, even though
payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt obligation. If the Portfolio makes the election referred to in the preceding sentence, then the rate at which the market
discount accrues, and thus is included in the Portfolio's income, will depend upon which of the permitted accrual methods the Portfolio elects.
Some debt obligations with a fixed maturity date of one year or less from the date of issuance may be treated as having OID
or, in certain cases, “acquisition discount” (very generally, the excess of the stated redemption price over the purchase price). The Portfolio will be required to include the OID or acquisition discount in income (as ordinary income)
and thus distribute it over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt security. The rate at which OID or acquisition discount
accrues, and thus is included in the Portfolio's income, will depend upon which of the permitted accrual methods the Portfolio elects.
If the Portfolio holds the foregoing kinds of obligations or other obligations subject to special rules under the Code, the Portfolio may be required to pay out as an income distribution each year an amount which is greater than the total amount of
cash interest the Portfolio actually received. Such distributions may be made from the cash assets of the Portfolio or, if necessary, by disposition of portfolio securities,
including at a time when it may not be advantageous to do so. These dispositions may cause the Portfolio to realize higher amounts of short-term capital gains (generally taxed to
shareholders at ordinary income tax rates) and, in the event the Portfolio realizes net capital gains from such transactions, its shareholders may receive a larger Capital Gain Dividend than they would have if the Portfolio had not held such
obligations.
A portion of the OID accrued on certain high yield discount obligations may not be deductible to the issuer and will instead
be treated as a dividend paid by the issuer for purposes of the dividends-received deduction. In such cases, if the issuer of the high yield discount obligations is a domestic corporation, dividend payments by the Portfolio may be eligible for the
dividends-received deduction to the extent attributable to the deemed dividend portion of such OID.
Securities Purchased at a Premium. Very generally, where the Portfolio purchases a bond at a price that exceeds the redemption price at maturity — that
is, at a premium — the premium is amortizable over the remaining term of the bond. In the case of a taxable bond, if the Portfolio makes an election applicable to all such
bonds it purchases, which election is irrevocable without consent of the IRS, the Portfolio reduces the current taxable income from the bond by the amortized premium and reduces its tax basis in the bond by the amount of such offset; upon the disposition or maturity of such bonds
acquired on or after January 4, 2013, the Portfolio is permitted to deduct any remaining premium allocable to a prior period.
At-risk or Defaulted Debt Obligations. Investments in debt obligations that are at risk of or in default present special tax issues for the Portfolio. Tax rules
are not entirely clear about issues such as when the Portfolio may cease to accrue interest, OID or market discount; whether, when or to what extent the Portfolio should recognize
market discount on such debt obligations; when and to what extent the Portfolio may take deductions for bad debts or worthless securities; and how
the Portfolio should allocate payments received on
obligations in default between principal and income. These and other related issues will be addressed by the Portfolio when, as and if it invests in such obligations, in order to
seek to ensure that it distributes sufficient income to preserve its status as a RIC and does not become subject to U.S. federal income or excise tax.
Certain Investments in REITs. Any investment by the Portfolio in equity securities of real estate
investment trusts qualifying as such under Subchapter M of the Code (“REITs”) may result in the Portfolio's receipt of
cash in excess of the REIT's earnings; if the Portfolio distributes these amounts, these distributions could constitute a return of capital to Portfolio shareholders for U.S. federal income tax purposes. Dividends received by the Portfolio from a REIT will not qualify
for the corporate dividends-received deduction and generally will not constitute qualified dividend income.
Distributions by the Portfolio to its shareholders that the Portfolio properly reports as
“Section 199A
dividends,” as defined and subject
to certain conditions described below, are treated as qualified REIT dividends in the hands of non-corporate shareholders. Non-corporate shareholders are permitted a U.S. federal
income tax deduction equal to 20% of qualified REIT dividends received by them, subject to certain limitations. Very generally, a “Section 199A dividend” is any dividend or portion thereof that is attributable to certain dividends received by a RIC from REITs, to the extent
such dividends are properly reported as such by the RIC in a written notice to its shareholders. A Section 199A dividend is treated as a qualified REIT dividend only if the shareholder receiving such dividend holds the dividend-paying RIC shares for at least 46
days of the 91-day period beginning 45 days before the shares become ex-dividend, and is not under an obligation to make related payments with respect to a position in
substantially similar or related property. The Portfolio is permitted to report such part of its dividends as Section 199A dividends as are eligible, but is not required to do
so.
Certain Investments in Mortgage Pooling
Vehicles. Special rules may apply if the Portfolio invests, directly or indirectly, in residual interests in
real estate mortgage investment conduits (“REMICs”) (including by investing in residual interests in
CMOs with respect to which an election to be treated as a REMIC is in effect) or equity interests in taxable mortgage pools (“TMPs”). Under a notice issued by the IRS in October 2006 and Treasury regulations that have yet to be issued but may apply retroactively, a portion of the Portfolio's income (including income allocated to the Portfolio from certain pass-through entities) that is attributable to a residual interest in a REMIC or an equity interest in a TMP (referred to in the Code as
an “excess inclusion”) will be subject to U.S. federal income tax in all events. This notice also provides, and the regulations are expected to
provide, that excess inclusion income of a RIC, such as the Portfolio, will be allocated to shareholders of the RIC in proportion to the dividends received by such shareholders,
with the same consequences as if the shareholders held the related interest directly. As a result, a RIC investing in such securities may not be a suitable investment for charitable remainder trusts
(“CRTs”), as noted below.
In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions), (ii) will constitute unrelated business taxable income (“UBTI”) to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt
entity) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess inclusion income, and that otherwise might not be required to file a tax return, to file a tax return and pay tax on such income, and (iii) in the case of a foreign shareholder will not qualify for any reduction in U.S. federal withholding tax. A shareholder will be subject to
U.S. federal income tax on such inclusions notwithstanding any exemption from such income tax otherwise available under the Code.
Foreign Currency Transactions. Any transaction by the Portfolio in foreign currencies, foreign
currency-denominated debt obligations or certain foreign currency options, futures contracts or forward contracts (or similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency
concerned. Any such net gains could require a larger dividend toward the end of the calendar year. Any such net losses will generally reduce and potentially require the recharacterization of prior ordinary income distributions. Such ordinary
income treatment may accelerate the Portfolio's distributions to shareholders and increase the distributions taxed to shareholders as ordinary income. Any net ordinary losses so created cannot be carried forward by the Portfolio to offset
income or gains earned in subsequent taxable years.
Options and Futures. In general, option premiums received by the Portfolio are not immediately included in
the income of the Portfolio. Instead, the premiums are recognized when the option contract expires, the option is exercised by the holder, or the Portfolio transfers or otherwise terminates the option (e.g., through a closing transaction). If a call option written by the Portfolio is exercised and the Portfolio sells or delivers the underlying stock, the Portfolio generally will recognize
capital gain or loss equal to (a) the sum of the strike price and the option premium received by the Portfolio minus (b) the Portfolio's basis in the stock. Such gain or loss generally will be short-term or long-term depending upon the holding
period of the underlying stock. If securities are purchased by the Portfolio pursuant to the exercise of a put option written
by it, the Portfolio generally will subtract the
premium received for purposes of computing its cost basis in the securities purchased. Gain or loss arising in respect of a termination of the Portfolio's obligation under an
option other than through the exercise of the option will be short-term gain or loss depending on whether the premium income received by the Portfolio is greater or less than the amount paid by the Portfolio (if any) in terminating the transaction. Subject to certain
exceptions, some of which are described below, such gain or loss will be short-term. Thus, for example, if an option written by the Portfolio expires unexercised, the Portfolio generally will recognize short-term gain equal to the premium
received.
The Portfolio's options activities may include transactions constituting straddles for U.S. federal income tax purposes, that is, that trigger the U.S. federal income tax straddle rules contained primarily in Section 1092 of the Code. Such straddles
include, for example, positions in a particular security, or an index of securities, and one or more options that offset the former position, including options that are
“covered” by the Portfolio's long position in the subject security. Very generally, where applicable, Section 1092 requires (i) that
losses be deferred on positions deemed to be offsetting positions with respect to “substantially similar or related property,” to
the extent of unrealized gain in the latter, and (ii) that the holding period of such a straddle position that has not already been held for the long-term holding period be
terminated and begin anew once the position is no longer part of a straddle. Options on single stocks that are not “deep in the money” may constitute qualified covered calls, which generally are not subject to the straddle rules; the holding period on stock
underlying qualified covered calls that are “in the money” although not “deep in the money” will be suspended during the period that such calls are outstanding. Thus, the straddle rules and the rules governing
qualified covered calls could cause gains that would otherwise constitute long-term capital gains to be treated as short-term capital gains, and distributions that would otherwise constitute “qualified
dividend income” or qualify for the dividends-received deduction to fail to satisfy the holding period requirements and therefore to be taxed as ordinary income or fail to qualify for the dividends-received
deduction, as the case may be.
The tax treatment of certain positions entered into by the Portfolio, including regulated futures contracts, certain foreign
currency positions and certain listed non-equity options, will be governed by Section 1256 of the Code
(“Section 1256 contracts”). Gains or losses on Section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses (“60/40”), although certain foreign currency gains and losses from such contracts may be treated as ordinary in character. Also, Section 1256 contracts held by the Portfolio at the end of each taxable year (and, for
purposes of the 4% excise tax, on certain other dates as prescribed under the Code) are “marked to market” with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as
ordinary or 60/40 gain or loss, as applicable.
Other Derivatives, Hedging, and Related Transactions. In addition to the special rules described above in
respect of futures and options transactions, the Portfolio's transactions in other derivative instruments (e.g., forward contracts and swap agreements), as well as any of its hedging, short sale, securities loan or similar transactions, may be subject to one
or more special tax rules (e.g., notional principal contract, straddle, constructive sale, wash sale and short sale rules). These rules may affect whether gains and losses recognized by the Portfolio are treated as ordinary or capital, accelerate
the recognition of income or gains to the Portfolio, defer losses to the Portfolio, and cause adjustments in the holding periods of the Portfolio's securities, thereby affecting, among other things, whether capital gains and losses are treated as
short-term or long-term. These rules could therefore affect the amount, timing and/or character of distributions to shareholders.
Because these and other tax rules applicable to these types of transactions are in some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance
could be retroactive) may affect whether the Portfolio has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a RIC and avoid a Portfolio-level tax.
Commodity-Linked Instruments. The Portfolio's direct or indirect
investments in commodities and commodity-linked instruments can be limited by the Portfolio's intention to qualify as a RIC, and can bear on the Portfolio's ability to so qualify. Income and gains from commodities and certain commodity-linked instruments do not constitute qualifying income to a
RIC for purposes of the 90% gross income test described above. The tax treatment of some other commodity-linked instruments in which the Portfolio might invest is not certain, in
particular with respect to whether income or gains from such instruments constitute qualifying income to a RIC. If the Portfolio were to treat income or gain from a particular
instrument as qualifying income and the income or gain were later determined not to constitute qualifying income and, together with any other nonqualifying income, caused the Portfolio's nonqualifying income to exceed 10% of its gross income
in any taxable year, the Portfolio would fail to qualify as a RIC unless it is eligible to and does pay a tax at the Portfolio level.
Book-Tax Differences. Certain of the Portfolio's investments in derivative instruments and foreign currency-denominated instruments, and any of
the Portfolio's transactions in foreign currencies and hedging activities, are likely to produce a difference between its book income and the sum of its taxable income and net
tax-exempt income (if any). If such a difference arises, and the Portfolio's book income is less than the sum of its taxable income and net tax-exempt income, the Portfolio could be required to make distributions exceeding book income to qualify as a RIC that is accorded special tax
treatment and to avoid an entity-level tax. In the alternative, if the Portfolio's book income exceeds the sum of its taxable income (including realized capital gains) and net
tax-exempt income, the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of the Portfolio's remaining earnings and profits (including
earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the recipient's basis in its shares, and (iii) thereafter as gain from the sale or exchange of a capital asset.
The Portfolio generally is required to withhold and remit to the U.S. Treasury a percentage of the taxable distributions and
redemption proceeds paid to any individual shareholder who fails to properly furnish the Portfolio with a correct taxpayer identification number (“TIN”), who has under-reported dividend or interest income, or who fails to certify to the Portfolio that he or she is not subject to such withholding.
Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal
income tax liability, provided the appropriate information is furnished to the IRS.
Income of a RIC that would be UBTI if earned directly by a tax-exempt entity generally will not constitute UBTI when distributed to a tax-exempt shareholder of the RIC. Notwithstanding this “blocking” effect, a tax-exempt shareholder could
realize UBTI by virtue of its investment in the Portfolio if shares in the Portfolio constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).
A tax-exempt shareholder may also recognize UBTI if the Portfolio recognizes
“excess inclusion
income” derived from direct or
indirect investments in residual interests in REMICs or equity interests in TMPs as described above if the amount of such income recognized by the Portfolio exceeds the Portfolio's
investment company taxable income (after taking into account deductions for dividends paid by the Portfolio).
In addition, special tax consequences apply to CRTs that invest in RICs that invest
directly or indirectly in residual interests in REMICs or equity interests in TMPs. Under legislation enacted in December 2006, a CRT (as defined in Section 664 of the Code) that realizes any UBTI for a taxable year must pay an excise tax annually of an amount equal to such UBTI. Under
IRS guidance issued in October 2006, a CRT will not recognize UBTI as a result of investing in a RIC that recognizes “excess inclusion income.” Rather, if at any time during any taxable year a CRT (or one of certain other tax-exempt shareholders, such as the United
States, a state or political subdivision, or an agency or instrumentality thereof, and certain energy cooperatives) is a record holder of a share in a RIC that recognizes “excess inclusion income,” then the RIC will be subject to a tax on that portion of its “excess inclusion income” for the taxable year that is allocable to such shareholders at the highest U.S. federal corporate income tax rate. The
extent to which this IRS guidance remains applicable in light of the December 2006 legislation is unclear. To the extent permitted under the 1940 Act, the Portfolio may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such shareholder's
distributions for the year by the amount of the tax that relates to such shareholder's interest in the Portfolio. CRTs and other tax-exempt investors are urged to consult their tax
advisors concerning the consequences of investing in the Portfolio.
Under U.S. Treasury regulations, if a shareholder recognizes a loss of at least $2 million in any single taxable year or $4 million in any combination of taxable years for an individual shareholder or at least $10 million in any taxable year or $20
million in any combination of taxable years for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC are not excepted. Future guidance may extend the
current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper.
Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Non-U.S.
Shareholders
Non-U.S. shareholders in the Portfolio should consult their tax
advisors concerning the tax consequences of ownership of shares in the Portfolio. Distributions by the Portfolio to shareholders that are not “U.S. persons” within the meaning of the Code (“foreign shareholders”) properly reported by the
Portfolio as (1) Capital Gain Dividends, (2) short-term capital gain dividends, and (3) interest-related dividends, each as defined and subject to certain conditions described
below, generally are not subject to withholding of U.S. federal income tax.
In general, the Code defines (1) “short-term capital gain dividends” as
distributions of net short-term capital gains in excess of net long-term capital losses and (2) “interest-related dividends” as distributions from
U.S.-source interest income of types similar to those not subject to U.S. federal income tax if earned directly by an individual foreign shareholder, in each case to the extent such distributions are properly reported as such by the Portfolio in a written notice to
shareholders. The exceptions to withholding for Capital Gain Dividends and short-term capital gain dividends do not apply to (A) distributions to an individual foreign shareholder who is present in the United States for a period or periods
aggregating 183 days or more during the year of the distribution and (B) distributions attributable to gain that is treated as effectively connected with the conduct by the foreign shareholder of a trade or business within the United States under
special rules regarding the disposition of “U.S. real property interests” (“USRPIs”) as described below. The exception to withholding for interest-related dividends does not apply to distributions to a
foreign shareholder (i) that has not provided a satisfactory statement that the beneficial owner is not a U.S. person, (ii) to the extent that the dividend is attributable to
certain interest on an obligation if the foreign shareholder is the issuer or is a 10% shareholder of the issuer, (iii) that is within certain foreign countries that have inadequate information exchange with the United States, or (iv) to the extent the
dividend is attributable to interest paid by a person that is a related person of the foreign shareholder and the foreign shareholder is a controlled foreign corporation. If the Portfolio invests in a RIC that pays Capital Gain Dividends to the
Portfolio, such distributions retain their character as not subject to withholding if properly reported when paid by the Portfolio to foreign shareholders. The Portfolio is permitted to report such parts of its dividends as are eligible to be
treated as interest-related or short-term capital gain dividends, but it is not required to do so. In the case of shares held through an intermediary, the intermediary may withhold even if the Portfolio reports all or a portion of a payment as an
interest-related or short-term capital gain dividend to shareholders.
Foreign shareholders should contact their intermediaries regarding the application of withholding rules to their accounts.
Distributions by the Portfolio to foreign shareholders other than Capital Gain Dividends,
short-term capital gain dividends and interest-related dividends (e.g., dividends attributable to dividend income or to short-term capital gains or U.S. source interest income to which the exception from withholding described above does not apply) are generally subject to withholding
of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate).
A foreign shareholder is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for
losses) realized on the sale of shares of the Portfolio unless (a) such gain is effectively connected with the conduct of a trade or business carried on by such holder within the United States, (b) in the case of an individual holder, the holder is
present in the United States for a period or periods aggregating 183 days or more during the year of the sale and certain other conditions are met, or (c) the special rules relating to gain attributable to the sale or exchange of USRPIs apply to
the foreign shareholder's sale of shares of the Portfolio (as described below).
Foreign shareholders with respect to whom income from the Portfolio is effectively connected with a trade or business conducted by the foreign person within the United States will in general be subject to U.S. federal income tax on the income
derived from the Portfolio at the graduated rates applicable to U.S. citizens, residents or domestic corporations, whether such income is received in cash or reinvested in shares
of the Portfolio and, in the case of a foreign corporation, may also be subject to a branch profits tax. If a foreign shareholder is eligible for the benefits of a tax treaty, any
effectively connected income or gain will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by the shareholder in the United States. More generally, foreign shareholders who are
residents in a country with an income tax treaty with the United States may obtain different tax results than those described herein, and are urged to consult their tax
advisors.
Special rules would apply if the Portfolio were a qualified
investment entity
(“QIE”) because it is either a “U.S. real property
holding corporation” (“USRPHC”) or would be a USRPHC but for the operation of certain exceptions to the definition of USRPIs described below. Very
generally, a USRPHC is a domestic corporation that holds USRPIs the fair market value of which equals or exceeds 50% of the sum of the fair market values of the corporation's
USRPIs, interests in real property located outside the United States, and other trade or business assets. USRPIs are generally defined as any interest in U.S. real property and any interest (other than solely as a creditor) in a USRPHC or, very generally, an entity that has been
a USRPHC in the last five years. A fund that
holds, directly or indirectly, significant interests in REITs may be a USRPHC. Interests in domestically controlled QIEs, including REITs and RICs that are QIEs,
not-greater-than-10% interests in publicly traded classes of stock in REITs and not-greater-than-5% interests in publicly traded classes of stock in RICs generally are not USRPIs, but these exceptions do not apply for purposes of determining whether the Portfolio is a QIE. If
an interest in the Portfolio were a USRPI, the Portfolio would be required to withhold U.S. tax on the proceeds of a share redemption by a greater-than-5% foreign shareholder, in which case such foreign shareholder generally would also be required
to file U.S. tax returns and pay any additional taxes due in connection with the redemption.
If the Portfolio were a QIE under a special
“look-through” rule, any distributions by the Portfolio to a foreign shareholder attributable directly or indirectly to (i) distributions
received by the Portfolio from a lower-tier RIC or REIT that the Portfolio is required to treat as USRPI gain in its hands and (ii) gains realized on the disposition of USRPIs by
the Portfolio, would retain their character as gains realized from USRPIs in the hands of the Portfolio's foreign shareholders and would be subject to U.S. tax withholding. In addition, such distributions could result in the foreign shareholder being required to file a U.S. tax return and pay tax on the distributions at regular U.S. federal income tax rates. The consequences to a foreign
shareholder, including the rate of such withholding and character of such distributions (e.g., as ordinary income or USRPI gain), would vary depending upon the extent of the foreign shareholder's current and past ownership of the Portfolio. The
Portfolio generally does not expect that it will be a QIE.
Foreign shareholders of the Portfolio also may be subject to “wash sale” rules to prevent the avoidance of the
tax-filing and –payment obligations discussed above through the sale and repurchase of Portfolio shares.
Foreign shareholders should consult their tax advisers and, if holding shares through
intermediaries, their intermediaries, concerning the application of these rules to their investment in the Portfolio.
In order for a foreign shareholder to qualify for any exemptions from withholding described
above or from lower withholding tax rates under income tax treaties, or to establish an exemption from back-up withholding, the foreign shareholder must comply with special certification and filing requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, IRS Form W-8BEN-E or substitute form). Foreign shareholders in the Portfolio should consult their tax
advisers in this regard.
Special rules (including withholding and reporting requirements) apply to foreign
partnerships and those holding Portfolio shares through foreign partnerships. Additional considerations may apply to foreign trusts and estates. Investors holding Portfolio shares through foreign entities should consult their tax advisers about their particular situation.
A foreign shareholder may be subject to state and local tax and to the U.S. federal estate
tax in addition to the U.S. federal income tax on income referred to above.
Shareholder Reporting Obligations with Respect to Foreign Bank and Financial Accounts
Shareholders that are U.S. persons and own, directly or indirectly, more than 50% of the
Portfolio by vote or value could be required to report annually their “financial interest” in the Portfolio's “foreign financial accounts,” if any, on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). Shareholders should consult a tax advisor, and persons investing in the Portfolio through an intermediary should contact
their intermediary, regarding the applicability to them of this reporting requirement.
Other Reporting and Withholding Requirements
Sections 1471-1474 of the Code and the U.S. Treasury and IRS guidance issued thereunder (collectively, “FATCA”) generally require the Portfolio to obtain information sufficient to identify the status of each of its shareholders under
FATCA or under an applicable intergovernmental agreement (an “IGA”) between the United States and a foreign
government. If a shareholder fails to provide the requested information or otherwise fails to comply with FATCA or an IGA, the Portfolio may be required to withhold under FATCA at a rate of 30% with respect to that shareholder on ordinary
dividends it pays. The IRS and the Department of Treasury have issued proposed regulations providing that these
withholding rules will not apply to the gross proceeds of share redemptions or Capital Gain Dividends the Portfolio pays. If a payment by the Portfolio is subject to FATCA withholding, the Portfolio is required to withhold even if such payment would
otherwise be exempt from withholding under the rules applicable to foreign shareholders described above (e.g., short-term capital gain dividends and interest-related
dividends).
Each prospective investor is urged to consult its tax adviser
regarding the applicability of FATCA and any other reporting requirements with respect to the prospective investor's own situation, including investments through an
intermediary.
General
Considerations
The U.S. federal income tax discussion set forth above is for
general information only. Prospective investors should consult their tax advisers regarding the specific U.S. federal income tax consequences of purchasing, holding, and disposing
of shares of the Portfolio, as well as the effects of state, local, foreign, and other tax laws and any proposed tax law changes.
ITEM 26. CALCULATION OF PERFORMANCE DATA
ITEM 27. FINANCIAL STATEMENTS
The audited financial statements for the fiscal year ended December 31, 2025 for the Portfolio, including E&Y's report for
the Portfolio thereon, are included in the Portfolio's Form N-CSR filing, which was filed with the SEC on March 9, 2026 (SEC Accession No. 0001193125-26-098723), and are incorporated into this Part B by reference. The Portfolio's Form N-CSR
filing is available, without charge, upon request, by calling (800) 242-0134 or through the Portfolio's website at www.statestreet.com/im.
APPENDIX A
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. (“MOODY'S”)
GLOBAL LONG-TERM RATING SCALE
Ratings assigned on Moody's global long-term rating scale are forward-looking opinions of the
relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of
one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
Aaa: Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit
risk.
Aa: Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A: Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa: Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain
speculative characteristics.
Ba: Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B: Obligations rated B are considered speculative and are subject to
high credit risk.
Caa: Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Additionally, a
“(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities
firms.*
*
By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
GLOBAL SHORT-TERM RATING SCALE
Ratings assigned on Moody's global short-term rating scale are forward-looking opinions of the relative credit risks of
financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen
months or less and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
P-1: Ratings of Prime-1 reflect a superior ability to repay short-term obligations.
P-2:
Ratings of Prime-2 reflect a strong ability to repay short-term obligations.
P-3: Ratings of Prime-3 reflect an acceptable ability to repay short-term obligations.
NP:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P
GLOBAL RATINGS
(“S&P”)
ISSUE CREDIT RATING DEFINITIONS
An S&P Global Ratings issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of
guarantors, insurers, or other forms of credit enhancement on the obligation and considers the currency in which the obligation is denominated. The opinion reflects S&P Global
Ratings' view of the obligor's capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS*
AAA: An
obligation rated ‘AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely
strong.
AA: An obligation rated ‘AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to
meet its financial commitments on the obligation is very strong.
A: An obligation rated ‘A' is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the obligation is strong.
BBB: An obligation rated ‘BBB' exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to weaken the obligor's capacity to meet its financial commitments on the obligation.
BB; B; CCC; CC; and C: Obligations rated ‘BB', ‘B', ‘CCC', ‘CC', and ‘C' are
regarded as having significant speculative characteristics. ‘BB' indicates the least degree of speculation and ‘C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
BB: An obligation rated ‘BB' is less vulnerable to nonpayment than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate capacity to meet its financial commitments on the obligation.
B: An obligation rated ‘B' is more vulnerable to nonpayment than obligations rated ‘BB', but
the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments on the obligation.
CCC: An obligation rated ‘CCC' is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
CC: An obligation rated ‘CC' is currently highly vulnerable to nonpayment. The ‘CC' rating is
used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default.
C: An
obligation rated ‘C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with
obligations that are rated higher.
D: An obligation rated ‘D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D' rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that
such payments will be made within the next five business days in the absence of a stated grace period or within the earlier of the stated grace period or the next 30 calendar days. The ‘D' rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to
automatic stay provisions. A rating on an obligation is lowered to 'D' if it is subject to a distressed debt restructuring.
NR:
This indicates that a rating has not been assigned or is no longer assigned.
*
Ratings from 'AA' to
'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1:
A short-term obligation rated ‘A-1' is rated in the highest category by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is
strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitments on these
obligations is extremely strong.
A-2: A short-term obligation rated ‘A-2' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitments on the obligation is satisfactory.
A-3: A short-term obligation rated ‘A-3' exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to weaken an obligor's capacity to meet its financial commitments on the obligation.
B: A short-term obligation rated ‘B' is regarded as vulnerable and has significant speculative
characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the obligor's inadequate capacity to meet its financial commitments.
C: A short-term obligation rated ‘C' is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.
D: A
short-term obligation rated ‘D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D' rating category is used when payments on
an obligation are not made on the date due, unless S&P Global Ratings believes that such payments will be made within any stated grace period. However, any stated grace period
longer than five business days will be treated as five business days. The ‘D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to
automatic stay provisions. A rating on an obligation's rating is lowered to ‘D' if it is subject to a distressed exchange offer.
Rated entities in several sectors, including financial and non-financial corporations,
sovereigns, insurance companies and some sectors within public finance, are generally assigned Issuer Default Ratings (IDRs). IDRs are also assigned to certain entities or enterprises in global infrastructure, project and public finance. IDRs opine on an entity's relative
vulnerability to default including by way of a distressed debt exchange (DDE) on financial obligations. The threshold default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the
uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts.
In aggregate, IDRs provide an ordinal ranking of issuers based on the agency's view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of default.
AAA: Highest credit quality.
‘AAA' ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable
events.
AA: Very high credit quality.
‘AA' ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable events.
‘A' ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB: Good credit
quality.
‘BBB' ratings indicate that expectations of default risk are
currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this
capacity.
‘BB' ratings indicate an elevated vulnerability to default risk, particularly in the
event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists that supports the servicing of financial commitments.
‘B' ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic
environment.
CCC: Substantial credit risk.
Very low margin for safety. Default is a real possibility.
CC: Very high levels of credit risk.
Default of some kind appears probable.
A default or default-like process has begun, or the issuer is in standstill, or for a closed funding vehicle, payment capacity
is irrevocably impaired. Conditions that are indicative of a ‘C' category rating for an issuer include:
a.
the issuer has entered into a grace or cure period following non-payment of a material
financial obligation;
b.
the issuer has entered into a temporary negotiated waiver or standstill agreement following a
payment default on a material financial obligation;
c.
the formal announcement by the issuer or their agent of a distressed debt
exchange;
d.
a closed financing vehicle where payment capacity is irrevocably impaired such that it is not
expected to pay interest and/or principal in full during the life of the transaction, but where no payment default is imminent.
‘RD' ratings indicate an issuer that in Fitch's opinion
has experienced:
a.
an uncured payment
default or distressed debt exchange on a bond, loan or other material financial obligation, but
b.
has not entered into bankruptcy filings, administration, receivership, liquidation, or other
formal winding-up procedure, and
c.
has not otherwise ceased operating.
i.
the selective payment default on a specific class or currency of debt;
ii.
the uncured expiry of
any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial
obligation;
iii.
the extension of multiple waivers or forbearance periods upon a payment default on one or more
material financial obligations, either in series or in parallel; ordinary execution of a distressed debt exchange on one or more material financial obligations.
‘D' ratings indicate an issuer that in Fitch's opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure or that has otherwise ceased business.
Default ratings are not assigned prospectively to
entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until
after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
In all cases, the assignment of a default rating reflects the agency's opinion as to the most appropriate rating category
consistent with the rest of its universe of ratings and may differ from the definition of default under the terms of an issuer's financial obligations or local commercial practice.
SHORT-TERM RATINGS ASSIGNED TO ISSUERS AND OBLIGATIONS
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity
and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-term deposit ratings may be adjusted for loss severity. Short-Term Ratings are assigned to obligations
whose initial maturity is viewed as
“short term” based on market convention (a long term rating can also be used to rate an issue with short maturity). Typically, this
means a timeframe of up to 13 months for corporate, sovereign, and structured obligations and up to 36 months for obligations in U.S. public finance markets.
F1: Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.
F2: Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of financial
commitments.
F3: Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B: Speculative Short-Term Credit Quality. Minimal capacity for timely
payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
C: High Short-Term Default risk. Default is a real possibility.
RD: Restricted Default. Indicates an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. Typically, applicable to entity ratings only.
D: Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
Note: The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. For
example, the rating category ‘AA' has three notch-specific rating levels (‘AA+'; ‘AA'; ‘AA-'; each a rating level). Such suffixes are not added to ‘AAA' ratings and ratings below the 'CCC' category. For the short-term rating category of ‘F1', a ‘+' may be appended. For Viability Ratings, the modifiers “+” or “–” may be appended to a rating to denote relative status within categories from ‘AA'
to ‘CCC'. For derivative counterparty ratings the modifiers
“+” or “–” may be appended to the ratings within ‘AA(dcr)' to ‘CCC(dcr)' categories.
APPENDIX B—TRUST'S PROXY VOTING POLICY AND PROCEDURES
SSGA FUNDS
STATE STREET MASTER FUNDS
STATE STREET INSTITUTIONAL INVESTMENT TRUST
ELFUN GOVERNMENT MONEY MARKET FUND
ELFUN TAX-EXEMPT INCOME FUND
ELFUN INCOME FUND
ELFUN DIVERSIFIED FUND
ELFUN INTERNATIONAL EQUITY FUND
ELFUN TRUSTS
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
STATE STREET INSTITUTIONAL
FUNDS
STATE STREET VARIABLE INSURANCE SERIES FUNDS, INC. (THE
“COMPANY”)1
PROXY VOTING POLICY AND PROCEDURES
The Board of Trustees/Directors of the Trust/Company (each series thereof, a “Fund”) have adopted the following policy and procedures with respect to voting proxies relating to portfolio securities held by the Trust/Company's investment
portfolios.
The policy of the Trust/Company is to delegate the responsibility for voting proxies relating to portfolio securities held by
the Trust/Company to SSGA Funds Management, Inc., the Trust/Company's investment adviser (the “Adviser”), subject to the Trustees/Directors' continuing oversight.
The right to vote proxies with respect to a portfolio security held by the Trust/Company is an asset of the Trust/Company.
The Adviser acts as a fiduciary of the Trust/Company and must vote proxies in a manner consistent with the best interest of the Trust/Company and its shareholders.
3. Proxy Voting Procedures
A. At least annually, the Adviser shall present to the Boards of Trustees/Directors its policies, procedures and other
guidelines for voting proxies
(“Policy”) and the policy of any Sub-adviser (as defined below) to which proxy voting authority has been delegated (see Section 9
below). In addition, the Adviser shall notify the Trustees/Directors of material changes to its Policy or the policy of any Sub-adviser promptly and not later than the next regular
meeting of the Board of Trustees/Directors after such amendment is implemented.
B. At least annually, the Adviser shall present to the Boards of Trustees/Directors its policy for managing conflicts of interests that may arise through the Adviser's proxy voting activities. In addition, the Adviser shall report any Policy
overrides involving portfolio securities held by a Fund to the Trustees/Directors at the next regular meeting of the Board of Trustees/Directors after such override(s) occur.
C. At least annually, the Adviser shall inform the Trustees/Director that a record is available with respect to each proxy
voted with respect to portfolio securities of the Trust/Company during the year. Also see Section 5 below.
4. Revocation of Authority to Vote
The delegation by the Trustees/Directors of the authority to vote proxies relating to
portfolio securities of the Trust/Company may be revoked by the Trustees/Directors, in whole or in part, at any time.
____________
1
Unless otherwise noted, the singular term “Trust/Company” used throughout this document means each of SSGA Funds, State Street Master Funds, State Street Institutional Investment
Trust, State Street Navigator Securities Lending Trust, Elfun Government Money Market Fund, Elfun Tax-Exempt Income Fund, Elfun Income Fund, Elfun Diversified Fund, Elfun
International Equity Fund, Elfun Trusts, State Street Institutional Funds, and State Street Variable Insurance Series Funds, Inc.
5. Annual Filing of Proxy Voting
Record
The Adviser shall provide the required data for each proxy voted with
respect to portfolio securities of the Trust/Company to the Trust/Company or its designated service provider in a timely manner and in a format acceptable to be filed in the
Trust/Company's annual proxy voting report on Form N-PX for the twelve-month period ended June 30. Form N-PX is
required to be filed not later than August 31 of each year.
6. Retention and Oversight of Proxy Advisory Firms
A. In considering whether to retain or continue retaining a particular proxy advisory firm, the Adviser will ascertain whether
the proxy advisory firm has the capacity and competency to adequately analyze proxy issues, act as proxy voting agent as requested, and implement the Policy. In this regard, the Adviser will consider, at least annually, among other things, the
adequacy and quality of the proxy advisory firm's staffing and personnel and the robustness of its policies and procedures regarding its ability to identify and address any conflicts of interest. The Adviser shall, at least annually, report to Boards of Trustees/Directors regarding the results of this review.
B. The Adviser will request quarterly and annual reporting from any proxy advisory firm retained by the Adviser, and hold ad
hoc meetings with such proxy advisory firm, in order to determine whether there has been any business changes that might impact the proxy advisory firm's capacity or competency to
provide proxy voting advice or services or changes to the proxy advisory firm's conflicts policies or procedures. The Adviser will also take reasonable steps to investigate any
material factual error, notified to the Adviser by the proxy advisory firm or identified by the Adviser, made by the proxy advisory firm in providing proxy voting services.
The Adviser will periodically sample proxy votes to review whether they complied with the Policy. The Adviser shall, at least
annually, report to the Boards of Trustees/Directors regarding the frequency and results of the sampling performed.
A.
The Trust/Company shall include in its registration statement:
1. A description
of this policy and of the policies and procedures used by the Adviser to determine how to vote proxies relating to portfolio securities; and
1. A statement disclosing that information regarding how the Trust/Company
voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge, upon request, by calling the Trust/Company's toll-free telephone number; or through a specified Internet address; or both; and on the
Securities and Exchange Commission's (the “SEC”) website.
B.
The Trust/Company shall include in its Form N-CSR filings to shareholders:
1. A statement
disclosing that a description of the policies and procedures used by or on behalf of the Trust/Company to determine how to vote proxies relating to portfolio securities of the
Funds is available without charge, upon request, by calling the Trust/Company's toll-free telephone number; through a specified Internet address, if applicable; and on the SEC's website; and
2. A statement disclosing that information regarding how the Trust/Company voted proxies relating to portfolio securities
during the most recent twelve-month period ended June 30 is available without charge, upon request, by calling the Trust/Company's toll-free telephone number; or through a
specified Internet address; or both; and on the SEC's website.
For certain Funds, the Adviser may retain investment management firms (“Sub-advisers”) to provide day-to-day investment
management services to the Funds pursuant to sub-advisory agreements. It is the policy of the Trust/Company that the Adviser may delegate proxy voting authority with respect to a Fund to a Sub-adviser. Pursuant to such delegation, a
Sub-adviser is authorized to vote proxies on behalf of the applicable Fund or Funds for which it serves as sub-adviser, in accordance with the Sub-adviser's proxy voting policies and procedures.
The Trustees/Directors shall review this policy to determine its continued sufficiency as necessary from time to time.
APPENDIX C—ADVISER'S PROXY VOTING PROCEDURES AND GUIDELINES
Adviser's Proxy Voting Policies and Procedures
Global Proxy Voting and Engagement Policy
State Street Investment Management is the investment management arm of State Street Corporation, a leading provider of
financial services to institutional investors. As an asset manager, State Street Investment Management votes its clients' proxies where the client has delegated proxy voting
authority to it, and State Street Investment Management votes these proxies and engages with companies in the manner that we believe will most likely protect and promote the
long-term economic value of client investments, as described in this
document.1
When engaging with and voting proxies with respect to the portfolio companies in which we invest our clients' assets, we do
so on behalf of and in the best interests of the client accounts we manage and do not seek to change or influence control of any such portfolio companies. The State Street
Investment Management Global Proxy Voting and Engagement Policy (the “Policy”) contains certain policies that State
Street Investment Management will only apply in jurisdictions where permitted by local law and regulations. State Street Investment Management will not apply any policies contained
herein in any jurisdictions where State Street Investment Management believes that implementing or following such
policies would be deemed to constitute seeking to change or influence control of a portfolio company.
At State Street Investment Management, we take our fiduciary duties as an asset manager
very seriously. One of our fiduciary obligations to our clients is to always act in their best interest, including when making investment decisions, voting proxies, and conducting other shareholder engagement activities. State Street Investment Management focuses on risks
and opportunities that may impact long-term value creation for our clients' investments. We rely on the elected representatives of the companies in which we invest—the board
of directors—to oversee these firms' strategies. We expect effective independent board oversight of the material risks and opportunities to a firm's business and operations.
We believe that appropriate consideration of these risks and opportunities is an essential component of a firm's long-term business strategy, and expect boards to actively oversee the management of the firm's strategy.
Our Asset Stewardship program
State Street Investment Management's Asset Stewardship Team is responsible for developing and implementing this Policy, the implementation of third-party proxy voting guidelines where applicable, case-by-case voting items, issuer
engagement activities, and research and analysis of corporate governance issues and proxy voting items. All engagement activities conducted with U.S. public company issuers held in our clients' portfolios are conducted in accordance with
Appendix A to this Policy.
The Asset Stewardship Team's activities are overseen by State Street Investment Management's Global Fiduciary and Conduct
Committee (“GFCC”). The GFCC is responsible for overseeing State Street Investment Management's stewardship strategy, engagement priorities,
and the implementation of this Policy.
State Street Investment
Management has independently developed the Policy and all voting decisions and engagement activities for which State Street Investment Management has been given voting discretion
are undertaken in accordance with the principles and viewpoints set forth in this Policy. Exceptions to this Policy include the use of an independent third party to vote on State Street Corporation (“State
Street”) stock and the stock of other State Street affiliated entities, to mitigate a conflict of interest of voting on our parent company or affiliated entities, and other situations where we believe
we may be conflicted from voting (for example, stock of a public company for which a State Street director also serves as a director, or due to an outside business interest). In such cases, delegated third parties exercise vote decisions based on
their independent voting policy.
1
This Policy is applicable to SSGA Funds Management, Inc., State Street Global Advisors Trust
Company, and other investment advisory affiliates of State Street Corporation.
We aim to vote at all shareholder meetings where
our clients have given us the authority to vote their shares and where it is feasible to do so. However, when we deem appropriate, we may refrain from voting at meetinqs in cases
where:
•Power of attorney documentation is required.
•Voting would have a material impact on our ability to trade the
security.
•Voting is not permissible due to sanctions affecting a company or individual.
•Issuer-specific special documentation
is required or various market or issuer certifications are required.
•Certain market limitations would prohibit voting (e.g., partial/split
voting prohibitions or residency restrictions).
•Unless a client directs otherwise in so-called
“share blocking” markets (markets where proxy voters have their securities blocked from trading during the period of the annual
meeting).
Additionally, we are unable to vote proxies when certain
custodians used by our clients do not offer proxy voting in a jurisdiction or when they charge a meeting-specific fee in excess of the typical custody service
agreement.
Voting authority attached to certain securities held by State
Street Investment Management's pooled funds may be delegated to an independent third party as required by regulatory or other requirements. Under such arrangements, voting will be conducted by the independent third party pursuant to its proxy voting policy and not pursuant to this Policy.
The State Street Investment Management proxy voting choice
program
In addition to the option of delegating proxy voting authority to
State Street Investment Management pursuant to this Policy, clients may alternatively choose to participate in the State Street Investment Management Proxy Voting Choice Program (the “Proxy Voting Choice Program”), which empowers clients to direct the proxy voting of shares held by the eligible fund or segregated account² they own. Clients that participate in the Proxy Voting Choice Program have the option of selecting a third-party proxy voting guideline from the policies included in the Proxy Voting Choice Program to apply to
the vote of the client's pro rata share of the securities held by the eligible fund or segregated account they own. This Policy does not apply to shares voted under the Proxy Voting Choice Program.
Securities not voted pursuant to the policy
Where clients have asked State Street Investment Management to vote the client's shares on their behalf, including where a
pooled fund fiduciary has delegated the responsibility to vote the fund's securities to State Street Investment Management, State Street Investment Management votes those
securities in a unified manner, consistent with the principles described in this Policy. Exceptions to this unified voting policy are: (1) where State Street Investment Management has made its Proxy Voting Choice Program available to its separately managed account clients and investors within
a fund managed by State Street Investment Management, in which case a pro rata portion of shares held by the fund or segregated account attributable to clients who choose to
participate in the Proxy Voting Choice Program will be voted consistent with the third-party proxy voting guidelines selected by the clients, (2) where a pooled investment vehicle managed by State Street Investment Management utilizes a third party proxy voting guideline as set forth in that
fund's organizational and/or offering documents, and (3) where voting authority with respect to certain securities held by State Street Investment Management pooled funds may be delegated to an independent third party as required by regulatory or
other requirements. With respect to such funds and separately managed accounts utilizing third-party proxy voting guidelines, the terms of the applicable third-party proxy voting
guidelines shall apply in place of the Policy described herein and the proxy votes implemented with respect to such a fund or account may differ from and be contrary to the votes implemented for other portfolios managed by State Street Investment Management pursuant to this Policy.
When voting and engaging with companies, we may consider regional nuances that may be
relevant to companies in a particular jurisdiction. We expect companies to observe the relevant laws and regulations of their respective markets, as well as country-specific best practice guidelines and corporate governance codes.
Our proxy voting and engagement principles
State Street Investment Management's proxy voting and engagement program focuses on three broad principles:
2
“Eligible funds and
segregated accounts” include all fund and client accounts managed by State Street Investment Management
that employ an equity index strategy and which have granted, or are able to grant, proxy voting authority to State Street Investment Management.
1.
Effective board oversight: We believe that well-governed companies are best placed to protect and pursue shareholder interests. Principally, a board
acts on behalf of shareholders by protecting their interests and preserving their rights. In order to carry out their primary responsibilities, directors undertake activities that
include setting strategy and providing guidance on strategic matters, selecting the CEO and other senior executives, overseeing executive management, creating a succession plan for the board and management, and providing effective oversight of material
risks and opportunities relevant to their business. Further, good corporate governance necessitates the existence of effective internal controls and risk management systems, which
should be governed by the board.
We view board quality as a measure of director independence, director succession planning, board composition, evaluations and refreshment, and company governance practices.
2.
Disclosure: It
is important for shareholders to receive timely and accurate reporting of a company's financial performance and strategy so that they are able to assess both the value and risk of
their investment. In addition to information related to strategy and performance, companies should also provide disclosure relating to their approach to corporate governance and shareholder rights. Such information allows investors to determine whether their economic
interests have been safeguarded by the board and provides insights into the quality of the board's oversight of management. Ultimately, the board of directors is accountable for
the oversight and disclosure of the material risks and opportunities faced by the company.
3.
Shareholder protection: State Street Investment Management believes it is in the best interest of shareholders for companies to have appropriate
shareholder rights and accountability mechanisms in place. As a starting place for voting rights, it is necessary for ownership rights to reflect one vote for one share to ensure
that economic interests and proxy voting power are aligned. This share structure best supports the shareholders' right to exercise their proxy vote on matters that are important to the protection of their investment, such as share issuances and other dilutive events,
authorization of strategic transactions, approval of a shareholder rights plan, and changes to the corporate bylaws or charter, among others. In terms of accountability to
shareholders and appropriate checks and balances, we believe there should be annual elections of the full board of directors.
Application of
principles
These three principles of effective board oversight,
disclosure and shareholder protection apply across all of State Street Investment Management's proxy voting decisions and engagements. When engaging with or voting at portfolio
companies in different markets, State Street Investment Management may apply the principles in ways that are specific to a given market based on factors such as regulatory and/or legal requirements, availability of data, resources, disclosure practices,
and size of holdings in our clients' accounts.
When voting our clients' proxies, we may be presented with shareholder proposals at portfolio companies that must be
evaluated on a case-by-case basis and in accordance with the principles set forth above. Where a company has received a shareholder proposal on a commonly requested disclosure topic and the company has determined that the topic is material to
its business, we assess the effectiveness of the company's disclosure on such topic in connection with the proposal.
We conduct engagements with individual issuers to communicate the principles set forth in
this Policy and to learn more about companies' strategy, board oversight and disclosure practices. Engagements with US public companies held in our clients' accounts are conducted in accordance with Appendix A. In addition, we encourage issuers to increase the amount of
direct communication board members have with shareholders. We believe direct communication with executive board members and independent non-executive directors is critical to
helping companies understand shareholder concerns.
Section I. Effective board oversight
We believe independent directors are crucial to good corporate governance because we believe that independent perspectives
contribute to establishing and maintaining more sound corporate governance practices.
We have developed criteria for evaluating director
independence, which vary by region and/or local jurisdiction. These criteria generally follow relevant listing standards, local regulatory requirements and/or local market practice
standards. Such criteria may include:
•Participation in related-party transactions or other material business
relations with the company
•Employment history with the company
•Status as founder or member of the founding family
•Government representative
•Excessive tenure and preponderance of long-tenured directors
•Relations with significant shareholders
•Close family ties with any of the company's advisers, directors or senior
employees
•Receipt of non-board related compensation from the issuer, its auditors or
advisors
•Company's own classification of a director as non-independent
In some cases, State Street Investment Management's criteria may be more rigorous than applicable local or listing requirements.
Majority independent board
We believe a sufficiently independent board is key to effectively monitoring management performance and providing strategic
oversight.
We believe there needs to be strong independent leadership of the board, in accordance with
the principles discussed above. We believe the board is best placed to choose the governance structure that is most appropriate for that company.
We believe that board committees are crucial to robust corporate governance and should be
composed of a sufficient number of independent directors. We use the same criteria for evaluating committee independence as we do for evaluating director independence, which varies by region and/or local jurisdiction. Although we recognize that board
structures may vary by jurisdiction, where a board has established an audit committee and/or compensation/remuneration committee, we generally expect the committee to be primarily, and in some cases, fully independent.
We believe that average board tenure should broadly align with the length of the business cycle of the respective industry
in which a company operates. In assessing excessive tenure, we consider factors such as the preponderance of long
tenured directors, board refreshment practices, classified board structures and the business cycle for the industry in which a company operates.
Director time commitments
We believe a company's nominating committee is best placed to determine appropriate time commitments for the company's
directors. We consider if a company publicly discloses its director time commitment policy (e.g., within corporate governance guidelines, proxy statement, annual report, company
website, etc.) and if this policy or associated disclosure outlines the factors that the nominating committee considers to assess director time commitments during the annual policy review process.
We believe effective board oversight of a company's long-term business strategy necessitates a board composition with a
range of knowledge, expertise, experience, and perspectives. We recognize that many factors may influence board
composition, including board size, geographic location, and local regulations. We believe board members should have adequate knowledge and expertise to provide effective oversight of corporate strategy, operations, and risks and
opportunities. Further, we believe that a robust
nominating and governance process is essential to achieving a board composition that is designed to facilitate effective and independent oversight of a company's long-term
strategy. We believe nominating committees are best placed to determining the most effective board composition and to ensure that adequate knowledge, expertise, experience and perspectives are represented in the boardroom. Boards should also have a
regular evaluation process in place to assess the effectiveness of the board and the knowledge and expertise of board members to address material issues such as emerging risks,
changes to corporate strategy, and diversification of operations and geographic footprint.
Non-US companies in certain non-US indexes that do not meet established board diversity thresholds will be flagged for case-by-case review of the company's disclosures related to board composition. In addition, companies in certain established
markets demonstrating underperformance relative to their Global Industry Classification Standard (GICS) sector (based on a total shareholder return metric), will be flagged for
review of the company's disclosures related to board composition.
When evaluating board composition, we assess a company's financial performance relative to its GICS sector (based on a total
shareholder return metric) and relevant disclosures.
1. Oversight of strategy and risk
We believe that risk management is a key function of the board, which
is responsible for setting the overall risk appetite of a company and for providing oversight on the risk management process established by senior executives at a company. We recognize that boards are responsible for determining the ways in which they provide oversight in this area. However, we
expect companies to disclose how the board provides oversight of its risk management system and risk identification. Boards should also review existing and emerging risks that
evolve in tandem with the changing political and economic landscape or as companies diversify or expand their operations into new areas.
As responsible stewards, we believe in the importance of effective risk management and
oversight of issues that are material to a company. To effectively manage and assess the risk of our clients' portfolios, we expect our portfolio companies to manage risks and opportunities that are material, market specific and industry-specific and that have a
demonstrated link to long-term value creation, and to provide high-quality disclosure of this process to shareholders.
When evaluating a board's oversight of risks and opportunities, we assess the following
factors, based on various criteria including a company's financial performance relative to its sector (based on a total shareholder return metric), relevant disclosures by, and engagements with, portfolio companies:
•Oversees long-term strategy
–Articulates the material risks and opportunities and how those risks and opportunities fit into the firm's long-term business strategy
–Regularly assesses the effectiveness of the company's long-term strategy, and
management's execution of this strategy
•Demonstrates an effective oversight process
–Describes which committee(s) have oversight over specific risks and opportunities, as well as which topics are overseen and/or discussed at the full-board level
–Includes risks and opportunities in board and/or committee agendas, and
articulates how often specific topics are discussed at the committee and/or full- board level
–Utilizes KPIs or metrics to assess the effectiveness of risk management processes
–Engages with key stakeholders including employees and investors
•Ensures effective
leadership
–Holds management accountable for progress on relevant metrics and targets
–Integrates necessary knowledge and expertise into the board nominating and executive hiring processes, and
provides training to directors and executives on topics material to the company's business
–Conducts a periodic effectiveness review
•Ensures disclosures of material information
–Ensures publication of relevant disclosures, including those regarding material topics to the company's business
2. Compliance with corporate
governance principles
Our minimum expectation is that companies will comply with their respective market governance codes and/or stewardship principles. Issuers are encouraged to provide explanations of their level of compliance with their local market code and why
their preferred governance structure (if not compliant with the code) serves shareholders' long-term interests.
We will review governance practices at companies in selected indexes for their adherence to
market governance codes and/or stewardship principles.
3. Proxy contests
We believe nominating committees that are comprised of independent directors are best
placed to assess which individuals are adequately equipped with the knowledge and expertise to fulfill the duties of board members, and to act as effective fiduciaries. While our default position is to support the committees' judgement, we consider the following factors
when evaluating dissident nominees:
•Strategy presented by dissident nominees versus that of current
management, as overseen by the incumbent board
•Effectiveness, quality, and experience
of the management slate
•Material governance failures and the level of
responsiveness to shareholder concerns and market signals by the incumbent board
•Quality of disclosure and engagement practices to support changes to shareholder rights, capital allocation and/or governance structure
•Company performance and, if applicable, the merit of a recovery
plan
•Expertise of board members with respect to company industry and strategy
4. Compensation and remuneration
We consider it the board's
responsibility to determine the appropriate level of executive compensation. Despite the differences among the possible types of plans and awards, there is a simple underlying
philosophy that guides our analysis of executive compensation: we believe that there should be a direct relationship between executive compensation and company performance over the long term.
Shareholders should have the opportunity to assess whether pay structures and levels are aligned with business performance.
When assessing remuneration reports, we consider factors such as adequate disclosure of various remuneration elements, absolute and relative pay levels, peer selection and
benchmarking, the mix of long-term and short-term incentives, alignment of pay structures with shareholder interests, as well as with corporate strategy and performance.
For example, criteria we may consider include the following:
•The company's financial performance
relative to its GICS sector, based on a total shareholder return metric
•Overall quantum relative to company performance
•Vesting periods and length of performance targets
•Mix of performance, time and options-based stock units
•Use of special grants and one-time awards
•Retesting and repricing features
•Disclosure and transparency
5. Board meeting attendance
We expect directors to attend at least 75 percent of board meetings in the
last financial year or provide an appropriate explanation for why they were unable to meet this attendance threshold.
It is important for shareholders to receive timely and accurate reporting of a company's
financial performance and strategy so that they are able to assess both the value and risk of their investment. In addition to information related to strategy and performance, companies should provide disclosure relating to their approach to corporate governance and shareholder
rights. Such information allows investors to determine whether their financial interests have been protected by the board and provides insights into the board's oversight of
management. Ultimately, the board of directors is accountable for the oversight and disclosure of the material risks and opportunities faced by the company.
Reporting
1. Financial statements
We believe the disclosure and availability of reliable financial statements in a timely manner is imperative for investment
analysis. We expect external auditors to provide assurance of a company's financial condition.
2. Disclosures of material risks and opportunities faced by the
company
We believe in the importance of effective risk management and governance of issues that are material to a company. This may include sustainability-related risks and opportunities where a company has identified such risks and opportunities as
material to its business. Such disclosure allows shareholders to effectively assess companies' oversight, strategy, and business practices related to these issues identified as material.
Where a company has determined a topic is material to its business, we will assess the company's disclosure in accordance
with our evaluation criteria that we believe represent quality disclosure on common disclosure topics. We may also review the company's relevant disclosures against industry and
market practice (e.g., peer disclosure, relevant frameworks, relevant industry guidance).
We look to companies to provide disclosure on the risks and
opportunities relevant to their businesses, and on the board's oversight of these risks and opportunities, in line with applicable local regulatory requirements and any voluntary
standards and frameworks adopted by the company.
Section III. Shareholder protection
1. Share capital structure
The ability to raise capital is critical for companies to carry out strategy, to grow, and to achieve returns above their cost of capital. The approval of capital raising activities is fundamental to a shareholder's ability to monitor the amounts of
proceeds and to ensure capital is deployed efficiently. Altering the capital structure of a company is a critical decision for boards. When making such a decision, we believe the company should disclose a comprehensive business rationale that is
consistent with corporate strategy and not overly dilutive to its shareholders.
Our approach to share capital structure matters may vary by local market and jurisdiction,
due to regional nuances. Such proposals may include:
•Increase in authorized common shares
•Increase in authorized preferred shares
•Introduction of unequal voting rights
•Share repurchase programs
2. Reorganization, mergers and acquisitions
The reorganization of the structure of a company or mergers
often involve proposals relating to reincorporation, restructurings, liquidations, and other major changes to the corporation.
We expect proposals to be in the best interests of shareholders, demonstrated by enhancing
share value or improving the effectiveness of the company's operations.
We evaluate structural reorganizations and mergers on a case-by-case basis and expect transactions to maximize shareholder value. Some of the considerations include the following:
•Board oversight of the process for the recommended
transaction, including director and/or management conflicts of interest
•Offers made at a premium and where
there are no other higher bidders
•Offers in which the secondary market
price is substantially lower than the net asset value
We also may
consider other factors, such as:
•Offers with potentially negative consequences for minority shareholders because of illiquid stock
•Offers where we believe there is a reasonable prospect for an enhanced bid or other bidders
•Cases where the current market price of
the security exceeds the bid price at the time of voting
3. Related-party transactions
Some companies have a controlled
ownership structure and complex cross-shareholdings between subsidiaries and parent companies (“related companies”). Such structures may result
in the prevalence of related-party transactions between the company and its various stakeholders, such as directors and management, subsidiaries and shareholders. In markets where shareholders are required to approve such transactions, we expect companies to disclose details of the
transaction, such as the nature, the value and the purpose of such a transaction. We also believe independent directors should ratify such transactions. Further, we believe companies should describe the level of independent board oversight and
the approval process, including details of any independent valuations provided by financial advisors on related-party transactions.
1. Proxy access
In general, we believe that proxy access is a fundamental right and an accountability mechanism for all long-term
shareholders. We consider proposals relating to proxy access on a case-by-case basis and consider a balance between providing long-term shareholders accountability while preserving the flexibility for management to design a process that is
appropriate for the company's circumstances.
a.
Annual elections: We believe the establishment of annual elections of the board of directors is appropriate. We also consider the overall
level of board independence and the independence of the key committees, as well as the existence of a shareholder rights plan.
b.
Majority voting: We believe a majority vote standard based on votes cast for the election of directors is
appropriate.
a.
Special meetings and written consent: We believe the ability for shareholders to call special meetings, as well as act by written consent is
appropriate.
b.
Notice period to convene a general meeting: We expect companies to give as much notice as is practicable
when calling a general meeting, generally at least 14 days.
c.
Virtual/hybrid shareholder meetings: We believe the right to hold shareholder meetings in a virtual or hybrid format is appropriate provided the
company:
–Affords virtual attendee shareholders the same rights as would normally be
granted to in-person attendee shareholders
–Commit to time-bound renewal (five years or less) of meeting format
authorization by shareholders
–Provides a written record of all questions
posed during the meeting, and
–Complies with local market laws and
regulations relating to virtual and hybrid shareholder meeting practices
In evaluating these proposals we also consider the operating environment of the company, including local regulatory developments and specific market circumstances impacting virtual meeting practices.
Governance documents & miscellaneous items
1. Article amendments
We believe amendments to company bylaws that
may negatively impact shareholder rights (such as fee-shifting, forum selection, and exclusion service bylaws) should be put to a shareholder vote. We believe a majority voting
standard is generally appropriate.
We generally believe companies should have a fixed board size, or designate a range for the board size.
2. Anti-takeover issues
Occasionally, companies add anti-takeover provisions that reduce the chances of a potential acquirer to make an offer, or to reduce the likelihood of a successful offer. We generally believe shareholders should have the right to vote on
reasonable offers. Our approach to anti-takeover issues may vary by local market and jurisdiction, due to regional nuances.
3. Accounting and audit-related issues
Companies should have robust internal audit and internal control
systems designed for effective management of any potential and emerging risks to company operations and strategy. The responsibility of setting out an internal audit function lies with the audit committee, which should have independent non-executive directors designated as members.
We believe the disclosure and availability of reliable financial statements in a timely manner is imperative for investment
analysis. As a result, board oversight of the internal controls and the independence of the audit process are essential if investors are to rely upon financial statements. It is important for the audit committee to appoint external auditors who are
independent from management, as we expect auditors to provide assurance of a company's financial condition.
State Street Investment Management believes that a company's external auditor is an
essential feature of an effective and transparent system of external independent assurance. Shareholders should be given the opportunity to vote on their (re-)appointment at the annual meeting. When appointing external auditors and approving audit fees, we will take into consideration the
level of detail in company disclosures.
In circumstances where “other” fees include fees related to initial public offerings, bankruptcy emergence, and spin-offs, and the company makes public
disclosure of the amount and nature of those fees which are determined to be an exception to the standard
“non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to
audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
We believe that a company should be able to discharge its auditors in the absence of
pending litigation, governmental investigation, charges or fraud or other indication of significant concern. Further, we believe that auditors should attend the annual meeting of shareholders.
4. Indemnification and liability
Generally, we believe directors3 should be able to limit their liability and/or expand indemnification and liability
protection if a director has not acted in bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.
Section IV. Shareholder Proposals
We believe that company boards do right by investors and are responsible for overseeing strategy and company management. To
that end, we do not support shareholder proposals that are on a topic that the company has not determined to be material to its business or that appear to impose changes to
business strategy or operations, such as increasing or decreasing investment in certain products or businesses or phasing out a product or business line.
When assessing shareholder proposals, we fundamentally consider whether the adoption of the
resolution would promote long-term shareholder value in the context of our core governance principles:
1.
Effective board oversight
3.
Shareholder protection
State Street Investment Management takes a comprehensive approach to engaging with
portfolio companies. Through engagement, we aim to learn more about portfolio companies' strategy, board oversight and disclosure practices, and to better understand topics that companies deem material to their business.
3 In Japan, this includes statutory auditors.
Engagements with US portfolio
companies: Engagements with US public companies in our clients' portfolios are conducted in accordance with
Appendix A. We do not seek to change or influence control of any portfolio company through engagement.
Equity engagements: In these conversations State Street Investment Management may express viewpoints
regarding what constitutes best practices supporting effective board oversight, disclosure, and shareholder protection consistent with the Policy. Engagements may be held with portfolio companies to discuss a ballot item, event or other established topic
found in our Policy.
Fixed income engagements: From time-to-time, certain corporate action election events, reclassifications or
other changes to the investment terms of debt holdings may occur or an issuer may seek to engage with State Street Investment Management to discuss matters pertaining to the debt instruments that State Street Investment Management holds on
behalf of its clients. In such instances, State Street Investment Management may engage with the issuer to obtain further information about the matter for purposes of its
investment decision making. Such engagements are the responsibility of the Fixed Income portfolio management team, but may be supported by State Street Investment Management's Asset Stewardship Team. All election decisions are the responsibility of the relevant portfolio management
team.
Engaging with other investors soliciting State Street Investment Management's votes in connection with contested shareholder meetings, vote-no campaigns, or shareholder proposals
While it may be helpful to speak to other investors that are running proxy contests, putting forth vote-no campaigns, or proposing shareholder proposals at portfolio companies, we limit such discussions to investors who have filed necessary
documentation with regulators and engage in these discussions at our own discretion.
Our primary purpose of engaging with investors is:
•To gain a better understanding of their
position or concerns at portfolio companies.
•In proxy contest
situations:
–To assess possible director candidates where investors are seeking board representation in proxy contest
situations
–To understand the investor's proposed strategy for the company and investment
time horizon to assess their alignment with State Street Investment Management's views and interests as a long-term shareholder
Any information about our vote decisions are available in this document and on our
website.
All requests for engagement should be sent to GovernanceTeam@ssga.com.
Section VI. Other matters
As a responsible investor and fiduciary, we recognize the importance of balancing the benefits of voting shares and the
incremental lending revenue for the pooled funds that participate in State Street Investment Management's securities lending program (the “Funds”). Our objective is to recall securities on loan and restrict future lending until after the record date for the respective vote in instances where we believe that a particular vote could have a material impact on the Funds'
long-term financial performance and the benefit of voting shares will outweigh the forgone lending income.
Accordingly, we have set systematic recall and lending restriction criteria for shareholder meetings involving situations with
the highest potential financial implications (such as proxy contests and strategic transactions including mergers and acquisitions, going dark transactions, change of corporate form, or bankruptcy and liquidation). Generally, these criteria for
recall and restriction for lending only apply to certain large cap indices in developed
markets.
State Street Investment Management monitors the forgone lending revenue associated with each recall to determine if the
impact on the Funds' long-term financial performance and the benefit of voting shares will outweigh the forgone lending income.
Although
our objective is to systematically recall securities based on the aforementioned criteria, we must receive notice of the vote in sufficient time to recall the shares on or before
the record date. When we do not receive timely notice, we may be unable to recall the shares on or before the record date.
Reporting
We provide transparency for our stewardship activities through our regular client reports and
relevant information reported online in accordance with applicable legal and regulatory requirements. We publish an annual stewardship report that provides details of our stewardship approach, engagement and voting policies, and activities during the year. The annual
stewardship report is complemented by quarterly stewardship activity reports as well as the publication of thought leadership on governance and other topics . Our voting record information is available on Vote View, an interactive platform
that provides relevant company details, proposal types, resolution descriptions, and records of our votes cast.
Appendix A:
Policy guidelines for engagement with portfolio companies that are U.S. public companies
These policy guidelines apply to all stewardship engagement activities conducted by the State Street Investment Management's Asset Stewardship Team with portfolio companies that are U.S. public companies (“U.S. portfolio companies”). “U.S. public companies” is defined for purposes of the Policy and this Appendix A as any issuer that has registered one or more classes of securities under the U.S. Securities Exchange Act of 1934, as amended. These policy
guidelines apply to engagements related to voting matters at U.S. portfolio companies as well as offseason engagements with US portfolio companies.
As a matter of policy, State Street Investment Management does not seek to influence or
change control of any issuer, including U.S. portfolio companies.
When engaging with U.S. portfolio companies, the Asset Stewardship Team may discuss State
Street Investment Management's viewpoints regarding what constitutes best practices supporting effective board oversight of material risks, disclosure of material risks, and shareholder protection consistent with the Policy, including this Appendix A. However, the
Asset Stewardship Team will not discuss how it intends to cast its vote on any ballot item, nor its rationale for any vote it has made. Additionally, the Asset Stewardship Team will not dictate or pressure U.S. portfolio companies to adopt or change
any policies (including but not limited to policies related to climate, diversity, equity and inclusion, or sustainability) or fundamental business choices like capital allocation.
The Asset Stewardship Team will not engage in discussions with U.S. portfolio companies that explicitly or implicitly suggest contingent voting or divestment if a company does not
adopt State Street Investment Management's viewpoint on a particular item, or that suggest that any particular factor, policy or practice is dispositive in making engagement or voting decisions.
All meeting agendas with U.S. portfolio companies are set by the U.S. portfolio company. If requested by the U.S. portfolio
company, State Street Investment Management may engage with the company on topics that the U.S. portfolio company
has determined to be material to its business, at all times in accordance with the principles set forth in the Policy. However, the Asset Stewardship Team does not discuss, and will remain in listen-only mode during all discussions of, the following
topics with U.S. portfolio companies or other investors soliciting State Street Investment Management's votes in
connection with contested shareholder meetings, vote-no campaigns, or shareholder proposals:
•Contested director
elections
•Adoption of a climate transition plan
•Adoption of specific targets for emissions reductions
•Scope 3 emissions, including without limitation adoption of a Scope 3 emissions policy, disclosure of Scope 3
emissions, and any reduction of Scope 3 emissions
•Changes to the U.S. portfolio company's capital allocation
When engaging with U.S. portfolio companies on issues or matters relating to gender,
racial or ethnic diversity, the Asset Stewardship Team may discuss State Street Investment Management's belief that effective board oversight of a company's long-term business strategy necessitates a board composition with a range of knowledge, expertise, experience, and
perspectives. However, State Street Investment Management does not apply, nor will it discuss, specific targets or thresholds of gender, racial or ethnic diversity in connection
with U.S. portfolio companies.
About State Street Investment
Management
At State Street Investment Management, we have been helping create
better outcomes for institutions, financial intermediaries, and investors for nearly half a century. Starting with our early innovations in indexing and ETFs, our rigorous approach continues to be driven by market-tested expertise and a relentless commitment to those we serve. With over
$5 trillion in assets managed*, clients in over 60 countries, and a global network of strategic partners, we use our scale to deliver a comprehensive and cost-effective suite of
investment solutions that help investors get wherever they want to go.
*
This figure is presented as of December 31, 2025 and includes ETF AUM of $1,950.80 billion USO of which approximately $173.02 billion USO in gold assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Investment Management are affiliated. Please note all AUM is unaudited.
statestreet.com/investment-management
© 2026 State Street Corporation. All Rights Reserved.
ID3984850 0326. Exp. Date: 31/03/2027
TABLE OF CONTENTS
|
|
|
|
|
|
|
| Coverage |
|
|
9 |
|
|
|
| 1. Board of Directors |
|
|
10 |
|
|
|
| Voting on Director Nominees in Uncontested Elections |
|
|
10 |
|
|
|
| Independence |
|
|
10 |
|
|
|
| ISS Classification of Directors – U.S. |
|
|
11 |
|
|
|
| Composition |
|
|
13 |
|
|
|
| Attendance |
|
|
13 |
|
|
|
| Overboarded Directors |
|
|
13 |
|
|
|
| Gender Diversity |
|
|
14 |
|
|
|
| Racial and/or Ethnic Diversity |
|
|
14 |
|
|
|
| Responsiveness |
|
|
14 |
|
|
|
| Accountability |
|
|
15 |
|
|
|
| Poison Pills |
|
|
15 |
|
|
|
| Unequal Voting Rights |
|
|
15 |
|
|
|
| Classified Board Structure |
|
|
16 |
|
|
|
| Removal of Shareholder Discretion on Classified Boards |
|
|
16 |
|
|
|
| Problematic Governance Structure |
|
|
16 |
|
|
|
| Unilateral Bylaw/Charter Amendments |
|
|
16 |
|
|
|
| Restricting Binding Shareholder Proposals |
|
|
17 |
|
|
|
| Director Performance Evaluation |
|
|
17 |
|
|
|
| Management Proposals to Ratify Existing Charter or Bylaw Provisions |
|
|
17 |
|
|
|
| Problematic Audit-Related Practices |
|
|
17 |
|
|
|
| Problematic Compensation Practices |
|
|
18 |
|
|
|
| Problematic Pledging of Company Stock |
|
|
18 |
|
|
|
| Climate Accountability |
|
|
18 |
|
|
|
| Governance Failures |
|
|
19 |
|
|
|
| Voting on Director Nominees in Contested Elections |
|
|
19 |
|
|
|
| Vote-No Campaigns |
|
|
19 |
|
|
|
| Proxy Contests/Proxy Access |
|
|
19 |
|
|
|
| Other Board-Related Proposals |
|
|
20 |
|
|
|
| Adopt Anti-Hedging/Pledging/Speculative Investments Policy |
|
|
20 |
|
|
|
| Board Refreshment |
|
|
20 |
|
|
|
| Term/Tenure Limits |
|
|
20 |
|
|
|
| Age Limits |
|
|
20 |
|
|
|
| Board Size |
|
|
20 |
|
|
|
| Classification/Declassification of the Board |
|
|
20 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
2 of 82 |
|
|
|
|
|
|
|
|
| CEO Succession Planning |
|
|
21 |
|
|
|
| Cumulative Voting |
|
|
21 |
|
|
|
| Director and Officer Indemnification, Liability Protection, and Exculpation |
|
|
21 |
|
|
|
| Establish/Amend Nominee Qualifications |
|
|
22 |
|
|
|
| Establish Other Board Committee Proposals |
|
|
22 |
|
|
|
| Filling Vacancies/Removal of Directors |
|
|
22 |
|
|
|
| Independent Board Chair |
|
|
22 |
|
|
|
| Majority of Independent Directors/Establishment of Independent Committees |
|
|
23 |
|
|
|
| Majority Vote Standard for the Election of Directors |
|
|
23 |
|
|
|
| Proxy Access |
|
|
23 |
|
|
|
| Require More Nominees than Open Seats |
|
|
24 |
|
|
|
| Shareholder Engagement Policy (Shareholder Advisory Committee) |
|
|
24 |
|
|
|
| 2. Audit-Related |
|
|
25 |
|
|
|
| Auditor Indemnification and Limitation of Liability |
|
|
25 |
|
|
|
| Auditor Ratification |
|
|
25 |
|
|
|
| Shareholder Proposals Limiting Non-Audit Services |
|
|
25 |
|
|
|
| Shareholder Proposals on Audit Firm Rotation |
|
|
25 |
|
|
|
| 3. Shareholder Rights & Defenses |
|
|
27 |
|
|
|
| Advance Notice Requirements for Shareholder Proposals/Nominations |
|
|
27 |
|
|
|
| Amend Bylaws without Shareholder Consent |
|
|
27 |
|
|
|
| Control Share Acquisition Provisions |
|
|
27 |
|
|
|
| Control Share Cash-Out Provisions |
|
|
27 |
|
|
|
| Disgorgement Provisions |
|
|
28 |
|
|
|
| Fair Price Provisions |
|
|
28 |
|
|
|
| Freeze-Out Provisions |
|
|
28 |
|
|
|
| Greenmail |
|
|
28 |
|
|
|
| Shareholder Litigation Rights |
|
|
28 |
|
|
|
| Federal Forum Selection Provisions |
|
|
28 |
|
|
|
| Exclusive Forum Provisions for State Law Matters |
|
|
29 |
|
|
|
| Fee shifting |
|
|
29 |
|
|
|
| Net Operating Loss (NOL) Protective Amendments |
|
|
29 |
|
|
|
| Poison Pills (Shareholder Rights Plans) |
|
|
30 |
|
|
|
| Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy |
|
|
30 |
|
|
|
| Management Proposals to Ratify a Poison Pill |
|
|
30 |
|
|
|
| Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs) |
|
|
30 |
|
|
|
| Proxy Voting Disclosure, Confidentiality, and Tabulation |
|
|
31 |
|
|
|
| Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions |
|
|
31 |
|
|
|
| Reimbursing Proxy Solicitation Expenses |
|
|
32 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
3 of 82 |
|
|
|
|
|
|
|
|
| Reincorporation Proposals |
|
|
32 |
|
|
|
| Shareholder Ability to Act by Written Consent |
|
|
32 |
|
|
|
| Shareholder Ability to Call Special Meetings |
|
|
33 |
|
|
|
| Stakeholder Provisions |
|
|
33 |
|
|
|
| State Antitakeover Statutes |
|
|
33 |
|
|
|
| Supermajority Vote Requirements |
|
|
33 |
|
|
|
| Virtual Shareholder Meetings |
|
|
33 |
|
|
|
| 4. Capital/Restructuring |
|
|
34 |
|
|
|
| Capital |
|
|
34 |
|
|
|
| Adjustments to Par Value of Common Stock |
|
|
34 |
|
|
|
| Common Stock Authorization |
|
|
34 |
|
|
|
| General Authorization Requests |
|
|
34 |
|
|
|
| Specific Authorization Requests |
|
|
35 |
|
|
|
| Dual Class Structure |
|
|
35 |
|
|
|
| Issue Stock for Use with Rights Plan |
|
|
35 |
|
|
|
| Preemptive Rights |
|
|
35 |
|
|
|
| Preferred Stock Authorization |
|
|
35 |
|
|
|
| General Authorization Requests |
|
|
35 |
|
|
|
| Recapitalization Plans |
|
|
37 |
|
|
|
| Reverse Stock Splits |
|
|
37 |
|
|
|
| Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S. |
|
|
37 |
|
|
|
| Share Repurchase Programs |
|
|
37 |
|
|
|
| Share Repurchase Programs Shareholder Proposals |
|
|
38 |
|
|
|
| Stock Distributions: Splits and Dividends |
|
|
38 |
|
|
|
| Tracking Stock |
|
|
38 |
|
|
|
| Restructuring |
|
|
38 |
|
|
|
| Appraisal Rights |
|
|
38 |
|
|
|
| Asset Purchases |
|
|
38 |
|
|
|
| Asset Sales |
|
|
39 |
|
|
|
| Bundled Proposals |
|
|
39 |
|
|
|
| Conversion of Securities |
|
|
39 |
|
|
|
| Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans |
|
|
39 |
|
|
|
| Formation of Holding Company |
|
|
40 |
|
|
|
| Going Private and Going Dark Transactions (LBOs and Minority
Squeeze-outs) |
|
|
40 |
|
|
|
| Joint Ventures |
|
|
40 |
|
|
|
| Liquidations |
|
|
41 |
|
|
|
| Mergers and Acquisitions |
|
|
41 |
|
|
|
| Private Placements/Warrants/Convertible Debentures |
|
|
42 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
4 of 82 |
|
|
|
|
|
|
|
|
| Reorganization/Restructuring Plan (Bankruptcy) |
|
|
43 |
|
|
|
| Special Purpose Acquisition Corporations (SPACs) |
|
|
43 |
|
|
|
| Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions |
|
|
43 |
|
|
|
| Spin-offs |
|
|
44 |
|
|
|
| Value Maximization Shareholder Proposals |
|
|
44 |
|
|
|
| 5. Compensation |
|
|
45 |
|
|
|
| Executive Pay Evaluation |
|
|
45 |
|
|
|
| Advisory Votes on Executive Compensation—Management Proposals (Say-on-Pay) |
|
|
45 |
|
|
|
| Pay-for-Performance
Evaluation |
|
|
46 |
|
|
|
| Problematic Pay Practices |
|
|
47 |
|
|
|
| Compensation Committee Communications and Responsiveness |
|
|
48 |
|
|
|
| Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”) |
|
|
48 |
|
|
|
| Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale |
|
|
48 |
|
|
|
| Equity-Based and Other Incentive Plans |
|
|
49 |
|
|
|
| Shareholder Value Transfer (SVT) |
|
|
50 |
|
|
|
| Three-Year Value-Adjusted Burn Rate |
|
|
50 |
|
|
|
| Egregious Factors |
|
|
50 |
|
|
|
| Liberal Change in Control Definition |
|
|
50 |
|
|
|
| Repricing Provisions |
|
|
51 |
|
|
|
| Problematic Pay Practices or Significant
Pay-for-Performance Disconnect |
|
|
51 |
|
|
|
| Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)) |
|
|
51 |
|
|
|
| Specific Treatment of Certain Award Types in Equity Plan Evaluations |
|
|
52 |
|
|
|
| Dividend Equivalent Rights |
|
|
52 |
|
|
|
| Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs) |
|
|
52 |
|
|
|
| Other Compensation Plans |
|
|
52 |
|
|
|
| 401(k) Employee Benefit Plans |
|
|
52 |
|
|
|
| Employee Stock Ownership Plans (ESOPs) |
|
|
52 |
|
|
|
| Employee Stock Purchase Plans—Qualified Plans |
|
|
53 |
|
|
|
| Employee Stock Purchase Plans—Non-Qualified Plans |
|
|
53 |
|
|
|
| Option Exchange Programs/Repricing Options |
|
|
53 |
|
|
|
| Stock Plans in Lieu of Cash |
|
|
54 |
|
|
|
| Transfer Stock Option (TSO) Programs |
|
|
54 |
|
|
|
| Director Compensation |
|
|
55 |
|
|
|
| Shareholder Ratification of Director Pay Programs |
|
|
55 |
|
|
|
| Equity Plans for Non-Employee Directors |
|
|
55 |
|
|
|
| Non-Employee Director Retirement Plans |
|
|
55 |
|
|
|
| Shareholder Proposals on Compensation |
|
|
56 |
|
|
|
| Bonus Banking/Bonus Banking “Plus” |
|
|
56 |
|
|
|
| Compensation Consultants—Disclosure of Board or Company’s Utilization |
|
|
56 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
5 of 82 |
|
|
|
|
|
|
|
|
| Disclosure/Setting Levels or Types of Compensation for Executives and Directors |
|
|
56 |
|
|
|
| Golden Coffins/Executive Death Benefits |
|
|
56 |
|
|
|
| Hold Equity Past Retirement or for a Significant Period of Time |
|
|
56 |
|
|
|
| Pay Disparity |
|
|
57 |
|
|
|
| Pay for Performance/Performance-Based Awards |
|
|
57 |
|
|
|
| Pay for Superior Performance |
|
|
57 |
|
|
|
| Pre-Arranged Trading Plans
(10b5-1 Plans) |
|
|
58 |
|
|
|
| Prohibit Outside CEOs from Serving on Compensation Committees |
|
|
58 |
|
|
|
| Recoupment of Incentive or Stock Compensation in Specified Circumstances |
|
|
58 |
|
|
|
| Severance and Golden Parachute Agreements |
|
|
59 |
|
|
|
| Share Buyback Impact on Incentive Program Metrics |
|
|
59 |
|
|
|
| Supplemental Executive Retirement Plans (SERPs) |
|
|
59 |
|
|
|
| Tax Gross-Up Proposals |
|
|
59 |
|
|
|
| Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested
Equity |
|
|
60 |
|
|
|
| 6. Routine/Miscellaneous |
|
|
61 |
|
|
|
| Adjourn Meeting |
|
|
61 |
|
|
|
| Amend Quorum Requirements |
|
|
61 |
|
|
|
| Amend Minor Bylaws |
|
|
61 |
|
|
|
| Change Company Name |
|
|
61 |
|
|
|
| Change Date, Time, or Location of Annual Meeting |
|
|
62 |
|
|
|
| Other Business |
|
|
62 |
|
|
|
| 7. Social and Environmental Issues |
|
|
63 |
|
|
|
| Global Approach – E&S Shareholder Proposals |
|
|
63 |
|
|
|
| Endorsement of Principles |
|
|
63 |
|
|
|
| Animal Welfare |
|
|
63 |
|
|
|
| Animal Welfare Policies |
|
|
63 |
|
|
|
| Animal Testing |
|
|
64 |
|
|
|
| Animal Slaughter |
|
|
64 |
|
|
|
| Consumer Issues |
|
|
64 |
|
|
|
| Genetically Modified Ingredients |
|
|
64 |
|
|
|
| Reports on Potentially Controversial Business/Financial Practices |
|
|
65 |
|
|
|
| Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation |
|
|
65 |
|
|
|
| Product Safety and Toxic/Hazardous Materials |
|
|
65 |
|
|
|
| Tobacco-Related Proposals |
|
|
66 |
|
|
|
| Climate Change |
|
|
66 |
|
|
|
| Say on Climate (SoC) Management Proposals |
|
|
66 |
|
|
|
| Say on Climate (SoC) Shareholder Proposals |
|
|
67 |
|
|
|
| Climate Change/Greenhouse Gas (GHG) Emissions |
|
|
67 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
6 of 82 |
|
|
|
|
|
|
|
|
| Energy Efficiency |
|
|
68 |
|
|
|
| Renewable Energy |
|
|
68 |
|
|
|
| Diversity |
|
|
68 |
|
|
|
| Board Diversity |
|
|
68 |
|
|
|
| Equality of Opportunity |
|
|
69 |
|
|
|
| Gender Identity, Sexual Orientation, and Domestic Partner Benefits |
|
|
69 |
|
|
|
| Gender, Race/Ethnicity Pay Gap |
|
|
69 |
|
|
|
| Racial Equity and/or Civil Rights Audit Guidelines |
|
|
70 |
|
|
|
| Environment and Sustainability |
|
|
70 |
|
|
|
| Facility and Workplace Safety |
|
|
70 |
|
|
|
| Natural Capital- Related and/or Community Impact Assessment Proposals |
|
|
70 |
|
|
|
| Hydraulic Fracturing |
|
|
71 |
|
|
|
| Operations in Protected Areas |
|
|
71 |
|
|
|
| Recycling |
|
|
71 |
|
|
|
| Sustainability Reporting |
|
|
71 |
|
|
|
| Water Issues |
|
|
71 |
|
|
|
| General Corporate Issues |
|
|
72 |
|
|
|
| Charitable Contributions |
|
|
72 |
|
|
|
| Data Security, Privacy, and Internet Issues |
|
|
72 |
|
|
|
| ESG Compensation-Related Proposals |
|
|
72 |
|
|
|
| Human Rights, Human Capital Management, and International Operations |
|
|
73 |
|
|
|
| Human Rights Proposals |
|
|
73 |
|
|
|
| Mandatory Arbitration |
|
|
73 |
|
|
|
| Operations in High-Risk Markets |
|
|
73 |
|
|
|
| Outsourcing/Offshoring |
|
|
74 |
|
|
|
| Sexual Harassment |
|
|
74 |
|
|
|
| Weapons and Military Sales |
|
|
74 |
|
|
|
| Political Activities |
|
|
75 |
|
|
|
| Lobbying |
|
|
75 |
|
|
|
| Political Contributions |
|
|
75 |
|
|
|
| Political Expenditures and Lobbying Congruency |
|
|
75 |
|
|
|
| Political Ties |
|
|
76 |
|
|
|
| 8. Mutual Fund Proxies |
|
|
77 |
|
|
|
| Election of Directors |
|
|
77 |
|
|
|
| Closed End Funds- Unilateral Opt-In to Control Share Acquisition
Statutes |
|
|
77 |
|
|
|
| Converting Closed-end Fund to
Open-end Fund |
|
|
77 |
|
|
|
| Proxy Contests |
|
|
77 |
|
|
|
| Investment Advisory Agreements |
|
|
77 |
|
|
|
| Approving New Classes or Series of Shares |
|
|
78 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
7 of 82 |
|
|
|
|
|
|
|
|
| Preferred Stock Proposals |
|
|
78 |
|
|
|
| 1940 Act Policies |
|
|
78 |
|
|
|
| Changing a Fundamental Restriction to a Nonfundamental Restriction |
|
|
78 |
|
|
|
| Change Fundamental Investment Objective to Nonfundamental |
|
|
78 |
|
|
|
| Name Change Proposals |
|
|
78 |
|
|
|
| Change in Fund’s Subclassification |
|
|
79 |
|
|
|
| Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value |
|
|
79 |
|
|
|
| Disposition of Assets/Termination/Liquidation |
|
|
79 |
|
|
|
| Changes to the Charter Document |
|
|
79 |
|
|
|
| Changing the Domicile of a Fund |
|
|
80 |
|
|
|
| Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval |
|
|
80 |
|
|
|
| Distribution Agreements |
|
|
80 |
|
|
|
| Master-Feeder Structure |
|
|
80 |
|
|
|
| Mergers |
|
|
80 |
|
|
|
| Shareholder Proposals for Mutual Funds |
|
|
80 |
|
|
|
| Establish Director Ownership Requirement |
|
|
80 |
|
|
|
| Reimburse Shareholder for Expenses Incurred |
|
|
81 |
|
|
|
| Terminate the Investment Advisor |
|
|
81 |
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
8 of 82 |
|
Coverage
The U.S. research team provides proxy analyses and voting recommendations for the common shareholder meetings of U.S. - incorporated
companies that are publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are held in our institutional investor clients’ portfolios. Coverage generally includes corporate actions for common equity holders, such as
written consents and bankruptcies. ISS’ U.S. coverage includes investment companies (including open-end funds, closed-end funds, exchange-traded funds, and unit
investment trusts), limited partnerships (“LPs”), master limited partnerships (“MLPs”), limited liability companies (“LLCs”), and business development companies. ISS reviews its universe of coverage on an annual
basis, and the coverage is subject to change based on client need and industry trends.
Foreign-incorporated companies
In addition to U.S.- incorporated, U.S.- listed companies, ISS’ U.S. policies are applied to certain foreign-incorporated company analyses. Like
the SEC, ISS distinguishes two types of companies that list but are not incorporated in the U.S.:
| |
◾ |
|
U.S. Domestic Issuers – which have a majority of outstanding shares held in the U.S. and meet other criteria, as
determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies (e.g. they are required to file DEF14A proxy statements) – are generally covered under standard U.S. policy guidelines.
|
| |
◾ |
|
Foreign Private Issuers (FPIs) – which are allowed to take exemptions from most
disclosure requirements (e.g., they are allowed to file 6-K for their proxy materials) and U.S. listing standards – are generally covered under a combination of policy guidelines: |
| |
◾ |
|
FPI Guidelines (see the Americas Regional Proxy Voting
Guidelines), may apply to companies incorporated in governance havens, and apply certain minimum independence and disclosure standards in the evaluation of key proxy ballot items, such as the election of
directors; and/or |
| |
◾ |
|
Guidelines for the market that is responsible for, or most relevant to, the item on the ballot. |
U.S. incorporated companies listed only on non-U.S. exchanges are generally covered under the ISS guidelines for
the market on which they are traded.
An FPI is generally covered under ISS’ approach to FPIs outlined above, even if such FPI voluntarily
files a proxy statement and/or other filing normally required of a U.S. Domestic Issuer, so long as the company retains its FPI status.
In all
cases – including with respect to other companies with cross-market features that may lead to ballot items related to multiple markets – items that are on the ballot solely due to the requirements of another market (listing,
incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” primary market coverage.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
9 of 82 |
|
1. Board of
Directors
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
Independence: Boards should be sufficiently independent from management (and
significant shareholders) to ensure that they are able and motivated to effectively supervise management’s performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with
appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership
position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of
directors.
Composition: Companies should ensure that
directors add value to the board through their specific skills and expertise and by having sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence,
while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.
Responsiveness: Directors should respond to investor
input, such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority
of shares are tendered.
Accountability:
Boards should be sufficiently accountable to shareholders, including through transparency of the company’s governance practices and regular board elections, by the provision of sufficient information for shareholders to be able to
assess directors and board composition, and through the ability of shareholders to remove directors.
General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1
considered on case-by-case basis):
Independence
Vote against2
or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per ISS’ Classification of
Directors) when:
| |
◾ |
|
Independent directors comprise 50 percent or less of the board; |
| |
◾ |
|
The non-independent director serves on the audit, compensation, or nominating
committee; |
| |
◾ |
|
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or
|
1 A “new nominee” is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made
on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question.
2 In general, companies with a plurality vote standard use “Withhold” as the
contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
10 of 82 |
|
ISS
Classification of Directors – U.S.
| |
1.1. |
Current officer1 of the company or one of its
affiliates2. |
| |
2. |
Non-Independent Non-Executive Director
|
Board Identification
| |
2.1. |
Director identified as not independent by the board. |
Controlling/Significant Shareholder
| |
2.2. |
Beneficial owner of more than 50 percent of the company’s voting power (this may be aggregated if voting power
is distributed among more than one member of a group). |
Current Employment at Company or Related Company
| |
2.3. |
Non-officer employee of the firm (including employee representatives).
|
| |
2.4. |
Officer1, former officer, or general or limited
partner of a joint venture or partnership with the company. |
Former Employment
| |
2.5. |
Former CEO of the company.3, 4 |
| |
2.6. |
Former non-CEO
officer1 of the company or an affiliate2 within the past five years. |
| |
2.7. |
Former officer1 of an acquired company within the past
five years.4 |
| |
2.8. |
Officer1 of a former parent or predecessor firm at the
time the company was sold or split off within the past five years. |
| |
2.9. |
Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an
assessment of the interim officer’s employment agreement will be made.5 |
Family Members
| |
2.10. |
Immediate family member6 of a current or former
officer1 of the company or its affiliates2 within the last five years. |
| |
2.11. |
Immediate family member6 of a current employee of
company or its affiliates2 where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or
its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role). |
Professional, Transactional, and Charitable Relationships
| |
2.12. |
Director who (or whose immediate family member6)
currently provides professional services7 in excess of $10,000 per year to: the company, an affiliate2, or an
individual officer of the company or an affiliate; or who is (or whose immediate family member6 is) a partner, employee, or controlling shareholder of an organization which provides
the services. |
| |
2.13. |
Director who (or whose immediate family member6)
currently has any material transactional relationship8 with the company or its affiliates2; or who is (or whose
immediate family member6 is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship8 (excluding investments in the company through a private placement). |
| |
2.14. |
Director who (or whose immediate family
member6) is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or
endowments8 from the company or its affiliates2. |
Other Relationships
| |
2.15. |
Party to a voting agreement9 to vote in line with
management on proposals being brought to shareholder vote. |
| |
2.16. |
Has (or an immediate family member6 has) an
interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee.10 |
| |
2.17. |
Founder11 of the company but not currently an
employee. |
| |
2.18. |
Director with pay comparable to Named Executive Officers. |
| |
2.19. |
Any material12 relationship with the company.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
11 of 82 |
|
| |
3.1. |
No material12 connection to the company other than a
board seat. |
Footnotes:
1. The definition of officer will generally follow that of a “Section 16 officer” (officers subject to Section 16 of the
Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a
principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving
as an officer due to statutory requirements (e.g. corporate secretary) will generally be classified as a Non-Independent Non-Executive Director under “Any material
relationship with the company.” However, if the company provides explicit disclosure that the director is not receiving additional compensation exceeding $10,000 per year for serving in that capacity, then the director will be classified as an
Independent Director.
2. “Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control
ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate.
3. Includes any former CEO of the company prior to the company’s initial public offering (IPO).
4. When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, ISS will generally
classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the existence of
any other conflicting relationships or related party transactions.
5. ISS will look at the terms of the interim officer’s employment
contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also
consider if a formal search process was under way for a full-time officer at the time.
6. “Immediate family member” follows the
SEC’s definition of such and covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director,
nominee for director, executive officer, or significant shareholder of the company.
7. Professional services can be characterized as advisory
in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include
but are not limited to the following: investment banking/financial advisory services, commercial banking (beyond deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing services, legal
services, property management services, realtor services, lobbying services, executive search services, and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit
services, IT tech support services, educational services, and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject
to the associated materiality test) rather than a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or
is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional
rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory.
8. A material transactional relationship, including grants to non-profit organizations, exists if the
company makes annual payments to, or receives annual payments from, another entity, exceeding the greater of: $200,000 or 5 percent of the recipient’s gross revenues, for a company that follows NASDAQ listing standards; or the greater of
$1,000,000 or 2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows neither of the preceding standards, ISS will apply the NASDAQ-based materiality test. (The recipient
is the party receiving the financial proceeds from the transaction).
9. Dissident directors who are parties to a voting
agreement pursuant to a settlement or similar arrangement may be classified as Independent Directors if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’
interests: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any
conflicting relationships or related party transactions.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
12 of 82 |
|
10. Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in
the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).
11. The operating involvement of the founder with the company will be considered; if the founder was never employed by the company, ISS may
deem him or her an Independent Director.
12. For purposes of ISS’s director independence classification,
“material” will be defined as a standard of relationship (financial, personal, or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have
a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
Composition
Attendance at Board and Committee Meetings: Generally vote against or withhold from
directors (except nominees who served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for
which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
| |
◾ |
|
Medical issues/illness; |
| |
◾ |
|
Family emergencies; and |
| |
◾ |
|
Missing only one meeting (when the total of all meetings is three or fewer). |
In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote
against or withhold from appropriate members of the nominating/governance committees or the full board.
If the proxy disclosure is unclear and
insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
Overboarded Directors: Generally vote against or withhold from individual directors who:
| |
◾ |
|
Sit on more than five public company boards; or |
| |
◾ |
|
Are CEOs of public companies who sit on the boards of more than two public companies besides their own— withhold only
at their outside boards4. |
NOTE: For shareholder meeting reports
published on or after February 25th, 2025, Institutional Shareholder Services (ISS) has indefinitely halted the consideration of the gender diversity of a company’s board when making vote recommendations with respect to the election or re-election of directors at U.S. companies covered by these guidelines under its proprietary ISS U.S. Benchmark policy.
3 Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.
4 Although all of a CEO’s subsidiary boards with publicly-traded common stock will be
counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than
50 percent controlled and boards outside the parent/subsidiary relationships.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
13 of 82 |
|
Gender Diversity: Generally vote against or withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) at companies where there are no women on the company’s board. An exception will be made if there was at least one woman on the board at the
preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.
NOTE: For shareholder meeting
reports published on or after February 25th, 2025, Institutional Shareholder Services (ISS) has indefinitely halted the consideration of the racial and/or ethnic diversity of a company’s board when making vote recommendations with respect to
the election or re-election of directors at U.S. companies covered under these guidelines under its proprietary ISS U.S. Benchmark policy.
Racial and/or Ethnic Diversity: For
companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) where the board has no apparent racially or ethnically diverse members5. An exception
will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
Responsiveness
Vote case-by-case on individual directors, committee members, or the
entire board of directors as appropriate if:
| |
◾ |
|
The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the
previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are: |
| |
◾ |
|
Disclosed outreach efforts by the board to shareholders in the wake of the vote; |
| |
◾ |
|
Rationale provided in the proxy statement for the level of implementation; |
| |
◾ |
|
The subject matter of the proposal; |
| |
◾ |
|
The level of support for and opposition to the resolution in past meetings; |
| |
◾ |
|
Actions taken by the board in response to the majority vote and its engagement with shareholders; |
| |
◾ |
|
The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals);
and |
| |
◾ |
|
Other factors as appropriate. |
| |
◾ |
|
The board failed to act on takeover offers where the majority of shares are tendered; or |
| |
◾ |
|
At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast
and the company has failed to address the issue(s) that caused the high withhold/against vote. |
Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
| |
◾ |
|
The company’s previous say-on-pay
received the support of less than 70 percent of votes cast. Factors that will be considered are: |
| |
◾ |
|
The company’s response, including: |
| |
◾ |
|
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated); |
| |
◾ |
|
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; and |
| |
◾ |
|
Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
| |
◾ |
|
Other recent compensation actions taken by the company; |
| |
◾ |
|
Whether the issues raised are recurring or isolated; |
| |
◾ |
|
The company’s ownership structure; and
|
5 Aggregate diversity statistics provided by the board will only be considered if specific to
racial and/or ethnic diversity.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
14 of 82 |
|
| |
◾ |
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
| |
◾ |
|
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received
the plurality of votes cast. |
Accountability
PROBLEMATIC TAKEOVER DEFENSES, CAPITAL
STRUCTURE, AND GOVERNANCE STRUCTURE
Poison Pills: Generally vote against or withhold from all nominees (except new nominees 1,
who should be considered case-by-case) if:
| |
◾ |
|
The company has a poison pill with a deadhand or slowhand
feature6; |
| |
◾ |
|
The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or
lowering the trigger, without shareholder approval; or |
| |
◾ |
|
The company has a long-term poison pill (with a term of over one year) that was not approved by the public shareholders7. |
Vote
case-by-case on nominees if the board adopts an initial short-term pill6 (with a term of one year or less) without
shareholder approval, taking into consideration:
| |
◾ |
|
The trigger threshold and other terms of the pill; |
| |
◾ |
|
The disclosed rationale for the adoption; |
| |
◾ |
|
The context in which the pill was adopted, (e.g., factors such as the company’s size and stage of development, sudden
changes in its market capitalization, and extraordinary industry-wide or macroeconomic events); |
| |
◾ |
|
A commitment to put any renewal to a shareholder vote; |
| |
◾ |
|
The company’s overall track record on corporate governance and responsiveness to shareholders; and
|
| |
◾ |
|
Other factors as relevant. |
Unequal Voting Rights: Generally vote withhold or against directors individually, committee members, or the entire board (except new nominees 1, who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights8.
Exceptions to this policy will generally be limited to:
| |
◾ |
|
Newly-public companies9 with a sunset provision of no more than
seven years from the date of going public; |
| |
◾ |
|
Limited Partnerships and the Operating Partnership (OP) unit structure of REITs; |
| |
◾ |
|
Situations where the super-voting shares represent less than 5% of total voting power and therefore considered to be de
minimis; or |
| |
◾ |
|
The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular
binding vote on whether the capital structure should be maintained. |
6 If a short-term pill with a deadhand or slowhand feature is enacted but expires before the
next shareholder vote, ISS will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption.
7 Approval prior to, or in connection, with a company’s becoming publicly-traded, or in connection with a de-SPAC transaction, is insufficient.
8 This generally includes classes of common stock that have additional votes per share than
other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”).
9 Includes companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct
listings, and those who complete a traditional initial public offering.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
15 of 82 |
|
Classified Board Structure: The board is classified, and a
continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.
Problematic Governance Structure: For companies that hold or held their first annual
meeting 9 of public shareholders after Feb. 1, 2015, generally vote against or withhold from directors individually, committee members, or the entire board
(except new nominees 1, who should be considered case-by-case) if, prior to or in connection with the
company’s public offering, the company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:
| |
◾ |
|
Supermajority vote requirements to amend the bylaws or charter; |
| |
◾ |
|
A classified board structure; or |
| |
◾ |
|
Other egregious provisions. |
A provision which specifies that the problematic structure(s) will be sunset within seven years of the date of going public will be considered a
mitigating factor.
Unless the adverse provision is reversed or removed, vote
case-by-case on director nominees in subsequent years.
Unilateral Bylaw/Charter Amendments: Generally vote against or withhold from directors individually, committee members, or the entire
board (except new nominees 1, who should be considered case-by-case) if the board amends the company’s
bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors:
| |
◾ |
|
The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification;
|
| |
◾ |
|
Disclosure by the company of any significant engagement with shareholders regarding the amendment; |
| |
◾ |
|
The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the
bylaws/charter; |
| |
◾ |
|
The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment
provisions; |
| |
◾ |
|
The company’s ownership structure; |
| |
◾ |
|
The company’s existing governance provisions; |
| |
◾ |
|
The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and
|
| |
◾ |
|
Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
|
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees 1, who should be considered case-by-case) if the directors:
| |
◾ |
|
Adopted supermajority vote requirements to amend the bylaws or charter; |
| |
◾ |
|
Eliminated shareholders’ ability to amend bylaws; |
| |
◾ |
|
Adopted a fee-shifting provision; or
|
| |
◾ |
|
Adopted another provision deemed egregious. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
16 of 82 |
|
Restricting Binding Shareholder Proposals: Generally vote
against or withhold from the members of the governance committee if:
| |
◾ |
|
The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such
restrictions include but are not limited to: outright prohibition on the submission of binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis. |
Submission of management proposals to
approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Generally
continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Director Performance Evaluation: The board lacks
mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder
returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not
limited to:
| |
◾ |
|
A classified board structure; |
| |
◾ |
|
A supermajority vote requirement; |
| |
◾ |
|
Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;
|
| |
◾ |
|
The inability of shareholders to call special meetings; |
| |
◾ |
|
The inability of shareholders to act by written consent; |
| |
◾ |
|
A multi-class capital structure; and/or |
| |
◾ |
|
A non-shareholder-approved poison pill. |
Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
| |
◾ |
|
The presence of a shareholder proposal addressing the same issue on the same ballot; |
| |
◾ |
|
The board’s rationale for seeking ratification; |
| |
◾ |
|
Disclosure of actions to be taken by the board should the ratification proposal fail; |
| |
◾ |
|
Disclosure of shareholder engagement regarding the board’s ratification request; |
| |
◾ |
|
The level of impairment to shareholders’ rights caused by the existing provision; |
| |
◾ |
|
The history of management and shareholder proposals on the provision at the company’s past meetings;
|
| |
◾ |
|
Whether the current provision was adopted in response to the shareholder proposal; |
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Previous use of ratification proposals to exclude shareholder proposals. |
Problematic Audit-Related Practices
Generally vote against or withhold from the members of the Audit Committee if:
| |
◾ |
|
The non-audit fees paid to the auditor are
excessive; |
| |
◾ |
|
The company receives an adverse opinion on the company’s financial statements from its auditor; or
|
| |
◾ |
|
There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its
auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
17 of 82 |
|
Vote case-by-case on members of the Audit Committee and potentially the full board if:
| |
◾ |
|
Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP;
and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether
withhold/against votes are warranted. |
Problematic Compensation Practices
In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the
members of the Compensation Committee and potentially the full board if:
| |
◾ |
|
There is an unmitigated misalignment between CEO pay and company performance
(pay for performance); |
| |
◾ |
|
The company maintains significant problematic pay practices; or |
| |
◾ |
|
The board exhibits a significant level of poor communication and responsiveness to
shareholders. |
Generally vote against or withhold from the Compensation Committee chair, other committee members, or potentially
the full board if:
| |
◾ |
|
The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s
declared frequency of say on pay; or |
| |
◾ |
|
The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.
|
Generally vote against members of the board committee responsible for approving/setting
non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a
compelling rationale or other mitigating factors.
Problematic Pledging of Company
Stock: Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of
pledged company stock by executives or directors raises concerns. The following factors will be considered:
| |
◾ |
|
The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;
|
| |
◾ |
|
The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume;
|
| |
◾ |
|
Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
|
| |
◾ |
|
Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged
company stock; and |
| |
◾ |
|
Any other relevant factors. |
Climate Accountability
For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain10, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a
case-by-case basis) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate
change to the company and the larger economy.
Minimum steps to understand and mitigate those risks are considered to be the following. Both minimum
criteria will be required to be in alignment with the policy :
10 Companies defined as “significant GHG emitters” will be those on the current
Climate Action 100+ Focus Group list.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
18 of 82 |
|
| |
◾ |
|
Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on
Climate-related Financial Disclosures (TCFD), including: |
| |
◾ |
|
Board governance measures; |
| |
◾ |
|
Risk management analyses; and |
| |
◾ |
|
Appropriate GHG emissions reduction targets. |
At this time, “appropriate GHG emissions reductions targets” will be medium-term GHG reduction targets or Net
Zero-by-2050 GHG reduction targets for a company’s operations (Scope 1) and electricity use (Scope 2). Targets should cover the vast majority of the
company’s direct emissions.
Governance Failures
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
| |
◾ |
|
Material failures of governance, stewardship, risk oversight11,
or fiduciary responsibilities at the company; |
| |
◾ |
|
Failure to replace management as appropriate; or |
| |
◾ |
|
Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her
ability to effectively oversee management and serve the best interests of shareholders at any company. |
Voting on Director Nominees in Contested Elections
Vote-No Campaigns
General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by
shareholders and other publicly available information.
Proxy Contests/Proxy Access
General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:
| |
◾ |
|
Long-term financial performance of the company relative to its industry; |
| |
◾ |
|
Management’s track record; |
| |
◾ |
|
Background to the contested election; |
| |
◾ |
|
Nominee qualifications and any compensatory arrangements; |
| |
◾ |
|
Strategic plan of dissident slate and quality of the critique against management; |
| |
◾ |
|
Likelihood that the proposed goals and objectives can be achieved (both slates); and |
| |
◾ |
|
Stock ownership positions. |
In the case of candidates nominated pursuant to proxy access, vote
case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the
nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).
11 Examples of failure of risk oversight include but are not limited to: bribery; large or
serial fines or sanctions from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant adverse legal judgments or settlement; or hedging of company stock.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
19 of 82 |
|
Other Board-Related
Proposals
Adopt Anti-Hedging/Pledging/Speculative Investments Policy
General Recommendation: Generally vote for proposals
seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan.
However, the company’s existing policies regarding responsible use of company stock will be considered.
Board
Refreshment
Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to
ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed.
Term/Tenure Limits
General Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits,
considering:
| |
◾ |
|
The rationale provided for adoption of the term/tenure limit; |
| |
◾ |
|
The robustness of the company’s board evaluation process; |
| |
◾ |
|
Whether the limit is of sufficient length to allow for a broad range of director tenures; |
| |
◾ |
|
Whether the limit would disadvantage independent directors compared to
non-independent directors; and |
| |
◾ |
|
Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner.
|
| |
◾ |
|
Vote case-by-case on shareholder proposals
asking for the company to adopt director term/tenure limits, considering: |
| |
◾ |
|
The scope of the shareholder proposal; and |
| |
◾ |
|
Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.
|
Age Limits
General Recommendation: Generally vote against management
and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits.
Board Size
General Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size.
Vote against proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
General Recommendation: Vote against proposals to classify
(stagger) the board.
Vote for proposals to repeal classified boards and to elect all directors annually.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
20 of 82 |
|
CEO Succession
Planning
General Recommendation: Generally
vote for proposals seeking disclosure on a CEO succession planning policy, considering, at a minimum, the following factors:
| |
◾ |
|
The reasonableness/scope of the request; and |
| |
◾ |
|
The company’s existing disclosure on its current CEO succession planning process. |
Cumulative Voting
General Recommendation: Generally vote against management
proposals to eliminate cumulate voting, and for shareholder proposals to restore or provide for cumulative voting, unless:
| |
◾ |
|
The company has proxy access12, thereby allowing shareholders
to nominate directors to the company’s ballot; and |
| |
◾ |
|
The company has adopted a majority vote standard, with a carve-out for plurality
voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections. |
Vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).
Director and Officer Indemnification, Liability Protection, and Exculpation
General Recommendation: Vote case-by-case on proposals on director and officer indemnification, liability protection, and exculpation13.
Consider the stated rationale for the proposed change. Also consider, among other factors, the extent to which the proposal would:
| |
◾ |
|
Eliminate directors’ and officers’ liability for monetary damages for violating the duty of care;
|
| |
◾ |
|
Eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalt;
|
| |
◾ |
|
Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation
than mere carelessness; and |
| |
◾ |
|
Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts
that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify.
|
Vote for those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was
unsuccessful if both of the following apply:
| |
◾ |
|
If the individual was found to have acted in good faith and in a manner that the individual reasonably believed was in the
best interests of the company; and |
| |
◾ |
|
If only the individual’s legal expenses would be covered.
|
12 A proxy access right that meets the recommended guidelines.
13 Indemnification: the condition of being secured against loss or damage.
Limited
liability: a person’s financial liability is limited to a fixed sum, or personal financial assets are not at risk if the individual loses a lawsuit that results in financial award/damages to the plaintiff.
Exculpation: to eliminate or limit the personal liability of a director or officer to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director or officer.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
21 of 82 |
|
Establish/Amend
Nominee Qualifications
General Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the
criteria and the degree to which they may preclude dissident nominees from joining the board.
Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
| |
◾ |
|
The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative
to that of its peers; |
| |
◾ |
|
The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is
sought; |
| |
◾ |
|
The company’s disclosure and performance relating to the issue for which board oversight is sought and any
significant related controversies; and |
| |
◾ |
|
The scope and structure of the proposal. |
Establish Other Board Committee Proposals
General Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such proposals seek a specific
oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:
| |
◾ |
|
Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is
sought; |
| |
◾ |
|
Level of disclosure regarding the issue for which board oversight is sought; |
| |
◾ |
|
Company performance related to the issue for which board oversight is sought; |
| |
◾ |
|
Board committee structure compared to that of other companies in its industry sector; and |
| |
◾ |
|
The scope and structure of the proposal. |
Filling Vacancies/Removal of Directors
General Recommendation: Vote against proposals that
provide that directors may be removed only for cause. Vote for proposals to restore shareholders’ ability to remove directors with or without cause.
Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.
Vote for proposals that permit shareholders to elect directors to fill board vacancies.
Independent Board Chair
General Recommendation: Generally vote for shareholder
proposals requiring that the board chair position be filled by an independent director, taking into consideration the following:
| |
◾ |
|
The scope and rationale of the proposal; |
| |
◾ |
|
The company’s current board leadership structure; |
| |
◾ |
|
The company’s governance structure and practices; |
| |
◾ |
|
Company performance; and |
| |
◾ |
|
Any other relevant factors that may be applicable. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
22 of 82 |
|
The following factors will increase the
likelihood of a “for” recommendation:
| |
◾ |
|
A majority non-independent board and/or the presence of non-independent directors on key board committees; |
| |
◾ |
|
A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined
CEO/chair role; |
| |
◾ |
|
The presence of an executive or non-independent chair in addition to the CEO, a
recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair; |
| |
◾ |
|
Evidence that the board has failed to oversee and address material risks facing the company; |
| |
◾ |
|
A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the
board has materially diminished shareholder rights; or |
| |
◾ |
|
Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’
interests. |
Majority of Independent Directors/Establishment of Independent Committees
General Recommendation: Vote for shareholder proposals
asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS’ definition of Independent Director (See ISS’ Classification of Directors.)
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors
unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
General Recommendation: Generally vote for management
proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included.
Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors
need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a
plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
Proxy Access
General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:
| |
◾ |
|
Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
|
| |
◾ |
|
Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each
member of the nominating group; |
| |
◾ |
|
Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; and
|
| |
◾ |
|
Cap: cap on nominees of generally twenty-five percent (25%) of the board. |
Review for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are more restrictive than these
guidelines.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
23 of 82 |
|
Require More Nominees
than Open Seats
General Recommendation:
Vote against shareholder proposals that would require a company to nominate more candidates than the number of open board seats.
Shareholder Engagement Policy (Shareholder Advisory Committee)
General Recommendation: Generally vote for shareholder
proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:
| |
◾ |
|
Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information
between shareholders and members of the board; |
| |
◾ |
|
Effectively disclosed information with respect to this structure to its shareholders; |
| |
◾ |
|
Company has not ignored majority-supported shareholder proposals, or a majority withhold vote on a director nominee; and
|
| |
◾ |
|
The company has an independent chair or a lead director, according to ISS’
definition. This individual must be made available for periodic consultation and direct communication with major shareholders. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
24 of 82 |
|
2. Audit-Related
Auditor Indemnification and Limitation of Liability
General Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to:
| |
◾ |
|
The terms of the auditor agreement—the degree to which these agreements impact shareholders’ rights;
|
| |
◾ |
|
The motivation and rationale for establishing the agreements; |
| |
◾ |
|
The quality of the company’s disclosure; and |
| |
◾ |
|
The company’s historical practices in the audit area. |
Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Auditor Ratification
General Recommendation: Vote for proposals to ratify
auditors unless any of the following apply:
| |
◾ |
|
An auditor has a financial interest in or association with the company, and is therefore not independent;
|
| |
◾ |
|
There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of
the company’s financial position; |
| |
◾ |
|
Poor accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP;
or |
| |
◾ |
|
Fees for non-audit services (“Other” fees) are excessive.
|
Non-audit fees are excessive if:
| |
◾ |
|
Non-audit (“other”) fees > audit fees + audit-related fees +
tax compliance/preparation fees |
Tax compliance and preparation include the preparation of original and amended tax returns and
refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to
“Other” fees.
In circumstances where “Other” fees include fees related to significant
one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to
the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
Shareholder Proposals Limiting Non-Audit Services
General Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.
Shareholder Proposals on Audit Firm Rotation
General Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account:
| |
◾ |
|
The tenure of the audit firm; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
25 of 82 |
|
| |
◾ |
|
The length of rotation specified in the proposal; |
| |
◾ |
|
Any significant audit-related issues at the company; |
| |
◾ |
|
The number of Audit Committee meetings held each year; |
| |
◾ |
|
The number of financial experts serving on the committee; and |
| |
◾ |
|
Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive
price. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
26 of 82 |
|
3. Shareholder
Rights & Defenses
Advance Notice Requirements for Shareholder Proposals/Nominations
General Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as
reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.
To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the
anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a
90-120-day window). The submittal window is the period under which shareholders must file their proposals/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the
company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
General Recommendation: Vote against proposals giving the
board exclusive authority to amend the bylaws.
Vote
case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into account the following:
| |
◾ |
|
Any impediments to shareholders’ ability to amend the bylaws (i.e. supermajority voting requirements);
|
| |
◾ |
|
The company’s ownership structure and historical voting turnout; |
| |
◾ |
|
Whether the board could amend bylaws adopted by shareholders; and |
| |
◾ |
|
Whether shareholders would retain the ability to ratify any board-initiated amendments. |
Control Share Acquisition Provisions
General Recommendation: Vote for proposals to opt out of
control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders.
Vote against proposals to amend the charter to include control share acquisition provisions.
Vote for proposals to restore voting rights to the control shares.
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds.
Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer
to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Control
Share Cash-Out Provisions
General
Recommendation: Vote for proposals to opt out of control share cash-out statutes.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
27 of 82 |
|
Control share
cash-out statutes give dissident shareholders the right to “cash-out” of their position in a company at the expense of the shareholder who has taken a
control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
Disgorgement Provisions
General Recommendation: Vote for proposals to opt out of
state disgorgement provisions.
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a
company’s stock to disgorge, or pay back, to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a
certain period of time (between 18 months and 24 months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.
Fair Price Provisions
General Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire
the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.
Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
Freeze-Out Provisions
General Recommendation: Vote for proposals to opt out of
state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time
before gaining control of the company.
Greenmail
General Recommendation: Vote for proposals to adopt
anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments.
Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only
the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Shareholder Litigation Rights
Federal Forum Selection Provisions
Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal
securities law.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
28 of 82 |
|
General Recommendation: Generally vote for federal forum
selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or
board responsiveness to shareholders.
Vote against provisions that restrict the forum to a particular federal district court; unilateral
adoption (without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments
policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims
arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
General Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the state of Delaware as the exclusive forum for
corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
For states other than Delaware, vote case-by-case on exclusive forum
provisions, taking into consideration:
| |
◾ |
|
The company’s stated rationale for adopting such a provision; |
| |
◾ |
|
Disclosure of past harm from duplicative shareholder lawsuits in more than one forum; |
| |
◾ |
|
The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and
the definition of key terms; and |
| |
◾ |
|
Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote
standard applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections. |
Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that
specify a particular local court within the state; unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee shifting
Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.
General Recommendation: Generally vote against provisions
that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful).
Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments policy.
Net Operating Loss (NOL) Protective Amendments
General
Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of protecting a company’s net operating losses (NOL) if the effective term of the protective
amendment would exceed the shorter of three years and the exhaustion of the NOL.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
29 of 82 |
|
Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the
NOL:
| |
◾ |
|
The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder); |
| |
◾ |
|
Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon
exhaustion or expiration of the NOL); |
| |
◾ |
|
The company’s existing governance structure including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and |
| |
◾ |
|
Any other factors that may be applicable. |
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
General Recommendation: Vote for shareholder proposals
requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill
in the future specifying that the board will only adopt a shareholder rights plan if either:
| |
◾ |
|
Shareholders have approved the adoption of the plan; or |
| |
◾ |
|
The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders
under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder
ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate. |
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add
the caveat that a vote within 12 months would be considered sufficient implementation.
Management Proposals to Ratify a
Poison Pill
General Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following
attributes:
| |
◾ |
|
No lower than a 20 percent trigger, flip-in or flip-over;
|
| |
◾ |
|
A term of no more than three years; |
| |
◾ |
|
No deadhand, slowhand, no-hand, or similar feature that limits the ability of a
future board to redeem the pill; and |
| |
◾ |
|
Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a
qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill. |
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into
consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
General Recommendation: Vote against proposals to adopt a
poison pill for the stated purpose of protecting a company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
30 of 82 |
|
Vote case-by-case on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
| |
◾ |
|
The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent); |
| |
◾ |
|
Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or
expiration of NOLs); |
| |
◾ |
|
The company’s existing governance structure, including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and |
| |
◾ |
|
Any other factors that may be applicable. |
Proxy Voting Disclosure, Confidentiality, and Tabulation
General Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder
rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company’s vote-counting methodology.
While a variety of factors may be considered
in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
| |
◾ |
|
The scope and structure of the proposal; |
| |
◾ |
|
The company’s stated confidential voting policy (or other relevant policies) and whether it ensures a “level
playing field” by providing shareholder proponents with equal access to vote information prior to the annual meeting; |
| |
◾ |
|
The company’s vote standard for management and shareholder proposals and whether it ensures consistency and fairness
in the proxy voting process and maintains the integrity of vote results; |
| |
◾ |
|
Whether the company’s disclosure regarding its vote counting method and other relevant voting policies with respect
to management and shareholder proposals are consistent and clear; |
| |
◾ |
|
Any recent controversies or concerns related to the company’s proxy voting mechanics; |
| |
◾ |
|
Any unintended consequences resulting from implementation of the proposal; and |
| |
◾ |
|
Any other factors that may be relevant. |
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
General Recommendation: Generally vote against management
proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best practice.
In addition, voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
| |
◾ |
|
The presence of a shareholder proposal addressing the same issue on the same ballot; |
| |
◾ |
|
The board’s rationale for seeking ratification; |
| |
◾ |
|
Disclosure of actions to be taken by the board should the ratification proposal fail; |
| |
◾ |
|
Disclosure of shareholder engagement regarding the board’s ratification request; |
| |
◾ |
|
The level of impairment to shareholders’ rights caused by the existing provision; |
| |
◾ |
|
The history of management and shareholder proposals on the provision at the company’s past meetings;
|
| |
◾ |
|
Whether the current provision was adopted in response to the shareholder proposal; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
31 of 82 |
|
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Previous use of ratification proposals to exclude shareholder proposals. |
Reimbursing Proxy Solicitation Expenses
General Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses.
When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with
the election.
Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one
or more candidates in a contested election where the following apply:
| |
◾ |
|
The election of fewer than 50 percent of the directors to be elected is contested in the election;
|
| |
◾ |
|
One or more of the dissident’s candidates is elected; |
| |
◾ |
|
Shareholders are not permitted to cumulate their votes for directors; and |
| |
◾ |
|
The election occurred, and the expenses were incurred, after the adoption of this bylaw. |
Reincorporation Proposals
General Recommendation: Management or shareholder
proposals to change a company’s state of incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance
concerns including the following:
| |
◾ |
|
Reasons for reincorporation; |
| |
◾ |
|
Comparison of company’s governance practices and provisions prior to and following the reincorporation; and
|
| |
◾ |
|
Comparison of corporation laws of original state and destination state. |
Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.
Shareholder Ability to Act by Written Consent
General Recommendation: Generally vote against management
and shareholder proposals to restrict or prohibit shareholders’ ability to act by written consent.
Generally vote for
management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
| |
◾ |
|
Shareholders’ current right to act by written consent; |
| |
◾ |
|
The inclusion of exclusionary or prohibitive language; |
| |
◾ |
|
Investor ownership structure; and |
| |
◾ |
|
Shareholder support of, and management’s response to, previous shareholder proposals. |
Vote case-by-case on shareholder proposals if, in addition to the
considerations above, the company has the following governance and antitakeover provisions:
| |
◾ |
|
An unfettered14 right for shareholders to call special meetings at a 10 percent threshold; |
| |
◾ |
|
A majority vote standard in uncontested director elections;
|
14 quality of the company’s disclosure; and “Unfettered” means no restrictions on
agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no
greater than 90 prior to the next annual meeting.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
32 of 82 |
|
| |
◾ |
|
No non-shareholder-approved pill; and |
| |
◾ |
|
An annually elected board. |
Shareholder Ability to Call Special Meetings
General Recommendation: Vote against management or
shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings.
Generally vote for management or
shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:
| |
◾ |
|
Shareholders’ current right to call special meetings; |
| |
◾ |
|
Minimum ownership threshold necessary to call special meetings (10 percent preferred); |
| |
◾ |
|
The inclusion of exclusionary or prohibitive language; |
| |
◾ |
|
Investor ownership structure; and |
| |
◾ |
|
Shareholder support of, and management’s response to, previous shareholder proposals. |
Stakeholder Provisions
General Recommendation: Vote against proposals that ask
the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
State Antitakeover Statutes
General Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and
labor contract provisions, and anti-greenmail provisions).
Supermajority Vote Requirements
General Recommendation: Vote against proposals to require
a supermajority shareholder vote.
Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for
companies with shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:
| |
◾ |
|
Quorum requirements; and |
Virtual Shareholder Meetings
General Recommendation: Generally vote for management
proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which
virtual-only15 meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting.
15 Virtual-only shareholder meeting” refers to a meeting of shareholders that is held
exclusively using technology without a corresponding in-person meeting.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
33 of 82 |
|
Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:
| |
◾ |
|
Scope and rationale of the proposal; and |
| |
◾ |
|
Concerns identified with the company’s prior meeting practices. |
4. Capital/Restructuring
Capital
Adjustments to Par Value of Common Stock
General Recommendation:
Vote for management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action.
Vote for management proposals to eliminate par value.
Common Stock Authorization
General Authorization Requests
General Recommendation: Vote
case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes:
| |
◾ |
|
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized share; |
| |
◾ |
|
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares; |
| |
◾ |
|
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage; or
|
| |
◾ |
|
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the
company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| |
◾ |
|
The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights
to other share classes; |
| |
◾ |
|
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization; |
| |
◾ |
|
The company has a non-shareholder approved poison pill (including an NOL pill); or
|
| |
◾ |
|
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| |
◾ |
|
In, or subsequent to, the company’s most recent 10-K filing, the company
discloses that there is substantial doubt about its ability to continue as a going concern; |
| |
◾ |
|
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or |
| |
◾ |
|
A government body has in the past year required the company to increase its capital ratios. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
34 of 82 |
|
For companies incorporated in states that allow
increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to
increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same
ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| |
◾ |
|
twice the amount needed to support the transactions on the ballot, and |
| |
◾ |
|
the allowable increase as calculated for general issuances above. |
Dual Class Structure
General Recommendation: Generally vote against proposals
to create a new class of common stock unless:
| |
◾ |
|
The company discloses a compelling rationale for the dual-class capital structure, such as: |
| |
◾ |
|
The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as
a going concern; or |
| |
◾ |
|
The new class of shares will be transitory; |
| |
◾ |
|
The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term
and long term; and |
| |
◾ |
|
The new class is not designed to preserve or increase the voting power of an insider or significant shareholder.
|
Issue Stock for Use with Rights Plan
General Recommendation: Vote against proposals that
increase authorized common stock for the explicit purpose of implementing a non-shareholder-approved shareholder rights plan (poison pill).
Preemptive Rights
General Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into consideration:
| |
◾ |
|
The size of the company; |
| |
◾ |
|
The shareholder base; and |
| |
◾ |
|
The liquidity of the stock. |
Preferred Stock Authorization
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes:
| |
◾ |
|
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized shares; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
35 of 82 |
|
| |
◾ |
|
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares; |
| |
◾ |
|
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.
|
| |
◾ |
|
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization; or |
| |
◾ |
|
If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a
specific use for the shares. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the
company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| |
◾ |
|
If the shares requested are blank check preferred shares that can be used for antitakeover purposes;16 |
| |
◾ |
|
The company seeks to increase a class of non-convertible preferred shares entitled
to more than one vote per share on matters that do not solely affect the rights of preferred stockholders “supervoting shares”); |
| |
◾ |
|
The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number
of common shares into which they are convertible (“supervoting shares”) on matters that do not solely affect the rights of preferred stockholders; |
| |
◾ |
|
The stated intent of the increase in the general authorization is to allow the company to increase an existing designated
class of supervoting preferred shares; |
| |
◾ |
|
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization; |
| |
◾ |
|
The company has a non-shareholder approved poison pill (including an NOL pill); and
|
| |
◾ |
|
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| |
◾ |
|
In, or subsequent to, the company’s most recent 10-K filing, the company
discloses that there is substantial doubt about its ability to continue as a going concern; |
| |
◾ |
|
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or |
| |
◾ |
|
A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all
nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to
increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the
same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| |
◾ |
|
twice the amount needed to support the transactions on the ballot, and |
| |
◾ |
|
the allowable increase as calculated for general issuances above.
|
16 To be acceptable, appropriate disclosure would be needed that the shares are
“declawed”: i.e., representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights
plan.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
36 of 82 |
|
Recapitalization Plans
General Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into account the following:
| |
◾ |
|
More simplified capital structure; |
| |
◾ |
|
Fairness of conversion terms; |
| |
◾ |
|
Impact on voting power and dividends; |
| |
◾ |
|
Reasons for the reclassification; |
| |
◾ |
|
Conflicts of interest; and |
| |
◾ |
|
Other alternatives considered. |
Reverse Stock Splits
General Recommendation: Vote for management proposals to
implement a reverse stock split if:
| |
◾ |
|
The number of authorized shares will be proportionately reduced; or |
| |
◾ |
|
The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with
ISS’ Common Stock Authorization policy. |
Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:
| |
◾ |
|
Stock exchange notification to the company of a potential delisting; |
| |
◾ |
|
Disclosure of substantial doubt about the company’s ability to continue as a going concern without additional
financing; |
| |
◾ |
|
The company’s rationale; or |
| |
◾ |
|
Other factors as applicable. |
Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S.
General Recommendation: For U.S. domestic issuers
incorporated outside the U.S. and listed solely on a U.S. exchange, generally vote for resolutions to authorize the issuance of common shares up to 20 percent of currently issued common share capital, where not tied
to a specific transaction or financing proposal.
For pre-revenue or other early-stage companies that
are heavily reliant on periodic equity financing, generally vote for resolutions to authorize the issuance of common shares up to 50 percent of currently issued common share capital. The burden of proof will be on the company to establish that
it has a need for the higher limit.
Renewal of such mandates should be sought at each year’s annual meeting.
Vote case-by-case on share issuances for a specific transaction or
financing proposal.
Share Repurchase Programs
General Recommendation: For U.S.-incorporated companies,
and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the
board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding:
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
37 of 82 |
|
| |
◾ |
|
The use of buybacks to inappropriately manipulate incentive compensation metrics; |
| |
◾ |
|
Threats to the company’s long-term viability; or |
| |
◾ |
|
Other company-specific factors as warranted. |
Vote case-by-case on proposals to repurchase shares directly from
specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
General Recommendation: Generally vote against shareholder
proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by
executives exercising options or selling shares during periods of share buybacks.
Stock Distributions: Splits and
Dividends
General Recommendation:
Generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less
than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.
Tracking
Stock
General Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:
| |
◾ |
|
Adverse governance changes; |
| |
◾ |
|
Excessive increases in authorized capital stock; |
| |
◾ |
|
Unfair method of distribution; |
| |
◾ |
|
Diminution of voting rights; |
| |
◾ |
|
Adverse conversion features; |
| |
◾ |
|
Negative impact on stock option plans; and |
| |
◾ |
|
Alternatives such as spin-off. |
Restructuring
Appraisal Rights
General Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal.
Asset
Purchases
General Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors:
| |
◾ |
|
Financial and strategic benefits; |
| |
◾ |
|
How the deal was negotiated; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
38 of 82 |
|
| |
◾ |
|
Other alternatives for the business; and |
Asset Sales
General Recommendation: Vote case-by-case on asset sales, considering the
following factors:
| |
◾ |
|
Impact on the balance sheet/working capital; |
| |
◾ |
|
Potential elimination of diseconomies; |
| |
◾ |
|
Anticipated financial and operating benefits; |
| |
◾ |
|
Anticipated use of funds; |
| |
◾ |
|
Value received for the asset; |
| |
◾ |
|
How the deal was negotiated; and |
Bundled Proposals
General Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the
packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals.
Conversion of Securities
General Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the
conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.
Vote for the
conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy
Plans/Reverse Leveraged Buyouts/Wrap Plans
General Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating:
| |
◾ |
|
Dilution to existing shareholders’ positions; |
| |
◾ |
|
Terms of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties;
exit strategy; |
| |
◾ |
|
Financial issues - company’s financial situation; degree of need for capital; use of proceeds; effect of the
financing on the company’s cost of capital; |
| |
◾ |
|
Management’s efforts to pursue other alternatives; |
| |
◾ |
|
Control issues - change in management; change in control, guaranteed board and committee seats; standstill provisions;
voting agreements; veto power over certain corporate actions; and |
| |
◾ |
|
Conflict of interest - arm’s length transaction, managerial incentives. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
39 of 82 |
|
Vote for the debt restructuring if it is
expected that the company will file for bankruptcy if the transaction is not approved.
Formation of Holding Company
General Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into consideration the following:
| |
◾ |
|
The reasons for the change; |
| |
◾ |
|
Any financial or tax benefits; |
| |
◾ |
|
Increases in capital structure; and |
| |
◾ |
|
Changes to the articles of incorporation or bylaws of the company. |
Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include
either of the following:
| |
◾ |
|
Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or
|
| |
◾ |
|
Adverse changes in shareholder rights. |
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
General Recommendation: Vote case-by-case on going private transactions, taking into account the following:
| |
◾ |
|
How the deal was negotiated; |
| |
◾ |
|
Other alternatives/offers considered; and |
Vote case-by-case on going dark transactions, determining whether the
transaction enhances shareholder value by taking into consideration:
| |
◾ |
|
Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market
research of the stock); and |
| |
◾ |
|
Balanced interests of continuing vs. cashed-out shareholders, taking into account
the following: |
| |
◾ |
|
Are all shareholders able to participate in the transaction? |
| |
◾ |
|
Will there be a liquid market for remaining shareholders following the transaction? |
| |
◾ |
|
Does the company have strong corporate governance? |
| |
◾ |
|
Will insiders reap the gains of control following the proposed transaction? and |
| |
◾ |
|
Does the state of incorporation have laws requiring continued reporting that may benefit shareholders?
|
Joint Ventures
General Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following:
| |
◾ |
|
Percentage of assets/business contributed; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
40 of 82 |
|
| |
◾ |
|
Financial and strategic benefits; |
| |
◾ |
|
Other alternatives; and |
Liquidations
General Recommendation: Vote case-by-case on liquidations, taking into account
the following:
| |
◾ |
|
Management’s efforts to pursue other alternatives; |
| |
◾ |
|
Appraisal value of assets; and |
| |
◾ |
|
The compensation plan for executives managing the liquidation. |
Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
Mergers and Acquisitions
General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing
factors including:
| |
◾ |
|
Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While
the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale. |
| |
◾ |
|
Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause
closer scrutiny of a deal. |
| |
◾ |
|
Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and
revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
| |
◾ |
|
Negotiations and process - Were the terms of the transaction negotiated at
arm’s-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation “wins” can also signify the deal makers’
competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. |
| |
◾ |
|
Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as
compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these
interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the “ISS Transaction Summary” section of this report is an aggregate figure that
can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
|
| |
◾ |
|
Governance - Will the combined company have a better or worse governance profile than the current governance
profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
41 of 82 |
|
Private
Placements/Warrants/Convertible Debentures
General Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration:
| |
◾ |
|
Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be
weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event
to trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to
trigger the dilutive event. |
| |
◾ |
|
Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features,
termination penalties, exit strategy): |
| |
◾ |
|
The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial
condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement. |
| |
◾ |
|
When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or
premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry, and anticipation of future performance. |
| |
◾ |
|
The company’s financial condition; |
| |
◾ |
|
Degree of need for capital; |
| |
◾ |
|
Effect of the financing on the company’s cost of capital; |
| |
◾ |
|
Current and proposed cash burn rate; and |
| |
◾ |
|
Going concern viability and the state of the capital and credit markets. |
| |
◾ |
|
Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A
fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger, or sale of part or all of the company. |
| |
◾ |
|
Guaranteed board and committee seats; |
| |
◾ |
|
Veto power over certain corporate actions; and |
| |
◾ |
|
Minority versus majority ownership and corresponding minority discount or majority control premium. |
| |
◾ |
|
Conflicts of interest should be viewed from the perspective of the company and the investor; and |
| |
◾ |
|
Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder
interests? |
| |
◾ |
|
The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be
addressed by analyzing the one-day impact on the unaffected stock price. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
42 of 82 |
|
Vote for the private placement, or for the
issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan (Bankruptcy)
General Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to:
| |
◾ |
|
Estimated value and financial prospects of the reorganized company; |
| |
◾ |
|
Percentage ownership of current shareholders in the reorganized company; |
| |
◾ |
|
Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an
Official Equity Committee); |
| |
◾ |
|
The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);
|
| |
◾ |
|
Existence of a superior alternative to the plan of reorganization; and |
| |
◾ |
|
Governance of the reorganized company. |
Special Purpose Acquisition Corporations (SPACs)
General Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following:
| |
◾ |
|
Valuation - Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness
opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to
the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target if it is a private entity. |
| |
◾ |
|
Market reaction - How has the market responded to the proposed deal? A negative market reaction may be a
cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
| |
◾ |
|
Deal timing - A main driver for most transactions is that the SPAC charter typically requires the deal to be
complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date. |
| |
◾ |
|
Negotiations and process - What was the process undertaken to identify potential target companies within
specified industry or location specified in charter? Consider the background of the sponsors. |
| |
◾ |
|
Conflicts of interest - How are sponsors benefiting from the transaction compared to IPO shareholders?
Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter
requires that the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a
transaction to be completed within the 18-24-month timeframe. |
| |
◾ |
|
Voting agreements - Are the sponsors entering into enter into any voting agreements/tender offers with
shareholders who are likely to vote against the proposed merger or exercise conversion rights? |
| |
◾ |
|
Governance - What is the impact of having the SPAC CEO or founder on key committees following the proposed
merger? |
Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions
The main purpose of SPACs is to identify and acquire a viable target within a specified timeframe, and failure to achieve this objective within the
allotted time calls into question management’s ability to execute its primary objective. The end of that timeframe is generally referred to as the termination date.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
43 of 82 |
|
General Recommendation: Generally
support requests to extend the termination date by up to one year from the SPAC’s original termination date (inclusive of any built-in extension options, and accounting for prior extension
requests).
Other factors that may be considered include: any added incentives, business combination status, other amendment terms, and, if
applicable, use of money in the trust fund to pay excise taxes on redeemed shares.
Spin-offs
General Recommendation: Vote case-by-case on spin-offs, considering:
| |
◾ |
|
Tax and regulatory advantages; |
| |
◾ |
|
Planned use of the sale proceeds; |
| |
◾ |
|
Benefits to the parent company; |
| |
◾ |
|
Corporate governance changes; and |
| |
◾ |
|
Changes in the capital structure. |
Value Maximization Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by:
| |
◾ |
|
Hiring a financial advisor to explore strategic alternatives; |
| |
◾ |
|
Selling the company; or |
| |
◾ |
|
Liquidating the company and distributing the proceeds to shareholders. |
These proposals should be evaluated based on the following factors:
| |
◾ |
|
Prolonged poor performance with no turnaround in sight; |
| |
◾ |
|
Signs of entrenched board and management (such as the adoption of takeover defenses); |
| |
◾ |
|
Strategic plan in place for improving value; |
| |
◾ |
|
Likelihood of receiving reasonable value in a sale or dissolution; and |
| |
◾ |
|
The company actively exploring its strategic options, including retaining a financial advisor. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
44 of 82 |
|
5. Compensation
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and
director compensation programs:
| |
1. |
Maintain appropriate pay-for-performance
alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over
the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; |
| |
2. |
Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or
indefinite contracts, excessive severance packages, and guaranteed compensation; |
| |
3. |
Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs
by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); |
| |
4. |
Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of
informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; and |
| |
5. |
Avoid inappropriate pay to non-executive directors: This principle recognizes the
interests of shareholders in ensuring that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level,
it may incorporate a variety of generally accepted best practices. |
Advisory Votes on Executive
Compensation—Management Proposals (Say-on-Pay)
General Recommendation: Vote case-by-case on ballot items related to executive
pay and practices, as well as certain aspects of outside director compensation.
Vote against Advisory Votes on Executive Compensation
(Say-on-Pay or “SOP”) if:
| |
◾ |
|
There is an unmitigated misalignment between CEO pay and company performance ( pay for
performance); |
| |
◾ |
|
The company maintains significant problematic pay practices; or |
| |
◾ |
|
The board exhibits a significant level of poor communication and responsiveness to
shareholders. |
Vote against or withhold from the members of the Compensation Committee and potentially the full board if:
| |
◾ |
|
There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;
|
| |
◾ |
|
The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes
cast; |
| |
◾ |
|
The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or
|
| |
◾ |
|
The situation is egregious. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
45 of 82 |
|
Primary Evaluation Factors for Executive
Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to
identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the S&P1500, Russell 3000, or Russell 3000E Indices17, this
analysis considers the following:
| |
1. |
Peer Group18 Alignment: |
| |
◾ |
|
The degree of alignment between the company’s annualized TSR rank and the CEO’s annualized total pay rank
within a peer group, each measured over a three-year period. |
| |
◾ |
|
The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year
period. |
| |
◾ |
|
The multiple of the CEO’s total pay relative to the peer group median in the most recent fiscal year.
|
| |
2. |
Absolute Alignment19 – the absolute alignment between
the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period. |
If the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our analysis
may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
| |
◾ |
|
The ratio of performance- to time-based incentive awards; |
| |
◾ |
|
The overall ratio of performance-based compensation to fixed or discretionary pay; |
| |
◾ |
|
The rigor of performance goals; |
| |
◾ |
|
The complexity and risks around pay program design; |
| |
◾ |
|
The transparency and clarity of disclosure; |
| |
◾ |
|
The company’s peer group benchmarking practices; |
| |
◾ |
|
Financial/operational results, both absolute and relative to peers; |
| |
◾ |
|
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards); |
| |
◾ |
|
Realizable pay20 compared to grant pay; and
|
| |
◾ |
|
Any other factors deemed relevant. |
17 The Russell
3000E Index includes approximately 4,000 of the largest U.S. equity securities.
18 The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company’s
selected peers’ GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of
the company’s market cap. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
19 Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
20 ISS research reports include realizable pay for S&P1500 companies.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
46 of 82 |
|
Problematic Pay
Practices
Problematic pay elements are generally evaluated
case-by-case considering the context of a company’s overall pay program and demonstrated
pay-for-performance philosophy. The focus is on executive compensation practices that contravene the global pay principles, including:
| |
◾ |
|
Problematic practices related to non-performance-based compensation elements;
|
| |
◾ |
|
Incentives that may motivate excessive risk-taking or present a windfall risk; and |
| |
◾ |
|
Pay decisions that circumvent
pay-for-performance, such as options backdating or waiving performance requirements. |
The list of examples below highlights certain problematic practices that carry significant weight in this overall consideration and may result
in adverse vote recommendations:
| |
◾ |
|
Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and
voluntary surrender of underwater options); |
| |
◾ |
|
Extraordinary perquisites or tax gross-ups; |
| |
◾ |
|
New or materially amended agreements that provide for: |
| |
◾ |
|
Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent
bonus); |
| |
◾ |
|
CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or
“modified single” triggers) or in connection with a problematic Good Reason definition; |
| |
◾ |
|
CIC excise tax gross-up entitlements (including “modified” gross-ups); and/or |
| |
◾ |
|
Multi-year guaranteed awards that are not at risk due to rigorous performance conditions; |
| |
◾ |
|
Liberal CIC definition combined with any single-trigger CIC benefits; |
| |
◾ |
|
Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of
pay programs and practices applicable to the EMI’s executives is not possible; |
| |
◾ |
|
Severance payments made when the termination is not clearly disclosed as involuntary (for example, a termination without
cause or resignation for good reason); and/or |
| |
◾ |
|
Any other provision or practice deemed to be egregious and present a significant risk to investors. |
The above examples are not an exhaustive list. Please refer to ISS’ U.S.
Compensation Policies FAQ document for additional detail on specific pay practices that have been identified as problematic and may lead to negative vote recommendations.
Options Backdating
The following
factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
| |
◾ |
|
Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;
|
| |
◾ |
|
Duration of options backdating; |
| |
◾ |
|
Size of restatement due to options backdating; |
| |
◾ |
|
Corrective actions taken by the board or compensation committee, such as canceling or
re-pricing backdated options, the recouping of option gains on backdated grants; and |
| |
◾ |
|
Adoption of a grant policy that prohibits backdating and creates a fixed grant schedule or window period for equity grants
in the future. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
47 of 82 |
|
Compensation Committee
Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
| |
◾ |
|
Failure to respond to majority-supported shareholder proposals on executive pay topics; or |
| |
◾ |
|
Failure to adequately respond to the company’s previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account: |
| |
◾ |
|
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated); |
| |
◾ |
|
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
| |
◾ |
|
Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
| |
◾ |
|
Other recent compensation actions taken by the company; |
| |
◾ |
|
Whether the issues raised are recurring or isolated; |
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)
General Recommendation: Vote for annual advisory votes on
compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
General Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of existing
change-in-control arrangements maintained with named executive officers but also considering new or extended arrangements.
Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude,
and/or timing of issue(s):
| |
◾ |
|
Single- or modified-single-trigger cash severance; |
| |
◾ |
|
Single-trigger acceleration of unvested equity awards; |
| |
◾ |
|
Full acceleration of equity awards granted shortly before the change in control; |
| |
◾ |
|
Acceleration of performance awards above the target level of performance without compelling rationale;
|
| |
◾ |
|
Excessive cash severance (generally >3x base salary and bonus); |
| |
◾ |
|
Excise tax gross-ups triggered and payable; |
| |
◾ |
|
Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or
|
| |
◾ |
|
Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary
equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or |
| |
◾ |
|
The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute
advisory vote. |
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis.
However, the presence of multiple legacy problematic features will also be closely scrutinized.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
48 of 82 |
|
In cases where the golden parachute vote is
incorporated into a company’s advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
Please refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
General Recommendation: Vote case-by-case on certain equity-based
compensation plans21 depending on a
combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an “Equity Plan
Scorecard” (EPSC) approach with three pillars:
| |
◾ |
|
Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap
peers, measured by the company’s estimated Shareholder Value Transfer (SVT) in relation to peers and considering both: |
| |
◾ |
|
SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;
and |
| |
◾ |
|
SVT based only on new shares requested plus shares remaining for future grants. |
| |
◾ |
|
Quality of disclosure around vesting upon a change in control (CIC); |
| |
◾ |
|
Discretionary vesting authority; |
| |
◾ |
|
Liberal share recycling on various award types; |
| |
◾ |
|
Lack of minimum vesting period for grants made under the plan; and |
| |
◾ |
|
Dividends payable prior to award vesting. |
| |
◾ |
|
The company’s three-year burn rate relative to its industry/market cap peers; |
| |
◾ |
|
Vesting requirements in CEO’s recent equity grants (3-year look-back);
|
| |
◾ |
|
The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by
the average annual shares granted in the prior three years); |
| |
◾ |
|
The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
|
| |
◾ |
|
Whether the company maintains a sufficient claw-back policy; and |
| |
◾ |
|
Whether the company maintains sufficient post-exercise/vesting share-holding requirements. |
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’
interests, or if any of the following egregious factors (“overriding factors”) apply:
| |
◾ |
|
Awards may vest in connection with a liberal
change-of-control definition; |
| |
◾ |
|
The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly
permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing – for non-listed companies); |
| |
◾ |
|
The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; |
| |
◾ |
|
The plan is excessively dilutive to shareholders’ holdings; |
| |
◾ |
|
The plan contains an evergreen (automatic share replenishment) feature; or |
| |
◾ |
|
Any other plan features are determined to have a significant negative impact on shareholder interests.
|
21 Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock
option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further
evaluated case-by-case.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
49 of 82 |
|
Further Information on certain EPSC
Factors:
Shareholder Value Transfer (SVT)
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the
amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans,
and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types
of awards (for example, full-value awards), the assumption is made that all awards to be granted will be the most expensive types.
For proposals
that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using
the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables
most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size, and cash compensation into the industry cap equations to
arrive at the company’s benchmark.22
Three-Year
Value-Adjusted Burn Rate
A “Value-Adjusted Burn Rate” is used for stock plan evaluations. Value-Adjusted Burn Rate
benchmarks are calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company’s GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year’s burn-rate benchmark.
The Value-Adjusted Burn Rate is calculated as follows:
Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) /
(Weighted average common shares * stock price).
Egregious Factors
Liberal Change in Control Definition
Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal
definition of change in control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a
“potential” takeover, shareholder approval of a merger or other transactions, or similar language.
22 For plans evaluated under the Equity Plan Scorecard policy, the company’s SVT benchmark is
considered along with other factors.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
50 of 82 |
|
Repricing Provisions
Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without
prior shareholder approval. “Repricing” typically includes the ability to do any of the following:
| |
◾ |
|
Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;
|
| |
◾ |
|
Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise
price of the original options or SARs; |
| |
◾ |
|
Cancel underwater options in exchange for stock awards; or |
| |
◾ |
|
Provide cash buyouts of underwater options. |
While the above cover most types of repricing, ISS may view other provisions as akin to repricing depending on the facts and circumstances.
Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by ISS),
without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote against plans that do not expressly prohibit
repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.
Problematic Pay Practices or Significant
Pay-for-Performance Disconnect
If the equity plan on the
ballot is a vehicle for problematic pay practices, vote against the plan.
ISS may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment. Considerations in voting against the equity plan may include, but are not limited to:
| |
◾ |
|
Severity of the pay-for-performance
misalignment; |
| |
◾ |
|
Whether problematic equity grant practices are driving the misalignment; and/or |
| |
◾ |
|
Whether equity plan awards have been heavily concentrated to the CEO and/or the other NEOs. |
Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
General Recommendation: Vote case-by-case on amendments to cash and equity incentive plans.
Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| |
◾ |
|
Addresses administrative features only; or |
| |
◾ |
|
Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of
independent directors, per ISS’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time for any reason (including after the company’s initial public
offering), or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below). |
Vote against proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| |
◾ |
|
Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of
independent directors, per ISS’ Classification of Directors. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
51 of 82 |
|
Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company’s IPO and/or proposals that bundle material
amendment(s) other than those for Section 162(m) purposes.
Vote
case-by-case on all other proposals to amend equity incentive plans, considering the following:
| |
◾ |
|
If the proposal requests additional shares and/or the amendments include a term extension or addition of full value awards
as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments; |
| |
◾ |
|
If the plan is being presented to shareholders for the first time (including after the company’s IPO), whether or not
additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments; and |
| |
◾ |
|
If there is no request for additional shares and the amendments do not include a term extension or addition of full value
awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown only for informational purposes. |
In the first two case-by-case evaluation scenarios, the EPSC
evaluation/score is the more heavily weighted consideration.
Specific Treatment of Certain Award Types in Equity Plan
Evaluations
Dividend Equivalent Rights
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the
binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder
equity to employees and non-employee directors and this cost should be captured.
Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the
share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Other Compensation Plans
401(k) Employee Benefit Plans
General Recommendation: Vote for proposals to implement a 401(k) savings plan for
employees.
Employee Stock Ownership Plans (ESOPs)
General Recommendation: Vote for proposals to implement an ESOP or increase authorized
shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
52 of 82 |
|
Employee Stock
Purchase Plans—Qualified Plans
General Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply:
| |
◾ |
|
Purchase price is at least 85 percent of fair market value; |
| |
◾ |
|
Offering period is 27 months or less; and |
| |
◾ |
|
The number of shares allocated to the plan is 10 percent or less of the outstanding shares. |
Vote against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.
Employee Stock Purchase Plans—Non-Qualified Plans
General
Recommendation: Vote case-by-case on nonqualified
employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features:
| |
◾ |
|
Broad-based participation; |
| |
◾ |
|
Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;
|
| |
◾ |
|
Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of
20 percent from market value; and |
| |
◾ |
|
No discount on the stock price on the date of purchase when there is a company matching contribution.
|
Vote against nonqualified employee stock purchase plans when the plan features do not meet all of the above criteria. If the
matching contribution or effective discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of the assessment.
Option Exchange Programs/Repricing Options
General Recommendation: Vote case-by-case on management proposals
seeking approval to exchange/reprice options taking into consideration:
| |
◾ |
|
Historic trading patterns--the stock price should not be so volatile that the
options are likely to be back “in-the-money” over the near term; |
| |
◾ |
|
Rationale for the re-pricing--was the stock
price decline beyond management’s control?; |
| |
◾ |
|
Is this a value-for-value exchange?;
|
| |
◾ |
|
Are surrendered stock options added back to the plan reserve?; |
| |
◾ |
|
Timing—repricing should occur at least one year out from any precipitous drop in company’s stock price;
|
| |
◾ |
|
Option vesting—does the new option vest immediately or is there a black-out
period?; |
| |
◾ |
|
Term of the option--the term should remain the same as that of the replaced option;
|
| |
◾ |
|
Exercise price—should be set at fair market or a premium to market; and |
| |
◾ |
|
Participants—executive officers and directors must be excluded. |
If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration
the company’s total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent,
rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the
company’s stock price demonstrates poor timing
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
53 of 82 |
|
and warrants additional scrutiny. Also,
consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take
advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder vote.
Stock Plans in Lieu of Cash
General Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.
Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not
dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture
the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
General Recommendation: One-time Transfers: Vote
against or withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval.
Vote case-by-case on one-time
transfers. Vote for if:
| |
◾ |
|
Executive officers and non-employee directors are excluded from participating;
|
| |
◾ |
|
Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing
models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and |
| |
◾ |
|
There is a two-year minimum holding period for sale proceeds (cash or stock) for
all participants. |
Additionally, management should provide a clear explanation of why options are being transferred to a
third-party institution and whether the events leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote
against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure, and mechanics must be disclosed to shareholders.
The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
| |
◾ |
|
Cost of the program and impact of the TSOs on company’s total option expense; and |
| |
◾ |
|
Option repricing policy. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
54 of 82 |
|
Amendments to existing plans that allow for
introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.
Director Compensation
Shareholder Ratification of Director Pay Programs
General Recommendation: Vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:
| |
◾ |
|
If the equity plan under which non-employee director grants are made is on the
ballot, whether or not it warrants support; and |
| |
◾ |
|
An assessment of the following qualitative factors: |
| |
◾ |
|
The relative magnitude of director compensation as compared to companies of a similar profile; |
| |
◾ |
|
The presence of problematic pay practices relating to director compensation; |
| |
◾ |
|
Director stock ownership guidelines and holding requirements; |
| |
◾ |
|
Equity award vesting schedules; |
| |
◾ |
|
The mix of cash and equity-based compensation; |
| |
◾ |
|
Meaningful limits on director compensation; |
| |
◾ |
|
The availability of retirement benefits or perquisites; and |
| |
◾ |
|
The quality of disclosure surrounding director compensation. |
Equity Plans for Non-Employee Directors
General Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on:
| |
◾ |
|
The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the
company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; |
| |
◾ |
|
The company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and
|
| |
◾ |
|
The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk).
|
On occasion, non-employee director stock plans will exceed the plan cost or burn-rate
benchmarks when combined with employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative
factors:
| |
◾ |
|
The relative magnitude of director compensation as compared to companies of a similar profile; |
| |
◾ |
|
The presence of problematic pay practices relating to director compensation; |
| |
◾ |
|
Director stock ownership guidelines and holding requirements; |
| |
◾ |
|
Equity award vesting schedules; |
| |
◾ |
|
The mix of cash and equity-based compensation; |
| |
◾ |
|
Meaningful limits on director compensation; |
| |
◾ |
|
The availability of retirement benefits or perquisites; and |
| |
◾ |
|
The quality of disclosure surrounding director compensation. |
Non-Employee Director Retirement Plans
General Recommendation: Vote
against retirement plans for non-employee directors. Vote for shareholder proposals to eliminate retirement plans for non-employee directors.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
55 of 82 |
|
Shareholder Proposals on
Compensation
Bonus Banking/Bonus Banking “Plus”
General Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the
named executive officers or a wider group of employees), taking into account the following factors:
| |
◾ |
|
The company’s past practices regarding equity and cash compensation; |
| |
◾ |
|
Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at
least 50 percent for full tenure); and |
| |
◾ |
|
Whether the company has a rigorous claw-back policy in place. |
Compensation Consultants—Disclosure of Board or Company’s Utilization
General Recommendation: Generally
vote for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid.
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
General Recommendation: Generally vote for shareholder proposals seeking additional
disclosure of executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome
to the company.
Generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form
of compensation (such as types of compensation elements or specific metrics) to be used for executive or directors.
Generally vote against
shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Vote case-by-case on all other shareholder proposals regarding executive
and director pay, taking into account relevant factors, including but not limited to: company performance, pay level and design versus peers, history of compensation concerns or
pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.
Golden Coffins/Executive Death Benefits
General Recommendation: Generally vote for proposals calling for companies to adopt a
policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses,
accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based
employee population is eligible.
Hold Equity Past Retirement or for a Significant Period of Time
General Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors
will be taken into account:
| |
◾ |
|
The percentage/ratio of net shares required to be retained; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
56 of 82 |
|
| |
◾ |
|
The time period required to retain the shares; |
| |
◾ |
|
Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness
of such requirements; |
| |
◾ |
|
Whether the company has any other policies aimed at mitigating risk taking by executives; |
| |
◾ |
|
Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested
holding period/retention ratio or the company’s existing requirements; and |
| |
◾ |
|
Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus.
|
Pay Disparity
General Recommendation: Vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The following factors will
be considered:
| |
◾ |
|
The company’s current level of disclosure of its executive compensation setting process, including how the company
considers pay disparity; |
| |
◾ |
|
If any problematic pay practices or
pay-for-performance concerns have been identified at the company; and |
| |
◾ |
|
The level of shareholder support for the company’s pay programs. |
Generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio in a specific way to set or limit executive pay.
Pay for Performance/Performance-Based Awards
General Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the
board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
| |
◾ |
|
First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent
options or restricted stock, indexed options, or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top
executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards;
and |
| |
◾ |
|
Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based
program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor
design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test. |
In general, vote for the shareholder proposal if the company does not meet both of the above two steps.
Pay for Superior Performance
General Recommendation: Vote case-by-case on shareholder proposals that request the board establish a pay-for-superior
performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles:
| |
◾ |
|
Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group
median; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
57 of 82 |
|
| |
◾ |
|
Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested,
equity awards; |
| |
◾ |
|
Provide the strategic rationale and relative weightings of the financial and
non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan; |
| |
◾ |
|
Establish performance targets for each plan financial metric relative to the performance of the company’s peer
companies; and |
| |
◾ |
|
Limit payment under the annual and performance-vested long-term incentive components of the plan to when the
company’s performance on its selected financial performance metrics exceeds peer group median performance. |
Consider the
following factors in evaluating this proposal:
| |
◾ |
|
What aspects of the company’s annual and long-term equity incentive programs are performance driven?
|
| |
◾ |
|
If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates
disclosed to shareholders or are they benchmarked against a disclosed peer group? |
| |
◾ |
|
Can shareholders assess the correlation between pay and performance based on the current disclosure? and
|
| |
◾ |
|
What type of industry and stage of business cycle does the company belong to? |
Pre-Arranged Trading Plans (10b5-1 Plans)
General Recommendation: Generally vote for shareholder proposals calling
for the addition of certain safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include:
| |
◾ |
|
Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K; |
| |
◾ |
|
Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary
circumstances, as determined by the board; |
| |
◾ |
|
Request that a certain number of days that must elapse between adoption or amendment of a
10b5-1 Plan and initial trading under the plan; |
| |
◾ |
|
Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
|
| |
◾ |
|
An executive may not trade in company stock outside the 10b5-1 Plan; and
|
| |
◾ |
|
Trades under a 10b5-1 Plan must be handled by a broker who does not handle other
securities transactions for the executive. |
Prohibit Outside CEOs from Serving on Compensation Committees
General Recommendation: Generally vote against proposals seeking a policy
to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.
Recoupment of Incentive or Stock Compensation in Specified Circumstances
General Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to
have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company’s financial position or reputation, or if the senior executive failed to manage or
monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies that permit recoupment in cases where an executive’s fraud, misconduct, or negligence significantly
contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant financial restatements.
Misconduct, negligence, or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
58 of 82 |
|
In considering whether to support such
shareholder proposals, ISS will take into consideration the following factors:
| |
◾ |
|
If the company has adopted a formal recoupment policy; |
| |
◾ |
|
The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock
compensation; |
| |
◾ |
|
Whether the company has chronic restatement history or material financial problems; |
| |
◾ |
|
Whether the company’s policy substantially addresses the concerns raised by the proponent; |
| |
◾ |
|
Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; and
|
| |
◾ |
|
Any other relevant factors. |
Severance and Golden Parachute Agreements
General Recommendation: Vote case-by-case on shareholder proposals requiring that executive severance (including change-in-control related)
arrangements or payments be submitted for shareholder ratification.
Factors that will be considered include, but are not limited to:
| |
◾ |
|
The company’s severance or
change-in-control agreements in place, and the presence of problematic features (such as excessive severance entitlements, single triggers, excise tax gross-ups, etc.); |
| |
◾ |
|
Any existing limits on cash severance payouts or policies which require shareholder ratification of severance payments
exceeding a certain level; |
| |
◾ |
|
Any recent severance-related controversies; and |
| |
◾ |
|
Whether the proposal is overly prescriptive, such as requiring shareholder approval of severance that does not exceed
market norms. |
Share Buyback Impact on Incentive Program Metrics
General Recommendation: Vote case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following factors:
| |
◾ |
|
The frequency and timing of the company’s share buybacks; |
| |
◾ |
|
The use of per-share metrics in incentive plans; |
| |
◾ |
|
The effect of recent buybacks on incentive metric results and payouts; and |
| |
◾ |
|
Whether there is any indication of metric result manipulation. |
Supplemental Executive Retirement Plans (SERPs)
General Recommendation: Generally vote for shareholder proposals requesting to put
extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement
plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.
Tax Gross-Up Proposals
General Recommendation: Generally vote for proposals calling for companies to adopt a
policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement
applicable to management employees of the company, such as a relocation or expatriate tax equalization policy.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
59 of 82 |
|
Termination of
Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
General Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of
employment prior to severance payment and/or eliminating accelerated vesting of unvested equity.
The following factors will be considered:
| |
◾ |
|
The company’s current treatment of equity upon employment termination and/or in change-in-control situations (i.e., vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.); and
|
| |
◾ |
|
Current employment agreements, including potential poor pay practices such as
gross-ups embedded in those agreements. |
Generally vote for proposals seeking a policy
that prohibits automatic acceleration of the vesting of equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of
any related performance goals between the award date and the change in control).
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
60 of 82 |
|
6.
Routine/Miscellaneous
Adjourn Meeting
General Recommendation: Generally vote against proposals
to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.
Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against
proposals if the wording is too vague or if the proposal includes “other business.”
Amend Quorum Requirements
General
Recommendation: Vote case-by-case on proposals to reduce quorum requirements for shareholder meetings below a majority
of the shares outstanding, taking into consideration:
| |
◾ |
|
The new quorum threshold requested; |
| |
◾ |
|
The rationale presented for the reduction; |
| |
◾ |
|
The market capitalization of the company (size, inclusion in indices); |
| |
◾ |
|
The company’s ownership structure; |
| |
◾ |
|
Previous voter turnout or attempts to achieve quorum; |
| |
◾ |
|
Any provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve
sufficiently; and |
| |
◾ |
|
Other factors as appropriate. |
In general, a quorum threshold kept as close to a majority of shares outstanding as is achievable is preferred.
Vote case-by-case on directors who unilaterally lower the quorum
requirements below a majority of the shares outstanding, taking into consideration the factors listed above.
Amend Minor Bylaws
General
Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections).
Change Company Name
General Recommendation: Vote for proposals to change the
corporate name unless there is compelling evidence that the change would adversely impact shareholder value.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
61 of 82 |
|
Change Date, Time, or Location of Annual Meeting
General Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is
unreasonable.
Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling
or location is unreasonable.
Other Business
General Recommendation: Vote against proposals to approve
other business when it appears as a voting item.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
62 of 82 |
|
7. Social and
Environmental Issues
Global Approach – E&S Shareholder Proposals
ISS applies a common approach globally to evaluating social and environmental proposals which cover a wide range of topics, including consumer and
product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations
focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
General Recommendation: Generally vote case-by-case, examining
primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors will be considered:
| |
◾ |
|
If the issues presented in the proposal are being appropriately or effectively dealt with through legislation or government
regulation; |
| |
◾ |
|
If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
|
| |
◾ |
|
Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive;
|
| |
◾ |
|
The company’s approach compared with any industry standard practices for addressing the issue(s) raised by the
proposal; |
| |
◾ |
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s practices
related to the issue(s) raised in the proposal; |
| |
◾ |
|
If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is
currently available to shareholders from the company or from other publicly available sources; and |
| |
◾ |
|
If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or
confidential information that could place the company at a competitive disadvantage. |
Endorsement of
Principles
General Recommendation: Generally
vote against proposals seeking a company’s endorsement of principles that support a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue that is beyond its own control and
may limit its flexibility with respect to future developments.
Management and the board should be afforded the flexibility to make decisions
on specific public policy positions based on their own assessment of the most beneficial strategies for the company.
Animal
Welfare
Animal Welfare Policies
General Recommendation: Generally vote
for proposals seeking a report on a company’s animal welfare standards, or animal welfare-related risks, unless:
| |
◾ |
|
The company has already published a set of animal welfare standards and monitors compliance; |
| |
◾ |
|
The company’s standards are comparable to industry peers; and |
| |
◾ |
|
There are no recent significant fines, litigation, or controversies related to the company’s and/or its
suppliers’ treatment of animals. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
63 of 82 |
|
Animal Testing
General
Recommendation: Generally vote against proposals to phase out the use of animals in product testing,
unless:
| |
◾ |
|
The company is conducting animal testing programs that are unnecessary or not required by regulation;
|
| |
◾ |
|
The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or
|
| |
◾ |
|
There are recent, significant fines or litigation related to the company’s treatment of animals.
|
Animal Slaughter
General Recommendation: Generally vote against proposals
requesting the implementation of Controlled Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.
Vote case-by-case on proposals requesting a report on the feasibility of
implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at
the company.
Consumer Issues
Genetically Modified Ingredients
General Recommendation: Generally vote against proposals
requesting that a company voluntarily label genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities.
Vote case-by-case on proposals asking for a report on the
feasibility of labeling products containing GE ingredients, taking into account:
| |
◾ |
|
The potential impact of such labeling on the company’s business; |
| |
◾ |
|
The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this
disclosure compares with industry peer disclosure; and |
| |
◾ |
|
Company’s current disclosure on the feasibility of GE product labeling. |
Generally vote against proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of
this sort are better undertaken by regulators and the scientific community.
Generally vote against proposals to eliminate GE ingredients from the
company’s products, or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current
regulations.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
64 of 82 |
|
Reports on Potentially Controversial Business/Financial Practices
General Recommendation: Vote case-by-case on requests for reports on a
company’s potentially controversial business or financial practices or products, taking into account:
| |
◾ |
|
Whether the company has adequately disclosed mechanisms in place to prevent abuses; |
| |
◾ |
|
Whether the company has adequately disclosed the financial risks of the products/practices in question;
|
| |
◾ |
|
Whether the company has been subject to violations of related laws or serious controversies; and |
| |
◾ |
|
Peer companies’ policies/practices in this area. |
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug
Reimportation
General Recommendation:
Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry
norms in its product pricing practices.
Vote
case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
| |
◾ |
|
The potential for reputational, market, and regulatory risk exposure; |
| |
◾ |
|
Existing disclosure of relevant policies; |
| |
◾ |
|
Deviation from established industry norms; |
| |
◾ |
|
Relevant company initiatives to provide research and/or products to disadvantaged consumers; |
| |
◾ |
|
Whether the proposal focuses on specific products or geographic regions; |
| |
◾ |
|
The potential burden and scope of the requested report; and |
| |
◾ |
|
Recent significant controversies, litigation, or fines at the company. |
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless
such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or
constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
Product Safety and Toxic/Hazardous Materials
General Recommendation: Generally vote
for proposals requesting that a company report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or
product safety in its supply chain, unless:
| |
◾ |
|
The company already discloses similar information through existing reports such as a supplier code of conduct and/or a
sustainability report; |
| |
◾ |
|
The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply
chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; or |
| |
◾ |
|
The company has not been recently involved in relevant significant controversies, fines, or litigation.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
65 of 82 |
|
Vote
case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous
materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:
| |
◾ |
|
The company’s current level of disclosure regarding its product safety policies, initiatives, and oversight
mechanisms; |
| |
◾ |
|
Current regulations in the markets in which the company operates; and |
| |
◾ |
|
Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company.
|
Generally vote against resolutions requiring that a company reformulate its products.
Tobacco-Related Proposals
General Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products,
considering:
| |
◾ |
|
Recent related fines, controversies, or significant litigation; |
| |
◾ |
|
Whether the company complies with relevant laws and regulations on the marketing of tobacco; |
| |
◾ |
|
Whether the company’s advertising restrictions deviate from those of industry peers; |
| |
◾ |
|
Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and
|
| |
◾ |
|
Whether restrictions on marketing to youth extend to foreign countries. |
Vote case-by-case on proposals regarding second-hand smoke, considering;
| |
◾ |
|
Whether the company complies with all laws and regulations; |
| |
◾ |
|
The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and
|
| |
◾ |
|
The risk of any health-related liabilities. |
Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
Climate Change
Say on Climate (SoC) Management Proposals
General Recommendation:
Vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action
plan23, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:
| |
◾ |
|
The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other
market standards; |
23 Variations of this request also include climate transition related ambitions, or commitment
to reporting on the implementation of a climate plan.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
66 of 82 |
|
| |
◾ |
|
Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3); |
| |
◾ |
|
The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply
chain GHG emissions (Scopes 1, 2, and 3 if relevant); |
| |
◾ |
|
Whether the company has sought and received third-party approval that its targets are science-based; |
| |
◾ |
|
Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes
1, 2, and 3) by 2050; |
| |
◾ |
|
Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;
|
| |
◾ |
|
Whether the company’s climate data has received third-party assurance; |
| |
◾ |
|
Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;
|
| |
◾ |
|
Whether there are specific industry decarbonization challenges; and |
| |
◾ |
|
The company’s related commitment, disclosure, and performance compared to its industry peers. |
Say on Climate (SoC) Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its
upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following:
| |
◾ |
|
The completeness and rigor of the company’s climate-related disclosure; |
| |
◾ |
|
The company’s actual GHG emissions performance; |
| |
◾ |
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
its GHG emissions; and |
| |
◾ |
|
Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.
|
Climate Change/Greenhouse Gas (GHG) Emissions
General Recommendation: Generally vote for resolutions
requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks,
considering:
| |
◾ |
|
Whether the company already provides current, publicly-available information on the impact that climate change may have on
the company as well as associated company policies and procedures to address related risks and/or opportunities; |
| |
◾ |
|
The company’s level of disclosure compared to industry peers; and |
| |
◾ |
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate
change-related performance. |
Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company
operations and/or products and operations, unless:
| |
◾ |
|
The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the
company as well as associated company policies and procedures to address related risks and/or opportunities; |
| |
◾ |
|
The company’s level of disclosure is comparable to that of industry peers; or |
| |
◾ |
|
There are no significant, controversies, fines, penalties, or litigation associated with the company’s GHG emissions.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
67 of 82 |
|
Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
| |
◾ |
|
Whether the company provides disclosure of year-over-year GHG emissions performance data; |
| |
◾ |
|
Whether company disclosure lags behind industry peers; |
| |
◾ |
|
The company’s actual GHG emissions performance; |
| |
◾ |
|
The company’s current GHG emission policies, oversight mechanisms, and related initiatives; and
|
| |
◾ |
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
GHG emissions. |
Energy Efficiency
General Recommendation: Generally vote for proposals
requesting that a company report on its energy efficiency policies, unless:
| |
◾ |
|
The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy
efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or |
| |
◾ |
|
The proponent requests adoption of specific energy efficiency goals within specific timelines. |
Renewable Energy
General Recommendation: Generally vote for requests for
reports on the feasibility of developing renewable energy resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business.
Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s
evaluation of the feasibility and financial impact that such programs may have on the company.
Generally vote against proposals that call
for the adoption of renewable energy goals, taking into account:
| |
◾ |
|
The scope and structure of the proposal; |
| |
◾ |
|
The company’s current level of disclosure on renewable energy use and GHG emissions; and |
| |
◾ |
|
The company’s disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate
climate change risks. |
Diversity
Board Diversity
General Recommendation: Generally vote for requests for
reports on a company’s efforts to diversify the board, unless:
| |
◾ |
|
The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies
of similar size and business; or |
| |
◾ |
|
The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within
the company. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
68 of 82 |
|
Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
| |
◾ |
|
The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
|
| |
◾ |
|
The level of gender and racial minority representation that exists at the company’s industry peers;
|
| |
◾ |
|
The company’s established process for addressing gender and racial minority board representation;
|
| |
◾ |
|
Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
|
| |
◾ |
|
The independence of the company’s nominating committee; |
| |
◾ |
|
Whether the company uses an outside search firm to identify potential director nominees; and |
| |
◾ |
|
Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.
|
Equality of Opportunity
General Recommendation: Generally vote for proposals
requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data,
unless:
| |
◾ |
|
The company publicly discloses equal opportunity policies and initiatives in a comprehensive manner; |
| |
◾ |
|
The company already publicly discloses comprehensive workforce diversity data; or |
| |
◾ |
|
The company has no recent significant EEO-related violations or litigation.
|
Generally vote against proposals seeking information on the diversity efforts of suppliers and service providers. Such requests
may pose a significant burden on the company.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
General Recommendation: Generally vote
for proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome.
Generally vote against proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions regarding benefits should be
left to the discretion of the company.
Gender, Race/Ethnicity Pay Gap
General Recommendation: Vote case-by-case on requests for reports on a company’s pay data by gender or race/ ethnicity, or a report on a company’s policies and goals to reduce any
gender or race/ethnicity pay gaps, taking into account:
| |
◾ |
|
The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and
its compensation philosophy on fair and equitable compensation practices; |
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race,
or ethnicity pay gap issues; |
| |
◾ |
|
The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its
industry peers; and |
| |
◾ |
|
Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
69 of 82 |
|
Racial Equity and/or
Civil Rights Audit Guidelines
General Recommendation: Vote case-by-case on proposals asking a company to conduct an independent racial equity and/or civil rights audit, taking into account:
| |
◾ |
|
The company’s established process or framework for addressing racial inequity and discrimination internally;
|
| |
◾ |
|
Whether the company adequately discloses workforce diversity and inclusion metrics and goals; |
| |
◾ |
|
Whether the company has issued a public statement related to its racial justice efforts in recent years, or has committed
to internal policy review; |
| |
◾ |
|
Whether the company has engaged with impacted communities, stakeholders, and civil rights experts; |
| |
◾ |
|
The company’s track record in recent years of racial justice measures and outreach externally; and
|
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial
inequity or discrimination. |
Environment and Sustainability
Facility and Workplace Safety
General Recommendation: Vote case-by-case on requests for workplace safety reports, including reports on accident risk reduction efforts, taking into account:
| |
◾ |
|
The company’s current level of disclosure of its workplace health and safety performance data, health and safety
management policies, initiatives, and oversight mechanisms; |
| |
◾ |
|
The nature of the company’s business, specifically regarding company and employee exposure to health and safety
risks; |
| |
◾ |
|
Recent significant controversies, fines, or violations related to workplace health and safety; and |
| |
◾ |
|
The company’s workplace health and safety performance relative to industry peers. |
Vote case-by-case on resolutions requesting that a company report on
safety and/or security risks associated with its operations and/or facilities, considering:
| |
◾ |
|
The company’s compliance with applicable regulations and guidelines; |
| |
◾ |
|
The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance
monitoring; and |
| |
◾ |
|
The existence of recent, significant violations, fines, or controversy regarding the safety and security of the
company’s operations and/or facilities. |
Natural Capital- Related and/or Community Impact
Assessment Proposals
General Recommendation:
Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental
impact of company operations, considering:
| |
◾ |
|
Alignment of current disclosure of applicable company policies, metrics, risk assessment report(s) and risk management
procedures with any relevant, broadly accepted reporting frameworks; |
| |
◾ |
|
The impact of regulatory non-compliance, litigation, remediation, or reputational
loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations; |
| |
◾ |
|
The nature, purpose, and scope of the company’s operations in the specific region(s); |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
70 of 82 |
|
| |
◾ |
|
The degree to which company policies and procedures are consistent with industry norms; and |
| |
◾ |
|
The scope of the resolution. |
Hydraulic Fracturing
General Recommendation: Generally vote for proposals
requesting greater disclosure of a company’s (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations,
considering:
| |
◾ |
|
The company’s current level of disclosure of relevant policies and oversight mechanisms; |
| |
◾ |
|
The company’s current level of such disclosure relative to its industry peers; |
| |
◾ |
|
Potential relevant local, state, or national regulatory developments; and |
| |
◾ |
|
Controversies, fines, or litigation related to the company’s hydraulic fracturing operations. |
Operations in Protected Areas
General Recommendation: Generally vote for requests for
reports on potential environmental damage as a result of company operations in protected regions, unless:
| |
◾ |
|
Operations in the specified regions are not permitted by current laws or regulations; |
| |
◾ |
|
The company does not currently have operations or plans to develop operations in these protected regions; or
|
| |
◾ |
|
The company’s disclosure of its operations and environmental policies in these regions is comparable to industry
peers. |
Recycling
General Recommendation: Vote case-by-case on proposals to report on an existing recycling program, or adopt a new recycling program, taking into account:
| |
◾ |
|
The nature of the company’s business; |
| |
◾ |
|
The current level of disclosure of the company’s existing related programs; |
| |
◾ |
|
The timetable and methods of program implementation prescribed by the proposal; |
| |
◾ |
|
The company’s ability to address the issues raised in the proposal; and |
| |
◾ |
|
How the company’s recycling programs compare to similar programs of its industry peers. |
Sustainability Reporting
General Recommendation: Generally vote for proposals
requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:
| |
◾ |
|
The company already discloses similar information through existing reports or policies such as an environment, health, and
safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or |
| |
◾ |
|
The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified time frame. |
Water Issues
General Recommendation: Vote case-by-case on proposals requesting a company report on, or adopt a new policy on, water-related risks and concerns, taking into account:
| |
◾ |
|
The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
71 of 82 |
|
| |
◾ |
|
Whether or not the company’s existing water-related policies and practices are consistent with relevant
internationally recognized standards and national/local regulations; |
| |
◾ |
|
The potential financial impact or risk to the company associated with water-related concerns or issues; and
|
| |
◾ |
|
Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers.
|
General Corporate Issues
Charitable Contributions
General Recommendation: Vote against proposals restricting
a company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence,
management should determine which, and if, contributions are in the best interests of the company.
Data Security,
Privacy, and Internet Issues
General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and
management policies and procedures, considering:
| |
◾ |
|
The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech,
information access and management, and Internet censorship; |
| |
◾ |
|
Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of
information on the Internet; |
| |
◾ |
|
The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other
telecommunications; |
| |
◾ |
|
Applicable market-specific laws or regulations that may be imposed on the company; and |
| |
◾ |
|
Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship.
|
ESG Compensation-Related Proposals
General Recommendation: Vote case-by-case on proposals seeking a report or additional disclosure on the
company’s approach, policies, and practices on incorporating environmental and social criteria into its executive compensation strategy, considering:
| |
◾ |
|
The scope and prescriptive nature of the proposal; |
| |
◾ |
|
The company’s current level of disclosure regarding its environmental and social performance and governance;
|
| |
◾ |
|
The degree to which the board or compensation committee already discloses information on whether it has considered related
E&S criteria; and |
| |
◾ |
|
Whether the company has significant controversies or regulatory violations regarding social or environmental issues.
|
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
72 of 82 |
|
Human Rights, Human
Capital Management, and International Operations
Human Rights Proposals
General Recommendation: Generally vote for proposals
requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed.
Vote case-by-case on proposals to implement company or company
supplier labor and/or human rights standards and policies, considering:
| |
◾ |
|
The degree to which existing relevant policies and practices are disclosed; |
| |
◾ |
|
Whether or not existing relevant policies are consistent with internationally recognized standards; |
| |
◾ |
|
Whether company facilities and those of its suppliers are monitored and how; |
| |
◾ |
|
Company participation in fair labor organizations or other internationally recognized human rights initiatives;
|
| |
◾ |
|
Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;
|
| |
◾ |
|
Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;
|
| |
◾ |
|
The scope of the request; and |
| |
◾ |
|
Deviation from industry sector peer company standards and practices. |
Vote case-by-case on proposals requesting that a company conduct an
assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering:
| |
◾ |
|
The degree to which existing relevant policies and practices are disclosed, including information on the implementation of
these policies and any related oversight mechanisms; |
| |
◾ |
|
The company’s industry and whether the company or its suppliers operate in countries or areas where there is a
history of human rights concerns; |
| |
◾ |
|
Recent significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and
whether the company has taken remedial steps; and |
| |
◾ |
|
Whether the proposal is unduly burdensome or overly prescriptive. |
Mandatory Arbitration
General Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory
arbitration on employment-related claims, taking into account:
| |
◾ |
|
The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace
claims; |
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of
mandatory arbitration agreements on workplace claims; and |
| |
◾ |
|
The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements
compared to its peers. |
Operations in High-Risk Markets
General Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk”
markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account:
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
73 of 82 |
|
| |
◾ |
|
The nature, purpose, and scope of the operations and business involved that could be affected by social or political
disruption; |
| |
◾ |
|
Current disclosure of applicable risk assessment(s) and risk management procedures; |
| |
◾ |
|
Compliance with U.S. sanctions and laws; |
| |
◾ |
|
Consideration of other international policies, standards, and laws; and |
| |
◾ |
|
Whether the company has been recently involved in recent, significant controversies, fines, or litigation related to its
operations in “high-risk” markets. |
Outsourcing/Offshoring
General Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated
with outsourcing/plant closures, considering:
| |
◾ |
|
Controversies surrounding operations in the relevant market(s); |
| |
◾ |
|
The value of the requested report to shareholders; |
| |
◾ |
|
The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and
|
| |
◾ |
|
The company’s existing human rights standards relative to industry peers. |
Sexual Harassment
General Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed
by a company’s failure to prevent workplace sexual harassment, taking into account:
| |
◾ |
|
The company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment;
|
| |
◾ |
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace
sexual harassment issues; and |
| |
◾ |
|
The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry
peers. |
Weapons and Military Sales
General Recommendation: Vote against reports on foreign
military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.
Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or
nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses,
and withdrawal from these contracts could have a negative impact on the company’s business.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
74 of 82 |
|
Political Activities
Lobbying
General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures,
considering:
| |
◾ |
|
The company’s current disclosure of relevant lobbying policies, and management and board oversight;
|
| |
◾ |
|
The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that
engage in lobbying activities; and |
| |
◾ |
|
Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities.
|
Political Contributions
General Recommendation: Generally vote for proposals
requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering:
| |
◾ |
|
The company’s policies, and management and board oversight related to its direct political contributions and payments
to trade associations or other groups that may be used for political purposes; |
| |
◾ |
|
The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may
make political contributions; and |
| |
◾ |
|
Recent significant controversies, fines, or litigation related to the company’s political contributions or political
activities. |
Vote against proposals barring a company from making political contributions. Businesses are affected by legislation
at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote against proposals
to publish in newspapers and other media a company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Political Expenditures and Lobbying Congruency
General Recommendation: Generally vote case-by-case on proposals requesting greater disclosure of a company’s alignment of political contributions, lobbying, and electioneering spending with a
company’s publicly stated values and policies, considering:
| |
◾ |
|
The company’s policies, management, board oversight, governance processes, and level of disclosure related to direct
political contributions, lobbying activities, and payments to trade associations, political action committees, or other groups that may be used for political purposes; |
| |
◾ |
|
The company’s disclosure regarding: the reasons for its support of candidates for public offices; the reasons for
support of and participation in trade associations or other groups that may make political contributions; and other political activities; |
| |
◾ |
|
Any incongruencies identified between a company’s direct and indirect political expenditures and its publicly stated
values and priorities; and |
| |
◾ |
|
Recent significant controversies related to the company’s direct and indirect lobbying, political contributions, or
political activities. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
75 of 82 |
|
Generally vote
case-by-case on proposals requesting comparison of a company’s political spending to objectives that can mitigate material risks for the company, such as limiting
global warming.
Political Ties
General Recommendation: Generally vote against proposals
asking a company to affirm political nonpartisanship in the workplace, so long as:
| |
◾ |
|
There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions
or trade association spending; and |
| |
◾ |
|
The company has procedures in place to ensure that employee contributions to company-sponsored political action committees
(PACs) are strictly voluntary and prohibit coercion. |
Vote against proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful
information to shareholders.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
76 of 82 |
|
8. Mutual Fund Proxies
Election of Directors
General Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual
fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
Closed
End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
General Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from
nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote.
Converting Closed-end Fund to Open-end Fund
General Recommendation: Vote case-by-case on conversion proposals, considering the following factors:
| |
◾ |
|
Past performance as a closed-end fund; |
| |
◾ |
|
Market in which the fund invests; |
| |
◾ |
|
Measures taken by the board to address the discount; and |
| |
◾ |
|
Past shareholder activism, board activity, and votes on related proposals. |
Proxy Contests
General Recommendation: Vote case-by-case on proxy contests, considering the following factors:
| |
◾ |
|
Past performance relative to its peers; |
| |
◾ |
|
Market in which the fund invests; |
| |
◾ |
|
Measures taken by the board to address the issues; |
| |
◾ |
|
Past shareholder activism, board activity, and votes on related proposals; |
| |
◾ |
|
Strategy of the incumbents versus the dissidents; |
| |
◾ |
|
Independence of directors; |
| |
◾ |
|
Experience and skills of director candidates; |
| |
◾ |
|
Governance profile of the company; and |
| |
◾ |
|
Evidence of management entrenchment. |
Investment Advisory Agreements
General Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors:
| |
◾ |
|
Proposed and current fee schedules; |
| |
◾ |
|
Fund category/investment objective; |
| |
◾ |
|
Performance benchmarks; |
| |
◾ |
|
Share price performance as compared with peers; |
| |
◾ |
|
Resulting fees relative to peers; and |
| |
◾ |
|
Assignments (where the advisor undergoes a change of control). |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
77 of 82 |
|
Approving New Classes
or Series of Shares
General Recommendation:
Vote for the establishment of new classes or series of shares.
Preferred
Stock Proposals
General Recommendation:
Vote case-by-case on the authorization for or increase in preferred shares, considering the following factors:
| |
◾ |
|
Stated specific financing purpose; |
| |
◾ |
|
Possible dilution for common shares; and |
| |
◾ |
|
Whether the shares can be used for antitakeover purposes. |
1940 Act Policies
General Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors:
| |
◾ |
|
Potential competitiveness; |
| |
◾ |
|
Regulatory developments; |
| |
◾ |
|
Current and potential returns; and |
| |
◾ |
|
Current and potential risk. |
Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
General Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:
| |
◾ |
|
The fund’s target investments; |
| |
◾ |
|
The reasons given by the fund for the change; and |
| |
◾ |
|
The projected impact of the change on the portfolio. |
Change Fundamental Investment Objective to Nonfundamental
General Recommendation: Vote against proposals to change a
fund’s fundamental investment objective to non-fundamental.
Name
Change Proposals
General Recommendation:
Vote case-by-case on name change proposals, considering the following factors:
| |
◾ |
|
Political/economic changes in the target market; |
| |
◾ |
|
Consolidation in the target market; and |
| |
◾ |
|
Current asset composition. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
78 of 82 |
|
Change in Fund’s
Subclassification
General Recommendation:
Vote case-by-case on changes in a fund’s sub-classification, considering the
following factors:
| |
◾ |
|
Potential competitiveness; |
| |
◾ |
|
Current and potential returns; |
| |
◾ |
|
Risk of concentration; and |
| |
◾ |
|
Consolidation in target industry. |
Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value
General Recommendation: Vote for proposals
authorizing the board to issue shares below Net Asset Value (NAV) if:
| |
◾ |
|
The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders
approve the underlying proposal, as required under the Investment Company Act of 1940; |
| |
◾ |
|
The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent
directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and |
| |
◾ |
|
The company has demonstrated responsible past use of share issuances by either: |
| |
◾ |
|
Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or |
| |
◾ |
|
Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts
to NAV and economic dilution to existing non-participating shareholders. |
Disposition of Assets/Termination/Liquidation
General
Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the
following factors:
| |
◾ |
|
Strategies employed to salvage the company; |
| |
◾ |
|
The fund’s past performance; and |
| |
◾ |
|
The terms of the liquidation. |
Changes to the Charter Document
General Recommendation: Vote case-by-case on changes to the charter document, considering the following factors:
| |
◾ |
|
The degree of change implied by the proposal; |
| |
◾ |
|
The efficiencies that could result; |
| |
◾ |
|
The state of incorporation; and |
| |
◾ |
|
Regulatory standards and implications. |
Vote against any of the following changes:
| |
◾ |
|
Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series;
|
| |
◾ |
|
Removal of shareholder approval requirement for amendments to the new declaration of trust; |
| |
◾ |
|
Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be
modified by the investment manager and the trust management, as permitted by the 1940 Act; |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
79 of 82 |
|
| |
◾ |
|
Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales
charges and redemption fees that may be imposed upon redemption of a fund’s shares; |
| |
◾ |
|
Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements; or |
| |
◾ |
|
Removal of shareholder approval requirement to change the domicile of the fund. |
Changing the Domicile of a Fund
General Recommendation: Vote case-by-case on re-incorporations, considering the following factors:
| |
◾ |
|
Regulations of both states; |
| |
◾ |
|
Required fundamental policies of both states; and |
| |
◾ |
|
The increased flexibility available. |
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
General Recommendation: Vote against proposals authorizing
the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser.
Distribution Agreements
General Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors:
| |
◾ |
|
Fees charged to comparably sized funds with similar objectives; |
| |
◾ |
|
The proposed distributor’s reputation and past performance; |
| |
◾ |
|
The competitiveness of the fund in the industry; and |
| |
◾ |
|
The terms of the agreement. |
Master-Feeder Structure
General Recommendation: Vote for the establishment of a
master-feeder structure.
Mergers
General Recommendation: Vote case-by-case on merger proposals, considering the following factors:
| |
◾ |
|
Resulting fee structure; |
| |
◾ |
|
Performance of both funds; |
| |
◾ |
|
Continuity of management personnel; and |
| |
◾ |
|
Changes in corporate governance and their impact on shareholder rights. |
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
General Recommendation: Generally vote against shareholder
proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
80 of 82 |
|
Reimburse Shareholder
for Expenses Incurred
General Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the
reimbursement of the proxy solicitation expenses.
Terminate the Investment Advisor
General Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the following factors:
| |
◾ |
|
Performance of the fund’s Net Asset Value (NAV); |
| |
◾ |
|
The fund’s history of shareholder relations; and |
| |
◾ |
|
The performance of other funds under the advisor’s management. |
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
81 of 82 |
|
We empower investors and
companies to build for long-term and sustainable growth by providing
high-quality data, analytics, and insight.
G E T S T A R T E D W I T H I S S S O L U T I O N S
Email sales@issgovernance.com or
visit www.issgovernance.com for more information.
Founded in 1985, Institutional Shareholder Services group of companies (ISS) empowers investors and companies to build for long-term and sustainable
growth by providing high-quality data, analytics and insight. ISS, which is majority owned by Deutsche Bourse Group, along with Genstar Capital and ISS management, is a leading provider of corporate governance and responsible investment solutions,
market intelligence, fund services, and events and editorial content for institutional investors and corporations, globally. ISS’ 2,600 employees operate worldwide across 29 global locations in 15 countries. Its approximately 3,400 clients
include many of the world’s leading institutional investors who rely on ISS’ objective and impartial offerings, as well as public companies focused on ESG and governance risk mitigation as a shareholder value enhancing measure. Clients
rely on ISS’ expertise to help them make informed investment decisions. This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the “Information”) is
the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.
The Information has not
been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or
recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or
trading strategies.
The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the
Information for any direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
© 2025 | Institutional Shareholder Services and/or its affiliates
|
|
|
|
|
| W W W . I S S G O V E R N A N C E . C O M |
|
|
82 of 82 |
|
Item 29.
Persons Controlled By or Under Common Control With Registrant
The Registrant is not directly or indirectly controlled by or under common control with any person other than the Trustees. It does not have any subsidiaries.
Under Article VI of the Registrant’s Master Trust Agreement the Trust generally shall indemnify each of its Trustees and officers (including persons who serve at the Trust’s request as directors, officers or trustees of another organization in which the Trust has any interest as a shareholder, creditor or otherwise (hereinafter referred to as a “Covered Person”)) against, and advance expenses with respect to, all liabilities, including but not limited to amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and expenses, including reasonable accountants’ and counsel fees, incurred by any Covered Person in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which such Covered Person may be or may have been involved as a party or otherwise or with which such person may be or may have been threatened, while in office or thereafter, by reason of being or having been such a Trustee or officer, director or trustee, except with respect to any matter as to which it has been determined that such Covered Person had acted with willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person’s office (such conduct referred to hereafter as “Disabling Conduct”). A determination that the Covered Person is entitled to indemnification may be made by (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the person to be indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of a court action or an administrative proceeding against a Covered Person for insufficiency of evidence of Disabling Conduct, or (iii) a reasonable determination, based upon a review of the facts, that the indemnitee was not liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum of Trustees who are neither “interested persons” of the Trust as defined in section 2(a) (19) of the Investment Company Act of 1940, as amended (the “1940 Act”), nor parties to the proceeding, (b) an independent legal counsel in a written opinion, or (c) Trust shareholders.
Insofar as indemnification by the Registrant for liabilities
arising under the Securities Act of 1933, as amended (the “1933 Act”), may be permitted to Trustees, officers, underwriters and controlling persons of the
Registrant, pursuant to Article VI of the Registrant’s Master Trust Agreement, or otherwise, the Registrant has been advised that, in the opinion of the U.S.
Securities and Exchange Commission (the “SEC”), such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such Trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.
Under a separate Indemnification Agreement by and among the Registrant and each
Trustee, the Registrant has undertaken to indemnify and advance expenses to each Trustee in a manner consistent with the laws of the Commonwealth of Massachusetts. The
Agreement precludes indemnification or advancement of expenses with respect to “disabling conduct” (willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of office) and sets forth reasonable and fair means for determining whether indemnification or advancement of expenses shall be made.
Item 31.
Business and Other Connections of Investment Adviser
Any other
business, profession, vocation or employment of a substantial nature in which each director or principal officer of each investment adviser is or has been, at any time
during the last two fiscal years, engaged for his or her own account or in the capacity of director, officer, employee, partner or trustee are as follows:
SSGA FM serves as the investment adviser for each series of the Trust. SSGA FM is a wholly-owned subsidiary of State Street Global Advisors, Inc., which itself is a wholly-owned subsidiary of State Street Corporation. SSGA FM and other advisory affiliates of State Street Corporation make up State Street Investment Management, the investment management arm of State Street Corporation. The principal address of SSGA FM is One Congress Street, Boston, Massachusetts 02114. SSGA FM is an investment adviser registered under the Investment Advisers Act of 1940, as amended.
Below is a list of the directors and principal executive officers of SSGA FM and
their principal occupation(s). Unless otherwise noted, the address of each person listed is One Congress Street, Boston, Massachusetts 02114.
| |
|
| |
Chairperson, Director, and President; Senior Vice President of State Street Global Advisors Trust
Company |
| |
Director; Senior Vice President of State Street Global Advisors Trust Company |
| |
Director; Chief Financial Officer of State Street Global Advisors Trust Company |
| |
|
| |
Director; Senior Vice President of State Street Global Advisors Trust Company |
| |
Director and Chief Risk Officer; Senior Vice President of State Street Global Advisors Trust Company |
| |
Director; Executive Vice President of State Street Global Advisors Trust Company |
| |
Director; Executive Vice President of State Street Global Advisors Trust Company |
| |
Chief Operating Officer; Managing Director of State Street Global Advisors Trust Company |
| |
Chief Compliance Officer; Managing Director of State Street Global Advisors Trust Company |
| |
Treasurer; Vice President of State Street Global Advisors Trust Company |
| |
Chief Legal Officer; Senior Vice President of State Street Global Advisors Trust Company |
| |
Derivatives Risk Manager; Vice President of State Street Global Advisors Trust Company |
| |
CTA Chief Marketing Officer; Senior Vice President of State Street Global Advisors Trust Company |
| |
Clerk; Vice President of State Street Global Advisors Trust Company |
Item
32.
Principal Underwriters
Item 33.
Location of Accounts and Records
All accounts, books, records and documents of the Registrant required pursuant to Section 31(a) of the 1940 Act and the rules promulgated thereunder are located in whole or in part, as the offices of the Registrant and the following locations:
SSGA Funds Management, Inc. (Investment Adviser and
Administrator)
One Congress Street
Boston, Massachusetts 02114
State Street Bank and Trust Company (Sub-Administrator,
Custodian and Transfer Agent)
One Congress Street
Boston, Massachusetts
02114
Item 34.
Management Services
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as amended, the Registrant, State Street Navigator Securities Lending Trust, has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Boston and Commonwealth of Massachusetts on the 24th day of April 2026.
STATE STREET NAVIGATOR SECURITIES LENDING TRUST
| |
|
| |
Ann M. Carpenter President (Principal Executive Officer) |
| |
|
| |
Bruce S. Rosenberg Treasurer (Principal Financial Officer and Principal Accounting Officer) |
EXHIBIT
INDEX
| |
|
| |
Fee Waiver and/or Expense Reimbursement Arrangements letter dated April 30, 2026 between SSGA FM and the
Trust with respect to State Street Navigator Securities Lending Government Money Market
Portfolio, State Street Navigator Securities Lending Portfolio I and State
Street Navigator Securities Lending Portfolio II |
| |
Supplement dated December 17, 2018 to the Transfer Agency and Service Agreement |
| |
Anti-Money Laundering Reliance Letter Agreement and Initial Certification between the Trust and the State Street
Bank and Trust Company dated December 17, 2018 |
| |
Agreement and Plan of Reorganization between the Trust and SSGA FM dated October 28, 2019 |
| |
Consent of Ernst &Young LLP |
| |
Code of Ethics of SSGA FM, effective March 31, 2026 |
