Table of Contents
- iv -
Table of Contents
(continued)
- v -
Table of Contents
(continued)
- vi -
PART ONE
OFFERED SERIES DISCLOSURE
SUMMARY
Investors should read the following summary together with the more detailed information, including under the caption Risk
Factors, and all exhibits to this Prospectus and the information incorporated by reference in this Prospectus, including the financial statements and the notes to those financial statements in the Trusts Annual Reports on Form 10-K,
as amended, Quarterly Reports on Form 10-Q, as amended, and Current Reports, if any, on Form 8-K before deciding to invest in any Shares. Please see the section entitled Incorporation by Reference of Certain Documents in Part
Two of this Prospectus. For ease of reference, any references throughout this Prospectus to various actions taken by each of the Funds are actually actions that the Trust has taken on behalf of such Funds.
Definitions used in this Prospectus can be found in the Glossary in Appendix A.
Important Information About the Funds
The Funds are not appropriate for all investors and present different risks than other funds. The Funds use leverage and are riskier than similarly benchmarked exchange-traded funds that do not use
leverage. An investor should only consider an investment in a Fund if he or she understands the consequences of seeking daily leveraged or daily inverse leveraged investment results.
Each Fund seeks to return (before fees and expenses) a multiple (2x or -2x) times the performance of its benchmark daily, not for any
other period. The return of a Fund for a period longer than a single day is the result of its return for each day compounded over the period and usually will differ from the Funds multiple times the return of the Funds benchmark for the
period. Daily compounding of a Funds investment returns can dramatically and adversely affect its longer-term performance during periods of high volatility. Volatility may be at least as important to a Funds return for a period as the
return of the Funds underlying benchmark. Each Ultra or UltraShort Fund uses leverage and should produce daily returns that are more volatile than that of its benchmark. For example, the daily return of an Ultra Fund with a 2x multiple should
be approximately two times as volatile on a daily basis as is the return of a fund with an objective of matching the same benchmark. The daily return of an UltraShort Fund is designed to return two times the inverse (-2x) of the return that
would be expected of a fund with an objective of matching the same benchmark. Shareholders who invest in the Funds should actively manage and monitor their investments, as frequently as daily.
Overview
The Funds
offer investors the opportunity to obtain leveraged or inverse leveraged exposure to a particular benchmark. The Funds currently include funds linked to futures-based commodity indexes (the Commodity Index Funds), individual commodities
(the Commodity Funds) or individual currency exchange rates (the Currency Funds). Each Fund targets a multiple or an inverse multiple of the daily return of such benchmarks, rather than targeting a multiple or an inverse
multiple of the benchmark returns over any other period. Each Ultra Fund and UltraShort Fund seeks, on a daily basis, results that correspond (before fees and expenses) to two times (2x) or two times the inverse (-2x),
respectively, of the performance of its corresponding benchmark.
Each Fund seeks to engage in daily rebalancing to position
its portfolio so that its exposure to its benchmark is consistent with such Funds daily investment objective. The impact of the benchmarks movements during the day will affect whether a particular Funds portfolio needs to be
repositioned. For example, if an UltraShort Funds benchmark has risen on a given day, net assets of such Fund should fall. As a result, inverse exposure will
- 1 -
need to be decreased. Conversely, if an UltraShort Funds benchmark has fallen on a given day, net assets of such Fund should rise. As a result, inverse exposure will need to be increased.
For Ultra Funds, the Funds long exposure will need to be increased on days when such Funds benchmark rises and decreased on days when such Funds benchmark falls. Daily rebalancing and the compounding of each days return over
time means that the return of each Fund for a period longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from two times (2x) or two times the inverse (-2x) of the
return of the Funds benchmark for the period. A Fund will lose money if its benchmarks performance is flat over time, and it is possible for a Fund to lose money over time even if its benchmarks performance increases (or decreases
in the case of an UltraShort Fund), as a result of daily rebalancing, the benchmarks volatility and compounding.
Each
of the Funds generally invests or will invest in Financial Instruments (
i.e.
, instruments whose value is derived from the value of an underlying asset, rate or benchmark (such asset, rate or benchmark, a Reference Asset)),
including futures contracts, swap agreements, forward contracts and other instruments, as a substitute for investing directly in commodities or currencies in order to gain exposure to its applicable benchmark. Financial Instruments also are used to
produce economically leveraged or inverse leveraged investment results for the Funds.
In seeking to
achieve the Funds investment objectives, the Sponsor uses a mathematical approach to investing. Using this approach, the Sponsor determines the type, quantity and mix of investment positions that the Sponsor believes, in combination, should
produce daily returns consistent with the Funds objectives. The Sponsor relies upon a pre-determined model to generate orders that result in repositioning the Funds investments in accordance with their respective investment objective.
The mathematical model is engineered during the product development phase prior to a Funds launch and is adjusted, when necessary, in order to help the Funds achieve their investment objective. Changes to the mathematical model may occur at
any time without notice to shareholders.
The Sponsor does not invest the assets of the Funds based on its view of the
investment merit of a particular investment, other than for cash management purposes, nor does it conduct conventional commodity or currency research or analysis, or forecast market movement or trends in managing the assets of the Funds. Each Fund
generally seeks to remain fully exposed at all times to its underlying benchmark without regard to market conditions, trends or direction.
ProShare Capital Management LLC, a Maryland limited liability company, serves as the Trusts Sponsor and commodity pool operator. The principal office of the Sponsor and the Funds is located at 7501
Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814. The telephone number of the Sponsor and each of the Funds is (240) 497-6400.
Each Fund is listed below along with its corresponding benchmark:
The Commodity Index Funds
|
|
|
Fund Name
|
|
Benchmark
|
ProShares Ultra DJ-UBS Crude Oil
ProShares UltraShort DJ-UBS Crude Oil
|
|
Dow JonesUBS WTI Crude Oil
Subindex
SM
|
- 2 -
The Commodity Funds
|
|
|
Fund Name
|
|
Benchmark
|
ProShares Ultra Gold
ProShares UltraShort Gold
|
|
The daily performance of gold bullion as measured by the U.S. dollar p.m. fixing price for delivery in London
|
ProShares Ultra Silver
ProShares UltraShort Silver
|
|
The daily performance of silver bullion as measured by the U.S. dollar fixing price for delivery in London
|
The Currency Funds
|
|
|
Fund Name
|
|
Benchmark
|
ProShares UltraShort Euro
|
|
The U.S. dollar price of the euro
|
ProShares UltraShort Yen
|
|
The U.S. dollar price of the Japanese yen
|
Purchases and Sales in the Secondary Market, on the NYSE Arca
The Shares of each Fund are listed on the NYSE Arca under the ticker symbols shown on the front cover of this Prospectus. Secondary market
purchases and sales of Shares are subject to ordinary brokerage commissions and charges.
Creation and Redemption Transactions
Only an Authorized Participant may purchase (
i.e.
, create) or redeem Creation Units in the Funds. Creation Units in
a Fund are expected to be created when there is sufficient demand for Shares in such Fund that the market price per Share is at a premium to the NAV per Share. Authorized Participants will likely sell such Shares to the public at prices that are
expected to reflect, among other factors, the trading price of the Shares of such Fund and the supply of and demand for the Shares at the time of sale and are expected to fall between the NAV and the trading price of the Shares at the time of sale.
Similarly, it is expected that Creation Units in a Fund will be redeemed when the market price per Share of such Fund is at a discount to the NAV per Share. The Sponsor expects that the exploitation of such arbitrage opportunities by Authorized
Participants and their clients and customers will tend to cause the public trading price of the Shares to track the NAV per Share of a Fund closely over time. Retail investors seeking to purchase or sell Shares on any day are expected to effect such
transactions in the secondary market at the market price per Share, rather than in connection with the creation or redemption of Creation Units.
A creation transaction, which is subject to acceptance by SEI, generally takes place when an Authorized Participant deposits a specified amount of cash (unless as provided otherwise in this Prospectus) in
exchange for a specified number of Creation Units. Similarly, Shares can be redeemed only in Creation Units, generally for cash (unless as provided otherwise in this Prospectus). Except when aggregated in Creation Units, Shares are not redeemable.
The prices at which creations and redemptions occur are based on the next calculation of the NAV after an order is received in a form described in the Authorized Participant Agreement and the related Authorized Participant Handbook. The manner by
which Creation Units are purchased and redeemed is dictated by the terms of the Authorized Participant Agreement and Authorized Participant Handbook. By placing a purchase order, an Authorized Participant agrees to deposit cash (unless as provided
otherwise in this Prospectus) with BBH&Co., the custodian of the Funds.
Creation and redemption transactions must be
placed each day with SEI by the create/redeem cut-off time (stated below), or earlier if the New York Stock Exchange (NYSE), a Funds primary listing exchange or other exchange material to the valuation or operation of such Fund
(each, an Exchange) closes before such cut-off
- 3 -
time, to receive that days NAV. Because the primary trading session for the commodities and/or futures contracts underlying certain of the Funds have different closing (or fixing) times
than U.S. Equity markets, the NAV calculation times typically range from 7:00 a.m. to 4:00 p.m. Eastern Time.
|
|
|
|
|
Underlying Benchmark
|
|
Create/Redeem Cut-off
|
|
NAV Calculation Time*
|
|
|
|
Silver
|
|
6:30 a.m. (Eastern Time)
|
|
7:00 a.m. (Eastern Time)
|
|
|
|
Gold
|
|
9:30 a.m. (Eastern Time)
|
|
10:00 a.m. (Eastern Time)
|
|
|
|
DJUBS WTI Crude Oil Subindex
SM
|
|
2:00 p.m. (Eastern Time)
|
|
2:30 p.m. (Eastern Time)
|
|
|
|
Euro
|
|
3:00 p.m. (Eastern Time)
|
|
4:00 p.m. (Eastern Time)
|
|
|
|
Yen
|
|
3:00 p.m. (Eastern Time)
|
|
4:00 p.m. (Eastern Time)
|
*
|
For silver and gold, this time may vary due to differences in when daylight savings time is effective between London and New York. The actual times equate to noon
London time for silver, and 3:00 p.m. London time for gold.
|
Breakeven Amounts
A Fund will be profitable only if returns from the Funds investments exceed its breakeven amount. Estimated breakeven
amounts are set forth in the table below. The estimated breakeven amounts represent the estimated amount of trading income that each Fund would need to achieve during one year to offset the Funds estimated fees, costs and expenses, net of any
interest income earned by the Fund on its investments. It is not possible to predict whether a Fund will break even at the end of the first twelve months of an investment or any other period. See ChargesBreakeven Table, beginning
on page 49, for more detailed tables showing Breakeven Amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund Name
|
|
Breakeven Amount
(% Per Annum of
Average Daily NAV)*
|
|
|
Assumed
Selling Price
Per Share*
|
|
|
Breakeven Amount
($ for the Assumed Selling
Price Per Share)*
|
|
ProShares Ultra DJ-UBS Crude Oil
|
|
|
0.98
|
|
|
$
|
25.00
|
|
|
|
0.25
|
|
ProShares UltraShort DJ-UBS Crude Oil
|
|
|
0.93
|
|
|
$
|
25.00
|
|
|
|
0.23
|
|
ProShares Ultra Gold
|
|
|
1.93
|
|
|
$
|
25.00
|
|
|
|
0.48
|
|
ProShares UltraShort Gold
|
|
|
1.79
|
|
|
$
|
25.00
|
|
|
|
0.44
|
|
ProShares Ultra Silver
|
|
|
1.98
|
|
|
$
|
25.00
|
|
|
|
0.49
|
|
ProShares UltraShort Silver
|
|
|
2.02
|
|
|
$
|
25.00
|
|
|
|
0.50
|
|
ProShares UltraShort Euro
|
|
|
0.93
|
|
|
$
|
25.00
|
|
|
|
0.23
|
|
ProShares UltraShort Yen
|
|
|
0.93
|
|
|
$
|
25.00
|
|
|
|
0.23
|
|
*
|
The breakeven analysis set forth in this table assumes that the Shares have a constant month-end NAV, and assumes that the selling price per Share will equal the NAV.
The analysis is based on an assumed NAV per Share of each Fund as listed in the table above under Assumed Selling Price Per Share. The actual NAV of each Fund differs and is likely to change on a daily basis.
|
Important Tax Information
Please note that each Fund will distribute to shareholders a Schedule K-1 that will contain information regarding the income and
expense items of the Fund. The Schedule K-1 is a complex form and shareholders may find that preparing tax returns may require additional time or may require the assistance of an accountant or other tax preparer, at an additional expense to the
shareholder.
- 4 -
RISK FACTORS
Before investors invest in the Shares, they should be aware that there are various risks. Investors should consider carefully the risks described below together with all of the other information
included in this Prospectus, as well as information found in documents incorporated by reference in this Prospectus, before they decide to purchase any Shares. These risk factors may be amended, supplemented or superseded from time to time by risk
factors contained in any prospectus supplement, post-effective amendment or in other reports filed with the SEC in the future.
Key
Risks Related to All Funds
Due to the compounding of daily returns, the Funds returns over periods longer than a single day
will likely differ in amount and possibly even direction from the Fund multiple times the benchmark return for the period.
Each of the Funds is a geared fund in the sense that each has an investment objective to correspond (before fees and expenses) to a multiple (
i.e.
, 2x) or an inverse multiple
(
i.e.
, -2x) of the performance of a benchmark on a given day. Each Fund seeks investment results for a single day only, as measured from NAV calculation time to NAV calculation time, and not for any other period (see
SummaryCreation and Redemption Transactions for the typical NAV calculation time of each Fund). The return of a Fund for a period longer than a single day is the result of its return for each day compounded over the period, and
usually will differ from two times (2x) or two times the inverse (-2x) of the return of the Funds benchmark for the period. A Fund will lose money if its benchmarks performance is flat over time, and it is possible for a Fund
to lose money over time even if its benchmarks performance increases (or decreases in the case of an UltraShort Fund), as a result of daily rebalancing, the benchmarks volatility and compounding. Longer holding periods, higher index
volatility, inverse exposure and greater leverage each affect the impact of compounding on a Funds returns. Daily compounding of a Geared Funds investment returns can dramatically and adversely affect its longer-term performance during
periods of high volatility. Volatility may be at least as important to a Funds return for a period as the return of the Funds underlying benchmark.
Each Ultra or UltraShort Fund uses leverage and should produce daily returns that are more volatile than that of its benchmark. For example, the daily return of an Ultra Fund with a 2x multiple should be
approximately two times as volatile on a daily basis as is the return of a fund with an objective of matching the same benchmark. The daily return of an UltraShort Fund with a -2x multiple is designed to return two times the inverse (-2x) of
the return that would be expected of a fund with an objective of matching the same benchmark. The Funds are not appropriate for all investors and present different risks than other funds. The Funds use leverage and are riskier than similarly
benchmarked exchange-traded funds that do not use leverage. An investor should only consider an investment in a Fund if he or she understands the consequences of seeking daily leveraged or daily inverse leveraged investment results. Daily objective
geared funds, if used properly and in conjunction with the investors view on the future direction and volatility of the markets, can be useful tools for investors who want to manage their exposure to various markets and market segments and who
are willing to monitor and/or periodically rebalance their portfolios. Shareholders who invest in the Funds should actively manage and monitor their investments, as frequently as daily.
- 5 -
The hypothetical examples below illustrate how daily geared fund returns can behave for
periods longer than a single day. Each involves a hypothetical fund XYZ that seeks to double the daily performance of benchmark XYZ. On each day, fund XYZ performs in line with its objective (two times (2x) the benchmarks daily
performance before fees and expenses). Notice that, in the first example (showing an overall benchmark loss for the period), over the entire seven-day period, the funds total return is more than two times the loss of the period return of the
benchmark. For the seven-day period, benchmark XYZ lost 3.26% while fund XYZ lost 7.01% (versus -6.52% (or 2 x -3.26%)).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benchmark XYZ
|
|
|
Fund XYZ
|
|
|
|
Level
|
|
|
Daily
Performance
|
|
|
Daily
Performance
|
|
|
Net Asset
Value
|
|
Start
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
Day 1
|
|
|
97.00
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
94.00
|
|
Day 2
|
|
|
99.91
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
99.64
|
|
Day 3
|
|
|
96.91
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
93.66
|
|
Day 4
|
|
|
99.82
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
99.28
|
|
Day 5
|
|
|
96.83
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
93.32
|
|
Day 6
|
|
|
99.73
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
98.92
|
|
Day 7
|
|
|
96.74
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
92.99
|
|
Total Return
|
|
|
|
|
|
|
-3.26
|
%
|
|
|
-7.01
|
%
|
|
|
|
|
Similarly, in another example (showing an overall benchmark gain for the period), over the entire
seven-day period, the funds total return is considerably less than double that of the period return of the benchmark. For the seven-day period, benchmark XYZ gained 2.72% while fund XYZ gained 4.86% (versus 5.44% (or 2 x 2.72%)).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benchmark XYZ
|
|
|
Fund XYZ
|
|
|
|
Level
|
|
|
Daily
Performance
|
|
|
Daily
Performance
|
|
|
Net Asset
Value
|
|
Start
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
Day 1
|
|
|
103.00
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
106.00
|
|
Day 2
|
|
|
99.91
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
99.64
|
|
Day 3
|
|
|
102.91
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
105.62
|
|
Day 4
|
|
|
99.82
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
99.28
|
|
Day 5
|
|
|
102.81
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
105.24
|
|
Day 6
|
|
|
99.73
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
98.92
|
|
Day 7
|
|
|
102.72
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
104.86
|
|
Total Return
|
|
|
|
|
|
|
2.72
|
%
|
|
|
4.86
|
%
|
|
|
|
|
These effects are caused by compounding, which exists in all investments, but has a more significant
impact in geared funds. In general, during periods of higher benchmark volatility, compounding will cause results for periods longer than a single day to be less than two times (2x) the return of the benchmark (or less than two times the
inverse (-2x) of the return of the benchmark for the UltraShort Funds). This effect becomes more pronounced as volatility increases. Conversely, in periods of lower benchmark volatility (particularly when combined with higher benchmark
returns), fund returns over longer periods can be higher than two times (2x) the return of the benchmark. Actual results for a particular period, before fees and expenses, are also dependent on the magnitude of the benchmark return in addition
to the benchmark volatility. Similar effects exist for the UltraShort Funds, and the significance of this effect is even greater with such inverse leveraged funds.
The graphs that follow illustrate this point. Each of the graphs shows a simulated hypothetical one year performance of a benchmark compared with the performance of a geared fund that perfectly achieves
its geared daily investment objective. The graphs demonstrate that, for periods greater than a single day, a geared fund is likely to underperform or overperform (but not match) the benchmark performance (or the inverse of the benchmark performance)
times the multiple stated as the daily fund objective. Investors should understand the
- 6 -
consequences of holding daily rebalanced funds for periods longer than a single day and should actively manage and monitor their investments, as frequently as daily. A one-year period is used
solely for illustrative purposes. Deviations from the benchmark return (or the inverse of the benchmark return) times the fund multiple can occur over periods as short as two days (each day as measured from NAV to NAV) and may also occur in periods
shorter than a single day (when measured intraday as opposed to NAV to NAV). See Intraday Price/Performance Risk below for additional details. To isolate the impact of daily leveraged or inverse leveraged exposure, these graphs
assume: a) no fund expenses or transaction costs; b) borrowing/lending rates (to obtain required leverage or inverse leveraged exposure) and cash reinvestment rates of zero percent; and c) the fund consistently maintaining perfect exposure (2x or
-2x) as of the funds NAV time each day. If these assumptions were different, the funds performance would be different than that shown. If fund expenses, transaction costs and financing expenses greater than zero percent were included,
the funds performance would also be different than shown. Each of the graphs also assumes a volatility rate of 44%, which is an approximate average of the five-year historical volatility rate of the most volatile benchmark referenced herein
(the daily performance of silver bullion as measured by the U.S. dollar fixing price for delivery in London). A benchmarks volatility rate is a statistical measure of the magnitude of fluctuations in its returns.
The graph above shows a scenario where the benchmark, which exhibits day-to-day volatility, is flat or
trendless over the year (
i.e.
, provides a return of 0% over the course of the year), but the Ultra Fund (2x) and the UltraShort Fund (-2x) are both down.
- 7 -
The graph above shows a scenario where the benchmark, which exhibits day-to-day volatility, is down
over the year, but the Ultra Fund (2x) is down less than two times the benchmark and the UltraShort Fund (-2x) is up less than two times the inverse of the benchmark.
- 8 -
The graph above shows a scenario where the benchmark, which exhibits day-to-day volatility, is up over
the year, but the Ultra Fund (2x) is up less than two times the benchmark and the UltraShort Fund (-2x) is down less than two times the inverse of the benchmark.
The historical five year average volatility of the benchmarks utilized by the Funds ranges from 11.55% to 43.62%, as set forth in the table below.
|
|
|
Benchmark
|
|
Historical Five-Year
Average Volatility Rate
as of May 31, 2013
|
Dow JonesUBS WTI Crude Oil Subindex
SM
|
|
38.67%
|
The daily performance of gold bullion as measured by the U.S. dollar p.m. fixing price for delivery in London
|
|
21.98%
|
The daily performance of silver bullion as measured by the U.S. dollar fixing price for delivery in London
|
|
43.62%
|
The U.S. dollar price of the euro
|
|
11.55%
|
The U.S. dollar price of the Japanese yen
|
|
11.56%
|
The tables below illustrate the impact of two factors that affect a geared funds performance,
benchmark volatility and benchmark return. Benchmark volatility is a statistical measure of the magnitude of fluctuations in the returns of a benchmark and is calculated as the standard deviation of the natural logarithms of one plus the benchmark
return (calculated daily), multiplied by the square root of the number of trading days per year (assumed to be 252). The tables show estimated fund returns for a number of combinations of benchmark volatility and benchmark return over a one-year
period. To isolate the impact of daily leveraged or inverse leveraged exposure, these graphs assume: a) no fund expenses or transaction costs; b) borrowing/lending rates of
- 9 -
zero percent (to obtain required leverage or inverse leveraged exposure) and cash reinvestment rates of zero percent; and c) the fund consistently maintaining perfect exposure (2x or -2x) as of
the funds NAV time each day. If these assumptions were different, the funds performance would be different than that shown. If fund expenses, transaction costs and financing expenses were included, the funds performance would be
different than shown. The first table below shows an example in which a geared fund has an investment objective to correspond (before fees and expenses) to two times (2x) the daily performance of a benchmark. The geared fund could incorrectly
be expected to achieve a 20% return on a yearly basis if the benchmark return was 10%, absent the effects of compounding. However, as the table shows, with a benchmark volatility of 40%, such a fund would return 3.1%. In the charts below, shaded
areas represent those scenarios where a geared fund with the investment objective described will outperform (
i.e.
, return more than) the benchmark performance times the stated multiple in the funds investment objective; conversely areas
not shaded represent those scenarios where the fund will underperform (
i.e.
, return less than) the benchmark performance times the multiple stated as the daily fund objective.
Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fees and Expenses, that Correspond to Two Times (2x) the Daily Performance of a Benchmark.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
One Year
Benchmark
Performance
|
|
|
Two Times (2x)
One
Year
Benchmark
Performance
|
|
|
|
|
|
|
|
|
Benchmark Volatility
|
|
|
|
0%
|
|
|
5%
|
|
|
10%
|
|
|
15%
|
|
|
20%
|
|
|
25%
|
|
|
30%
|
|
|
35%
|
|
|
40%
|
|
|
45%
|
|
|
50%
|
|
|
55%
|
|
|
60%
|
|
|
65%
|
|
|
70%
|
|
|
-60%
|
|
|
|
-120
|
%
|
|
|
-84.0
|
%
|
|
|
-84.0
|
%
|
|
|
-84.2
|
%
|
|
|
-84.4
|
%
|
|
|
-84.6
|
%
|
|
|
-85.0
|
%
|
|
|
-85.4
|
%
|
|
|
-85.8
|
%
|
|
|
-86.4
|
%
|
|
|
-86.9
|
%
|
|
|
-87.5
|
%
|
|
|
-88.2
|
%
|
|
|
-88.8
|
%
|
|
|
-89.5
|
%
|
|
|
-90.2
|
%
|
|
-55%
|
|
|
|
-110
|
%
|
|
|
-79.8
|
%
|
|
|
-79.8
|
%
|
|
|
-80.0
|
%
|
|
|
-80.2
|
%
|
|
|
-80.5
|
%
|
|
|
-81.0
|
%
|
|
|
-81.5
|
%
|
|
|
-82.1
|
%
|
|
|
-82.7
|
%
|
|
|
-83.5
|
%
|
|
|
-84.2
|
%
|
|
|
-85.0
|
%
|
|
|
-85.9
|
%
|
|
|
-86.7
|
%
|
|
|
-87.6
|
%
|
|
-50%
|
|
|
|
-100
|
%
|
|
|
-75.0
|
%
|
|
|
-75.1
|
%
|
|
|
-75.2
|
%
|
|
|
-75.6
|
%
|
|
|
-76.0
|
%
|
|
|
-76.5
|
%
|
|
|
-77.2
|
%
|
|
|
-77.9
|
%
|
|
|
-78.7
|
%
|
|
|
-79.6
|
%
|
|
|
-80.5
|
%
|
|
|
-81.5
|
%
|
|
|
-82.6
|
%
|
|
|
-83.6
|
%
|
|
|
-84.7
|
%
|
|
-45%
|
|
|
|
-90
|
%
|
|
|
-69.8
|
%
|
|
|
-69.8
|
%
|
|
|
-70.1
|
%
|
|
|
-70.4
|
%
|
|
|
-70.9
|
%
|
|
|
-71.6
|
%
|
|
|
-72.4
|
%
|
|
|
-73.2
|
%
|
|
|
-74.2
|
%
|
|
|
-75.3
|
%
|
|
|
-76.4
|
%
|
|
|
-77.6
|
%
|
|
|
-78.9
|
%
|
|
|
-80.2
|
%
|
|
|
-81.5
|
%
|
|
-40%
|
|
|
|
-80
|
%
|
|
|
-64.0
|
%
|
|
|
-64.1
|
%
|
|
|
-64.4
|
%
|
|
|
-64.8
|
%
|
|
|
-65.4
|
%
|
|
|
-66.2
|
%
|
|
|
-67.1
|
%
|
|
|
-68.2
|
%
|
|
|
-69.3
|
%
|
|
|
-70.6
|
%
|
|
|
-72.0
|
%
|
|
|
-73.4
|
%
|
|
|
-74.9
|
%
|
|
|
-76.4
|
%
|
|
|
-77.9
|
%
|
|
-35%
|
|
|
|
-70
|
%
|
|
|
-57.8
|
%
|
|
|
-57.9
|
%
|
|
|
-58.2
|
%
|
|
|
-58.7
|
%
|
|
|
-59.4
|
%
|
|
|
-60.3
|
%
|
|
|
-61.4
|
%
|
|
|
-62.6
|
%
|
|
|
-64.0
|
%
|
|
|
-65.5
|
%
|
|
|
-67.1
|
%
|
|
|
-68.8
|
%
|
|
|
-70.5
|
%
|
|
|
-72.3
|
%
|
|
|
-74.1
|
%
|
|
-30%
|
|
|
|
-60
|
%
|
|
|
-51.0
|
%
|
|
|
-51.1
|
%
|
|
|
-51.5
|
%
|
|
|
-52.1
|
%
|
|
|
-52.9
|
%
|
|
|
-54.0
|
%
|
|
|
-55.2
|
%
|
|
|
-56.6
|
%
|
|
|
-58.2
|
%
|
|
|
-60.0
|
%
|
|
|
-61.8
|
%
|
|
|
-63.8
|
%
|
|
|
-65.8
|
%
|
|
|
-67.9
|
%
|
|
|
-70.0
|
%
|
|
-25%
|
|
|
|
-50
|
%
|
|
|
-43.8
|
%
|
|
|
-43.9
|
%
|
|
|
-44.3
|
%
|
|
|
-45.0
|
%
|
|
|
-46.0
|
%
|
|
|
-47.2
|
%
|
|
|
-48.6
|
%
|
|
|
-50.2
|
%
|
|
|
-52.1
|
%
|
|
|
-54.1
|
%
|
|
|
-56.2
|
%
|
|
|
-58.4
|
%
|
|
|
-60.8
|
%
|
|
|
-63.1
|
%
|
|
|
-65.5
|
%
|
|
-20%
|
|
|
|
-40
|
%
|
|
|
-36.0
|
%
|
|
|
-36.2
|
%
|
|
|
-36.6
|
%
|
|
|
-37.4
|
%
|
|
|
-38.5
|
%
|
|
|
-39.9
|
%
|
|
|
-41.5
|
%
|
|
|
-43.4
|
%
|
|
|
-45.5
|
%
|
|
|
-47.7
|
%
|
|
|
-50.2
|
%
|
|
|
-52.7
|
%
|
|
|
-55.3
|
%
|
|
|
-58.1
|
%
|
|
|
-60.8
|
%
|
|
-15%
|
|
|
|
-30
|
%
|
|
|
-27.8
|
%
|
|
|
-27.9
|
%
|
|
|
-28.5
|
%
|
|
|
-29.4
|
%
|
|
|
-30.6
|
%
|
|
|
-32.1
|
%
|
|
|
-34.0
|
%
|
|
|
-36.1
|
%
|
|
|
-38.4
|
%
|
|
|
-41.0
|
%
|
|
|
-43.7
|
%
|
|
|
-46.6
|
%
|
|
|
-49.6
|
%
|
|
|
-52.6
|
%
|
|
|
-55.7
|
%
|
|
-10%
|
|
|
|
-20
|
%
|
|
|
-19.0
|
%
|
|
|
-19.2
|
%
|
|
|
-19.8
|
%
|
|
|
-20.8
|
%
|
|
|
-22.2
|
%
|
|
|
-23.9
|
%
|
|
|
-26.0
|
%
|
|
|
-28.3
|
%
|
|
|
-31.0
|
%
|
|
|
-33.8
|
%
|
|
|
-36.9
|
%
|
|
|
-40.1
|
%
|
|
|
-43.5
|
%
|
|
|
-46.9
|
%
|
|
|
-50.4
|
%
|
|
-5%
|
|
|
|
-10
|
%
|
|
|
-9.8
|
%
|
|
|
-10.0
|
%
|
|
|
-10.6
|
%
|
|
|
-11.8
|
%
|
|
|
-13.3
|
%
|
|
|
-15.2
|
%
|
|
|
-17.5
|
%
|
|
|
-20.2
|
%
|
|
|
-23.1
|
%
|
|
|
-26.3
|
%
|
|
|
-29.7
|
%
|
|
|
-33.3
|
%
|
|
|
-37.0
|
%
|
|
|
-40.8
|
%
|
|
|
-44.7
|
%
|
|
0%
|
|
|
|
0
|
%
|
|
|
0.0
|
%
|
|
|
-0.2
|
%
|
|
|
-1.0
|
%
|
|
|
-2.2
|
%
|
|
|
-3.9
|
%
|
|
|
-6.1
|
%
|
|
|
-8.6
|
%
|
|
|
-11.5
|
%
|
|
|
-14.8
|
%
|
|
|
-18.3
|
%
|
|
|
-22.1
|
%
|
|
|
-26.1
|
%
|
|
|
-30.2
|
%
|
|
|
-34.5
|
%
|
|
|
-38.7
|
%
|
|
5%
|
|
|
|
10
|
%
|
|
|
10.3
|
%
|
|
|
10.0
|
%
|
|
|
9.2
|
%
|
|
|
7.8
|
%
|
|
|
5.9
|
%
|
|
|
3.6
|
%
|
|
|
0.8
|
%
|
|
|
-2.5
|
%
|
|
|
-6.1
|
%
|
|
|
-10.0
|
%
|
|
|
-14.1
|
%
|
|
|
-18.5
|
%
|
|
|
-23.1
|
%
|
|
|
-27.7
|
%
|
|
|
-32.5
|
%
|
|
10%
|
|
|
|
20
|
%
|
|
|
21.0
|
%
|
|
|
20.7
|
%
|
|
|
19.8
|
%
|
|
|
18.3
|
%
|
|
|
16.3
|
%
|
|
|
13.7
|
%
|
|
|
10.6
|
%
|
|
|
7.0
|
%
|
|
|
3.1
|
%
|
|
|
-1.2
|
%
|
|
|
-5.8
|
%
|
|
|
-10.6
|
%
|
|
|
-15.6
|
%
|
|
|
-20.7
|
%
|
|
|
-25.9
|
%
|
|
15%
|
|
|
|
30
|
%
|
|
|
32.3
|
%
|
|
|
31.9
|
%
|
|
|
30.9
|
%
|
|
|
29.3
|
%
|
|
|
27.1
|
%
|
|
|
24.2
|
%
|
|
|
20.9
|
%
|
|
|
17.0
|
%
|
|
|
12.7
|
%
|
|
|
8.0
|
%
|
|
|
3.0
|
%
|
|
|
-2.3
|
%
|
|
|
-7.7
|
%
|
|
|
-13.3
|
%
|
|
|
-19.0
|
%
|
|
20%
|
|
|
|
40
|
%
|
|
|
44.0
|
%
|
|
|
43.6
|
%
|
|
|
42.6
|
%
|
|
|
40.8
|
%
|
|
|
38.4
|
%
|
|
|
35.3
|
%
|
|
|
31.6
|
%
|
|
|
27.4
|
%
|
|
|
22.7
|
%
|
|
|
17.6
|
%
|
|
|
12.1
|
%
|
|
|
6.4
|
%
|
|
|
0.5
|
%
|
|
|
-5.6
|
%
|
|
|
-11.8
|
%
|
|
25%
|
|
|
|
50
|
%
|
|
|
56.3
|
%
|
|
|
55.9
|
%
|
|
|
54.7
|
%
|
|
|
52.8
|
%
|
|
|
50.1
|
%
|
|
|
46.8
|
%
|
|
|
42.8
|
%
|
|
|
38.2
|
%
|
|
|
33.1
|
%
|
|
|
27.6
|
%
|
|
|
21.7
|
%
|
|
|
15.5
|
%
|
|
|
9.0
|
%
|
|
|
2.4
|
%
|
|
|
-4.3
|
%
|
|
30%
|
|
|
|
60
|
%
|
|
|
69.0
|
%
|
|
|
68.6
|
%
|
|
|
67.3
|
%
|
|
|
65.2
|
%
|
|
|
62.4
|
%
|
|
|
58.8
|
%
|
|
|
54.5
|
%
|
|
|
49.5
|
%
|
|
|
44.0
|
%
|
|
|
38.0
|
%
|
|
|
31.6
|
%
|
|
|
24.9
|
%
|
|
|
17.9
|
%
|
|
|
10.8
|
%
|
|
|
3.5
|
%
|
|
35%
|
|
|
|
70
|
%
|
|
|
82.3
|
%
|
|
|
81.8
|
%
|
|
|
80.4
|
%
|
|
|
78.2
|
%
|
|
|
75.1
|
%
|
|
|
71.2
|
%
|
|
|
66.6
|
%
|
|
|
61.2
|
%
|
|
|
55.3
|
%
|
|
|
48.8
|
%
|
|
|
41.9
|
%
|
|
|
34.7
|
%
|
|
|
27.2
|
%
|
|
|
19.4
|
%
|
|
|
11.7
|
%
|
|
40%
|
|
|
|
80
|
%
|
|
|
96.0
|
%
|
|
|
95.5
|
%
|
|
|
94.0
|
%
|
|
|
91.6
|
%
|
|
|
88.3
|
%
|
|
|
84.1
|
%
|
|
|
79.1
|
%
|
|
|
73.4
|
%
|
|
|
67.0
|
%
|
|
|
60.1
|
%
|
|
|
52.6
|
%
|
|
|
44.8
|
%
|
|
|
36.7
|
%
|
|
|
28.5
|
%
|
|
|
20.1
|
%
|
|
45%
|
|
|
|
90
|
%
|
|
|
110.3
|
%
|
|
|
109.7
|
%
|
|
|
108.2
|
%
|
|
|
105.6
|
%
|
|
|
102.0
|
%
|
|
|
97.5
|
%
|
|
|
92.2
|
%
|
|
|
86.0
|
%
|
|
|
79.2
|
%
|
|
|
71.7
|
%
|
|
|
63.7
|
%
|
|
|
55.4
|
%
|
|
|
46.7
|
%
|
|
|
37.8
|
%
|
|
|
28.8
|
%
|
|
50%
|
|
|
|
100
|
%
|
|
|
125.0
|
%
|
|
|
124.4
|
%
|
|
|
122.8
|
%
|
|
|
120.0
|
%
|
|
|
116.2
|
%
|
|
|
111.4
|
%
|
|
|
105.6
|
%
|
|
|
99.1
|
%
|
|
|
91.7
|
%
|
|
|
83.8
|
%
|
|
|
75.2
|
%
|
|
|
66.3
|
%
|
|
|
57.0
|
%
|
|
|
47.5
|
%
|
|
|
37.8
|
%
|
|
55%
|
|
|
|
110
|
%
|
|
|
140.3
|
%
|
|
|
139.7
|
%
|
|
|
137.9
|
%
|
|
|
134.9
|
%
|
|
|
130.8
|
%
|
|
|
125.7
|
%
|
|
|
119.6
|
%
|
|
|
112.6
|
%
|
|
|
104.7
|
%
|
|
|
96.2
|
%
|
|
|
87.1
|
%
|
|
|
77.5
|
%
|
|
|
67.6
|
%
|
|
|
57.5
|
%
|
|
|
47.2
|
%
|
|
60%
|
|
|
|
120
|
%
|
|
|
156.0
|
%
|
|
|
155.4
|
%
|
|
|
153.5
|
%
|
|
|
150.3
|
%
|
|
|
146.0
|
%
|
|
|
140.5
|
%
|
|
|
134.0
|
%
|
|
|
126.5
|
%
|
|
|
118.1
|
%
|
|
|
109.1
|
%
|
|
|
99.4
|
%
|
|
|
89.2
|
%
|
|
|
78.6
|
%
|
|
|
67.8
|
%
|
|
|
56.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 10 -
Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before
Fees and Expenses, that Correspond to Two Times the Inverse (-2x) of the Daily Performance of a Benchmark.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
Benchmark
Performance
|
|
|
Two Times the
Inverse (-2x)
Inverse
of
One Year
Benchmark
Performance
|
|
|
|
|
|
|
|
|
Benchmark Volatility
|
|
|
|
0%
|
|
|
5%
|
|
|
10%
|
|
|
15%
|
|
|
20%
|
|
|
25%
|
|
|
30%
|
|
|
35%
|
|
|
40%
|
|
|
45%
|
|
|
50%
|
|
|
55%
|
|
|
60%
|
|
|
65%
|
|
|
70%
|
|
|
-60%
|
|
|
|
120
|
%
|
|
|
525.0
|
%
|
|
|
520.3
|
%
|
|
|
506.5
|
%
|
|
|
484.2
|
%
|
|
|
454.3
|
%
|
|
|
418.1
|
%
|
|
|
377.1
|
%
|
|
|
332.8
|
%
|
|
|
286.7
|
%
|
|
|
240.4
|
%
|
|
|
195.2
|
%
|
|
|
152.2
|
%
|
|
|
112.2
|
%
|
|
|
76.0
|
%
|
|
|
43.7
|
%
|
|
-55%
|
|
|
|
110
|
%
|
|
|
393.8
|
%
|
|
|
390.1
|
%
|
|
|
379.2
|
%
|
|
|
361.6
|
%
|
|
|
338.0
|
%
|
|
|
309.4
|
%
|
|
|
277.0
|
%
|
|
|
242.0
|
%
|
|
|
205.6
|
%
|
|
|
169.0
|
%
|
|
|
133.3
|
%
|
|
|
99.3
|
%
|
|
|
67.7
|
%
|
|
|
39.0
|
%
|
|
|
13.5
|
%
|
|
-50%
|
|
|
|
100
|
%
|
|
|
300.0
|
%
|
|
|
297.0
|
%
|
|
|
288.2
|
%
|
|
|
273.9
|
%
|
|
|
254.8
|
%
|
|
|
231.6
|
%
|
|
|
205.4
|
%
|
|
|
177.0
|
%
|
|
|
147.5
|
%
|
|
|
117.9
|
%
|
|
|
88.9
|
%
|
|
|
61.4
|
%
|
|
|
35.8
|
%
|
|
|
12.6
|
%
|
|
|
-8.0
|
%
|
|
-45%
|
|
|
|
90
|
%
|
|
|
230.6
|
%
|
|
|
228.1
|
%
|
|
|
220.8
|
%
|
|
|
209.0
|
%
|
|
|
193.2
|
%
|
|
|
174.1
|
%
|
|
|
152.4
|
%
|
|
|
128.9
|
%
|
|
|
104.6
|
%
|
|
|
80.1
|
%
|
|
|
56.2
|
%
|
|
|
33.4
|
%
|
|
|
12.3
|
%
|
|
|
-6.9
|
%
|
|
|
-24.0
|
%
|
|
-40%
|
|
|
|
80
|
%
|
|
|
177.8
|
%
|
|
|
175.7
|
%
|
|
|
169.6
|
%
|
|
|
159.6
|
%
|
|
|
146.4
|
%
|
|
|
130.3
|
%
|
|
|
112.0
|
%
|
|
|
92.4
|
%
|
|
|
71.9
|
%
|
|
|
51.3
|
%
|
|
|
31.2
|
%
|
|
|
12.1
|
%
|
|
|
-5.7
|
%
|
|
|
-21.8
|
%
|
|
|
-36.1
|
%
|
|
-35%
|
|
|
|
70
|
%
|
|
|
136.7
|
%
|
|
|
134.9
|
%
|
|
|
129.7
|
%
|
|
|
121.2
|
%
|
|
|
109.9
|
%
|
|
|
96.2
|
%
|
|
|
80.7
|
%
|
|
|
63.9
|
%
|
|
|
46.5
|
%
|
|
|
28.9
|
%
|
|
|
11.8
|
%
|
|
|
-4.5
|
%
|
|
|
-19.6
|
%
|
|
|
-33.4
|
%
|
|
|
-45.6
|
%
|
|
-30%
|
|
|
|
60
|
%
|
|
|
104.1
|
%
|
|
|
102.6
|
%
|
|
|
98.1
|
%
|
|
|
90.8
|
%
|
|
|
81.0
|
%
|
|
|
69.2
|
%
|
|
|
55.8
|
%
|
|
|
41.3
|
%
|
|
|
26.3
|
%
|
|
|
11.2
|
%
|
|
|
-3.6
|
%
|
|
|
-17.6
|
%
|
|
|
-30.7
|
%
|
|
|
-42.5
|
%
|
|
|
-53.1
|
%
|
|
-25%
|
|
|
|
50
|
%
|
|
|
77.8
|
%
|
|
|
76.4
|
%
|
|
|
72.5
|
%
|
|
|
66.2
|
%
|
|
|
57.7
|
%
|
|
|
47.4
|
%
|
|
|
35.7
|
%
|
|
|
23.1
|
%
|
|
|
10.0
|
%
|
|
|
-3.2
|
%
|
|
|
-16.0
|
%
|
|
|
-28.3
|
%
|
|
|
-39.6
|
%
|
|
|
-49.9
|
%
|
|
|
-59.1
|
%
|
|
-20%
|
|
|
|
40
|
%
|
|
|
56.3
|
%
|
|
|
55.1
|
%
|
|
|
51.6
|
%
|
|
|
46.1
|
%
|
|
|
38.6
|
%
|
|
|
29.5
|
%
|
|
|
19.3
|
%
|
|
|
8.2
|
%
|
|
|
-3.3
|
%
|
|
|
-14.9
|
%
|
|
|
-26.2
|
%
|
|
|
-36.9
|
%
|
|
|
-46.9
|
%
|
|
|
-56.0
|
%
|
|
|
-64.1
|
%
|
|
-15%
|
|
|
|
30
|
%
|
|
|
38.4
|
%
|
|
|
37.4
|
%
|
|
|
34.3
|
%
|
|
|
29.4
|
%
|
|
|
22.8
|
%
|
|
|
14.7
|
%
|
|
|
5.7
|
%
|
|
|
-4.2
|
%
|
|
|
-14.4
|
%
|
|
|
-24.6
|
%
|
|
|
-34.6
|
%
|
|
|
-44.1
|
%
|
|
|
-53.0
|
%
|
|
|
-61.0
|
%
|
|
|
-68.2
|
%
|
|
-10%
|
|
|
|
20
|
%
|
|
|
23.5
|
%
|
|
|
22.5
|
%
|
|
|
19.8
|
%
|
|
|
15.4
|
%
|
|
|
9.5
|
%
|
|
|
2.3
|
%
|
|
|
-5.8
|
%
|
|
|
-14.5
|
%
|
|
|
-23.6
|
%
|
|
|
-32.8
|
%
|
|
|
-41.7
|
%
|
|
|
-50.2
|
%
|
|
|
-58.1
|
%
|
|
|
-65.2
|
%
|
|
|
-71.6
|
%
|
|
-5%
|
|
|
|
10
|
%
|
|
|
10.8
|
%
|
|
|
10.0
|
%
|
|
|
7.5
|
%
|
|
|
3.6
|
%
|
|
|
-1.7
|
%
|
|
|
-8.1
|
%
|
|
|
-15.4
|
%
|
|
|
-23.3
|
%
|
|
|
-31.4
|
%
|
|
|
-39.6
|
%
|
|
|
-47.7
|
%
|
|
|
-55.3
|
%
|
|
|
-62.4
|
%
|
|
|
-68.8
|
%
|
|
|
-74.5
|
%
|
|
0%
|
|
|
|
0
|
%
|
|
|
0.0
|
%
|
|
|
-0.7
|
%
|
|
|
-3.0
|
%
|
|
|
-6.5
|
%
|
|
|
-11.3
|
%
|
|
|
-17.1
|
%
|
|
|
-23.7
|
%
|
|
|
-30.8
|
%
|
|
|
-38.1
|
%
|
|
|
-45.5
|
%
|
|
|
-52.8
|
%
|
|
|
-59.6
|
%
|
|
|
-66.0
|
%
|
|
|
-71.8
|
%
|
|
|
-77.0
|
%
|
|
5%
|
|
|
|
-10
|
%
|
|
|
-9.3
|
%
|
|
|
-10.0
|
%
|
|
|
-12.0
|
%
|
|
|
-15.2
|
%
|
|
|
-19.6
|
%
|
|
|
-24.8
|
%
|
|
|
-30.8
|
%
|
|
|
-37.2
|
%
|
|
|
-43.9
|
%
|
|
|
-50.6
|
%
|
|
|
-57.2
|
%
|
|
|
-63.4
|
%
|
|
|
-69.2
|
%
|
|
|
-74.5
|
%
|
|
|
-79.1
|
%
|
|
10%
|
|
|
|
-20
|
%
|
|
|
-17.4
|
%
|
|
|
-18.0
|
%
|
|
|
-19.8
|
%
|
|
|
-22.7
|
%
|
|
|
-26.7
|
%
|
|
|
-31.5
|
%
|
|
|
-36.9
|
%
|
|
|
-42.8
|
%
|
|
|
-48.9
|
%
|
|
|
-55.0
|
%
|
|
|
-61.0
|
%
|
|
|
-66.7
|
%
|
|
|
-71.9
|
%
|
|
|
-76.7
|
%
|
|
|
-81.0
|
%
|
|
15%
|
|
|
|
-30
|
%
|
|
|
-24.4
|
%
|
|
|
-25.0
|
%
|
|
|
-26.6
|
%
|
|
|
-29.3
|
%
|
|
|
-32.9
|
%
|
|
|
-37.3
|
%
|
|
|
-42.3
|
%
|
|
|
-47.6
|
%
|
|
|
-53.2
|
%
|
|
|
-58.8
|
%
|
|
|
-64.3
|
%
|
|
|
-69.5
|
%
|
|
|
-74.3
|
%
|
|
|
-78.7
|
%
|
|
|
-82.6
|
%
|
|
20%
|
|
|
|
-40
|
%
|
|
|
-30.6
|
%
|
|
|
-31.1
|
%
|
|
|
-32.6
|
%
|
|
|
-35.1
|
%
|
|
|
-38.4
|
%
|
|
|
-42.4
|
%
|
|
|
-47.0
|
%
|
|
|
-51.9
|
%
|
|
|
-57.0
|
%
|
|
|
-62.2
|
%
|
|
|
-67.2
|
%
|
|
|
-72.0
|
%
|
|
|
-76.4
|
%
|
|
|
-80.4
|
%
|
|
|
-84.0
|
%
|
|
25%
|
|
|
|
-50
|
%
|
|
|
-36.0
|
%
|
|
|
-36.5
|
%
|
|
|
-37.9
|
%
|
|
|
-40.2
|
%
|
|
|
-43.2
|
%
|
|
|
-46.9
|
%
|
|
|
-51.1
|
%
|
|
|
-55.7
|
%
|
|
|
-60.4
|
%
|
|
|
-65.1
|
%
|
|
|
-69.8
|
%
|
|
|
-74.2
|
%
|
|
|
-78.3
|
%
|
|
|
-82.0
|
%
|
|
|
-85.3
|
%
|
|
30%
|
|
|
|
-60
|
%
|
|
|
-40.8
|
%
|
|
|
-41.3
|
%
|
|
|
-42.6
|
%
|
|
|
-44.7
|
%
|
|
|
-47.5
|
%
|
|
|
-50.9
|
%
|
|
|
-54.8
|
%
|
|
|
-59.0
|
%
|
|
|
-63.4
|
%
|
|
|
-67.8
|
%
|
|
|
-72.0
|
%
|
|
|
-76.1
|
%
|
|
|
-79.9
|
%
|
|
|
-83.3
|
%
|
|
|
-86.4
|
%
|
|
35%
|
|
|
|
-70
|
%
|
|
|
-45.1
|
%
|
|
|
-45.5
|
%
|
|
|
-46.8
|
%
|
|
|
-48.7
|
%
|
|
|
-51.3
|
%
|
|
|
-54.5
|
%
|
|
|
-58.1
|
%
|
|
|
-62.0
|
%
|
|
|
-66.0
|
%
|
|
|
-70.1
|
%
|
|
|
-74.1
|
%
|
|
|
-77.9
|
%
|
|
|
-81.4
|
%
|
|
|
-84.6
|
%
|
|
|
-87.4
|
%
|
|
40%
|
|
|
|
-80
|
%
|
|
|
-49.0
|
%
|
|
|
-49.4
|
%
|
|
|
-50.5
|
%
|
|
|
-52.3
|
%
|
|
|
-54.7
|
%
|
|
|
-57.7
|
%
|
|
|
-61.1
|
%
|
|
|
-64.7
|
%
|
|
|
-68.4
|
%
|
|
|
-72.2
|
%
|
|
|
-75.9
|
%
|
|
|
-79.4
|
%
|
|
|
-82.7
|
%
|
|
|
-85.6
|
%
|
|
|
-88.3
|
%
|
|
45%
|
|
|
|
-90
|
%
|
|
|
-52.4
|
%
|
|
|
-52.8
|
%
|
|
|
-53.8
|
%
|
|
|
-55.5
|
%
|
|
|
-57.8
|
%
|
|
|
-60.6
|
%
|
|
|
-63.7
|
%
|
|
|
-67.1
|
%
|
|
|
-70.6
|
%
|
|
|
-74.1
|
%
|
|
|
-77.5
|
%
|
|
|
-80.8
|
%
|
|
|
-83.8
|
%
|
|
|
-86.6
|
%
|
|
|
-89.1
|
%
|
|
50%
|
|
|
|
-100
|
%
|
|
|
-55.6
|
%
|
|
|
-55.9
|
%
|
|
|
-56.9
|
%
|
|
|
-58.5
|
%
|
|
|
-60.6
|
%
|
|
|
-63.2
|
%
|
|
|
-66.1
|
%
|
|
|
-69.2
|
%
|
|
|
-72.5
|
%
|
|
|
-75.8
|
%
|
|
|
-79.0
|
%
|
|
|
-82.1
|
%
|
|
|
-84.9
|
%
|
|
|
-87.5
|
%
|
|
|
-89.8
|
%
|
|
55%
|
|
|
|
-110
|
%
|
|
|
-58.4
|
%
|
|
|
-58.7
|
%
|
|
|
-59.6
|
%
|
|
|
-61.1
|
%
|
|
|
-63.1
|
%
|
|
|
-65.5
|
%
|
|
|
-68.2
|
%
|
|
|
-71.2
|
%
|
|
|
-74.2
|
%
|
|
|
-77.3
|
%
|
|
|
-80.3
|
%
|
|
|
-83.2
|
%
|
|
|
-85.9
|
%
|
|
|
-88.3
|
%
|
|
|
-90.4
|
%
|
|
60%
|
|
|
|
-120
|
%
|
|
|
-60.9
|
%
|
|
|
-61.2
|
%
|
|
|
-62.1
|
%
|
|
|
-63.5
|
%
|
|
|
-65.4
|
%
|
|
|
-67.6
|
%
|
|
|
-70.2
|
%
|
|
|
-73.0
|
%
|
|
|
-75.8
|
%
|
|
|
-78.7
|
%
|
|
|
-81.5
|
%
|
|
|
-84.2
|
%
|
|
|
-86.7
|
%
|
|
|
-89.0
|
%
|
|
|
-91.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foregoing tables are intended to isolate the effect of benchmark volatility and benchmark performance
on the return of leveraged or inverse leveraged funds. The Funds actual returns may be significantly greater or less than the returns shown above as a result of any of the factors discussed above or under the below risk factor describing
correlation risks.
Correlation Risks.
While the Funds seek to meet their investment objectives, there is no guarantee they will do so. Factors that may affect a Funds ability to meet its investment objective include: (1) the
Sponsors ability to purchase and sell Financial Instruments in a manner that correlates to a Funds objective; (2) an imperfect correlation between the performance of the Financial Instruments held by a Fund and the performance of
the applicable benchmark; (3) bid-ask spreads on such Financial Instruments; (4) fees, expenses, transaction costs, financing costs associated with the use of Financial Instruments and commission costs; (5) holding Financial
Instruments traded in a market that has become illiquid or disrupted; (6) a Funds Share prices being rounded to the nearest cent and/or valuation methodologies; (7) changes to a benchmark that are not disseminated in advance;
(8) the need to conform a Funds portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements; (9) early and unanticipated closings of the markets on which the holdings of a Fund trade,
resulting in the inability of the Fund to execute intended portfolio transactions; and (10) accounting standards.
Further, in order to achieve a high degree of correlation with their applicable underlying benchmarks, the Funds seek to rebalance their
portfolios daily to keep exposure consistent with their investment objectives. Being materially under- or over-exposed to the benchmarks may prevent such Funds from achieving a high degree of correlation with their applicable underlying benchmarks.
Market disruptions or closure, large amounts of assets into or out of the Funds, regulatory
- 11 -
restrictions or extreme market volatility will adversely affect such Funds ability to adjust exposure to requisite levels. The target amount of portfolio exposure is impacted dynamically by
the benchmarks movements during each day. Because of this, it is unlikely that the Funds will be perfectly exposed (
i.e.
, 2x or -2x, as applicable) at the end of each day, and the likelihood of being materially under- or over-exposed is
higher on days when the benchmark levels are volatile near the close of the trading day. In addition, unlike other funds that do not rebalance their portfolios as frequently, each Fund may be subject to increased trading costs associated with daily
portfolio rebalancings in order to maintain appropriate exposure to the underlying benchmarks. Such costs include commissions paid to the FCMs, and may vary by FCM. The effects of these trading costs have been estimated and included in the breakeven
table. See ChargesBreakeven Table below.
Intraday Price/Performance Risk.
Each Fund is rebalanced at or about the time of its NAV calculation time (which may be other than at the close of the U.S. equity
markets). As such, the intraday position of the Fund will generally be different from the Funds stated daily investment objective (
i.e.
, 2x or -2x). When shares are bought intraday, the performance of a Funds shares until the
Funds next NAV calculation will generally be greater than or less than the Funds stated daily multiple or inverse multiple.
The use of leveraged and/or inverse leveraged positions could result in the total loss of an investors investment.
The Funds utilize leverage in seeking to achieve their respective investment objectives and will lose more money in market environments
adverse to their respective daily investment objectives than Funds that do not employ leverage. The use of leveraged and/or inverse leveraged positions could result in the total loss of an investors investment.
For example, because the Ultra and UltraShort Funds offered hereby include a two times (2x) or two times the inverse
(-2x) multiplier, a single-day movement in the relevant benchmark approaching 50% at any point in the day could result in the total loss or almost total loss of an investors investment if that movement is contrary to the investment
objective of the Fund in which an investor has invested, even if such Funds benchmark subsequently moves in an opposite direction, eliminating all or a portion of the movement. This would be the case with downward single-day or intraday
movements in the underlying benchmark of an Ultra Fund or upward single day or intraday movements in the benchmark of an UltraShort Fund, even if the underlying benchmark maintains a level greater than zero at all times.
Each Fund seeks to provide investment return results that correspond (before fees and expenses) to a multiple or an inverse multiple of the daily
performance of a benchmark at all times, even during periods when the applicable benchmark is flat as well as when the benchmark is moving in a manner which causes the Funds NAV to decline, thereby causing losses to such Fund.
Other than for cash management purposes, the Funds are not actively managed by traditional methods (
e.g.
, by
effecting changes in the composition of a portfolio on the basis of judgments relating to economic, financial and market considerations with a view toward obtaining positive results under all market conditions). Rather, each Fund seeks investment
results that correspond (before fees and expenses) to a multiple of or an inverse multiple of the daily performance of a benchmark in accordance with each Funds investment objective, even during periods in which the benchmark is flat or moving
in a manner which causes the NAV of a Fund to decline. It is possible to lose money over time when an underlying benchmark is up for the corresponding Ultra Fund, or down for the corresponding UltraShort Fund, due to the effects of daily
rebalancing, volatility and compounding (see the risk factors above for additional details).
- 12 -
Risks Specific to the Commodity Funds, the Commodity Index Funds and the Currency Funds.
With regard to the Commodity Funds and the Commodity Index Funds, several factors may affect the price of commodities
and, in turn, the Financial Instruments and other assets, if any, owned by such a Fund, including, but not limited to:
|
|
|
Significant increases or decreases in the available supply of a physical commodity due to natural or technological factors. Natural factors would
include depletion of known cost-effective sources for a commodity or the impact of severe weather on the ability to produce or distribute the commodity. Technological factors, such as increases in availability created by new or improved extraction,
refining and processing equipment and methods or decreases caused by failure or unavailability of major refining and processing equipment (for example, shutting down or constructing oil refineries), also materially influence the supply of
commodities.
|
|
|
|
Significant increases or decreases in the demand for a physical commodity due to natural or technological factors. Natural factors would include such
events as unusual climatological conditions impacting the demand for commodities. Technological factors may include such developments as substitutes for particular commodities.
|
|
|
|
Large purchases or sales of physical commodities by the official sector. Governments and large institutions have large commodities holdings or may
establish major commodities positions. For example, a significant portion of the aggregate world gold holdings is owned by governments, central banks and related institutions. Similarly, nations with centralized or nationalized oil production and
organizations such as the Organization of Petroleum Exporting Countries control large physical quantities of crude oil. If one or more of these institutions decides to buy or sell any commodity in amounts large enough to cause a change in world
prices, the price of Shares based upon a benchmark related to that commodity will be affected.
|
|
|
|
Other political factors. In addition to the organized political and institutional trading-related activities described above, peaceful political
activity such as imposition of regulations or entry into trade treaties, as well as political disruptions caused by societal breakdown, insurrection and/or war may greatly influence commodities prices.
|
|
|
|
A significant increase or decrease in commodity hedging activity by commodity producers. Should there be an increase or decrease in the level of hedge
activity of commodity producing companies, countries and/or organizations, it could cause a change in world prices of any given commodity, causing the price of Shares based upon a benchmark related to that commodity to be affected.
|
|
|
|
The recent proliferation of commodity-linked, exchange-traded products and their unknown effect on the commodity markets.
|
|
|
|
A significant change in the attitude of speculators and investors towards a commodity. Should the speculative community take a negative or positive
view towards any given commodity, it could cause a change in world prices of any given commodity, the price of Shares based upon a benchmark related to that commodity will be affected.
|
With regard to the Currency Funds, several factors may affect the value of foreign currencies or the U.S. dollar and, in turn, Financial
Instruments and other assets, if any, owned by a Fund, including, but not limited to:
|
|
|
Debt level and trade deficit of the relevant foreign countries;
|
|
|
|
Inflation rates of the United States and the relevant foreign countries and investors expectations concerning inflation rates;
|
|
|
|
Interest rates of the United States and the relevant foreign countries and investors expectations concerning interest rates;
|
|
|
|
Investment and trading activities of mutual funds, hedge funds and currency funds;
|
- 13 -
|
|
|
Global or regional political, economic or financial events and situations;
|
|
|
|
Sovereign action to set or restrict currency conversion; and
|
|
|
|
Monetary policies and other related activities of central banks within the U.S. and other relevant foreign markets.
|
These factors interrelate in complex ways, and the effect of one factor on the market value of a Fund may offset or enhance the effect of
another factor. Daily increases in the value of a currency will negatively impact the daily performance of Shares of the Currency Funds.
If a Commodity Index Fund establishes its positions through the use of sampling, a Commodity Index Fund may experience additional tracking error.
Tracking error is the difference between the performance of an index tracking fund and its applicable benchmark index.
While each Commodity Index Fund seeks to provide investment results (before fees and expenses) that correspond with a multiple or an inverse multiple of the daily performance of its corresponding index, as applicable, it is possible that tracking
error may increase because of the differences between the proportion of exposure Financial Instruments held by a Commodity Index Fund have to components included in the applicable benchmark index and the proportional weight that such components
carry within the index.
A Commodity Index Fund may obtain exposure through Financial Instruments to a representative sample
of the components in its underlying index, which have aggregate characteristics similar to those of the underlying index. This sampling process typically involves selecting a representative sample of components in an index principally to
enhance liquidity and reduce transaction costs while seeking to maintain high correlation with, and similar aggregate characteristics (e.g., underlying commodities and valuations) to, the underlying index. In addition, a Commodity Index Fund may
obtain exposure to components not included in its underlying index, invest in assets that are not included in the underlying index or may overweight or underweight certain components contained in the underlying index. Index tracking funds that use
sampling may experience greater tracking error than index tracking funds that fully replicate an underlying index by obtaining exposure on a proportionate basis to all components of that index.
Risks specific to ProShares UltraShort Euro Fund
The European financial markets and the value of the euro have experienced significant volatility recently, in part related to unemployment, budget deficits and economic downturns. In addition, several
member countries of the Economic and Monetary Union of the European Union (the EU) have experienced credit rating downgrades, rising government debt levels and, for certain EU member countries (including Greece, Spain, Portugal, Ireland
and Italy), weaknesses in sovereign debt. These events, along with decreasing imports or exports, changes in governmental or EU regulations on trade, the default or threat of default by an EU member country on its sovereign debt and/or an economic
recession in an EU member country may continue to cause prolonged volatility in euro-related investments.
In addition, given
recent events, it is possible that the euro could be abandoned in the future by countries that have already adopted its use. If this were to occur, the value of the euro could fluctuate drastically. Increased volatility related to the euro could
exacerbate the effects of daily compounding on the ProShares UltraShort Euros performance over periods longer than one day. If the euro is abandoned by all countries that have adopted its use, the Fund may be forced to switch benchmarks or
liquidate.
Potential negative impact from rolling futures positions.
The Commodity Funds and Commodity Index Funds invest in or have exposure to futures contracts and are subject to risks related to rolling.
The contractual obligations of a buyer or seller holding a futures contract to expiration may generally be satisfied by taking or making physical delivery of the contracts underlying
- 14 -
Reference Asset or settling in cash as designated in the contract specifications. Alternatively, futures contracts may be closed out prior to expiration by making an offsetting sale or purchase
of an identical futures contract on the same or linked exchange before the designated date of delivery. Once this date is reached, the futures contract expires. As the futures contracts held by a Commodity Fund or Commodity Index Fund
near expiration, they are generally closed out and replaced by contracts with a later expiration. This process is referred to as rolling. The Commodity Funds and Commodity Index Funds do not intend to take physical delivery of any
Reference Assets underlying a futures contract, but instead to roll their respective positions.
When the market
for these contracts is such that the prices are higher in the more distant delivery months than in the nearer delivery months, the sale during the course of the rolling process of the more nearby contract would take place at a price that
is lower than the price of the more distant contract. This pattern of higher futures prices for longer expiration futures contracts is often referred to as contango. Alternatively, when the market for these contracts is such that the
prices are higher in the nearer months than in the more distant months, the sale during the course of the rolling process of the more nearby contract would take place at a price that is higher than the price of the more distant contract.
This pattern of higher futures prices of shorter expiration futures contracts is referred to as backwardation.
There have been extended periods in which contango or backwardation has existed in the futures contract markets for various types of
futures contracts, and such periods can be expected to occur in the future. The presence of contango in certain futures contracts at the time of rolling would be expected to adversely affect the Ultra Funds, and positively affect the UltraShort
Funds. Similarly, the presence of backwardation in certain futures contracts at the time of rolling such contracts would be expected to adversely affect the UltraShort Funds and positively affect the Ultra Funds.
Investments linked to commodities, commodity futures contracts or currencies can be highly volatile and the Funds may experience large losses when
buying, selling or holding such instruments.
Investments linked to commodities, commodity futures contracts or
currencies can be highly volatile compared to investments in traditional securities and Funds may experience large losses. High volatility may have an adverse impact on the Funds beyond the impact of any performance-based losses of the underlying
benchmark.
The number of underlying components included in a Funds benchmark may impact volatility, which could adversely affect
an investment in the Shares.
The number of underlying components in a Funds benchmark may also impact
volatility, which could adversely affect an investment in the Shares. For example, each of the indices for the Commodity Index Funds is concentrated in terms of the number and type of commodities represented, and some of the subindexes are solely
concentrated in a single commodity futures contract. In addition, the benchmarks for the Currency Funds are concentrated solely on a single currency. Investors should be aware that other benchmarks are more diversified in terms of both the number
and variety of investments included. Concentration in fewer components may result in a greater degree of volatility in a benchmark and the NAV of the Fund which corresponds to that benchmark under specific market conditions and over time.
The Commodity Funds do not invest in bullion itself as certain other exchange-traded products do. Rather, these Commodity Funds use
Financial Instruments to gain exposure to these precious metals. Not investing directly in bullion may introduce additional tracking error and these Commodity Funds are subject to the effects of contango and backwardation described above.
Using Financial Instruments such as forwards and futures in an effort to replicate the performance (or inverse
performance) of gold and silver bullion may introduce additional tracking error to the performance of the Commodity Funds. While prices of Financial Instruments are, as a rule, related to the prices of an underlying
- 15 -
cash market, they are not perfectly correlated. In addition, the use of Financial Instruments causes the need to roll futures or forward contracts as described above and the resulting possibility
that contango or backwardation can occur. Gold and silver historically exhibit contango markets during most periods. The existence of historically prevalent contango markets would be expected to adversely affect the Ultra Funds. Alternatively, the
existence of backwardated markets in either silver or gold would have an adverse impact on the UltraShort Funds.
The Commodity Index
Funds are linked to an index of commodity futures contracts, and are not linked to the spot prices of the underlying physical commodities. Commodity futures contracts may perform very differently from the spot price of the underlying physical
commodities.
Each Commodity Index Fund is designed to correspond (before fees and expenses) to a
multiple or an inverse multiple of the daily performance of the DJUBS WTI Crude Oil Subindex
SM
, which is intended to reflect the performance of crude oil as measured by the price of West Texas Intermediate crude oil futures contracts traded on the New York Mercantile Exchange (the
NYMEX). The Commodity Index Funds are not directly linked to the spot price of crude oil. While prices of swaps, futures contracts and other derivative contracts are, as a rule, related to the prices of an underlying cash market, they
are not perfectly correlated. It is possible that during certain time periods, derivative contract prices will cease to track cash market prices and may be substantially lower or higher than cash market prices for the underlying commodity due to
differences in derivative contract terms or as supply, demand or other economic or regulatory factors become more pronounced in either the cash or derivative markets.
For example, during the one-year period from January 1, 2010 to December 31, 2010, the Dow JonesUBS
WTI Crude Oil Subindex
SM
underperformed the spot price of
crude oil by 11.48% (the level of the Subindex increased by 3.67%, while the spot price of crude oil increased by 15.15%). During a similar one-year period from January 1, 2004 to December 31, 2004, the Dow JonesUBS WTI Crude Oil
Subindex
SM
outperformed the spot price of crude oil by
13.61% (the level of the Subindex increased 47.22%, while the spot price of crude oil increased by 33.61%).
Depending upon the direction and level of the Dow JonesUBS WTI Crude Oil Subindex
SM
changes, the Funds may underperform or outperform a portfolio directly holding crude oil interests.
Credit and liquidity risks associated with collateralized repurchase agreements.
A portion of each Funds assets may be held in cash and/or U.S. Treasury securities, agency securities, or other high credit quality
short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements). These securities may be used for direct investment or serve as collateral for such Funds trading in Financial
Instruments, as applicable, and may include collateralized repurchase agreements. Collateralized repurchase agreements involve an agreement to purchase a security and to sell that security back to the original seller at an agreed-upon price. The
resale price reflects the purchase price plus an agreed-upon incremental amount which is unrelated to the coupon rate or maturity of the purchased security. As protection against the risk that the original seller will not fulfill its obligation, the
buyer receives collateral marked-to-market daily, and maintained at a value at least equal to the sale price plus the accrued incremental amount. Although the collateralized repurchase agreements that the Funds enter into require that counterparties
(which act as original sellers) over-collateralize the amount owed to a Fund with U.S. Treasury securities and/or agency securities, there is a risk that such collateral could decline in price at the same time that the counterparty defaults on its
obligation to repurchase the security. If this occurs, a Fund may incur losses or delays in receiving proceeds. To minimize these risks, the Funds typically enter into transactions only with major, global financial institutions.
Possible illiquid markets may exacerbate losses.
Financial Instruments cannot always be liquidated at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in a market. A
market disruption can also make it difficult to liquidate a position or find a swap or forward contract counterparty at a reasonable cost.
- 16 -
Market illiquidity may cause losses for the Funds. The large size of the positions which the
Funds may acquire increases the risk of illiquidity by both making their positions more difficult to liquidate and increasing the losses incurred while trying to do so. Any type of disruption or illiquidity will potentially be exacerbated due to the
fact that the Funds will typically invest in Financial Instruments related to one benchmark, which in many cases is highly concentrated.
It may not be possible to gain exposure to the benchmarks using exchange-traded Financial Instruments in the future.
The Funds may utilize exchange-traded Financial Instruments. It may not be possible to gain exposure to the benchmarks with these
Financial Instruments in the future. If these Financial Instruments cease to be traded on regulated exchanges, they may be replaced with Financial Instruments traded on trading facilities that are subject to lesser degrees of regulation or, in some
cases, no substantive regulation. As a result, trading in such Financial Instruments, and the manner in which prices and volumes are reported by the relevant trading facilities, may not be subject to the provisions of, and the protections afforded
by, the Commodity Exchange Act, as amended (the CEA), or other applicable statutes and related regulations, that govern trading on regulated U.S. futures exchanges, or similar statutes and regulations that govern trading on regulated
U.K. futures exchanges. In addition, many electronic trading facilities have only recently initiated trading and do not have significant trading histories. As a result, the trading of contracts on such facilities, and the inclusion of such contracts
in a benchmark, may be subject to certain risks not presented by U.S. or U.K. exchange-traded futures contracts, including risks related to the liquidity and price histories of the relevant contracts.
Fees are charged regardless of a Funds returns and may result in depletion of assets.
The Funds are subject to the fees and expenses described herein which are payable irrespective of a Funds returns. Such fees and
expenses include asset-based fees of 0.95% per annum of each Funds average daily net assets, as well as the effects of commissions, trading spreads, and embedded financing, borrow costs and fees associated with swaps, forwards, futures
contracts, and costs relating to the purchase of U.S. Treasury securities or similar high credit quality short-term fixed-income or similar securities. Additional charges may include other fees as applicable.
For the Funds linked to an index, changes implemented by the index provider that affect the composition and valuation of the index could adversely
affect the value of an investment in a Funds Shares.
ProShares Ultra DJ-UBS Crude Oil and ProShares UltraShort
DJ-UBS Crude Oil are linked to an index maintained by an index provider that is unaffiliated with the Funds or the Sponsor. The policies implemented by such index provider concerning the calculation of the level of an index or the composition of an
index could affect the level of the index and, therefore, the value of such Funds Shares. The index provider may change the composition of the indexes, or make other methodological changes that could change the level of an index. Additionally,
the index provider may alter, discontinue or suspend calculation or dissemination of an index. Any of these actions could adversely affect the value of Shares of a Fund using that index as a benchmark. The index provider has no obligation to
consider Fund shareholder interests in calculating or revising an index. Any of these actions could adversely affect the value of such Funds Shares. Calculation of an index may not be possible or feasible under certain events or circumstances
that are beyond the reasonable control of the Sponsor, which in turn may adversely impact both the index and/or the Shares, as applicable. Additionally, index calculations may be disrupted by rollover disruptions, rebalancing disruptions and/or
market emergencies, which may have an adverse effect on the value of the Shares.
The Funds may be subject to counterparty risks.
The Funds will use swap agreements and/or forward contracts as a means to achieve their respective investment
objectives. Such Funds will use either swap agreements and/or forward contracts referencing their
- 17 -
respective benchmarks. The Funds may also invest in other swap agreements or forward contracts if such instruments tend to exhibit trading prices or returns that correlate with the benchmark or a
component of the benchmark and will further the investment objective of the Fund.
Swap agreements and forward contracts are
generally traded in over-the-counter markets and have only recently become subject to regulation by the CFTC. CFTC rules, however, do not cover all types of swap agreements and forward contracts. Investors, therefore, may not receive the protection
of CFTC regulation or the statutory scheme of the CEA in connection with each Funds swap agreements or forward contracts. The lack of regulation in these markets could expose investors to significant losses under certain circumstances
including in the event of trading abuses or financial failure by participants.
The Funds will be subject to credit risk with
respect to the counterparties to the derivative contracts (whether a clearing corporation in the case of cleared instruments or another third party in the case of over-the-counter uncleared instruments). Unlike in futures contracts, the counterparty
to uncleared swap agreements or forward contracts is generally a single bank or other financial institution, rather than a clearing organization backed by a group of financial institutions. As a result, a Fund is subject to credit risk with respect
to the amount it expects to receive from counterparties to uncleared swaps and forward contracts entered into as part of that Funds principal investment strategy. If a counterparty becomes bankrupt or otherwise fails to perform its obligations
due to financial difficulties, a Fund could suffer significant losses on these contracts and the value of an investors investment in a Fund may decline.
The Funds have sought to mitigate these risks by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund, marked to market daily, subject to certain
minimum thresholds; however there are no limitations on the percentage of its assets each Fund may invest in swap agreements or forward contracts with a particular counterparty. To the extent any such collateral is insufficient or there are delays
in accessing the collateral, the Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings. The Funds typically enter into transactions only with major global
financial institutions.
Over-the-counter swaps and forward contracts are less liquid than futures contracts because they are
not traded on an exchange, do not have uniform terms and conditions, and are generally entered into based upon the creditworthiness of the parties and the availability of credit support, such as collateral, and in general, are not transferable
without the consent of the counterparty. If the level of the Funds benchmark has a dramatic intraday move that would cause a material decline in the Funds NAV, the terms of the swap may permit the counterparty to immediately close out
the transaction with the Fund. In that event, it may not be possible for the Fund to enter into another swap agreement or to invest in other Financial Instruments necessary to achieve the desired exposure consistent with the Funds objective.
This, in turn, may prevent the Fund from achieving its investment objective, particularly if the level of the Funds benchmark reverses all or part of its intraday move by the end of the day. In addition, cleared derivative transactions benefit
from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered into directly between two counterparties generally do not benefit from such protections. This exposes
the Funds to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus
causing the Funds to suffer a loss.
As of the date of this prospectus, the Funds approved counterparties for
over-the-counter swap agreements and forward contracts are: Deutsche Bank AG, UBS AG, Goldman Sachs International and Société Générale. The Sponsor regularly reviews the performance of its counterparties for, among other
things, creditworthiness and execution quality. In addition, the Sponsor periodically considers the addition of new counterparties. Thus, the list of counterparties noted above may change at any time. See pages 36 through 38 for more
information about the Funds swap agreements and forward contracts.
Each day, the Funds
disclose their portfolio holdings as of the prior Business Day (as such term is defined in Creation Procedures below). Each
Funds portfolio holdings identifies its counterparties, as applicable. This portfolio holdings information may be accessed through the web on the Sponsors website at
www.ProShares.com.
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More information about Deutsche Bank AG, including its current financial statements, may be
found on the SECs EDGAR website under Central Index Key No (CIK No.) 0001159508 (for Deutsche Bank AG). More information about UBS AG, including its current financial statements, may also be found on the SECs EDGAR website
under CIK No. 0001114446 (for UBS AG). More information about Goldman Sachs International, a U.K. broker-dealer and subsidiary of The Goldman Sachs Group, Inc., may also be found on the SECs EDGAR website under CIK No. 0000886982
(for The Goldman Sachs Group, Inc.). The Goldman Sachs Group, Inc. consolidates the financial statements of each of its subsidiaries, including Goldman Sachs International, with its own. More information about Société
Générale, a French public limited company, including its current financial statements as filed with the AMF (the French securities regulator), may be found on Société Générales website. Please note
that the references to third-party websites have been provided solely for informational purposes. Neither the Funds nor the Sponsor endorses or is responsible for the content or information contained on any third-party website, including with
respect to any financial statements. In addition, neither the Funds nor the Sponsor makes any warranty, express or implied or assumes any legal liability or responsibility for the accuracy, completeness or usefulness of any such information.
Each counterparty and/or any of its affiliates may be an Authorized Participant or shareholder of a Fund, subject to
applicable law.
The counterparty risk for cleared derivative transactions is generally lower than for uncleared
over-the-counter derivatives since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the contract as each party to a trade
looks only to the clearing house for performance of financial obligations. However, there can be no assurance that the clearing house, or its members, will satisfy its obligations to the Fund. Historical correlation trends between Fund benchmarks
and other asset classes may not continue or may reverse, limiting or eliminating any potential diversification or other benefit from owning a Fund.
To the extent that an investor purchases a Fund seeking diversification benefits based on the historic correlation (whether positive or negative) between the returns of the commodity or currency markets
and other asset classes, such historic correlation may not continue or may reverse itself. In this circumstance, the diversification or other benefits sought may be limited or nonexistent.
The Funds have limited operating history, and, as a result, investors have only a limited performance history to serve as a factor for evaluating an investment in the Funds.
The Funds have limited performance history upon which to evaluate an investors investment in the Funds. Although past performance is
not necessarily indicative of future results, if the Funds had longer performance histories, such performance histories might (or might not) provide investors with more information on which to evaluate an investment in the Funds. Likewise, certain
benchmarks have a limited history which might (or might not) provide investors with more information on which to evaluate an investment in the Funds.
Investors cannot be assured of the Sponsors continued services, the discontinuance of which may be detrimental to the Funds.
Investors cannot be assured that the Sponsor will be able to continue to service the Funds for any length of time. If the Sponsor
discontinues its activities on behalf of the Funds, the Funds may be adversely affected, as there may be no entity servicing the Funds for a period of time. If the Sponsors registrations with the CFTC or memberships in the NFA were revoked or
suspended, the Sponsor would no longer be able to provide services and/or to render advice to the Funds. If the Sponsor were unable to provide services and/or advice to the Funds, the Funds would be unable to pursue their investment objectives
unless and until the Sponsors ability to provide services and advice to the Funds was reinstated or a replacement for the Sponsor as commodity pool operator could be found. Such an event could result in termination of the Funds.
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The lack of active trading markets for the Shares of the Funds may result in losses on investors
investments at the time of disposition of Shares.
Although the Shares of the Funds are publicly listed and traded on
the NYSE Arca, there can be no guarantee that an active trading market for the Shares of the Funds will be maintained. If investors need to sell their Shares at a time when no active market for them exists, the price investors receive for their
Shares, assuming that investors are able to sell them, likely will be lower than the price that investors would receive if an active market did exist.
Investors may be adversely affected by redemption or creation orders that are subject to postponement, suspension or rejection under certain circumstances.
A Fund may, in its discretion, suspend the right of creation or redemption or may postpone the redemption or purchase settlement date, for
(1) any period during which the NYSE Arca, the NYSE or any other exchange, marketplace or trading center, deemed to affect the normal operations of the Funds, is closed, or when trading is restricted or suspended or restricted on such exchanges
in any of the Funds futures contracts, (2) any period during which an emergency exists as a result of which the fulfillment of a purchase order or the redemption distribution is not reasonably practicable, or (3) such other period as
the Sponsor determines to be necessary for the protection of the shareholders of the Funds. In addition, a Fund will reject a redemption order if the order is not in proper form as described in the Authorized Participant Agreement or if the
fulfillment of the order might be unlawful. Any such postponement, suspension or rejection could adversely affect a redeeming Authorized Participant. For example, the resulting delay may adversely affect the value of the Authorized
Participants redemption proceeds if the NAV of a Fund declines during the period of delay. The Funds disclaim any liability for any loss or damage that may result from any such suspension or postponement. Suspension of creation privileges may
adversely impact how the Shares are traded and arbitraged on the secondary market, which could cause them to trade at levels materially different (premiums and discounts) from the fair value of their underlying holdings.
The NAV may not always correspond to market price and, as a result, investors may be adversely affected by the creation or redemption of Creation
Units at a value that differs from the market price of the Shares.
The NAV per Share of a Fund changes as fluctuations
occur in the market value of a Funds portfolio. Investors should be aware that the public trading price of a number of Shares of a Fund otherwise amounting to a Creation Unit may be different from the NAV of an actual Creation Unit
(
i.e.
, 50,000 individual Shares may trade at a premium over, or a discount to, the NAV of a Creation Unit of a Fund) and similarly the public trading price per Share of a Fund may be different from the NAV per Share of the Fund. Consequently,
an Authorized Participant may be able to create or redeem a Creation Unit of a Fund at a discount or a premium to the public trading price per Share of that Fund. This price difference may be due, in large part, to the fact that supply and demand
forces at work in the secondary trading market for Shares of a Fund are closely related, but not identical, to the same forces influencing the price of an underlying Reference Asset at any point in time.
Authorized Participants or their clients or customers may have an opportunity to realize a profit if they can purchase a Creation Unit at
a discount to the public trading price of the Shares of a Fund or can redeem a Creation Unit at a premium over the public trading price of the Shares of a Fund. The Sponsor expects that the exploitation of such arbitrage opportunities by Authorized
Participants and their clients and customers will tend to cause the public trading price to track the NAV per Share of the Funds closely over time.
The value of a Share may be influenced by non-concurrent trading hours between the NYSE Arca and the market in which the Financial Instruments (or related Reference Assets) held by a Fund are traded. The
Shares of each Fund trade on the NYSE Arca from 9:30 a.m. to 4:00 p.m. (Eastern Time). The Financial Instruments (and/or the Reference Assets) held by a particular Fund, however, may have different fixing or settlement times. Consequently,
liquidity in the Financial Instruments (and/or the Reference Assets) may be reduced after such fixing or settlement time. As a result, during the time when the NYSE Arca is open but after the applicable fixing
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or settlement time of an underlying component, trading spreads and the resulting premium or discount on the Shares of a Fund may widen, and, therefore, may increase the difference between the
price of the Shares of a Fund and the NAV of such Shares.
Trading on exchanges outside the United States is not subject to U.S.
regulation and may result in different or diminished investor protections.
Some of the Funds trading may be
conducted on exchanges outside the United States. Trading on such exchanges is not regulated by any U.S. governmental agency and may involve certain risks not applicable to trading on U.S. exchanges, including different or diminished investor
protections. In trading contracts denominated in currencies other than U.S. dollars, the Shares are subject to the risk of adverse exchange rate movements between the dollar and the functional currencies of such contracts. Investors could incur
substantial losses from trading on foreign exchanges which such investors would not have otherwise been subject had the Funds trading been limited to U.S. markets.
Competing claims of intellectual property rights may adversely affect the Funds and an investment in the Shares.
Although the Sponsor does not anticipate that such claims will adversely impact the Funds, it is impossible to provide definite assurances that no such negative impact will occur. The Sponsor believes
that it has properly licensed or obtained the appropriate consent of all necessary parties with respect to intellectual property rights. However, other third parties could allege ownership as to such rights and may bring an action in asserting their
claims. To the extent any action is brought by a third party asserting such rights, the expenses in litigating, negotiating, cross-licensing or otherwise settling such claims may adversely affect the Funds.
Investors may be adversely affected by an overstatement or understatement of the NAV calculation of the Funds due to the valuation method employed
on the date of the NAV calculation.
Calculating the NAV of the Funds includes, in part, any unrealized profits or
losses on open Financial Instrument positions. Under normal circumstances, the NAV of a Fund reflects the value of the Financial Instruments held by a Fund, as of the time the NAV is calculated. However, if any of the Financial Instruments held by a
Fund could not be purchased or sold on a day when a Fund is accepting creation and redemption orders (due to the operation of daily limits or other rules of the exchange or otherwise), a Fund may be improperly exposed which could cause it to fail to
meet its stated investment objective. Alternatively, a Fund may attempt to calculate the fair value of such Financial Instruments. In such a situation, there is a risk that the calculation of the relevant benchmark, and therefore, the NAV of the
applicable Fund on such day, may not accurately reflect the realizable market value of the Financial Instruments underlying such benchmark.
The liquidity of the Shares may also be affected by the withdrawal from participation of Authorized Participants, which could adversely affect the
market price of the Shares.
In the event that one or more Authorized Participants which have substantial interests in
the Shares withdraw from participation, the liquidity of the Shares will likely decrease, which could adversely affect the market price of the Shares and result in investors incurring a loss on their investment.
Shareholders that are not Authorized Participants may only purchase or sell their Shares in secondary trading markets, and the conditions
associated with trading in secondary markets may adversely affect investors investment in the Shares.
Only
Authorized Participants may create or redeem Creation Units. All other investors that desire to purchase or sell Shares must do so through the NYSE Arca or in other markets, if any, in which the Shares may be traded. Shares may trade at a premium or
discount to NAV per Share.
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NYSE Arca may halt trading in the Shares of a Fund which would adversely impact investors
ability to sell Shares.
Trading in Shares of a Fund may be halted due to market conditions or, in light of NYSE Arca
rules and procedures, for reasons that, in the view of the NYSE Arca, make trading in Shares of a Fund inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility pursuant to circuit breaker
rules that require trading to be halted for a specified period based on a specified decline or rise in a market index (
e.g.
, the Dow Jones Industrial Average) or in the price of a Funds Shares. Additionally, the ability to short sell a
Funds shares may be restricted when there is a 10% or greater change from the previous days official closing price. There can be no assurance that the requirements necessary to maintain the listing of the Shares of a Fund will continue
to be met or will remain unchanged.
Shareholders do not have the protections associated with ownership of shares in an investment
company registered under the 1940 Act.
None of the Funds are subject to registration or regulation under the 1940 Act.
Consequently, shareholders do not have the regulatory protections provided to investors in investment companies.
Shareholders do not
have the rights enjoyed by investors in certain other vehicles and may be adversely affected by a lack of statutory rights and by limited voting and distribution rights.
The Shares have limited voting and distribution rights. For example, shareholders do not have the right to elect directors, the Funds may
enact splits or reverse splits without shareholder approval and the Funds are not required to pay regular distributions, although the Funds may pay distributions at the discretion of the Sponsor.
The value of the Shares will be adversely affected if the Funds are required to indemnify the Trustee.
Under the Amended and Restated Trust Agreement of the Trust, as may be further amended and restated from time to time (the Trust
Agreement), the Trustee has the right to be indemnified for any liability or expense incurred without gross negligence or willful misconduct. That means the Sponsor may require the assets of a Fund to be sold in order to cover losses or
liability suffered by it or by the Trustee. Any sale of that kind would reduce the NAV of one or more of the Funds.
Although the Shares
of the Funds are limited liability investments, certain circumstances such as bankruptcy of a Fund will increase a shareholders liability.
The Shares of the Funds are limited liability investments; investors may not lose more than the amount that they invest plus any profits recognized on their investment. However, shareholders could be
required, as a matter of bankruptcy law, to return to the estate of a Fund any distribution they received at a time when such Fund was in fact insolvent or in violation of the Trust Agreement.
Failure of the FCMs to segregate assets may increase losses in the Funds.
The CEA requires a clearing broker to segregate all funds received from customers from such brokers proprietary assets. There is a
risk that assets deposited by the Sponsor on behalf of the Funds as margin with the FCMs may, in certain circumstances, be used to satisfy losses of other clients of the FCMs. If an FCM fails to segregate the funds received from the Sponsor,
the assets of the Funds might not be fully protected in the event of the FCMs bankruptcy. Furthermore, in the event of an FCMs bankruptcy, Fund Shares could be limited to recovering only a
pro rata
share of all available funds
segregated on behalf of the FCMs combined customer accounts, even though certain property specifically traceable to a particular Fund was held by the FCM. Each FCM may, from time to time, have been the subject of certain regulatory and private
causes of action.
- 22 -
Similarly, the CEA requires a clearing organization approved by the CFTC as a derivatives
clearing organization to segregate all funds and other property received from a clearing members clients in connection with domestic futures and options contracts from any funds held at the clearing organization to support the clearing
members proprietary trading. Nevertheless, customer funds held at a clearing organization in connection with any futures or options contracts may be held in a commingled omnibus account, which may not identify the name of the clearing
members individual customers. With respect to futures and options contracts, a clearing organization may use assets of a non-defaulting customer held in an omnibus account at the clearing organization to satisfy payment obligations of a
defaulting customer of the clearing member to the clearing organization. As a result, in the event of a default of the clearing FCMs other clients or the clearing FCMs failure to extend own funds in connection with any such default, a
Fund may not be able to recover the full amount of assets deposited by the clearing FCM on behalf of the Fund with the clearing organization.
In the event of a bankruptcy or insolvency of any exchange or a clearing house, a Fund could experience a loss of the funds deposited through its FCM as margin with the exchange or clearing house, a loss
of any profits on its open positions on the exchange, and the loss of unrealized profits on its closed positions on the exchange.
A
court could potentially conclude that the assets and liabilities of one Fund are not segregated from those of another series of the Trust and may thereby potentially expose assets in a Fund to the liabilities of another series of the Trust.
Each series of the Trust is a separate series of a Delaware statutory trust and not itself a separate legal entity.
Section 3804(a) of the Delaware Statutory Trust Act, as amended (the DSTA), provides that if certain provisions are in the formation and governing documents of a statutory trust organized in series, and if separate and distinct
records are maintained for any series and the assets associated with that series are held in separate and distinct records (directly or indirectly, including through a nominee or otherwise) and accounted for in such separate and distinct records
separately from the other assets of the statutory trust, or any series thereof, then the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series are enforceable against the
assets of such series only, and not against the assets of the statutory trust generally or any other series thereof, and none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the
statutory trust generally or any other series thereof shall be enforceable against the assets of such series. The Sponsor is not aware of any court case that has interpreted Section 3804(a) of the DSTA or provided any guidance as to what is
required for compliance. The Sponsor maintains separate and distinct records for each series and accounts for them separately, but it is possible a court could conclude that the methods used did not satisfy Section 3804(a) of the DSTA and thus
potentially expose assets of a Fund to the liabilities of another series of the Trust.
There may be circumstances that could prevent a
Fund from being operated in a manner consistent with its investment objective and principal investment strategies.
There may be circumstances outside the control of the Sponsor and/or a Fund that make it, for all practical purposes, impossible to
re-position such Fund and/or to process a purchase or redemption order. Examples of such circumstances include: natural disasters; public service disruptions or utility problems such as those caused by fires, floods, extreme weather conditions, and
power outages resulting in telephone, telecopy, and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the aforementioned parties, as well as the
Depository Trust Company (DTC), the National Securities Clearing Corporation (NSCC), or any other participant in the purchase process; and similar extraordinary events. Accordingly, while the Sponsor has implemented and
tested a business continuity plan that transfers functions of any disrupted facility to another location and has effected a disaster recovery plan, circumstances, such as those above, may prevent a Fund from being operated in a manner consistent
with its investment objective and/or principal investment strategies.
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Shareholders tax liability will exceed cash distributions on the Shares.
Shareholders of each Fund are subject to U.S. federal income taxation and, in some cases, state, local, or foreign income taxation on
their share of the Funds taxable income, whether or not they receive cash distributions from the Fund. Each Fund does not currently expect to make distributions with respect to capital gains or ordinary income. Accordingly, shareholders of a
Fund will not receive cash distributions equal to their share of the Funds taxable income or the tax liability that results from such income. A Funds income, gains, losses and deductions are allocated to shareholders on a monthly basis.
If you own shares in a Fund at the beginning of a month and sell them during the month, you are generally still considered a shareholder through the end of that month.
The U.S. Internal Revenue Service (IRS) could adjust or reallocate items of income, gain, deduction, loss and credit with respect to the Shares if the IRS does not accept the assumptions
or conventions utilized by the Fund.
U.S. federal income tax rules applicable to partnerships, which each Fund is
anticipated to be treated as under the Internal Revenue Code of 1986, as amended (the Code), are complex and their application is not always clear. Moreover, the rules generally were not written for, and in some respects are difficult to
apply to, publicly traded interests in partnerships. The Funds apply certain assumptions and conventions intended to comply with the intent of the rules and to report income, gain, deduction, loss and credit to shareholders in a manner that reflects
the shareholders economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable Regulations (as defined below). It is possible therefore that the IRS will successfully assert that these
assumptions or conventions do not satisfy the technical requirements of the Code or the Treasury regulations promulgated thereunder (the Regulations) and will require that items of income, gain, deduction, loss and credit be adjusted or
reallocated in a manner that could be adverse to investors.
Shareholders will receive partner information tax returns on
Schedule K-1, which could increase the complexity of tax returns.
The partner information tax returns on
Schedule K-1 which the Funds will distribute to shareholders will contain information regarding the income items and expense items of the Funds. If you have not received Schedule K-1s from other investments, you may find that preparing
your tax return may require additional time, or it may be necessary for you to retain an accountant or other tax preparer, at an additional expense to you, to assist you in the preparation of your return.
Investors could be adversely affected if the current treatment of long-term capital gains under current U.S. federal income tax law is changed or
repealed in the future.
Under current law, long-term capital gains are taxed to non-corporate investors at a maximum
U.S. federal income tax rate of 20%. This tax treatment may be adversely affected, changed or repealed by future changes in tax laws at any time.
Shareholders of each Fund may recognize significant amounts of ordinary income and short-term capital gain.
Due to the investment strategy of the Funds, the Funds may realize and pass-through to shareholders significant amounts of ordinary income and short-term capital gains as opposed to long-term capital
gains, which generally are taxed at a preferential rate. A Funds income, gains, losses and deductions are allocated to shareholders on a monthly basis. If you own shares in a Fund at the beginning of a month and sell them during the month, you
are generally still considered a shareholder through the end of that month.
PROSPECTIVE INVESTORS ARE STRONGLY URGED TO
CONSULT THEIR OWN TAX ADVISERS AND COUNSEL WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE SHARES OF A FUND; SUCH TAX CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT INVESTORS.
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Regulatory changes or actions, including the implementation of new legislation, may alter the
operations and profitability of the Funds.
The U.S. derivative markets and market participants have been subject to
comprehensive regulation, not only by the CFTC but also by self regulatory organizations, including the NFA and the exchanges on which the derivatives contracts are traded and/or cleared. As with any regulated activity, changes in the regulations
may have unexpected results. For example, changes in the amount or quality of the collateral that traders in derivative contracts are required to provide to secure their open positions, or in the limits on number or size of positions that a trader
may have open at a given time, may adversely affect the ability of the Funds to enter into certain transactions that could otherwise present lucrative opportunities. Considerable regulatory attention has been focused on non-traditional investment
pools which are publicly distributed in the United States. There is a possibility of future regulatory changes altering, perhaps to a material extent, the nature of an investment in the Funds or the ability of the Funds to continue to implement
their investment strategies.
In addition, the SEC, CFTC and the exchanges are authorized to take extraordinary actions in the
event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading. The regulation of swaps,
forwards and futures transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action. The effect of any future regulatory change on the Funds is impossible to predict, but could be
substantial and adverse.
In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Act) was signed into law on July 21, 2010. The Dodd-Frank Act will make sweeping changes to the way in which the U.S. financial system is supervised and regulated. Title VII of the Dodd-Frank Act sets forth a new legislative
framework for OTC derivatives, including certain Financial Instruments, such as swaps, in which certain of the Funds may invest. Title VII of the Dodd-Frank Act makes broad changes to the OTC derivatives market, grants significant new authority
to the SEC and the CFTC to regulate OTC derivatives and market participants, and will require clearing and exchange trading of many OTC derivatives transactions.
Provisions in the Dodd-Frank Act include the requirement that position limits on commodity futures contracts be established; new registration, recordkeeping, capital and margin requirements for swap
dealers and major swap participants as determined by the Dodd-Frank Act and applicable regulations; and mandatory use of clearinghouse mechanisms for many OTC derivative transactions.
The CFTC, the SEC and other federal regulators have been tasked with developing the rules and regulations enacting the provisions of the
Dodd-Frank Act. While certain regulations have been promulgated and are already in effect, it is not possible at this time to assess the exact nature and full scope of the impact of the Dodd-Frank Act on any of the Funds. The new legislation and the
related regulations that may be promulgated in the future may negatively impact a Funds ability to meet its investment objective either through limits on its investments or requirements imposed on it or any of its counterparties. In
particular, new requirements, including capital requirements and mandatory clearing of over-the-counter derivative transactions, may increase the cost of a Funds investments and the cost of doing business, which could adversely affect
investors.
Regulatory and exchange accountability levels may restrict the creation of Creation Units and the operation of the Trust.
Many U.S. commodities exchanges and boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day by regulations referred to as daily price fluctuation limits or daily limits. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond
that limit or trading may be suspended for specified periods during the trading day. In addition, the CFTC, U.S. futures exchanges and certain non-U.S. exchanges have established limits referred to as speculative position limits or
accountability levels on the maximum net long or short futures positions that any person may hold or control in derivatives traded on such exchanges.
- 25 -
In connection with these limits, the Dodd-Frank Act has required the CFTC to adopt
regulations establishing speculative position limits applicable to regulated futures and over-the-counter derivatives and impose aggregate speculative position limits across regulated U.S. futures, over-the-counter positions and certain futures
contracts traded on non-U.S. exchanges. In accordance with this mandate, in October 2011 the CFTC finalized rules that established position limits with respect to 28 physical delivery commodity futures and options contracts, as well as to swaps that
are economically equivalent to such contracts. The new position limits established by the CFTC would apply with respect to contracts traded on all U.S. and certain foreign exchanges on an aggregate basis. In addition, the CFTC required U.S.
commodities exchanges to establish corresponding speculative position limits. Under the adopted CFTC regulations, all accounts owned or managed by an entity that is responsible for such accounts trading decisions, their principals and their
affiliates would be combined for position limit purposes.
In September 2012, the U.S. District Court in Washington, D.C.
struck down these CFTC position limit rules adopted in connection with the Dodd-Frank Act, remanding such rules to the CFTC to resolve various issues identified in the courts decision. Although it is unclear what future position limit rules
will be, the Sponsor is subject to current position and accountability limits established by the CFTC and exchanges. Accordingly, it may be required to reduce the size of outstanding positions or not enter into new positions that would otherwise be
taken for the Funds or not trade certain markets on behalf of the Funds in order to comply with those limits or any future limits established by the CFTC and the relevant exchanges. Derivative contract prices could move to a limit for several
consecutive trading days with little or no trading, thereby preventing prompt liquidation of derivatives positions and potentially subjecting the Funds to substantial losses or periods in which such Funds do not create additional Creation Units.
Modification of trades made by the Trust, if required, could adversely affect the Trusts operations and profitability and significantly limit the Trusts ability to reinvest income in additional contracts, create additional Creation
Units, or add to existing positions in the desired amount.
In addition, the Sponsor may be required to liquidate certain open
positions in order to ensure compliance with the speculative position limits at unfavorable prices, which may result in substantial losses for the relevant Funds. There also can be no assurance that the Sponsor will liquidate positions held on
behalf of all the Sponsors accounts, including any proprietary accounts, in a proportionate manner. In the event the Sponsor chooses to liquidate a disproportionate number of positions held on behalf of any of the Funds at unfavorable prices,
such Funds may incur substantial losses and the value of the Shares may be adversely affected.
Further, in October 2012, a
new CFTC rule became effective, which requires each registered FCM to establish risk-based limits on position and order size. As a result, the Trusts FCMs may be required to reduce their internal limits on the size of the positions they will
execute or clear for the Funds, and the Trust may seek to use additional FCMs, which may increase the costs for the Funds and adversely affect the value of the Shares.
The Trust may apply to the CFTC or to the relevant exchanges for relief from certain position limits. If the Trust is unable to obtain such relief, a Funds ability to issue new Creation Units, or
the Funds ability to reinvest income in additional futures contracts, may be limited to the extent these activities cause the Trust to exceed applicable position limits. Limiting the size of a Fund may affect the correlation between the price
of the Shares, as traded on an exchange, and the net asset value of the Fund. Accordingly, the inability to create additional Creation Units or add to existing positions in the desired amount could result in Shares trading at a premium or discount
to NAV.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated by reference contain forward-looking statements that are subject to risks and
uncertainties. Investors can identify these forward-looking statements by the use of expressions such as may, will, expect, anticipate, believe, intend, plan,
project, should, estimate or any negative or other variations on such expression. These forward-looking statements are based on information currently available to the Sponsor and are subject to a number of risks,
uncertainties and other factors, both known, such as those described in Risk Factors and elsewhere in this Prospectus and the documents incorporated by reference in this Prospectus, and unknown, that could cause the actual results,
performance, prospects or opportunities of the Funds to differ materially from those expressed in, or implied by, these forward-looking statements.
Except as expressly required by federal securities laws, the Trust assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or
otherwise. Investors should not place undue reliance on any forward-looking statements.
- 27 -
DESCRIPTION OF THE DOW JONESUBS COMMODITY INDEX
SM
AND SUBINDEXES
Dow JonesUBS Commodity Index
SM
The Dow JonesUBS Commodity Index
SM
(the Dow JonesUBS) is designed to be a highly liquid and diversified benchmark for the commodity futures market. It is intended to reflect the overall commodity sector by measuring the
performance of commodity futures contracts. The performance of the commodity futures market is often very different than the performance of the physical, or spot, commodities market. See Risk FactorsThe Commodity Index Funds
are linked to an index comprised of commodity futures contracts, and are not linked to the spot prices of the underlying physical commodities. Commodity futures contracts may perform very differently from the spot price of the underlying physical
commodities. Unlike equities, which entitle the holder to a continuing stake in a corporation, commodity futures contracts specify a delivery date for the underlying physical commodity or its cash equivalent. The Dow JonesUBS is a
rolling index, which means that the Dow JonesUBS does not take actual physical possession of any commodities; rather, it tracks a rolling futures position. An investor with a rolling futures position is able to avoid delivering (or
taking delivery of) underlying physical commodities while maintaining exposure to those commodities. The roll for each Index component occurs over a period of five Dow JonesUBS business days in certain months according to a pre-determined
schedule, generally beginning on the fifth business day of the month and ending on the ninth business day. Each day, approximately 20% of each rolling futures position that is included in the months roll is rolled, increasing from 0% to 20%,
40%, 60%, 80% and finally 100%. The Dow JonesUBS is calculated by applying the weighting adjustments at the close of each day, with the adjusted weights used for the next days calculation. Not all contracts are rolled every month;
generally the futures that underlie the indexes within the Dow JonesUBS family roll approximately every other month. The exact roll methodology differs between certain commodities. The index will reflect the performance of its underlying
commodities, including the impact of rolling, without regard to income earned on cash positions. For more information about the risks associated with rolling futures positions, see Risk FactorsPotential negative impact from rolling
futures positions.
The Dow JonesUBS is comprised of five different commodity sectors:
energy, livestock, industrial metals, precious metals and agriculture. These five sectors track futures contracts prices of 22 specific commodities: natural gas, WTI crude oil, brent crude, unleaded gasoline, heating oil, live cattle, lean hogs,
Hard Red Winter Wheat (KBWT), wheat, corn, soybeans, soybean oil, soybean meal, aluminum, copper, zinc, nickel, gold, silver, sugar, cotton and coffee. The Dow Jones-UBS is designed to minimize concentration in any one commodity or sector. No single
commodity can constitute more than 15% of the Dow-Jones UBS and no related group of commodities (
e.g.
, energy, precious metals, livestock or grains) may constitute more than 33% of the index as of the annual reweighting of the components. The
Dow JonesUBS family of indices also includes ten subindexes that group commodities based on type, as well as single commodity subindexes representing each of the commodities that are currently tracked by the Dow JonesUBS. As discussed
below, ProShares Ultra DJ-UBS Crude Oil and ProShares UltraShort DJUBS Crude Oil are designed to track one of these subindexes, the Dow JonesUBS Crude Oil Subindex
SM
.
To determine its component weightings, the Dow JonesUBS relies primarily on liquidity data, or the relative amount of trading activity of a particular commodity. Liquidity is an important indicator
of the value placed on a commodity by financial and physical market participants. The index also relies to a lesser extent on dollar-adjusted production data. The index thus relies on data that is endogenous to the futures markets (liquidity) and
exogenous to the futures markets (production) in determining relative weightings. All data used in both the liquidity and production calculations is averaged over a five-year period.
In consultation with the DJUBS Commodity Index Advisory Committee, the DJUBS Commodity Index Supervisory Committee meets
annually to determine the composition of the index in accordance with the rules established in the DJUBSCI Handbook. The Supervisory Committee consists of employees of UBS Securities LLC and Dow Jones & Company, Inc. (Dow
Jones). DJUBS Commodity Index Advisory Committee members are drawn from the academic, financial and legal communities. The Index is re-weighted
- 28 -
and rebalanced each year in January on a price-percentage basis. The annual weightings for the Index are determined each year in June or July by UBS Securities LLC and Dow Jones under the
supervision of the Dow JonesUBS Commodity Index Oversight Committee, announced after approval by the Committee and implemented the following January.
The Dow JonesUBS is composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange. Trading hours for the U.S. commodity
exchanges are between 8:00 a.m. and 3:00 p.m. (Eastern Time). The Dow JonesUBS contract trades exclusively on the Chicago Board of Trades (CBOT) electronic trading platform. A daily settlement price for the Dow
JonesUBS is published at approximately 5:00 p.m. (Eastern Time).
The Dow JonesUBS is designed to provide:
|
|
|
Weightings that reflect economic significance
|
|
|
|
Annual reweighting and rebalancing
|
The Dow JonesUBS is a proprietary index that UBS Securities LLC (successor to AIG Financial Products Corp.) developed and that Dow
Jones, in conjunction with UBS Securities LLC, calculates. The methodology for determining the composition and weighting of the Index and for calculating its level is subject to modification at any time. Dow Jones disseminates the Index level at
least every 15 seconds from 8:00 a.m. to 3:00 p.m. (Eastern Time), and publishes a daily Index level at approximately 5:00 p.m. (Eastern Time), each business day.
As of January 2013, the target weightings of all Dow Jones-UBS components were as follows:
|
|
|
|
|
Commodity
|
|
Weight (%)
|
|
Natural Gas
|
|
|
10.42
|
%
|
WTI Crude Oil
|
|
|
9.21
|
%
|
Brent Crude
|
|
|
5.79
|
%
|
Unleaded Gasoline
|
|
|
3.46
|
%
|
Heating Oil
|
|
|
3.52
|
%
|
Live Cattle
|
|
|
3.28
|
%
|
Lean Hogs
|
|
|
1.90
|
%
|
Wheat
|
|
|
3.43
|
%
|
KCBT Wheat
|
|
|
1.32
|
%
|
Corn
|
|
|
7.05
|
%
|
Soybeans
|
|
|
5.49
|
%
|
Soybean Oil
|
|
|
2.74
|
%
|
Soy Meal
|
|
|
2.61
|
%
|
Aluminum
|
|
|
4.91
|
%
|
Copper
|
|
|
7.28
|
%
|
Zinc
|
|
|
2.52
|
%
|
Nickel
|
|
|
2.24
|
%
|
Gold
|
|
|
10.82
|
%
|
Silver
|
|
|
3.90
|
%
|
Sugar
|
|
|
3.89
|
%
|
Cotton
|
|
|
1.77
|
%
|
Coffee
|
|
|
2.44
|
%
|
- 29 -
Dow JonesUBS WTI Crude Oil Subindex
SM
ProShares Ultra DJ-UBS Crude Oil and ProShares UltraShort DJ-UBS Crude Oil are designed to correspond (before fees
and expenses) to two times (2x) or two times the inverse (-2x) of the daily performance of the Dow JonesUBS WTI Crude Oil Subindex
SM
, a subindex of the Dow JonesUBS. The Dow JonesUBS WTI Crude Oil Subindex
SM
is intended to reflect the performance of crude oil as measured by
the price of futures contracts of West Texas Intermediate sweet, light crude oil traded on the NYMEX, including the impact of rolling, without regard to income earned on cash positions. The performance of the crude oil futures market is normally
very different than the performance of the physical crude oil market (
e.g.
, the price of crude oil at port). See Risk FactorsThe Commodity Index Funds are linked to an index comprised of commodity futures contracts, and are not
linked to the spot prices of the underlying physical commodities. Commodity futures contracts may perform very differently from the spot price of the underlying physical commodities.
The Subindex is based on the Crude Oil component of the Dow JonesUBS, which is described above under Dow
JonesUBS Commodity Index
SM
, and tracks what is
known as a rolling futures position. The roll occurs over a period of five Dow JonesUBS business days in certain months according to a pre-determined schedule, generally beginning on the fifth business day of the month and ending on the ninth
business day. Each day, approximately 20% of each rolling futures position that is included in the months roll is rolled, increasing from 0% to 20%, 40%, 60%, 80% and finally 100%. The exact roll methodology differs between certain
commodities. The Index will reflect the performance of its underlying crude oil futures contracts, including the impact of rolling, without regard to income earned on cash positions. For more information about the risks associated with rolling
futures positions, see Risk FactorsPotential negative impact from rolling futures positions.
Information About the Index
Licensor
The Dow Jones-UBS Commodity
Indexes
SM
(the DJ-UBSCI
SM
) are a joint product of Dow Jones Indexes, a licensed
trademark of CME Group Index Services LLC (CME Indexes), and UBS Securities LLC (UBS Securities), and have been licensed for use. Dow Jones
®
, DJ, Dow Jones Indexes, UBS, Dow JonesUBS WTI Crude Oil Subindex
SM
, and DJ-UBS
SM
are service marks of Dow Jones Trademark Holdings, LLC and UBS
AG (UBS AG), as the case may be, have been licensed to CME Indexes and have been licensed for use for certain purposes by the Trust (Licensee).
The Funds are not sponsored, endorsed, sold or promoted by Dow Jones, UBS AG, UBS Securities, CME Indexes or any of
their subsidiaries or affiliates. None of Dow Jones, UBS AG, UBS Securities, CME Indexes or any of their subsidiaries or affiliates makes any representation or warranty, express or implied, to the owners of or counterparts to the Funds or any member
of the public regarding the advisability of investing in securities or commodities generally or in the Funds particularly. The only relationship of Dow Jones, UBS AG, UBS Securities, CME Indexes or any of their subsidiaries or affiliates to the
Licensee is the licensing of certain trademarks, trade names and service marks and of the DJ-UBSCI
SM
, which is determined, composed and calculated by CME Indexes in conjunction with UBS Securities without regard to the Licensee or the Funds. Dow Jones, UBS Securities and CME Indexes have no obligation
to take the needs of the Licensee or the shareholders of the Funds into consideration in determining, composing or calculating DJ-UBSCI
SM
. None of Dow Jones, UBS AG, UBS Securities, CME Indexes or any of their respective subsidiaries or affiliates is
responsible for or has participated in the determination of the timing of, prices at, or quantities of the Shares to be issued or in the determination or calculation of the equation by which the Shares are to be converted into cash. None of Dow
Jones, UBS AG, UBS Securities, CME Indexes or any of their subsidiaries or affiliates shall have any obligation or liability, including, without limitation, to Fund shareholders, in connection with the administration, marketing or trading of the
Funds. Notwithstanding the foregoing, UBS AG, UBS Securities, CME Group Inc. and their respective subsidiaries and affiliates may independently issue and/or sponsor financial products unrelated to the Shares currently being issued by the Licensee,
but which may be similar to and competitive with the Funds. In addition, UBS AG, UBS Securities, CME Group Inc. and their subsidiaries and
- 30 -
affiliates actively trade commodities, commodity indexes and commodity futures (including the DJ-UBSCI
SM
and Dow Jones-UBS Commodity Index Total Return
SM
), as well as swaps, options and derivatives which are linked to the performance of such commodities, commodity indexes
and commodity futures. It is possible that this trading activity will affect the value of the DJ-UBSCI
SM
and Fund Shares.
This Prospectus relates only to Funds and
does not relate to the exchange-traded physical commodities underlying any of the DJ-UBSCI
SM
components. Purchasers of the Shares should not conclude that the inclusion of a futures contract in the DJ-UBSCI
SM
is any form of investment recommendation of the futures contract or the underlying exchange-traded physical commodity
by Dow Jones, UBS AG, UBS Securities, CME Indexes or any of their subsidiaries or affiliates. The information in this Prospectus regarding the DJ-UBSCI
SM
components has been derived solely from publicly available documents. None of Dow Jones, UBS AG, UBS Securities, CME
Indexes or any of their subsidiaries or affiliates has made any due diligence inquiries with respect to the
DJ-UBSCI
SM
components in connection with the Funds. None
of Dow Jones, UBS AG, UBS Securities, CME Indexes or any of their subsidiaries or affiliates makes any representation that these publicly available documents or any other publicly available information regarding the DJ-UBSCI
SM
components, including without limitation a description of factors
that affect the prices of such components, are accurate or complete.
NONE OF DOW JONES, UBS AG, UBS
SECURITIES, CME INDEXES OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE DJ-UBSCI
SM
OR ANY DATA RELATED THERETO AND NONE OF DOW JONES, UBS AG, UBS SECURITIES, CME INDEXES OR ANY OF THEIR SUBSIDIARIES OR
AFFILIATES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. NONE OF DOW JONES, UBS AG, UBS SECURITIES, CME INDEXES OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY THE LICENSEE, FUND SHAREHOLDERS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE DJ-UBSCI
SM
OR ANY DATA RELATED THERETO. NONE OF DOW JONES, UBS AG, UBS SECURITIES, CME INDEXES OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES MAKES ANY EXPRESS OR IMPLIED WARRANTIES AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE DJ-UBSCI
SM
OR ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES, UBS AG, UBS SECURITIES, CME INDEXES OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES HAVE ANY LIABILITY FOR ANY
LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS AMONG UBS SECURITIES, CME INDEXES AND THE LICENSEE,
OTHER THAN UBS AG AND THE LICENSORS OF CME INDEXES.
- 31 -
DESCRIPTION OF THE COMMODITY BENCHMARKS
Gold
ProShares Ultra
Gold and ProShares UltraShort Gold are designed to correspond (before fees and expenses) to two times (2x) or two times the inverse (-2x), respectively, of the daily performance of gold bullion as measured by the U.S. dollar p.m. fixing price
for delivery in London, which serves as the Funds benchmark. The Funds do not directly or physically hold the underlying gold to pursue their respective investment objectives, but instead, seek exposure to gold through the use of Financial
Instruments (primarily exchange-traded futures contracts and OTC forward contracts) whose value is based on the underlying price of gold.
The price of gold is the U.S. dollar price of gold bullion as measured by the London afternoon fixing price per troy ounce of unallocated gold bullion for delivery in London through a member of the London
Bullion Market Association (the LBMA), authorized to effect such delivery. The gold market is a global marketplace consisting of both OTC transactions and exchange-traded products. The OTC market generally consists of transactions in
spot, forwards, options and other derivatives, while exchange-traded transactions consist of futures and options.
A London
gold fix is conducted each trading day at 3:00 p.m. London time, providing a reference gold price for that days trading. Many long-term contracts are priced on the basis of the London gold fix and market participants will
usually refer to the London gold fix when looking for a basis for valuation.
Silver
ProShares Ultra Silver and ProShares UltraShort Silver are designed to correspond (before fees and expenses) to two times (2x) or two
times the inverse (-2x), respectively, of the daily performance of silver bullion as measured by the U.S. dollar fixing price for delivery in London, which serves as the Funds benchmark. The Funds do not directly or physically hold the
underlying silver to pursue their respective investment objectives, but instead, seek exposure to silver through the use of Financial Instruments whose value is based on the underlying price of silver.
The price of silver is the U.S. dollar price of silver bullion as measured by the London fixing price per troy ounce of unallocated
silver bullion for delivery in London through a member of the LBMA authorized to effect such delivery. Like gold, the silver market is a global marketplace consisting of both OTC transactions and exchange-traded products. The OTC market generally
consists of transactions in spot, forwards, options and other derivatives, while exchange-traded transactions consist of futures and options.
A London silver fix is conducted each trading day at 12:00 p.m. London time, providing a reference silver price for that days trading. Many long-term contracts are priced on the
basis of the London silver fix and market participants will usually refer to the London silver fix when looking for a basis for valuation.
- 32 -
DESCRIPTION OF THE CURRENCY BENCHMARKS
ProShares UltraShort Euro and ProShares UltraShort Yen are designed to correspond (before fees and expenses) to an inverse multiple of
the daily performance of the spot price of the applicable currency versus the U.S. dollar. The spot price of each currency is measured by the 4:00 p.m. (Eastern Time) spot prices as provided by Bloomberg, expressed in terms of U.S. dollars per
unit of foreign currency. The Currency Funds do not necessarily directly or physically hold the underlying currency and will instead seek exposure through the use of certain Financial Instruments whose value is based on the price of the underlying
currency to pursue its investment objective.
Euro
ProShares UltraShort Euro is designed to correspond (before fees and expenses) to two times the inverse (-2x) of the daily performance of the euro spot price versus the U.S. dollar. This Fund uses the
4:00 p.m. (Eastern Time) euro/U.S. dollar exchange rate as provided by Bloomberg, expressed in terms of U.S. dollars per unit of foreign currency, as the basis for the underlying benchmark.
In 1998, the European Central Bank in Frankfurt was organized by Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg,
the Netherlands, Portugal and Spain in order to establish a common currencythe euro. Unlike the U.S. Federal Reserve System, the Bank of Japan and other comparable central banks, the European Central Bank is a central authority that conducts
monetary policy for an economic area consisting of many otherwise largely autonomous states.
At its inception on
January 1, 1999, the euro was launched as an electronic currency used by banks, foreign exchange dealers and stock markets. In 2002, the euro became cash currency for approximately 300 million citizens of 12 European countries (the eleven
countries mentioned above, in addition to Greece). Today, 23 countries use the euro, including Andorra, Cyprus, Finland, Kosovo, Malta, Monaco, Montenegro, San Marino, Slovakia, Slovenia and the Vatican City.
Although the European countries that have adopted the euro are members of the European Union, the United Kingdom, Denmark and Sweden are
European Union members that have not adopted the euro as their national currency.
Japanese Yen
ProShares UltraShort Yen is designed to correspond (before fees and expenses) to two times the inverse (-2x) of the daily performance of
the Japanese yen spot price versus the U.S. dollar. This Fund uses the 4:00 p.m. (Eastern Time) Japanese yen/U.S. dollar exchange rate as provided by Bloomberg, expressed in terms of U.S. dollars per unit of foreign currency, as the basis for
the underlying benchmark.
The Japanese yen has been the official currency of Japan since 1871. The Bank of Japan has been
operating as the central bank of Japan since 1882.
- 33 -
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
Investment Objectives
Each Fund seeks, on a daily basis, to provide investment results that correspond (before fees and expenses) to two times (2x) the
performance of or two times the inverse (-2x) of the performance of a benchmark. The Funds do not seek to achieve their stated objective over a period greater than a single day. Because the Funds seek investment results for a single day only
(as measured from the time a Fund calculates its NAV to the time of the Funds next NAV calculation) and on a leveraged and/or inverse leveraged basis, each Fund is different from most exchange-traded funds.
Investment Objective of the Ultra Funds:
The Ultra Funds seek daily results that match (before fees and expenses) two times (2x) the daily performance of a benchmark. The Ultra Funds do not seek to achieve their stated objective
over a period greater than one day. If an Ultra Fund is successful in meeting its objective, its value on a given day (before fees and expenses) should gain approximately two times as much on a percentage basis as the level of its corresponding
benchmark when the benchmark rises. Conversely, its value on a given day (before fees and expenses) should lose approximately two times as much on a percentage basis as the level of its corresponding benchmark when the benchmark declines. Each Ultra
Fund acquires long exposure through any one of or combinations of Financial Instruments, including Financial Instruments with respect to the applicable Ultra Funds benchmark, such that each Ultra Fund has exposure intended to approximate two
times (2x) its corresponding benchmark at the time of its NAV calculation.
Investment Objective of the UltraShort
Funds:
The UltraShort Funds seek daily results that match (before fees and expenses) two times the inverse
(-2x) of the daily performance of a benchmark. The UltraShort Funds do not seek to achieve their stated objectives over a period greater than one day. If an UltraShort Fund is successful in meeting its objective, its value on a given day
(before fees and expenses) should gain approximately twice as much on a percentage basis as the level of its corresponding benchmark when the benchmark declines. Conversely, its value on a given day (before fees and expenses) should lose
approximately twice as much on a percentage basis as the level of its corresponding benchmark when the benchmark rises. Each UltraShort Fund acquires short exposure through any one of or combinations of Financial Instruments, including Financial
Instruments with respect to the applicable UltraShort Funds benchmark, such that each UltraShort Fund has exposure intended to approximate two times the inverse (-2x) of its corresponding benchmark at the time of its NAV calculation.
There can be no assurance that any Fund will achieve its investment objective or avoid substantial losses. The Funds do
not seek to achieve their stated investment objective over a period of time greater than a single day because mathematical compounding prevents the Funds from achieving such results. Results for the Funds over periods of time greater than a single
day should not be expected to be a simple multiple (2x) or inverse multiple (-2x) of the period return of the corresponding benchmark and will likely differ significantly from such. A Fund will lose money if its benchmarks
performance is flat over time, and it is possible for a Fund to lose money over time even if its benchmarks performance increases (or decreases in the case of an UltraShort Fund), as a result of daily rebalancing, the benchmarks
volatility and compounding. Daily compounding of a Funds investment returns can dramatically and adversely affect its longer-term performance during periods of high volatility. Volatility may be at least as important to a Funds return
for a period as the return of the Funds underlying benchmark.
The corresponding benchmark for each Fund is listed
below:
The Commodity Index Funds:
ProShares Ultra DJ-UBS Crude Oil
and
ProShares UltraShort DJ-UBS Crude Oil
: the Dow JonesUBS WTI
Crude Oil Subindex
SM
. The Dow JonesUBS WTI Crude Oil
Subindex
SM
is designed to track crude oil futures prices.
- 34 -
The Commodity Funds:
ProShares Ultra Gold
and
ProShares UltraShort Gold
: the daily performance of gold bullion as measured by the U.S. dollar
p.m. fixing price for delivery in London.
ProShares Ultra Silver
and
ProShares UltraShort Silver
: the daily
performance of silver bullion as measured by the U.S. dollar fixing price for delivery in London.
The Currency Funds:
ProShares UltraShort Euro
: the 4:00 p.m. (Eastern Time) spot price of the euro versus the U.S. dollar using the
euro/U.S. dollar exchange rate, expressed in terms of U.S. dollars per unit of foreign currency.
ProShares UltraShort
Yen
: the 4:00 p.m. (Eastern Time) spot price of the Japanese yen versus the U.S. dollar using the Japanese yen/U.S. dollar exchange rate, expressed in terms of U.S. dollars per unit of foreign currency.
Principal Investment Strategies
In seeking to achieve the Funds investment objectives, the Sponsor uses a mathematical approach to investing. Using this approach, the Sponsor determines the type, quantity and mix of investment
positions that the Sponsor believes, in combination should produce daily returns consistent with the Funds objectives. The Sponsor relies upon a pre-determined model to generate orders that result in repositioning the Funds investments
in accordance with their respective investment objective.
Each Fund invests principally in any one of or combinations of
Financial Instruments, including swap agreements, futures contracts or forward contracts with respect to the applicable Funds benchmark to the extent determined appropriate by the Sponsor. The types of commodity or currency interests in which
the relevant Commodity Funds, Commodity Index Funds or Currency Funds invest may vary daily. The Funds do not currently intend to invest directly in any commodity or currency. The Funds will also hold cash or cash equivalents such as U.S. Treasury
securities or other high credit quality, short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements) for direct investment or as collateral for Financial Instruments. Each Fund may
invest up to 100% of its assets in any of these types of cash or cash equivalent securities.
In October 2011, the CFTC
finalized rules imposing aggregate position limits applicable to regulated futures and swaps, which may significantly limit the Funds ability to obtain the appropriate amount of investment exposure to the relevant benchmarks through futures
and swaps and impair the Trusts ability to achieve its investment objectives. In September 2012, the U.S. District Court in Washington, D.C. struck down these CFTC position limit rules adopted in connection with the Dodd-Frank Act, remanding
such rules to the CFTC to resolve various issues identified in the courts decision. Although it is unclear what future position limit rules will be, the Sponsor is subject to current position and accountability limits established by the CFTC
and other exchanges. Accordingly, it may be required to reduce the size of outstanding positions or not enter into new positions that would otherwise be taken for the Funds or not trade certain markets on behalf of the Funds in order to comply with
those limits or any future limits established by the CFTC and relevant exchanges. See Risk FactorsRegulatory and exchange accountability levels may restrict the creation of Creation Units and the operation of the Trust.
The Sponsor does not invest the assets of the Funds based on its view of the investment merit of a particular investment, other than for
cash management purposes, nor does it conduct conventional commodity or currency research or analysis, or forecast market movement or trends, in managing the assets of the Funds. The Funds seek to remain fully exposed at all times to the Funds
underlying benchmarks without regard to market conditions, trends or direction.
- 35 -
For the Commodity Index Funds, a Fund may obtain exposure through Financial Instruments to a
representative sample of the components in its underlying index, which have aggregate characteristics similar to those of the underlying index. This sampling process typically involves selecting a representative sample of components in
an index principally to enhance liquidity and reduce transaction costs while seeking to maintain high correlation with, and similar aggregate characteristics (
e.g.
, underlying commodities and valuations) to, the underlying index. In addition,
a Commodity Index Fund may obtain exposure to components not included in the underlying index, invest in assets that are not included in its underlying index or may overweight or underweight certain components contained in the underlying index.
As of the NAV calculation time each trading day, each Fund will seek to position its portfolio so that its exposure to its
benchmark is consistent with its investment objective. The impact of a benchmarks movements during the day will affect whether the Funds portfolio needs to be rebalanced. For example, if an UltraShort Funds benchmark has risen on a
given day, net assets of such Fund should fall. As a result, inverse exposure will need to be decreased. Conversely, if an UltraShort Funds benchmark has fallen on a given day, net assets of such Fund should rise. As a result, inverse exposure
will need to be increased. For Ultra Funds, the Funds long exposure will need to be increased on days when such Funds benchmark rises and decreased on days when such Funds benchmark falls. Daily rebalancing and the compounding of
each days return over time means that the return of each Fund for a period longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from two times (2x) or two times
the inverse (-2x) of the return of the Funds benchmark for the period. A Fund will lose money if its benchmarks performance is flat over time, and it is possible for a Fund to lose money over time even if its benchmarks
performance increases (or decreases in the case of an UltraShort Fund), as a result of daily rebalancing, the benchmarks volatility and compounding.
The amount of exposure each Fund has to Financial Instruments differs with each particular Fund and may be changed without shareholder approval at any given time. Currently, the Funds anticipate that, in
the normal course of business and absent any unforeseen circumstances, they will be exposed to the specific Financial Instruments below as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
Forwards
|
|
Futures
|
|
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
ProShares Ultra Silver
|
|
0%
|
|
190%
|
|
200%
|
|
0%
|
|
|
10
|
%
|
ProShares UltraShort Silver
|
|
0%
|
|
-190%
|
|
-200%
|
|
0%
|
|
|
-10
|
%
|
ProShares Ultra Gold
|
|
0%
|
|
190%
|
|
200%
|
|
0%
|
|
|
10
|
%
|
ProShares UltraShort Gold
|
|
0%
|
|
-190%
|
|
-200%
|
|
0%
|
|
|
-10
|
%
|
ProShares Ultra DJ-UBS Crude Oil
|
|
75%
|
|
200%
|
|
0%
|
|
0%
|
|
|
125
|
%
|
ProShares UltraShort DJ-UBS Crude Oil
|
|
-75%
|
|
-200%
|
|
0%
|
|
0%
|
|
|
-125
|
%
|
ProShares UltraShort Euro
|
|
0%
|
|
-200%
|
|
0%
|
|
ProShares UltraShort Yen
|
|
0%
|
|
-200%
|
|
0%
|
|
Swap Agreements
Swap agreements are two-party contracts that have traditionally been entered into primarily by institutional investors in OTC markets for a specified period ranging from a day to more than a year.
However, the Dodd-Frank Act provides for significant reforms of the over-the-counter derivatives markets, including a requirement to execute certain swap and forward transactions on a CFTC regulated market and/or to clear such transactions through a
CFTC-regulated central clearing organization. In a standard swap transaction, the parties agree to exchange the returns on a particular predetermined investment, instrument or index for a fixed or floating rate of return (the interest rate
leg, which will also include the cost of borrowing for short swaps) in respect of a predetermined notional amount. The notional amount of the agreement reflects the extent of a Funds total investment exposure under the swap agreement. In
the case of futures contracts-based indexes, such as those used by the Commodity Index Funds, the reference interest rate is zero, although a financing spread or fee is normally still applied. Transaction or commission costs are reflected in the
benchmark level at which the transaction is
- 36 -
entered into. The gross returns to be exchanged are calculated with respect to the notional amount and the benchmark returns to which the swap is linked. Swaps are usually closed out on a net
basis,
i.e.
, the two payment streams are netted out in a cash settlement on the payment date specified in the agreement, with the parties receiving or paying, as the case may be, only the net amount of the two payments. Thus, while the
notional amount reflects a Funds total investment exposure under the swap agreement (
i.e.
, the entire face amount or principal of a swap agreement), the net amount is a Funds current obligations (or rights) under the swap
agreement, which is the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement on any given termination date.
Swap agreements involve, to varying degrees, elements of market risk and exposure to loss in excess of the amount which would be
reflected on the Statement of Assets and Liabilities. The primary risks associated with the use of swap agreements arise from the inability of counterparties to perform. Each Fund that invests in swaps bears the risk of loss of the net amount, if
any, expected to be received under a swap agreement in the event of the default or bankruptcy of a swap counterparty. Each such Fund enters or intends to enter into swap agreements only with major global financial institutions; however, there are no
limitations on the percentage of its assets each Fund may invest in swap agreements with a particular counterparty. Each Fund that invests in swaps may use various techniques to minimize credit risk.
Each Fund that invests in swaps generally collateralizes the swap agreements with cash and/or certain securities. Collateral posted in
connection with uncleared derivative transactions is generally held for the benefit of the counterparty in a segregated tri-party account at the Custodian to protect the counterparty against non-payment by the Fund. The counterparty also may
collateralize the uncleared swap agreements with cash and/or certain securities, which collateral is typically held for the benefit of the Fund in a segregated tri-party account at the Custodian. In the event of a default by the counterparty, and
the Fund is owed money in the uncleared swap transaction, such Fund will seek withdrawal of this collateral from the segregated account and may incur certain costs exercising its right with respect to the collateral. These Funds remain subject to
credit risk with respect to the amount it expects to receive from counterparties.
The Funds have sought to mitigate these
risks in connection with the uncleared OTC swaps by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund, marked to market daily, subject to certain minimum thresholds; however there are no
limitations on the percentage of its assets each Fund may invest in swap agreements with a particular counterparty. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be exposed to
counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings.
The counterparty risk for cleared derivative transactions is generally lower than for uncleared over-the-counter derivatives since
generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the contract as each party to a trade looks only to the clearing house for
performance of financial obligations. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries.
Forward Contracts
A forward contract is a contractual obligation to purchase or sell a specified quantity of a particular underlying asset at or before a
specified date in the future at a specified price and, therefore, is economically similar to a futures contract. Unlike futures contracts, however, forward contracts are typically traded in the OTC markets and are not standardized contracts. Forward
contracts for a given commodity or currency are generally available for various amounts and maturities and are subject to individual negotiation between the parties involved. Moreover, there is generally no direct means of offsetting or closing out
a forward contract by taking an offsetting position as one would a futures contract on a U.S. exchange. If a trader desires to close out a forward contract position, he generally will establish an opposite position in the contract but will settle
and recognize the profit or loss on both positions simultaneously on the delivery date. Thus, unlike in the futures
- 37 -
contract market where a trader who has offset positions will recognize profit or loss immediately, in the forward market a trader with a position that has been offset at a profit will generally
not receive such profit until the delivery date, and likewise a trader with a position that has been offset at a loss will generally not have to pay money until the delivery date. In recent years, however, the terms of forward contracts have become
more standardized, and in some instances such contracts now provide a right of offset or cash settlement as an alternative to making or taking delivery of the underlying commodity or currency. The primary risks associated with the use of forward
contracts arise from the inability of the counterparty to perform.
Each Fund that invests in forward contracts generally
collateralizes the uncleared forward contracts with cash and/or certain securities. Such collateral is generally held for the benefit of the counterparty in a segregated tri-party account at the Custodian to protect the counterparty against
non-payment by the Fund. The counterparty also may collateralize the uncleared forward contracts with cash and/or certain securities, which collateral is typically held for the benefit of the Fund in a segregated tri-party account at the Custodian.
In the event of a default by the counterparty, and the Fund is owed money in the uncleared forward transaction, such Fund will seek withdrawal of this collateral from the segregated account and may incur certain costs exercising its right with
respect to the collateral. These Funds remain subject to credit risk with respect to the amount it expects to receive from OTC counterparties.
The Funds have sought to mitigate these risks by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund, marked to market daily, subject to certain
minimum thresholds; however, there are no limitations on the percentage of its assets each Fund may invest in forward contracts with a particular counterparty. To the extent any such collateral is insufficient or there are delays in accessing the
collateral, the Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings.
The forward markets provide what has typically been a highly liquid market for foreign exchange trading, and in certain cases the prices quoted for foreign exchange forward contracts may be more favorable
than the prices for foreign exchange futures contracts traded on U.S. exchanges. Forward contracts have traditionally not been cleared or guaranteed by a third party. However, the Dodd-Frank Act provides for significant reforms of the
over-the-counter derivatives markets, including a requirement to execute most forward transactions on a CFTC regulated market and/or to clear such transactions through a CFTC-regulated central clearing organization. Commercial banks participating in
trading OTC foreign exchange forward contracts often do not require margin deposits, but rely upon internal credit limitations and their judgments regarding the creditworthiness of their counterparties. In recent years, however, many OTC market
participants in foreign exchange trading have begun to require that their counterparties post margin.
Futures Contracts
A futures contract is a standardized contract traded on, or subject to the rules of, an exchange that calls for the
future delivery of a specified quantity and type of a particular underlying asset at a specified time and place or alternatively may call for cash settlement. Futures contracts are traded on a wide variety of underlying assets, including bonds,
interest rates, agricultural products, stock indexes, currencies, energy, metals, economic indicators and statistical measures. The notional size and calendar term futures contracts on a particular underlying asset are identical and are not subject
to any negotiation, other than with respect to price and the number of contracts traded between the buyer and seller. Each Fund generally deposits cash with an FCM for its open positions, which may, in turn, transfer such deposits to the clearing
house to protect the clearing house against non-payment by the Fund. The clearing house becomes substituted for each counterparty to a futures contract, and, in effect, guarantees performance. In addition, the FCM may require the Funds to deposit
collateral in excess of the clearing houses margin requirements for the FCMs own protection. Certain futures contracts settle in cash, reflecting the difference between the contract purchase/sale price and the contract settlement price.
The cash settlement mechanism avoids the potential for either side to have to deliver the underlying asset. For other futures contracts, the contractual obligations of a buyer or seller may generally be satisfied by taking or
- 38 -
making physical delivery of the underlying asset or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of
delivery. The difference between the price at which the futures contract is purchased or sold and the price paid for the offsetting sale or purchase, after allowance for brokerage commissions, constitutes the profit or loss to the trader.
Money Market Instruments
Money market instruments are short-term debt instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles. Money market instruments may include U.S.
government securities, securities issued by governments of other developed countries and repurchase agreements.
U.S. Derivatives
Exchanges
Derivatives exchanges provide centralized market facilities for trading derivatives in which multiple
persons have the ability to execute or trade contracts by accepting bids and offers from multiple participants. Members of, and trades executed on, a particular exchange are subject to the rules of that exchange. Among the principal exchanges in the
United States are the Chicago Board Options Exchange, Incorporated (CBOE) (which includes the CFE), the Chicago Mercantile Exchange (CME) (which includes, among others, the CBOT and the NYMEX) and the Intercontinental
Exchange (ICE)).
Each derivatives exchange in the United States has an associated clearing house.
Clearing houses provide services designed to transfer credit risk and ensure the integrity of trades. Once trades between members of an exchange have been confirmed and/or cleared, the clearing house becomes substituted for each buyer and each
seller of contracts traded on the exchange and, in effect, becomes the other party to each traders open position in the market. Thereafter, each party to a trade looks only to the clearing house for performance. The clearing house generally
establishes some sort of security or guarantee fund to which all clearing members of the exchange must contribute. This fund acts as an emergency buffer which is intended to enable the clearing house to meet its obligations with regard to the other
side of an insolvent clearing members contracts. Furthermore, clearing houses require margin deposits and continuously mark positions to market to provide some assurance that their members will be able to fulfill their contractual obligations.
Thus, members effecting derivatives transactions on an organized exchange or clearing an OTC derivative transaction through a clearing house do not bear the risk of the insolvency of the party on the opposite side of the trade; their credit risk is
limited to the respective solvencies of their commodity broker and the clearing house. The clearing house guarantee of performance on open positions does not run to customers. If a member firm goes bankrupt, customers could lose money.
Regulations
Derivatives exchanges in the United States are subject to regulation under the CEA, by the CFTC, the governmental agency having responsibility for regulation of derivatives exchanges and trading on those
exchanges. Following the adoption of the Dodd-Frank Act, the CFTC also has authority to regulate OTC derivative markets, including certain OTC foreign exchange markets. The CFTC has exclusive authority to designate exchanges for the trading of
specific futures contracts and options on futures contracts and to prescribe rules and regulations of the marketing of each. The CFTC also regulates the activities of commodity pool operators and the CFTC has adopted regulations with
respect to certain of such persons activities. Pursuant to its authority, the CFTC requires a commodity pool operator, such as the Sponsor, to keep accurate, current and orderly records with respect to each pool it operates. The CFTC may
suspend, modify or terminate the registration of any registrant for failure to comply with CFTC rules or regulations. Suspension, restriction or termination of the Sponsors registration as a commodity pool operator would prevent it, until such
time (if any) as such registration were to be reinstated, from managing, and might result in the termination of, the Funds. If the Sponsor were unable to provide services and/or advice to the Funds, the Funds would be unable to pursue their
investment objectives unless and until the Sponsors ability to provide services and advice to the Funds was reinstated or a replacement for the Sponsor as commodity pool operator could be found. Such an event could result in termination of the
Funds.
- 39 -
The CEA requires all FCMs to meet and maintain specified fitness and financial requirements,
segregate customer funds from proprietary funds and account separately for all customers funds and positions, and to maintain specified books and records open to inspection by the staff of the CFTC. See Risk FactorsFailure of the
FCMs to segregate assets may increase losses in the Funds.
The CEA also gives the states certain powers to enforce its
provisions and the regulations of the CFTC.
Under certain circumstances, the CEA grants shareholders the right to institute a
reparations proceeding before the CFTC against the Sponsor (as a registered commodity pool operator), an FCM, as well as those of their respective employees who are required to be registered under the CEA. Shareholders may also be able to maintain a
private right of action for certain violations of the CEA.
Pursuant to authority in the CEA, the NFA has been formed and
registered with the CFTC as a registered futures association. At the present time, the NFA is the only self regulatory organization for commodities professionals other than exchanges. As such, the NFA promulgates rules governing the conduct of
commodity professionals and disciplines those professionals that do not comply with such standards. The CFTC has delegated to the NFA responsibility for the registration of commodity pool operators, FCMs, swap dealers, commodity trading advisors,
introducing brokers and their respective associated persons and floor brokers. The Sponsor is a member of the NFA (the Funds themselves are not required to become members of the NFA). As an NFA member, the Sponsor is subject to NFA standards
relating to fair trade practices, financial condition, and consumer protection. The CFTC is prohibited by statute from regulating trading on foreign commodity exchanges and markets.
The CEA and CFTC regulations prohibit market abuse and generally require that all futures exchange-based trading be conducted in
compliance with rules designed to ensure the integrity of market prices and without any intent to manipulate prices. CFTC regulations and futures exchange rules also impose limits on the size of the positions that a person may hold or control as
well as standards for aggregating certain positions. The rules of the CFTC and the futures exchanges also authorize special emergency actions to halt, suspend or limit trading overall or to restrict, halt, suspend or limit the trading of an
individual trader or to otherwise impose special reporting or margin requirements.
Non-U.S. Derivatives Exchanges
Foreign derivatives exchanges differ in certain respects from their U.S. counterparts. Non-U.S. derivatives exchanges are generally not
subject to regulation by the CFTC. In contrast to U.S. exchanges, certain foreign exchanges are principals markets, where trades remain the liability of the traders involved, and the exchange or an affiliated clearing house, if
any, does not become substituted for any party. Therefore, participants in such markets must often satisfy themselves as to the creditworthiness of their counterparty. Additionally, in the event of the insolvency or bankruptcy of a non-U.S. market
or broker, the rights of market participants are likely to be more limited than the rights afforded by the U.S. derivatives exchanges. The Sponsor does not anticipate that the Funds will hold futures traded on foreign exchanges.
Daily Limits
Most U.S. futures exchanges (but generally not foreign exchanges or banks or dealers in the cases of forward contracts, swap agreements
and options on forward contracts) limit the amount of fluctuation in some futures contract or options on futures contract prices during a single day by regulations. These regulations specify what are referred to as daily price fluctuation
limits or more commonly daily limits. Once the daily limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit.
WTI Crude Oil Only: As of June 24, 2013, the maximum daily price fluctuation limit for crude oil futures contracts was $10 per
barrel ($10,000 per contract) for all months. If a market for any of the first three (3) contract months is bid or offered on Globex at the upper or lower price fluctuation limit, it will be considered
- 40 -
a triggering event which will halt trading for a five (5) minute period (Temporary Trading Halt) in all contract months of the crude oil futures contract. Following the end
of the Temporary Trading Halt, the affected markets shall re-open simultaneously in all contract months of these futures contracts. Details are set forth in NYMEX Rulebook, Rule 200102.D.
Margin
Initial or original margin is the
minimum amount of funds that a counterparty to a cleared derivative contract must deposit with his commodity broker in order to establish an open position. Maintenance margin is the amount (generally less than initial margin) to which a
traders account may decline before he must deliver additional margin so as to maintain open positions. A margin deposit is like a cash performance bond. It helps assure the futures traders performance of the futures contracts he
purchases or sells. The minimum amount of margin required in connection with a particular futures contract is set by the exchange on which such contract is traded and is subject to change at any time during the term of the contract. Futures
contracts are customarily bought and sold on margins that represent a very small percentage (ranging upward from less than 2%) of the aggregate purchase or sales price of the contract. Because of such low margins, price fluctuations occurring in the
futures markets may create profits and losses that are greater, in relation to the amount invested, than are customary in other forms of investments.
Brokerage firms carrying accounts for traders in futures contracts may not accept lower, and may require higher, amounts of margin as a matter of policy in order to afford further protection for
themselves.
Margin requirements are computed each day by a commodity broker and the relevant exchange. At the close of each
trading day, each open futures contract is marked to market, that is, the gain or loss on the position is calculated from the prior days close. When the market value of a particular open futures contract position changes to a point where the
margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the commodity broker. If the margin call is not met within a reasonable time, the broker may close out the customers position.
- 41 -
PERFORMANCE OF THE OFFERED COMMODITY POOLS OPERATED BY
THE COMMODITY POOL OPERATOR
The following performance information is presented in accordance with CFTC regulations. The performance of the Funds, which is presented herein, will differ materially in certain respects from the
performance of the other series of the Trust (the Other Funds), which is included in the section entitled Performance of the Other Commodity Pools Operated by the Commodity Pool Operator in Part Two of this Prospectus.
All summary performance information is as of May 31, 2013. Performance information is set forth, in accordance with
CFTC regulations, since each funds inception of trading.
|
|
|
Name of Pool:
|
|
ProShares Ultra DJ-UBS Crude Oil
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$4,717,192,520
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$(69,546,997)
|
Net Asset Value as of May 31, 2013:
|
|
$261,706,707
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$27.70
|
Worst Monthly Loss:
4
|
|
-40.05%
|
|
|
(December 2008)
|
Worst Peak-to-Valley Loss:
5
|
|
-73.02%
|
|
|
(Inception October 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-29.62
|
%
|
|
|
-17.41
|
%
|
|
|
-0.76
|
%
|
|
|
-1.50
|
%
|
|
|
11.40
|
%
|
February
|
|
|
|
|
|
|
-22.51
|
%
|
|
|
16.44
|
%
|
|
|
-0.93
|
%
|
|
|
16.39
|
%
|
|
|
-12.31
|
%
|
March
|
|
|
|
|
|
|
6.57
|
%
|
|
|
9.05
|
%
|
|
|
16.17
|
%
|
|
|
-8.66
|
%
|
|
|
10.30
|
%
|
April
|
|
|
|
|
|
|
-10.92
|
%
|
|
|
6.28
|
%
|
|
|
11.89
|
%
|
|
|
1.99
|
%
|
|
|
-8.84
|
%
|
May
|
|
|
|
|
|
|
58.86
|
%
|
|
|
-30.86
|
%
|
|
|
-21.14
|
%
|
|
|
-32.85
|
%
|
|
|
-4.07
|
%
|
June
|
|
|
|
|
|
|
7.46
|
%
|
|
|
-1.02
|
%
|
|
|
-15.38
|
%
|
|
|
-5.48
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-5.61
|
%
|
|
|
6.72
|
%
|
|
|
-1.08
|
%
|
|
|
5.40
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-6.46
|
%
|
|
|
-16.13
|
%
|
|
|
-16.65
|
%
|
|
|
18.59
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-1.64
|
%
|
|
|
17.69
|
%
|
|
|
-22.33
|
%
|
|
|
-9.61
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
16.57
|
%
|
|
|
1.00
|
%
|
|
|
35.20
|
%
|
|
|
-13.83
|
%
|
|
|
|
|
November
|
|
|
-1.38
|
%
|
|
|
-1.68
|
%
|
|
|
4.12
|
%
|
|
|
15.54
|
%
|
|
|
4.23
|
%
|
|
|
|
|
December
|
|
|
-40.05
|
%
|
|
|
-2.91
|
%
|
|
|
17.17
|
%
|
|
|
-4.15
|
%
|
|
|
4.52
|
%
|
|
|
|
|
Annual
|
|
|
-40.88
|
%
|
|
|
-14.59
|
%
|
|
|
-0.99
|
%
|
|
|
-18.23
|
%
|
|
|
-28.11
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-5.77
|
%
|
See accompanying Footnotes to Performance Information.
- 42 -
|
|
|
Name of Pool:
|
|
ProShares UltraShort DJ-UBS Crude Oil
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$2,056,924,084
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$138,038,168
|
Net Asset Value as of May 31, 2013:
|
|
$219,336,091
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$40.10
|
Worst Monthly Loss:
4
|
|
-40.18%
|
|
|
(May 2009)
|
Worst Peak-to-Valley Loss:
5
|
|
-83.85%
|
|
|
(February 2009 February 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
20.65
|
%
|
|
|
19.06
|
%
|
|
|
-1.93
|
%
|
|
|
-0.18
|
%
|
|
|
-10.82
|
%
|
February
|
|
|
|
|
|
|
15.74
|
%
|
|
|
-17.55
|
%
|
|
|
-1.17
|
%
|
|
|
-15.40
|
%
|
|
|
12.92
|
%
|
March
|
|
|
|
|
|
|
-23.29
|
%
|
|
|
-9.94
|
%
|
|
|
-16.39
|
%
|
|
|
7.52
|
%
|
|
|
-10.12
|
%
|
April
|
|
|
|
|
|
|
2.31
|
%
|
|
|
-7.28
|
%
|
|
|
-12.36
|
%
|
|
|
-3.25
|
%
|
|
|
7.27
|
%
|
May
|
|
|
|
|
|
|
-40.18
|
%
|
|
|
37.38
|
%
|
|
|
17.41
|
%
|
|
|
45.59
|
%
|
|
|
2.47
|
%
|
June
|
|
|
|
|
|
|
-11.11
|
%
|
|
|
-2.10
|
%
|
|
|
13.87
|
%
|
|
|
-0.84
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-1.14
|
%
|
|
|
-8.74
|
%
|
|
|
-0.90
|
%
|
|
|
-8.47
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
3.15
|
%
|
|
|
16.03
|
%
|
|
|
11.34
|
%
|
|
|
-17.32
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-4.21
|
%
|
|
|
-16.55
|
%
|
|
|
21.29
|
%
|
|
|
8.99
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-17.10
|
%
|
|
|
-3.48
|
%
|
|
|
-30.03
|
%
|
|
|
12.73
|
%
|
|
|
|
|
November
|
|
|
-2.35
|
%
|
|
|
-1.21
|
%
|
|
|
-6.34
|
%
|
|
|
-15.40
|
%
|
|
|
-6.95
|
%
|
|
|
|
|
December
|
|
|
19.09
|
%
|
|
|
1.00
|
%
|
|
|
-15.66
|
%
|
|
|
1.48
|
%
|
|
|
-5.36
|
%
|
|
|
|
|
Annual
|
|
|
16.28
|
%
|
|
|
-52.91
|
%
|
|
|
-25.70
|
%
|
|
|
-23.66
|
%
|
|
|
3.84
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-0.52
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Ultra Gold
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
December 1, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$502,336,728
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$140,420,022
|
Net Asset Value as of May 31, 2013:
|
|
$195,593,494
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$57.53
|
Worst Monthly Loss:
4
|
|
-23.82%
|
|
|
(December 2011)
|
Worst Peak-to-Valley Loss:
5
|
|
-47.98%
|
|
|
(August 2011 May 2013)
|
- 43 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
10.61
|
%
|
|
|
-2.22
|
%
|
|
|
-11.26
|
%
|
|
|
28.64
|
%
|
|
|
0.48
|
%
|
February
|
|
|
|
|
|
|
6.21
|
%
|
|
|
4.96
|
%
|
|
|
12.66
|
%
|
|
|
2.55
|
%
|
|
|
-9.22
|
%
|
March
|
|
|
|
|
|
|
-8.60
|
%
|
|
|
0.81
|
%
|
|
|
3.57
|
%
|
|
|
-12.33
|
%
|
|
|
1.03
|
%
|
April
|
|
|
|
|
|
|
-7.93
|
%
|
|
|
11.30
|
%
|
|
|
13.40
|
%
|
|
|
-1.83
|
%
|
|
|
-16.74
|
%
|
May
|
|
|
|
|
|
|
21.19
|
%
|
|
|
4.29
|
%
|
|
|
-0.32
|
%
|
|
|
-11.53
|
%
|
|
|
-10.49
|
%
|
June
|
|
|
|
|
|
|
-8.76
|
%
|
|
|
5.47
|
%
|
|
|
-4.33
|
%
|
|
|
4.62
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
0.44
|
%
|
|
|
-12.14
|
%
|
|
|
16.53
|
%
|
|
|
2.48
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
3.04
|
%
|
|
|
13.12
|
%
|
|
|
22.50
|
%
|
|
|
2.91
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
7.95
|
%
|
|
|
9.62
|
%
|
|
|
-21.35
|
%
|
|
|
15.51
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
8.54
|
%
|
|
|
5.68
|
%
|
|
|
12.10
|
%
|
|
|
-6.65
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
26.93
|
%
|
|
|
4.89
|
%
|
|
|
2.19
|
%
|
|
|
0.43
|
%
|
|
|
|
|
December
|
|
|
23.30
|
%
|
|
|
-15.05
|
%
|
|
|
2.65
|
%
|
|
|
-23.82
|
%
|
|
|
-8.05
|
%
|
|
|
|
|
Annual
|
|
|
23.30
|
%
|
|
|
42.95
|
%
|
|
|
57.02
|
%
|
|
|
9.71
|
%
|
|
|
10.35
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-31.32
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares UltraShort Gold
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
December 1, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$519,061,037
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$268,402,722
|
Net Asset Value as of May 31, 2013:
|
|
$186,724,212
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$84.99
|
Worst Monthly Loss:
4
|
|
-24.37%
|
|
|
(January 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-88.74%
|
|
|
(Inception September 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-12.44
|
%
|
|
|
0.61
|
%
|
|
|
11.62
|
%
|
|
|
-24.37
|
%
|
|
|
-1.47
|
%
|
February
|
|
|
|
|
|
|
-8.58
|
%
|
|
|
-6.45
|
%
|
|
|
-11.95
|
%
|
|
|
-3.48
|
%
|
|
|
9.42
|
%
|
March
|
|
|
|
|
|
|
4.35
|
%
|
|
|
-2.01
|
%
|
|
|
-4.43
|
%
|
|
|
12.18
|
%
|
|
|
-1.44
|
%
|
April
|
|
|
|
|
|
|
6.15
|
%
|
|
|
-11.01
|
%
|
|
|
-12.72
|
%
|
|
|
0.60
|
%
|
|
|
14.63
|
%
|
May
|
|
|
|
|
|
|
-18.90
|
%
|
|
|
-5.46
|
%
|
|
|
-0.84
|
%
|
|
|
11.02
|
%
|
|
|
9.24
|
%
|
June
|
|
|
|
|
|
|
8.14
|
%
|
|
|
-6.70
|
%
|
|
|
3.70
|
%
|
|
|
-6.17
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-1.67
|
%
|
|
|
12.44
|
%
|
|
|
-15.13
|
%
|
|
|
-3.57
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-4.12
|
%
|
|
|
-12.50
|
%
|
|
|
-21.72
|
%
|
|
|
-3.63
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-8.81
|
%
|
|
|
-9.53
|
%
|
|
|
21.16
|
%
|
|
|
-14.63
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-9.09
|
%
|
|
|
-6.43
|
%
|
|
|
-12.90
|
%
|
|
|
6.40
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
-22.76
|
%
|
|
|
-6.35
|
%
|
|
|
-3.74
|
%
|
|
|
-1.39
|
%
|
|
|
|
|
December
|
|
|
-22.47
|
%
|
|
|
15.24
|
%
|
|
|
-4.06
|
%
|
|
|
28.00
|
%
|
|
|
8.09
|
%
|
|
|
|
|
Annual
|
|
|
-22.47
|
%
|
|
|
-45.91
|
%
|
|
|
-45.83
|
%
|
|
|
-27.18
|
%
|
|
|
-22.78
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
33.06
|
%
|
See accompanying Footnotes to Performance Information.
- 44 -
|
|
|
Name of Pool:
|
|
ProShares Ultra Silver
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
December 1, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$2,337,427,567
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$1,108,022,337
|
Net Asset Value as of May 31, 2013:
|
|
$532,310,827
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$22.85
|
Worst Monthly Loss:
4
|
|
-50.93%
|
|
|
(September 2011)
|
Worst Peak-to-Valley Loss:
5
|
|
-87.62%
|
|
|
(April 2011 May 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
30.91
|
%
|
|
|
-9.19
|
%
|
|
|
-19.29
|
%
|
|
|
39.92
|
%
|
|
|
13.30
|
%
|
February
|
|
|
|
|
|
|
10.07
|
%
|
|
|
-3.77
|
%
|
|
|
44.19
|
%
|
|
|
21.64
|
%
|
|
|
-18.79
|
%
|
March
|
|
|
|
|
|
|
-3.39
|
%
|
|
|
16.36
|
%
|
|
|
25.05
|
%
|
|
|
-25.33
|
%
|
|
|
-2.67
|
%
|
April
|
|
|
|
|
|
|
-8.72
|
%
|
|
|
11.87
|
%
|
|
|
62.43
|
%
|
|
|
-8.23
|
%
|
|
|
-29.79
|
%
|
May
|
|
|
|
|
|
|
48.18
|
%
|
|
|
-2.78
|
%
|
|
|
-43.56
|
%
|
|
|
-19.70
|
%
|
|
|
-15.45
|
%
|
June
|
|
|
|
|
|
|
-20.90
|
%
|
|
|
0.64
|
%
|
|
|
-19.37
|
%
|
|
|
-8.46
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-5.87
|
%
|
|
|
-12.07
|
%
|
|
|
25.13
|
%
|
|
|
7.40
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
11.41
|
%
|
|
|
13.00
|
%
|
|
|
6.12
|
%
|
|
|
16.30
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
25.22
|
%
|
|
|
35.55
|
%
|
|
|
-50.93
|
%
|
|
|
27.12
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-0.05
|
%
|
|
|
16.11
|
%
|
|
|
22.20
|
%
|
|
|
-13.81
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
17.86
|
%
|
|
|
25.47
|
%
|
|
|
-17.46
|
%
|
|
|
11.96
|
%
|
|
|
|
|
December
|
|
|
14.42
|
%
|
|
|
-13.40
|
%
|
|
|
25.30
|
%
|
|
|
-21.78
|
%
|
|
|
-24.27
|
%
|
|
|
|
|
Annual
|
|
|
14.42
|
%
|
|
|
99.56
|
%
|
|
|
173.63
|
%
|
|
|
-44.69
|
%
|
|
|
-0.52
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-46.83
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares UltraShort Silver
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
December 1, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$1,958,520,348
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$374,521,246
|
Net Asset Value as of May 31, 2013:
|
|
$119,911,680
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$79.49
|
Worst Monthly Loss:
4
|
|
-42.41%
|
|
|
(April 2011)
|
Worst Peak-to-Valley Loss:
5
|
|
-99.20%
|
|
|
(Inception November 2012)
|
- 45 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-30.75
|
%
|
|
|
6.25
|
%
|
|
|
17.54
|
%
|
|
|
-32.75
|
%
|
|
|
-14.21
|
%
|
February
|
|
|
|
|
|
|
-12.75
|
%
|
|
|
-1.65
|
%
|
|
|
-33.03
|
%
|
|
|
-20.18
|
%
|
|
|
21.21
|
%
|
March
|
|
|
|
|
|
|
-3.04
|
%
|
|
|
-17.28
|
%
|
|
|
-26.55
|
%
|
|
|
27.37
|
%
|
|
|
1.17
|
%
|
April
|
|
|
|
|
|
|
4.15
|
%
|
|
|
-13.65
|
%
|
|
|
-42.41
|
%
|
|
|
6.34
|
%
|
|
|
28.38
|
%
|
May
|
|
|
|
|
|
|
-37.42
|
%
|
|
|
-3.39
|
%
|
|
|
20.59
|
%
|
|
|
20.84
|
%
|
|
|
14.53
|
%
|
June
|
|
|
|
|
|
|
18.90
|
%
|
|
|
-5.63
|
%
|
|
|
16.50
|
%
|
|
|
3.78
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
0.97
|
%
|
|
|
10.64
|
%
|
|
|
-26.91
|
%
|
|
|
-9.59
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-16.54
|
%
|
|
|
-14.05
|
%
|
|
|
-13.79
|
%
|
|
|
-15.77
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-26.33
|
%
|
|
|
-28.05
|
%
|
|
|
38.68
|
%
|
|
|
-25.12
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-4.39
|
%
|
|
|
-18.10
|
%
|
|
|
-28.46
|
%
|
|
|
14.03
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
-19.82
|
%
|
|
|
-26.17
|
%
|
|
|
15.21
|
%
|
|
|
-12.57
|
%
|
|
|
|
|
December
|
|
|
-21.60
|
%
|
|
|
11.08
|
%
|
|
|
-24.65
|
%
|
|
|
14.07
|
%
|
|
|
29.28
|
%
|
|
|
|
|
Annual
|
|
|
-21.60
|
%
|
|
|
-76.00
|
%
|
|
|
-78.79
|
%
|
|
|
-61.57
|
%
|
|
|
-32.99
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
54.67
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares UltraShort Euro
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$2,132,121,095
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$460,145,139
|
Net Asset Value as of May 31, 2013:
|
|
$518,052,045
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$19.44
|
Worst Monthly Loss:
4
|
|
-18.61%
|
|
|
(December 2008)
|
Worst Peak-to-Valley Loss:
5
|
|
-36.77%
|
|
|
(November 2008 April 2011)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
17.58
|
%
|
|
|
6.32
|
%
|
|
|
-5.04
|
%
|
|
|
-2.49
|
%
|
|
|
-5.76
|
%
|
February
|
|
|
|
|
|
|
1.29
|
%
|
|
|
3.37
|
%
|
|
|
-1.95
|
%
|
|
|
-3.88
|
%
|
|
|
7.90
|
%
|
March
|
|
|
|
|
|
|
-9.86
|
%
|
|
|
1.30
|
%
|
|
|
-5.56
|
%
|
|
|
-0.47
|
%
|
|
|
3.51
|
%
|
April
|
|
|
|
|
|
|
0.18
|
%
|
|
|
2.58
|
%
|
|
|
-8.81
|
%
|
|
|
1.33
|
%
|
|
|
-5.46
|
%
|
May
|
|
|
|
|
|
|
-12.88
|
%
|
|
|
16.81
|
%
|
|
|
5.21
|
%
|
|
|
14.31
|
%
|
|
|
2.46
|
%
|
June
|
|
|
|
|
|
|
0.93
|
%
|
|
|
0.30
|
%
|
|
|
-2.15
|
%
|
|
|
-4.86
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-3.45
|
%
|
|
|
-12.37
|
%
|
|
|
1.32
|
%
|
|
|
5.50
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-1.43
|
%
|
|
|
5.33
|
%
|
|
|
-0.58
|
%
|
|
|
-4.52
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-4.24
|
%
|
|
|
-14.03
|
%
|
|
|
14.26
|
%
|
|
|
-4.43
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-1.41
|
%
|
|
|
-4.60
|
%
|
|
|
-6.97
|
%
|
|
|
-1.83
|
%
|
|
|
|
|
November
|
|
|
2.93
|
%
|
|
|
-4.32
|
%
|
|
|
14.26
|
%
|
|
|
5.48
|
%
|
|
|
-0.81
|
%
|
|
|
|
|
December
|
|
|
-18.61
|
%
|
|
|
9.68
|
%
|
|
|
-6.11
|
%
|
|
|
7.49
|
%
|
|
|
-2.97
|
%
|
|
|
|
|
Annual
|
|
|
-16.22
|
%
|
|
|
-10.84
|
%
|
|
|
8.66
|
%
|
|
|
0.22
|
%
|
|
|
-6.49
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
1.95
|
%
|
See accompanying Footnotes to Performance Information.
- 46 -
|
|
|
Name of Pool:
|
|
ProShares UltraShort Yen
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$1,160,920,654
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$443,816,074
|
Net Asset Value as of May 31, 2013:
|
|
$544,383,757
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$66.80
|
Worst Monthly Loss:
4
|
|
-10.60%
|
|
|
(December 2008)
|
Worst Peak-to-Valley Loss:
5
|
|
-47.04%
|
|
|
(March 2009 January 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-2.56
|
%
|
|
|
-6.25
|
%
|
|
|
1.85
|
%
|
|
|
-2.11
|
%
|
|
|
10.61
|
%
|
February
|
|
|
|
|
|
|
17.12
|
%
|
|
|
-3.39
|
%
|
|
|
-0.87
|
%
|
|
|
13.43
|
%
|
|
|
2.19
|
%
|
March
|
|
|
|
|
|
|
2.07
|
%
|
|
|
10.27
|
%
|
|
|
2.79
|
%
|
|
|
3.44
|
%
|
|
|
2.86
|
%
|
April
|
|
|
|
|
|
|
-1.17
|
%
|
|
|
0.74
|
%
|
|
|
-5.14
|
%
|
|
|
-7.26
|
%
|
|
|
6.29
|
%
|
May
|
|
|
|
|
|
|
-7.18
|
%
|
|
|
-7.31
|
%
|
|
|
0.74
|
%
|
|
|
-3.88
|
%
|
|
|
5.69
|
%
|
June
|
|
|
|
|
|
|
1.58
|
%
|
|
|
-5.58
|
%
|
|
|
-2.64
|
%
|
|
|
3.81
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-3.95
|
%
|
|
|
-4.67
|
%
|
|
|
-8.79
|
%
|
|
|
-4.54
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-3.66
|
%
|
|
|
-5.79
|
%
|
|
|
-1.49
|
%
|
|
|
0.25
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-7.28
|
%
|
|
|
-1.61
|
%
|
|
|
1.33
|
%
|
|
|
-0.86
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
0.16
|
%
|
|
|
-7.23
|
%
|
|
|
2.26
|
%
|
|
|
4.51
|
%
|
|
|
|
|
November
|
|
|
-3.07
|
%
|
|
|
-8.10
|
%
|
|
|
7.93
|
%
|
|
|
-1.62
|
%
|
|
|
6.38
|
%
|
|
|
|
|
December
|
|
|
-10.60
|
%
|
|
|
15.36
|
%
|
|
|
-6.09
|
%
|
|
|
-1.51
|
%
|
|
|
10.53
|
%
|
|
|
|
|
Annual
|
|
|
-13.35
|
%
|
|
|
-1.10
|
%
|
|
|
-26.84
|
%
|
|
|
-12.90
|
%
|
|
|
23.92
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
30.61
|
%
|
See accompanying Footnotes to Performance Information.
Footnotes to Performance Information
1
|
Aggregate Gross Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, including those of investors who
subsequently redeemed their investments.
|
2
|
Aggregate Net Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, excluding those of investors who
subsequently redeemed their investments.
|
3
|
Net Asset Value per Share is the net asset value, based on the pricing policies of the Trust and determined in accordance with Generally
Accepted Accounting Principles, of the pool divided by the total number of Shares outstanding as of May 31, 2013. Please see Description of the Shares; The Funds; Certain Material Terms of the Trust AgreementNet Asset Value
(NAV) for additional information regarding the pricing policies of the Trust.
|
4
|
Worst Monthly Loss is the largest single month loss sustained since inception of trading. Loss as used in this section of the
Prospectus means losses experienced by the relevant pool over the specified period and is calculated on a rate of return basis, i.e., dividing net performance by beginning equity. Loss is measured on the basis of monthly returns only, and does not
reflect intra-month figures.
|
5
|
Worst Peak-to-Valley Loss is the largest percentage decline in Net Asset Value per Share over the history of the pool. This need not be a
continuous decline, but can be a series of positive and negative returns where the negative returns are larger than the positive returns. Worst Peak-to-Valley Loss represents the greatest percentage decline from any month-end Net Asset Value per
Share that occurs without such month-end Net Asset Value per Share being equaled or exceeded as of a subsequent month-end.
|
6
|
Based on the latest calculated net asset value, as applicable to creations and redemptions of Creation Units, with respect to each period.
|
- 47 -
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investors should consider Managements Discussion and Analysis of Financial Condition and Results of Operations with respect to the Funds, which section is incorporated by reference to our Annual
Report on Form 10-K for the year ended December 31, 2012, as amended, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.
- 48 -
CHARGES
Breakeven Table
The projected twelve month breakeven analysis for the
Funds is set forth in the Breakeven Table below. For purposes of calculating the amounts in the Breakeven Table for the Funds, the analysis assumes that the average daily NAV per Fund is $25.00.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount and Percentage of Expenses per Fund
|
|
Expenses
(1)
|
|
ProShares
Ultra DJ-UBS
Crude
Oil
|
|
|
ProShares
UltraShort
DJ-UBS
Crude Oil
|
|
|
ProShares
Ultra Gold
|
|
|
ProShares
UltraShort Gold
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Selling price per share
|
|
|
25.00
|
|
|
|
|
|
|
|
25.00
|
|
|
|
|
|
|
|
25.00
|
|
|
|
|
|
|
|
25.00
|
|
|
|
|
|
Management fee
(
2)
|
|
|
0.24
|
|
|
|
0.95
|
%
|
|
|
0.24
|
|
|
|
0.95
|
%
|
|
|
0.24
|
|
|
|
0.95
|
%
|
|
|
0.24
|
|
|
|
0.95
|
%
|
Brokerage commissions and fees
|
|
|
0.01
|
|
|
|
0.05
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.25
|
|
|
|
1.00
|
%
|
|
|
0.21
|
|
|
|
0.86
|
%
|
Other expenses
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
Total fees and expenses
|
|
|
0.25
|
|
|
|
1.00
|
%
|
|
|
0.24
|
|
|
|
0.95
|
%
|
|
|
0.49
|
|
|
|
1.95
|
%
|
|
|
0.45
|
|
|
|
1.81
|
%
|
Interest income
(3)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)%
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)%
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)%
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)%
|
Amount of trading income required for the NAV at the end of one year to equal the initial selling price per share (12-Month
breakeven)
(4)
|
|
|
0.25
|
|
|
|
0.98
|
%
|
|
|
0.23
|
|
|
|
0.93
|
%
|
|
|
0.48
|
|
|
|
1.93
|
%
|
|
|
0.44
|
|
|
|
1.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount and Percentage of Expenses per Fund
|
|
Expenses
(1)
|
|
ProShares
Ultra Silver
|
|
|
ProShares
UltraShort
Silver
|
|
|
ProShares
UltraShort
Euro
|
|
|
ProShares
UltraShort
Yen
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Selling price per share
|
|
|
25.00
|
|
|
|
|
|
|
|
25.00
|
|
|
|
|
|
|
|
25.00
|
|
|
|
|
|
|
|
25.00
|
|
|
|
|
|
Management fee
(2)
|
|
|
0.24
|
|
|
|
0.95
|
%
|
|
|
0.24
|
|
|
|
0.95
|
%
|
|
|
0.24
|
|
|
|
0.95
|
%
|
|
|
0.24
|
|
|
|
0.95
|
%
|
Brokerage commissions and fees
|
|
|
0.26
|
%
|
|
|
1.05
|
%
|
|
|
0.27
|
|
|
|
1.09
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
Other expenses
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
Total fees and expenses
|
|
|
0.50
|
|
|
|
2.00
|
%
|
|
|
0.51
|
|
|
|
2.04
|
%
|
|
|
0.24
|
|
|
|
0.95
|
%
|
|
|
0.24
|
|
|
|
0.95
|
%
|
Interest income
(3)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)%
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)%
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)%
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)%
|
Amount of trading income required for the NAV at the end of one year to equal the initial selling price per share (12-Month
breakeven)
(4)
|
|
|
0.49
|
%
|
|
|
1.98
|
%
|
|
|
0.50
|
%
|
|
|
2.02
|
%
|
|
|
0.23
|
|
|
|
0.93
|
%
|
|
|
0.23
|
|
|
|
0.93
|
%
|
(1)
|
The breakeven analysis set forth in this table assumes that the Shares have a constant month end NAV and is based on $25.00 as the NAV per Share of each of the Funds.
The actual NAV of each Fund differs and is likely to change on a daily basis. The numbers provided in this chart have been rounded to the nearest 0.01. The breakeven analysis reflects all fees and expenses, including estimated rebalancing expenses,
that are anticipated to be incurred by each Fund during the first year of an investors investment.
|
(2)
|
From the Management Fee, the Sponsor, though not contractually required, is responsible for paying the fees and expenses of the Administrator, Custodian, Distributor,
ProFunds Distributors, Inc. (PDI), Transfer Agent and all routine operational, administrative and other ordinary expenses of each Fund, including fees payable to index providers. Please note that these fees and expenses are not included
in the above breakeven table.
|
(3)
|
Based on current U.S. Treasury securities yields and anticipated investment levels in the various Funds, the breakeven analysis assumes an interest rate of 0.02% for
the Funds.
|
(4)
|
Investors may pay customary brokerage commissions in connection with purchases of the Shares. Because such brokerage commission rates will vary from investor to
investor, such brokerage commissions have not been included in the Breakeven Table. Investors are encouraged to review the terms of their brokerage accounts for applicable charges.
|
- 49 -
Operational Stage
Management Fee
Each Fund pays the Sponsor a management fee (the
Management Fee), monthly in arrears, in an amount equal to 0.95% per annum of its average daily net assets.
No other management fee is paid by the Funds. The Management Fee is paid in consideration of the Sponsors trading advisory services
and the other services provided to the Funds that the Sponsor pays directly.
Licensing Fee
The Sponsor pays Dow JonesUBS a licensing fee for the Dow JonesUBS Commodity Index as well as for each subindex that serves as
a benchmark for a Commodity Index Fund.
Routine Operational, Administrative and Other Ordinary Expenses
The Sponsor pays all of the routine operational, administrative and other ordinary expenses of each Fund, generally, as determined by the
Sponsor, including, but not limited to, fees and expenses of the Administrator, Custodian, Distributor, PDI and Transfer Agent, licensing fees, accounting and audit fees and expenses, tax preparation expenses, legal fees not in excess of $100,000
per annum, ongoing SEC registration fees not exceeding 0.021% per annum of the net assets of the Funds, Financial Industry Regulatory Authority, Inc. (FINRA) filing fees, individual K-1 preparation and mailing fees not exceeding
0.10% per annum of the net assets of the Funds, and report preparation and mailing expenses.
Non-Recurring Fees and Expenses
The Funds pay all of their non-recurring and unusual fees and expenses, if any, as determined by the Sponsor.
Non-recurring and unusual fees and expenses are fees and expenses which are unexpected or unusual in nature, such as legal claims and liabilities and litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and
expenses also include material expenses which are not currently anticipated obligations of the Funds. Routine operational, administrative and other ordinary expenses are not deemed extraordinary expenses.
Selling Commission
Retail investors may purchase and sell Shares through traditional brokerage accounts. Investors are expected to be charged a customary
commission by their brokers in connection with purchases of Shares that will vary from investor to investor. Investors are encouraged to review the terms of their brokerage accounts for applicable charges. The price at which an Authorized
Participant sells a Share may be higher or lower than the price paid by such Authorized Participant in connection with the creation of such Share in a Creation Unit.
Brokerage Commissions and Fees
Each Fund pays all of its respective
brokerage commissions, including applicable exchange fees, NFA fees and give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with trading activities for each Funds investments in CFTC regulated
investments.
Other Transaction Costs
The Funds bear other transaction costs including the effects of trading spreads and financing costs/fees, if any, associated with the use of Financial Instruments, and costs relating to the purchase of
U.S. Treasury securities or similar high credit quality short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements).
- 50 -
FUTURES COMMISSION MERCHANTS
Each of Goldman, Sachs & Co. (Goldman Sachs), Jefferies Bache, LLC (JBL) (formerly Prudential Bache
Commodities, LLC), Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) and RBC Capital Markets, LLC (RBC) (formerly RBC Capital Markets Corporation), in its capacity as a registered FCM, serves as the
Funds clearing broker and as such arranges for the execution and clearing of the Funds futures transactions. Each of Goldman Sachs, JBL, Merrill Lynch and RBC acts as clearing broker for many other funds and individuals. A variety of
executing brokers may execute futures transactions on behalf of the Funds. The executing brokers will give up all such transactions to Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable.
Investors should be advised that none of Goldman Sachs, JBL, Merrill Lynch or RBC are affiliated with or act as a supervisor of the Funds
or the Funds commodity pool operators, commodity trading advisors, investment managers, trustees, general partners, administrators, transfer agents, registrars or organizers, as applicable. Additionally, none of Goldman Sachs, JBL, Merrill
Lynch or RBC are acting as underwriters or sponsors of the offering of any Shares or interests in the Funds or have passed upon the merits of participating in this offering.
None of Goldman Sachs, JBL, Merrill Lynch or RBC have passed upon the adequacy of this Prospectus or on the accuracy of the information contained herein. Additionally, none of Goldman Sachs, JBL, Merrill
Lynch or RBC provide any commodity trading advice regarding the Funds trading activities. Investors should not rely upon Goldman Sachs, JBL, Merrill Lynch or RBC in deciding whether to invest in the Funds or retain their interests in the
Funds. Investors should also note that the Funds may select additional clearing brokers or replace Goldman Sachs, JBL, Merrill Lynch and/or RBC as the Funds clearing broker.
Litigation and Regulatory Disclosure Relating to FCMs
Goldman Sachs & Co.
(Goldman Sachs)
Goldman Sachs, in addition to being a registered futures commission merchant, is a registered
broker-dealer. From time to time, Goldman Sachs and its affiliates are involved in judicial, regulatory and arbitration concerning matters arising in connection with the conduct of its business. Goldman Sachs management believes, based on
currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on Goldman Sachs financial condition, but may be material to Goldman Sachs operating results for any
particular period, depending, in part, upon the results for such period. For further information, please refer to the periodic public filings by The Goldman Sachs Group, Inc. (GS Group) as periodically filed with the SEC and to
Goldman Sachs Form BD as periodically filed with FINRA.
IPO Process Matters
Goldman Sachs is among numerous financial services companies that have been named as defendants in a variety of lawsuits alleging
improprieties in the process by which those companies participated in the underwriting of public offerings in recent years.
Goldman Sachs has been named as a defendant in a number of related lawsuits filed in the U.S. District Court for the Southern
District of New York alleging, among other things, that the prospectuses for the offerings violated the federal securities laws by failing to disclose the existence of alleged arrangements tying allocations in certain offerings to higher customer
brokerage commission rates as well as purchase orders in the aftermarket, and that the alleged arrangements resulted in market manipulation. On October 5, 2009, the district court approved a settlement agreement entered into by the parties.
Goldman Sachs has paid into a settlement fund the full amount that Goldman Sachs would contribute in the settlement. Certain objectors appealed certain aspects of the settlements approval, but all such appeals have been withdrawn or finally
dismissed, thereby concluding the matter.
- 51 -
Goldman Sachs was among numerous underwriting firms named as defendants in a number of
complaints filed commencing October 3, 2007, in the U.S. District Court for the Western District of Washington alleging violations of Section 16 of the Securities Exchange Act of 1934, as amended (the 1934 Act) in
connection with offerings of securities for 15 issuers during 1999 and 2000. The complaints generally asserted that the underwriters, together with each issuers directors, officers and principal shareholders, entered into purported agreements
to tie allocations in the offerings to increased brokerage commissions and aftermarket purchase orders. The complaints further alleged that, based upon these and other purported agreements, the underwriters violated the reporting provisions of, and
are subject to short-swing profit recovery under, Section 16 of the 1934 Act. The district court granted defendants motions to dismiss on the grounds that the plaintiffs demands were inadequate with respect to certain actions and
that the remaining actions were time-barred. On December 2, 2010, the appellate court affirmed in part and reversed in part, upholding the dismissal of seven of the actions in which Goldman Sachs is a defendant that were dismissed based on the
deficient demands but remanding the remaining eight actions in which Goldman Sachs is a defendant that were dismissed as time-barred for consideration of other bases for dismissal. On March 26, 2012, the U.S. Supreme Court vacated the appellate
courts determination that the actions were timely and remanded the actions to determine if the claims were subject to equitable tolling in further proceedings consistent with the Supreme Courts opinion. On July 8, 2012, pursuant to
the plaintiffs notices of voluntary dismissal, all of the actions were dismissed with prejudice as to the deficiency of the demand letters and without prejudice as to all other issues, bringing this matter to conclusion.
Goldman Sachs has been named as a defendant in an action commenced on May 15, 2002 in New York Supreme Court, New York County, by an
official committee of unsecured creditors on behalf of eToys, Inc., alleging that Goldman Sachs intentionally underpriced eToys, Inc.s initial public offering. The action seeks, among other things, unspecified compensatory damages resulting
from the alleged lower amount of offering proceeds. On appeal from rulings on Goldman Sachs motion to dismiss, the New York Court of Appeals dismissed claims for breach of contract, professional malpractice and unjust enrichment, but permitted
claims for breach of fiduciary duty and fraud to continue. On remand, the lower court granted Goldman Sachs motion for summary judgment and, on December 8, 2011, the appellate court affirmed the lower courts decision. On
September 6, 2012, the New York Court of Appeals granted the creditors motion for leave to appeal.
Research
Matters
Goldman Sachs is subject to a number of investigations and reviews by various governmental and regulatory bodies
and self-regulatory organizations relating to research practices, including, among other things, research analysts methods for obtaining receipt and distribution of information and communications among research analysts, sales and trading
personnel and clients. On June 9, 2011, pursuant to a settlement, a consent order was entered by the Massachusetts Securities Division pursuant to which Goldman Sachs paid a $10 million civil penalty and agreed to various undertakings
regarding certain of its research practices. On April 12, 2012, the SEC and FINRA issued orders in connection with Goldman Sachs settlement of charges relating to matters similar to those involved in the Massachusetts settlement. Pursuant
to these settlements, Goldman Sachs paid $11 million to each of the SEC and FINRA and agreed to various undertakings with regard to its policies and procedures.
Adelphia Communications Fraudulent Conveyance Litigation
Goldman Sachs is
named a defendant in two adversary proceedings commenced in the U.S. Bankruptcy Court for the Southern District of New York, one on July 6, 2003 by a creditors committee, and the second on or about July 31, 2003 by an equity committee of
Adelphia Communications, Inc. Those proceedings were consolidated in a single amended complaint filed by the Adelphia Recovery Trust on October 31, 2007. The complaint seeks, among other things, to recover, as fraudulent conveyances,
approximately $62.9 million allegedly paid to Goldman Sachs by Adelphia Communications, Inc. and its affiliates in respect of margin calls made in the ordinary course of business on accounts owned by members of the family that formerly
controlled Adelphia Communications, Inc. The district court assumed jurisdiction over the action and on April 8, 2011 granted Goldman Sachs motion for summary judgment. The plaintiff appealed on May 6, 2011.
- 52 -
Treasury Matters
Goldman Sachs was named as a defendant in a purported class action filed on March 10, 2004 in the U.S. District Court for the
Northern District of Illinois on behalf of holders of short positions in 30-year U.S. Treasury futures and options on the morning of October 31, 2001. The complaint alleged that Goldman Sachs purchased 30-year bonds and futures prior to a
forthcoming U.S. Treasury refunding announcement that morning based on non-public information about that announcement, and that such purchases increased the costs of covering such short positions. The complaint also named as defendants the
Washington, D.C.-based political consultant who allegedly was the source of the information, a former Goldman Sachs economist who allegedly received the information, and another company and one of its employees who also allegedly received and traded
on the information prior to its public announcement. The complaint alleged violations of the federal commodities and antitrust laws, as well as Illinois statutory and common law, and seeks, among other things, unspecified damages including treble
damages under the antitrust laws. The district court dismissed the antitrust and Illinois state law claims but permitted the federal commodities law claims to proceed. Plaintiffs motion for class certification was denied. Goldman Sachs moved
for summary judgment, and the district court granted the motion but only insofar as the claim relates to the trading of treasury bonds. On October 13, 2009, the parties filed an offer of judgment and notice of acceptance with respect to
plaintiffs individual claim. The plaintiff attempted to pursue an appeal of the denial of class certification, as did another individual trader who had previously litigated and lost an individual claim and unsuccessfully sought to intervene in
the purported class action. On August 5, 2011, the U.S. Court of Appeals for the Seventh Circuit affirmed the lower courts rulings that neither the plaintiff nor the proposed intervenor could pursue the class issues on appeal, but
remanded for further consideration as to the amount of pre-judgment interest on the plaintiffs individual claim. The appellants petition for reconsideration en banc was denied on October 19, 2011. On remand, the district court
entered a final stipulation and order on December 7, 2011 regarding calculation of pre-judgment interest, which concluded the matter.
Fannie Mae Litigation
Goldman Sachs was added as a defendant in an amended
complaint filed on August 14, 2006 in a purported class action pending in the U.S. District Court for the District of Columbia. The complaint asserts violations of the federal securities laws generally arising from allegations concerning
Fannie Maes accounting practices in connection with certain Fannie Mae-sponsored REMIC transactions that were allegedly arranged by Goldman Sachs. The complaint does not specify a dollar amount of damages. The other defendants include Fannie
Mae, certain of its past and present officers and directors, and accountants. By a decision dated May 8, 2007, the district court granted Goldman Sachs motion to dismiss the claim against it. The time for an appeal will not begin to run
until disposition of the claims against other defendants. A motion to stay the action filed by the Federal Housing Finance Agency (FHFA), which took control of the foregoing action following Fannie Maes conservatorship, was denied on
November 14, 2011.
Mortgage-Related Matters
On April 16, 2010, the SEC brought an action (the SEC Action) under the U.S. federal securities laws in the
U.S. District Court for the Southern District of New York against Goldman Sachs and Fabrice Tourre, a former employee, in connection with a CDO offering made in early 2007 (ABACUS 2007-AC1 transaction), alleging that the defendants made
materially false and misleading statements to investors and seeking, among other things, unspecified monetary penalties. Investigations of Goldman Sachs by FINRA and of GSI by the FSA were subsequently initiated and resolved, and GS Group and
certain of its affiliates have received subpoenas and requests for information from other regulators, regarding CDO offerings, including the ABACUS 2007-AC1 transaction, and related matters. On July 14, 2010, Goldman Sachs entered into a
consent agreement with the SEC, settling all claims made against Goldman Sachs in the SEC Action, pursuant to which Goldman Sachs paid $550 million of disgorgement and civil penalties, and which was approved by the U.S. District Court for
the Southern District of New York on July 20, 2010.
- 53 -
On January 6, 2011, ACA Financial Guaranty Corp. filed an action against Goldman Sachs
in respect of the ABACUS 2007-AC1 transaction in New York Supreme Court, New York County. The complaint includes allegations of fraudulent inducement, fraudulent concealment and unjust enrichment and seeks at least $30 million in compensatory
damages, at least $90 million in punitive damages and unspecified disgorgement. On April 25, 2011, the plaintiff filed an amended complaint and, on June 3, 2011, Goldman Sachs moved to dismiss the amended complaint. By a decision
dated April 23, 2012, the court granted the motion to dismiss as to the unjust enrichment claim and denied the motion as to the other claims, and on May 29, 2012, Goldman Sachs appealed the decision to the extent that its motion was denied
and filed counterclaims for breach of contract and fraudulent inducement, and third-party claims against ACA Management, LLC for breach of contract, unjust enrichment and indemnification. ACA Financial Guaranty Corp. and ACA Management, LLC moved to
dismiss Goldman Sachs counterclaims and third-party claims on August 31, 2012. On January 31, 2013, ACA filed an amended complaint naming a third party to the ABACUS 2007-AC1 transaction as an additional defendant.
Beginning April 22, 2010, a number of putative shareholder derivative actions were filed in New York Supreme Court, New York County,
and the U.S. District Court for the Southern District of New York against GS Group, its board (the Board) and certain officers and employees of GS Group and its affiliates in connection with mortgage-related matters
between 2004 and 2007, including the ABACUS 2007-AC1 transaction and other CDO offerings. These derivative complaints generally included allegations of breach of fiduciary duty, corporate waste, abuse of control, mismanagement, unjust enrichment,
misappropriation of information, securities fraud and insider trading, and challenge the accuracy and adequacy of GS Groups disclosure. These derivative complaints seek, among other things, declaratory relief, unspecified compensatory
damages, restitution and certain corporate governance reforms. In addition, the plaintiffs in the compensation-related Delaware Court of Chancery actions twice amended their complaint, including to assert allegations similar to those in the
derivative claims referred to above, the Delaware court granted the defendants motion to dismiss the second amended complaint and the Delaware Supreme Court affirmed the dismissal on May 3, 2012. The federal court cases were consolidated,
plaintiffs filed a consolidated amended complaint on August 1, 2011, and, on October 6, 2011, the defendants moved to dismiss the action. On June 25, 2012, in light of the decision of the Delaware Supreme Court, the parties in the New
York state action stipulated to a voluntary dismissal, which the court has entered.
Beginning April 26, 2010, a number
of purported securities law class actions have been filed in the U.S. District Court for the Southern District of New York challenging the adequacy of GS Groups public disclosure of, among other things, Goldman Sachs activities
in the CDO market and the SEC investigation that led to the SEC Action. The purported class action complaints, which name as defendants GS Group and certain officers and employees of GS Group and its affiliates, have been consolidated,
generally allege violations of Sections 10(b) and 20(a) of the Exchange Act and seek unspecified damages. Plaintiffs filed a consolidated amended complaint on July 25, 2011. On October 6, 2011, the defendants moved to dismiss, and by
a decision, dated June 21, 2012, the district court dismissed the claims based on GS Groups not disclosing that it had received a Wells notice from the staff of the SEC related to the ABACUS 2007-AC1 transaction, but permitted
the plaintiffs other claims to proceed.
Since April 23, 2010, the Board has received letters from shareholders
demanding that the Board take action to address alleged misconduct by Goldman Sachs, the Board and certain officers and employees of GS Group and its affiliates. These demands, which the Board has rejected, generally alleged misconduct in
connection with Goldman Sachs securitization practices, including the ABACUS 2007-AC1 transaction, the alleged failure by GS Group to adequately disclose the SEC investigation that led to the SEC Action, and GS Groups 2009
compensation practices. In addition, the Board has received books and records demands from several shareholders for materials relating to, among other subjects, Goldman Sachs mortgage servicing and foreclosure activities, participation in
federal programs providing assistance to financial institutions and homeowners, loan sales to Fannie Mae and Freddie Mac, mortgage-related activities and conflicts management.
Goldman Sachs is a defendant in a putative class action commenced on December 11, 2008 in the U.S. District Court for the Southern District of New York brought on behalf of purchasers of various
mortgage
- 54 -
pass-through certificates and asset-backed certificates issued by various securitization trusts established by Goldman Sachs and underwritten by Goldman Sachs in 2007. The complaint generally
alleges that the registration statement and prospectus supplements for the certificates violated the federal securities laws, and seeks unspecified compensatory damages and rescission or rescissionary damages. Following dismissals of certain of the
plaintiffs claims under the initial and three amended complaints, on May 5, 2011, the court granted plaintiffs motion for entry of a final judgment dismissing all its claims, thereby allowing plaintiff to appeal. The plaintiff
appealed from the dismissal with respect to all 17 of the offerings included in its original complaint. By a decision dated September 6, 2012, the U.S. Court of Appeals for the Second Circuit affirmed the district courts dismissal of
plaintiffs claims with respect to 10 of the offerings included in plaintiffs original complaint but vacated the dismissal and remanded the case to the district court with instructions to reinstate the plaintiffs claims with respect
to the other seven offerings. On March 18, 2013, the U.S. Supreme Court denied the defendants petition for certiorari from the Second Circuit decision. On October 31, 2012, the plaintiff served a fourth amended complaint relating to
those seven offerings, plus seven additional offerings. On June 3, 2010, another investor (who had unsuccessfully sought to intervene in the action) filed a separate putative class action asserting substantively similar allegations relating to
one of the offerings included in the initial plaintiffs complaint. The district court twice granted defendants motions to dismiss this separate action, both times with leave to replead. On July 9, 2012, that separate plaintiff filed
a second amended complaint, and the defendants moved to dismiss on September 21, 2012. On December 26, 2012, that separate plaintiff filed a motion to amend the second amended complaint to add claims with respect to two additional
offerings included in the initial plaintiffs complaint, which defendants have opposed. The securitization trusts issued, and Goldman Sachs underwrote, approximately $11 billion principal amount of certificates to all purchasers in the 14
offering at issue in the complaints.
Goldman Sachs is among the defendants in a separate putative class action commenced on
February 6, 2009 in the U.S. District Court for the Southern District of New York brought on behalf of purchasers of various mortgage pass-through certificates and asset-backed certificates issued by various securitization trusts
established by Goldman Sachs and underwritten by Goldman Sachs in 2006. The other original defendants include three current or former GS Group employees and various rating agencies. The second amended complaint generally alleges that the
registration statement and prospectus supplements for the certificates violated the federal securities laws, and seeks unspecified compensatory and rescissionary damages. Defendants moved to dismiss the second amended complaint. On January 12,
2011, the district court granted the motion to dismiss with respect to offerings in which plaintiff had not purchased securities as well as all claims against the rating agencies, but denied the motion to dismiss with respect to a single offering in
which the plaintiff allegedly purchased securities. These trusts issued, and Goldman Sachs underwrote, approximately $698 million principal amount of certificates to all purchasers in the offerings at issue in the complaint (excluding those
offerings for which the claims have been dismissed). On February 2, 2012, the district court granted the plaintiffs motion for class certification and on June 13, 2012, the U.S. Court of Appeals for the Second Circuit granted
defendants petition to review that ruling. On July 31, 2012, the parties reached a settlement, subject to court approval. The firm has paid the full amount of the proposed settlement in an escrow account.
On September 30, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York
against Goldman Sachs, GS Group and two former Goldman Sachs employees on behalf of investors in $821 million of notes issued in 2006 and 2007 by two synthetic CDOs (Hudson Mezzanine 2006-1 and 2006-2). The complaint, which was amended on
February 4, 2011, asserts federal securities law and common law claims, and seeks unspecified compensatory, punitive and other damages. The defendants moved to dismiss on April 5, 2011, and the motion was granted as to plaintiffs
claim of market manipulation and denied as to the remainder of plaintiffs claims by a decision dated March 21, 2012. On May 21, 2012, the defendants counterclaimed for breach of contract and fraud. On December 17, 2012, the
plaintiff moved for class certification.
Goldman Sachs, GSMC and GSMSC are among the defendants in a lawsuit filed in August
2011 by CIFG Assurance of North America, Inc. (CIFG) in New York Supreme Court, New York County. The complaint
- 55 -
alleges that CIFG was fraudulently induced to provide credit enhancement for a 2007 securitization sponsored by GSMC, and seeks, among other things, the repurchase of $24.7 million in
aggregate principal amount of mortgages that CIFG had previously stated to be non-conforming, an accounting for any proceeds associated with mortgages discharged from the securitization and unspecified compensatory damages. On October 11, 2011,
the Goldman Sachs defendants moved to dismiss. By a decision dated May 1, 2012, the court dismissed the fraud and accounting claims but denied the motion as to certain breach of contract claims that were also alleged. On June 6, 2012, the
Goldman Sachs defendants filed counterclaims for breach of contract. In addition, the parties have each appealed the courts May 1, 2012 decision to the extent adverse. By an order dated May 7, 2013, the appellate court reversed the
dismissal of the fraud claim but otherwise affirmed the trial courts May 1, 2012 decision.
In addition, on
January 15, 2013, CIFG filed a complaint against Goldman Sachs in New York Supreme Court, New York County, alleging that Goldman Sachs falsely represented that a third party would independently select the collateral for a 2006 CDO. CIFG
seeks unspecified compensatory and punitive damages, including claims for approximately $10 million in connection with its purchase of notes, which CIFG has agreed to refer to arbitration with FINRA, and claims for over $30 million for
payments to discharge alleged liabilities arising from its issuance of a financial guaranty insurance policy guaranteeing payment on a credit default swap referencing the CDO, which CIFG has agreed to stay until the arbitration of the notes-related
claims has concluded.
Various alleged purchasers of, and counterparties involved in transactions relating to, mortgage
pass-through certificates, CDOs and other mortgage-related products (including certain Allstate affiliates, Aozora Bank, Ltd., Bank Hapoalim B.M., Basis Yield Alpha Fund (Master), Bayerische Landesbank, the Charles Schwab Corporation, Deutsche
Zentral-Genossenschaftbank, the FDIC (as receiver for Guaranty Bank), the Federal Home Loan Banks of Boston, Chicago, Indianapolis and Seattle, the FHFA (as conservator for Fannie Mae and Freddie Mac), HSH Nordbank, IKB Deutsche Industriebank AG,
Landesbank Baden-Württemberg, Joel I. Sher (Chapter 11 Trustee) on behalf of TMST, Inc. (TMST), f/k/a Thornburg Mortgage, Inc. and certain TMST Affiliates, John Hancock and related parties), Massachusetts Mutual Life Insurance
Company, MoneyGram Payment Systems, Inc., National Australia Bank, the National Credit Union Administration, Phoenix Light SF Limited and related parties, Prudential Insurance Company of America and related parties, Royal Park Investments SA/NV,
Sealink Funding Limited, The Union Central Life Insurance Company, Ameritas Life Insurance Corp., Acacia Life Insurance Company, Watertown Savings Bank, and The Western and Southern Life Insurance Co.) have filed complaints or summonses with notice
in state and federal court or initiated arbitration proceedings against firm affiliates, generally alleging that the offering documents for the securities that they purchased contained untrue statements of material fact and material omissions and
generally seeking rescission and/or damages. Certain of these complaints allege fraud and seek punitive damages. Certain of these complaints also name other firms as defendants.
A number of other entities (including American International Group, Inc. (AIG), Deutsche Bank National Trust Company, John
Hancock and related parties, M&T Bank, Norges Bank Investment Management, Selective Insurance Company and U.S. Bank) have threatened to assert claims of various types against Goldman Sachs in connection with various mortgage-related
transactions, and Goldman Sachs has entered into agreements with a number of these entities to toll the relevant statute of limitations.
As of the date hereof, the aggregate notional amount of mortgage-related securities sold to plaintiffs in active cases brought against Goldman Sachs where those plaintiffs are seeking rescission of such
securities was approximately $19.7 billion (which does not reflect adjustment for any subsequent paydowns or distributions or any residual value of such securities, statutory interest or any other adjustments that may be claimed). This amount
does not include the threatened claims noted above, potential claims by these or other purchasers in the same or other mortgage-related offerings that have not actually been brought against Goldman Sachs, or claims that have been dismissed.
Goldman Sachs is among the numerous financial services firms named as defendants in a qui tam action originally filed by a
realtor on April 7, 2010 purportedly on behalf of the City of Chicago and State of Illinois in
- 56 -
Cook County, Illinois Circuit Court asserting claims under the Illinois Whistleblower Reward and Protection Act and Chicago False Claims Act, based on allegations that defendants had falsely
certified compliance with various Illinois laws, which were purportedly violated in connection with mortgage origination and servicing activities. The complaint, which was originally filed under seal, seeks treble damages and civil penalties.
Plaintiff filed an amended complaint on December 28, 2011, naming Goldman Sachs, among others, as an additional defendant and a second amended complaint on February 8, 2012. On March 12, 2012, the action was removed to the U.S.
District Court for the Northern District of Illinois, and on September 17, 2012, the district court granted plaintiffs motion to remand the action to state court. On November 16, 2012, the defendants moved to dismiss, and
discovery has been stayed pending a ruling on the motion to dismiss.
Goldman Sachs has also received, and continues to
receive, requests for information and/or subpoenas from federal, state and local regulators and law enforcement authorities, relating to the mortgage-related securitization process, subprime mortgages, CDOs, synthetic mortgage-related products,
particular transactions involving these products, and servicing and foreclosure activities, and is cooperating with these regulators and other authorities, including in some cases agreeing to the tolling of the relevant statute of limitations. See
also Financial CrisisRelated Matters below.
On February 24, 2012, Goldman Sachs received a
Wells notice from the staff of the SEC with respect to the disclosures contained in the offering documents used in connection with a late 2006 offering of approximately $1.3 billion of subprime residential mortgage-backed securities
underwritten by Goldman Sachs. On August 6, 2012, Goldman Sachs was notified by the SEC staff that the investigation into this offering has been completed as to Goldman Sachs and that the staff does not intend to recommend any enforcement
action by the SEC against Goldman Sachs with respect to this offering.
Washington Mutual Securities Litigation
Goldman Sachs is among numerous underwriters named as defendants in a putative securities class action amended complaint
filed on August 5, 2008 in the U.S. District Court for the Western District of Washington. As to the underwriters, plaintiffs allege that the offering documents in connection with various securities offerings by Washington Mutual, Inc.
failed to describe accurately the companys exposure to mortgage-related activities in violation of the disclosure requirements of the federal securities laws. The defendants include past and present directors and officers of Washington Mutual,
the companys former outside auditors, and numerous underwriters. On June 30, 2011, the underwriter defendants and plaintiffs entered into a definitive settlement agreement, pursuant to which Goldman Sachs would contribute to a settlement
fund. On November 4, 2011, the court approved the settlement, and the time to appeal has run, thereby concluding the matter. Goldman Sachs has paid the full amount of Goldman Sachs contribution to the settlement fund.
IndyMac Pass-Through Certificates Litigation
Goldman Sachs is among numerous underwriters named as defendants in a putative securities class action filed on May 14, 2009 in the U.S. District Court for the Southern District of New York. As
to the underwriters, plaintiffs allege that the offering documents in connection with various securitizations of mortgage-related assets violated the disclosure requirements of the federal securities laws. The defendants include IndyMac-related
entities formed in connection with the securitizations, the underwriters of the offerings, certain ratings agencies which evaluated the credit quality of the securities, and certain former officers and directors of IndyMac affiliates. On
November 2, 2009, the underwriters moved to dismiss the complaint. The motion was granted in part on February 17, 2010 to the extent of dismissing claims based on offerings in which no plaintiff purchased, and the court reserved judgment
as to the other aspects of the motion. By a decision dated June 21, 2010, the district court formally dismissed all claims relating to offerings in which no named plaintiff purchased certificates (including all offerings underwritten by Goldman
Sachs), and both granted and denied the defendants motions to dismiss in various other respects. On November 16, 2012, the district court denied the plaintiffs motion seeking reinstatement of claims relating to 42 offerings
previously dismissed for lack of
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standing (one of which was co-underwritten by Goldman Sachs) without prejudice to renewal depending on the outcome of the now-denied petition for a writ of certiorari to the U.S. Supreme Court
with respect to the Second Circuits decision described under Mortgage-Related Matters above. By an order dated March 26, 2013, the district court stayed the action for 60 days and directed the parties to mediate. On
May 17, 2010, four additional investors filed a motion seeking to intervene in order to assert claims based on additional offerings (including two underwritten by Goldman Sachs). The defendants opposed the motion on the ground that the putative
intervenors claims were time-barred and, on June 21, 2011, the court denied the motion to intervene with respect to, among others, the claims based on the offerings underwritten by Goldman Sachs. Certain of the putative intervenors
(including those seeking to assert claims based on two offerings underwritten by Goldman Sachs) have appealed. Goldman Sachs underwrote approximately $751 million principal amount of securities to all purchasers in the offerings at issue in the
May 2010 motion to intervene. On July 11, 2008, IndyMac Bank was placed under an FDIC receivership, and on July 31, 2008, IndyMac Bancorp, Inc. filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court in Los Angeles, California.
RALI Pass-Through Certificates Litigation
Goldman Sachs is among numerous underwriters named as defendants in a putative securities class action initially filed in September 2008 in New York Supreme Court, and subsequently removed to the
U.S. District Court for the Southern District of New York. As to the underwriters, plaintiffs allege that the offering documents in connection with various offerings of mortgage-backed pass-through certificates violated the disclosure
requirements of the federal securities laws. In addition to the underwriters, the defendants include Residential Capital, LLC (ResCap), Residential Accredit Loans, Inc. (RALI), Residential Funding Corporation
(RFC), Residential Funding Securities Corporation (RFSC), and certain of their officers and directors. On March 31, 2010, the defendants motion to dismiss was granted in part and denied in part by the district
court, resulting in dismissal on the basis of standing of all claims relating to offerings in which no plaintiff purchased securities. In June and July 2010, the lead plaintiff and five additional investors moved to intervene in order to assert
claims based on additional offerings (including two underwritten by Goldman Sachs). On April 28, 2011, the court granted defendants motion to dismiss as to certain of these claims (including those relating to one offering underwritten by
Goldman Sachs based on a release in an unrelated settlement), but otherwise permitted the intervenor case to proceed. By an order dated January 3, 2013, the district court denied the defendants motions to dismiss certain of the
intervenors remaining claims as time barred. Class certification of the claims based on the pre-intervention offerings was initially denied by the district court, and that denial was upheld on appeal; however, following remand, on
October 15, 2012, the district court certified a class in connection with the pre-intervention offerings. By an order dated January 3, 2013, the district court granted plaintiffs application to modify the class definition to
include only initial purchasers who bought the securities directly from the underwriters or their agents no later than ten trading days after the offering date (rather than just on the offering date). On March 26, 2013, the U.S. Court
of Appeals for the Second Circuit denied the defendants petition seeking leave to appeal the district courts class certification orders. On April 30, 2013, the district court granted, in part, plaintiffs request to
reinstate a number of the claims, including claims related to seven offerings underwritten by Goldman Sachs, that were previously dismissed on March 31, 2010.
Goldman Sachs underwrote approximately $5.51 billion principal amount of securities to all purchasers in the offerings for which claims have not been dismissed or which have been reinstated. On
May 14, 2012, ResCap, RALI and RFC filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York and the action has been stayed with respect to them, RFSC and certain of their officers
and directors.
MF Global Securities Litigation
Goldman Sachs is among numerous underwriters named as defendants in class action complaints filed in the U.S. District Court for the
Southern District of New York commencing November 18, 2011. These complaints generally allege that the offering materials for two offerings of MF Global Holdings Ltd. (MF Global)
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convertible notes (aggregating approximately $575 million in principal amount) in February 2011 and July 2011, among other things, failed to describe adequately the nature, scope and risks
of MF Globals exposure to European sovereign debt, in violation of the disclosure requirements of the federal securities laws. On August 20, 2012, the plaintiffs filed a consolidated amended complaint and on October 19, 2012, the
defendants filed motions to dismiss the amended complaint. Numerous parties, including Goldman Sachs, have commenced a mediation relating to various MF Global-related proceedings. Goldman Sachs underwrote an aggregate principal amount of
approximately $214 million of the notes.
On October 31, 2011, MF Global filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Manhattan, New York.
Goldman Sachs has also received inquiries from various governmental and regulatory bodies and self-regulatory organizations concerning
certain transactions with MF Global prior to its bankruptcy filing. GS Group is cooperating with all such inquiries.
Employment-Related Matters
On May 27, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York by several contingent technology workers who were employees of third-party
vendors. The plaintiffs are seeking overtime pay for alleged hours worked in excess of 40 per work week. The complaint alleges that the plaintiffs were de facto employees of Goldman Sachs and that Goldman Sachs is responsible for the overtime
pay under federal and state overtime laws. The complaint seeks class action status and unspecified damages. On March 21, 2011, the parties agreed to the terms of a settlement in principle and on February 10, 2012, the court approved the
terms of the settlement. Goldman Sachs has reserved the full amount of the proposed settlement.
On September 15, 2010, a
putative class action was filed in the U.S. District Court for the Southern District of New York by three former female employees alleging that GS Group and Goldman Sachs have systematically discriminated against female employees in
respect of compensation, promotion, assignments, mentoring and performance evaluations. The complaint alleges a class consisting of all female employees employed at specified levels by GS Group and Goldman Sachs since July 2002, and asserts
claims under federal and New York City discrimination laws. The complaint seeks class action status, injunctive relief and unspecified amounts of compensatory, punitive and other damages. GS Group and Goldman Sachs filed a motion to stay the claims
of one of the named plaintiffs and to compel individual arbitration with that individual, based on an arbitration provision contained in an employment agreement between GS Group and that individual. On April 28, 2011, the magistrate judge to
whom the district judge assigned the motion denied the motion and the district court affirmed the magistrate judges decision on November 15, 2011. On March 21, 2013, the U.S. Court of Appeals for the Second Circuit reversed the
district courts decision, holding that arbitration should be compelled. On June 13, 2011, GS Group and Goldman Sachs moved to strike the class allegations of one of the three named plaintiffs based on her failure to exhaust
administrative remedies. On September 29, 2011, the magistrate judge recommended denial of the motion to strike and, on January 10, 2012, the district court denied the motion to strike. On July 22, 2011, GS Group and
Goldman Sachs moved to strike all of the plaintiffs class allegations, and for partial summary judgment as to plaintiffs disparate impact claims. By a decision dated January 19, 2012, the magistrate judge recommended that
defendants motion be denied as premature. The defendants filed objections to that recommendation with the district judge and on July 17, 2012, the district court issued a decision granting in part GS Groups and Goldman
Sachs motion to strike plaintiffs class allegations on the ground that plaintiffs lacked standing to pursue certain equitable remedies and denying in part GS Groups and Goldman Sachs motion to strike plaintiffs class
allegations in their entirety as premature.
Hellenic Republic (Greece) Matters
GS Group and certain of its affiliates have been subject to a number of investigations and reviews by various governmental and
regulatory bodies and self-regulatory organizations in connection with Goldman Sachs transactions with the Hellenic Republic (Greece), including financing and swap transactions, as well as trading and research activities with respect to Greek
sovereign debt. GS Group has cooperated with the investigations and reviews.
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Investment Management Services
GS Group and certain of its affiliates are parties to various civil litigation and arbitration proceedings and other disputes with
clients relating to losses allegedly sustained as a result of Goldman Sachs investment management services. These claims generally seek, among other things, restitution or other compensatory damages and, in some cases, punitive damages. In
addition, GS Group and its affiliates are subject from time to time to investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations in connection with Goldman Sachs investment management
services. GS Group is cooperating with all such investigations and reviews.
Financial Advisory Services
GS Group and certain of its affiliates are parties to various civil litigation and arbitration proceedings and other
disputes with clients and third parties relating to the firms financial advisory activities. These claims generally seek, among other things, compensatory damages and, in some cases, punitive damages, and in certain cases allege that the firm
did not appropriately disclose or deal with conflicts of interest. In addition, GS Group and its affiliates are subject from time to time to investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations
in connection with conflicts of interest. GS Group is cooperating with all such investigations and reviews.
GS Group, Goldman
Sachs and The Goldman, Sachs & Co. L.L.C. are defendants in an action brought by the founders and former majority shareholders of Dragon Systems, Inc. (Dragon) on November 18, 2008, alleging that the plaintiffs incurred losses due to
Goldman Sachs financial advisory services provided in connection with the plaintiffs exchange of their purported $300 million interest in Dragon for stock of Lernout & Hauspie Speech Products, N.V. (L&H) in 2000. L&H
filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Wilmington, Delaware on November 29, 2000. The action is pending in the United States District Court for the District of Massachusetts. The complaint sought unspecified
compensatory, punitive and other damages, and alleged breach of fiduciary duty, violation of Massachusetts unfair trade practices laws, negligence, negligent and intentional misrepresentation, gross negligence, willful misconduct and bad faith.
Former minority shareholders of Dragon brought a similar action against Goldman Sachs with respect to their purported $49 million interest in Dragon, and this action was consolidated with the action described above. By an order dated
October 31, 2012, the court granted summary judgment with respect to certain counterclaims and an indemnification claim brought by the Goldman Sachs defendants against one of the shareholders, but denied summary judgment with respect to all
other claims. On January 23, 2013, a jury found in favor of the Goldman Sachs defendants on the plaintiffs claims for negligence, negligent and intentional misrepresentation, gross negligence and breach of fiduciary duty. The
plaintiffs claims for violation of Massachusetts unfair trade practices laws will be addressed by the district court and have not yet been decided.
Sales, Trading and Clearance Practices
GS Group and certain of its
affiliates are subject to a number of investigations and reviews, certain of which are industry-wide, by various governmental and regulatory bodies and self-regulatory organizations relating to the sales, trading and clearance of corporate and
government securities and other financial products, including compliance with the SECs short sale rule, algorithmic and quantitative trading, futures trading, transaction reporting, securities lending practices, trading and clearance of credit
derivative instruments, commodities trading, private placement practices and compliance with the U.S. Foreign Corrupt Practices Act.
The European Commission announced in April 2011 that it was initiating proceedings to investigate further numerous financial services companies, including GS Group, in connection with the supply of
data related to credit default swaps and in connection with profit sharing and fee arrangements for clearing of credit default swaps, including potential anti-competitive practices. The proceedings in connection with the supply of data related to
credit default swaps are ongoing. GS Groups current understanding is that the proceedings related to
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profit sharing and fee arrangements for clearing of credit default swaps have been suspended indefinitely. Goldman Sachs has received civil investigative demands from the U.S. Department of
Justice (DOJ) for information on similar matters.
Goldman Sachs is among the numerous defendants in a putative antitrust
class action filed on May 3, 2013 in the U.S. District Court for the Northern District of Illinois. The complaint generally alleges that defendants violated federal antitrust laws by conspiring to inflate bid-ask spreads for credit
derivatives. The complaint seeks declaratory and injunctive relief as well as treble damages in an unspecified amount.
The CFTC has been investigating the role of Goldman Sachs Execution & Clearing, L.P. (GSEC), as the clearing broker
for an SEC-registered broker-dealer client. The CFTC staff has orally advised GSEC that it intends to recommend that the CFTC bring aiding and abetting, civil fraud and supervision-related charges against GSEC arising from its provision of clearing
services to this broker-dealer client based on allegations that GSEC knew or should have known that the clients subaccounts maintained at GSEC were actually accounts belonging to customers of the broker-dealer client and not the clients
proprietary accounts. GSEC has been discussing a potential resolution. GS Group is cooperating with the investigations and reviews.
In December 2012, Goldman Sachs, without admitting or denying the findings, consented to a civil monetary penalty in the amount of $1.5 million and a cease and desist order from the CFTC in connection
with CFTC findings that Goldman Sachs failed to ensure that certain aspects of its risk management, compliance and supervision programs comported with its obligations to supervise diligently the trading activities of an associated person (the
trader), whose trading activities on seven days in mid-November and mid-December 2007 in the e-mini S&P 500 futures contract traded on the CME resulted in a substantial loss to Goldman Sachs. Specifically, in violation of CFTC
Regulation 166.3, Goldman Sachs was alleged to have failed to have procedures reasonably designed to detect and prevent the manual entry of fabricated futures trades into its front office systems, which aggregated manually entered and electronically
executed trades in the same product. As a result, the trader entered fabricated e-mini S&P 500 sell trades into its manual trading system, which artificially offset and camouflaged e-mini S&P buy trades the trader had executed in the market.
In particular, the trader established an $8.3 billion e-mini S&P 500 position in a firm trading account causing Goldman Sachs a loss of over $118 million in unwinding the traders position. Separately, after the trader was discharged,
Goldman Sachs withheld certain key information from the NFA and the CFTC until after the CFTCs Division of Enforcement commenced its investigation. In addition to the civil monetary penalty, Goldman Sachs agreed to cease and desist from
violating CFTC Regulation 166.3.
Insider Trading Investigations
From time to time, Goldman Sachs and its employees are the subject of or otherwise involved in regulatory investigations relating to
insider trading, the potential misuse of material nonpublic information and the effectiveness of Goldman Sachs insider trading controls and information barriers. It is Goldman Sachs practice to cooperate fully with any such
investigations.
Research Investigations
From time to time, GS Group is the subject of or otherwise involved in regulatory investigations relating to research practices, including research independence and interactions between research analysts
and other firm personnel, including investment banking personnel. It is the firms practice to cooperate fully with any such investigations.
Municipal Securities Matters
GS Group and certain of its affiliates
are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations relating to transactions involving municipal securities, including wall-cross procedures and conflict of interest
disclosure with respect to state and
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municipal clients, the trading and structuring of municipal derivative instruments in connection with municipal offerings, political contribution rules, underwriting of Build America Bonds,
municipal advisory services and the possible impact of credit default swap transactions on municipal issuers. GS Group is cooperating with the investigations and reviews.
On August 21, 2008, Goldman Sachs entered into a settlement in principle with the Office of the Attorney General of the State of New York and the Illinois Securities Department (on behalf of the
North American Securities Administrators Association) regarding auction rate securities. Under the agreement, GS Group agreed, among other things, (i) to offer to repurchase at par the outstanding auction rate securities that its private
wealth management clients purchased through Goldman Sachs prior to February 11, 2008, with the exception of those auction rate securities where auctions were clearing, (ii) to continue to work with issuers and other interested parties,
including regulatory and governmental entities, to expeditiously provide liquidity solutions for institutional investors, and (iii) to pay a $22.5 million fine. The settlement is subject to approval by the various states. Goldman Sachs has
entered into consent orders with New York, Illinois and most other states and is in the process of doing so with the remaining states.
Beginning in February 2012, Goldman Sachs was named as respondent in four FINRA arbitrations filed, respectively, by the cities of Houston, Texas and Reno, Nevada, a California school district, and a
North Carolina municipal power authority, based on Goldman Sachs role as underwriter and broker-dealer of the claimants issuances of an aggregate of over $1.8 billion of auction rate securities from 2003 through 2007 (in the Houston
arbitration, two other financial services firms were named as respondents, and in the North Carolina arbitration, one other financial services firm was named). Each claimant alleges that Goldman Sachs failed to disclose that it had a practice of
placing cover bids on auctions, and failed to offer the claimant the option of a formulaic maximum rate (rather than a fixed maximum rate), and that, as a result, the claimant was forced to engage in a series of expensive refinancing and conversion
transactions after the failure of the auction market (at an estimated cost, in the case of Houston, of approximately $90 million). Houston and Reno also allege that Goldman Sachs advised them to enter into interest rate swaps in connection with
their auction rate securities issuances, causing them to incur additional losses (including, in the case of Reno, a swap termination obligation of over $8 million). The claimants assert claims for breach of fiduciary duty, fraudulent concealment,
negligent misrepresentation, breach of contract, violations of the 1934 Act and state securities laws, and breach of duties under the rules of the Municipal Securities Rulemaking Board and the NASD, and seek unspecified damages. In federal court,
Goldman Sachs has filed complaints and motions seeking to enjoin the Reno, California school district and North Carolina arbitrations pursuant to the exclusive forum selection clauses in the transaction documents. On November 26, 2012,
Goldman Sachs motion to enjoin was denied with regard to the Reno arbitration, and Goldman Sachs appealed on March 11, 2013. On February 8, 2013, Goldman Sachs motion to enjoin was granted with regard to the
California school district arbitration, and the California school district appealed on March 5, 2013. On April 26, 2013, Goldman Sachs filed its formal motion to enjoin the North Carolina arbitration, and the North Carolina
municipal power authority filed a motion to dismiss Goldman Sachs complaint for lack of venue.
Financial
Crisis-Related Matters
GS Group and certain of its affiliates are subject to a number of investigations and reviews
by various governmental and regulatory bodies and self-regulatory organizations and litigation relating to the 2008 financial crisis. Goldman Sachs is cooperating with the investigations and reviews.
In the second quarter of 2011, a Staff Report of the Senate Permanent Subcommittee on Investigations concerning the key causes of the
financial crisis was issued. Goldman Sachs and another financial institution were used as case studies with respect to the role of investment banks. The report was referred to the DOJ and the SEC for review. Goldman Sachs has cooperated with the
investigations arising from this referral. On August 9, 2012, the DOJ announced that it had concluded its investigation and would not be bringing criminal charges against Goldman Sachs or any of its current or former employees in connection
with this matter.
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Jefferies Bache, LLC (JBL)
From time to time JBL (in its capacity as a commodities broker) and its principals may be involved in numerous legal actions, some of
which individually and all of which in the aggregate, seek significant or indeterminate damages. However, except for the action described below, during the five years preceding the date of this offering memorandum there has been no administrative,
civil, or criminal action against JBL or any of its principals which is material, in light of all the circumstances, to an investors decision to invest.
In December 2009, JBL was served with a Statement of Claim in an arbitration brought before the National Futures Association. The claimant, an oil company involved in the marketing, supply and
transportation of petroleum products, alleged that JBL knew that one of claimants employees, who had been an authorized trader for the claimant, engaged in unauthorized trading and that JBL permitted him to do so. Claimant alleged actual
damages of $7 million and, to the extent it also alleged that JBL violated the RICO statute, claimed treble damages, or $21 million.
In February 2010, JBL filed an answer which denied any responsibility for the conduct of the claimants employee. Pursuant to the sale of JBL earlier in 2011, Prudential Financial, Inc. retained
responsibility for this matter, although JBL remained as the respondent in the arbitration. In October 2011, Prudential Financial and the claimant reached a settlement of this matter; JBL did not contribute any monies to the settlement.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch)
Merrill Lynch has been named as a defendant in various legal actions and proceedings, including arbitrations, class actions and other
litigation arising in connection with its activities as a global, diversified, financial services institution. Some of the legal actions and proceedings include claims for substantial compensatory and/or punitive damages or claims for indeterminate
amounts of damages. In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or otherwise in financial distress. Merrill Lynch is also involved in investigations and/or proceedings by governmental and
self-regulatory agencies.
Bank of America Corporation (Bank of America), Merrill Lynchs ultimate parent,
and Merrill Lynch & Co., Inc. (the Parent), Merrill Lynchs direct corporate parent, make all required disclosures in their Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, which may be updated in
reports on Form 8-K, all of which are filed or furnished with the SEC (Regulatory Filings). Merrill Lynch makes all required disclosures in its Form BD and ADV filings (Form BD and ADV Filings) with FINRA. Those
Regulatory Filings and Form BD and ADV Filings include disclosures of regulatory inquiries as required by federal law and applicable regulations. The Regulatory Filings are publicly available on the SECs website at
www.sec.gov
. The Form
BD filings are publicly available on the FINRA BrokerCheck system at
http://www.finra.org/Investors/Tools Calculators/ BrokerCheck/index.htm
. The Form ADV filings are publicly available on the SECs Investment Adviser Search website at:
http://www.adviserinfo.sec.gov
.
In view of the inherent difficulty of predicting the outcome of such litigation and
regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, Merrill Lynch generally cannot predict what the eventual outcome of
the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
In accordance with applicable accounting guidance, Merrill Lynch establishes an accrued liability for litigation and regulatory matters
when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, Merrill Lynch does not
establish an accrued liability. As a litigation or regulatory matter develops, Merrill Lynch, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable
and
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estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for
further developments that would make such loss contingency both probable and estimable. Once the loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, Merrill Lynch will establish an accrued
liability with respect to such loss contingency and record a corresponding amount of litigation-related expense. Merrill Lynch continues to monitor the matter for further developments that could affect the amount of the accrued liability that has
been previously established.
In some of the matters described below, loss contingencies are not both probable and estimable
in the view of Merrill Lynch management, and accordingly, an accrued liability has not been established for those matters. Information is provided below regarding the nature of these contingencies and, where specified, the amount of the claim
associated with these loss contingencies. Based on current knowledge, management does not believe that loss contingencies arising from pending matters will have a material adverse effect on Merrill Lynchs consolidated financial position or
liquidity. However, in light of the inherent uncertainties involved in these matters, some of which are beyond Merrill Lynchs control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or
more of these matters could be material to Merrill Lynch for any particular reporting period.
The actions against Merrill
Lynch include, but are not limited to, the following:
Auction Rate Securities Litigation
Since October 2007, Merrill Lynch and certain affiliates have been named as defendants in a variety of lawsuits and other proceedings
brought by customers, both individual and institutional investors, and issuers regarding auction rate securities (ARS). These actions generally allege that defendants: (i) misled the plaintiffs into believing that there was a deeply
liquid market for ARS, and (ii) failed to adequately disclose their or their affiliates practice of placing their own bids to support ARS auctions. Plaintiffs assert that ARS auctions started failing from August 2007 through February 2008
when defendants and other broker-dealers stopped placing those support bids. In addition to the matters described in more detail below, arbitrations and individual lawsuits have been filed against Merrill Lynch and certain affiliates by
parties who purchased ARS and are seeking relief that includes compensatory and punitive damages, as well as rescission, among other relief.
Merrill Lynch and the Parent face civil actions relating to the sales of ARS and management of ARS auctions, including two putative class action lawsuits in which the plaintiffs seek to recover the
alleged losses in market value of ARS securities purportedly caused by the defendants actions. Plaintiffs also seek unspecified damages, including rescission, other compensatory and consequential damages, costs, fees and interest. The first
action,
In Re Merrill Lynch Auction Rate Securities Litigation
, is the result of the consolidation of two separate class action suits in the U.S. District Court for the Southern District of New York. These suits were brought by two
customers of Merrill Lynch, on behalf of all persons who purchased ARS in auctions managed by Merrill Lynch and other affiliates, against the Parent and Merrill Lynch. On March 31, 2010, the U.S. District Court for the Southern District of
New York granted Merrill Lynchs motion to dismiss. Plaintiffs appealed and on November 14, 2011, the U.S. Court of Appeals for the Second Circuit affirmed the district courts dismissal. Plaintiffs time to seek a writ of
certiorari to the U.S. Supreme Court expired on February 13, 2012, and, as a result, this action is now concluded. The second action,
Bondar v. Bank of America Corporation
, was brought by a putative class of ARS purchasers against Bank
of America and BAS. On February 24, 2011, the U.S. District Court for the Northern District of California dismissed the amended complaint and directed plaintiffs to state whether they will file a further amended complaint or appeal the
courts dismissal. Following the Second Circuits decision in
In re Merrill Lynch Auction Rate Securities Litigation
, plaintiffs voluntarily dismissed their action on January 4, 2012. The dismissal is subject to the district
courts approval.
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Bank of America Merger-related Matters
Since January 2009, Bank of America, Parent and/or certain of their current and former officers and directors, among others, have been
named as defendants in a variety of securities actions filed in federal courts relating to Bank of Americas acquisition of Parent (the Acquisition). The claims in these actions generally concern (i) the Acquisition;
(ii) the financial condition and 2008 fourth quarter losses experienced by Bank of America and Parent; (iii) due diligence conducted in connection with the Acquisition; (iv) the Acquisition agreements terms regarding
Parents ability to pay bonuses to Parent employees up to $5.8 billion; (v) Bank of Americas discussions with government officials in December 2008 regarding Bank of Americas consideration of invoking the material adverse
change clause in the Acquisition agreement and the possibility of obtaining government assistance in completing the Acquisition; and/or (vi) alleged material misrepresentations and/or material omissions in the proxy statement and related
materials for the Acquisition.
Plaintiffs in
In re Bank of America Securities, Derivative and Employment Retirement Income
Security Act (ERISA) Litigation
(the Securities Plaintiffs), a putative class action pending in the U.S. District Court for the Southern District of New York, represent all (i) purchasers of the Bank of America
common and preferred securities between September 15, 2008 and January 21, 2009 and its January 2011 options, (ii) holders of Bank of America common stock as of October 10, 2008, and (iii) purchasers of Bank of
Americas common stock issued in the offering that occurred on or about October 7, 2008. During the purported class period, Bank of America common shares declined from $33.74 on September 12, 2008 to $6.68 on January 21, 2009.
Securities Plaintiffs claim violations of Sections 10(b), 14(a) and 20(a) of the 1934 Act, and SEC rules promulgated thereunder. Bank of America and its co-defendants filed motions to dismiss, which the court granted in part by dismissing
certain of the Securities Plaintiffs claims under Section 10(b) of the 1934 Act. Securities Plaintiffs filed a second amended complaint which repleaded some of the dismissed claims as well as added claims under Sections 10(b) and
20(a) of the 1934 Act on behalf of holders of certain debt, preferred securities and option securities. Securities Plaintiffs amended complaint also alleges violations of Sections 11,12(a)(2) and 15 of the Securities Act of 1933, as
amended (the 1933 Act), related to the offering of Bank of Americas common stock that occurred on or about October 7, 2008, and names Merrill Lynch, among others, as defendants on certain claims. Bank of America and its
co-defendants filed motions to dismiss, which the court granted in part in August 2010 by dismissing certain of the Securities Plaintiffs claims under Section 10(b) of the 1934 Act. In July 2011, the court granted in part defendants
motion to dismiss the second amended complaint. As a result of the courts July 2011 ruling, the Securities Plaintiffs were (in addition to the claims sustained in the courts August 2010 ruling) permitted to pursue a claim under
Section 10(b) asserting that defendants should have made additional disclosures in connection with the Acquisition about the financial condition and 2008 fourth-quarter losses experienced by Parent. Securities Plaintiffs seek unspecified
monetary damages, legal costs and attorneys fees. On February 6, 2012, the court granted Securities Plaintiffs motion for class certification. On February 21, 2012, Bank of America filed a petition requesting that the U.S.
Court of Appeals for the Second Circuit review the district courts order granting Securities Plaintiffs motion for class certification.
Several individual plaintiffs have opted to pursue claims apart from the
In re Bank of America Securities, Derivative, and Employment Retirement Income Security Act (ERISA) Litigation
and,
accordingly, have initiated individual actions in the U.S. District Court for the Southern District of New York relying on substantially the same facts and claims as the Securities Plaintiffs.
Benistar Litigation
In
Gail A. Cahaly, et al. v. Benistar Property Exchange Trust Company, Inc. (Benistar), et al.,
a matter filed on August 1, 2001, in the Massachusetts Superior Court, Suffolk
County, plaintiffs alleged that Merrill Lynch aided and abetted a fraud and breach of fiduciary duty allegedly perpetrated by Benistar, a former client of Merrill Lynch On June 25, 2009, the jury in the second trial in this matter found in
favor of plaintiffs on all counts. Plaintiffs filed discovery-related sanctions motions, as well as a petition seeking attorneys fees and costs. On January 11, 2011, the court issued rulings denying plaintiffs request for sanctions
and punitive damages, but awarding consequential damages and attorneys fees to plaintiffs in an amount not material to Merrill Lynchs
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results of operations. Plaintiffs and Merrill Lynch appealed the courts January 11, 2011 rulings on damages and sanctions. On December 26, 2012, plaintiffs and Merrill Lynch
agreed to settle for an amount not material to Merrill Lynchs results of operations.
Good Reason
Litigation
Since 2009, Merrill Lynch and certain affiliates have been named as defendants in lawsuits and arbitrations
brought by former Merrill Lynch employees, primarily financial advisors, who participated in certain Merrill Lynch equity and contingent long term incentive compensation plans (the Plans). These actions generally allege that the former
employees had good reason to resign as that term is defined under the change in control provisions of the applicable Plans and, as such, are entitled to immediate vesting and payment of forfeited awards and/or monetary sums under those
Plans.
In addition, a putative class action was filed in October 2009, entitled
Chambers, et al. v. Merrill
Lynch & Co., et al
. in the U.S. District Court for the Southern District of New York, seeking certification of a putative class of financial advisors and seeking damages and other payments under the good reason provisions of certain
contingent incentive compensation plans. On November 26, 2012, the parties entered into an agreement to settle
Chambers
. The settlement amount has been fully accrued. On December 13, 2012, the court issued an order granting
preliminary approval to the settlement and providing for notice to potential class members. The agreement is subject to the courts final approval. Other actions asserting good reason claims remain pending.
Illinois Funeral Directors Association Matters
Commencing in 1979, the Illinois Funeral Directors Association (IFDA), an Illinois not-for-profit corporation that serves as a trade association representative for the Illinois funeral
industry, began providing trust services to Illinois consumers for the deposit of payments for pre-paid funeral services. Illinois law regulates the sale of pre-paid funeral goods and services and requires that proceeds of those sales be held in
trust. In 1986, the IFDA began offering a tax-advantaged pre-need trust administered by its subsidiary, IFDA Services, Inc. (IFDA Services). The tax-advantaged pre-need trust invested primarily in variable universal life insurance
(VUL) policies written against the lives of keymen of IFDA, its members and its affiliates. In response to the stated investment objectives of IFDAs executive director and its board of directors, Merrill Lynch
recommended the purchase of the VUL policies to IFDA for the tax-advantaged pre-need trust, and Merrill Lynch Life Agency, Inc. (MLLA), sold the pre-need trust approximately 270 VUL policies as investment vehicles.
During IFDA Services operation of the pre-need trust, it credited IFDA members with earnings on deposits into the pre-need trust
based on a rate of return set by IFDA Services, even though the crediting rate sometimes exceeded the actual earnings on the trust investments. As a result, a deficit developed between the amounts that the IFDA credited to IFDA members and the
actual earnings of the trust. The Illinois Office of the Comptroller, the trusts regulator, removed IFDA Services as trustee of the trust in 2008, and asked Merrill Lynch Bank & Trust Company, FSB (MLBTC), to serve as
successor trustee.
On February 10, 2012, the State of Illinois Office of the Secretary of State, Securities Department
(ISD) entered into a consent order with Merrill Lynch to resolve the ISDs investigation of the sale of life insurance policies to the pre-need trust. The consent order provided for payment by Merrill Lynch of an amount not material
to Merrill Lynchs results of operations as restitution to the tax-advantaged pre-need trust and its beneficiaries to mitigate any potential loss or injuries that Illinois pre-need patrons or funeral homes might otherwise suffer and fund the
anticipated funeral costs of Illinois pre-need patrons. In addition, the consent order provided for payment by Merrill Lynch of the costs of the ISDs investigation and of administration and distribution of the ISD settlement funds.
On June 16, 2009, a purported class action on behalf of a proposed class of pre-need contract holders,
David Tipsword as Trustee
of Mildred E. Tipsword Trust, individually and on behalf of all others similarly situated v. I.F.D.A. Services Inc., et al.
, was filed in the U.S. District Court for the Southern District of Illinois against
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Merrill Lynch, among other defendants. The complaint alleged that Merrill Lynch breached purported fiduciary duties and committed negligence and seeks compensatory and punitive damages,
reasonable attorneys fees, and costs. The court denied Merrill Lynchs motion to dismiss.
On June 30, 2009, a
purported class action on behalf of a proposed class of funeral directors,
Clancy-Gernon Funeral Home, Inc., et al. v. Merrill Lynch, et al.
, was filed in the Illinois Circuit Court, Cook County, alleging that Merrill Lynch and MLLA, among
other defendants, committed consumer fraud, civil conspiracy, unjust enrichment, and conversion. Merrill Lynch and MLLA removed the complaint to the U.S. District Court for the Northern District of Illinois, and the case ultimately transferred
to the U.S. District Court for the Southern District of Illinois. On November 9, 2010, plaintiffs filed a third amended complaint, which added new parties, including MLBT-FSB, and additional claims for fraud, breach of fiduciary duty,
negligence and aiding and abetting fiduciary duty against Merrill Lynch and MLLA, and breach of fiduciary duty and negligence against MLBT-FSB. The third amended complaint sought disgorgement and remittance of all commissions, premiums, fees and
compensation; an accounting; compensatory damages; pre-judgment and post-judgment interest; and reasonable attorneys and experts fees and costs. The court denied MLBT-FSBs motion to dismiss and permitted Merrill Lynch and MLLA to
withdraw their motions to dismiss.
On December 9, 2010, a purported class action on behalf of a proposed class of
funeral directors,
Pettett Funeral Home, Ltd., et al. v. Merrill Lynch, et al.
, was filed in the U.S. District Court for the Southern District of Illinois. The allegations and relief sought in the
Pettett
matter were virtually
identical to the claims in
Clancy-Gernon.
On July 28, 2010, Charles G. Kurrus, III, P.C., a funeral director and
owner of a funeral home, filed an action in the Illinois Circuit Court, St. Clair County, against Merrill Lynch, MLLA and MLBT-FSB, among others, including present and former Merrill Lynch employees. The complaint, entitled
Charles F.
Kurrus, III, P.C. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., et al.
, asserted causes of action for breach of the Illinois Consumer Fraud and Deceptive Business Practices Act and civil conspiracy against all defendants; breach of
fiduciary duty against Merrill Lynch and MLBT-FSB; and negligence and aiding and abetting breach of fiduciary duty against Merrill Lynch. The complaint sought declaratory relief; disgorgement of all commissions, fees and revenues received by Merrill
Lynch, MLLA and MLBT-FSB; pre-judgment and post-judgment interest; an accounting; and attorneys fees. Defendants filed motions to dismiss.
On February 15, 2012, the parties to the above-referenced litigations executed a settlement agreement to fully resolve the claims asserted in the class action litigations and the
Kurrus
litigation, and fully release and bar any civil claims against Merrill Lynch, its employees or affiliates with respect to the IFDA pre-need trust. The settlement agreement provided for a payment by Merrill Lynch in an amount not material to Merrill
Lynchs results of operations (which amount was fully accrued as of December 31, 2011). On June 12, 2012, the court entered a final order approving the class action settlement and entered judgments dismissing the three class action
lawsuits (
Tipsword
,
Clancy-Vernon
and
Pettett
) with prejudice. On August 2, 2012, the court in
Kurrus
dismissed the matter with prejudice.
In re Initial Public Offering Securities Litigation
The Parent, Merrill
Lynch and certain of their subsidiaries, along with other underwriters, and various issuers and others, were named as defendants in a number of putative class action lawsuits that have been consolidated in the U.S. District Court for the
Southern District of New York as
In re Initial Public Offering Securities Litigation
. Plaintiffs contended, among other things, that defendants failed to make certain required disclosures in the registration statements and prospectuses for
applicable offerings regarding alleged agreements with institutional investors that tied allocations in certain offerings to the purchase orders by those investors in the aftermarket. Plaintiffs alleged that such agreements allowed defendants to
manipulate the price of the securities sold in these offerings in violation of Section 11 of the 1933 Act and Section 10(b) of the 1934 Act and SEC rules promulgated thereunder. The parties agreed to settle the matter, for which the court
granted final
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approval in an amount that was not material to Merrill Lynchs results of operations. Some putative class members have filed an appeal, which remains pending, in the U.S. Court of Appeals
for the Second Circuit seeking reversal of the final approval. On August 25, 2011, the district court, on remand from the U.S. Court of Appeals for the Second Circuit, dismissed the objection by the last remaining putative class member,
concluding that he was not a class member. On January 9, 2012, that objector dismissed with prejudice an appeal of the courts dismissal pursuant to a settlement agreement. On November 28, 2011, an objector whose appeals were
dismissed by the Second Circuit filed a petition for a writ of certiorari with the U.S. Supreme Court that was rejected as procedurally defective. On January 17, 2012, the Supreme Court advised the objector that the petition was untimely and
should not be resubmitted to the Supreme Court.
Lehman Brothers Holdings, Inc. Litigation
Beginning in September 2008, Merrill Lynch, including BAS, along with other underwriters and individuals, were named as defendants in
several putative class action lawsuits filed in federal and state courts. All of these cases were transferred or conditionally transferred to the U.S. District Court for the Southern District of New York under the caption
In re Lehman Brothers
Securities and ERISA Litigation
. Plaintiffs alleged that the underwriter defendants violated Section 11 of the Securities Act of 1933, as well as various state laws, by making false or misleading disclosures about the real estate-related
investments and mortgage lending practices of Lehman Brothers Holdings, Inc. (LBHI) in connection with various debt and convertible stock offerings of LBHI. Plaintiffs sought unspecified damages. On June 4, 2010, defendants filed a
motion to dismiss the complaint. On July 27, 2011, the court granted in part and denied in part the motion. Certain of the allegations in the complaint that purported to support the Section 11 claim against the underwriter defendants were
dismissed; others were not dismissed relating to alleged misstatements regarding LBHIs leverage and financial condition, risk management and risk concentrations.
On September 23, 2011, the majority of the underwriter defendants, including BAS, the Company and approximately 40 others, reached an agreement in principle with the lead plaintiffs to settle the
securities class action as to the settling underwriters. On May 2, 2012, the court gave final approval to the settlement. The Companys portion of the settlement was not material to its results of operations or financial condition.
MBIA Insurance Corporation CDO Litigation
On April 30, 2009, MBIA Insurance Corporation (MBIA) and LaCrosse Financial Products, LLC filed a complaint in New York State Supreme Court, New York County, against Merrill Lynch and
Merrill Lynch International (MLI) under the caption
MBIA Insurance Corporation and LaCrosse Financial Products, LLC v. Merrill Lynch Pierce Fenner and Smith Inc., and Merrill Lynch International (MLI)
. The complaint
related to certain credit default swap and insurance agreements by which plaintiffs provided credit protection to Merrill Lynch and MLI and other parties on CDO securities. Plaintiffs claimed that Merrill Lynch and MLI did not adequately disclose
the credit quality and other risks of the CDO securities and underlying collateral. The complaint alleged claims for fraud, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing and breach of contract and seeks
rescission and unspecified compensatory and punitive damages, among other relief. On April 9, 2010, the court granted defendants motion to dismiss as to the fraud, negligent misrepresentation, and breach of the implied covenant of good
faith and fair dealing and rescission claims, as well as a portion of the breach of contract claim. Plaintiffs appealed the dismissal of their claims and MLI cross-appealed the denial of its motion to dismiss the breach of contract claim in its
entirety. On February 1, 2011, the appellate court dismissed the case against MLI in its entirety. On July 11, 2011, the parties reached an agreement to settle the litigation. The settlement did not require any payment by Merrill Lynch.
Mortgage-Backed Securities Litigation
The Parent, Merrill Lynch and certain of their affiliates have been named as defendants in several cases relating to their various roles as issuer, originator, seller, depositor, sponsor, underwriter
and/or controlling entity in mortgage-backed securities (MBS) offerings, pursuant to which the MBS investors were entitled to a portion
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of the cash flow from the underlying pools of mortgages. These cases generally include actions by individual MBS purchasers. Although the allegations vary by lawsuit, these cases generally allege
that the registration statements, prospectuses and prospectus supplements for securities issued by securitization trusts contained material misrepresentations and omissions, in violation of Sections 11 and 12 of the 1933 Act,
Sections 10(b) and/or 20 of the 1934 Act and/or state securities laws and other state statutory and/or common laws.
These cases generally involve allegations of false and misleading statements regarding (i) the process by which the properties that
served as collateral for the mortgage loans underlying the MBS were appraised; (ii) the percentage of equity that mortgage borrowers had in their homes; (iii) the borrowers ability to repay their mortgage loans; (iv) the
underwriting practices by which those mortgage loans were originated; (v) the ratings given to the different tranches of MBS by rating agencies; and (vi) the validity of each issuing trusts title to the mortgage loans comprising the
pool for the securitization (collectively, MBS Claims). Plaintiffs in these cases generally seek unspecified compensatory damages, unspecified costs and legal fees and, in some instances, seek rescission. A number of other entities have
threatened legal actions against Merrill Lynch and its affiliates concerning MBS offerings. On January 11, 2013, Merrill Lynch preliminarily agreed on a settlement amount with the National Credit Union Administration (NCUA) to resolve claims
concerning certain MBS offerings that the NCUA had threatened to bring against Merrill Lynch and certain of its affiliates. The agreement is subject to the negotiation and execution of mutually agreeable settlement documentation and approval by the
NCUA board. The settlement amount would be covered by existing reserves.
AIG Litigation
On August 8, 2011, American International Group, Inc. and certain of its affiliates (collectively, AIG) filed a complaint
in New York Supreme Court, New York County, in a case entitled
American International Group, Inc. et al. v. Bank of America Corporation et al
. AIG has named, among others, Merrill Lynch and a number of its related entities as defendants.
AIGs complaint asserts certain MBS Claims pertaining to 158 MBS offerings and two MBS private placements relating to Merrill Lynch affiliates, in which AIG alleges that it purchased securities between 2005 and 2007. AIG seeks rescission of its
purchases or a rescissory measure of damages or, in the alternative, compensatory damages of not less than $10 billion as to all defendants; punitive damages; and other unspecified relief. Defendants removed the case to the U.S. District
Court for the Southern District of New York. The district court has denied AIGs motion to remand the case to state court. On April 24, 2012, the U.S. Court of Appeals for the Second Circuit granted plaintiffs petition for leave to
appeal the ruling of the district court in the Southern District of New York denying plaintiffs motion to remand the case to New York Supreme Court. The appeal is pending.
Bayerische Landesbank, New York Branch (Merrill Lynch) Litigation
On May 2, 2012, Bayerische Landesbank, New York Branch, filed a complaint against the Parent, Merrill Lynch, Merrill Lynch Mortgage
Investors, Inc. (MLMI) and Merrill Lynch Mortgage Lending, Inc. (MLML), in New York Supreme Court, New York County, entitled
Bayerische Landesbank, New York Branch v. Merrill Lynch & Co., et al.
The complaint
asserted certain MBS Claims in connection with alleged purchases in thirteen offerings of Merrill Lynch-related MBS issued between 2006 and 2007. Plaintiff sought unspecified compensatory damages, punitive damages, interest and legal fees, and
rescission or rescissory damages. On September 27, 2012, the case was settled for an amount not material to Merrill Lynchs results of operations.
Dexia (Merrill Lynch) Litigation
On March 29, 2012, Dexia
SA/NV, Dexia Holdings, Inc., FSA Asset Management LLC and Dexia Crédit Local SA (Dexia) filed a complaint against the Parent, Merrill Lynch, MLMI, MLML and First Franklin Financial Corporation in New York Supreme Court, New York
County, entitled
Dexia, et al. v. Merrill Lynch & Co. et al.
The complaint asserted certain MBS Claims in connection with its alleged purchase of fifteen MBS that were issued and/or underwritten by the Company and related entities
between 2006 and 2007. Dexia sought
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unspecified compensatory damages, rescission, interest and legal fees. The action was removed to the U.S. District Court for the Southern District of New York. On September 27, 2012, the
case was settled for an amount not material to Merrill Lynchs results of operations.
Federal Housing Finance
Agency Litigation
On September 2, 2011, the Federal Housing Finance Agency (FHFA), as conservator for
Fannie Mae (FNMA) and Freddie Mac (FHLMC), filed complaints in the U.S. District Court for the Southern District of New York against Bank of America, Merrill Lynch and certain related entities, and certain current and
former officers and directors of these entities. The actions are entitled
Federal Housing Finance Agency v. Bank of America Corporation, et al
. (the FHFA Bank of America Litigation) and
Federal Housing Finance Agency v. Merrill
Lynch & Co., Inc., et al
. (the FHFA Merrill Lynch Litigation). The complaints assert certain MBS Claims relating to MBS issued and/or underwritten by Bank of America, Merrill Lynch and related entities in 23 MBS offerings
and in 72 MBS offerings, respectively, between 2005 and 2008 and allegedly purchased by either FNMA or FHLMC. The FHFA seeks, among other relief, rescission of the consideration FNMA and FHLMC paid for the securities or alternatively damages
allegedly incurred by FNMA and FHLMC, including consequential damages. The FHFA also seeks recovery of punitive damages in the FHFA Merrill Lynch Litigation.
The FHFA Bank of America Litigation and the FHFA Merrill Lynch Litigation, along with fourteen other cases filed by the FHFA against other financial institutions, have been coordinated before a single
judge in the U.S. District Court for the Southern District of New York. One action,
FHFA v. UBS Americas, Inc., et al.
(the UBS Action), was designated the lead action with respect to allegations and claims common to the pending
FHFA cases. On May 4, 2012, the court denied in part and granted in part a motion to dismiss in the UBS Action. The court subsequently denied motions to dismiss in the FHFA Merrill Lynch Litigation and the FHFA Bank of America Litigation on
November 8, 2012 and November 28, 2012, respectively. On August 14, 2012, the U.S. Court of Appeals for the Second Circuit granted the UBS defendants application for an interlocutory appeal of the district courts ruling
pertaining to the statute of repose on the federal and state securities law claims and the statute of limitations on the federal securities law claims asserted in the UBS Action. The FHFA has asserted similar claims in the FHFA Merrill Lynch
Litigation and the FHFA Bank of America Litigation.
Merrill Lynch MBS Litigation
The Parent, Merrill Lynch, Merrill Lynch Mortgage Investors, Inc. (MLMI) and certain current and former directors of MLMI are
named as defendants in a consolidated class action in the U.S. District Court in the Southern District of New York, entitled
Public Employees Ret. System of Mississippi v. Merrill Lynch & Co. Inc
. Plaintiffs assert certain
MBS Claims in connection with their purchase of MBS. In March 2010, the court dismissed claims related to 65 of 84 offerings with prejudice due to lack of standing as no named plaintiff purchased securities in those offerings. On November 8,
2010, the court dismissed claims related to one additional offering on separate grounds. On May 7, 2012, the court granted final approval of a settlement providing for a payment in an amount not material to Merrill Lynchs results of
operations (which was fully accrued as of December 31, 2011).
Stichting Pensioenfonds Litigation
On August 19, 2010, Stichting Pensioenfonds ABP (ABP) filed a complaint against Merrill Lynch related entities, and
certain current and former directors of MLMI, and certain other defendants, in New York Supreme Court, New York County, entitled
Stichting Pensioenfonds v. Merrill Lynch & Co., Inc., et al
. The action was removed to the
U.S. District Court for the Southern District of New York. ABPs original complaint asserted certain MBS Claims in connection with alleged purchases in 13 offerings of Merrill Lynch-related MBS issued between 2006 and 2007. On
October 12, 2011, ABP filed an amended complaint regarding the same offerings and adding additional federal securities law and state law claims. ABP seeks unspecified compensatory damages, interest and legal fees, or alternatively rescission.
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Regulatory Investigations
Merrill Lynch has received a number of subpoenas and other requests for information from regulators and governmental authorities regarding
MBS and other mortgage-related matters, including inquiries, investigations and potential proceedings related to a number of transactions involving Merrill Lynchs underwriting and issuance of MBS and its participation in certain CDO offerings.
These inquiries and investigations include, among others: an investigation by the SEC related to Merrill Lynchs risk control, valuation, structuring, marketing and purchase of CDOs; and an investigation by the New York State Attorney General
concerning the purchase, securitization and underwriting of mortgage loans and MBS. Merrill Lynch has provided documents and testimony and continues to cooperate fully with these inquiries and investigations.
Rosen Capital Partners LP & Rosen Capital Institutional LPs FINRA Arbitration
On May 28, 2008, two former hedge fund clients of Merrill Lynch Professional Clearing Corp. (MLPCC), Rosen Capital
Partners LP and Rosen Capital Institutional LP (collectively, the Rosen Funds), filed a statement of claim asserting claims for breach of contract, fraud, and negligence against MLPCC in connection with alleged losses in the fall of
2008. On July 5, 2011, a FINRA panel awarded the Rosen Funds $64 million plus pre-judgment interest. On December 23, 2011, the California Superior Court granted the Rosen Funds motion to confirm the award and on
February 15, 2012 entered judgment on the award and pre-judgment interest, an amount that was fully accrued. On February 5, 2013, the Court of Appeals affirmed the decision of the California Superior Court.
Regulatory Actions
Squawk Box Settlement
The SEC alleged, and Merrill Lynch neither admitted
nor denied, that Merrill Lynch failed to maintain policies and procedures reasonably designed to prevent the misuse of customer order information as required by Section 15(f) of the 1934 Act and Section 204A of the Advisers Act. The order
(1) requires that Merrill Lynch cease and desist from committing or causing any future violations of the provisions charged, (2) censures Merrill Lynch, (3) imposed a civil money penalty in the amount of $7,000,000, and
(4) orders Merrill Lynch to comply with undertakings regarding the enhancement of certain policies and procedures. On March 11, 2009, without admitting or denying the SECs findings, Merrill Lynch consented to the entry of an
administrative SEC order finding violations of Section 15(f) of the 1934 Act and Section 204A of the Advisers Act for allegedly failing to maintain written policies and procedures reasonably designed to prevent the misuse of customer order
information. The order requires Merrill Lynch to comply with undertakings to implement (or to continue) and maintain policies and procedures to, among things: (1) inform employees that information concerning customer order information is
confidential, (2) address employee access to the equity squawk box, and (3) train employees who use squawk box related technology. In addition, Merrill Lynchs internal audit department shall conduct periodic reviews of these policies
and procedures and provide the SEC staff with a copy of the audit report.
Consulting Services Settlement
On January 30, 2009, Merrill Lynch, without admitting or denying any findings of misconduct by the SEC, consented to the entry of an
administrative order by the SEC that (1) found that Merrill Lynch violated Sections 204 and 206(2) of the Advisers Act, and Rule 204-2(a)(14) thereunder; (2) required that Merrill Lynch cease and desist from committing or causing
any violation or further violations of the provisions charged; (3) censured Merrill Lynch pursuant to Section 203(e) of the Advisers Act; and (4) required Merrill Lynch to pay a civil money penalty of $1 million. The order found
that Merrill Lynch, through its pension consulting services advisory program, breached its fiduciary duty to certain current and prospective pension fund clients by misrepresenting and omitting to disclose material information.
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Multi-State Auction Rate Securities Settlement
The Commonwealth of Massachusetts Office of the Secretary of the Commonwealth Securities Division (MSD) alleged that Merrill
Lynch violated the Massachusetts Uniform Securities Act, which, in part, prohibits unethical or dishonest conduct or practices in the securities business, concerning the sale of ARS to retail and other customers by Merrill Lynch. Without admitting
or denying the allegations, Merrill Lynch entered into a settlement with the MSD, in which it agreed to certain undertakings, including offering to buy back eligible ARS from eligible investors. Merrill Lynch agreed to pay the MSD a civil penalty of
$1,598,650.90, as part of a $125,000,000 fine that will be allocated at the Commonwealth of Massachusetts and other states discretion to resolve all underlying conduct relating to the sale of ARS.
Banc of America Investment Services, Inc./Banc of America Securities LLC Auction Rate Securities Settlement
As the result of the merger of Banc of America Investment Services, Inc. (BAI) with and into Merrill Lynch on October 23,
2009 and the merger of Banc of America Securities LLC (BAS) with and into Merrill Lynch on November 1, 2010, Merrill Lynch assumed the liabilities of BAI and BAS in the following matter: The SEC alleged that BAI and BAS (together,
the Firms), misled customers regarding the fundamental nature and increasing risks associated with ARS that the Firms underwrote, marketed, and sold. The SEC also alleged that, by engaging in such conduct, the Firms violated
Section 15(c) of the 1934 Act. The Firms neither admit nor deny these allegations. Among other undertakings, the Firms have, through their affiliate Blue Ridge Investments, L.L.C., offered to purchase at par from Individual
Investors (as defined in the Consent of Defendants Banc of America Securities LLC and Banc of America Investment Services, Inc.) certain ARS, and have substantially completed the purchase of those ARS. The Firms have also agreed to pay a total
civil penalty of $50,000,000 that will be distributed among the states and U.S. territories that enter into administrative or civil consent orders related to ARS.
Multi-State Client Associate Registration Settlement
The Texas State
Securities Board (the Board) alleged that in connection with the sale of securities in Texas by certain of Merrill Lynchs client associates who were not registered in Texas, Merrill Lynch failed to establish a supervisory system
reasonably designed to achieve compliance with the Texas Securities Act and Rules and Regulations of the Texas State Securities Board (the Board Rules) and failed to enforce its established written procedures in violation of
§§ 115.10(a) and (b)(1) of the Board Rules, respectively. Without admitting or denying the findings of fact or conclusions of law, Merrill Lynch entered into a Consent Order with the Board in which it agreed to a reprimand, to cease
and desist from engaging in the sale of securities in Texas through unregistered agents, and to comply with certain undertakings. Merrill Lynch agreed to pay the State of Texas $1,568,985.00, as part of a total payment, consisting of fines,
penalties and any other monetary sanctions, of $26,563,094.50 that will be allocated among the 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Merrill Lynch also agreed to pay $25,000.00 to the North American
Securities Administrators Association (NASAA) as consideration for financial assistance provided by NASAA in connection with the multi-state investigation.
Muni Derivatives Settlement
As the result of the merger of BAS with and
into Merrill Lynch on November 1, 2010, Merrill Lynch assumed the liabilities of BAS in the following matter: On December 7, 2010, the SEC issued an administrative and cease-and-desist order finding that BAS willfully violated
Section 15(c)(1)(A) of the 1934 Act when certain employees participated in improper bidding practices involving the temporary investment of proceeds of tax-exempt municipal securities in reinvestment products during the period 1998-2002. The
order censured BAS, ordered BAS to cease and desist from committing or causing such violations and future violations, and ordered BAS to pay disgorgement plus prejudgment interest in the amount of $36,096,442.00. BAS consented to the order without
admitting or denying the SECs findings.
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Prop Trading Settlement
Pursuant to an offer of settlement made by Merrill Lynch, the SEC issued on January 25, 2011 an order finding that between February
2003 and February 2005 Merrill Lynch market makers executing institutional customer orders for securities sometimes shared information concerning those trades with traders on a Merrill Lynch securities proprietary trading desk. The order found that,
at times, Merrill Lynchs securities proprietary traders used that information to place trades for Merrill Lynch after execution of the institutional customer order. The order found that this disclosure and use of institutional customer order
information by Merrill Lynchs traders was improper and contrary to Merrill Lynchs confidentiality representations to its customers. The order also found instances between 2002 and 2007 when Merrill Lynch charged institutional and high
net worth customers undisclosed mark-ups and mark-downs on riskless securities principal trades for which Merrill Lynch had agreed to charge the customer only a commission equivalent fee. The order found that, in doing so, Merrill Lynch acted
improperly and contrary to its agreements with its customers. The order also found that from 2002 through 2007 Merrill Lynch failed in many instances to make records of its agreements with institutional customers to guarantee an execution price,
which agreements were part of the terms and conditions of the institutional customer orders. The order found that, as a result of its conduct, Merrill Lynch willfully violated Section 15(c)(1)(A) of the 1934 Act by effecting transactions in
securities by means of manipulative, deceptive or other fraudulent devices or contrivances, and willfully violated Section 15(g) of the 1934 Act by failing to establish, maintain, and enforce written policies and procedures reasonably designed
to prevent the misuse of material, nonpublic information. The order also found that under Section 15(b)(4)(E) of the 1934 Act, Merrill Lynch failed reasonably to supervise its traders with a view towards preventing them from violating the
federal securities laws. The order also found that Merrill Lynch willfully violated Section 17(a) of the 1934 Act and Rule 17a-3(a)(6) thereunder by failing to record certain terms and conditions of customer orders. Merrill Lynch neither
admitted nor denied the findings in the order. The findings in the order are not binding on any person or entity other than Merrill Lynch. On December 17, 2010, Merrill Lynch submitted an offer of settlement to the SEC. In the offer of
settlement, Merrill Lynch agreed to consent to the entry of the order, without admitting or denying the findings contained therein (other than those relating to jurisdiction). The order was issued on January 25, 2011. The order
(1) required that Merrill Lynch cease and desist from committing or causing any violations and any future violations of Sections 15(c)(1)(A), 15(g) and 17(a) of the 1934 Act and Rule 17a-3(a)(6) thereunder; (2) censured Merrill
Lynch pursuant to Section 15(b)(4) of the 1934 Act; and (3) required pursuant to Section 15(b)(4) and Section 21B of the 1934 Act that Merrill Lynch pay a civil money penalty in the amount of $10 million. The penalty was
paid on February 1, 2011.
RBC Capital Markets LLC (RBC)
RBC is a large broker-dealer subject to many different complex legal and regulatory requirements. As a result, certain of RBCs
regulators may from time to time conduct investigations, initiate enforcement proceedings and/or enter into settlements with RBC with respect to issues raised in various investigations. RBC complies fully with its regulators in all investigations
being conducted and in all settlements it reaches. In addition, RBC is and has been subject to a variety of civil legal claims in various jurisdictions, a variety of settlement agreements and a variety of orders, awards and judgments made against it
by courts and tribunals, both in regard to such claims and investigations. RBC complies fully with all settlements it reaches and all orders, awards and judgments made against it.
RBC has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation including those
described below, arising in connection with its activities as a broker-dealer. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. RBC
is also involved, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding RBCs business, including among other matters, accounting and operational matters, certain of
which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.
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RBC contests liability and/or the amount of damages as appropriate in each pending matter.
In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, RBC cannot predict the
loss or range of loss, if any, related to such matters; how or if such matters will be resolved; when they will ultimately be resolved; or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, RBC
believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of RBC.
On June 12, 2012, the State of Illinois Secretary of State Securities Department consented to entry of a judgment enjoining the firm
for violation of the Illinois Securities Law of 1953. RBC undertook to repurchase auction rate securities from certain customers before June 30, 2009. RBC also undertook to use best efforts to provide, by December 31, 2009, liquidity
opportunities for customers ineligible for the buyback. RBC undertook to provide periodic reports to regulator. RBC paid a penalty of $1,400,139.82.
On May 10, 2012, FINRA commenced and settled an administrative proceeding against RBC for violations of FINRA Rules 1122 and 2010 and NASD Rules 2110 and 3010 for failing to establish, maintain and
enforce written supervisory procedures reasonably designed to achieve compliance with applicable rules concerning short-term transactions in closed end funds. RBC paid a fine of $200,000.
On May 2, 2012, the Massachusetts Securities Division entered a consent order settling an administrative complaint against RBC,
which alleged that RBC recommended unsuitable products to its brokerage and advisory clients and failed to supervise its registered representatives sales of inverse and leveraged ETFs in violation of Section 204(a)(2) of the Massachusetts
Uniform Securities Act (MUSA). Without admitting or denying the allegations of fact, RBC consented to permanently cease and desist from violations of MUSA, pay restitution of $2.9 million to the investors who purchased the inverse and
leveraged ETFs and pay a civil monetary penalty of $250,000.
As of April 17, 2012, RBC has been involved in the
following recent actions with the SEC. On February 24, 2009, the SEC commenced and settled an administrative proceeding against RBC for willful violations of Section 15B(c)(1) of the 1934 Act and Municipal Securities Rulemaking Board Rules
G-17, G-20 and G-27, related to municipal expenses in connection with ratings agency trips. The firm was censured and paid a civil monetary penalty of $125,000.
On June 9, 2009, the SEC commenced and settled a civil action against RBC for willful violations of Section 15(c) of the 1934 Act, in connection with auction rate securities (ARS). The firm
agreed to repurchase ARS owned by certain retail customers and to use best efforts to provide ineligible customers opportunities to liquidate ARS, and other ancillary relief.
On September 27, 2011, the SEC commenced and settled an administrative proceeding against RBC for willful violations of Sections 17(a)(2) and 17(a)(3) of the 1933 Act for negligently selling the
collateralized debt obligations to five Wisconsin school districts despite concerns about the suitability of the product. The firm agreed to pay disgorgement of $6.6 million, prejudgment interest of $1.8 million, and a civil monetary penalty of $22
million.
Please see RBCs Form BD for more details.
Margin Levels Expected to be Held at the FCMs
The following is
based on how the Funds have been managed as of the date of this Prospectus. While the portfolio composition may vary over time, it is not expected that the Ultra Funds or UltraShort Funds will ever have futures exposure greater than two times
(2x) the Funds assets. Thus the maximum margin held at an FCM would not exceed twice the margin requirement for the Ultra Funds or UltraShort Funds. The margin levels
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described below are based upon current exchange requirements for non-hedger accounts. It is possible that the Funds FCMs will require margins greater than the levels set by the relevant
exchange and it is also possible that the Funds may qualify for the lower margin levels available to hedge accounts. However, because there is no certainty as to these probabilities, the estimates are made with the assumption that the applicable
margin levels for the Funds are the current exchange margin levels for non-hedger accounts. The expected amount is listed first and the maximum amount is listed second. These amounts are based on current margin requirements and current futures
levels. They will fluctuate with changes to either factor.
As of June 21, 2013, ProShares Ultra DJ-UBS Crude Oil and
ProShares UltraShort DJ-UBS Crude Oil each had futures contracts with notional amounts equal to approximately 70.5% and 84.6% of Fund assets, respectively. The minimum margin requirement as a percentage of futures notional was approximately 4.5%.
Thus, the minimum margin held at FCMs was approximately 3.2% and 3.8% of Fund assets for each of ProShares Ultra DJ-UBS Crude Oil and ProShares UltraShort DJ-UBS Crude Oil.
As of June 21, 2013, ProShares Ultra Gold and ProShares UltraShort Gold had futures contracts with notional amounts equal to approximately 0.2% and 0.2% of Fund assets, respectively. The minimum
margin requirement as a percentage of futures notional was approximately 6.79%. Thus, the minimum margin held at FCMs was approximately 0% of Fund assets for each of ProShares Ultra Gold and ProShares UltraShort Gold.
As of June 21, 2013, ProShares Ultra Silver and ProShares UltraShort Silver each had futures contracts with notional amounts equal
to approximately 0% and 0.2% of Fund assets, respectively. The minimum margin requirement as a percentage of futures notional was approximately 12.5%. Thus, the minimum margin held at FCMs was approximately 0% of Fund assets for each of ProShares
Ultra Silver and ProShares UltraShort Silver.
As of May 31, 2013, ProShares UltraShort Euro did not hold futures
contracts. ProShares UltraShort Euro may hold futures contracts in the future.
As of May 31, 2013, ProShares UltraShort
Yen did not hold futures contracts. ProShares UltraShort Yen may hold futures contracts in the future.
The Funds receive the
income on any securities or other property of the Funds transferred to the FCMs to fulfill requirements for margin to be held by the FCMs in respect of commodity interests, and receive a negotiated portion of any income derived by the FCMs in
respect of any cash transferred to the FCMs and held for this purpose.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material U.S. federal (and certain state and local) income tax considerations associated with the
purchase, ownership and disposition of Shares as of the date hereof by U.S. Shareholders (as defined below) and non-U.S. Shareholders (as defined below). Except where noted, this discussion deals only with Shares held as capital assets by
shareholders who acquired Shares by purchase and does not address special situations, such as those of:
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dealers in securities or commodities;
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financial institutions;
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regulated investment companies;
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real estate investment trusts;
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partnerships and persons in their capacity as partners;
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tax-exempt organizations;
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persons holding Shares as a part of a hedging, integrated or conversion transaction or a straddle;
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traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; or
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persons liable for alternative minimum tax.
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Furthermore, the discussion below is based upon the provisions of the Code, the Regulations, and administrative and judicial interpretations thereof, all as of the date hereof, and such authorities may be
repealed, revoked, modified or subject to differing interpretations, possibly on a retroactive basis, so as to result in U.S. federal income tax consequences different from those described below.
A U.S. Shareholder of Shares means a beneficial owner of Shares that is for U.S. federal income tax purposes:
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an individual that is a citizen or resident of the United States;
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a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States, any state thereof or the
District of Columbia;
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an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to
control all substantial decisions of such trust or (2) has a valid election in effect under applicable Regulations to be treated as a U.S. person.
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A non-U.S. Shareholder of Shares means a beneficial owner of Shares that is for U.S. federal income tax purposes:
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an individual that is a nonresident alien;
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If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Shares, the tax treatment of a partner will generally depend upon the status of the
partner and the activities of the partnership. If an investor is a partner of a partnership holding Shares, the Trust urges such investor to consult its own tax adviser.
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No statutory, administrative or judicial authority directly addresses the treatment of
Shares or instruments similar to Shares for U.S. federal income tax purposes. As a result, the Trust cannot assure investors that the IRS or the courts will agree with the tax consequences described herein. A different treatment from that described
below could adversely affect the amount, timing and character of income, gain or loss in respect of an investment in the Shares.
If an investor is considering the purchase of Shares, the Trust urges investors to consult their own tax adviser
concerning the particular U.S. federal income tax consequences to investors of the purchase, ownership and disposition of Shares, as well as any consequences to investors arising under the laws of any other taxing jurisdiction
.
Status of the Funds
Under Section 7704 of the Code, unless certain exceptions apply, a publicly traded partnership is generally treated and taxed as a
corporation, and not as a partnership, for U.S. federal income tax purposes. A partnership is a publicly traded partnership if (1) interests in the partnership are traded on an established securities market or (2) interests in the
partnership are readily tradable on a secondary market or the substantial equivalent thereof. It is expected that initially or in the future each Fund may be treated as a publicly traded partnership. If 90% or more of the income of a publicly traded
partnership during each taxable year consists of qualifying income and the partnership is not required to register under the Investment Company Act, it will be treated as a partnership, and not as an association or publicly traded
partnership taxable as a corporation, for U.S. federal income tax purposes (the qualifying income exception). Qualifying income includes dividends, interest, capital gains from the sale or other disposition of stocks and debt instruments
and, in the case of a partnership a principal activity of which is the buying and selling of commodities or certain positions with respect to commodities, income and gains derived from certain swap agreements or regulated futures or forward
contracts with respect to commodities. Each Fund anticipates that at least 90% of its gross income for each taxable year will constitute qualifying income within the meaning of Section 7704(d) of the Code.
Sidley Austin LLP has acted as counsel to the Trust in connection with this offering. Under current law and assuming full compliance with
the terms of the Trust Agreement (and other relevant documents) and based on factual representations made by each Fund, in the opinion of Sidley Austin LLP, each Fund will be classified as a partnership for U.S. federal income tax purposes. The
factual representations upon which Sidley Austin LLP has relied are: (1) the Funds have not elected and will not elect to be treated as a corporation for U.S. federal income tax purposes; and (2) for each taxable year, 90% or more of a
Funds gross income will be qualifying income. Shareholders should be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinion. Each
Funds sponsor will use its best efforts to cause the operation of a Fund in such manner as is necessary for a Fund to continue to meet the qualifying income exception.
While it is expected that each Fund will operate so that it will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership
taxable as a corporation, given the highly complex nature of the rules governing partnerships, the ongoing importance of factual determinations, the lack of direct guidance with respect to the application of tax laws to the activities the Funds are
undertaking and the possibility of future changes in its circumstances, it is possible that a Fund will not so qualify for any particular year. Sidley Austin LLP has no obligation to advise a Fund or its shareholders of any subsequent change in the
matters stated, represented or assumed, or of any subsequent change in the applicable law. A Funds taxation as a partnership will depend on such Funds ability to meet, on a continuing basis, through actual operating results, the
qualifying income exception, the compliance of which will not be reviewed by Sidley Austin LLP. Accordingly, no assurance can be given that the actual results of a Funds operations for any taxable year will satisfy the qualifying income
exception.
If, for any reason a Fund becomes taxable as a corporation for U.S. federal income tax purposes, such Funds
items of income and deduction would not pass through to the Funds shareholders and shareholders would be treated for U.S. federal income tax purposes as stockholders in a corporation. The Fund would be required to pay income tax at corporate
rates on its net income. Distributions by the Fund to the shareholders
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would constitute dividend income taxable to such shareholders, to the extent of the Funds earnings and profits, and the payment of these distributions would not be deductible by the Fund.
These consequences would have a material adverse effect on the Fund, the Funds shareholders and the value of the Shares.
If at the end of any taxable year a Fund fails to meet the qualifying income exception, the Fund may still qualify as a partnership if
the Fund is entitled to relief under the Code for an inadvertent termination of partnership status. This relief will be available if (1) the failure is cured within a reasonable time after discovery, (2) the failure is determined by the
IRS to be inadvertent, and (3) the Fund agrees to make such adjustments or to pay such amounts as are determined by the IRS. It is not possible to state whether a Fund would be entitled to this relief in any or all circumstances. It also is not
clear under the Code whether this relief is available for the Funds first taxable year as a publicly traded partnership. If this relief provision is not applicable to a particular set of circumstances involving a Fund, it will not qualify as a
partnership for U.S. federal income tax purposes. Even if this relief provision applies and a Fund retains its partnership qualification, the Fund or its shareholders (during the failure period) will be required to pay such amounts as determined by
the IRS.
The remainder of this discussion assumes that each Fund will qualify to be taxed as a partnership for U.S. federal
income tax purposes.
U.S. Shareholders
Treatment of Fund Income
A partnership does not incur U.S. federal
income tax liability. Instead, each partner of a partnership is required to take into account its share of items of income, gain, loss, deduction and other items of the partnership. Accordingly, each shareholder in a Fund is required to include in
income its allocable share of a Funds income, gain, loss, deduction and other items for a Funds taxable year ending with or within its taxable year. In computing a partners U.S. federal income tax liability, such items must be
included, regardless of whether cash distributions are made by the partnership. Thus, shareholders in a Fund may be required to take into account taxable income without a corresponding current receipt of cash if a Fund generates taxable income but
does not make cash distributions in an amount equal to, or if the shareholder is not able to deduct, in whole or in part, such shareholders allocable share of a Funds expenses or capital losses. Each Funds taxable year ends on
December 31 unless otherwise required by law. Each Fund uses the accrual method of accounting.
Shareholders must take
into account their share of ordinary income realized by the respective Funds investments, including from accruals of interest on the U.S. Treasury securities or other cash and cash equivalents held in a Funds portfolio. Each Fund may
hold U.S. Treasury securities or other debt instruments with acquisition discount or original issue discount, in which case shareholders in such Fund are required to include accrued amounts in taxable income on a current
basis even though receipt of those amounts may occur in a subsequent year. Each Fund may also acquire U.S. Treasury securities with market discount. Upon disposition of such obligations, gain would generally be required to be treated as
interest income to the extent of the market discount, and shareholders in such Fund would be required to include as ordinary income their share of such market discount that accrued during the period the obligations were held by such Fund. Income or
loss from transactions involving certain derivative instruments, such as periodic and certain non-periodic payments in swap transactions, will also generally constitute ordinary income or loss and may result in recognition of taxable income to a
U.S. Shareholder on a current basis even though receipt of those amounts may occur in a subsequent year.
The character and
timing of income that a Fund earns from the positions in its investment strategy depends on the particular U.S. federal income tax treatment of each such position. The U.S. federal income tax treatment of certain positions is not always clear, and
the IRS and Congress sometimes take steps which change the manner in which certain positions are taxed. For example, the IRS has issued guidance indicating that a position that certain taxpayers were previously accounting for as prepaid forward
contracts for U.S. federal income tax purposes should, instead, be accounted for under the U.S. federal income tax rules for non-dollar denominated
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debt instruments. The IRS has also released a Notice seeking comments from practitioners about the application of U.S. federal income tax rules to certain derivative positions, including
derivative positions in commodities. The Notice asks for comments about, among other questions, when investors in these positions should have income, the character of income and gain or loss from these positions and whether the U.S. federal
constructive ownership rules should apply to these positions. It is not possible to predict what changes, if any, will be adopted or when any such changes would take effect. However, any such changes could affect the amount, timing and
character of income, gain and loss in respect of a Funds investments, possibly with retroactive effect. As the Funds pass-through their items of income, gain and loss to Shareholders, any change in the manner in which a Fund accounts for these
items could have an adverse impact on the shareholders of that Fund.
The Code generally applies a mark-to-market
system of taxing unrealized gains and losses on, and otherwise provides for special rules of taxation with respect to, Section 1256 Contracts. A Section 1256 Contract includes certain regulated futures contracts, certain non-equity options
and certain non-U.S. currency forward contracts. The Sponsor expects substantially all of its futures contracts and foreign currency futures contracts to qualify as Section 1256 Contracts. Swap agreements and non-currency forward contracts are
generally not Section 1256 Contracts. Section 1256 Contracts held by the Funds at the end of a taxable year of the Funds will be treated for U.S. federal income tax purposes as if they were sold by the Funds at their fair market value on
the last business day of the taxable year. The net gain or loss, if any, resulting from these deemed sales (known as marking-to-market), together with any gain or loss resulting from any actual sales of Section 1256 Contracts (or
other termination of a Funds obligations under such contracts), must be taken into account by a Fund in computing its taxable income for the year. If a Section 1256 Contract held by a Fund at the end of a taxable year is sold in the
following year, the amount of any gain or loss realized on the sale will be adjusted to reflect the gain or loss previously taken into account under the mark-to-market rules.
Capital gains and losses from Section 1256 Contracts generally are characterized as short-term capital gains or losses to the extent of 40% of the gains or losses and as long-term capital gains or
losses to the extent of 60% of the gains or losses. Shareholders of a Fund will generally take into account their
pro rata
share of the long-term capital gains and losses and short-term capital gains and losses from Section 1256
Contracts held by a Fund. If a noncorporate taxpayer incurs a net capital loss for a year, the portion of the loss, if any, which consists of a net loss on Section 1256 Contracts may, at the election of the taxpayer, be carried back three
years. A loss carried back to a year by a noncorporate taxpayer may be deducted only to the extent (1) the loss does not exceed the net gain on Section 1256 Contracts for the year and (2) the allowance of the carryback does not
increase or produce a net operating loss for the year. Due to the Funds investment strategy, it is also likely that a significant portion of any capital gain or loss realized by the Funds with respect to non-Section 1256 Contracts will be
short-term.
Allocation of the Funds Profits and Losses
For U.S. federal income tax purposes, a shareholders distributive share of a Funds income, gain, loss, deduction and other
items are determined by the Trust Agreement, unless an allocation under the agreement does not have substantial economic effect, in which case the allocations will be determined in accordance with the partners interests in
the partnership. Subject to the discussions below under Monthly Allocation and Revaluation Conventions and Section 754 Election, the allocations pursuant to the Trust Agreement should be considered to have
substantial economic effect or deemed to be made in accordance with the partners interests in the partnership.
If the
allocations provided by the Trust Agreement were successfully challenged by the IRS, the amount of income or loss allocated to shareholders for U.S. federal income tax purposes under the agreement could be increased or reduced, or the character of
the income or loss could be modified.
As described in more detail below, the U.S. tax rules that apply to partnerships are
complex and their application is not always clear. Additionally, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded partnerships. Each Fund will apply certain assumptions and conventions
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intended to comply with the intent of the rules and to report income, gain, deduction, loss and credit to shareholders in a manner that reflects the economic gains and losses, but these
assumptions and conventions may not comply with all aspects of the applicable Regulations. It is possible, therefore, that the IRS will successfully assert that assumptions made and/or conventions used do not satisfy the technical requirements of
the Code or the Regulations and will require that tax items be adjusted or reallocated in a manner that could adversely impact an investor.
Monthly Allocation and Revaluation Conventions
In general, each Funds taxable income and losses are determined monthly and are apportioned among the shareholders of a Fund in proportion to the number of Shares treated as owned by each of them as
of the close of the last trading day of the preceding month;
provided
,
however
, such items for the period beginning on the closing date and ending on the last day of the month in which the option closing date or the expiration of the
over-allotment option occurs shall be allocated to the shareholders as of the opening of the NYSE Arca on the first business day of the next succeeding month. By investing in Shares, a U.S. Shareholder agrees that, in the absence of an
administrative determination or judicial ruling to the contrary, it will report income and loss under the monthly allocation and revaluation conventions described below, except for the period beginning on the closing date and ending on the last day
of the month in which the option closing date or the expiration of the over-allotment option occurs, in which case the allocation shall take place as described above.
Under the monthly allocation convention, whoever is treated for U.S. federal income tax purposes as holding Shares as of the close of the last trading day of the preceding month will be treated as
continuing to hold the Shares until immediately before the close of the last trading day of the following month. For the initial month during which a Fund becomes operational, the shareholders at the close of trading at month-end will also receive
that months allocation. As a result, a holder who has disposed of Shares prior to the close of the last trading day of a month may be allocated income, gain, loss and deduction realized after the date of transfer.
The Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of
partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to a Funds monthly convention for allocating income
and deductions. If this were to occur, a Funds allocation method might be deemed to violate that requirement.
In
addition, for any month in which a creation or redemption of Shares takes place, a Fund generally credits or debits, respectively, the book capital accounts of the holders of existing Shares with any unrealized gain or loss in that
Funds assets. This results in the allocation of items of a Funds income, gain, loss, deduction and credit to existing holders of Shares to account for the difference between the tax basis and fair market value of property owned by such
Fund at the time new Shares are issued or old Shares are redeemed, or the reverse section 704(c) allocations. The intended effect of these allocations is to allocate any built-in gain or loss in a Funds assets at the time of a creation or
redemption of Shares to the investors that economically have earned such gain or loss.
As with the other allocations
described above, each Fund generally will use a monthly convention for purposes of the reverse section 704(c) allocations. More specifically, each Fund generally credits or debits, respectively, the book capital accounts of the
holders of existing Shares with any unrealized gain or loss in a Funds assets based on a calculation utilizing the creation/redemption price of a Funds Shares during the month in which the creation or redemption transaction takes place,
rather than the fair market value of its assets at the time of such creation or redemption, or the revaluation convention. As a result, it is possible that, for U.S. federal income tax purposes, (1) a purchaser of newly issued
Shares will be allocated some or all of the unrealized gain in a Funds assets at the time it acquires the Shares or (2) a purchase of newly issued Shares will not be allocated its entire share in the loss in a Funds assets accruing
after the time of such acquisition. Furthermore, the applicable Regulations generally require that the book capital accounts will be adjusted based on the fair market value of partnership property on the date of adjustment and do not
explicitly allow the
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adoption of a monthly revaluation convention. The Sponsor, in an attempt to eliminate book-tax disparities, allocates items of income, gain, or loss for U.S. federal income tax purposes among the
Members under the principles of the remedial method of Section 1.704-3(d) of the Regulations.
The Code and applicable
Regulations generally require that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis, and that adjustments to book capital accounts be made based on the
fair market value of partnership property on the date of adjustment. The Code and Regulations do not contemplate monthly allocation or revaluation conventions.
If the IRS does not accept a Funds monthly allocation or revaluation convention, the IRS may contend that taxable income or losses of the Funds must be reallocated among the shareholders. If such a
contention were sustained, the holders respective tax liabilities would be adjusted to the possible detriment of certain holders. The Sponsor is authorized to revise the Funds allocation and revaluation methods in order to comply with
applicable law or to allocate items of partnership income and deductions in a manner that reflects more accurately the shareholders interests in the Funds.
Section 754 Election
Each Fund has made or intends to make the
election permitted by Section 754 of the Code. Such an election, once made, is irrevocable without the consent of the IRS. The making of such election by a Fund generally has the effect of requiring a purchaser of Shares in that Fund to adjust,
utilizing the lowest closing price during the month, its proportionate share of the basis in that Funds assets, or the inside basis, pursuant to Section 743(b) of the Code to fair market value (as reflected in the purchase price for the
purchasers Shares), as if it had acquired a direct interest in that Funds assets. The Section 743(b) adjustment is attributed solely to a purchaser of Shares and is not added to the basis of a Funds assets associated with all
of the other shareholders. Depending on the relationship between a holders purchase price for Shares and its unadjusted share of a Funds inside basis at the time of the purchase, the Section 754 election may be either advantageous
or disadvantageous to the holder as compared to the amount of gain or loss a holder would be allocated absent the Section 754 election.
The calculations under Section 754 of the Code are complex, and there is little legal authority concerning the mechanics of the calculations, particularly in the context of publicly traded
partnerships. Therefore, in making the election under Section 754 of the Code, a Fund applies certain conventions in determining and allocating the Section 743 basis adjustments to help reduce the complexity of those calculations and the
resulting administrative costs to a Fund. It is possible that the IRS will successfully assert that some or all of such conventions utilized by a Fund do not satisfy the technical requirements of the Code or the Regulations and, thus, will require
different basis adjustments to be made.
In order to make the basis adjustments permitted by Section 754, each Fund is
required to obtain information regarding each holders secondary market transactions in Shares, as well as creations and redemptions of Shares. Each Fund seeks such information from the record holders of Shares, and, by purchasing Shares, each
beneficial owner of Shares will be deemed to have consented to the provision of such information by the record owner of such beneficial owners Shares. Notwithstanding the foregoing, however, there can be no guarantee that a Fund will be able
to obtain such information from record owners or other sources, or that the basis adjustments that a Fund makes based on the information it is able to obtain will be effective in eliminating disparity between a holders outside basis in its
share of the Fund interests and its share of inside basis.
Constructive Termination
A Fund will be considered to have terminated for tax purposes if there is a sale or exchange of 50% or more of the total Shares in that
Fund within a 12-month period. A constructive termination results in the closing of a Funds taxable year for all holders of Shares in that Fund. In the case of a holder of Shares reporting on a taxable year other than the taxable year used by
a Fund (which is a fiscal year ending December 31), the early closing of a Funds taxable year may result in more than 12 months of its taxable income or loss being includable in such
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holders taxable income for the year of termination. A Fund would be required to make new tax elections after a termination, including a new election under Section 754. A termination
could also result in penalties if a Fund were unable to determine that the termination had occurred.
Treatment of Distributions
Distributions of cash by a partnership are generally not taxable to the distributee to the extent the amount of cash
does not exceed the distributees tax basis in its partnership interest. Thus, any cash distributions made by a Fund will be taxable to a shareholder only to the extent such distributions exceed the shareholders tax basis in the
partnership interests it is treated as owning. (See U.S. ShareholdersTax Basis in Shares below.) Any cash distributions in excess of a shareholders tax basis generally will be considered to be gain from the sale or
exchange of the Shares. See U.S. ShareholdersDisposition of Shares below. The Funds do not currently expect to make any cash distributions.
Creation and Redemption of Creation Units
Shareholders, other than
Authorized Participants (or holders for which an Authorized Participant is acting), generally will not recognize gain or loss as a result of an Authorized Participants creation or redemption of a Creation Unit. If a Fund disposes of assets in
connection with the redemption of a Creation Unit, however, the disposition may give rise to gain or loss that will be allocated in part to investors. An Authorized Participants creation or redemption of a Creation Unit may also affect an
investors share of a Funds tax basis in its assets, which could affect the amount of gain or loss allocated to an investor on the sale or disposition of portfolio assets by a Fund.
Disposition of Shares
If a U.S. Shareholder transfers Shares of a Fund, in a sale or other taxable disposition, the U.S. Shareholder will generally be required to recognize gain or loss measured by the difference between the
amount realized on the sale and the U.S. Shareholders adjusted tax basis in the Shares. The amount realized will include the U.S. Shareholders share of a Funds liabilities, as well as any proceeds from the sale. The gain or loss
recognized will generally be taxable as capital gain or loss.
Capital gain of non-corporate U.S. Shareholders is eligible to
be taxed at reduced rates when the Shares are held for more than one year. The maximum rate is currently 20%. Capital gain of corporate U.S. Shareholders is taxed at the same rate as ordinary income. Any capital loss recognized by a U.S. Shareholder
on a sale of Shares will generally be deductible only against capital gains, except that a non-corporate U.S. Shareholder may generally also offset up to $3,000 per year of ordinary income.
Medicare Tax on Investment Income
Certain U.S. shareholders that
are individuals, estates or trusts must pay an additional 3.8% tax on their net investment income. U.S. Shareholders should consult their own tax advisors regarding the effect, if any, of this tax on their investment in the Funds.
Tax Basis in Shares
A U.S. Shareholders initial tax basis in the partnership interests it is treated as holding will equal the sum of (1) the amount of cash paid by such U.S. Shareholder for its Shares and
(2) such U.S. Shareholders share of a Funds liabilities. A U.S. Shareholders tax basis in the Shares will be increased by (1) the U.S. Shareholders share of a Funds taxable income, including capital gain,
(2) the U.S. Shareholders share of a Funds income, if any, that is exempt from tax and (3) any increase in the U.S. Shareholders share of a Funds liabilities. A U.S. Shareholders tax basis in Shares will be
decreased (but not below zero) by (1) the amount of any cash distributed (or deemed distributed) to the U.S. Shareholder, (2) the U.S. Shareholders share of a Funds losses and
- 82 -
deductions, (3) the U.S. Shareholders share of a Funds expenditures that is neither deductible nor properly chargeable to its capital account and (4) any decrease in the
U.S. Shareholders share of a Funds liabilities.
Limitations on Deductibility of Certain Losses and Expenses
The deductibility for U.S. federal income tax purposes of a U.S. Shareholders share of losses and expenses of a
Fund is subject to certain limitations, including, but not limited to, rules providing that: (1) a U.S. Shareholder may not deduct a Funds losses that are allocated to it in excess of its adjusted tax basis in its Shares;
(2) individuals and personal holding companies may not deduct the losses allocable to a particular activity in excess of the amount that they are considered to have at risk with respect to the activity; (3) the
ability of individuals to take certain itemized deductions may be limited by the alternative minimum tax; and (4) a noncorporate U.S. Shareholder may deduct its share of expenses of a Fund only to the extent that such share,
together with such noncorporate U.S. Shareholders other miscellaneous itemized deductions, exceeds 2% of such noncorporate U.S. Shareholders adjusted gross income. In addition, in the case of individuals whose U.S. federal adjusted gross
income exceeds a certain inflation-adjusted threshold, the aggregate itemized deductions allowable for the year will be reduced by the lesser of (i) 3% of the excess of U.S. federal adjusted gross income over the applicable threshold; or
(ii) 80% of the aggregate itemized deductions otherwise allowable for the taxable year (determined after giving effect to the 2% limitation described above and any other applicable limitations). It is anticipated that Management Fees that each
Fund will pay will constitute miscellaneous itemized deductions. To the extent that a loss or expense that cannot be deducted currently is allocated to a U.S. Shareholder, such U.S. Shareholder may be required to report taxable income in excess of
its economic income or cash distributions on the Shares. Prospective shareholders are urged to consult their own tax advisors with regard to these and other limitations on the ability to deduct losses or expenses with respect to an investment in a
Fund.
Under Section 709(b) of the Code, amounts paid or incurred to organize a partnership may, at the election of the
partnership, be treated as deferred expenses, which are allowed as a deduction ratably over a period of not less than 180 months. Each Fund has elected, or is expected to elect, to treat such expenses as ratably deductable over 180 months,
beginning with the month the Fund is considered to have started its investment activities for federal tax purposes. A non-corporate U.S. Shareholders allocable share of such organizational expenses would constitute miscellaneous itemized
deductions. Expenditures in connection with the issuance and marketing of Shares (so-called syndication fees) are not eligible for the 180-month amortization provision and are not deductible.
Transferor/Transferee Allocations
In general, a Funds taxable income and losses are determined monthly and are apportioned among a Funds shareholders in proportion to the number of Shares owned by each of them as of the close
of the last trading day of the preceding month;
provided
,
however
, such items for the period beginning on the closing date and ending on the last day of the month in which the option closing date or the expiration of the over-allotment
option occurs shall be allocated to the shareholders as of the opening of the NYSE Arca on the first business day of the next succeeding month. With respect to any Share that was not treated as outstanding as of the close of the last trading day of
the preceding month, the first person that is treated as holding such Share (other than an underwriter or other person holding in a similar capacity and except with respect to the period beginning on the closing date and ending on the last day of
the month in which the option closing date or the expiration of the over-allotment option occurs) for U.S. federal income tax purposes will be treated as holding such Share for this purpose as of the close of the last trading day of the preceding
month. As a result, a shareholder transferring its Shares may be allocated income, gain, loss and deduction realized after the date of transfer.
Section 706 of the Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis. It is possible
that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to a Funds convention for allocating income and deductions. In that event, a Funds allocation method
might be considered a monthly convention that does not literally comply with that requirement.
- 83 -
If the IRS treats transfers of Shares as occurring throughout each month and a monthly
convention is not allowed by the Regulations (or only applies to transfers of less than all of a shareholders Shares), or if the IRS otherwise does not accept a Funds convention, the IRS may contend that taxable income or losses of a
Fund must be reallocated among the shareholders. If such a contention were sustained, the shareholders respective tax liabilities would be adjusted to the possible detriment of certain shareholders. Each Funds Sponsor is authorized to
revise a Funds methods of allocation between transferors and transferees (as well as among shareholders whose interests otherwise vary during a taxable period).
Tax Reporting by each Fund
Information returns will be filed with
the IRS as required with respect to income, gain, loss, deduction and other items derived from Shares of each Fund. Each Fund will file a partnership return with the IRS and a Schedule K-1 to the shareholders.
Treatment of Securities Lending Transactions Involving Shares
A shareholder whose Shares are loaned to a short seller to cover a short sale of Shares may be considered as having disposed of those Shares. If so, such shareholder would no longer be a
beneficial owner of a
pro rata
portion of the partnership interests with respect to those Shares during the period of the loan and may recognize gain or loss from the disposition. As a result, during the period of the loan, (1) any of
the relevant Funds income, gain, loss, deduction or other items with respect to those Shares would not be reported by the shareholder, and (2) any cash distributions received by the shareholder as to those Shares could be fully taxable,
likely as ordinary income. Accordingly, shareholders who desire to avoid the risk of income recognition from a loan of their Shares to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from
borrowing their Shares.
Audits and Adjustments to Tax Liability
Under the Code, adjustments in tax liability with respect to a Funds items generally will be made at the Fund level in a partnership
proceeding rather than in separate proceedings with each shareholder. Pursuant to the Trust Agreement, the Sponsor will represent each Fund as such Funds Tax Matters Partner during any audit and in any dispute with the IRS. Each
shareholder will be informed of the commencement of an audit of a Fund. In general, the Tax Matters Partner may enter into a settlement agreement with the IRS on behalf of, and that is binding upon, the shareholders.
Adjustments resulting from an IRS audit may require each shareholder to adjust a prior years liability, and possibly may result in
an audit of its return. Any audit of a shareholders return could result in adjustments not related to a Funds returns as well as those related to the Funds returns.
The Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against shareholders for items in a
Funds returns. The Tax Matters Partner may bind a shareholder with less than a 1% profits interest in a Fund to a settlement with the IRS unless that shareholder elects, by filing a statement with the IRS, not to give that authority to the Tax
Matters Partner. The Tax Matters Partner may seek judicial review, by which all the shareholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought
by any shareholder having at least a 1% interest in profits or by any group of shareholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward, and each shareholder with an
interest in the outcome may participate.
Foreign Tax Credits
Subject to generally applicable limitations, U.S. Shareholders will be able to claim foreign tax credits with respect to certain foreign
income taxes paid or incurred by a Fund, withheld on payments made to the Trust or paid by the Trust on behalf of Fund shareholders (if any of such foreign income taxes are so paid, incurred or
- 84 -
withheld). U.S. Shareholders must include in their gross income, for U.S. federal income tax purposes, both their share of a Funds items of income and gain and also their share of the
amount which is deemed to be the shareholders portion of foreign income taxes paid with respect to, or withheld from interest or other income derived by, a Fund. U.S. Shareholders may then subtract from their U.S. federal income tax the amount
of such taxes withheld, or else treat such foreign taxes as deductions from gross income; however, as in the case of investors receiving income directly from foreign sources, the tax credit or deduction described above is subject to certain
limitations. Even if the shareholder is unable to claim a credit, he or she must include all amounts described above in income. U.S. Shareholders are urged to consult their tax advisers regarding this election and its consequences to them.
Tax Shelter Disclosure Rules
There are circumstances under which certain transactions must be disclosed to the IRS in a disclosure statement attached to a taxpayers U.S. federal income tax return. (A copy of such statement must
also be sent to the IRS Office of Tax Shelter Analysis.) In addition, the Code imposes a requirement on certain material advisers to maintain a list of persons participating in such transactions, which list must be furnished to the IRS
upon written request. These provisions can apply to transactions not conventionally considered to involve abusive tax planning. Consequently, it is possible that such disclosure could be required by a Fund or the shareholders (1) if a
shareholder incurs a loss (in each case, in excess of a threshold computed without regard to offsetting gains or other income or limitations) from the disposition (including by way of withdrawal) of Shares, or (2) possibly in other
circumstances. Furthermore, a Funds material advisers could be required to maintain a list of persons investing in that Fund pursuant to the Code. While the tax shelter disclosure rules generally do not apply to a loss recognized on the
disposition of an asset in which the taxpayer has a qualifying basis (generally a basis equal to the amount of cash paid by the taxpayer for such asset), such rules will apply to a taxpayer recognizing a loss with respect to interests in a
pass-through entity (such as the Shares) even if its basis in such interests is equal to the amount of cash it paid. In addition, under recently enacted legislation, significant penalties may be imposed in connection with a failure to comply with
these reporting requirements. U.S. Shareholders are urged to consult their tax advisers regarding the tax shelter disclosure rules and their possible application to them.
U.S. Shareholders should consult their own tax advisers regarding any tax reporting or filing obligations they may have as a result of their acquisition, ownership or disposition of Shares.
Non-U.S. Shareholders
Except as described below, each Fund anticipates that a non-U.S. Shareholder will not be subject to U.S. federal income tax on such shareholders distributive share of a Funds income,
provided
that such income is not considered to be income of the shareholder that is effectively connected with the conduct of a trade or business within the United States. In the case of an individual non-U.S. Shareholder, such shareholder
will be subject to U.S. federal income tax on gains on the sale of Shares in a Funds or such shareholders distributive share of gains if such shareholder is present in the United States for 183 days or more during a taxable year and
certain other conditions are met.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a non-U.S. Shareholder (and, if certain income tax treaties apply, is attributable to a U.S. permanent establishment), then such shareholders share of any income and any gains realized upon the sale or exchange of Shares
will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens and residents and domestic corporations. Non-U.S. Shareholders that are corporations may also be subject to a 30% U.S. branch profits tax (or lower treaty
rate, if applicable) on their effectively connected earnings and profits that are not timely reinvested in a U.S. trade or business.
To the extent any interest income allocated to a non-U.S. Shareholder is considered portfolio interest, generally neither the allocation of such interest income to the non-U.S. Shareholder nor
a subsequent distribution
- 85 -
of such interest income to the non-U.S. Shareholder will be subject to withholding,
provided
that the non-U.S. Shareholder is not otherwise engaged in a trade or business in the United
States and provides the relevant Fund with a timely and properly completed and executed IRS Form W-8BEN or other applicable form. In general, portfolio interest is interest paid on debt obligations issued in registered form, unless
the recipient owns 10% or more of the voting power of the issuer.
Non-U.S. Shareholders that are individuals will
be subject to U.S. federal estate tax on the value of U.S. situs property owned at the time of their death (unless a statutory exemption or tax treaty exemption applies). It is unclear whether partnership interests such as the Shares will be
considered U.S. situs property. Accordingly, non-U.S. Shareholders may be subject to U.S. federal estate tax on all or part of the value of the Shares owned at the time of their death.
Non-U.S. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an
investment in the Shares.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (FATCA) generally impose a
new reporting and 30% withholding tax regime with respect to certain items of U.S. source income (including dividends and interest) and gross proceeds from the sale or other disposal of property that can produce U.S. source interest or dividends
(Withholdable Payments). As a general matter, the new rules are designed to require U.S. persons direct and indirect ownership of non-U.S. accounts and non-U.S. entities to be reported to the IRS. The 30% withholding tax regime
applies if there is a failure to provide required information regarding U.S. ownership. The new withholding rules generally apply to Withholdable Payments (other than gross proceeds of the type described above) made after December 31, 2013 and
payments of gross proceeds of the type described above with respect to a sale or disposition occurring after December 31, 2016.
The new rules may subject a non-U.S. Shareholders share of Withholdable Payments received by a Fund to 30% withholding tax unless such shareholder provides information, representations and waivers
of non-U.S. law as may be required to comply with the provisions of the new rules, including information regarding certain U.S. direct and indirect owners of such non-U.S. Shareholder. A non-U.S. Shareholder that is treated as a foreign
financial institution will generally be subject to withholding unless it agrees to report certain information to the IRS regarding its U.S. accountholders and those of its affiliates.
Although the application of the new withholding rules to a sale or other disposal of an interest in a partnership is unclear, it is
possible that the gross proceeds of the sale or other disposal of an interest in a Fund will be subject to tax under the new withholding rules if such proceeds are treated as an indirect disposal of the non-U.S. Shareholders interest in assets
that can produce U.S. source interest or dividends, unless the selling non-U.S. Shareholder provides appropriate reporting information. Prospective shareholders should consult their own advisors regarding the requirements under FATCA with respect to
their own situation.
Regulated Investment Companies (RICs)
The treatment of a RICs investment in a Fund will depend, in part, on whether a Fund is classified as a qualified publicly traded
partnership (PTP) for purposes of the RIC rules. RICs are only allowed to invest up to 25% of their assets in qualified PTPs and to treat net income derived from such investments as qualifying income for purposes of certain rules
relevant to determining whether an entity qualifies as a RIC. Similarly, interests in a qualified PTP are treated as issued by such PTP and a RIC is not required to look through to the underlying partnership assets when testing compliance with
certain asset diversification tests applicable to determining whether an entity qualified as a RIC. On the other hand, an investment by a RIC in a publicly traded partnership that is not a qualified PTP is not counted against the 25% limit on a
RICs investments in qualified PTPs and the RIC is treated as owning its proportionate share of the partnerships assets and earning its proportionate share of the partnerships income for purposes of the income and asset tests
relevant to determining whether an entity qualifies as a RIC.
- 86 -
It is generally expected that the Commodity Index Funds will be qualified PTPs and that the
Currency Funds will not. Prospective RIC investors should consult a tax adviser regarding the treatment of an investment in a Fund under current tax rules and in light of their particular circumstances.
Tax-Exempt Organizations
An organization that is otherwise exempt from U.S. federal income tax is nonetheless subject to taxation with respect to its unrelated business taxable income, or UBTI, to the extent that its
UBTI from all sources exceeds $1,000 in any taxable year. Except as noted below with respect to certain categories of exempt income, UBTI generally includes income or gain derived (either directly or through a partnership) from a trade or business,
the conduct of which is substantially unrelated to the exercise or performance of the organizations exempt purpose or function.
UBTI generally does not include passive investment income, such as dividends, interest and capital gains, whether realized by the organization directly or indirectly through a partnership (such as the
Funds) in which it is a partner. This type of income is exempt, subject to the discussion of unrelated debt-financed income below, even if it is realized from securities-trading activity that constitutes a trade or business.
UBTI includes not only trade or business income or gain as described above, but also unrelated debt-financed income. This
latter type of income generally consists of (1) income derived by an exempt organization (directly or through a partnership) from income producing property with respect to which there is acquisition indebtedness at any time during
the taxable year and (2) gains derived by an exempt organization (directly or through a partnership) from the disposition of property with respect to which there is acquisition indebtedness at any time during the twelve-month period ending with
the date of the disposition. Each Fund does not expect to incur a significant amount of acquisition indebtedness with respect to its assets.
To the extent a Fund recognizes gain from property with respect to which there is acquisition indebtedness, the portion of the gain that will be treated as UBTI will be equal to the amount of
the gain multiplied by a fraction, the numerator of which is the highest amount of the acquisition indebtedness with respect to the property during the 12-month period ending with the date of their disposition, and the denominator of
which is the average amount of the adjusted basis of the property during the period that such property is held by a Fund during the taxable year. In determining the unrelated debt-financed income of a Fund, an allocable portion of
deductions directly connected with a Funds debt-financed property will be taken into account. In making such a determination, for instance, a portion of losses from debt-financed securities (determined in the manner described above for
evaluating the portion of any gain that would be treated as UBTI) would offset gains treated as UBTI. A charitable remainder trust is subject to a 100% federal excise tax on any UBTI that it earns; in view of the potential for UBTI, the Shares may
not be a suitable investment for a charitable remainder trust.
Certain State and Local Taxation Matters
Prospective shareholders should consider, in addition to the U.S. federal income tax consequences described above, the potential state and
local tax consequences of investing in the Shares.
State and local laws often differ from U.S. federal income tax laws with
respect to the treatment of specific items of income, gain, loss, deduction and credit. A shareholders distributive share of the taxable income or loss of a Fund generally will be required to be included in determining the shareholders
reportable income for state and local tax purposes in the jurisdiction in which the shareholder is a resident. A Fund may conduct business in one or more jurisdictions that will subject a shareholder to tax (and require a shareholder to file an
income tax return with the jurisdiction with respect to the shareholders share of the income derived from that business). A prospective shareholder should consult its tax adviser with respect to the availability of a credit for such tax in the
jurisdiction in which the shareholder is resident.
- 87 -
Backup Withholding
In certain circumstances, shareholders may be subject to backup withholding on certain payments paid to them if they do not establish that they are exempt from the backup withholding rules or if they do
not furnish their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax. Any
amounts withheld from payments made to an investor may be refunded or credited against an investors U.S. federal income tax liability, if any,
provided
that the required information is furnished to the IRS.
Shareholders should be aware that certain aspects of the U.S. federal, state and local income tax treatment regarding the purchase,
ownership and disposition of Shares are not clear under existing law. Thus, shareholders are urged to consult their own tax advisers to determine the tax consequences of ownership of the Shares in their particular circumstances, including the
application of U.S. federal, state, local and foreign tax laws.
- 88 -
PART TWO
GENERAL POOL DISCLOSURE
This Prospectus has two parts: the offered
series disclosure and the general pool disclosure. These parts are bound together and are incomplete if not distributed together to prospective participants.
PERFORMANCE OF THE OTHER COMMODITY POOLS OPERATED BY
THE COMMODITY POOL OPERATOR
The following performance information is
presented in accordance with CFTC regulations. The performance of the Funds will differ materially in certain respects from the performance of the Other Funds which is included herein.
The performance of the Other Funds which is summarized herein is materially different in certain respects from the Funds and the past
performance summaries of the Other Funds below are generally not representative of how the Funds might perform in the future.
All summary performance information is as of May 31, 2013. Performance information is set forth, in accordance with CFTC
regulations, since each funds inception of trading.
|
|
|
Name of Pool:
|
|
ProShares Ultra DJ-UBS Commodity
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$41,711,516
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$1,941,346
|
Net Asset Value as of May 31, 2013:
|
|
$4,254,274
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$21.27
|
Worst Monthly Loss:
4
|
|
-27.91%
|
|
|
(September 2011)
|
Worst Peak-to-Valley Loss:
5
|
|
-49.29%
|
|
|
(April 2011 May 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-11.51
|
%
|
|
|
-14.51
|
%
|
|
|
1.63
|
%
|
|
|
4.65
|
%
|
|
|
4.64
|
%
|
February
|
|
|
|
|
|
|
-9.37
|
%
|
|
|
6.89
|
%
|
|
|
2.58
|
%
|
|
|
5.24
|
%
|
|
|
-8.17
|
%
|
March
|
|
|
|
|
|
|
5.85
|
%
|
|
|
-2.89
|
%
|
|
|
4.06
|
%
|
|
|
-8.43
|
%
|
|
|
0.76
|
%
|
April
|
|
|
|
|
|
|
0.66
|
%
|
|
|
3.56
|
%
|
|
|
6.11
|
%
|
|
|
-1.16
|
%
|
|
|
-5.52
|
%
|
May
|
|
|
|
|
|
|
26.77
|
%
|
|
|
-13.83
|
%
|
|
|
-10.53
|
%
|
|
|
-17.71
|
%
|
|
|
-4.66
|
%
|
June
|
|
|
|
|
|
|
-4.85
|
%
|
|
|
0.16
|
%
|
|
|
-10.87
|
%
|
|
|
10.78
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
5.57
|
%
|
|
|
13.55
|
%
|
|
|
6.50
|
%
|
|
|
12.77
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-1.97
|
%
|
|
|
-5.36
|
%
|
|
|
1.52
|
%
|
|
|
2.35
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
2.33
|
%
|
|
|
14.71
|
%
|
|
|
-27.91
|
%
|
|
|
3.16
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
5.82
|
%
|
|
|
9.65
|
%
|
|
|
13.16
|
%
|
|
|
-7.85
|
%
|
|
|
|
|
November
|
|
|
-1.59
|
%
|
|
|
6.47
|
%
|
|
|
-1.44
|
%
|
|
|
-4.74
|
%
|
|
|
-0.16
|
%
|
|
|
|
|
December
|
|
|
-9.91
|
%
|
|
|
3.47
|
%
|
|
|
22.04
|
%
|
|
|
-7.73
|
%
|
|
|
-5.34
|
%
|
|
|
|
|
Annual
|
|
|
-11.34
|
%
|
|
|
27.25
|
%
|
|
|
28.95
|
%
|
|
|
-28.84
|
%
|
|
|
-5.78
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-12.78
|
%
|
See accompanying Footnotes to Performance Information.
- 89 -
|
|
|
Name of Pool:
|
|
ProShares UltraShort DJ-UBS Commodity
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$95,173,240
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$8,650,362
|
Net Asset Value as of May 31, 2013:
|
|
$3,606,348
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$60.11
|
Worst Monthly Loss:
4
|
|
-23.20%
|
|
|
(May 2009)
|
Worst Peak-to-Valley Loss:
5
|
|
-74.41%
|
|
|
(February 2009 April 2011)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
8.25
|
%
|
|
|
15.02
|
%
|
|
|
-2.66
|
%
|
|
|
-5.44
|
%
|
|
|
-4.91
|
%
|
February
|
|
|
|
|
|
|
7.52
|
%
|
|
|
-8.21
|
%
|
|
|
-3.16
|
%
|
|
|
-5.47
|
%
|
|
|
8.48
|
%
|
March
|
|
|
|
|
|
|
-10.44
|
%
|
|
|
1.86
|
%
|
|
|
-5.66
|
%
|
|
|
8.11
|
%
|
|
|
-1.25
|
%
|
April
|
|
|
|
|
|
|
-3.46
|
%
|
|
|
-4.33
|
%
|
|
|
-6.50
|
%
|
|
|
0.31
|
%
|
|
|
4.61
|
%
|
May
|
|
|
|
|
|
|
-23.20
|
%
|
|
|
14.14
|
%
|
|
|
9.15
|
%
|
|
|
20.41
|
%
|
|
|
4.27
|
%
|
June
|
|
|
|
|
|
|
0.93
|
%
|
|
|
-1.55
|
%
|
|
|
11.01
|
%
|
|
|
-11.11
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-8.52
|
%
|
|
|
-12.92
|
%
|
|
|
-6.96
|
%
|
|
|
-12.82
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-0.65
|
%
|
|
|
4.72
|
%
|
|
|
-2.99
|
%
|
|
|
-3.00
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-4.80
|
%
|
|
|
-13.42
|
%
|
|
|
35.06
|
%
|
|
|
-3.84
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-7.91
|
%
|
|
|
-10.27
|
%
|
|
|
-13.06
|
%
|
|
|
7.73
|
%
|
|
|
|
|
November
|
|
|
1.14
|
%
|
|
|
-7.92
|
%
|
|
|
-1.01
|
%
|
|
|
3.77
|
%
|
|
|
-0.57
|
%
|
|
|
|
|
December
|
|
|
5.97
|
%
|
|
|
-4.66
|
%
|
|
|
-19.03
|
%
|
|
|
7.04
|
%
|
|
|
5.15
|
%
|
|
|
|
|
Annual
|
|
|
7.18
|
%
|
|
|
-45.43
|
%
|
|
|
-34.35
|
%
|
|
|
18.60
|
%
|
|
|
-4.97
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
11.11
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Ultra DJ-UBS Natural Gas
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
October 4, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$185,265,202
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$19,798,672
|
Net Asset Value as of May 31, 2013:
|
|
$33,229,933
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$46.16
|
Worst Monthly Loss:
4
|
|
-39.34%
|
|
|
(March 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-81.26%
|
|
|
(Inception May 2012)
|
- 90 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-33.79
|
%
|
|
|
-2.67
|
%
|
February
|
|
|
|
|
|
|
-7.98
|
%
|
|
|
2.40
|
%
|
March
|
|
|
|
|
|
|
-39.34
|
%
|
|
|
29.13
|
%
|
April
|
|
|
|
|
|
|
-0.48
|
%
|
|
|
13.20
|
%
|
May
|
|
|
|
|
|
|
-0.06
|
%
|
|
|
-18.86
|
%
|
June
|
|
|
|
|
|
|
21.89
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
25.46
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-28.03
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
23.97
|
%
|
|
|
|
|
October
|
|
|
-3.23
|
%
|
|
|
3.06
|
%
|
|
|
|
|
November
|
|
|
-24.05
|
%
|
|
|
-14.18
|
%
|
|
|
|
|
December
|
|
|
-30.62
|
%
|
|
|
-13.68
|
%
|
|
|
|
|
Annual
|
|
|
-49.01
|
%
|
|
|
-61.71
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
18.20
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares UltraShort DJ-UBS Natural Gas
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
October 4, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$63,425,772
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$28,498,197
|
Net Asset Value as of May 31, 2013:
|
|
$25,988,504
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$17.92
|
Worst Monthly Loss:
4
|
|
-28.95%
|
|
|
(June 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-68.85%
|
|
|
(March 2012 April 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
30.13
|
%
|
|
|
-1.67
|
%
|
February
|
|
|
|
|
|
|
0.98
|
%
|
|
|
-5.48
|
%
|
March
|
|
|
|
|
|
|
56.44
|
%
|
|
|
-24.30
|
%
|
April
|
|
|
|
|
|
|
-4.32
|
%
|
|
|
-15.15
|
%
|
May
|
|
|
|
|
|
|
-8.88
|
%
|
|
|
17.55
|
%
|
June
|
|
|
|
|
|
|
-28.95
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-27.12
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
30.80
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-23.39
|
%
|
|
|
|
|
October
|
|
|
0.57
|
%
|
|
|
-6.83
|
%
|
|
|
|
|
November
|
|
|
27.35
|
%
|
|
|
11.11
|
%
|
|
|
|
|
December
|
|
|
39.41
|
%
|
|
|
11.43
|
%
|
|
|
|
|
Annual
|
|
|
78.55
|
%
|
|
|
7.26
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-29.81
|
%
|
See accompanying Footnotes to Performance Information.
- 91 -
|
|
|
Name of Pool:
|
|
ProShares Ultra Australian Dollar
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
July 17, 2012
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$4,000,200
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$4,000,200
|
Net Asset Value as of May 31, 2013:
|
|
$3,583,153
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$35.83
|
Worst Monthly Loss:
4
|
|
-14.54%
|
|
|
(May 2013)
|
Worst Peak-to-Valley Loss:
5
|
|
-15.02%
|
|
|
(March 2013 May 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.94
|
%
|
February
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-3.77
|
%
|
March
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.28
|
|
April
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-0.56
|
%
|
May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-14.54
|
%
|
June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
*
|
|
|
|
|
|
|
|
|
|
|
4.03
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
|
|
|
|
-2.91
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
|
|
|
|
1.27
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
|
|
|
|
0.59
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
1.50
|
%
|
|
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
-0.42
|
%
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
3.98
|
%
|
|
|
|
|
Year-to-Date
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
-13.91
|
%
|
See accompanying Footnotes to Performance Information.
*
|
Represents rate of return from inception to July 31, 2012, as the inception of trading date for the pool was after July 1, 2012.
|
|
|
|
Name of Pool:
|
|
ProShares UltraShort Australian Dollar
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
July 17, 2012
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$15,947,907
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$15,947,907
|
Net Asset Value as of May 31, 2013:
|
|
$17,175,553
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$42.94
|
Worst Monthly Loss:
4
|
|
-4.35%
|
|
|
(March 2013)
|
Worst Peak-to-Valley Loss:
5
|
|
-7.73%
|
|
|
(Inception March 2013)
|
- 92 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-1.26
|
%
|
February
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.60
|
%
|
March
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-4.35
|
%
|
April
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.10
|
%
|
May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.30
|
%
|
June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
*
|
|
|
|
|
|
|
|
|
|
|
-4.17
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
|
|
|
|
2.68
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
|
|
|
|
-1.71
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
|
|
|
|
-0.91
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
-1.76
|
%
|
|
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
0.15
|
%
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
-5.70
|
%
|
|
|
|
|
Year-to-Date
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
13.91
|
%
|
See accompanying Footnotes to Performance Information.
*
|
Represents rate of return from inception to July 31, 2012, as the inception of trading date for the pool was after July 1, 2012.
|
|
|
|
Name of Pool:
|
|
ProShares Ultra VIX Short-Term Futures ETF
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
October 3, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$2,544,910,134
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$1,041,768,980
|
Net Asset Value as of May 31, 2013:
|
|
$369,932,662
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$6.50
|
Worst Monthly Loss:
4
|
|
-57.41%
|
|
|
(March 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-99.74%
|
|
|
(Inception April 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-44.29
|
%
|
|
|
-42.22
|
%
|
February
|
|
|
|
|
|
|
-18.65
|
%
|
|
|
-3.28
|
%
|
March
|
|
|
|
|
|
|
-57.41
|
%
|
|
|
-32.67
|
%
|
April
|
|
|
|
|
|
|
-6.68
|
%
|
|
|
-17.72
|
%
|
May
|
|
|
|
|
|
|
55.72
|
%
|
|
|
4.28
|
%
|
June
|
|
|
|
|
|
|
-53.69
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-20.88
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-30.01
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-42.97
|
%
|
|
|
|
|
October
|
|
|
-55.10
|
%
|
|
|
8.79
|
%
|
|
|
|
|
November
|
|
|
-4.14
|
%
|
|
|
-41.80
|
%
|
|
|
|
|
December
|
|
|
-28.30
|
%
|
|
|
4.64
|
%
|
|
|
|
|
Annual
|
|
|
-69.14
|
%
|
|
|
-97.28
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-67.72
|
%
|
See accompanying Footnotes to Performance Information.
- 93 -
|
|
|
Name of Pool:
|
|
ProShares VIX Short-Term Futures ETF
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
January 3, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$1,387,597,413
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$471,005,879
|
Net Asset Value as of May 31, 2013:
|
|
$247,599,804
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$10.45
|
Worst Monthly Loss:
4
|
|
-32.69%
|
|
|
(March 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-91.19%
|
|
|
(September 2011 April 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
-12.84
|
%
|
|
|
-24.92
|
%
|
|
|
-22.82
|
%
|
February
|
|
|
-6.37
|
%
|
|
|
-8.04
|
%
|
|
|
0.85
|
%
|
March
|
|
|
-1.88
|
%
|
|
|
-32.69
|
%
|
|
|
-17.16
|
%
|
April
|
|
|
-21.52
|
%
|
|
|
-1.14
|
%
|
|
|
-5.88
|
%
|
May
|
|
|
-8.52
|
%
|
|
|
28.89
|
%
|
|
|
2.55
|
%
|
June
|
|
|
-1.13
|
%
|
|
|
-29.23
|
%
|
|
|
|
|
July
|
|
|
11.10
|
%
|
|
|
-9.26
|
%
|
|
|
|
|
August
|
|
|
65.31
|
%
|
|
|
-15.50
|
%
|
|
|
|
|
September
|
|
|
38.45
|
%
|
|
|
-22.58
|
%
|
|
|
|
|
October
|
|
|
-24.39
|
%
|
|
|
5.59
|
%
|
|
|
|
|
November
|
|
|
1.68
|
%
|
|
|
-21.88
|
%
|
|
|
|
|
December
|
|
|
-14.06
|
%
|
|
|
7.09
|
%
|
|
|
|
|
Annual
|
|
|
-4.53
|
%
|
|
|
-78.02
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-37.77
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Short VIX Short-Term Futures ETF
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
October 3, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$778,520,122
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$19,664,879
|
Net Asset Value as of May 31, 2013:
|
|
$61,114,877
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$87.30
|
Worst Monthly Loss:
4
|
|
-26.85%
|
|
|
(May 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-29.34%
|
|
|
(March 2012 May 2012)
|
- 94 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
31.19
|
%
|
|
|
25.87
|
%
|
February
|
|
|
|
|
|
|
4.50
|
%
|
|
|
-6.34
|
%
|
March
|
|
|
|
|
|
|
39.60
|
%
|
|
|
18.25
|
%
|
April
|
|
|
|
|
|
|
-3.41
|
%
|
|
|
-2.00
|
%
|
May
|
|
|
|
|
|
|
-26.85
|
%
|
|
|
-3.39
|
%
|
June
|
|
|
|
|
|
|
29.53
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
5.11
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
16.20
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
23.02
|
%
|
|
|
|
|
October
|
|
|
27.51
|
%
|
|
|
-7.76
|
%
|
|
|
|
|
November
|
|
|
-10.40
|
%
|
|
|
22.09
|
%
|
|
|
|
|
December
|
|
|
13.17
|
%
|
|
|
-13.67
|
%
|
|
|
|
|
Annual
|
|
|
29.29
|
%
|
|
|
155.84
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
31.97
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares VIX Mid-Term Futures ETF
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
January 3, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$318,550,392
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$156,834,714
|
Net Asset Value as of May 31, 2013:
|
|
$67,194,574
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$26.09
|
Worst Monthly Loss:
4
|
|
-18.65%
|
|
|
(January 2013)
|
Worst Peak-to-Valley Loss:
5
|
|
-72.49%
|
|
|
(September 2011 April 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
-10.88
|
%
|
|
|
-9.76
|
%
|
|
|
-18.65
|
%
|
February
|
|
|
-3.79
|
%
|
|
|
1.25
|
%
|
|
|
-3.13
|
%
|
March
|
|
|
-1.77
|
%
|
|
|
-17.42
|
%
|
|
|
-3.31
|
%
|
April
|
|
|
-6.98
|
%
|
|
|
-0.83
|
%
|
|
|
-6.78
|
%
|
May
|
|
|
-2.60
|
%
|
|
|
13.10
|
%
|
|
|
5.89
|
%
|
June
|
|
|
1.15
|
%
|
|
|
-12.30
|
%
|
|
|
|
|
July
|
|
|
-3.41
|
%
|
|
|
-5.77
|
%
|
|
|
|
|
August
|
|
|
28.73
|
%
|
|
|
-2.59
|
%
|
|
|
|
|
September
|
|
|
16.65
|
%
|
|
|
-17.84
|
%
|
|
|
|
|
October
|
|
|
-16.01
|
%
|
|
|
-5.90
|
%
|
|
|
|
|
November
|
|
|
7.47
|
%
|
|
|
-10.69
|
%
|
|
|
|
|
December
|
|
|
-8.29
|
%
|
|
|
-0.53
|
%
|
|
|
|
|
Annual
|
|
|
-7.31
|
%
|
|
|
-53.21
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-24.79
|
%
|
See accompanying Footnotes to Performance Information.
- 95 -
|
|
|
Name of Pool:
|
|
ProShares Ultra Euro
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$31,586,320
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$3,272,169
|
Net Asset Value as of May 31, 2013:
|
|
$3,506,166
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$23.37
|
Worst Monthly Loss:
4
|
|
-16.10%
|
|
|
(January 2009)
|
Worst Peak-to-Valley Loss:
5
|
|
-35.67%
|
|
|
(November 2009 July 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-16.10
|
%
|
|
|
-6.28
|
%
|
|
|
4.70
|
%
|
|
|
1.94
|
%
|
|
|
5.71
|
%
|
February
|
|
|
|
|
|
|
-2.14
|
%
|
|
|
-3.74
|
%
|
|
|
1.57
|
%
|
|
|
3.62
|
%
|
|
|
-7.71
|
%
|
March
|
|
|
|
|
|
|
9.48
|
%
|
|
|
-1.78
|
%
|
|
|
5.42
|
%
|
|
|
0.05
|
%
|
|
|
-3.75
|
%
|
April
|
|
|
|
|
|
|
-0.98
|
%
|
|
|
-2.97
|
%
|
|
|
9.16
|
%
|
|
|
-1.62
|
%
|
|
|
5.39
|
%
|
May
|
|
|
|
|
|
|
14.01
|
%
|
|
|
-15.18
|
%
|
|
|
-5.62
|
%
|
|
|
-12.87
|
%
|
|
|
-2.75
|
%
|
June
|
|
|
|
|
|
|
-1.71
|
%
|
|
|
-0.90
|
%
|
|
|
1.50
|
%
|
|
|
4.59
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
3.03
|
%
|
|
|
13.32
|
%
|
|
|
-1.85
|
%
|
|
|
-5.68
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
1.01
|
%
|
|
|
-5.63
|
%
|
|
|
-0.09
|
%
|
|
|
4.30
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
4.06
|
%
|
|
|
15.54
|
%
|
|
|
-13.16
|
%
|
|
|
4.23
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
1.04
|
%
|
|
|
4.08
|
%
|
|
|
6.42
|
%
|
|
|
1.53
|
%
|
|
|
|
|
November
|
|
|
-3.10
|
%
|
|
|
4.00
|
%
|
|
|
-13.15
|
%
|
|
|
-5.83
|
%
|
|
|
0.53
|
%
|
|
|
|
|
December
|
|
|
20.70
|
%
|
|
|
-9.23
|
%
|
|
|
5.95
|
%
|
|
|
-7.32
|
%
|
|
|
2.79
|
%
|
|
|
|
|
Annual
|
|
|
16.96
|
%
|
|
|
3.03
|
%
|
|
|
-14.48
|
%
|
|
|
-7.28
|
%
|
|
|
1.93
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-3.76
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Short Euro
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
June 26, 2012
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$4,000,200
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$4,000,200
|
Net Asset Value as of May 31, 2013:
|
|
$3,807,243
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$38.07
|
Worst Monthly Loss:
4
|
|
-2.88%
|
|
|
(January 2013)
|
Worst Peak-to-Valley Loss:
5
|
|
-9.81%
|
|
|
(July 2012 January 2013)
|
- 96 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-2.88
|
%
|
February
|
|
|
|
|
|
|
3.91
|
%
|
March
|
|
|
|
|
|
|
1.70
|
%
|
April
|
|
|
|
|
|
|
-2.76
|
%
|
May
|
|
|
|
|
|
|
1.24
|
%
|
June
*
|
|
|
-1.32
|
%
|
|
|
|
|
July
|
|
|
2.68
|
%
|
|
|
|
|
August
|
|
|
-2.27
|
%
|
|
|
|
|
September
|
|
|
-2.23
|
%
|
|
|
|
|
October
|
|
|
-0.93
|
%
|
|
|
|
|
November
|
|
|
-0.40
|
%
|
|
|
|
|
December
|
|
|
-1.51
|
%
|
|
|
|
|
Annual
|
|
|
-5.90
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
1.04
|
%
|
See accompanying Footnotes to Performance Information.
*
|
Represents rate of return from inception to June 29, 2012, as the inception of trading date for the pool was after June 1, 2012.
|
|
|
|
Name of Pool:
|
|
ProShares Ultra Yen
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$11,322,654
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$3,929,709
|
Net Asset Value as of May 31, 2013:
|
|
$3,089,328
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$20.59
|
Worst Monthly Loss:
4
|
|
-15.60%
|
|
|
(February 2009)
|
Worst Peak-to-Valley Loss:
5
|
|
-44.18%
|
|
|
(August 2011 May 2013)
|
- 97 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
1.67
|
%
|
|
|
6.21
|
%
|
|
|
-2.25
|
%
|
|
|
1.83
|
%
|
|
|
-10.24
|
%
|
February
|
|
|
|
|
|
|
-15.60
|
%
|
|
|
2.89
|
%
|
|
|
0.55
|
%
|
|
|
-12.23
|
%
|
|
|
-2.89
|
%
|
March
|
|
|
|
|
|
|
-3.21
|
%
|
|
|
-9.78
|
%
|
|
|
-3.51
|
%
|
|
|
-3.77
|
%
|
|
|
-3.21
|
%
|
April
|
|
|
|
|
|
|
0.49
|
%
|
|
|
-1.08
|
%
|
|
|
4.97
|
%
|
|
|
7.33
|
%
|
|
|
-7.13
|
%
|
May
|
|
|
|
|
|
|
6.81
|
%
|
|
|
6.40
|
%
|
|
|
-1.08
|
%
|
|
|
3.66
|
%
|
|
|
-6.03
|
%
|
June
|
|
|
|
|
|
|
-2.48
|
%
|
|
|
5.51
|
%
|
|
|
2.38
|
%
|
|
|
-4.03
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
3.30
|
%
|
|
|
4.39
|
%
|
|
|
9.24
|
%
|
|
|
4.50
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
3.19
|
%
|
|
|
5.59
|
%
|
|
|
0.78
|
%
|
|
|
-0.57
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
7.30
|
%
|
|
|
0.99
|
%
|
|
|
-1.62
|
%
|
|
|
0.57
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-0.79
|
%
|
|
|
7.47
|
%
|
|
|
-2.89
|
%
|
|
|
-4.61
|
%
|
|
|
|
|
November
|
|
|
3.03
|
%
|
|
|
8.35
|
%
|
|
|
-7.64
|
%
|
|
|
1.40
|
%
|
|
|
-6.36
|
%
|
|
|
|
|
December
|
|
|
10.44
|
%
|
|
|
-14.04
|
%
|
|
|
5.91
|
%
|
|
|
1.29
|
%
|
|
|
-9.85
|
%
|
|
|
|
|
Annual
|
|
|
13.79
|
%
|
|
|
-8.11
|
%
|
|
|
28.13
|
%
|
|
|
8.90
|
%
|
|
|
-22.73
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-26.37
|
%
|
See accompanying Footnotes to Performance Information.
Footnotes to Performance Information
1
|
Aggregate Gross Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, including those of investors who subsequently redeemed
their investments.
|
2
|
Aggregate Net Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, excluding those of investors who subsequently redeemed
their investments.
|
3
|
Net Asset Value per Share is the net asset value, based on the pricing policies of the Trust and determined in accordance with Generally Accepted Accounting
Principles, of the pool divided by the total number of Shares outstanding as of May 31, 2013. Please see Description of the Shares; The Funds; Certain Material Terms of the Trust AgreementNet Asset Value (NAV) for
additional information regarding the pricing policies of the Trust.
|
4
|
Worst Monthly Loss is the largest single month loss sustained since inception of trading. Loss as used in this section of the Prospectus means
losses experienced by the relevant pool over the specified period and is calculated on a rate of return basis, i.e., dividing net performance by beginning equity. Loss is measured on the basis of monthly returns only, and does not reflect
intra-month figures.
|
5
|
Worst Peak-to-Valley Loss is the largest percentage decline in Net Asset Value per Share over the history of the pool. This need not be a continuous
decline, but can be a series of positive and negative returns where the negative returns are larger than the positive returns. Worst Peak-to-Valley Loss represents the greatest percentage decline from any month-end Net Asset Value per Share that
occurs without such month-end Net Asset Value per Share being equaled or exceeded as of a subsequent month-end.
|
6
|
Based on the latest calculated net asset value, as applicable to creations and redemptions of Creation Units, with respect to each period.
|
- 98 -
USE OF PROCEEDS
Substantially all of the proceeds of the offering of the Shares of the Funds are used to enter into Financial Instruments in which a Fund
invests, in combination with cash or cash equivalents and/or U.S. Treasury securities or other high credit quality, short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements) that
may in part be used for direct investment or deposited with the FCMs as margin in connection with futures contracts or in segregated accounts at the Funds custodian bank as collateral for swap agreements or forward contracts, as applicable. To
the extent that the Funds do not invest the proceeds of the offering of the Shares in the manner described above on the day such proceeds are received, such proceeds will be deposited with the Custodian in a non-interest bearing account.
To the extent that the Funds trade in futures contracts on U.S. exchanges, the assets deposited by the Funds with the FCMs (or another
eligible financial institution, as applicable) as margin must be segregated pursuant to the regulations of the CFTC. Such segregated funds may be invested only in a limited range of instrumentsprincipally U.S. government obligations to margin
futures and forward contract positions.
The Sponsor has selected Goldman, Sachs & Co. (Goldman Sachs), Jefferies
Bache, LLC (JBL), Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) and RBC Capital Markets, LLC (RBC) as its FCMs. JBL currently is an indirect, wholly owned subsidiary of Jefferies Group, LLC, which in turn is an
indirect, wholly owned subsidiary of Leucadia National Corporation. Prior to July 1, 2011, JBL had been an indirect, wholly owned subsidiary of Prudential Financial, Inc. operating under the name Prudential Bache Commodities, LLC. Each of
Goldman Sachs, JBL, Merrill Lynch and RBC, in its capacity as a registered FCM, serves as a clearing broker to the Trust and the Funds and as such arranges for the execution and clearing of the Funds futures transactions. Each of Goldman
Sachs, JBL, Merrill Lynch and RBC acts as clearing broker for many other funds and individuals. A variety of executing brokers may execute futures transactions on behalf of the Funds. The executing brokers will give up all such transactions to
Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable. Each of Goldman Sachs, JBL, Merrill Lynch and RBC is registered as an FCM with the CFTC and is a member of the NFA. Goldman Sachs, JBL and RBC are clearing members of the CBOT, CME, NYMEX, and
all other major U.S. commodity exchanges. Merrill Lynch is a clearing member of the CBOT and the CME, and is either a clearing member or member of all other principal U.S. futures and futures options exchanges. With regard to those domestic futures
and futures options exchanges of which it is not a clearing member, Merrill Lynch has entered into third party brokerage relationships with FCMs that are clearing members of those exchanges. None of Goldman Sachs, JBL, Merrill Lynch or RBC are
affiliated with or act as a supervisor of the Trust, the Funds, the Sponsor, the Trustee, or BBH&Co. (the Administrator and the Custodian). None of Goldman Sachs, JBL, Merrill Lynch or RBC, in their capacity as FCMs, are acting as
underwriters or sponsors of the offering of the Shares, or have passed upon the merits of participating in this offering. None of Goldman Sachs, JBL, Merrill Lynch or RBC have passed upon the adequacy of this Prospectus or on the accuracy of the
information contained herein. None of Goldman Sachs, JBL, Merrill Lynch or RBC provide any commodity trading advice regarding the Funds trading activities. Investors should not rely upon Goldman Sachs, JBL, Merrill Lynch or RBC in deciding
whether to invest in the Funds or retain their interests in the Funds. Prospective investors should also note that the Sponsor may select additional clearing brokers or replace Goldman Sachs, JBL, Merrill Lynch and/or RBC as the Funds clearing
broker.
To the extent, if any, that the Funds enter into trades in futures on markets other than regulated U.S. futures
exchanges, funds deposited to margin positions held on such exchanges are invested in bank deposits or in instruments of a credit standing generally comparable to those authorized by the CFTC for investment of customer segregated funds,
although applicable CFTC rules prohibit funds employed in trading on foreign exchanges from being deposited in customer segregated fund accounts.
The Sponsor, a registered commodity pool operator, is responsible for the cash management activities of the Funds, including investing in cash equivalents that may be used as margin for the Financial
Instruments as described above.
- 99 -
WHO MAY SUBSCRIBE
Only Authorized Participants may create or redeem Creation Units. Each Authorized Participant must (1) be a registered broker-dealer
or other securities market participant such as a bank or other financial institution which is not required to register as a broker-dealer to engage in securities transactions, (2) be a participant in DTC, and (3) have entered into an
agreement with the Trust and the Sponsor (an Authorized Participant Agreement).
CREATION AND
REDEMPTION OF SHARES
Each Fund creates and redeems Shares from time to time, but only in one or more Creation Units. A
Creation Unit is a block of 50,000 Shares of a Fund. Except when aggregated in Creation Units, the Shares are not redeemable securities.
The manner by which Creation Units are purchased and redeemed is dictated by the terms of the Authorized Participant Agreement and Authorized Participant Handbook. By placing a purchase order, an
Authorized Participant agrees to deposit cash with the Custodian of the Funds (unless as provided otherwise in this Prospectus). If permitted by the Sponsor in its sole discretion with respect to a Fund, an Authorized Participant may also agree to
enter into or arrange for an exchange of futures contract for related position (EFCRP) or block trade with the relevant Fund whereby the Authorized Participant would also transfer to such Fund a number and type of exchange-traded futures
contracts at or near the closing settlement price for such contracts on the purchase order date. Similarly, the Sponsor in its sole discretion may agree with an Authorized Participant to use an EFCRP to effect an order to redeem Creation Units.
An EFCRP is a technique permitted by the rules of certain futures exchanges that, as utilized by a Fund in the Sponsors
discretion, would allow such Fund to take a position in a futures contract from an Authorized Participant, or give futures contracts to an Authorized Participant, in the case of a redemption, rather than to enter the futures exchange markets to
obtain such a position. An EFCRP by itself will not change either partys net risk position materially. Because the futures position that a Fund would otherwise need to take in order to meet its investment objective can be obtained without
unnecessarily impacting the financial or futures markets or their pricing, EFCRPs can generally be viewed as transactions beneficial to a Fund. A block trade is a technique that permits certain Funds to obtain a futures position without going
through the market auction system and can generally be viewed as a transaction beneficial to the Fund.
Authorized
Participants pay a fixed transaction fee of up to $500 in connection with each order to create or redeem a Creation Unit in order to compensate BBH&Co., as the Administrator, the Custodian and the Transfer Agent of each Fund and its Shares, for
services in processing the creation and redemption of Creation Units and to offset the costs of increasing or decreasing derivative positions. Authorized Participants also may pay a variable transaction fee to the Fund of up to 0.10% of the value of
the Creation Unit that is purchased or redeemed unless the transaction fee is waived or otherwise adjusted by the Sponsor. The Sponsor provides such Authorized Participant with prompt notice in advance of any such waiver or adjustment of the
transaction fee. Authorized Participants may sell the Shares included in the Creation Units they purchase from the Funds to other investors. Further detail on the fees is set forth in the Authorized Participant Handbook.
The form of Authorized Participant Agreement and the related Authorized Participant Handbook set forth the procedures for the creation
and redemption of Creation Units and for the payment of cash required for such creations and redemptions. The Sponsor may delegate its duties and obligations under the form of Authorized Participant Agreement to SEI or the Administrator without
consent from any shareholder or Authorized Participant. The form of Authorized Participant Agreement and the related procedures attached thereto may be amended by the Sponsor without the consent of any shareholder or Authorized Participant.
Authorized Participants who purchase Creation Units from the Funds receive no fees, commissions or other form of compensation or inducement of any kind from either the Sponsor or the Funds, and no such person has any obligation or responsibility to
the Sponsor or the Fund to effect any sale or resale of Shares.
- 100 -
Authorized Participants are cautioned that some of their activities may result in their
being deemed participants in a distribution in a manner which would render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the 1933 Act, as described in Plan of Distribution.
Each Authorized Participant must be registered as a broker-dealer under the 1934 Act and regulated by FINRA, or exempt from
being, or otherwise not required to be, so regulated or registered, and must be qualified to act as a broker or dealer in the states or other jurisdictions where the nature of its business so requires. Certain Authorized Participants may be
regulated under federal and state banking laws and regulations. Each Authorized Participant must have its own set of rules and procedures, internal controls and information barriers as it determines is appropriate in light of its own regulatory
regime.
Authorized Participants may act for their own accounts or as agents for broker-dealers, custodians and other
securities market participants that wish to create or redeem Creation Units.
Persons interested in purchasing Creation Units
should contact the Sponsor or the Administrator to obtain the contact information for the Authorized Participants. Shareholders who are not Authorized Participants are only able to redeem their Shares through an Authorized Participant.
Pursuant to the Authorized Participant Agreement, the Sponsor agreed to indemnify the Authorized Participants against certain
liabilities, including liabilities under the 1933 Act, and to contribute to the payments the Authorized Participants may be required to make in respect of those liabilities.
The following description of the procedures for the creation and redemption of Creation Units is only a summary and an investor should refer to the relevant provisions of the Trust Agreement and the form
of Authorized Participant Agreement for more detail. The Trust Agreement and the form of Authorized Participant Agreement are filed as exhibits to the Registration Statement of which this Prospectus is a part.
Creation Procedures
On any Business Day, an Authorized Participant may place an order with the Distributor to create one or more Creation Units. For purposes of processing both purchase and redemption orders, a
Business Day for each Fund means any day on which the NAV of such Fund is determined.
Purchase orders must be
placed by the cut-off time shown on page 4 or earlier if the NYSE, a Funds primary listing exchange or other exchange material to the valuation or operation of such Fund (any Exchange) closes before the cut-off time. If a purchase order
is received prior to the applicable cut-off time, the day on which SEI receives a valid purchase order is the purchase order date. If the purchase order is received after the applicable cut-off time, the purchase order date will be the next day.
Purchase orders are irrevocable. By placing a purchase order, and prior to delivery of such Creation Units, an Authorized Participants DTC account will be charged the non-refundable transaction fee due for the purchase order.
Determination of Required Payment
The total payment required to create each Creation Unit is the NAV of 50,000 Shares of the applicable Fund on the purchase order date plus the applicable transaction fee. For each Fund, Authorized
Participants have create/redeem cut-off times prior to the NAV calculation time, which may be different from the close of U.S. markets, as shown in the table on page 4.
Delivery of Cash
Cash required for settlement will typically be
transferred to the Custodian through: (1) the Continuous Net Settlement (CNS) clearing process of NSCC, as such processes have been enhanced to effect creations and redemptions of Creation Units; or (2) the facilities of DTC on
a Delivery Versus Payment (DVP) basis, which is
- 101 -
the procedure in which the buyers payment for securities is due at the time of delivery. Security delivery and payment are simultaneous. If the Custodian does not receive the cash by the
market close on the first Business Day following the purchase order date (T+1), such order may be charged interest for delayed settlement or cancelled. The Sponsor reserves the right to extend the deadline for the Custodian to receive the cash
required for settlement up to the third Business Day following the purchase order date (T+3). In the event a purchase order is cancelled, the Authorized Participant will be responsible for reimbursing the Fund for all costs associated with
cancelling the order including costs for repositioning the portfolio. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. Additional fees may apply for special settlement. The Creation Unit will be delivered to the
Authorized Participant upon the Custodians receipt of the purchase amount.
Delivery of Exchange of Futures Contract for Related
Position (EFCRP) Futures Contracts or Block Trades
In the event that the Sponsor shall have determined to permit the
Authorized Participant to transfer futures contracts pursuant to an EFCRP or to engage in a block trade purchase of futures contracts from the Authorized Participant with respect to a Fund, as well as to deliver cash, in the creation process,
futures contracts required for settlement must be transferred directly to the Funds account at its FCM. If the cash is not received by the market close on the third Business Day following the purchase order date (T+3); such order may be
charged interest for delayed settlements or cancelled. In the event a purchase order is cancelled, the Authorized Participant will be responsible for reimbursing a Fund for all costs associated with cancelling the order including costs for
repositioning the portfolio. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. The Creation Unit will be delivered to the Authorized Participant upon the Custodians receipt of the cash purchase amount and the
futures contracts.
Suspension or Rejection of Purchase Orders
In respect of any Fund, the Sponsor may, in its discretion, suspend the right to purchase, or postpone the purchase settlement date,
(1) for any period during which any of the NYSE, NYSE Arca, CBOE, CFE, CME (including CBOT and NYMEX) or ICE or other exchange material to the valuation or operation of the Funds is closed or when trading is suspended or restricted on such
exchanges in any of the underlying Reference Assets; (2) for any period during which an emergency exists as a result of which the fulfillment of a purchase order is not reasonably practicable; or (3) for such other period as the Sponsor
determines to be necessary for the protection of the shareholders. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
The Sponsor also may reject a purchase order if:
|
|
|
it determines that the purchase order is not in proper form;
|
|
|
|
the Sponsor believes that the purchase order would have adverse tax consequences to a Fund or its shareholders;
|
|
|
|
the order would be illegal; or
|
|
|
|
circumstances outside the control of the Sponsor make it, for all practical purposes, not feasible to process creations of Creation Units.
|
None of the Sponsor, the Administrator or the Custodian will be liable for the suspension or rejection of
any purchase order.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or more Creation Units mirror the procedures for the creation of Creation
Units. On any Business Day, an Authorized Participant may place an order with the Distributor to redeem one or more Creation Units. If a redemption order is received prior to the applicable cut-off time, the day on which SEI receives a valid
redemption order is the redemption order date. If
- 102 -
the redemption order is received after the applicable cut-off time, or earlier if any Exchange closes before the cut-off time, the redemption order date will be the next day. Redemption orders
are irrevocable. The redemption procedures allow Authorized Participants to redeem Creation Units. Individual shareholders may not redeem directly from a Fund.
By placing a redemption order, an Authorized Participant agrees to deliver the Creation Units to be redeemed through DTCs book-entry system to the applicable Fund not later than noon (Eastern Time),
on the first Business Day immediately following the redemption order date (T+1). The Sponsor reserves the right to extend the deadline for the Fund to receive the Creation Units required for settlement up to the third Business Day following the
redemption order date (T+3). By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant must wire to the Custodian the non-refundable transaction fee due for the redemption order or any proceeds due
will be reduced by the amount of the fee payable. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. Additional fees may apply for special settlement.
Upon request of an Authorized Participant made at the time of a redemption order, the Sponsor at its sole discretion may determine, in
addition to delivering redemption proceeds, to transfer futures contracts to the Authorized Participant pursuant to an EFCRP or to a block trade sale of futures contracts to the Authorized Participant.
Determination of Redemption Proceeds
The redemption proceeds from a Fund consist of the cash redemption amount and, if permitted by the Sponsor in its sole discretion with respect to a Fund, an EFCRP or block trade with the relevant Fund as
described in Creation and Redemption of Shares above. The cash redemption amount is equal to the NAV of the number of Creation Unit(s) of such Fund requested in the Authorized Participants redemption order as of the time of the
calculation of such Funds NAV on the redemption order date, less transaction fees and any amounts attributable to any applicable EFCRP or block trade.
Delivery of Redemption Proceeds
The redemption proceeds due from a
Fund are delivered to the Authorized Participant at noon (Eastern Time), on the third Business Day immediately following the redemption order date if, by such time on such Business Day immediately following the redemption order date, a Funds
DTC account has been credited with the Creation Units to be redeemed. The Fund should be credited through: (1) the CNS clearing process of NSCC, as such processes have been enhanced to effect creations and redemptions of Creation Units; or
(2) the facilities of DTC on a Delivery Versus Payment basis. If a Funds DTC account has not been credited with all of the Creation Units to be redeemed by such time, the redemption distribution is delivered to the extent whole Creation
Units are received. Any remainder of the redemption distribution is delivered on the next Business Day to the extent any remaining whole Creation Units are received if: (1) the Sponsor receives the fee applicable to the extension of the
redemption distribution date which the Sponsor may, from time to time, determine, and (2) the remaining Creation Units to be redeemed are credited to the Funds DTC account by noon (Eastern Time), on such next Business Day. Any further
outstanding amount of the redemption order may be cancelled. The Authorized Participant will be responsible for reimbursing a Fund for all costs associated with cancelling the order including costs for repositioning the portfolio.
The Sponsor is also authorized to deliver the redemption distribution notwithstanding that the Creation Units to be redeemed are not
credited to a Funds DTC account by noon (Eastern Time), on the third Business Day immediately following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the Creation Units through DTCs
book-entry system on such terms as the Sponsor may determine from time to time.
- 103 -
In the event that the Authorized Participant shall have requested, and the Sponsor shall
have determined to permit the Authorized Participant to receive futures contracts pursuant to an EFCRP, as well as the cash redemption proceeds, in the redemption process, futures contracts required for settlement shall be transferred directly from
the Funds account at its FCM to the account of the Authorized Participant at its FCM.
Suspension or Rejection of Redemption
Orders
In respect of any Fund, the Sponsor may, in its discretion, suspend the right of redemption, or postpone the
redemption settlement date, (1) for any period during which any of the NYSE, NYSE Arca, CBOE, CFE, CME (including CBOT and NYMEX) or ICE or other exchange material to the valuation or operation of the Funds is closed or when trading is
suspended or restricted on such exchanges in any of the underlying Reference Assets; (2) for any period during which an emergency exists as a result of which the redemption distribution is not reasonably practicable; or (3) for such other
period as the Sponsor determines to be necessary for the protection of the shareholders. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
The Sponsor will reject a redemption order if the order is not in proper form as described in the form of Authorized Participant
Agreement or if the fulfillment of the order might be unlawful.
Creation and Redemption Transaction Fee
To compensate BBH&Co. for services in processing the creation and redemption of Creation Units and to offset some or
all of the transaction costs, an Authorized Participant may be required to pay a fixed transaction fee to BBH&Co. of up to $500 per order to create or redeem Creation Units and may pay a variable transaction fee to a Fund of up to 0.10% of the
value of a Creation Unit. An order may include multiple Creation Units. The transaction fee(s) may be reduced, increased or otherwise changed by the Sponsor at its sole discretion.
Special Settlement
The Sponsor may allow for
early settlement of purchase or redemption orders. Such arrangements may result in additional charges to the Authorized Participant.
- 104 -
LITIGATION
As of the date of this Prospectus, there is no pending legal proceeding, other than ordinary routine litigation incidental to the
business of the Trust and that which is described below, to which the Trust or a Fund is a claimant or defendant or to which any of their property is the subject.
As of the date of this Prospectus, there are no material administrative, civil or criminal actions, whether pending or concluded, within five years preceding the date of the Prospectus, against the
Sponsor. Louis Mayberg and Michael Sapir, both principals of the Sponsor, have been named as defendants in a purported class action lawsuit in the United States District Court for the Southern District of New York, styled
In re ProShares Trust
Securities Litigation, Civ. No. 09-cv-6935
. The Trust is also a defendant in this action, along with several others. The action was initially brought by Steven Novick, on behalf of himself and all others similarly situated, in a complaint
filed August 5, 2009, and was consolidated on April 28, 2011, with 33 related putative class actions. The second amended complaint alleges that the defendants violated Sections 11 and 15 of the 1933 Act by including untrue statements
of material fact and omitting material facts in the Registration Statement for one or more of ProShares exchange-traded funds (ETFs) and allegedly failing to adequately disclose the funds investment objectives and risks.
Claimants, all purchasers of shares of ETFs sold by the Trust or ProShares Trust, seek class certification, compensatory damages, punitive damages, litigation costs, expectation damages and declaratory judgment. The six other series of the Trust
named in the complaint are ProShares Ultra Silver, ProShares Ultra Gold, ProShares UltraShort Gold, ProShares UltraShort DJ-UBS Crude Oil, ProShares Ultra DJ-UBS Crude Oil, and ProShares UltraShort Silver. On September 10, 2012, the District
Court issued an Opinion and Order dismissing the class action lawsuit in its entirety. On December 17, 2012, the plaintiffs filed an appeal brief to the United States Court of Appeals for the Second Circuit. Oral argument on
plaintiffs appeal before the United States Court of Appeals for the Second Circuit was held on May 2, 2013. The Trust believes the complaint is without merit and that the anticipated outcome will not adversely impact the operation of the
Trust or any of its funds. Accordingly, no loss contingency has been recorded in the balance sheet and the amount of loss, if any, cannot be reasonably estimated at this time.
JBL currently is an indirect, wholly owned subsidiary of Jefferies Group, LLC, which in turn is an indirect, wholly owned subsidiary of Leucadia National Corporation. Prior to July 1, 2011, JBL had
been an indirect, wholly owned subsidiary of Prudential Financial, Inc., operating under the name Prudential Bache Commodities, LLC. JBL is registered as an FCM with the CFTC and is a member of the NFA. Goldman Sachs, JBL and RBC are clearing
members of the CBOT, CME, NYMEX, and all other major U.S. commodity exchanges. Merrill Lynch is registered as an FCM with the CFTC and is a member of the NFA. Merrill Lynch is a clearing member of the CBOT and the CME, and is either a clearing
member or member of all other principal U.S. futures and futures options exchanges. With regard to those domestic futures and futures options exchanges of which it is not a clearing member, Merrill Lynch has entered into third-party brokerage
relationships with FCMs that are clearing members of those exchanges.
From time to time, each of Goldman Sachs, JBL, Merrill
Lynch and RBC (in its capacity as a commodities broker) and its respective principals may be involved in numerous legal actions, some of which individually and all of which in the aggregate, seek significant or indeterminate damages. However, except
for the actions described in the section entitled Futures Commission MerchantsLitigation and Regulatory Disclosure Relating to FCMs beginning on page 51, each of Goldman Sachs, JBL, Merrill Lynch and RBC has advised that
during the five years preceding the date of this Prospectus there has been no material administrative, civil, or criminal action against it or any of its respective principals.
- 105 -
DESCRIPTION OF THE SHARES; THE FUNDS; CERTAIN MATERIAL
TERMS OF THE TRUST AGREEMENT
The following summary describes in brief the Shares and certain aspects of the operation of the Trust, the Funds, and the respective responsibilities of the Trustee and the Sponsor concerning the Trust
and the material terms of the Trust Agreement. Prospective investors should carefully review the Trust Agreement filed as an exhibit to the Registration Statement of which this Prospectus is a part and consult with their own advisers concerning the
implications to such prospective investors of investing in a series of a Delaware statutory trust. Capitalized terms used in this section and not otherwise defined shall have such meanings assigned to them under the Trust Agreement.
Description of the Shares
Each Fund issues, or will issue, common units of beneficial interest, or Shares, which represent units of fractional undivided beneficial interest in and ownership of the Funds.
The Shares may be purchased from the Funds or redeemed on a continuous basis, but only by Authorized Participants and only in Creation
Units. Individual Shares may not be purchased or redeemed from the Funds. Shareholders that are not Authorized Participants may not purchase or redeem any Shares or Creation Units from the Funds.
Principal Office; Location of Records; Fiscal Year
The Trust is organized as a statutory trust under the DSTA. The Trust is managed by the Sponsor, whose office is located at 7501 Wisconsin
Avenue, Suite 1000, Bethesda, Maryland 20814.
The books and records of the Funds are maintained as follows: all
marketing materials are maintained at the offices of SEI, One Freedom Valley Drive, Oaks, Pennsylvania 19456. Creation Unit creation and redemption books and records, certain financial books and records (including Fund accounting records, ledgers
with respect to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related details) and certain trading and related documents received from FCMs are maintained by BBH&Co., 50 Milk Street, Boston,
Massachusetts 02109.
All other books and records of the Funds (including minute books and other general corporate records,
trading records and related reports) are maintained at the Funds principal office, c/o ProShare Capital Management LLC, 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814.
Trust books and records located at the foregoing addresses, are available for inspection and copying (upon payment of reasonable
reproduction costs) by Fund shareholders or their representatives for any purposes reasonably related to such shareholders interest as a beneficial owner during regular business hours as provided in the Trust Agreement. The Sponsor will
maintain and preserve the Trusts books and records for a period of not less than six years.
The fiscal year of each
Fund ends on December 31 of each year.
The Funds
The Trust is formed and operated in a manner such that each Fund is liable only for obligations attributable to such Fund and shareholders
of a Fund are not subject to the losses or liabilities of any other series of the Trust. If any creditor or shareholder in a Fund asserted against a Fund a valid claim with respect to its indebtedness or Shares, the creditor or shareholder would
only be able to recover money from that particular Fund and its assets. Accordingly, the debts, liabilities, obligations and expenses, or, collectively, claims, incurred, contracted for or
- 106 -
otherwise existing solely with respect to a particular Fund, are enforceable only against the assets of that Fund, and not against any other series of the Trust or the Trust generally, or any of
their respective assets. The assets of each Fund include only those funds and other assets that are paid to, held by, or distributed to the Fund on account of and for the benefit of that Fund, including, without limitation, funds delivered to the
Trust for the purchase of Shares or Creation Units in a Fund. This limitation on liability is referred to as the Inter-Series Limitation on Liability. The Inter-Series Limitation on Liability is expressly provided for under the DSTA,
which provides that if certain conditions (as set forth in Section 3804(a)) are met, then the debts of any particular series will be enforceable only against the assets of such series and not against the assets of any other series of the Trust
or the Trust generally.
The Trustee
Wilmington Trust Company, a Delaware trust company, is the sole Trustee of the Trust. The rights and duties of the Trustee and the Sponsor
with respect to the offering of the Shares and Fund management and the shareholders are governed by the provisions of the DSTA and by the Trust Agreement. The Trustee will accept service of legal process on the Trust in the State of Delaware and
will make certain filings under the DSTA. The Trustee does not owe any other duties to the Trust, the Sponsor or the shareholders of a Fund. The Trustees principal offices are located at 1100 North Market Street, Wilmington, Delaware 19890.
The Trustee is unaffiliated with the Sponsor.
The Trustee is permitted to resign upon at least sixty (60) days
notice to the Trust,
provided
, that any such resignation will not be effective until a successor Trustee is appointed by the Sponsor. The Trustee is compensated by the Funds, as appropriate, and is indemnified by the Funds, as appropriate,
against any expenses it incurs relating to or arising out of the formation, operation or termination of such Fund, as appropriate, or the performance of its duties pursuant to the Trust Agreement, except to the extent that such expenses result from
the gross negligence or willful misconduct of the Trustee. The Sponsor has the discretion to replace the Trustee.
Only the
assets of the Trust and the Sponsor are subject to issuer liability under the federal securities laws for the information contained in this Prospectus and under federal securities laws with respect to the issuance and sale of the Shares. Under such
laws, neither the Trustee, either in its capacity as Trustee or in its individual capacity, nor any director, officer or controlling person of the Trustee is, or has any liability as, the issuer or a director, officer or controlling person of the
issuer of the Shares. The Trustees liability in connection with the issuance and sale of the Shares is limited solely to the express obligations of the Trustee set forth in the Trust Agreement.
Under the Trust Agreement, the Sponsor has exclusive management and control of all aspects of the Trusts business. The Trustee has
no duty or liability to supervise the performance of the Sponsor, nor will the Trustee have any liability for the acts or omissions of the Sponsor. The shareholders have no voice in the day-to-day management of the business and operations of the
Funds and the Trust, other than certain limited voting rights as set forth in the Trust Agreement. In the course of its management of the business and affairs of the Funds and the Trust, the Sponsor may, in its sole and absolute discretion, appoint
an affiliate or affiliates of the Sponsor as additional sponsors and retain such persons, including affiliates of the Sponsor, as it deems necessary to effectuate and carry out the purposes, business and objectives of the Trust.
Because the Trustee has no authority over the Trusts operations, the Trustee itself is not registered in any capacity with the
CFTC.
The Sponsor
ProShare Capital Management LLC, is the Sponsor of the Trust, the Funds and the other series of the Trust. As noted above, the Sponsor has exclusive management and control of all aspects of the business
of the Funds. The Trustee has no duty or liability to supervise the performance of the Sponsor, nor will the Trustee have any liability for the acts or omissions of the Sponsor.
- 107 -
The Sponsor serves as the Trusts commodity pool operator.
Specifically, with respect to the Trust, the Sponsor:
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selects the Funds service providers;
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negotiates various agreements and fees;
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performs such other services as the Sponsor believes that the Trust may require from time to time;
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selects the FCM and Financial Instrument counterparties, if any;
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manages the Funds portfolio of other assets, including cash equivalents; and
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manages the Funds with a view toward achieving the Funds investment objectives.
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The Shares are not deposits or other obligations of the Sponsor, the Trustee or any of their respective subsidiaries or affiliates or any
other bank, are not guaranteed by the Sponsor, the Trustee or any of their respective subsidiaries or affiliates or any other bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. An investment in
the Shares of the Funds offered hereby is speculative and involves a high degree of risk.
The principal office of the Sponsor
is located at 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814. The telephone number of the Sponsor is (240) 497-6400.
Background and Principals
The Sponsor currently serves as the commodity pool operator of the Trust and the Funds, and previously also served as the commodity
trading advisor to the Trust and the Funds. The Sponsor is registered as a commodity pool operator with the CFTC and is a member in good standing of the NFA. The Sponsors membership with the NFA was originally approved on June 11, 1999.
It withdrew its membership with the NFA on August 31, 2000 but later re-applied and had its membership subsequently approved on January 8, 2001. Its membership with the NFA is currently effective. The Sponsors registration as a
commodity trading advisor was approved on June 11, 1999. On February 17, 2013, the Sponsors commodity trading advisor registration was withdrawn. The Sponsors registration as a commodity pool operator was originally approved on
June 11, 1999. It withdrew its registration as a commodity pool operator on August 30, 2000 but later re-applied and had its registration subsequently approved on November 28, 2007. Its registration as a commodity pool operator is
currently effective. As a registered commodity pool operator, with respect to the Trust, the Sponsor must comply with various regulatory requirements under the CEA, and the rules and regulations of the CFTC and the NFA, including investor protection
requirements, antifraud prohibitions, disclosure requirements, and reporting and recordkeeping requirements. The Sponsor is also subject to periodic inspections and audits by the CFTC and NFA. Its principal place of business is 7501 Wisconsin
Avenue, Suite 1000, Bethesda, Maryland 20814, and its telephone number is (240) 497-6400. The registration of the Sponsor with the CFTC and its membership in the NFA must not be taken as an indication that either the CFTC or the NFA has
recommended or approved the Sponsor, the Trust and the Funds.
In its capacity as a commodity pool operator, the Sponsor is an
organization which operates or solicits funds for commodity pools; that is, an enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures contracts. For past performance of commodity pools operated
by the Sponsor, see the section entitled Performance of the Offered Commodity Pools Operated by the Commodity Pool Operator beginning on page 42 and the section entitled Performance of Other Commodity Pools Operated by the
Commodity Pool Operator beginning on page 89.
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Executive Officers of the Trust and Principals and Significant Employees of the Sponsor
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Name
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Position
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Michael L. Sapir
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Chief Executive Officer and Principal of the Sponsor
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Louis M. Mayberg
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Principal Executive Officer of the Trust; Chief Financial Officer and Principal of the Sponsor
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William E. Seale
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Principal of the Sponsor
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Sapir Family Trust
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Principal of the Sponsor
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Northstar Trust
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Principal of the Sponsor
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Edward J. Karpowicz
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Principal Financial Officer of the Trust
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Todd B. Johnson*
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Chief Investment Officer and Principal of the Sponsor
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Howard S. Rubin
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Director, Portfolio Management and Associated Person of the Sponsor
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Michael Neches
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Senior Portfolio Manager and Associated Person of the Sponsor
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Ryan Dofflemeyer
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Portfolio Manager and Associated Person of the Sponsor
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Jeffrey Ploshnick
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Senior Portfolio Manager and Associated Person of the Sponsor
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Lisa P. Johnson
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Principal of the Sponsor
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Victor M. Frye
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Principal of the Sponsor
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*
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Denotes principal of the Sponsor who supervises persons who participate in making trading decisions for the Funds.
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The following is a biographical summary of the business experience of the executive officers of the Trust and the principals and
significant employees of the Sponsor.
ProFund Advisors LLC (PFA) and ProShare Advisors LLC (PSA) are
investment advisers registered under the Investment Advisers Act of 1940 (the Advisers Act). PFA is also a commodity trading advisor registered under the CEA.
Michael L. Sapir
, Chairman, Chief Executive Officer and a listed principal of the Sponsor since August 14, 2008; Chairman, Chief Executive Officer and a member of PFA since April 1997, and a
listed principal of PFA since November 26, 2012; and Chairman, Chief Executive Officer and a member of PSA since January 2005. As Chairman and Chief Executive Officer of the Sponsor, PSA and PFA, Mr. Sapirs responsibilities include
oversight of all aspects of the Sponsor, PSA and PFA, respectively.
Louis M. Mayberg
, Chief Financial Officer, a
member and a listed principal of the Sponsor since June 9, 2008; a member of PFA since April 1997 and a listed principal of PFA since November 26, 2012; and a member of PSA, since January 2005. Principal Executive Officer of the Trust
since June 2008. As Chief Financial Officer of the Sponsor, Mr. Maybergs responsibilities include oversight of the financial matters of the Sponsor. As Principal Executive Officer of the Trust, his responsibilities include oversight of
operations of the Trust.
William E. Seale, Ph.D.
, a member of the Sponsor and a listed principal of the Sponsor since
June 11, 1999; a member of PFA since April 1997; and a member of PSA since April 2005. He served as Chief Investment Officer of PFA from January 2003 to July 2005 and from October 2006 to June 2008 and Director of Portfolio from January 1997 to
January 2003. He served as Chief Investment Officer of PSA from October 2006 to June 2008. In these roles, Dr. Seales responsibilities included oversight of the investment management activities of the respective entities. Dr. Seale
is a former commissioner of the CFTC.
Sapir Family Trust
, a listed principal of the Sponsor. The Sapir Family Trust
has ownership interest in the Sponsor and PSA. The Sapir Family Trust has passive ownership interest in the Sponsor and exercises no management authority over the Funds.
Northstar Trust
, a listed principal of the Sponsor. Northstar Trust has ownership interest in the Sponsor and PFA. Northstar Trust has passive ownership interest in the Sponsor and exercises no
management authority over the Funds.
- 109 -
Edward J. Karpowicz
, Principal Financial Officer of the Trust since July 2008.
Mr. Karpowicz has been employed by PFA since July 2002 as Vice President of Financial Administration.
Todd B.
Johnson
, a registered swap associated person of the Sponsor since January 4, 2013, a registered associated person of the Sponsor since January 29, 2010, a listed principal of the Sponsor since January 16, 2009 and Chief Investment
Officer of the Sponsor since February 27, 2009. In this role, Mr. Johnsons responsibilities include oversight of the investment management activities of the Sponsor. Mr. Johnson has served as Chief Investment Officer of PSA and
PFA since December 2008 and has been registered as an associated person of PFA since December 5, 2012 and listed as a principal of PFA since November 26, 2012. Mr. Johnson served from 2002 to December 2008 at World Asset Management (a
financial services firm), working as President and Chief Investment Officer from January 2006 to December 2008, and as Managing Director and Chief Investment Officer of Quantitative Investments of Munder Capital Management, an asset management firm,
from January 2002 to December 2005.
Howard Rubin, CFA
, a registered associated person and an NFA associate member of
the Sponsor since July 14, 2008 and Director, Portfolio Management of the Sponsor since December 1, 2009. In these roles, Mr. Rubins responsibilities include day-to-day portfolio management of the Funds. Mr. Rubin has been
registered as an associated person of PFA since December 5, 2012. Mr. Rubin has served as Senior Portfolio Manager of PSA since December 2007 and Senior Portfolio Manager of the Sponsor from November 27, 2008 through November 30,
2009. Mr. Rubin has also served as Senior Portfolio Manager of PFA since November 2004 and Portfolio Manager of PFA from April 2000 through November 2004. Mr. Rubin holds the Chartered Financial Analyst (CFA) designation.
Michael Neches
, a registered associated person and an NFA associate member of the Sponsor since November 16, 2011 and Senior
Portfolio Manager of the Sponsor since June 27, 2012. In these roles, Mr. Neches responsibilities include day-to-day portfolio management of the Commodity Index Funds, Commodity Funds and other series of the Trust. Mr. Neches
has been registered as an associated person of PFA since December 5, 2012. Mr. Neches also serves as a Senior Portfolio Manager of PSA since December 2009; has served as Associate Portfolio Manager from January 2007 through November 2009;
and has served as Portfolio Analyst from November 2004 through December 2006.
Jeffrey Ploshnick
, a registered
associated person and an NFA associate member of the Sponsor since April 12, 2011 and Senior Portfolio Manager of the Sponsor since April 12, 2011. In these roles, Mr. Ploshnicks responsibilities include day-to-day portfolio
management of the Currency Funds and certain other series of the Trust. Mr. Ploshnick has been registered as an associated person of PFA since December 5, 2012. Mr. Ploshnick also serves as a Senior Portfolio Manager of PFA since May
2007 and has served as Portfolio Manager from February 2001 to April 2007.
Ryan Dofflemeyer
, a registered associated
person and an NFA associate member of the Sponsor since October 26, 2010 and Portfolio Manager of the Sponsor since January 3, 2011. In these roles, Mr. Dofflemeyers responsibilities include day-to-day portfolio management of
certain series of the Trust. Mr. Dofflemeyer has been registered as an associated person of PFA since December 5, 2012. Mr. Dofflemeyer also serves as a Portfolio Manager of PFA since August 2007 and was a Portfolio Analyst between
October 2003 and August 2007. In addition, Mr. Dofflemeyer also serves as Portfolio Manager for Horizon BetaPro Funds (investment funds) since May 2008 and Portfolio Manager of PSA since March 2010. Mr. Dofflemeyer worked as a Research
Assistant for the Investment Company Institute (investment funds trade organization) from September 2001 to August 2003.
Lisa Johnson
, a listed principal of the Sponsor since November 11, 2008 and a listed principal of PFA since November 26,
2012. Ms. Johnsons responsibilities include the review and approval of advertising material of the Sponsor. Ms. Johnson has been employed with PDI since April 2008 as Head of Compliance. Prior to her employment with PDI,
Ms. Johnson was the Senior Corporate Compliance Officer for ICMA Retirement Corporation (a financial services company) where she was employed from February 2005 to April 2008. She
- 110 -
served as Senior Compliance Officer for Delaware Investments (a financial services firm) from January 2001 to February 2005. Ms. Johnson is FINRA registered and holds Series 7, 24 and
63 licenses. She also possesses a Certified Regulatory and Compliance Professional designation, from the NASD Institute at Wharton.
Victor Frye
, a listed principal of the Sponsor since December 2, 2008 and a listed principal of PFA since November 26, 2012. Mr. Fryes responsibilities include the review and
approval of advertising material of the Sponsor. Mr.
Frye has been employed by PFA since October 2002 as Chief Compliance Officer.
Fiduciary and Regulatory Duties
of the Sponsor
The general fiduciary duties which would otherwise be imposed on the Sponsor (which would make its
operation of the Trust as described herein impracticable due to the strict prohibition imposed by such duties on, for example, conflicts of interest on behalf of a fiduciary in its dealings with its beneficiaries), are replaced by the terms of the
Trust Agreement (to which terms all shareholders, by subscribing to the Shares, are deemed to consent).
The Trust Agreement
provides that the Sponsor and its affiliates shall have no liability to the Trust or to any shareholder for any loss suffered by the Trust arising out of any action or inaction of the Sponsor or its affiliates or their respective directors,
officers, shareholders, partners, members, managers or employees (the Sponsor Related Parties), if the Sponsor Related Parties, in good faith, determined that such course of conduct was in the best interests of the Funds and such course
of conduct did not constitute gross negligence or willful misconduct by the Sponsor Related Parties. The Trust has agreed to indemnify the Sponsor Related Parties against claims, losses or liabilities based on their conduct relating to the Trust,
provided
that the conduct resulting in the claims, losses or liabilities for which indemnity is sought did not constitute gross negligence or willful misconduct and was done in good faith and in a manner reasonably believed to be in the best
interests of the Funds.
Under Delaware law, a beneficial owner of a statutory trust (such as a shareholder of a Fund) may,
under certain circumstances, institute legal action on behalf of himself and all other similarly situated beneficial owners (a class action) to recover damages for violations of fiduciary duties, or on behalf of a statutory trust (a
derivative action) to recover damages from a third party where there has been a failure or refusal to institute proceedings to recover such damages. In addition, beneficial owners may have the right, subject to certain legal
requirements, to bring class actions in federal court to enforce their rights under the federal securities laws and the rules and regulations promulgated thereunder by the SEC. Beneficial owners who have suffered losses in connection with the
purchase or sale of their beneficial interests may be able to recover such losses from the Sponsor where the losses result from a violation by the Sponsor of the anti-fraud provisions of the federal securities laws.
Under certain circumstances, shareholders also have the right to institute a reparations proceeding before the CFTC against the Sponsor
(a registered commodity pool operator), an FCM, as well as those of their respective employees who are required to be registered under the CEA, and the rules and regulations promulgated thereunder. Private rights of action are conferred by the CEA.
Investors in futures and in commodity pools may, therefore, invoke the protections provided thereunder.
The foregoing summary
describing in general terms the remedies available to shareholders under federal law is based on statutes, rules and decisions as of the date of this Prospectus. As this is a rapidly developing and changing area of the law, shareholders who believe
that they may have a legal cause of action against any of the foregoing parties should consult their own counsel as to their evaluation of the status of the applicable law at such time.
Ownership or Beneficial Interest in the Funds
As of the date of this Prospectus, the Sponsor owns (1) 28 Shares of ProShares Ultra Silver; (2) 14 Shares in each of ProShares
Ultra Gold and ProShares UltraShort Euro; (3) 4 Shares of ProShares UltraShort Yen; (4) 3 Shares of ProShares Ultra DJ-UBS Crude Oil; and (5) 2 Shares of ProShares UltraShort DJ-UBS Crude Oil.
- 111 -
As of the date of this Prospectus, the Sponsor does not own any Shares of ProShares UltraShort Gold or ProShares UltraShort Silver. As of the date of this Prospectus, none of the principals of
the Sponsor have an ownership or beneficial interest in any Fund.
Although the Sponsor does not currently trade or hold any
commodity interests for its own account as of the date of this Prospectus, the Sponsor and its principals reserve the right to trade commodity interests for their own accounts. Fund investors will not be permitted to inspect the records of such
persons trades or any written policies related to such trading.
Management; Voting by Shareholders
The shareholders of the Funds take no part in the management or control, and have no voice in the Trusts operations
or business.
The Sponsor has the right unilaterally to amend the Trust Agreement as it applies to the Funds
provided
that the shareholders have the right to vote only if expressly required under Delaware or federal law or rules or regulations of the NYSE Arca, or if submitted to the shareholders by the Sponsor in its sole discretion. No amendment affecting the
Trustee shall be binding upon or effective against the Trustee unless consented to by the Trustee in writing.
Recognition of the Trust and the Funds in Certain States
A number of states do not have statutory trust statutes such as that under which the Trust has been formed in the State of
Delaware. It is possible, although unlikely, that a court in such a state could hold that, due to the absence of any statutory provision to the contrary in such jurisdiction, the shareholders, although entitled under Delaware law to the same
limitation on personal liability as stockholders in a private corporation for profit organized under the laws of the State of Delaware, are not so entitled in such state.
Possible Repayment of Distributions Received by Shareholders
The Shares are limited liability investments; investors may not lose more than the amount that they invest plus any profits recognized on their investment. However, shareholders of the Funds could be
required, as a matter of bankruptcy law, to return to the estate of a Fund any distribution they received at a time when such Fund was in fact insolvent or in violation of the Trust Agreement.
Shares Freely Transferable
The Shares of each Fund trade on the NYSE Arca and provide institutional and retail investors with direct access to each Fund. Each Funds Shares may be bought and sold on the NYSE Arca like any
other exchange-listed security.
Book-Entry Form
Individual certificates will not be issued for the Shares. Instead, global certificates are deposited by the Trust with DTC and registered
in the name of Cede & Co., as nominee for DTC. The global certificates evidence all of the Shares outstanding at any time. Under the Trust Agreement, shareholders are limited to (1) participants in DTC such as banks, brokers, dealers
and trust companies (DTC Participants), (2) those who maintain, either directly or indirectly, a custodial relationship with a DTC Participant (Indirect Participants), and (3) those banks, brokers, dealers, trust
companies and others who hold interests in the Shares through DTC Participants or Indirect Participants. The Shares are only transferable through the book-entry system of DTC. Shareholders who are not DTC Participants may transfer their Shares
through DTC by instructing the DTC Participant holding their Shares (or by instructing the Indirect Participant or other entity through which their Shares are held) to transfer the Shares. Transfers are made in accordance with standard securities
industry practice.
- 112 -
Reports to Shareholders
The Sponsor will furnish an annual report of the Funds in the manner required by the rules and regulations of the SEC as well as with
those reports required by the CFTC and the NFA, including, but not limited to, annual audited financial statements of the Funds examined and certified by independent registered public accountants and any other reports required by any other
governmental authority that has jurisdiction over the activities of the Funds. Monthly account statements conforming to CFTC and NFA requirements are posted on the Sponsors website at
www.ProShares.com
. Shareholders of record will also
be provided with appropriate information to permit them to file U.S. federal and state income tax returns with respect to Shares held. Additional reports may be posted on the Sponsors website at the discretion of the Sponsor or as required by
regulatory authorities.
The Sponsor will notify shareholders of any change in the fees paid by the Trust or of any material
changes to the Funds by filing with the SEC a supplement to this Prospectus and a Form 8-K, as applicable, which will be publicly available at
www.sec.gov
and at the Sponsors website at
www.ProShares.com
. Any such
notification will include a description of shareholders voting rights.
Net Asset Value (NAV)
The NAV in respect of a Fund, means the total assets of that Fund including, but not limited to, all cash and cash
equivalents or other debt securities less total liabilities of such Fund, consistently applied under the accrual method of accounting. In particular, the NAV includes any unrealized profit or loss on open Financial Instruments, and any other credit
or debit accruing to a Fund but unpaid or not received by a Fund. The NAV per Share of a Fund is computed by dividing the value of the net assets of such Fund (
i.e.
, the value of its total assets less total liabilities) by its total number of
Shares outstanding. Expenses and fees are accrued daily and taken into account for purposes of determining the NAV. Each Funds NAV is calculated on each day other than a day when one (or more) of such Funds Exchanges is closed for
regular trading. The Funds compute their NAVs at the times set forth below, or an earlier time as set forth on
www.ProShares.com
if necessitated by an Exchange closing early.
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Fund
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NAV Calculation Time*
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ProShares Ultra Silver
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7:00 a.m. (Eastern Time)
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ProShares UltraShort Silver
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ProShares Ultra Gold
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10:00 a.m. (Eastern Time)
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ProShares UltraShort Gold
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ProShares Ultra DJ-UBS Crude Oil
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2:30 p.m. (Eastern Time)
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ProShares UltraShort DJ-UBS Crude Oil
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ProShares UltraShort Euro
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4:00 p.m. (Eastern Time)
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ProShares UltraShort Yen
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4:00 p.m. (Eastern Time)
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For silver and gold, this time may vary due to differences in when daylight savings time is effective between London and New York. The actual times equate to noon
London time for silver, and 3:00 p.m. London time for gold.
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In calculating the NAV of a Fund, the
settlement value of the Funds non-exchange traded Financial Instruments, is determined by applying the then-current disseminated levels for the applicable benchmark to the terms of such Funds non-exchange traded Financial Instruments.
However, in the event that an underlying Reference Asset is not trading due to the operation of daily limits or otherwise, the Sponsor may, in its sole discretion, choose to fair value the index level in order to value the Funds non-exchange
traded Financial Instruments for purposes of the NAV calculation. Such fair value prices would generally be determined based on available inputs about the current value of the underlying Reference Assets and would be based on principles that the
Sponsor deems fair and equitable so long as such principles are consistent with normal industry standards.
- 113 -
Futures contracts traded on a U.S. exchange are calculated at their then current market
value, which is based upon the settlement price or the last traded price before the NAV time (for the Currency Funds), for that particular futures contract traded on the applicable U.S. exchange on the date with respect to which the NAV is being
determined. If a futures contract traded on a U.S. exchange could not be liquidated on such day, due to the operation of daily limits or other rules of the exchange upon which that position is traded or otherwise, the Sponsor may, in its sole
discretion, choose to determine a fair value price as the basis for determining the market value of such position for such day. Such fair value prices would generally be determined based on available inputs about the current value of the underlying
Reference Assets and would be based on principles that the Sponsor deems fair and equitable so long as such principles are consistent with normal industry standards.
The Funds may use a variety of money market instruments to invest excess cash. Short-term debt instruments used in this capacity and expected to be held-to-maturity will be priced for NAV purposes at
amortized cost.
Indicative Optimized Portfolio Value (IOPV)
The IOPV is an indicator of the value of a Funds net assets at the time the IOPV is disseminated. The IOPV is
calculated and disseminated every 15 seconds throughout the trading day. The IOPV is generally calculated using the prior days closing net assets of a Fund as a base and updating throughout the trading day changes in the value of the
Financial Instruments held by a Fund. The IOPV should not be viewed as an actual real time update of the NAV because NAV is calculated only once at the end of each trading day. The IOPV also should not be viewed as a precise value of the Shares. The
IOPV for Funds based on the Dow JonesUBS WTI Crude Oil Subindex
SM
will not update following the determination of the 2:30 p.m. settlement price of the futures contracts underlying that index.
The NYSE Arca disseminates the IOPV. In addition, the IOPV is published on the NYSE Arcas website and is available through on-line
information services such as Bloomberg and/or Reuters.
Termination Events
The Trust, or, as the case may be, a Fund, may be dissolved at any time and for any reason by the Sponsor with written notice to the
shareholders.
DISTRIBUTIONS
The Sponsor does not expect to make distributions. Depending on a Funds performance and an investors own tax situation, an
investors income tax liability for his, her or its allocable share of such Funds net ordinary income or loss and capital gain or loss may exceed the capital gains an investor may realize from selling his, her or its shares of such Fund
in a taxable year.
THE ADMINISTRATOR
The Sponsor and the Trust, on behalf of itself and on behalf of the Funds, have appointed BBH&Co. as the Administrator of the Funds
and BBH&Co. has entered into an administrative agency agreement (the Administrative Agency Agreement) with the Trust (for itself and on behalf of the Funds) and the Sponsor in connection therewith. In addition, BBH&Co. serves as
Transfer Agent of the Funds pursuant to the Administrative Agency Agreement. A copy of the Administrative Agency Agreement is available for inspection at BBH&Co.s offices identified above.
The Administrators fees are paid on behalf of the Funds by the Sponsor out of the Management Fee.
- 114 -
Pursuant to the terms of the Administrative Agency Agreement and under the supervision and
direction of the Sponsor, BBH&Co. prepares and files certain regulatory filings on behalf of the Funds. BBH&Co. may also perform other services for the Funds pursuant to the Administrative Agency Agreement as mutually agreed to from time to
time.
The Administrator and any of its affiliates may from time to time purchase or sell Shares for their own account, as
agent for their customers and for accounts over which they exercise investment discretion.
The Sponsor, on behalf of the
Funds, is expected to retain the services of one or more additional service providers to assist with certain tax reporting requirements of the Funds and their shareholders.
BBH&Co., a private bank founded in 1818, is not a publicly held company nor is it insured by the Federal Deposit Insurance Corporation. BBH&Co. is authorized to conduct a commercial banking
business in accordance with the provisions of Article IV of the New York State Banking Law, New York Banking Law §§ 160 181, and is subject to regulation, supervision, and examination by the New York State Banking
Department. BBH&Co. is also licensed to conduct a commercial banking business by the Commonwealths of Massachusetts and Pennsylvania and is subject to supervision and examination by the banking supervisors of those states.
THE CUSTODIAN
BBH&Co. serves as the Custodian of the Funds and has entered into a custodian agreement (the Custodian Agreement) with the Trust (for itself and on behalf of the Funds) in connection
therewith. Pursuant to the terms of the Custodian Agreement, BBH&Co. is responsible for the holding and safekeeping of assets delivered to it by the Funds, and performing various administrative duties in accordance with instructions delivered to
BBH&Co. by the Funds. The Custodians fees are paid on behalf of the Funds by the Sponsor out of the Management Fee.
THE TRANSFER AGENT
BBH&Co. serves as the Transfer Agent of the Funds for Authorized Participants and has entered into the Administrative Agency Agreement referred to above in connection therewith. Pursuant to the terms
of the Administrative Agency Agreement, BBH&Co. is responsible for processing purchase and redemption orders and maintaining records of the ownership of the Funds. The Transfer Agent fees are paid on behalf of the Funds by the Sponsor out of the
Management Fee.
THE DISTRIBUTOR
SEI serves as the Distributor of the Funds and assists the Sponsor and the Administrator with functions and duties relating to
distribution and marketing, which include the following: taking creation and redemption orders, and consulting with the marketing staff of the Sponsor and its affiliates with respect to compliance matters in connection with marketing efforts.
SEI retains all marketing materials separately for the Funds, at the offices of SEI, One Freedom Valley Drive, Oaks,
Pennsylvania 19456; and its telephone number is (610) 676-1000.
The Sponsor, out of the relevant Management Fee, pays
SEI for performing its duties on behalf of the Funds. For more information on the compensation paid to SEI, see the section entitled Plan of DistributionGeneral on page 122.
Description of SEI
SEI is a wholly owned
subsidiary of SEI Investments Company, which is a public company and a global provider of investment processing, fund processing, and investment management business outsourcing solutions.
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THE SECURITIES DEPOSITORY; BOOK-ENTRY ONLY SYSTEM; GLOBAL
SECURITY
DTC acts as securities depository for the Shares. DTC is a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of
section 17A of the 1934 Act. DTC was created to hold securities of DTC Participants and to facilitate the clearance and settlement of transactions in such securities among the DTC Participants through electronic book-entry changes. This
eliminates the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives)
own DTC. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly. DTC has agreed to
administer its book-entry system in accordance with its rules and bylaws and the requirements of law.
Individual certificates
will not be issued for the Shares. Instead, global certificates are signed by the Sponsor on behalf of the Funds, registered in the name of Cede & Co., as nominee for DTC, and deposited with the Trust on behalf of DTC. The global
certificates evidence all of the Shares of the Funds outstanding at any time. The representations, undertakings and agreements made on the part of the Funds in the global certificates are made and intended for the purpose of binding only the Funds
and not the Trustee or the Sponsor individually.
Upon the settlement date of any creation, transfer or redemption of Shares,
DTC credits or debits, on its book-entry registration and transfer system, the amount of the Shares so created, transferred or redeemed to the accounts of the appropriate DTC Participants. The Sponsor and the Authorized Participants designate the
accounts to be credited and charged in the case of creation or redemption of Shares.
Beneficial ownership of the Shares is
limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Owners of beneficial interests in the Shares are shown on, and the transfer of ownership is effected only through,
records maintained by DTC (with respect to DTC Participants), the records of DTC Participants (with respect to Indirect Participants) and the records of Indirect Participants (with respect to shareholders that are not DTC Participants or Indirect
Participants). Shareholders are expected to receive from or through the DTC Participant maintaining the account through which the shareholder has purchased their Shares a written confirmation relating to such purchase.
Shareholders that are not DTC Participants may transfer the Shares through DTC by instructing the DTC Participant or Indirect Participant
through which the shareholders hold their Shares to transfer the Shares. Shareholders that are DTC Participants may transfer the Shares by instructing DTC in accordance with the rules of DTC. Transfers are made in accordance with standard securities
industry practice.
DTC may decide to discontinue providing its service with respect to Creation Units and/or the Shares of
the Funds by giving notice to the Trust and the Sponsor. Under such circumstances, the Sponsor will either find a replacement for DTC to perform its functions at a comparable cost or, if a replacement is unavailable, terminate the Funds.
The rights of the shareholders generally must be exercised by DTC Participants acting on their behalf in accordance with the rules and
procedures of DTC. Because the Shares can only be held in book-entry form through DTC and DTC Participants, investors must rely on DTC, DTC Participants and any other financial intermediary through which they hold the Shares to receive the benefits
and exercise the rights described in this section. Investors should consult with their broker or financial institution to find out about procedures and requirements for securities held in book-entry form through DTC.
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SHARE SPLITS OR REVERSE SPLITS
If the Sponsor believes that the per Share price of a Fund in the secondary market has fallen outside a desirable trading price range,
the Sponsor may direct the Trust to declare a split or reverse split in the number of Shares outstanding and, if necessary in the Sponsors opinion, to make a corresponding change in the number of Shares of a Fund constituting a Creation Unit.
CONFLICT OF INTEREST
The Sponsor has not established formal procedures to resolve all potential conflicts of interest. Consequently, investors may be
dependent on the good faith of the respective parties subject to such conflicts to resolve them equitably. The Sponsor does not expect that material conflicts of interest will arise in the operation of the Funds, each of which operates independently
of the others.
MATERIAL CONTRACTS
Administrative Agency Agreement
BBH&Co.
serves as the Funds Administrator pursuant to the terms of the Administrative Agency Agreement among the Trust, on behalf of itself and on behalf of the Funds, the Administrator and the Sponsor. The Administrator performs or supervises the
performance of services necessary for the operation and administration of the Funds (other than making investment decisions or providing services provided by other service providers), including the NAV calculations, accounting and other fund
administrative services.
BBH&Co. serves as the Funds Transfer Agent. Pursuant to the Administrative Agency
Agreement among the Trust, on behalf of itself and on behalf of the Funds, the Transfer Agent and the Sponsor, the Transfer Agent serves as the Funds transfer agent and agent in connection with certain other activities as provided under the
Administrative Agency Agreement. Under the Administrative Agency Agreement, the Transfer Agents services include, among other things, assisting the Funds with the issuance and redemption of Creation Units to and from Authorized Participants,
recording the issuance of Creation Units and maintaining a record of the total number of Creation Units that are authorized, issued and outstanding based upon data provided to the Transfer Agent by the Funds or the Sponsor.
The Administrative Agency Agreement has an initial term of one year and, after the initial term, will continue in effect for successive
one-year periods unless terminated on at least seventy-five (75) days prior written notice by any party to the other parties. Notwithstanding the foregoing, any party may terminate the Administrative Agency Agreement at any time upon
thirty (30) days prior written notice to the other party if either party is adjudged bankrupt or insolvent, or there shall be commenced against such party a case under any applicable bankruptcy, insolvency or other similar law.
In its capacity as Administrator and Transfer Agent, BBH&Co. is both exculpated and indemnified under the Administrative
Agency Agreement.
Custodian Agreement
BBH&Co. serves as the Funds Custodian. Pursuant to the Custodian Agreement between the Trust, on its own behalf and on behalf of
the Funds, and the Custodian, the Custodian serves as custodian of all securities and cash at any time delivered to the Custodian by the Funds during the term of the Custodian Agreement and has authorized the Custodian to hold its securities in its
name or the names of its nominees. Pursuant to the terms of the Custodian Agreement, the Custodian may deposit and/or maintain the investment assets of the Funds in a securities depository and may appoint a subcustodian to hold investment assets of
the Funds. The Custodian
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establishes and maintains one or more securities accounts and cash accounts for the Funds pursuant to the Custodian Agreement. The Custodian maintains separate and distinct books and records
segregating the assets of the Funds.
The Custodian Agreement had an initial term of one year. After the initial term, the
Custodian Agreement continued and will continue in effect for successive one-year periods unless the Trust, on behalf of the Funds, independently, or the Custodian terminates the Custodian Agreement by giving to the other party a notice in writing
specifying the date of such termination, which will not be less than seventy-five (75) days after the date of such notice. In the event of the appointment of a successor custodian, the parties agree that the investment assets of the Funds held
by the Custodian or any subcustodian shall be delivered to the successor custodian in accordance with reasonable instructions described in the Custodian Agreement. The parties further agree to cooperate in the execution of documents and performance
of other actions necessary or desirable in order to facilitate the succession of the new custodian. If no successor custodian is appointed, the Custodian shall in like manner transfer the Funds investment assets in accordance with the
instructions set forth in the Custodian Agreement. If no instructions are given as of the effective date of termination, the Custodian may, at any time on or after such termination date and upon ten (10) consecutive calendar days written
notice to the Fund, either: (1) deliver the investment assets held under the Custodian Agreement to the Fund; or (2) deliver any investment assets held under the Custodian Agreement to a bank or trust company that meets the criteria set
forth in the Custodian Agreement, with such delivery being at the risk of the Funds. In the event that investment assets or moneys of the Funds remain in the custody of the Custodian or its subcustodians after the date of termination of the
Custodian Agreement due to the failure of the Fund to issue instructions with respect to its disposition or the fact that such disposition could not be accomplished in accordance with such instructions despite diligent efforts of the Custodian, the
Custodian shall be entitled to compensation for its services with respect to such investments and moneys during such period as the Custodian or its subcustodians retain possession of such items, and the provisions of the Custody Agreement shall
remain in full force and effect until the disposition of the investment assets.
The Custodian is both exculpated and
indemnified under the Custodian Agreement.
Distribution Agreement
Pursuant to a distribution agreement (the Distribution Agreement) between the Trust and SEI, SEI assists the Sponsor and the
Administrator with certain functions and duties relating to distribution and marketing of Shares including reviewing and approving marketing materials.
The Distribution Agreement became effective on the date of the offering of the Shares of the Funds and the Distribution Agreement will continue until December 19, 2014, continuing automatically for
successive periods of three years. The Distribution Agreement may be terminated by either party at the end of the initial term or the end of any renewal term on ninety (90) days prior written notice. Notwithstanding the foregoing, either
party may terminate the Distribution Agreement in the event of a material breach of the agreement by the other party, upon forty-five (45) days prior written notice, if such breach is not cured. The Distribution Agreement will
automatically terminate in the event of a liquidation of the Trust.
Futures Account Agreement
Each of Goldman Sachs, JBL, Merrill Lynch and RBC, in its capacity as a registered FCM, serves as the Funds clearing broker and as
such arranges for the execution and clearing of the Funds futures transactions. Pursuant to futures account agreements (each, a Futures Account Agreement) between Goldman Sachs and the Funds, JBL and the Funds, Merrill Lynch and
the Funds and RBC and the Funds, the Funds agree to indemnify and hold harmless each of Goldman Sachs, JBL, Merrill Lynch and RBC, its directors, officers, employees, agents and affiliates from and against all claims, damages, losses and costs
(including reasonable attorneys fees) incurred by Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, in connection with: (1) any failure by the
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Funds to perform its obligations under the Futures Account Agreement and any exercise by Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, of its rights and remedies thereunder;
(2) any failure by the Funds to comply with the applicable law; (3) any action reasonably taken by Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, or its affiliates or agents to comply with the applicable law; and (4) any
reliance by Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, on any instruction, notice or communication that Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable reasonably believes to originate from a person authorized to act on behalf
of the Funds. Also, the Funds agree to remain liable for and pay to Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, on demand the amount of any deficiency in the Funds Accounts, and the Funds shall reimburse, compensate and indemnify
Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, for any and all costs, losses, penalties, fines, taxes and damages that Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, may incur in collecting such deficiency or otherwise exercising
its rights and remedies under the Futures Account Agreement.
The Futures Account Agreement may be terminated at any time by
the Funds, or Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, by written notice to the other.
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PURCHASES BY EMPLOYEE BENEFIT PLANS
General
The following section sets forth certain consequences under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, and the Code, which a fiduciary of an employee benefit
plan as defined in and subject to ERISA or of a plan as defined in and subject to Section 4975 of the Code who has investment discretion should consider before deciding to invest the plans assets in a Fund (such
employee benefit plans and plans being referred to herein as Plans, and such fiduciaries with investment discretion being referred to herein as Plan Fiduciaries). The following summary is not intended
to be complete, but only to address certain questions under ERISA and the Code which are likely to be raised by the Plan Fiduciarys own counsel.
In general, the terms employee benefit plan as defined in and subject to Title I of ERISA and plan as defined in Section 4975 of the Code together refer to any plan or
account of various types which provide retirement benefits or welfare benefits to an individual or to an employers employees and their beneficiaries. Such plans and accounts include, but are not limited to, corporate pension and profit-sharing
plans, simplified employee pension plans, plans for self-employed individuals (including partners), individual retirement accounts described in Section 408 of the Code and medical plans.
Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in a Fund,
which may include, among other things, the role that such an investment would play in the Plans overall investment portfolio. Each Plan Fiduciary, before deciding to invest in a Fund, must be satisfied that such investment is prudent for the
Plan, that the investments of the Plan, including the investment in a Fund, are diversified so as to minimize the risk of large losses and that an investment in a Fund complies with the Plan documents and that the purchase will not result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Code.
EACH PLAN FIDUCIARY CONSIDERING ACQUIRING
SHARES ON BEHALF OF A PLAN MUST CONSULT WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO. AN INVESTMENT IN A FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. NONE OF THE FUNDS IS INTENDED AS A COMPLETE INVESTMENT PROGRAM.
Plan Assets
ERISA and a regulation issued thereunder by the U.S. Department of Labor contain rules for determining when an investment by a Plan in an equity interest of an entity will result in the underlying assets
of such entity being considered to constitute assets of the Plan for purposes of ERISA and Section 4975 of the Code (
i.e.
, plan assets). Those rules provide that assets of an entity will not be considered assets of a Plan
which purchases an equity interest in the entity if one or more exceptions apply, including (1) an exception applicable if the equity interest purchased is a publicly-offered security (the Publicly-Offered Security
Exception), and (2) an exception applicable if equity interests purchased by a plan are not significant.
The
Publicly-Offered Security Exception applies if the equity interest is a security that is (1) freely transferable, (2) part of a class of securities that is widely held and (3) either (a) part of a class of
securities registered under Section 12(b) or 12(g) of the 1934 Act, or (b) sold to the Plan as part of a public offering pursuant to an effective registration statement under the 1933 Act and the class of which such security is a part is
registered under the 1934 Act within 120 days (or such later time as may be allowed by the SEC) after the end of the fiscal year of the issuer in which the offering of such security occurred.
The Trust expects that the Publicly-Offered Security Exception should apply with respect to the Shares of each Fund.
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Ineligible Purchasers
Among other considerations, Shares generally may not be purchased with the assets of a Plan if the Sponsor, the FCMs or any of their
respective affiliates, any of their respective employees or any employees of their respective affiliates: (1) has investment discretion with respect to the investment of such plan assets; (2) has authority or responsibility to give or
regularly gives investment advice with respect to such plan assets, for a fee, and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to such plan assets and that such
advice will be based on the particular investment needs of the Plan; or (3) is an employer maintaining or contributing to such Plan. A party that is described in clause (1) or (2) of the preceding sentence would be a fiduciary under
ERISA and the Code with respect to the Plan, and unless an exemption applies, any such purchase might result in a prohibited transaction under ERISA and the Code.
Except as otherwise set forth, the foregoing statements regarding the consequences under ERISA and the Code of an investment in Shares of the Funds are based on the provisions of the Code and ERISA as
currently in effect, and the existing administrative and judicial interpretations thereunder. No assurance can be given that administrative, judicial or legislative changes will not occur that will not make the foregoing statements incorrect or
incomplete.
THE PERSON WITH INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY AND FINANCIAL ADVISERS AS TO THE
PROPRIETY OF AN INVESTMENT IN SHARES IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN AND CURRENT TAX LAW.
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PLAN OF DISTRIBUTION
Buying and Selling Shares
Most investors buy and sell shares in secondary market transactions through brokers. Shares of the Funds trade on the NYSE Arca under the ticker symbols listed in this Prospectus. Shares are bought and
sold throughout the trading day like other publicly traded securities. When buying or selling Shares through a broker, most investors incur customary brokerage commissions and charges.
Authorized Participants
The Funds continuously
offer Shares in Creation Units to Authorized Participants. Shares of the Funds are to be offered to Authorized Participants in Creation Units at each Funds respective NAV.
Authorized Participants may offer to the public, from time to time, Shares of a Fund from any Creation Units they create. Shares of a
Fund offered to the public by Authorized Participants are offered at a per Share market price that varies depending on, among other factors, the trading price of the Shares of each Fund on the NYSE Arca, the NAV per Share and the supply of and
demand for the Shares at the time of the offer. Shares initially comprising the same Creation Unit but offered by Authorized Participants to the public at different times may have different offering prices. Additionally, the price at which an
Authorized Participant sells a Share may be higher or lower than the price paid by such Authorized Participant in connection with the creation of such Share in a Creation Unit. Authorized Participants do not receive from any Fund, the Sponsor or any
of their affiliates, any fee or other compensation in connection with their sale of Shares to the public, although investors are expected to be charged a customary commission by their brokers in connection with the purchase and sale of Shares that
varies from investor to investor. Investors are encouraged to review the terms of their brokerage accounts for applicable charges.
As of the date of this Prospectus, ABN AMRO Clearing Chicago LLC, Banca IMI Securities Corp., Barclays Capital Inc., BNP Paribas Securities Corp., Credit Suisse Securities (USA) LLC, Deutsche Bank
Securities Inc., EWT, LLC, Goldman, Sachs & Co., Goldman Sachs Execution & Clearing, L.P., Jefferies LLC, J.P. Morgan Securities Inc., Knight Clearing Services LLC, Newedge USA LLC, Nomura Securities International, Inc., RBC
Capital Markets, LLC, SG Americas Securities, LLC, Timber Hill, LLC, UBS Securities LLC, Virtu Financial BD LLC and Wedbush Morgan Securities, Inc. have each executed an Authorized Participant Agreement and are the only Authorized Participants.
Likelihood of Becoming a Statutory Underwriter
Each Fund issues Shares in Creation Units to Authorized Participants from time to time in exchange for cash. Because new Shares can be
created and issued on an ongoing basis at any point during the life of each Fund, a distribution, as such term is used in the 1933 Act, will be occurring. An Authorized Participant, other broker-dealer firm or its client could be deemed
a statutory underwriter, and thus would be subject to the prospectus delivery and liability provisions of the 1933 Act, if it purchased a Creation Unit from each Fund, broke the Creation Unit down into the constituent Shares and sold the Shares to
its customers; or if it chose to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for the Shares. A determination of whether one is an underwriter must take into account
all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that would lead to
categorization as an underwriter. Authorized Participants, other broker-dealers and other persons are cautioned that some of their activities may result in their being deemed participants in a distribution in a manner which would render them
statutory underwriters and subject them to the prospectus delivery and liability provisions of the 1933 Act.
Dealers who are
neither Authorized Participants nor underwriters but are participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that are part of an unsold allotment within the
meaning of section 4(3)(C) of the 1933 Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the 1933 Act.
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Summary of Certain Items Paid by the Trust or the Sponsor in Connection with
the Distribution
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Payment
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Recipient
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Payor
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Maximum Payment
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Services Provided
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Distribution/Services Fee
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SEI Investments Distribution, Inc. (SEI)
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ProShare Capital Management LLC (the Sponsor)
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$2,593,167 (or approximately 0.01% of maximum gross offering proceeds)*
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Taking purchase and redemption orders for Creation Units; Providing a prospectus with respect to the above orders; Reviewing any permitted advertising or marketing material; and
Archiving associated records.
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Wholesaling Support and Distribution and Shareholder Services Fee
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ProFunds Distributors, Inc. (PDI), an affiliated broker-dealer of the Sponsor
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ProShare Capital Management LLC (the Sponsor)
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$2,337,639 (or approximately 0.09% of minimum gross offering proceeds)*
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Wholesaling support, including promoting the sale of investment products; Conducting training seminars on investment products; Creating and maintaining advertising and sales
literature files; and retaining associated records.
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Gross offering proceeds includes proceeds from other series of the Trust that are registered on the same registration statement as the Funds but are not
offered by this Prospectus. These series are: ProShares Ultra VIX Short-Term Futures ETF and ProShares VIX Short-Term Futures ETF.
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For additional details, see below.
General
Retail investors may purchase and sell Shares through traditional brokerage accounts. Investors who purchase Shares through a
commission/fee-based brokerage account may pay commissions/fees charged by the brokerage account. Investors are encouraged to review the terms of their brokerage accounts for applicable charges.
The Sponsor (from its own assets) pays SEI for performing its duties on behalf of the Funds. The fees paid to SEI represent the greater
of (i) a fixed amount per fund of the Trust per annum or (ii) 0.0040% of the aggregate average daily net assets of the Trust on assets that are less than or equal to $30 billion and 0.0035% of the aggregate average daily assets of the
Trust on assets that exceed $30 billion. Assuming the minimum gross offering proceeds are sold, the amount payable to SEI in connection with these offerings is estimated to be $427,500, equal to approximately 0.02% of gross offering proceeds.
Assuming the maximum gross offering proceeds are sold, the maximum amount payable to SEI will be $2,593,167, an amount equal to approximately 0.01% of gross offering proceeds. These amounts include reimbursements to SEI for marketing material
review. Gross offering proceeds includes proceeds from other series of the Trust that are registered on the same registration statement as the Funds but are not offered by this Prospectus. These series are: ProShares Ultra VIX Short-Term
Futures ETF and ProShares VIX Short-Term Futures ETF. For a description of services provided by SEI, see the section entitled The Distributor on page 115.
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Also, the Sponsor (from its own assets) pays ProFunds Distributors, Inc. (PDI), an
affiliated broker-dealer of the Sponsor and a FINRA member, to provide wholesaling and distribution/shareholder services support for all funds that it manages. For its services, the Sponsor pays PDI: 1) a fixed amount split among the Sponsor and two
of its investment adviser affiliates
pro rata
based on the amount of net assets managed by that entity; and 2) reimbursements for any sales-related expenses PDI incurs on behalf of the Sponsor. Irrespective of the amount sold, the amount
payable to PDI in connection with these offerings is estimated to be $2,337,639. This amount includes a portion of the fixed amount payable to PDI, along with reimbursements for non-transaction based compensation (salaries), gifts, business
entertainment expenses, training and education. Assuming the minimum gross offering proceeds are sold, this amount would constitute approximately 0.09% of gross offering proceeds. Assuming the maximum gross offering proceeds are sold, this amount
would constitute approximately 0.01% of gross offering proceeds.
The offering of Creation Units is being made in compliance
with FINRA Rule 2310. Accordingly, the Authorized Participants may not make any sales to any account over which they have discretionary authority without the prior written approval of a purchaser of Shares. in any event, the maximum amount of all
items of value, including compensation paid from the offering proceeds and in the form of trail commissions, to be paid to FINRA members, including to SEI and PDI, in connection with the offering of the Shares by a Fund will not exceed
10% of gross offering proceeds.
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LEGAL MATTERS
Sidley Austin LLP has advised the Sponsor in connection with the Shares being offered. Sidley Austin LLP also advises the Sponsor with
respect to its responsibilities as sponsor of, and with respect to matters relating to, the Trust and the Funds. Sidley Austin LLP has prepared the sections Material U.S. Federal Income Tax Considerations with respect to U.S. federal
income tax laws and Purchases By Employee Benefit Plans with respect to ERISA. Sidley Austin LLP has not represented, nor will it represent, the Trust, the Funds or the shareholders in matters relating to the Trust or the Funds and no
other counsel has been engaged to act on their behalf.
Richards, Layton & Finger, P.A. has represented the Trust in
connection with the legality of the Shares being offered hereby.
Certain opinions of counsel have been filed with the SEC as
exhibits to the Registration Statement of which this Prospectus is a part.
EXPERTS
The financial statements and managements assessment of the effectiveness of internal control over financial
reporting (which is included in Managements Report of Internal Control over Financial Reporting) incorporated in this Prospectus by reference to ProShares Trust IIs Amendment No. 1 on Form 10-K/A for the year ended December 31,
2012, have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE INVESTORS CAN FIND MORE INFORMATION
The Trust has filed a Registration Statement on Form S-3 with the SEC under the 1933 Act. This Prospectus constitutes part of the
Registration Statement filed by the Trust for itself and on behalf of each Fund. Additionally, as further discussed under Incorporation by Reference of Certain Documents, we have incorporated by reference certain historical information.
This Prospectus does not contain all of the information set forth in such Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits thereto
(for example, the form of the Authorized Participant Agreement). The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries and may not be complete; the exhibits themselves may be
inspected without charge at the Public Reference Room maintained by the SEC at 100 F Street, NE, Washington, DC 20549, and copies of all or part thereof may be obtained from the SEC upon payment of the prescribed fees. Investors may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically
with the SEC. The address of such site is
www.sec.gov
.
RECENT FINANCIAL INFORMATION AND
ANNUAL REPORTS
You should read the financial statements and the notes to those financial statements in the Trusts
Annual Report on Form 10-K for the year ended December 31, 2012 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, along with any amendments thereto, which have been incorporated by reference into this
Prospectus and, subsequent to the date of this Prospectus, future filings with the SEC will be automatically deemed incorporated into this Prospectus, including subsequent financial statements, data and related notes with respect to all of the
Funds. Please refer to the section entitled Incorporation by Reference of
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Certain Documents in this Prospectus. The Sponsor will furnish an annual report of the Funds in the manner required by the rules and regulations of the SEC as well as with those reports
required by the CFTC and the NFA, including, but not limited to, annual audited financial statements of the Funds examined and certified by independent registered public accountants and any other reports required by any other governmental authority
that has jurisdiction over the activities of the Funds. Monthly account statements conforming to CFTC and NFA requirements, as well as the current annual and quarterly reports and other filings made with the SEC, are posted on the Sponsors
website at
www.ProShares.com
. Shareholders of record will also be provided with appropriate information to permit them to file U.S. federal and state income tax returns with respect to Shares held. Additional reports may be posted on the
Sponsors website at the discretion of the Sponsor or as required by regulatory authorities.
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PRIVACY POLICY
The Trusts Commitment to Investors
The Sponsor and the Trust are committed to respecting the privacy of personal information investors entrust to the Trust in the course of doing business.
The Information the Trust Collects About Investors
The Sponsor, on behalf of the Trust, collects non-public personal information from various sources. For instance, forms may include names,
addresses, and social security numbers. The Funds receive information from transactions in investors accounts, including account balances, and from correspondence between investors and the Funds or third parties, such as the Funds
service providers. The Sponsor, on behalf of the Funds, uses such information provided by investors or their representative to process transactions, to respond to inquiries from investors, to deliver reports, products, and services, and to fulfill
legal and regulatory requirements.
How the Trust Handles Investors Personal Information
The Sponsor does not disclose any non-public personal information about investors to anyone unless permitted by law or approved by the
affected investor. The Sponsor may share information about investors with certain third parties who are not affiliated with the Trust to process or service a transaction that investors have requested or as permitted by law. For example, sharing
information with non-affiliated third parties that maintain or service investors accounts for the Funds is essential.
The Sponsor may also share information with companies that perform administrative or marketing services for the Funds including research
firms. When the Funds enter into such a relationship, such third parties use of customers information is restricted and they are prohibited from sharing it or using it for any purposes other than those for which they were hired. The
Sponsor also requires service providers to maintain physical, electronic and procedural safeguards that comply with federal standards to guard investors non-public personal information.
How the Trust Safeguards Investors Personal Information
The Sponsor maintains physical, electronic, and procedural safeguards to protect investors personal information. Within the Funds, access to personal information is restricted to those employees who
require access to that information in order to provide products or services to customers such as processing transactions and handling inquiries. Use of customer information is restricted and customer information is required to be held in strict
confidence.
The Sponsor will adhere to the policies and practices described in this notice for both current and former
customers of the Funds.
INCORPORATION BY REFERENCE OF CERTAIN DOCUMENTS
The SEC allows the Trust to incorporate by reference into this Prospectus certain information that the Trust files with the
SEC, meaning it can disclose important information to an investor by referring to those documents on file with the SEC.
The
information that the Trust incorporates by reference is an important part of this Prospectus, and later information that is filed with the SEC will automatically update and, where applicable, supersede any information contained in this Prospectus or
incorporated by reference in this Prospectus. The Trust incorporates by reference the documents listed below, and any future filings it may make with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act, including those filed
prior to the effectiveness of the Registration Statement containing this Prospectus.
- 127 -
This filing incorporates by reference the following documents:
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Our Annual Report on Form 10-K for the year ended December 31, 2012;
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Our Amendment No. 1 on Form 10-K/A, dated July 15, 2013, to our Annual Report on Form 10-K for the year ended December 31, 2012;
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Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013;
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All other reports filed pursuant to Section 13(a) or 15(d) of the 1934 Act since December 31, 2012, except for information furnished on
Form 8-K, which is not deemed filed and not incorporated herein by reference; and
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Any documents filed under Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act subsequent to the date of this Prospectus and prior to the
termination of the offering made under this Prospectus.
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Any statement contained in a document that is
incorporated by reference will be modified or superseded for all purposes to the extent that a statement contained in this Prospectus (or in any other document that is subsequently filed with the SEC and incorporated by reference) modifies or is
contrary to that previous statement. Any statement so modified or superseded will not be deemed a part of this Prospectus except as so modified or superseded.
The Trust will provide to you a copy of the filings that have been incorporated by reference in this Prospectus upon your request, at no cost. In addition, the Trust will also provide you with information
regarding the other series of the Trust upon your request, at no cost. Any request may be made by writing or calling at the following address or telephone number:
ProShares Trust II
c/o ProShare Capital Management LLC
7501 Wisconsin Avenue
Suite 1000
Bethesda, Maryland 20814
Telephone: (240) 497-6400
These documents may also be accessed through the web at
www.ProShares.com
or as described under Where Investors Can Find More Information. The information and other content contained on
or linked from the website are not incorporated by reference in this Prospectus and should not be considered a part of this Prospectus.
Annual, quarterly and current reports and other information are on file with the SEC. You may read and copy these materials at the SECs Public Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site at
www.sec.gov
that contains reports, proxy and information statements and other
information regarding the Trust and the Funds.
- 128 -
APPENDIX A GLOSSARY
The Glossary below defines certain of the terms and meanings used throughout this Prospectus. Each term also is defined the first time it
is used in this Prospectus.
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1933 Act
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Securities Act of 1933, as amended
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1934 Act
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Securities Exchange Act of 1934, as amended
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1940 Act
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Investment Company Act of 1940, as amended
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Administrator
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Brown Brothers Harriman & Co., as administrator for the Funds
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Advisers Act
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The Investment Advisers Act of 1940
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Authorized Participant
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Those who may purchase (i.e., create) or redeem Creation Units directly from the Funds
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BBH&Co.
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Brown Brothers Harriman & Co.
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Business Day
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Any day on which the NAV of a specified Fund is determined.
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CBOE
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Chicago Board Options Exchange, Incorporated
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CBOT
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Chicago Board of Trade
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CEA
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Commodity Exchange Act, as amended
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CFE
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CBOE Futures Exchange
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CFTC
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United States Commodity Futures Trading Commission
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CME
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Chicago Mercantile Exchange
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Creation Unit
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A block of 50,000 Shares that is created for sale by the Trust to Authorized Participants and/or submitted to the Trust for redemption by an Authorized
Participant.
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Custodian
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Brown Brothers Harriman & Co., as custodian for the Funds
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Distributor
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SEI Investments Distribution Co., as distributor for the Funds
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DSTA
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Delaware Statutory Trust Act
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DTC
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Depository Trust Company
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Exchange
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The NYSE, a Funds primary listing exchange or other exchange material to the valuation or operation of such Fund.
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FCM
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Futures Commission Merchant
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Financial Instruments
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Instruments whose value is derived from the value of an underlying asset, rate or benchmark, including futures contracts, swap agreements, forward contracts and other
instruments.
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FINRA
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Financial Industry Regulatory Authority, Inc.
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Fund(s)
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One or more of the series of the Trust offered herein.
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Goldman Sachs
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Goldman, Sachs & Co.
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ICE
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Intercontinental Exchange
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IRS
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United States Internal Revenue Service
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JBL
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Jefferies Bache, LLC
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LME
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London Metal Exchange
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Merrill Lynch
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Merrill Lynch, Pierce, Fenner & Smith Incorporated
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NAV
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Net Asset Value
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NFA
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National Futures Association
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NSCC
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National Securities Clearing Corporation
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NYMEX
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New York Mercantile Exchange
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NYSE
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New York Stock Exchange
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NYSE Arca
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New York Stock Exchange Archipelago
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Other Fund
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A series of the Trust that is not being offered pursuant to this registration statement.
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PDI
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ProFunds Distributors, Inc.
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PTP
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Publicly traded partnership
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RBC
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RBC Capital Markets, LLC
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Reference Asset
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The underlying asset that is used to determine the value of a Financial Instrument.
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SEC
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United States Securities & Exchange Commission
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SEI
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SEI Investments Distribution Co.
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Shares
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Common units of beneficial interest that represent units of fractional undivided beneficial interest in and ownership of the Funds.
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Sponsor
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ProShare Capital Management LLC
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Transfer Agent
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Brown Brothers Harriman & Co., as transfer agent for the Funds
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Trust
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ProShares Trust II
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Trustee
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Wilmington Trust Company
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U.S.
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United States of America
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The information in this Prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
Preliminary Prospectus Subject to Completion, dated July 15, 2013
PROSHARES TRUST II
Common Units of Beneficial Interest
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Title of Securities to be Registered
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Benchmark
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Proposed
Maximum
Aggregate
Offering Price
Per
Fund
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ProShares Ultra VIX Short-Term Futures ETF (UVXY)
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S&P 500 VIX Short-Term Futures Index
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$
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8,000,000,000
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ProShares VIX Short-Term Futures ETF (VIXY)
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S&P 500 VIX Short-Term Futures Index
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$
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3,250,000,000
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ProShares Trust II (the Trust) is a Delaware statutory trust organized into separate series
(each a Fund and collectively, the Funds). The Trust may from time to time offer to sell common units of beneficial interest (Shares) of either or both of the two series of the Trust listed above (each, a
VIX Fund and collectively, the VIX Funds) or other series of the Trust, which represent units of fractional undivided beneficial interest in and ownership of a series of the Trust. Please note that the Trust has series other
than those that comprise the VIX Funds. Each VIX Funds Shares will be offered on a continuous basis from time to time.
The Shares of ProShares Ultra VIX Short-Term Futures ETF (the Ultra Fund or the Geared Fund) and the Shares of
ProShares VIX Short-Term Futures ETF (the Matching Fund) are listed on the New York Stock Exchange Archipelago (the NYSE Arca) under the ticker symbols shown above. The VIX Funds are benchmarked to an index comprised of VIX
futures contracts (as defined herein). The Matching Fund seeks results (before fees and expenses) that, both over a single day and over time, match the performance of the index. The Ultra Fund seeks results (before fees and expenses) that correspond
to two times (2x) the performance of the index on a daily basis. The VIX Funds are not benchmarked to the VIX (as defined herein), which is calculated based on the prices of put and call options on the S&P 500. As such, the VIX Funds can be
expected to perform very differently from the VIX (in the case of the Matching Fund) or two times (2x) the performance of the VIX (in the case of the Ultra Fund).
The Ultra Fund is a geared fund in the sense that it has an investment objective to correspond (before fees and expenses) to two times (2x) the performance of its index for a single day,
not for any other period. A single day is measured from the time the Geared Fund typically calculates its Net Asset Value (NAV) to the time of the Geared Funds next NAV calculation. The NAV calculation time for the VIX
Funds, is typically 4:15 p.m. (Eastern Time); please see the section entitled SummaryCreation and Redemption Transactions on page 3 for additional details on the NAV calculation time for the VIX Funds.
Although each Fund is linked to an underlying equity volatility index, the VIX Funds do not currently intend to invest directly in spot
volatility. Rather, the VIX Funds will attempt to gain exposure to the applicable equity market volatility index through investments in financial instruments (
i.e.
, instruments whose value is derived from the value of an underlying asset,
rate or benchmark, including futures contracts and swap agreements).
INVESTING IN THE SHARES INVOLVES SIGNIFICANT RISKS. PLEASE REFER TO
RISK FACTORS
BEGINNING ON PAGE 5.
Each VIX Fund will distribute to shareholders a Schedule K-1 that will contain information regarding the income and expenses of the
VIX Fund.
The Geared Fund is not appropriate for all investors and presents different risks than other funds. The
Geared Fund uses leverage and is riskier than similarly benchmarked exchange-traded funds that do not use leverage. An investor should only consider an investment in the Geared Fund if he or she understands the consequences of seeking daily
leveraged investment results.
The Geared Fund seeks to return (before fees and expenses) two times (2x) the
performance of its index daily, not for any other period. The return of the Geared Fund for a period longer than a single day is the result of its return for each day compounded over the period and usually will differ from two times (2x) the
performance of the Geared Funds index for the period. Daily compounding of the Geared Funds investment returns can dramatically and adversely affect its longer-term performance during periods of high volatility. Volatility may be at
least as important to the Geared Funds return for a period as the return of the Funds underlying index. The Geared Fund uses leverage and should produce daily returns that are more volatile than that of its index. For example, the daily
return of the Geared Fund with its 2x multiple should be approximately two times as volatile on a daily basis as the return of a fund with an objective of matching the same index. Shareholders who invest in the Geared Fund should actively manage and
monitor their investments, as frequently as daily.
The Geared Fund continuously offers and redeems its Shares in blocks
of 50,000 Shares and the Matching Fund continuously offers and redeems its Shares in blocks of 25,000 Shares (each such block, a Creation Unit). Only Authorized Participants may purchase and redeem Shares from a Fund and then only in
Creation Units. An Authorized Participant is an entity that has entered into an Authorized Participant Agreement with the Trust and ProShare Capital Management LLC (the Sponsor). Shares of the Funds are offered to Authorized Participants
in Creation Units at each Funds respective NAV. Authorized Participants may then offer to the public, from time to time, Shares from any Creation Unit they create at a per-Share market price. The form of Authorized Participant Agreement and
the related Authorized Participant Handbook set forth the terms and conditions under which an Authorized Participant may purchase or redeem a Creation Unit. Authorized Participants will not receive from any Fund, the Sponsor, or any of their
affiliates, any fee or other compensation in connection with their sale of Shares to the public. An Authorized Participant may receive commissions or fees from investors who purchase Shares through their commission or fee-based brokerage accounts.
These securities have not been approved or disapproved by the United States Securities and Exchange Commission (the
SEC) or any state securities commission nor has the SEC or any state securities commission passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
NEITHER THE TRUST NOR ANY FUND IS A MUTUAL FUND OR ANY OTHER TYPE OF INVESTMENT COMPANY AS DEFINED IN THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED (THE 1940 ACT), AND NEITHER IS SUBJECT TO REGULATION THEREUNDER.
THE COMMODITY FUTURES
TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
[ ], 2013
The Shares are neither interests in nor obligations of the Sponsor, Wilmington Trust
Company (the Trustee), or any of their respective affiliates. The Shares are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
This Prospectus has two parts: the offered series disclosure and the general pool disclosure. These parts are bound together and are
incomplete if not distributed together to prospective participants.
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE
LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION
IN THE POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND ADVISORY AND BROKERAGE
FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED
TO THIS POOL, AT PAGES 42 THROUGH 43 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 42.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL.
THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGES 5 THROUGH 25.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED
OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY
BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK, COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL RISK.
HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS.
HIGHLY
- i -
LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR. IN EVALUATING
THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP TRANSACTION MAY, IN CERTAIN INSTANCES, BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE ORIGINAL PARTIES AND SUBJECT
TO AGREEMENT ON INDIVIDUALLY NEGOTIATED TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOLS OBLIGATIONS OR THE POOLS EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR
TO ITS SCHEDULED TERMINATION DATE.
THIS PROSPECTUS DOES NOT INCLUDE ALL OF THE INFORMATION OR EXHIBITS IN THE REGISTRATION STATEMENT OF THE TRUST. INVESTORS CAN READ AND
COPY THE ENTIRE REGISTRATION STATEMENT AT THE PUBLIC REFERENCE FACILITIES MAINTAINED BY THE SEC IN WASHINGTON, D.C.
THE BOOKS AND
RECORDS OF THE FUNDS ARE MAINTAINED AS FOLLOWS:
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All marketing materials are maintained at the offices of:
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SEI Investments Distribution Co. (SEI or the Distributor)
1 Freedom Valley Drive
Oaks, Pennsylvania 19456
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Creation Unit creation and redemption books and records, accounting and certain other financial books and records (including Fund accounting
records, ledgers with respect to assets, liabilities, capital, income and expenses, the register, transfer journals and related details) and certain trading and related documents received from Futures Commission Merchants (FCMs) are
maintained at the offices of:
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Brown Brothers Harriman & Co. (BBH&Co. or the
Custodian)
50 Milk Street
Boston, Massachusetts 02109
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All other books and records of the Funds (including minute books and other general corporate records, trading records and related reports)
are maintained at the Funds principal office, c/o ProShare Capital Management LLC, 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814. The main business telephone number of each of the Funds and the Sponsor is
(240) 497-6400.
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SHAREHOLDERS HAVE THE RIGHT, DURING NORMAL BUSINESS HOURS, TO HAVE ACCESS TO
AND COPY (UPON PAYMENT OF REASONABLE REPRODUCTION COSTS) SUCH BOOKS AND RECORDS IN PERSON OR BY THEIR AUTHORIZED ATTORNEY OR AGENT. MONTHLY ACCOUNT STATEMENTS CONFORMING TO THE COMMODITY FUTURES TRADING COMMISSION (CFTC) AND THE NATIONAL
FUTURES ASSOCIATION (THE NFA) REQUIREMENTS ARE POSTED ON THE SPONSORS WEBSITE AT WWW.PROSHARES.COM. ADDITIONAL REPORTS MAY BE POSTED ON THE SPONSORS WEBSITE AT THE DISCRETION OF THE SPONSOR OR AS REQUIRED BY REGULATORY
AUTHORITIES. THERE WILL SIMILARLY BE DISTRIBUTED TO SHAREHOLDERS, NOT MORE THAN 90 DAYS AFTER THE CLOSE OF THE FUNDS FISCAL YEAR, CERTIFIED AUDITED FINANCIAL STATEMENTS. THE TAX INFORMATION RELATING TO SHARES OF EACH VIX FUND NECESSARY FOR THE
PREPARATION OF SHAREHOLDERS ANNUAL FEDERAL INCOME TAX RETURNS WILL ALSO BE DISTRIBUTED.
- ii -
THE TRUST WILL FILE QUARTERLY AND ANNUAL REPORTS WITH THE SEC. INVESTORS CAN READ AND COPY THESE REPORTS AT THE SEC PUBLIC REFERENCE FACILITIES IN WASHINGTON, D.C. PLEASE CALL THE SEC AT
1800SEC0330 FOR FURTHER INFORMATION.
THE FILINGS OF THE TRUST ARE POSTED AT THE SEC WEBSITE AT
WWW.SEC.GOV.
REGULATORY NOTICES
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST, ANY OF THE FUNDS, THE SPONSOR, THE AUTHORIZED PARTICIPANTS OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY OFFER, SOLICITATION, OR SALE OF THE SHARES IN ANY JURISDICTION IN WHICH
SUCH OFFER, SOLICITATION, OR SALE IS NOT AUTHORIZED OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER, SOLICITATION, OR SALE.
AUTHORIZED
PARTICIPANTS MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN TRANSACTING IN SHARES. SEE PLAN OF DISTRIBUTION IN PART TWO OF THIS PROSPECTUS.
- iii -
PROSHARES TRUST II
Table of Contents
- iv -
Table of Contents
(continued)
- v -
Table of Contents
(continued)
- vi -
PART ONE
OFFERED SERIES DISCLOSURE
SUMMARY
Investors should read the following summary together with the more detailed information, including under the caption
Risk Factors, and all exhibits to this Prospectus and the information incorporated by reference in this Prospectus, including the financial statements and the notes to those financial statements in the Trusts Annual Reports on
Form 10-K, as amended, Quarterly Reports on Form 10-Q, as amended, and Current Reports, if any, on Form 8-K before deciding to invest in any Shares. Please see the section entitled Incorporation by Reference of Certain
Documents in Part Two of this Prospectus. For ease of reference, any references throughout this Prospectus to various actions taken by each of the Funds are actually actions that the Trust has taken on behalf of such Funds.
Definitions used in this Prospectus can be found in the Glossary in Appendix A.
Important Information About the Geared Fund
The Geared Fund is not appropriate for all investors and presents different risks than other funds. The Geared Fund uses leverage and
is riskier than similarly benchmarked exchange-traded funds that do not use leverage. An investor should only consider an investment in the Geared Fund if he or she understands the consequences of seeking daily leveraged investment results.
The Geared Fund seeks to return (before fees and expenses) two times (2x) the performance of its index daily, not
for any other period. The return of the Geared Fund for a period longer than a single day is the result of its return for each day compounded over the period and usually will differ from two times (2x) the performance of the Geared Funds
index for the period. Daily compounding of the Geared Funds investment returns can dramatically and adversely affect its longer-term performance during periods of high volatility. Volatility may be at least as important to the Geared
Funds return for a period as the return of the Funds underlying index. The Geared Fund uses leverage and should produce daily returns that are more volatile than that of its index. For example, the daily return of the Geared Fund with
its 2x multiple should be approximately two times as volatile on a daily basis as the return of a fund with an objective of matching the same index. Shareholders who invest in the Geared Fund should actively manage and monitor their investments, as
frequently as daily.
Overview
The Geared Fund
The Geared Fund offers investors the opportunity to
obtain leveraged exposure to a futures based equity market volatility index. The Geared Fund targets a multiple of the daily return of such index, rather than targeting a multiple of the index returns over any other period. The Geared Fund seeks, on
a daily basis, results that correspond (before fees and expenses) to two times (2x) the performance of its index. The Geared Fund does not seek to achieve its stated objective over a period greater than a single day. A single day is
measured from the time the Fund calculates its net asset value (NAV) to the time of the Funds next NAV calculation.
The Geared Fund seeks to engage in daily rebalancing to position its portfolio so that its exposure to its index is consistent with the Geared Funds daily investment objective. The impact of the
indexs movements during the day will affect whether the Geared Funds portfolio needs to be repositioned. The Geared Funds long exposure will need to be increased on days when the Geared Funds index rises and decreased on days
when the Geared Funds index falls. Daily rebalancing and the compounding of each days return over time means that the return of the Geared Fund for a period longer than a single day will be the result of each days returns
compounded over the period, which will very likely differ from two times (2x) the return of the Geared Funds
- 1 -
index for the period. The Geared Fund will lose money if its indexs performance is flat over time, and it is possible for the Geared Fund to lose money over time even if its indexs
performance increases, as a result of daily rebalancing, the indexs volatility and compounding.
The Matching Fund
The Matching Fund offers investors the opportunity to obtain matching (
i.e.
, not leveraged or
inverse) exposure to a futures based equity market volatility index. The Matching Fund seeks results that, both over a single day and over time, correspond (before fees and expenses) to the performance of its index.
All Funds
Each
of the VIX Funds generally invests or will invest in Financial Instruments (
i.e.
, futures contracts and swap agreements, and other instruments whose value is based on an equity market volatility index). Financial Instruments are used to gain
exposure to the applicable equity market volatility index and/or to produce economically leveraged investment results for the Geared Fund.
In seeking to achieve the Funds investment objectives, the Sponsor uses a mathematical approach to investing. Using this approach, the Sponsor determines the type, quantity and mix of investment
positions that the Sponsor believes, in combination, should produce daily returns consistent with the Funds objectives. The Sponsor relies upon a pre-determined model to generate orders that result in repositioning the Funds investments
in accordance with their respective investment objective. The mathematical model is engineered during the product development phase prior to a Funds launch and is adjusted, when necessary, in order to help the Funds achieve their investment
objective. Changes to the mathematical model may occur at any time without notice to shareholders.
The Sponsor does not
invest the assets of the Funds based on its view of the investment merit of a particular investment, other than for cash management purposes, nor does it conduct conventional volatility research or analysis, or forecast market movement or trends in
managing the assets of the Funds. Each VIX Fund generally seeks to remain fully exposed at all times to its underlying index without regard to market conditions, trends or direction.
ProShare Capital Management LLC, a Maryland limited liability company, serves as the Trusts Sponsor and commodity pool operator.
The principal office of the Sponsor and the Funds is located at 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814. The telephone number of the Sponsor and each of the Funds is (240) 497-6400.
Each VIX Fund is listed below along with its corresponding index:
The VIX Funds*
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|
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Fund Name
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Index
|
ProShares Ultra VIX Short-Term Futures ETF
ProShares VIX Short-Term Futures ETF
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|
S&P 500 VIX Short-Term Futures Index (the Short-Term Index)
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*
|
The VIX Funds are benchmarked to an index comprised of VIX futures contracts and not to the VIX (as defined herein), which is calculated based on the prices of put and
call options on the S&P 500. As such, the VIX Funds can be expected to perform very differently from the VIX (in the case of the Matching Fund) or two times (2x) the performance of the VIX (in the case of the Geared Fund).
|
- 2 -
Purchases and Sales in the Secondary Market, on the NYSE Arca
The Shares of each VIX Fund are or will be listed on the NYSE Arca under the ticker symbols shown on the front cover of
this Prospectus. Secondary market purchases and sales of Shares are subject to ordinary brokerage commissions and charges.
Creation and Redemption Transactions
Only an Authorized Participant may purchase (
i.e.
, create) or redeem
Creation Units in the Funds. Creation Units in a Fund are expected to be created when there is sufficient demand for Shares in such Fund that the market price per Share is at a premium to the NAV per Share. Authorized Participants will likely sell
such Shares to the public at prices that are expected to reflect, among other factors, the trading price of the Shares of such Fund and the supply of and demand for the Shares at the time of sale and are expected to fall between the NAV and the
trading price of the Shares at the time of sale. Similarly, it is expected that Creation Units in a Fund will be redeemed when the market price per Share of such Fund is at a discount to the NAV per Share. The Sponsor expects that the exploitation
of such arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public trading price of the Shares to track the NAV per Share of a Fund closely over time. Retail investors seeking to purchase or sell
Shares on any day are expected to effect such transactions in the secondary market at the market price per Share, rather than in connection with the creation or redemption of Creation Units.
A creation transaction, which is subject to acceptance by SEI, generally takes place when an Authorized Participant deposits a specified
amount of cash (unless as provided otherwise in this Prospectus) in exchange for a specified number of Creation Units. Similarly, Shares can be redeemed only in Creation Units, generally for cash (unless as provided otherwise in this Prospectus).
Except when aggregated in Creation Units, Shares are not redeemable. The prices at which creations and redemptions occur are based on the next calculation of the NAV after an order is received in a form described in the Authorized Participant
Agreement and the related Authorized Participant Handbook. The manner by which Creation Units are purchased and redeemed is dictated by the terms of the Authorized Participant Agreement and Authorized Participant Handbook. By placing a purchase
order, an Authorized Participant agrees to deposit cash (unless as provided otherwise in this Prospectus) with BBH&Co., the custodian of the Funds.
Creation and redemption transactions must be placed each day with SEI by the create/redeem cut-off time (stated below) or earlier if the New York Stock Exchange (NYSE), a Funds primary
listing exchange or other exchange material to the valuation or operation of such Fund (each, an Exchange) closes before such cut-off time to receive that days NAV.
|
|
|
|
|
Underlying Index
|
|
Create/Redeem Cut-off
|
|
NAV Calculation Time
|
|
|
|
S&P 500 VIX Short-Term Futures Index
|
|
2:00 p.m. (Eastern Time)
|
|
4:15 p.m. (Eastern Time)
|
Breakeven Amounts
A Fund will be profitable only if returns from the Funds investments exceed its breakeven amount. Estimated breakeven
amounts are set forth in the table below. The estimated breakeven amounts represent the estimated amount of trading income that each Fund would need to achieve during one year to offset the Funds estimated fees, costs and expenses, net of any
interest income earned by the Fund on its investments. It is not possible to predict whether a Fund will break even at the end of the first twelve months of an investment or any other period. See ChargesBreakeven Table, beginning
on page 42, for more detailed tables showing Breakeven Amounts.
|
|
|
|
|
|
|
|
|
|
|
Fund Name
|
|
Breakeven Amount
(% Per Annum of
Average Daily NAV)
*
|
|
|
Assumed
Selling Price
Per
Share
*
|
|
|
Breakeven Amount
($ for the
Assumed Selling
Price Per Share)
*
|
ProShares Ultra VIX Short-Term Futures ETF
|
|
|
1.56
|
|
|
$
|
40.00
|
|
|
0.62
|
ProShares VIX Short-Term Futures ETF
|
|
|
0.83
|
|
|
$
|
80.00
|
|
|
0.66
|
- 3 -
*
|
The breakeven analysis set forth in this table assumes that the Shares have a constant month end NAV, and assumes that the selling price per Share will equal the NAV.
The analysis is based on an assumed NAV per Share of each Fund as listed in the table above under Assumed Selling Price Per Share. The actual NAV of each Fund differs and is likely to change on a daily basis.
|
Important Tax Information
Please note that each VIX Fund will distribute to shareholders a Schedule K-1 that will contain information regarding the income and expense items of the VIX Fund. The Schedule K-1 is a complex form and
shareholders may find that preparing tax returns may require additional time or may require the assistance of an accountant or other tax preparer, at an additional expense to the shareholder.
- 4 -
RISK FACTORS
Before investors invest in the Shares, they should be aware that there are various risks. Investors should consider carefully the
risks described below together with all of the other information included in this Prospectus, as well as information found in documents incorporated by reference in this Prospectus, before they decide to purchase any Shares. These risk factors may
be amended, supplemented or superseded from time to time by risk factors contained in any prospectus supplement, post-effective amendment or in other reports filed with the SEC in the future.
Risks Specific to the Geared Fund
In addition to the risks described elsewhere in this Risk Factors section, the following risks apply to the Geared Fund.
Due to the compounding of daily returns, the Geared Funds returns over periods longer than a single day will likely differ in amount and possibly even direction from the two times
(2x) the index return for the period.
The Ultra Fund is a geared fund in the sense that it has an
investment objective to correspond (before fees and expenses) to two times (2x) the performance of an index on a given day. The Geared Fund seeks investment results for a single day only, as measured from NAV calculation time to NAV calculation
time, and not for any other period (see SummaryCreation and Redemption Transactions for the typical NAV calculation time of each VIX Fund). The return of the Geared Fund for a period longer than a single day is the result of its
return for each day compounded over the period and usually will differ from two times (2x) the return of the Geared Funds index for the period. The Geared Fund will lose money if its index performance is flat over time, and it is possible
for the Geared Fund to lose money over time even if its indexs performance increases, as a result of daily rebalancing, the indexs volatility and compounding. Longer holding periods, higher index volatility and greater leverage each
affect the impact of compounding on the Geared Funds returns. Daily compounding of the Geared Funds investment returns can dramatically and adversely affect its longer-term performance during periods of high volatility. Volatility may be
at least as important to the Geared Funds return for a period as the return of the Funds underlying index.
The
Geared Fund uses leverage and should produce daily returns that are more volatile than that of its index. For example, the daily return of the Geared Fund with its 2x multiple should be approximately two times as volatile on a daily basis as the
return of a fund with an objective of matching the same index. The Geared Fund is not appropriate for all investors and presents different risks than other funds. The Geared Fund uses leverage and is riskier than similarly benchmarked
exchange-traded funds that do not use leverage. An investor should only consider an investment in the Geared Fund if he or she understands the consequences of seeking daily leveraged investment results. Daily objective geared funds, if used properly
and in conjunction with the investors view on the future direction and volatility of the markets, can be useful tools for investors who want to manage their exposure to various markets and market segments and who are willing to monitor and/or
periodically rebalance their portfolios. Shareholders who invest in the Geared Fund should actively manage and monitor their investments, as frequently as daily.
- 5 -
The hypothetical examples below illustrate how daily geared fund returns can behave for
periods longer than a single day. Each involves a hypothetical fund XYZ that seeks to double the daily performance of index XYZ. On each day, fund XYZ performs in line with its objective (two times (2x) the indexs daily performance before
fees and expenses). Notice that, in the first example (showing an overall benchmark loss for the period), over the entire seven-day period, the funds total return is more than two times the loss of the period return of the index. For the
seven-day period, index XYZ lost 3.26% while fund XYZ lost 7.01% (versus -6.52% (or 2 x -3.26%)).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index XYZ
|
|
|
Fund XYZ
|
|
|
|
Level
|
|
|
Daily
Performance
|
|
|
Daily
Performance
|
|
|
Net Asset
Value
|
|
Start
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
Day 1
|
|
|
97.00
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
94.00
|
|
Day 2
|
|
|
99.91
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
99.64
|
|
Day 3
|
|
|
96.91
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
93.66
|
|
Day 4
|
|
|
99.82
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
99.28
|
|
Day 5
|
|
|
96.83
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
93.32
|
|
Day 6
|
|
|
99.73
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
98.92
|
|
Day 7
|
|
|
96.74
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
92.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return
|
|
|
|
|
|
|
-3.26
|
%
|
|
|
-7.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Similarly, in another example (showing an overall benchmark gain for the period), over the entire
seven-day period, the funds total return is considerably less than double that of the period return of the benchmark. For the seven-day period, benchmark XYZ gained 2.72% while fund XYZ gained 4.86% (versus 5.44% (or 2 x 2.72%)).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index XYZ
|
|
|
Fund XYZ
|
|
|
|
Level
|
|
|
Daily
Performance
|
|
|
Daily
Performance
|
|
|
Net Asset
Value
|
|
Start
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
Day 1
|
|
|
103.00
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
106.00
|
|
Day 2
|
|
|
99.91
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
99.64
|
|
Day 3
|
|
|
102.91
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
105.62
|
|
Day 4
|
|
|
99.82
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
99.28
|
|
Day 5
|
|
|
102.81
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
105.24
|
|
Day 6
|
|
|
99.73
|
|
|
|
-3.00
|
%
|
|
|
-6.00
|
%
|
|
$
|
98.92
|
|
Day 7
|
|
|
102.72
|
|
|
|
3.00
|
%
|
|
|
6.00
|
%
|
|
$
|
104.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return
|
|
|
|
|
|
|
2.72
|
%
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These effects are caused by compounding, which exists in all investments, but has a more significant
impact in geared funds. In general, during periods of higher index volatility, compounding will cause the Geared Funds results for periods longer than a single day to be less than two times (2x) the return of its index. Conversely, in
periods of lower index volatility (particularly when combined with higher index returns), the Geared Funds returns over longer periods can be higher than two times (2x) the return of its index. Actual results for a particular period,
before fees and expenses, are also dependent on the magnitude of the index return in addition to the index volatility.
The
graphs that follow illustrate this point. Each of the graphs shows a simulated hypothetical one-year performance of an index compared with the performance of a geared fund that perfectly achieves its geared daily investment objective. The graphs
demonstrate that, for periods greater than a single day, a geared fund is likely to underperform or overperform (but not match) the index performance times the multiple stated as the daily fund objective. Investors should understand the consequences
of holding daily rebalanced funds for periods longer
- 6 -
than a single day and should actively manage and monitor their investments, as frequently as daily. A one-year period is used solely for illustrative purposes. Deviations from the index return
times the fund multiple can occur over periods as short as two days (each day as measured from NAV to NAV) and may also occur in periods shorter than a single day (when measured intraday as opposed to NAV to NAV). See Intraday
Price/Performance Risk below for additional details. To isolate the impact of daily leveraged exposure, these graphs assume: a) no fund expenses or transaction costs; b) borrowing/lending rates (to obtain required leverage) and cash
reinvestment rates of zero percent; and c) the fund consistently maintaining perfect exposure (2x) as of the funds NAV time each day. If these assumptions were different, the funds performance would be different than that shown. If
fund expenses, transaction costs and financing expenses greater than zero percent were included, the funds performance would also be different than shown. Each of the graphs also assumes a volatility rate of 68%, which is an approximate
average of the five-year historical volatility rate of the S&P 500 VIX Short-Term Futures Index. An indexs volatility rate is a statistical measure of the magnitude of fluctuations in its returns.
The graph above shows a scenario where the index, which exhibits day-to-day volatility, is flat or
trendless over the year (
i.e.
, begins and ends the year at 0%), but the Ultra Fund (2x) is down.
- 7 -
The graph above shows a scenario where the index, which exhibits day-to-day volatility, is down over
the year, but the Ultra Fund (2x) is down less than two times the index.
- 8 -
The graph above shows a scenario where the index, which exhibits day-to-day volatility, is up over the
year, but the Ultra Fund (2x) is up less than two times the index.
The historical five year average volatility of the
index utilized by the VIX Funds (the Short-Term Index) was 68.19% as of May 31, 2013.
The table below illustrates the
impact of two factors that affect a geared funds performance, index volatility and index return. Index volatility is a statistical measure of the magnitude of fluctuations in the returns of an index and is calculated as the standard deviation
of the natural logarithms of one plus the index return (calculated daily), multiplied by the square root of the number of trading days per year (assumed to be 252). The table shows estimated fund returns for a number of combinations of index
volatility and index return over a one-year period. To isolate the impact of daily leveraged exposure, the graph assumes: a) no fund expenses or transaction costs; b) borrowing/lending rates of zero percent (to obtain required leveraged exposure)
and cash reinvestment rates of zero percent; and c) the fund consistently maintaining perfect exposure (2x) as of the funds NAV time each day. If these assumptions were different, the funds performance would be different than that
shown. If fund expenses, transaction costs and financing expenses were included, the funds performance would be different than shown. The table below shows an example in which a geared fund has an investment objective to correspond (before
fees and expenses) to two times (2x) the daily performance of an index. The geared fund could incorrectly be expected to achieve a 20% return on a yearly basis if the index return was 10%, absent the effects of compounding. However, as the
table shows, with an index volatility of 40%, such a fund would return 3.1%. In the charts below, shaded areas represent those scenarios where a geared fund with the investment objective described will outperform (
i.e.
, return more than) the
index performance times the stated multiple in the funds investment objective; conversely areas not shaded represent those scenarios where the fund will underperform (
i.e.
, return less than) the index performance times the multiple
stated as the daily fund objective.
- 9 -
Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before
Fees and Expenses, that Correspond to Two Times (2x) the Daily Performance of an Index.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
Index
Performance
|
|
|
Two Times (2x)
One
Year
Index
Performance
|
|
|
|
|
|
|
|
|
Index Volatility
|
|
|
|
0%
|
|
|
5%
|
|
|
10%
|
|
|
15%
|
|
|
20%
|
|
|
25%
|
|
|
30%
|
|
|
35%
|
|
|
40%
|
|
|
45%
|
|
|
50%
|
|
|
55%
|
|
|
60%
|
|
|
65%
|
|
|
70%
|
|
|
-60%
|
|
|
|
-120
|
%
|
|
|
-84.0
|
%
|
|
|
-84.0
|
%
|
|
|
-84.2
|
%
|
|
|
-84.4
|
%
|
|
|
-84.6
|
%
|
|
|
-85.0
|
%
|
|
|
-85.4
|
%
|
|
|
-85.8
|
%
|
|
|
-86.4
|
%
|
|
|
-86.9
|
%
|
|
|
-87.5
|
%
|
|
|
-88.2
|
%
|
|
|
-88.8
|
%
|
|
|
-89.5
|
%
|
|
|
-90.2
|
%
|
|
-55%
|
|
|
|
-110
|
%
|
|
|
-79.8
|
%
|
|
|
-79.8
|
%
|
|
|
-80.0
|
%
|
|
|
-80.2
|
%
|
|
|
-80.5
|
%
|
|
|
-81.0
|
%
|
|
|
-81.5
|
%
|
|
|
-82.1
|
%
|
|
|
-82.7
|
%
|
|
|
-83.5
|
%
|
|
|
-84.2
|
%
|
|
|
-85.0
|
%
|
|
|
-85.9
|
%
|
|
|
-86.7
|
%
|
|
|
-87.6
|
%
|
|
-50%
|
|
|
|
-100
|
%
|
|
|
-75.0
|
%
|
|
|
-75.1
|
%
|
|
|
-75.2
|
%
|
|
|
-75.6
|
%
|
|
|
-76.0
|
%
|
|
|
-76.5
|
%
|
|
|
-77.2
|
%
|
|
|
-77.9
|
%
|
|
|
-78.7
|
%
|
|
|
-79.6
|
%
|
|
|
-80.5
|
%
|
|
|
-81.5
|
%
|
|
|
-82.6
|
%
|
|
|
-83.6
|
%
|
|
|
-84.7
|
%
|
|
-45%
|
|
|
|
-90
|
%
|
|
|
-69.8
|
%
|
|
|
-69.8
|
%
|
|
|
-70.1
|
%
|
|
|
-70.4
|
%
|
|
|
-70.9
|
%
|
|
|
-71.6
|
%
|
|
|
-72.4
|
%
|
|
|
-73.2
|
%
|
|
|
-74.2
|
%
|
|
|
-75.3
|
%
|
|
|
-76.4
|
%
|
|
|
-77.6
|
%
|
|
|
-78.9
|
%
|
|
|
-80.2
|
%
|
|
|
-81.5
|
%
|
|
-40%
|
|
|
|
-80
|
%
|
|
|
-64.0
|
%
|
|
|
-64.1
|
%
|
|
|
-64.4
|
%
|
|
|
-64.8
|
%
|
|
|
-65.4
|
%
|
|
|
-66.2
|
%
|
|
|
-67.1
|
%
|
|
|
-68.2
|
%
|
|
|
-69.3
|
%
|
|
|
-70.6
|
%
|
|
|
-72.0
|
%
|
|
|
-73.4
|
%
|
|
|
-74.9
|
%
|
|
|
-76.4
|
%
|
|
|
-77.9
|
%
|
|
-35%
|
|
|
|
-70
|
%
|
|
|
-57.8
|
%
|
|
|
-57.9
|
%
|
|
|
-58.2
|
%
|
|
|
-58.7
|
%
|
|
|
-59.4
|
%
|
|
|
-60.3
|
%
|
|
|
-61.4
|
%
|
|
|
-62.6
|
%
|
|
|
-64.0
|
%
|
|
|
-65.5
|
%
|
|
|
-67.1
|
%
|
|
|
-68.8
|
%
|
|
|
-70.5
|
%
|
|
|
-72.3
|
%
|
|
|
-74.1
|
%
|
|
-30%
|
|
|
|
-60
|
%
|
|
|
-51.0
|
%
|
|
|
-51.1
|
%
|
|
|
-51.5
|
%
|
|
|
-52.1
|
%
|
|
|
-52.9
|
%
|
|
|
-54.0
|
%
|
|
|
-55.2
|
%
|
|
|
-56.6
|
%
|
|
|
-58.2
|
%
|
|
|
-60.0
|
%
|
|
|
-61.8
|
%
|
|
|
-63.8
|
%
|
|
|
-65.8
|
%
|
|
|
-67.9
|
%
|
|
|
-70.0
|
%
|
|
-25%
|
|
|
|
-50
|
%
|
|
|
-43.8
|
%
|
|
|
-43.9
|
%
|
|
|
-44.3
|
%
|
|
|
-45.0
|
%
|
|
|
-46.0
|
%
|
|
|
-47.2
|
%
|
|
|
-48.6
|
%
|
|
|
-50.2
|
%
|
|
|
-52.1
|
%
|
|
|
-54.1
|
%
|
|
|
-56.2
|
%
|
|
|
-58.4
|
%
|
|
|
-60.8
|
%
|
|
|
-63.1
|
%
|
|
|
-65.5
|
%
|
|
-20%
|
|
|
|
-40
|
%
|
|
|
-36.0
|
%
|
|
|
-36.2
|
%
|
|
|
-36.6
|
%
|
|
|
-37.4
|
%
|
|
|
-38.5
|
%
|
|
|
-39.9
|
%
|
|
|
-41.5
|
%
|
|
|
-43.4
|
%
|
|
|
-45.5
|
%
|
|
|
-47.7
|
%
|
|
|
-50.2
|
%
|
|
|
-52.7
|
%
|
|
|
-55.3
|
%
|
|
|
-58.1
|
%
|
|
|
-60.8
|
%
|
|
-15%
|
|
|
|
-30
|
%
|
|
|
-27.8
|
%
|
|
|
-27.9
|
%
|
|
|
-28.5
|
%
|
|
|
-29.4
|
%
|
|
|
-30.6
|
%
|
|
|
-32.1
|
%
|
|
|
-34.0
|
%
|
|
|
-36.1
|
%
|
|
|
-38.4
|
%
|
|
|
-41.0
|
%
|
|
|
-43.7
|
%
|
|
|
-46.6
|
%
|
|
|
-49.6
|
%
|
|
|
-52.6
|
%
|
|
|
-55.7
|
%
|
|
-10%
|
|
|
|
-20
|
%
|
|
|
-19.0
|
%
|
|
|
-19.2
|
%
|
|
|
-19.8
|
%
|
|
|
-20.8
|
%
|
|
|
-22.2
|
%
|
|
|
-23.9
|
%
|
|
|
-26.0
|
%
|
|
|
-28.3
|
%
|
|
|
-31.0
|
%
|
|
|
-33.8
|
%
|
|
|
-36.9
|
%
|
|
|
-40.1
|
%
|
|
|
-43.5
|
%
|
|
|
-46.9
|
%
|
|
|
-50.4
|
%
|
|
-5%
|
|
|
|
-10
|
%
|
|
|
-9.8
|
%
|
|
|
-10.0
|
%
|
|
|
-10.6
|
%
|
|
|
-11.8
|
%
|
|
|
-13.3
|
%
|
|
|
-15.2
|
%
|
|
|
-17.5
|
%
|
|
|
-20.2
|
%
|
|
|
-23.1
|
%
|
|
|
-26.3
|
%
|
|
|
-29.7
|
%
|
|
|
-33.3
|
%
|
|
|
-37.0
|
%
|
|
|
-40.8
|
%
|
|
|
-44.7
|
%
|
|
0%
|
|
|
|
0
|
%
|
|
|
0.0
|
%
|
|
|
-0.2
|
%
|
|
|
-1.0
|
%
|
|
|
-2.2
|
%
|
|
|
-3.9
|
%
|
|
|
-6.1
|
%
|
|
|
-8.6
|
%
|
|
|
-11.5
|
%
|
|
|
-14.8
|
%
|
|
|
-18.3
|
%
|
|
|
-22.1
|
%
|
|
|
-26.1
|
%
|
|
|
-30.2
|
%
|
|
|
-34.5
|
%
|
|
|
-38.7
|
%
|
|
5%
|
|
|
|
10
|
%
|
|
|
10.3
|
%
|
|
|
10.0
|
%
|
|
|
9.2
|
%
|
|
|
7.8
|
%
|
|
|
5.9
|
%
|
|
|
3.6
|
%
|
|
|
0.8
|
%
|
|
|
-2.5
|
%
|
|
|
-6.1
|
%
|
|
|
-10.0
|
%
|
|
|
-14.1
|
%
|
|
|
-18.5
|
%
|
|
|
-23.1
|
%
|
|
|
-27.7
|
%
|
|
|
-32.5
|
%
|
|
10%
|
|
|
|
20
|
%
|
|
|
21.0
|
%
|
|
|
20.7
|
%
|
|
|
19.8
|
%
|
|
|
18.3
|
%
|
|
|
16.3
|
%
|
|
|
13.7
|
%
|
|
|
10.6
|
%
|
|
|
7.0
|
%
|
|
|
3.1
|
%
|
|
|
-1.2
|
%
|
|
|
-5.8
|
%
|
|
|
-10.6
|
%
|
|
|
-15.6
|
%
|
|
|
-20.7
|
%
|
|
|
-25.9
|
%
|
|
15%
|
|
|
|
30
|
%
|
|
|
32.3
|
%
|
|
|
31.9
|
%
|
|
|
30.9
|
%
|
|
|
29.3
|
%
|
|
|
27.1
|
%
|
|
|
24.2
|
%
|
|
|
20.9
|
%
|
|
|
17.0
|
%
|
|
|
12.7
|
%
|
|
|
8.0
|
%
|
|
|
3.0
|
%
|
|
|
-2.3
|
%
|
|
|
-7.7
|
%
|
|
|
-13.3
|
%
|
|
|
-19.0
|
%
|
|
20%
|
|
|
|
40
|
%
|
|
|
44.0
|
%
|
|
|
43.6
|
%
|
|
|
42.6
|
%
|
|
|
40.8
|
%
|
|
|
38.4
|
%
|
|
|
35.3
|
%
|
|
|
31.6
|
%
|
|
|
27.4
|
%
|
|
|
22.7
|
%
|
|
|
17.6
|
%
|
|
|
12.1
|
%
|
|
|
6.4
|
%
|
|
|
0.5
|
%
|
|
|
-5.6
|
%
|
|
|
-11.8
|
%
|
|
25%
|
|
|
|
50
|
%
|
|
|
56.3
|
%
|
|
|
55.9
|
%
|
|
|
54.7
|
%
|
|
|
52.8
|
%
|
|
|
50.1
|
%
|
|
|
46.8
|
%
|
|
|
42.8
|
%
|
|
|
38.2
|
%
|
|
|
33.1
|
%
|
|
|
27.6
|
%
|
|
|
21.7
|
%
|
|
|
15.5
|
%
|
|
|
9.0
|
%
|
|
|
2.4
|
%
|
|
|
-4.3
|
%
|
|
30%
|
|
|
|
60
|
%
|
|
|
69.0
|
%
|
|
|
68.6
|
%
|
|
|
67.3
|
%
|
|
|
65.2
|
%
|
|
|
62.4
|
%
|
|
|
58.8
|
%
|
|
|
54.5
|
%
|
|
|
49.5
|
%
|
|
|
44.0
|
%
|
|
|
38.0
|
%
|
|
|
31.6
|
%
|
|
|
24.9
|
%
|
|
|
17.9
|
%
|
|
|
10.8
|
%
|
|
|
3.5
|
%
|
|
35%
|
|
|
|
70
|
%
|
|
|
82.3
|
%
|
|
|
81.8
|
%
|
|
|
80.4
|
%
|
|
|
78.2
|
%
|
|
|
75.1
|
%
|
|
|
71.2
|
%
|
|
|
66.6
|
%
|
|
|
61.2
|
%
|
|
|
55.3
|
%
|
|
|
48.8
|
%
|
|
|
41.9
|
%
|
|
|
34.7
|
%
|
|
|
27.2
|
%
|
|
|
19.4
|
%
|
|
|
11.7
|
%
|
|
40%
|
|
|
|
80
|
%
|
|
|
96.0
|
%
|
|
|
95.5
|
%
|
|
|
94.0
|
%
|
|
|
91.6
|
%
|
|
|
88.3
|
%
|
|
|
84.1
|
%
|
|
|
79.1
|
%
|
|
|
73.4
|
%
|
|
|
67.0
|
%
|
|
|
60.1
|
%
|
|
|
52.6
|
%
|
|
|
44.8
|
%
|
|
|
36.7
|
%
|
|
|
28.5
|
%
|
|
|
20.1
|
%
|
|
45%
|
|
|
|
90
|
%
|
|
|
110.3
|
%
|
|
|
109.7
|
%
|
|
|
108.2
|
%
|
|
|
105.6
|
%
|
|
|
102.0
|
%
|
|
|
97.5
|
%
|
|
|
92.2
|
%
|
|
|
86.0
|
%
|
|
|
79.2
|
%
|
|
|
71.7
|
%
|
|
|
63.7
|
%
|
|
|
55.4
|
%
|
|
|
46.7
|
%
|
|
|
37.8
|
%
|
|
|
28.8
|
%
|
|
50%
|
|
|
|
100
|
%
|
|
|
125.0
|
%
|
|
|
124.4
|
%
|
|
|
122.8
|
%
|
|
|
120.0
|
%
|
|
|
116.2
|
%
|
|
|
111.4
|
%
|
|
|
105.6
|
%
|
|
|
99.1
|
%
|
|
|
91.7
|
%
|
|
|
83.8
|
%
|
|
|
75.2
|
%
|
|
|
66.3
|
%
|
|
|
57.0
|
%
|
|
|
47.5
|
%
|
|
|
37.8
|
%
|
|
55%
|
|
|
|
110
|
%
|
|
|
140.3
|
%
|
|
|
139.7
|
%
|
|
|
137.9
|
%
|
|
|
134.9
|
%
|
|
|
130.8
|
%
|
|
|
125.7
|
%
|
|
|
119.6
|
%
|
|
|
112.6
|
%
|
|
|
104.7
|
%
|
|
|
96.2
|
%
|
|
|
87.1
|
%
|
|
|
77.5
|
%
|
|
|
67.6
|
%
|
|
|
57.5
|
%
|
|
|
47.2
|
%
|
|
60%
|
|
|
|
120
|
%
|
|
|
156.0
|
%
|
|
|
155.4
|
%
|
|
|
153.5
|
%
|
|
|
150.3
|
%
|
|
|
146.0
|
%
|
|
|
140.5
|
%
|
|
|
134.0
|
%
|
|
|
126.5
|
%
|
|
|
118.1
|
%
|
|
|
109.1
|
%
|
|
|
99.4
|
%
|
|
|
89.2
|
%
|
|
|
78.6
|
%
|
|
|
67.8
|
%
|
|
|
56.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foregoing table is intended to isolate the effect of index volatility and index performance on the
return of leveraged funds. The Geared Funds actual returns may be significantly greater or less than the returns shown above as a result of any of the factors discussed above or under the below risk factor describing correlation risks.
Correlation Risks Specific to the Geared Fund.
In order to achieve a high degree of correlation with its underlying index, the Geared Fund seeks to rebalance its portfolio daily to keep exposure consistent with its investment objectives. Being
materially over- or under-exposed to its index may prevent the Geared Fund from achieving a high degree of correlation with its index. Market disruptions or closure, large amounts of assets into or out of the Geared Fund, regulatory restrictions or
extreme market volatility will adversely affect the Funds ability to adjust exposure to requisite levels. The target amount of portfolio exposure is impacted dynamically by the benchmarks movements during each day. Because of this, it is
unlikely that the Geared Fund will be perfectly exposed (
i.e.
, 2x) at the end of each day, and the likelihood of being materially under- or over-exposed is higher on days when the index levels are volatile near the close of the trading day.
These risks are particularly acute for the Geared Fund due to the combination of (a) no market for VIX futures contracts
after the 4:15 p.m. settlement time and (b) the high degree of volatility in VIX futures contracts. Investors in the Geared Fund should be aware that the Fund bears a greater risk of not achieving its investment objective on a daily basis, a
risk that increases with the level of volatility on a particular day. In addition, unlike other funds that do not rebalance their portfolios as frequently, the Geared Fund may be subject to increased trading costs associated with daily portfolio
rebalancings in order to maintain appropriate exposure to the underlying benchmark. Such costs include commissions paid to the FCMs, and may vary by FCM. The effects of these trading costs have been estimated and included in the breakeven table. See
ChargesBreakeven Table below.
- 10 -
For general correlation risks of the VIX Funds, please see Several factors may affect
a VIX Funds ability to closely track its index on a consistent basis. below.
Intraday Price/Performance Risk.
The Geared Fund is rebalanced at or about the time of its NAV calculation time (which may be other than at the close
of the U.S. equity markets). As such, the intraday position of the Fund will generally be different from the Funds stated daily investment objective (
i.e.
, 2x). When shares are bought intraday, the performance of the Geared Funds
shares until the Funds next NAV calculation will generally be greater than or less than the Funds stated daily multiple.
The use of leveraged positions could result in the total loss of an investors investment.
The Geared Fund utilizes leverage in seeking to achieve its investment objective and will lose more money in market environments adverse
to its respective daily investment objectives than funds that do not employ leverage. The use of leveraged positions could result in the total loss of an investors investment.
For example, because the Geared Fund includes a two times (2x) multiplier, a single-day movement in its index approaching 50% at any
point in the day could result in the total loss or almost total loss of an investors investment if that movement is contrary to the investment objective of the Fund, even if such index subsequently moves in an opposite direction, eliminating
all or a portion of the movement. This would be the case with downward single-day or intraday movements in the Geared Funds index, even if the underlying index (and the components of that index) maintains a level greater than zero at all
times.
Risks Related to All VIX Funds
The VIX Funds are benchmarked to the Short-Term Index. They are not benchmarked to the VIX or actual realized volatility of the S&P 500.
The level of the Short-Term Index is based on the value of the relevant futures contracts (VIX futures contracts) based on the
Chicago Board Options Exchange, Incorporated (CBOE) Volatility Index (the VIX) comprising the Short-Term Index. Each VIX Fund is benchmarked to Short-Term Index and the VIX Funds are not linked to the VIX (which is a measure
of implied volatility of the S&P 500 over the next 30 days derived from option prices), to realized volatility of the S&P 500 or to the options that underlie the VIX calculation. Each VIX Fund should be expected to perform very differently
from the VIX over all periods of time. In many cases the Short-Term Index will significantly underperform the VIX. Furthermore, because each VIX Fund may invest in VIX futures contracts other than the VIX futures contracts comprising the Short-Term
Index, the VIX Funds may perform differently than the Short-Term Index.
VIX futures contracts are not directly based on a tradable
underlying asset.
The VIX is not directly investable. The settlement price at maturity of VIX futures contracts are
based on the calculation that determines the level of the VIX. As a result, the behavior of the VIX futures contracts may be different from traditional futures contracts whose settlement price is based on a specific tradable asset.
The Short-Term Index and VIX futures contracts have limited historical information.
The Short-Term Index was created in December 2008 and Standard & Poors (S&P) has published limited
information about how the Short-Term Index would have performed had it been calculated prior to its creation. In addition, VIX futures contracts have traded freely only since March 26, 2004, and not all futures of all relevant maturities have
traded at all times since that date. Because the Short-Term Index and the VIX futures contracts that underlie it are of recent origin and limited historical performance data exists with respect to it, your investment in the VIX Funds may involve a
greater risk than investing in alternate instruments linked to one or
- 11 -
more indexes with a more established record of performance. A longer history of actual performance may have been helpful in providing more reliable information on which to assess the validity of
the proprietary methodology that the Short-Term Index makes use of as the basis for an investment decision.
The level of the VIX has
historically reverted to a long-term mean level and is subject to the risk associated with reversion to its mean. Accordingly, investors should not expect the VIX Funds to retain any appreciation in value over extended periods of time.
In the past, the level of the VIX has typically reverted over the longer term to a historical mean, and its absolute
level has been constrained within a band. It is likely that the spot level of the VIX will continue to be constrained in the future. This implies that the level of VIX futures contracts and the Short-Term Index will likely also be constrained within
a band and revert to a long-term mean over time. Because of the mean reverting nature of the Short-Term Index, investors should not expect the VIX Funds to appreciate in value over extended periods. Rather the Short-Term Index, the Ultra Fund and
the Matching Fund will rise and fall (or fall and rise) as volatility increases and decreases (or decreases and increases). For most investors this likely implies that the VIX Funds should only be used as a short-term tactical tool or for
diversification purposes rather than an investment in anticipation of long-term gains.
When economic uncertainty recedes and
there is an associated decrease in expected volatility, the value of VIX futures contracts will likely also decrease and the potential upside of an investment in the Ultra Fund or the Matching Fund will correspondingly be limited as a result.
Several factors may affect a VIX Funds ability to closely track its index on a consistent basis.
While the VIX Funds seek to meet their investment objectives, there is no guarantee they will do so. Factors that may affect a Funds
ability to meet its investment objective include: (1) the Sponsors ability to purchase and sell Financial Instruments in a manner that correlate to a Funds objective; (2) an imperfect correlation between the performance of the
Financial Instruments held by a Fund and the performance of the applicable index; (3) bid-ask spreads on such Financial Instruments; (4) fees, expenses, transaction costs, financing costs associated with the use of Financial Instruments
and commission costs; (5) holding Financial Instruments traded in a market that has become illiquid or disrupted; (6) a Funds Share prices being rounded to the nearest cent and/or valuation methodologies; (7) changes to an index
that are not disseminated in advance; (8) the need to conform a Funds portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements; (9) early and unanticipated closings of the markets on
which the holdings of a Fund trade, resulting in the inability of the Fund to execute intended portfolio transactions; and (10) accounting standards.
Being materially over- or under-exposed to its index may prevent such Funds from achieving a high degree of correlation with their applicable underlying index. Market disruptions or closure, large amounts
of assets into or out of the VIX Funds, regulatory restrictions or extreme market volatility will adversely affect such Funds ability to maintain a high degree of correlation.
Each VIX Fund seeks to provide investment results that correspond (before fees and expenses) to the daily performance (or, in the case of the Geared Fund, correspond to a multiple (2x) of the
daily performance) of the Short-Term Index at all times, even during periods when the Short-Term Index is flat as well as when the Short-Term Index is moving in a manner which causes the VIX Funds NAV to decline, thereby causing losses to such
Fund.
Other than for cash management purposes, the VIX Funds are not actively managed by traditional methods
(
e.g.
, by effecting changes in the composition of a portfolio on the basis of judgments relating to economic, financial and market considerations with a view toward obtaining positive results under all market conditions). Rather, the Sponsor
seeks to cause the NAV to track the daily performance of an index in accordance with each VIX Funds investment objective, even during periods in which the index is flat or moving in a manner which
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causes the NAV of a VIX Fund to decline. It is possible to lose money over time when the underlying index is up for the Geared Fund, due to the effects of daily rebalancing, volatility and
compounding (see Risks Specific to the Geared Fund for additional details).
The value of the Shares of each VIX Fund
relates directly to the value of, and realized profit or loss from, the Financial Instruments and other assets held by that Fund. Fluctuations in the price of these Financial Instruments or assets could materially adversely affect an investment in
the Shares.
Several factors may affect the price and/or liquidity of VIX futures contracts and other assets, if any,
owned by a VIX Fund, including, but not limited to:
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Prevailing market prices and forward volatility levels of the U.S. stock markets, the S&P 500, the equity securities included in the S&P 500
and prevailing market prices of options on the S&P 500, the VIX, options on the VIX, the relevant VIX futures contracts, or any other financial instruments related to the S&P 500 and the VIX or VIX futures contracts;
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Economic, financial, political, regulatory, geographical, biological or judicial events that affect the level of the Short-Term Index or the market
price or forward volatility of the U.S. stock markets, the equity securities included in the S&P 500, the S&P 500, the VIX or the relevant futures or option contracts on the VIX;
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Supply and demand as well as hedging activities in the listed and over-the-counter (OTC) equity derivative markets; and
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Disruptions in trading of the S&P 500, futures contracts on the S&P 500 or options on the S&P 500.
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These factors interrelate in complex ways, and the effect of one factor on the market value of a VIX Fund may offset or enhance the
effect of another factor.
Financial Instruments linked to equity market volatility indexes can be highly volatile and the VIX Funds may
experience large losses when buying, selling or holding such instruments.
Financial Instruments linked to equity
market volatility indexes can be highly volatile and may experience large losses. In particular, trading in VIX futures contracts has been very volatile and can be expected to be very volatile in the future. High volatility may have an adverse
impact on the VIX Funds beyond the impact of any performance-based losses of the underlying indexes, especially the Geared Fund (see Risks Specific to the Geared Fund for additional details).
If a VIX Fund establishes its positions through the use of sampling, a VIX Fund may experience additional tracking error.
Tracking error is the difference between the performance of an index tracking fund and its benchmark index. While each VIX Fund seeks to
provide investment results (before fees and expenses) that correspond with the daily performance or a multiple of the daily performance of the Short-Term Index, it is possible that tracking error may increase because of the differences between the
proportion of exposure Financial Instruments held by a VIX Fund have to components included in the Short-Term Index and the proportional weight that such components carry within the Short-Term Index.
A VIX Fund may obtain exposure through Financial Instruments to a representative sample of the components in the Short-Term Index, which
have aggregate characteristics similar to those of the Short-Term Index. This sampling process typically involves selecting a representative sample of components in an index principally to enhance liquidity and reduce transaction costs
while seeking to maintain high correlation with, and
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similar aggregate characteristics (e.g., underlying commodities and valuations) to, the Short-Term Index. In addition, a VIX Fund may obtain exposure to components not included in the Short-Term
Index, invest in assets that are not included in the Short-Term Index or may overweight or underweight certain components contained in the Short-Term Index. Index tracking funds that use sampling may experience greater tracking error than index
tracking funds that fully replicate an underlying index by obtaining exposure on a proportionate basis to all components of that index.
Potential negative impact from rolling futures positions.
The VIX Funds invest in or have exposure to futures contracts and are subject to risks related to rolling. The contractual obligations of a buyer or seller holding a futures contract to expiration may
generally be satisfied by taking or making physical delivery of the contracts underlying asset or settling in cash as designated in the contract specifications. Alternatively, futures contracts may be closed out prior to expiration by making
an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery. Once this date is reached, the futures contract expires. As the futures contracts held by a Fund near
expiration, they are generally closed out and replaced by contracts with a later expiration. This process is referred to as rolling. The VIX Funds do not intend to take physical delivery of any asset underlying a futures contract, but
instead to roll their respective positions.
When the market for these contracts is such that the prices are
higher in the more distant delivery months than in the nearer delivery months, the sale during the course of the rolling process of the more nearby contract would take place at a price that is lower than the price of the more distant
contract. This pattern of higher futures prices for longer expiration futures contracts is often referred to as contango. Alternatively, when the market for these contracts is such that the prices are higher in the nearer months than in
the more distant months, the sale during the course of the rolling process of the more nearby contract would take place at a price that is higher than the price of the more distant contract. This pattern of higher futures prices of
shorter expiration futures contracts is referred to as backwardation. The presence of contango in certain futures contracts at the time of rolling would be expected to adversely affect the Ultra Fund or a Matching Fund that invests in
such futures. Similarly, the presence of backwardation in certain futures contracts at the time of rolling would be expected to positively affect the Ultra Fund or a Matching Fund that invests in such futures.
Since the introduction of VIX futures contracts, there have frequently been periods where VIX futures prices reflect higher volatility
levels further out in time. This can result from rolling the VIX futures contracts to maintain the constant weighted average maturity of the Short-Term Index. Losses from exchanging a lower priced VIX future contract for higher priced
longer-term futures contracts in the rolling process would adversely affect the value of the Short-Term Index and, accordingly, decrease the return of the Ultra Fund or the Matching Fund.
Credit and liquidity risks associated with collateralized repurchase agreements.
A portion of each VIX Funds assets may be held in cash and/or U.S. Treasury securities, agency securities, or other high credit quality short-term fixed-income or similar securities (such as shares
of money market funds and collateralized repurchase agreements). These securities may be used for direct investment or serve as collateral for such Funds trading in Financial Instruments, as applicable, and may include collateralized
repurchase agreements. Collateralized repurchase agreements involve an agreement to purchase a security and to sell that security back to the original seller at an agreed-upon price. The resale price reflects the purchase price plus an agreed-upon
incremental amount which is unrelated to the coupon rate or maturity of the purchased security. As protection against the risk that the original seller will not fulfill its obligation, the buyer receives collateral marked-to-market daily, and
maintained at a value at least equal to the sale price plus the accrued incremental amount. Although the collateralized repurchase agreements that the VIX Funds enter into require that counterparties (which act as original sellers)
over-collateralize the amount owed to a Fund with U.S. Treasury securities and/or agency securities, there is a risk that such collateral could decline in price at the same
- 14 -
time that the counterparty defaults on its obligation to repurchase the security. If this occurs, a VIX Fund may incur losses or delays in receiving proceeds. To minimize these risks, the VIX
Funds typically enter into transactions only with major global financial institutions.
Possible illiquid markets may exacerbate losses.
Financial Instruments cannot always be liquidated at the desired price. It is difficult to execute a trade at a
specific price when there is a relatively small volume of buy and sell orders in a market. A market disruption can also make it difficult to liquidate a position or find a swap counterparty at a reasonable cost.
Market illiquidity may cause losses for the VIX Funds. The large size of the positions which the VIX Funds may acquire increases the risk
of illiquidity by both making their positions more difficult to liquidate and increasing the losses incurred while trying to do so. Any type of disruption or illiquidity will potentially be exacerbated due to the fact that the VIX Funds will
typically invest in Financial Instruments related to one benchmark, which in many cases is highly concentrated.
It may not be possible
to gain exposure to the Short-Term Index using exchange-traded Financial Instruments in the future.
The VIX Funds may
utilize exchange-traded Financial Instruments. It may not be possible to gain exposure to the Short-Term Index with these Financial Instruments in the future. If these Financial Instruments cease to be traded on regulated exchanges, they may be
replaced with Financial Instruments traded on trading facilities that are subject to lesser degrees of regulation or, in some cases, no substantive regulation. As a result, trading in such Financial Instruments, and the manner in which prices and
volumes are reported by the relevant trading facilities, may not be subject to the provisions of, and the protections afforded by, the Commodity Exchange Act, as amended (the CEA), or other applicable statutes and related regulations,
that govern trading on regulated U.S. futures exchanges, or similar statutes and regulations that govern trading on regulated U.K. futures exchanges. In addition, many electronic trading facilities have only recently initiated trading and do not
have significant trading histories. As a result, the trading of contracts on such facilities, and the inclusion of such contracts in an index, may be subject to certain risks not presented by U.S. or U.K. exchange-traded futures contracts, including
risks related to the liquidity and price histories of the relevant contracts.
Fees are charged regardless of a VIX Funds returns
and may result in depletion of assets.
The VIX Funds are subject to the fees and expenses described herein which are
payable irrespective of a Funds returns. Such fees and expenses include asset-based fees of 0.95% per annum of the Geared Funds average daily net assets and 0.85% per annum of the Matching Funds average daily net assets,
as well as the effects of commissions, trading spreads, and embedded financing, borrow costs and fees associated with swaps, futures contracts, and costs relating to the purchase of U.S. Treasury securities or similar high credit quality, short-term
fixed-income or similar securities. Additional charges may include other fees as applicable.
The policies of S&P and the CBOE and
changes that affect the composition and valuation of the S&P 500, the VIX or the Short-Term Index could affect the value of an investment in a VIX Funds Shares.
The policies of S&P and the CBOE concerning the calculation of the level of the S&P 500, the VIX and the Short-Term Index, and any
additions, deletions or substitutions of equity securities, options or futures contracts in the above indexes, respectively, and the manner in which changes affecting the equity securities, options contracts or futures contracts are reflected in the
indexes outlined above, could affect the level of such indexes and, therefore, the value of VIX Fund Shares. S&P can add, delete or substitute the equity securities underlying the S&P 500 or make other methodological changes that could
change the level of the S&P 500. S&P can also add, delete or substitute the futures contracts underlying the Short-Term Index or make other methodological changes that could change the level of such Index. The changing of equity securities
included in the S&P 500
- 15 -
may affect the S&P 500, as a newly added equity security may perform significantly better or worse than the equity security or securities it replaces. Such a change may also affect the value
of the put and call options used to calculate the level of the VIX. The changing of the futures contracts underlying the Short-Term Index may affect the performance of the Short-Term Index in similar ways. Additionally, S&P may alter,
discontinue or suspend calculation or dissemination of the S&P 500 or the Short-Term Index. Any of these actions could adversely affect the value of VIX Fund Shares. S&P has no obligation to consider shareholder interests in calculating or
revising the S&P 500 or the Short-Term Index. The CBOE can make methodological changes to the calculation of the VIX that could affect the value of VIX futures contracts and, consequently, the value of VIX Fund Shares. There can be no assurance
that the CBOE will not change the VIX calculation methodology in a way which may affect the value of VIX Fund Shares. Additionally, the CBOE may alter, discontinue or suspend calculation or dissemination of the VIX and/or the exercise settlement
value. Any of these actions could adversely affect the value of VIX Fund Shares. Calculation of the VIX may not be possible or feasible under certain events or circumstances that are beyond the reasonable control of the Sponsor, which in turn may
adversely impact both the VIX and/or the Shares, as applicable. Additionally, index calculations may be disrupted by rollover disruptions, rebalancing disruptions and/or market emergencies, which may have an adverse effect on the value of the
Shares.
The VIX Funds may be subject to counterparty risks.
Each of the VIX Funds may use swap agreements as a means to achieve their respective investment objectives. The VIX Funds may use swap
agreements referencing their respective benchmarks. The VIX Funds may also invest in other swap agreements if such instruments tend to exhibit trading prices or returns that correlate with the benchmark or a component of the benchmark and will
further the investment objective of the Fund. The VIX Funds may invest in swap agreements when accountability rules or position limits are reached with respect to the futures contracts or the market for a specific futures contract experiences
emergencies (
e.g.
, natural disaster, terrorist attack or an act of God) or disruptions (
e.g.
, a trading halt or a flash crash) that prevent the Funds from obtaining the appropriate amount of investment exposure to the affected futures
contract or certain other futures contracts. Although unlikely, the Funds, under these circumstances, could have 100% exposure to swap agreements.
Swap agreements are generally traded in over-thecounter markets and have only recently become subject to regulation by the CFTC. CFTC rules, however, do not cover all types of swap agreements.
Investors, therefore, may not receive the protection of CFTC regulation or the statutory scheme of the CEA in connection with each VIX Funds swap agreements. The lack of regulation in these markets could expose investors to significant losses
under certain circumstances including in the event of trading abuses or financial failure by participants.
The VIX Funds will
be subject to credit risk with respect to the counterparties to the derivative contracts (whether a clearing corporation in the case of cleared instruments or another third party in the case of over-the-counter uncleared instruments). Unlike in
futures contracts, the counterparty to uncleared swap agreements is generally a single bank or other financial institution, rather than a clearing organization backed by a group of financial institutions. As a result, a VIX Fund is subject to credit
risk with respect to the amount it expects to receive from counterparties to uncleared swaps entered into as part of that Funds principal investment strategy. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, a VIX Fund could suffer significant losses on these contracts and the value of an investors investment in a VIX Fund may decline.
The VIX Funds have sought to mitigate these risks by generally requiring that the counterparties for each VIX Fund agree to post collateral for the benefit of the Fund, marked to market daily, subject to
certain minimum thresholds; however there are no limitations on the percentage of its assets each VIX Fund may invest in swap agreements with a particular counterparty. To the extent any such collateral is insufficient or there are delays in
accessing the collateral, the VIX Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings. The VIX Funds typically enter into transactions only with major
global financial institutions.
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Over-the-counter swaps are less liquid than futures contracts because they are not traded on
an exchange, do not have uniform terms and conditions, and are generally entered into based upon the creditworthiness of the parties and the availability of credit support, such as collateral, and in general, are not transferable without the consent
of the counterparty. If the level of the VIX Funds index has a dramatic intraday move that would cause a material decline in the Funds NAV, the terms of the swap may permit the counterparty to immediately close out the transaction with
the Fund. In that event, it may not be possible for the Fund to enter into another swap agreement or to invest in other Financial Instruments necessary to achieve the desired exposure consistent with the Funds objective. This, in turn, may
prevent the VIX Fund from achieving its investment objective, particularly if the level of the VIX Funds index reverses all or part of its intraday move by the end of the day. In addition, cleared derivative transactions benefit from daily
marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered into directly between two counterparties generally do not benefit from such protections. This exposes the VIX Funds
to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the
VIX Funds to suffer a loss.
As of the date of this prospectus, the VIX Funds approved counterparties for
over-the-counter swap agreements are: Deutsche Bank AG, UBS AG, Goldman Sachs International and Société Générale. The Sponsor regularly reviews the performance of its counterparties for, among other things,
creditworthiness and execution quality. In addition, the Sponsor periodically considers the addition of new counterparties. Thus, the list of counterparties noted above may change at any time. See pages 34 through 35 for more information about the
Funds swap agreements.
Each day, the VIX Funds disclose their portfolio holdings as of the prior Business Day (as such term is defined in Creation Procedures below). Each VIX Funds portfolio holdings identifies its
counterparties, as applicable. This portfolio holdings information may be accessed through the web on the Sponsors website at
www.ProShares.com
.
More information about Deutsche Bank AG, including its current financial statements, may be found on the SECs EDGAR website under Central Index Key No (CIK No.) 0001159508 (for Deutsche
Bank AG). More information about UBS AG, including its current financial statements, may also be found on the SECs EDGAR website under CIK No. 0001114446 (for UBS AG). More information about Goldman Sachs International, a U.K.
broker-dealer and subsidiary of The Goldman Sachs Group, Inc., may also be found on the SECs EDGAR website under CIK No. 0000886982 (for The Goldman Sachs Group, Inc.). The Goldman Sachs Group, Inc. consolidates the financial statements
of each of its subsidiaries, including Goldman Sachs International, with its own. More information about Société Générale, a French public limited company, including its current financial statements as filed with the AMF
(the French securities regulator), may be found on Société Générales website. Please note that the references to third-party websites have been provided solely for informational purposes. Neither the VIX Funds nor
the Sponsor endorses or is responsible for the content or information contained on any third-party website, including with respect to any financial statements. In addition, neither the VIX Funds nor the Sponsor makes any warranty, express or implied
or assumes any legal liability or responsibility for the accuracy, completeness or usefulness of any such information.
Each
counterparty and/or any of its affiliates may be an Authorized Participant or shareholder of a VIX Fund, subject to applicable law.
The counterparty risk for cleared derivative transactions is generally lower than for uncleared over-the-counter derivatives since generally a clearing organization becomes substituted for each
counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the contract as each party to a trade looks only to the clearing house for performance of financial obligations. However, there can be no
assurance that the clearing house, or its members, will satisfy its obligations to a VIX Fund. Historical correlation trends between the Short-Term Index and other asset classes may not continue or may reverse, limiting or eliminating any potential
diversification or other benefit from owning a Fund.
- 17 -
To the extent that an investor purchases a Fund seeking diversification benefits based on
the historic correlation (whether positive or negative) between the returns of the equity market volatility markets and other asset classes, such historic correlation may not continue or may reverse itself. In this circumstance, the diversification
or other benefits sought may be limited or nonexistent.
The VIX Funds have a limited operating history, and, as a result, investors
have only a limited performance history to serve as a factor for evaluating an investment in the VIX Funds.
The VIX
Funds have limited performance history upon which to evaluate an investors investment in the VIX Funds. Although past performance is not necessarily indicative of future results, if the VIX Funds had longer performance histories, such
performance histories might (or might not) provide investors with more information on which to evaluate an investment in the VIX Funds. Likewise, certain indexes have a limited history which might (or might not) provide investors with more
information on which to evaluate an investment in the VIX Funds.
Investors cannot be assured of the Sponsors continued services,
the discontinuance of which may be detrimental to the VIX Funds.
Investors cannot be assured that the Sponsor will be
able to continue to service the VIX Funds for any length of time. If the Sponsor discontinues its activities on behalf of the VIX Funds, the VIX Funds may be adversely affected, as there may be no entity servicing the VIX Funds for a period of time.
If the Sponsors registrations with the CFTC or memberships in the NFA were revoked or suspended, the Sponsor would no longer be able to provide services and/or to render advice to the VIX Funds. If the Sponsor were unable to provide services
and/or advice to the VIX Funds, the VIX Funds would be unable to pursue their investment objectives unless and until the Sponsors ability to provide services and advice to the VIX Funds was reinstated or a replacement for the Sponsor as
commodity pool operator could be found. Such an event could result in termination of the VIX Funds.
The lack of active trading markets
for the Shares of the VIX Funds may result in losses on investors investments at the time of disposition of Shares.
Although the Shares of the VIX Funds are publicly listed and traded on the NYSE Arca, there can be no guarantee that an active trading market for the Shares of the VIX Funds will develop or be maintained.
If investors need to sell their Shares at a time when no active market for them exists, the price investors receive for their Shares, assuming that investors are able to sell them, likely will be lower than the price that investors would receive if
an active market did exist.
Investors may be adversely affected by redemption or creation orders that are subject to postponement,
suspension or rejection under certain circumstances.
A VIX Fund may, in its discretion, suspend the right of creation
or redemption or may postpone the redemption or purchase settlement date, for (1) any period during which the NYSE Arca, New York Stock Exchange (NYSE) or any other exchange, marketplace or trading center, deemed to affect the
normal operations of the Funds, is closed, or when trading is restricted or suspended or restricted on such exchanges in any of the Funds futures contracts, (2) any period during which an emergency exists as a result of which the
fulfillment of a purchase order or the redemption distribution is not reasonably practicable, or (3) such other period as the Sponsor determines to be necessary for the protection of the shareholders of the Funds. In addition, a Fund will
reject a redemption order if the order is not in proper form as described in the Authorized Participant Agreement or if the fulfillment of the order might be unlawful. Any such postponement, suspension or rejection could adversely affect a redeeming
Authorized Participant. For example, the resulting delay may adversely affect the value of the Authorized Participants redemption proceeds if the NAV of a Fund declines during the period of delay. The Funds disclaim any liability for any loss
or damage that may result from any such suspension or
- 18 -
postponement. Suspension of creation privileges may adversely impact how the Shares are traded and arbitraged on the Exchange, which could cause them to trade at levels materially different
(premiums and discounts) from the fair value of their underlying holdings.
The NAV may not always correspond to market price and, as a
result, investors may be adversely affected by the creation or redemption of Creation Units at a value that differs from the market price of the Shares.
The NAV per Share of a VIX Fund changes as fluctuations occur in the market value of a VIX Funds portfolio. Investors should be aware that the public trading price of a number of Shares of a VIX
Fund otherwise amounting to a Creation Unit may be different from the NAV of an actual Creation Unit (
i.e.
, 50,000 individual Shares may trade at a premium over, or a discount to, the NAV of a Creation Unit of the Geared Fund or 25,000
individual Shares may trade at a premium over, or a discount to, NAV of a Creation Unit of the Matching Fund) and similarly the public trading price per Share of a VIX Fund may be different from the NAV per Share of the Fund. Consequently, an
Authorized Participant may be able to create or redeem a Creation Unit of a VIX Fund at a discount or a premium to the public trading price per Share of that Fund. This price difference may be due, in large part, to the fact that supply and demand
forces at work in the secondary trading market for Shares of a VIX Fund are closely related, but not identical, to the same forces influencing the price of the VIX futures contracts comprising the Short-Term Index at any point in time.
Authorized Participants or their clients or customers may have an opportunity to realize a profit if they can purchase a Creation Unit at
a discount to the public trading price of the Shares of a Fund or can redeem a Creation Unit at a premium over the public trading price of the Shares of a Fund. The Sponsor expects that the exploitation of such arbitrage opportunities by Authorized
Participants and their clients and customers will tend to cause the public trading price to track the NAV per Share of the Funds closely over time.
Also, the NAV of a Share may not correspond to its market price due to differences in timing. The Shares of each VIX Fund trade, or will trade, on the NYSE Arca from 9:30 a.m. to 4:00 p.m. (Eastern Time).
The NAV for each Share of a VIX Fund, however, will be calculated at 4:15 p.m. (Eastern Time). Consequently, during the time when the NYSE Arca is closed but before the determination of NAV, there could be market developments or other events that
cause or exacerbate the difference between the price of the Shares of a VIX Fund and the NAV of such Shares.
The number of underlying
components included in a VIX Funds index may impact volatility, which could adversely affect an investment in the Shares.
The Short-Term Index for the VIX Funds is concentrated solely in VIX futures contracts. Investors should be aware that other volatility indexes may be more diversified in terms of both the number and
variety of instruments included or in terms of the volatility exposure offered. Concentration in fewer underlying components may result in a greater degree of volatility in an index and the NAV of the VIX Fund which tracks that index under specific
market conditions and over time.
Trading on exchanges outside the United States is not subject to U.S. regulation and may result in
different or diminished investor protections.
Some of the VIX Funds trading may be conducted on exchanges
outside the United States. Trading on such exchanges is not regulated by any U.S. governmental agency and may involve certain risks not applicable to trading on U.S. exchanges, including different or diminished investor protections. In trading
contracts denominated in currencies other than U.S. dollars, the Shares are subject to the risk of adverse exchange rate movements between the dollar and the functional currencies of such contracts. Investors could incur substantial losses from
trading on foreign exchanges which such investors would not have otherwise been subject had the Funds trading been limited to U.S. markets.
- 19 -
Competing claims of intellectual property rights may adversely affect the VIX Funds and an investment
in the Shares.
Although the Sponsor does not anticipate that such claims will adversely impact the VIX Funds, it is
impossible to provide definite assurances that no such negative impact will occur. The Sponsor believes that it has properly licensed or obtained the appropriate consent of all necessary parties with respect to intellectual property rights. However,
other third parties could allege ownership as to such rights and may bring an action in asserting their claims. To the extent any action is brought by a third party asserting such rights, the expenses in litigating, negotiating, cross-licensing or
otherwise settling such claims may adversely affect the VIX Funds.
Investors may be adversely affected by an overstatement or
understatement of the NAV calculation of the VIX Funds due to the valuation method employed on the date of the NAV calculation.
Calculating the NAV of the VIX Funds includes, in part, any unrealized profits or losses on open Financial Instrument positions. Under normal circumstances, the NAV of a Fund reflects the value of the
Financial Instruments held by a Fund, as of the time the NAV is calculated. However, if any of the Financial Instruments held by a Fund could not be purchased or sold on a day when a Fund is accepting creation and redemption orders (due to the
operation of daily limits or other rules of the exchange or otherwise), a Fund may be improperly exposed which could cause it to fail to meet its stated investment objective. Alternatively, a Fund may attempt to calculate the fair value of such
Financial Instruments. In such a situation, there is a risk that the calculation of the relevant benchmark, and therefore, the NAV of the applicable Fund on such day, may not accurately reflect the realizable market value of the Financial
Instruments underlying such benchmark.
The liquidity of the Shares may also be affected by the withdrawal from participation of
Authorized Participants, which could adversely affect the market price of the Shares.
In the event that one or more
Authorized Participants which have substantial interests in the Shares withdraw from participation, the liquidity of the Shares will likely decrease, which could adversely affect the market price of the Shares and result in investors incurring a
loss on their investment.
Shareholders that are not Authorized Participants may only purchase or sell their Shares in secondary trading
markets, and the conditions associated with trading in secondary markets may adversely affect investors investment in the Shares.
Only Authorized Participants may create or redeem Creation Units. All other investors that desire to purchase or sell Shares must do so through the NYSE Arca or in other markets, if any, in which the
Shares may be traded. Shares may trade at a premium or discount to NAV per Share.
The NYSE Arca may halt trading in the Shares of a VIX
Fund, which would adversely impact investors ability to sell Shares.
Trading in Shares of a VIX Fund may be
halted due to market conditions or, in light of the NYSE Arca rules and procedures, for reasons that, in the view of the NYSE Arca, make trading in Shares of a Fund inadvisable. In addition, trading is subject to trading halts caused by
extraordinary market volatility pursuant to circuit breaker rules that require trading to be halted for a specified period based on a specified decline or rise in a market index (
e.g.
, the Dow Jones Industrial Average) or in the
price of a Funds Shares. Additionally, the ability to short sell a Funds shares may be restricted when there is a 10% or greater change from the previous days official closing price. There can be no assurance that the requirements
necessary to maintain the listing of the Shares of a Fund will continue to be met or will remain unchanged.
- 20 -
Shareholders do not have the protections associated with ownership of shares in an investment company
registered under the 1940 Act.
None of the VIX Funds are subject to registration or regulation under the 1940 Act.
Consequently, shareholders do not have the regulatory protections provided to investors in investment companies.
Shareholders do not
have the rights enjoyed by investors in certain other vehicles and may be adversely affected by a lack of statutory rights and by limited voting and distribution rights.
The Shares have limited voting and distribution rights. For example, shareholders do not have the right to elect directors, the VIX Funds
may enact splits or reverse splits without shareholder approval and the VIX Funds are not required to pay regular distributions, although the VIX Funds may pay distributions at the discretion of the Sponsor.
The value of the Shares will be adversely affected if the VIX Funds are required to indemnify the Trustee.
Under the Amended and Restated Trust Agreement of the Trust, as may be further amended and restated from time to time (the Trust
Agreement), the Trustee has the right to be indemnified for any liability or expense incurred without gross negligence or willful misconduct. That means the Sponsor may require the assets of a VIX Fund to be sold in order to cover losses or
liability suffered by it or by the Trustee. Any sale of that kind would reduce the NAV of one or more of the Funds.
Although the Shares
of the VIX Funds are limited liability investments, certain circumstances such as bankruptcy of a Fund will increase a shareholders liability.
The Shares of the VIX Funds are limited liability investments; investors may not lose more than the amount that they invest plus any profits recognized on their investment. However, shareholders could be
required, as a matter of bankruptcy law, to return to the estate of a VIX Fund any distribution they received at a time when such Fund was in fact insolvent or in violation of the Trust Agreement.
Failure of the FCMs to segregate assets may increase losses in the VIX Funds.
The CEA requires a clearing broker to segregate all funds received from customers from such brokers proprietary assets. There is a
risk that assets deposited by the Sponsor on behalf of the VIX Funds as margin with the FCMs may, in certain circumstances, be used to satisfy losses of other clients of the FCMs. If an FCM fails to segregate the funds received from the Sponsor, the
assets of the VIX Funds might not be fully protected in the event of the FCMs bankruptcy. Furthermore, in the event of an FCMs bankruptcy, Fund Shares could be limited to recovering only a
pro rata
share of all available funds
segregated on behalf of the FCMs combined customer accounts, even though certain property specifically traceable to a particular Fund was held by the FCM. Each FCM may, from time to time, have been the subject of certain regulatory and private
causes of action.
Similarly, the CEA requires a clearing organization approved by the CFTC as a derivatives clearing
organization to segregate all funds and other property received from a clearing members clients in connection with domestic futures and options contracts from any funds held at the clearing organization to support the clearing members
proprietary trading. Nevertheless, customer funds held at a clearing organization in connection with any futures or options contracts may be held in a commingled omnibus account, which may not identify the name of the clearing members
individual customers. With respect to futures and options contracts, a clearing organization may use assets of a non-defaulting customer held in an omnibus account at the clearing organization to satisfy payment obligations of a defaulting customer
of the clearing member to the clearing organization. As a result, in the event of a default of the clearing FCMs other clients or the clearing FCMs failure to extend its own funds in connection with any such default, a VIX Fund may not
be able to recover the full amount of assets deposited by the clearing FCM on behalf of the VIX Fund with the clearing organization. In the event of a bankruptcy or insolvency of any exchange or a clearing house, a VIX Fund could experience a loss
of the funds deposited through its FCM as margin with the exchange or clearing house, a loss of any profits on its open positions on the exchange, and the loss of unrealized profits on its closed positions on the exchange.
- 21 -
A court could potentially conclude that the assets and liabilities of a VIX Fund are not segregated
from those of another series of the Trust and may thereby potentially expose assets in a VIX Fund to the liabilities of another series of the Trust.
Each series of the Trust is a separate series of a Delaware statutory trust and not itself a separate legal entity. Section 3804(a) of the Delaware Statutory Trust Act, as amended (the
DSTA), provides that if certain provisions are in the formation and governing documents of a statutory trust organized in series, and if separate and distinct records are maintained for any series and the assets associated with that
series are held in separate and distinct records (directly or indirectly, including through a nominee or otherwise) and accounted for in such separate and distinct records separately from the other assets of the statutory trust, or any series
thereof, then the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series are enforceable against the assets of such series only, and not against the assets of the statutory
trust generally or any other series thereof, and none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the statutory trust generally or any other series thereof shall be enforceable
against the assets of such series. The Sponsor is not aware of any court case that has interpreted Section 3804(a) of the DSTA or provided any guidance as to what is required for compliance. The Sponsor maintains separate and distinct records
for each series and accounts for them separately, but it is possible a court could conclude that the methods used did not satisfy Section 3804(a) of the DSTA and thus potentially expose assets of a VIX Fund to the liabilities of another series
of the Trust.
There may be circumstances that could prevent a VIX Fund from being operated in a manner consistent with its investment
objective and principal investment strategies.
There may be circumstances outside the control of the Sponsor and/or a
VIX Fund that make it, for all practical purposes, impossible to re-position such VIX Fund and/or to process a purchase or redemption order. Examples of such circumstances include: natural disasters; public service disruptions or utility problems
such as those caused by fires, floods, extreme weather conditions, and power outages resulting in telephone, telecopy, and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other
information systems affecting the aforementioned parties, as well as the Depository Trust Company (DTC), the National Securities Clearing Corporation (NSCC), or any other participant in the purchase process; and similar
extraordinary events. Accordingly, while the Sponsor has implemented and tested a business continuity plan that transfers functions of any disrupted facility to another location and has effected a disaster recovery plan, circumstances, such as those
above, may prevent a VIX Fund from being operated in a manner consistent with its investment objective and/or principal investment strategies.
Shareholders tax liability will exceed cash distributions on the Shares.
Shareholders of each VIX Fund are subject to U.S. federal income taxation and, in some cases, state, local, or foreign income taxation on
their share of the VIX Funds taxable income, whether or not they receive cash distributions from the VIX Fund. Each VIX Fund does not currently expect to make distributions with respect to capital gains or ordinary income. Accordingly,
shareholders of a VIX Fund will not receive cash distributions equal to their share of the VIX Funds taxable income or the tax liability that results from such income. A VIX Funds income, gains, losses and deductions are allocated to
shareholders on a monthly basis. If you own shares in a VIX Fund at the beginning of a month and sell them during the month, you are generally still considered a shareholder through the end of that month.
The U.S. Internal Revenue Service (IRS) could adjust or reallocate items of income, gain, deduction, loss and credit with respect to
the Shares if the IRS does not accept the assumptions or conventions utilized by the VIX Fund.
U.S. federal income tax
rules applicable to partnerships, which each VIX Fund is anticipated to be treated as under the Internal Revenue Code of 1986, as amended (the Code), are complex and their application is not
always clear. Moreover, the rules generally were not written for, and in some respects are difficult to apply to,
- 22 -
publicly traded interests in partnerships. The VIX Funds apply certain assumptions and conventions intended to comply with the intent of the rules and to report income, gain, deduction, loss and
credit to shareholders in a manner that reflects the shareholders economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable Regulations (as defined below). It is possible therefore that
the IRS will successfully assert that these assumptions or conventions do not satisfy the technical requirements of the Code or the Treasury regulations promulgated thereunder (the Regulations) and will require that items of income,
gain, deduction, loss and credit be adjusted or reallocated in a manner that could be adverse to investors.
Shareholders will receive
partner information tax returns on Schedule K-1, which could increase the complexity of tax returns.
The partner
information tax returns on Schedule K-1 which the VIX Funds will distribute to shareholders will contain information regarding the income items and expense items of the VIX Funds. If you have not received Schedule K-1s from other investments, you
may find that preparing your tax return may require additional time, or it may be necessary for you to retain an accountant or other tax preparer, at an additional expense to you, to assist you in the preparation of your return.
Investors could be adversely affected if the current treatment of long-term capital gains under current U.S. federal income tax law is changed or
repealed in the future.
Under current law, long-term capital gains are taxed to non-corporate investors at a maximum
U.S. federal income tax rate of 20%. This tax treatment may be adversely affected, changed or repealed by future changes in tax laws at any time.
Shareholders of each VIX Fund may recognize significant amounts of ordinary income and short-term capital gain.
Due to the investment strategy of the VIX Funds, the VIX Funds may realize and pass-through to shareholders significant amounts of ordinary income and short-term capital gains as opposed to long-term
capital gains, which generally are taxed at a preferential rate. A VIX Funds income, gains, losses and deductions are allocated to shareholders on a monthly basis. If you own shares in a VIX Fund at the beginning of a month and sell them
during the month, you are generally still considered a shareholder through the end of that month.
PROSPECTIVE INVESTORS
ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISERS AND COUNSEL WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE SHARES OF A VIX FUND; SUCH TAX CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT INVESTORS.
Regulatory changes or actions, including the implementation of new legislation, may alter the operations and profitability of the VIX Funds.
The U.S. derivative markets and market participants have been subject to comprehensive regulation, not only by the
CFTC but also by self regulatory organizations, including the NFA and the exchanges on which the derivatives contracts are traded and/or cleared. As with any regulated activity, changes in the regulations may have unexpected results. For example,
changes in the amount or quality of the collateral that traders in derivative contracts are required to provide to secure their open positions, or in the limits on number or size of positions that a trader may have open at a given time, may
adversely affect the ability of the VIX Funds to enter into certain transactions that could otherwise present lucrative opportunities. Considerable regulatory attention has been focused on non-traditional investment pools which are publicly
distributed in the United States. There is a possibility of future regulatory changes altering, perhaps to a material extent, the nature of an investment in the VIX Funds or the ability of the VIX Funds to continue to implement their investment
strategies.
- 23 -
In addition, the SEC, CFTC and the exchanges are authorized to take extraordinary actions in
the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading. The regulation of swaps and
futures transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action. The effect of any future regulatory change on the Funds is impossible to predict, but could be substantial
and adverse.
In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act)
was signed into law on July 21, 2010. The Dodd-Frank Act will make sweeping changes to the way in which the U.S. financial system is supervised and regulated. Title VII of the Dodd-Frank Act sets forth a new legislative framework for OTC
derivatives, including certain Financial Instruments, such as swaps, in which certain of the Funds may invest. Title VII of the Dodd-Frank Act makes broad changes to the OTC derivatives market, grants significant new authority to the SEC and the
CFTC to regulate OTC derivatives and market participants, and will require clearing and exchange trading of many OTC derivatives transactions.
Provisions in the Dodd-Frank Act include the requirement that position limits on commodity futures contracts be established; new registration, recordkeeping, capital and margin requirements for swap
dealers and major swap participants as determined by the Dodd-Frank Act and applicable regulations; and the mandatory use of clearinghouse mechanisms for many OTC derivative transactions. The CFTC, the SEC and other federal
regulators have been tasked with developing the rules and regulations enacting the provisions of the Dodd-Frank Act. While certain regulations have been promulgated and are already in effect, it is not possible at this time to assess the exact
nature and full scope of the impact of the Dodd-Frank Act on any of the Funds. The new legislation and the related regulations that may be promulgated in the future may negatively impact a Funds ability to meet its investment objective either
through limits on its investments or requirements imposed on it or any of its counterparties. In particular, new requirements, including capital requirements and mandatory clearing of over-the-counter derivative transactions, may increase the cost
of a Funds investments and the cost of doing business, which could adversely affect investors.
Regulatory and exchange
accountability levels may restrict the creation of Creation Units and the operation of the Trust.
Many U.S.
commodities exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day by regulations referred to as daily price fluctuation limits or daily limits. Once the
daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. In addition, the CFTC, U.S. futures exchanges and certain
non-U.S. exchanges have established limits referred to as speculative position limits or accountability levels on the maximum net long or short futures positions that any person may hold or control in derivatives traded on
such exchanges.
In connection with these limits, the Dodd-Frank Act has required the CFTC to adopt regulations establishing
speculative position limits applicable to regulated futures and over-the-counter derivatives and impose aggregate speculative position limits across regulated U.S. futures, over-the-counter positions and certain futures contracts traded on non-U.S.
exchanges. In accordance with this mandate, in October 2011, the CFTC finalized rules that established position limits with respect to 28 physical delivery commodity futures and options contracts, as well as to swaps that are economically equivalent
to such contracts. The new position limits established by the CFTC would apply with respect to contracts traded on all U.S. and certain foreign exchanges on an aggregate basis. In addition, the CFTC required U.S. commodities exchanges to establish
corresponding speculative position limits. Under the adopted CFTC regulations, all accounts owned or managed by an entity that is responsible for such accounts trading decisions, their principals and their affiliates would be combined for
position limit purposes.
In September 2012, the U.S. District Court in Washington, D.C. struck down these CFTC position limit
rules adopted in connection with the Dodd-Frank Act, remanding such rules to the CFTC to resolve various issues identified in the courts decision. Although it is unclear what future position limit rules will be, the
- 24 -
Sponsor is subject to current position and accountability limits established by the CFTC and exchanges. Accordingly, it may be required to reduce the size of outstanding positions or not enter
into new positions that would otherwise be taken for the Funds in order to comply with those limits or any future limits established by the CFTC and the relevant exchanges. Derivative contract prices could move to a limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of derivatives positions and potentially subjecting the Funds to substantial losses or periods in which such Funds do not create additional Creation Units. Modification of
trades made by the Trust, if required, could adversely affect the Trusts operations and profitability and significantly limit the Trusts ability to reinvest income in additional contracts, create additional Creation Units, or add to
existing positions in the desired amount.
In addition, the Sponsor may be required to liquidate certain open positions in
order to ensure compliance with the speculative position limits at unfavorable prices, which may result in substantial losses for the relevant Funds. There also can be no assurance that the Sponsor will liquidate positions held on behalf of all the
Sponsors accounts, including any proprietary accounts, in a proportionate manner. In the event the Sponsor chooses to liquidate a disproportionate number of positions held on behalf of any of the Funds at unfavorable prices, such Funds may
incur substantial losses and the value of the Shares may be adversely affected.
Further, in October 2012, a new CFTC rule
became effective, which requires each registered FCM to establish risk-based limits on position and order size. As a result, the Trusts FCMs may be required to reduce their internal limits on the size of the positions they will execute or
clear for the Funds, and the Trust may seek to use additional FCMs, which may increase the costs for the Funds and adversely affect the value of the Shares.
The Trust may apply to the CFTC or to the relevant exchanges for relief from certain position limits. If the Trust is unable to obtain such relief, a Funds ability to issue new Creation Units, or
the Funds ability to reinvest income in additional futures contracts, may be limited to the extent these activities cause the Trust to exceed applicable position limits. Limiting the size of a Fund may affect the correlation between the price
of the Shares, as traded on an exchange, and the net asset value of the Fund. Accordingly, the inability to create additional Creation Units or add to existing positions in the desired amount could result in Shares trading at a premium or discount
to NAV.
- 25 -
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated by reference contain forward-looking statements that are subject to risks
and uncertainties. Investors can identify these forward-looking statements by the use of expressions such as may, will, expect, anticipate, believe, intend, plan,
project, should, estimate or any negative or other variations on such expression. These forward-looking statements are based on information currently available to the Sponsor and are subject to a number of risks,
uncertainties and other factors, both known, such as those described in Risk Factors and elsewhere in this Prospectus and the documents incorporated by reference in this Prospectus, and unknown, that could cause the actual results,
performance, prospects or opportunities of the Funds to differ materially from those expressed in, or implied by, these forward-looking statements.
Except as expressly required by federal securities laws, the Trust assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or
otherwise. Investors should not place undue reliance on any forward-looking statements.
- 26 -
DESCRIPTION OF THE VIX FUNDS INDEX
The S&P 500 VIX Short-Term Futures Index
The VIX Funds seek to offer exposure to forward equity market volatility by obtaining exposure to the S&P 500 VIX Short-Term Futures Index (the Short-Term Index), which is based on publicly traded VIX
futures contracts. The Short Term-Index is intended to reflect the returns that are potentially available through an unleveraged investment in the VIX futures contracts comprising the Short-Term Index. The VIX, which is not the index underlying the
VIX Funds, is calculated based on the prices of put and call options on the S&P 500. The VIX Funds can be expected to perform very differently from the VIX.
The Short-Term Index employs rules for selecting VIX futures contracts comprising the Short-Term Index and a formula to calculate a level for the Short-Term Index from the prices of these VIX futures
contracts. Specifically, the VIX futures contracts comprising the Short-Term Index represent the prices of two near-term VIX futures contracts, replicating a position that rolls the nearest month VIX futures to the next month VIX futures on a daily
basis in equal fractional amounts. This results in a constant weighted average maturity of one month. The roll period begins on the Tuesday prior to the monthly CBOE VIX futures settlement and runs through the Tuesday prior to the subsequent
months CBOE VIX futures settlement date.
The level of the Short-Term Index is calculated in accordance with the method
described in Composition and Calculation of the Short-Term IndexComposition of the Short-Term Index below. The level of the Short-Term Index will be published by Bloomberg L.P. in real time and at the close of trading on each
Short-Term Index business day under the following ticker symbol:
|
|
|
Index
|
|
Bloomberg Ticker Symbol
|
S&P 500 VIX Short-Term Futures Index
|
|
SPVXSPID
|
The performance of the Short-Term Index is influenced by the S&P 500 (and options thereon) and the
VIX. A description of VIX futures contracts, the VIX and S&P 500 follows:
VIX Futures Contracts
The Short-Term Index is comprised of VIX futures contracts. VIX futures contracts were first launched for trading by the CBOE in 2004. VIX
futures contracts have expirations ranging from the front month consecutively out to the tenth month. VIX futures contracts allow investors the ability to invest based on their view of forward implied market volatility. Investors that believe the
forward implied market volatility of the S&P 500, as represented by VIX futures contracts, will increase may buy VIX futures contracts. Conversely, investors that believe that the forward implied market volatility of the S&P 500, as
represented by VIX futures contracts, will decline may sell VIX futures contracts. VIX futures contracts are reported by Bloomberg L.P. under the ticker symbol VX.
While the VIX represents a measure of the current expected volatility of the S&P 500 over the next 30 days, the prices of VIX futures contracts are based on the current expectation of what the
expected 30-day volatility will be at a particular time in the future (on the expiration date). The VIX and VIX futures contracts generally behave quite differently. To illustrate, on January 31, 2011, the VIX was 19.53 and the price of the
February 2011 VIX futures contracts expiring on February 16, 2011 was 19.10. In this example, the price of the VIX represented the 30-day implied, or spot, volatility (the volatility expected for the period from January 31,
2011 to March 2, 2011) of the S&P 500 and the February VIX futures contracts represented forward implied volatility (the volatility expected for the period from February 16, 2011 to March 16, 2011) of the S&P 500. The
spot/forward relationship between the VIX and VIX futures contracts has two noteworthy consequences: (1) the price of a VIX futures contract can be lower, equal to or higher than the VIX, depending on whether the market expects volatility to be
lower, equal to or higher in the 30-day forward period covered by the VIX futures contract than in the 30-day spot period covered by the VIX; and (2) you cannot create a position equivalent to one in VIX futures contracts by buying the VIX and
holding the position to the futures expiration date while financing the transaction.
- 27 -
The VIX
The VIX Funds are not linked to the VIX and can be expected to perform very differently from the VIX. The VIX is an index designed to measure the implied volatility of the S&P 500 over 30 days in the
future, and is calculated based on the prices of certain put and call options on the S&P 500. The VIX is reflective of the premium paid by investors for certain options linked to the level of the S&P 500. During periods of rising investor
uncertainty, including periods of market instability, the implied level of volatility of the S&P 500 typically increases and, consequently, the prices of options linked to the S&P 500 typically increase (assuming all other relevant factors
remain constant or have negligible changes). This, in turn, causes the level of the VIX to increase. The VIX has historically had a negative correlation to the S&P 500. The VIX was developed by the CBOE and is calculated, maintained and
published by the CBOE. The CBOE has no obligation to continue to publish, and may discontinue the publication of, the VIX. The VIX is reported by Bloomberg L.P. under the ticker symbol VIX.
The calculation of the VIX involves a formula that uses the prices of a weighted series of out-of-the-money put and call options on the
level of the S&P 500 (SPX Options) with two adjacent expiry terms to derive a constant 30-day forward measure of market volatility. The VIX is calculated independent of any particular option pricing model and in doing so seeks to
eliminate any biases which may otherwise be included in using options pricing methodology based on certain assumptions. Although the VIX measures the 30-day forward volatility of the S&P 500 as implied by the SPX Options, 30-day options are only
available once a month. To arrive at the VIX level, a broad range of out-of-the-money SPX Options expiring on the two closest nearby months (near term options and next term options, respectively) are selected in order to
bracket a 30-day calendar period. SPX Options having a maturity of less than eight days are excluded at the outset and, when the near term options have eight days or less left to expiration, the VIX rolls to the second and third contract months in
order to minimize pricing anomalies that occur close to expiration. The model-free implied volatility using prices of the near term options and next term options are then calculated on a strike price weighted average basis in order to arrive at a
single average implied volatility value for each month. The results of each of the two months are then interpolated to arrive at a single value with a constant maturity of 30 days to expiration.
The S&P 500
The S&P 500 is an index that measures large-cap U.S. stock market performance. It is a float-adjusted market capitalization weighted
index of 500 U.S. operating companies and real estate investment trusts selected by the S&P U.S. Index Committee through a non-mechanical process that factors in criteria such as liquidity, price, market capitalization and financial viability.
Reconstitution occurs both on a quarterly and ongoing basis. S&P publishes the S&P 500. The daily calculation of the current value of the S&P 500 is based on the relative value of the aggregate market value of the common stocks of 500
companies as of a particular time compared to the aggregate average initial market value of the common stocks of 500 similar companies at the time of the inception of the S&P 500. The 500 companies are not the 500 largest publicly traded
companies and not all 500 companies are listed on the NYSE. S&P chooses companies for inclusion in the S&P 500 with the objective of achieving a distribution by broad industry groupings that approximates the distribution of these groupings
in the common stock population of the U.S. equity market. S&P may from time to time, in its sole discretion, add companies to, or delete companies from, the S&P 500 to achieve the objectives stated above. Relevant criteria employed by
S&P include the viability of the particular company, the extent to which that company represents the industry group to which it is assigned, the extent to which the companys common stock is widely held and the market value and trading
activity of the common stock of that company.
THE VIX FUNDS ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P AND ITS
AFFILIATES OR CBOE. S&P AND CBOE MAKE NO REPRESENTATION, CONDITION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE VIX FUNDS OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN THE VIX FUNDS
PARTICULARLY OR THE ABILITY OF THE INDEX TO TRACK MARKET PERFORMANCE AND/OR OF GROUPS OF ASSETS OR ASSET CLASSES AND/OR TO ACHIEVE ITS STATED OBJECTIVE AND/OR TO FORM THE BASIS OF A SUCCESSFUL INVESTMENT STRATEGY,
- 28 -
AS APPLICABLE. S&PS AND CBOES ONLY RELATIONSHIP TO PROSHARES TRUST II ON BEHALF OF ITS APPLICABLE SERIES AND PROSHARE CAPITAL MANAGEMENT LLC IS THE LICENSING OF CERTAIN TRADEMARKS
AND TRADE NAMES AND OF THE INDEX WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY S&P WITHOUT REGARD TO PROSHARES TRUST II ON BEHALF OF ITS APPLICABLE SERIES AND PROSHARE CAPITAL MANAGEMENT LLC OR THE VIX FUNDS. S&P HAS NO OBLIGATION TO TAKE
THE NEEDS OF PROSHARES TRUST II ON BEHALF OF ITS APPLICABLE SERIES AND PROSHARE CAPITAL MANAGEMENT LLC OR THE OWNERS OF THE VIX FUNDS INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE INDEX. S&P AND CBOE ARE NOT ADVISORS TO THE VIX
FUNDS AND ARE NOT RESPONSIBLE FOR AND HAVE NOT PARTICIPATED IN THE DETERMINATION OF THE PRICES AND AMOUNT OF THE VIX FUNDS OR THE TIMING OF THE ISSUANCE OR SALE OF THE VIX FUNDS OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE VIX
FUND SHARES ARE TO BE CONVERTED INTO CASH. S&P AND CBOE HAVE NO OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING, OR TRADING OF THE VIX FUNDS.
NEITHER S&P, ITS AFFILIATES NOR THIRD PARTY LICENSORS, INCLUDING CBOE, GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN AND S&P, ITS AFFILIATES AND THEIR
THIRD PARTY LICENSORS, INCLUDING CBOE, SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P AND CBOE MAKE NO WARRANTY, CONDITION OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY PROSHARES TRUST
II ON BEHALF OF ITS APPLICABLE SERIES AND PROSHARE CAPITAL MANAGEMENT LLC, OWNERS OF THE VIX FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. S&P AND CBOE MAKE NO EXPRESS OR IMPLIED WARRANTIES,
REPRESENTATIONS OR CONDITIONS, AND EXPRESSLY DISCLAIM ALL WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE AND ANY OTHER EXPRESS OR IMPLIED WARRANTY OR CONDITION WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P, ITS AFFILIATES OR THEIR THIRD PARTY LICENSORS, INCLUDING CBOE, HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS)
RESULTING FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Composition and Calculation of the Short-Term Index
Composition of the Short-Term Index
The Short-Term Index represents a daily rolling long position in VIX futures contracts of specified maturities and are intended to reflect
the returns that are potentially available through an unleveraged investment in those contracts. The Short-Term Index measures the return from a rolling long position in the first and second month VIX futures contracts. It rolls continuously
throughout each month from the first month VIX futures contract into the second month VIX futures contract.
The Short-Term
Index rolls on a daily basis. One of the effects of daily rolling is to maintain a constant weighted average maturity for the underlying futures contracts. Certain futures contracts, like those on the VIX, specify a date for settlement in cash based
on the price of the underlying asset or index. Once this date is reached, the futures contract expires. As described in more detail below, the Short-Term Index operates by, on a daily basis, selling VIX futures contracts with a nearby
settlement date and purchasing VIX futures contracts which settle on a later date. The roll for each contract occurs on each Short-Term Index business day according to a pre-determined schedule that has the effect of keeping constant the weighted
average maturity of the relevant futures contracts. The constant weighted average maturity for the futures underlying the Short-Term Index is one month. Rolling futures contracts may have certain adverse consequences as described in the section
entitled Risks FactorsRisks Related to All VIX FundsPotential negative impact from rolling futures positions on page 14.
- 29 -
Calculation of the Short-Term Index
On any business day,
t
, the Short-Term Index is calculated as follows:
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
where:
|
|
|
IndexER
t-1
=
|
|
The Index Excess Return on the preceding business day, defined as any date on which the Short-Term Index is calculated.
|
CDR
t
= Contract Daily Return, as determined by the following formula:
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
where:
t-1
= the preceding business day.
|
|
|
TDWO
t
=
|
|
Total Dollar Weight Obtained on
t
, as determined by the following formula for the Short Term Index:
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
TDWI
t-1
=
|
|
Total Dollar Weight Invested on
t-1
, as determined by the following formula for the Short-Term Index:
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
where:
CRW
i,t
= Contract Roll Weight of the i
th
VIX futures contract on date
t
.
DCRP
i,t
= Daily
Contract Reference Price of the i
th
VIX futures contract
on date
t
.
m
= For the S&P 500 VIX Short-Term Futures Index
m
= 1.
n
= For the
S&P 500 VIX Short-Term Futures Index
n
= 2.
Contract Rebalancing
The roll period starts on the Tuesday prior to the monthly VIX futures settlement date (the Wednesday falling 30 calendar days before the
S&P 500 option expiration for the following month), and runs through the Tuesday prior to the subsequent months VIX futures settlement date. Thus, the Short-Term Index is rolling on a continual basis. On the business date after the current
roll period ends the following roll period will begin.
- 30 -
In calculating the Excess Return of the Short-Term Index, the Contract
Roll Weights (
CRW
i,t
) of each of the contracts in the Short-Term Index, on a given day, t, are determined as follows:
where:
CRW
i,t
= Contract Roll Weight of the
i
th
VIX futures contract on date
t
.
|
|
|
dt =
|
|
The total number of business days in the current roll period beginning with, and including, the starting VIX futures settlement date and ending with, but excluding, the following
VIX futures settlement date. The number of business days stays constant in cases of a new holiday introduced intra-month or an unscheduled market closure.
|
|
|
|
dr =
|
|
The total number of business days within a roll period beginning with, and including, the following business day and ending with, but excluding, the following VIX futures settlement
date. The number of business days includes a new holiday introduced intra-month up to the business day preceding such a holiday.
|
At the close on the Tuesday corresponding to the start of the roll period, all of the weight is allocated
to the first month contract. Then, on each subsequent business day a fraction of the first month VIX futures holding is sold and an equal notional amount of the second month VIX futures is bought. The fraction, or quantity, is proportional to the
number of first month VIX futures contracts as of the previous Short-Term Index roll day, and inversely proportional to the length of the current roll period. In this way, the initial position in the first month contract is progressively moved to
the second month one over the course of the month, until the following Roll Period starts when the old second month VIX futures contract becomes the new first month VIX futures contract and gets sold every day afterward as the process begins again.
In addition to the transactions described above, the weight of each VIX futures contract comprising the Short-Term Index is
also adjusted every day to ensure that the change in total dollar exposure for the Short-Term Index is only due to the price change of each contract and not due to using a different weight for a contract trading at a higher price.
- 31 -
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
Investment Objectives
The Geared Fund (the Ultra Fund)
The Ultra Fund seeks daily results
that match (before fees and expenses) two times (2x) the daily performance of the Short-Term Index. The Ultra Fund does not seek to achieve its stated objective over a period greater than a single day. A single day is measured from
the time the Fund calculates its NAV to the time of the Funds next NAV calculation. If the Ultra Fund is successful in meeting its objective, its value on a given day (before fees and expenses) should gain approximately two times as much on a
percentage basis as the level of the Short-Term Index when the Short-Term Index rises. Conversely, its value on a given day (before fees and expenses) should lose approximately two times as much on a percentage basis as the level of the Short-Term
Index when the Short-Term Index declines. The Ultra Fund acquires long exposure through any one of or combinations of Financial Instruments, including Financial Instruments with respect to the Short-Term Index, such that the Ultra Fund has exposure
intended to approximate two times (2x) the Short-Term Index at the time of its NAV calculation.
The Matching Fund
The Matching Fund seeks results that, both over a single day and over time, match (before fees and expenses) the
performance of the Short-Term Index. If the Matching Fund is successful in meeting its objective, its value (before fees and expenses) should gain approximately as much on a percentage basis as the level of the Short-Term Index when the Index rises.
Conversely, its value (before fees and expenses) should lose approximately as much on a percentage basis as the level of the Short-Term Index when the Index declines. The Matching Fund acquires exposure through VIX futures contracts, such that the
Matching Fund has exposure intended to approximate Short-Term Index at the time of its NAV calculation. The Short-Term Index tracks the performance of VIX futures contracts; it does not track the performance of the VIX, and the Matching Fund should
not be expected to match the performance of the VIX.
There can be no assurance that either VIX Fund will achieve its
investment objective or avoid substantial losses. The Geared Fund does not seek to achieve its stated investment objective over a period of time greater than a single day because mathematical compounding prevents this Fund from achieving such
results. Results for this Fund over periods of time greater than a single day should not be expected to be a simple multiple (2x) of the period return of the corresponding index and will likely differ significantly from such. A VIX Fund will
lose money if its indexs performance is flat over time, and it is possible for the Geared Fund to lose money over time even if its indexs performance increases, as a result of daily rebalancing, the indexs volatility and
compounding. Daily compounding of the Geared Funds investment returns can dramatically and adversely affect its longer-term performance during periods of high volatility. Volatility may be at least as important to the Geared Funds return
for a period as the return of the Funds underlying index. The Matching Fund seeks to achieve its stated investment objective both over a single day and over time.
The corresponding index for each VIX Fund
*
is listed below:
ProShares Ultra VIX Short-Term Futures ETF and ProShares VIX
Short-Term Futures ETF
: the S&P 500 VIX Short-Term Futures Index (Short-Term Index). The Short-Term Index seeks to offer exposure to market volatility through publicly traded futures markets and is designed to measure the return from a
rolling long position in the first and second month VIX futures contracts.
*
|
The VIX Funds are benchmarked to an index comprised of VIX futures contracts and not to the VIX, which is calculated based on the prices of put and call options on the
S&P 500. As such, the VIX Funds can be expected to perform very differently from the VIX (in the case of the Matching Fund) or two times (2x) the VIX (in the case of the Geared Fund).
|
- 32 -
Principal Investment Strategies
In seeking to achieve the Funds investment objectives, the Sponsor uses a mathematical approach to investing. Using this approach,
the Sponsor determines the type, quantity and mix of investment positions that the Sponsor believes, in combination, should produce daily returns consistent with the Funds objectives. The Sponsor relies upon a pre-determined model to generate
orders that result in repositioning the Funds investments in accordance with their respective investment objective.
Each VIX Fund intends to meet its investment objective by taking long or short positions in VIX futures contracts. In the event position
accountability rules or position limits are reached with respect to VIX futures contracts, the Sponsor may, in its commercially reasonable judgment, cause a VIX Fund to obtain exposure to the Short-Term Index through swaps referencing the Index or
particular VIX futures contracts comprising such Index, or invest in other futures contracts or swaps not based on the particular VIX futures contracts comprising such Index if such instruments tend to exhibit trading prices or returns that
correlate with the Short-Term Index or any VIX futures contract and will further the investment objective of the VIX Fund. The VIX Fund may also invest in swaps if the market for a specific futures contract experiences emergencies (
e.g.
,
natural disaster, terrorist attack or an act of God) or disruptions (
e.g.
, a trading halt or a flash crash) to prevent the VIX Funds from obtaining the appropriate amount of investment exposure to the affected VIX futures contracts directly
or other futures contracts. Each VIX Fund will also hold cash or cash equivalents such as U.S. Treasury securities or other high credit quality, short-term fixed-income or similar securities (such as shares of money market funds and collateralized
repurchase agreements) for direct investment or as collateral for Financial Instruments. Each Fund may invest up to 100% of its assets in any of these types of cash or cash equivalent securities.
The VIX Funds may invest in or have exposure to futures contracts and may be subject to risks related to rolling. The contractual
obligations of a buyer or seller holding a futures contract to expiration may generally be satisfied by taking or making physical delivery of the underlying asset or settling in cash as designated in the contract specifications. Alternatively,
futures contracts may be closed out prior to expiration by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery. Once this date is reached, the futures contract
expires. As the futures contracts held by a VIX Fund near expiration, they are generally closed out and replaced by contracts with a later expiration. This process is referred to as rolling. The Funds do not intend to take
physical delivery of any asset underlying a futures contract, but instead to roll their respective positions.
In
October 2011, the CFTC finalized rules imposing aggregate position limits applicable to regulated futures and swap agreements, which may significantly limit the Funds ability to obtain the appropriate amount of investment exposure to each
Funds applicable benchmark through futures and swap agreements and impair the Trusts ability to achieve its investment objectives. In September 2012, the U.S. District Court in Washington, D.C. struck down these CFTC position limit rules
adopted in connection with the Dodd-Frank Act, remanding such rules to the CFTC to resolve various issues identified in the courts decision. Although it is unclear what future position limit rules will be, the Sponsor is subject to current
position and accountability limits established by the CFTC and exchanges. Accordingly, it may be required to reduce the size of outstanding positions or not enter into new positions that would otherwise be taken for the Funds in order to comply with
those limits or any future limits established by the CFTC and relevant exchanges. See Risk FactorsRegulatory and exchange accountability levels may restrict the creation of Creation Units and the operation of the Trust.
The Sponsor does not invest the assets of the Funds based on its view of the investment merit of a particular investment, other than for
cash management purposes, nor does it conduct conventional volatility research or analysis, or forecast market movement or trends, in managing the assets of the Funds. The Funds seek to remain fully exposed at all times to the Funds underlying
indexes without regard to market conditions, trends or direction.
The VIX Funds may obtain exposure through Financial
Instruments to a representative sample of the components in the Short-Term Index, which have aggregate characteristics similar to those of the Short-Term
- 33 -
Index. This sampling process typically involves selecting a representative sample of components in an index principally to enhance liquidity and reduce transaction costs while seeking
to maintain high correlation with, and similar aggregate characteristics (e.g., underlying commodities and valuations) to, the Short-Term Index. In addition, each Fund may obtain exposure to components not included in the Short-Term Index, invest in
assets that are not included in the Short-Term Index or may overweight or underweight certain components in the Short-Term Index.
As of the NAV calculation time each trading day, each Fund will seek to position its portfolio so that its exposure to its index is consistent with its investment objective. For the Geared Fund, the
impact of its indexs movements during the day will affect whether the Funds portfolio needs to be rebalanced. The Geared Funds long exposure will need to be increased on days when the Geared Funds benchmark rises and
decreased on days when the Geared Funds benchmark falls. Daily rebalancing and the compounding of each days return over time means that the return of the Geared Fund for a period longer than a single day will be the result of each
days returns compounded over the period, which will very likely differ from two times (2x) the return of the Geared Funds index for the period. A Fund will lose money if its indexs performance is flat over time, and it is
possible for the Geared Fund to lose money over time even if its indexs performance increases, as a result of daily rebalancing, the indexs volatility and compounding.
The amount of exposure each VIX Fund has to Financial Instruments differs with each particular VIX Fund and may be changed without
shareholder approval at any given time. Currently, the VIX Funds anticipate that, in the normal course of business and absent any unforeseen circumstances, they will be exposed to the specific Financial Instruments below as follows:
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
Futures
|
|
ProShares Ultra VIX Short-Term Futures ETF
|
|
|
0
|
%
|
|
|
200
|
%
|
ProShares VIX Short-Term Futures ETF
|
|
|
0
|
%
|
|
|
100
|
%
|
Swap Agreements
Swap agreements are two-party contracts that have traditionally been entered into primarily by institutional investors in OTC markets for a specified period ranging from a day to more than a year.
However, the Dodd-Frank Act provides for significant reforms of the over-the-counter derivatives markets, including a requirement to execute certain swap and forward transactions on a CFTC regulated market and/or to clear such transactions through a
CFTC-regulated central clearing organization. In a standard swap transaction, the parties agree to exchange the returns on a particular predetermined investment, instrument or index for a fixed or floating rate of return (the interest rate
leg, which will also include the cost of borrowing for short swaps) in respect of a predetermined notional amount. The notional amount of the agreement reflects the extent of a Funds total investment exposure under the swap agreement. In
the case of futures contracts based indices, such as the Short-Term Index, the reference interest rate is zero, although a financing spread or fee is normally still applied. Transaction or commission costs are reflected in the index level at which
the transaction is entered into. The gross returns to be exchanged are calculated with respect to the notional amount and the index returns to which the swap is linked. Swaps are usually closed out on a net basis,
i.e.
, the two payment
streams are netted out in a cash settlement on the payment date specified in the agreement, with the parties receiving or paying, as the case may be, only the net amount of the two payments. Thus, while the notional amount reflects a Funds
total investment exposure under the swap agreement (
i.e.
, the entire face amount or principal of a swap agreement), the net amount is a Funds current obligations (or rights) under the swap agreement, which is the net amount to be paid
or received under the agreement based on the relative values of the positions held by each party to the agreement on any given termination date.
Swap agreements involve, to varying degrees, elements of market risk and exposure to loss in excess of the amount which would be reflected on the Statement of Assets and Liabilities. The primary risks
associated with the use of swap agreements arise from the inability of counterparties to perform. Each Fund that invests in swaps
- 34 -
bears the risk of loss of the net amount, if any, expected to be received under a swap agreement in the event of the default or bankruptcy of a swap counterparty. Each such Fund enters or intends
to enter into swap agreements only with major global financial institutions; however, there are no limitations on the percentage of its assets each Fund may invest in swap agreements with a particular counterparty. Each Fund that invests in swaps
may use various techniques to minimize credit risk.
Each Fund that invests in swaps generally collateralizes the swap
agreements with cash and/or certain securities. Collateral posted in connection with uncleared derivative transactions is generally held for the benefit of the counterparty in a segregated tri-party account at the Custodian to protect the
counterparty against non-payment by the Fund. The counterparty also may collateralize the uncleared swap agreements with cash and/or certain securities, which collateral is typically held for the benefit of the Fund in a segregated tri-party account
at the Custodian. In the event of a default by the counterparty, and the Fund is owed money in the uncleared swap transaction, such Fund will seek withdrawal of this collateral from the segregated account and may incur certain costs exercising its
right with respect to the collateral. These Funds remain subject to credit risk with respect to the amount it expects to receive from counterparties.
The Funds have sought to mitigate these risks in connection with the uncleared OTC swaps by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund,
marked to market daily, subject to certain minimum thresholds; however there are no limitations on the percentage of its assets each Fund may invest in swap agreements with a particular counterparty. To the extent any such collateral is insufficient
or there are delays in accessing the collateral, the Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings.
The counterparty risk for cleared derivative transactions is generally lower than for uncleared over-the-counter derivatives since
generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the contract as each party to a trade looks only to the clearing house for
performance of financial obligations. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries.
Futures Contracts
A futures contract is a standardized contract traded on, or subject to the rules of, an exchange that calls for the future delivery of a
specified quantity and type of a particular underlying asset at a specified time and place or alternatively may call for cash settlement. Futures contracts are traded on a wide variety of underlying assets, including bonds, interest rates,
agricultural products, stock indexes, currencies, energy, metals, economic indicators and statistical measures. The notional size and calendar term futures contracts on a particular underlying asset are identical and are not subject to any
negotiation, other than with respect to price and the number of contracts traded between the buyer and seller. Each Fund generally deposits cash with an FCM for its open positions in futures contracts, which may, in turn, transfer such deposits to
the clearing house to protect the clearing house against non-payment by the Fund. The clearing house becomes substituted for each counterparty to a futures contract, and, in effect, guarantees performance. In addition, the FCM may require the Funds
to deposit collateral in excess of the clearing houses margin requirements for the FCMs own protection. Certain futures contracts, including stock index contracts, VIX futures contracts and certain commodity futures contracts settle in
cash, reflecting the difference between the contract purchase/sale price and the contract settlement price. The cash settlement mechanism avoids the potential for either side to have to deliver the underlying asset. For other futures contracts, the
contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying asset or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before
the designated date of delivery. The difference between the price at which the futures contract is purchased or sold and the price paid for the offsetting sale or purchase, after allowance for brokerage commissions, constitutes the profit or loss to
the trader.
- 35 -
Money Market Instruments
Money market instruments are short-term debt instruments that have a remaining maturity of 397 days or less and exhibit high quality
credit profiles. Money market instruments may include U.S. government securities, securities issued by governments of other developed countries and repurchase agreements.
U.S. Derivatives Exchanges
Derivatives exchanges provide
centralized market facilities for trading derivatives in which multiple persons have the ability to execute or trade contracts by accepting bids and offers from multiple participants. Members of, and trades executed on, a particular exchange are
subject to the rules of that exchange. Among the principal exchanges in the United States are the CBOE (which includes the CFE), the Chicago Mercantile Exchange (CME) (which includes, among others, the Chicago Board of Trade
(CBOT) and the NYMEX) and the Intercontinental Exchange (ICE)).
Each derivatives exchange in the
United States has an associated clearing house. Clearing houses provide services designed to transfer credit risk and ensure the integrity of trades. Once trades between members of an exchange have been confirmed and/or cleared, the
clearing house becomes substituted for each buyer and each seller of contracts traded on the exchange and, in effect, becomes the other party to each traders open position in the market. Thereafter, each party to a trade looks only to the
clearing house for performance. The clearing house generally establishes some sort of security or guarantee fund to which all clearing members of the exchange must contribute. This fund acts as an emergency buffer which is intended to enable the
clearing house to meet its obligations with regard to the other side of an insolvent clearing members contracts. Furthermore, clearing houses require margin deposits and continuously mark positions to market to provide some assurance that
their members will be able to fulfill their contractual obligations. Thus, members effecting derivatives transactions on an organized exchange or clearing an OTC derivative transaction through a clearing house do not bear the risk of the insolvency
of the party on the opposite side of the trade; their credit risk is limited to the respective solvencies of their commodity broker and the clearing house. The clearing house guarantee of performance on open positions does not run to
customers. If a member firm goes bankrupt, customers could lose money.
Regulations
Derivatives exchanges in the United States are subject to regulation under the CEA, by the CFTC, the governmental agency having
responsibility for regulation of derivatives exchanges and trading on those exchanges. Following the adoption of the Dodd-Frank Act, the CFTC also has authority to regulate OTC derivative markets, including certain OTC foreign exchange markets.
The CFTC has exclusive authority to designate exchanges for the trading of specific futures contracts and options on futures
contracts and to prescribe rules and regulations of the marketing of each. The CFTC also regulates the activities of commodity pool operators and the CFTC has adopted regulations with respect to certain of such persons activities.
Pursuant to its authority, the CFTC requires a commodity pool operator, such as the Sponsor, to keep accurate, current and orderly records with respect to each pool it operates. The CFTC may suspend, modify or terminate the registration of any
registrant for failure to comply with CFTC rules or regulations. Suspension, restriction or termination of the Sponsors registration as a commodity pool operator would prevent it, until such time (if any) as such registration were to be
reinstated, from managing, and might result in the termination of, the Funds. If the Sponsor were unable to provide services and/or advice to the Funds, the Funds would be unable to pursue their investment objectives unless and until the
Sponsors ability to provide services and advice to the Funds was reinstated or a replacement for the Sponsor as commodity pool operator could be found. Such an event could result in termination of the Funds.
The CEA requires all FCMs to meet and maintain specified fitness and financial requirements, segregate customer funds from proprietary
funds and account separately for all customers funds and positions, and to maintain specified books and records open to inspection by the staff of the CFTC. See Risk FactorsRisks Related to All VIX FundsFailure of the FCMs to
segregate assets may increase losses in the VIX Funds.
- 36 -
The CEA also gives the states certain powers to enforce its provisions and the regulations
of the CFTC.
Under certain circumstances, the CEA grants shareholders the right to institute a reparations proceeding before
the CFTC against the Sponsor (as a registered commodity pool operator), an FCM, as well as those of their respective employees who are required to be registered under the CEA. Shareholders may also be able to maintain a private right of action for
certain violations of the CEA.
Pursuant to authority in the CEA, the NFA has been formed and registered with the CFTC as a
registered futures association. At the present time, the NFA is the only self-regulatory organization for commodities professionals other than exchanges. As such, the NFA promulgates rules governing the conduct of commodity professionals and
disciplines those professionals that do not comply with such standards. The CFTC has delegated to the NFA responsibility for the registration of commodity pool operators, FCMs, swap dealers, commodity trading advisors, introducing brokers and their
respective associated persons and floor brokers. The Sponsor is a member of the NFA (the Funds themselves are not required to become members of the NFA). As an NFA member, the Sponsor is subject to NFA standards relating to fair trade practices,
financial condition, and consumer protection. The CFTC is prohibited by statute from regulating trading on foreign commodity exchanges and markets.
The CEA and CFTC regulations prohibit market abuse and generally require that all futures exchange-based trading be conducted in compliance with rules designed to ensure the integrity of market prices and
without any intent to manipulate prices. CFTC regulations and futures exchange rules also impose limits on the size of the positions that a person may hold or control as well as standards for aggregating certain positions. The rules of the CFTC and
the futures exchanges also authorize special emergency actions to halt, suspend or limit trading overall or to restrict, halt, suspend or limit the trading of an individual trader or to otherwise impose special reporting or margin requirements.
Non-U.S. Derivatives Exchanges
Foreign derivatives exchanges differ in certain respects from their U.S. counterparts. Non-U.S. derivatives exchanges are generally not subject to regulation by the CFTC. In contrast to U.S. exchanges,
certain foreign exchanges are principals markets, where trades remain the liability of the traders involved, and the exchange or an affiliated clearing house, if any, does not become substituted for any party. Therefore,
participants in such markets must often satisfy themselves as to the creditworthiness of their counterparty. Additionally, in the event of the insolvency or bankruptcy of a non-U.S. market or broker, the rights of market participants are likely to
be more limited than the rights afforded by the U.S. derivatives exchanges. The Sponsor does not anticipate that the Funds will hold futures traded on foreign exchanges.
Daily Limits
Most U.S. futures exchanges (but generally not foreign
exchanges or banks or dealers in the cases of swap agreements) limit the amount of fluctuation in some futures contract or options on futures contract prices during a single day by regulations. These regulations specify what are referred to as
daily price fluctuation limits or more commonly daily limits. Once the daily limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit.
As of May 31, 2013, there were no daily price fluctuation limits in place for the futures contracts held by the VIX Funds.
Margin
Initial or original margin is the minimum amount of funds that a counterparty to a cleared derivatives contract
must deposit with his commodity broker in order to establish an open position. Maintenance margin is the amount (generally less than initial margin) to which a traders account may decline before he must deliver additional margin so as to
maintain open positions. A margin deposit is like a cash performance bond. It helps
- 37 -
assure the futures traders performance of the futures contracts he purchases or sells. The minimum amount of margin required in connection with a particular futures contract is set by the
exchange on which such contract is traded and is subject to change at any time during the term of the contract. Futures contracts are customarily bought and sold on margins that represent a very small percentage (ranging upward from less than 2%) of
the aggregate purchase or sales price of the contract. Because of such low margins, price fluctuations occurring in the futures markets may create profits and losses that are greater, in relation to the amount invested, than are customary in other
forms of investments.
Brokerage firms carrying accounts for traders in futures contracts may not accept lower, and may
require higher, amounts of margin as a matter of policy in order to afford further protection for themselves.
Margin
requirements are computed each day by a commodity broker and the relevant exchange. At the close of each trading day, each open futures contract is marked to market, that is, the gain or loss on the position is calculated from the prior days
close. When the market value of a particular open futures contract position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the commodity broker. If the margin call is not met
within a reasonable time, the broker may close out the customers position.
- 38 -
PERFORMANCE OF THE OFFERED COMMODITY POOLS OPERATED BY
THE COMMODITY POOL OPERATOR
The following performance information is presented in accordance with CFTC regulations. The performance of the VIX Funds, which is presented herein, will differ materially in certain respects from the
performance of the other series of the Trust (the Other Funds) which is included in the section entitled Performance of The Other Commodity Pools Operated by the Commodity Pool Operator in Part Two of this Prospectus.
All summary performance information is as of May 31, 2013. Performance information is set forth, in accordance with
CFTC regulations, since each funds inception of trading.
|
|
|
Name of Pool:
|
|
ProShares Ultra VIX Short-Term Futures ETF
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
October 3, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$2,544,910,134
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$1,041,768,980
|
Net Asset Value as of May 31, 2013:
|
|
$369,932,662
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$6.50
|
Worst Monthly Loss:
4
|
|
-57.41%
|
|
|
(March 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-99.74%
|
|
|
(Inception April 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-44.29
|
%
|
|
|
-42.22
|
%
|
February
|
|
|
|
|
|
|
-18.65
|
%
|
|
|
-3.28
|
%
|
March
|
|
|
|
|
|
|
-57.41
|
%
|
|
|
-32.67
|
%
|
April
|
|
|
|
|
|
|
-6.68
|
%
|
|
|
-17.72
|
%
|
May
|
|
|
|
|
|
|
55.72
|
%
|
|
|
4.28
|
%
|
June
|
|
|
|
|
|
|
-53.69
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-20.88
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-30.01
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-42.97
|
%
|
|
|
|
|
October
|
|
|
-55.10
|
%
|
|
|
8.79
|
%
|
|
|
|
|
November
|
|
|
-4.14
|
%
|
|
|
-41.80
|
%
|
|
|
|
|
December
|
|
|
-28.30
|
%
|
|
|
4.64
|
%
|
|
|
|
|
Annual
|
|
|
-69.14
|
%
|
|
|
-97.28
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-67.72
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares VIX Short-Term Futures ETF
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
January 3, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$1,387,597,413
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$471,005,879
|
Net Asset Value as of May 31, 2013:
|
|
$247,599,804
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$10.45
|
Worst Monthly Loss:
4
|
|
-32.69%
|
|
|
(March 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-91.19%
|
|
|
(September 2011April 2013)
|
- 39 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
-12.84%
|
|
|
|
-24.92%
|
|
|
|
-22.82%
|
|
February
|
|
|
-6.37%
|
|
|
|
-8.04%
|
|
|
|
0.85%
|
|
March
|
|
|
-1.88%
|
|
|
|
-32.69%
|
|
|
|
-17.16%
|
|
April
|
|
|
-21.52%
|
|
|
|
-1.14%
|
|
|
|
-5.88%
|
|
May
|
|
|
-8.52%
|
|
|
|
28.89%
|
|
|
|
2.55%
|
|
June
|
|
|
-1.13%
|
|
|
|
-29.23%
|
|
|
|
|
|
July
|
|
|
11.10%
|
|
|
|
-9.26%
|
|
|
|
|
|
August
|
|
|
65.31%
|
|
|
|
-15.50%
|
|
|
|
|
|
September
|
|
|
38.45%
|
|
|
|
-22.58%
|
|
|
|
|
|
October
|
|
|
-24.39%
|
|
|
|
5.59%
|
|
|
|
|
|
November
|
|
|
1.68%
|
|
|
|
-21.88%
|
|
|
|
|
|
December
|
|
|
-14.06%
|
|
|
|
7.09%
|
|
|
|
|
|
Annual
|
|
|
-4.53%
|
|
|
|
-78.02%
|
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-37.77%
|
|
See accompanying Footnotes to Performance Information.
Footnotes to Performance Information
1
|
Aggregate Gross Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, including those of investors who
subsequently redeemed their investments.
|
2
|
Aggregate Net Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, excluding those of investors who
subsequently redeemed their investments.
|
3
|
Net Asset Value per Share is the net asset value, based on the pricing policies of the Trust and determined in accordance with Generally
Accepted Accounting Principles, of the pool divided by the total number of Shares outstanding as of May 31, 2013. Please see Description of the Shares; The Funds; Certain Material Terms of the Trust AgreementNet Asset Value
(NAV) for additional information regarding the pricing policies of the Trust.
|
4
|
Worst Monthly Loss is the largest single month loss sustained since inception of trading. Loss as used in this section of the
Prospectus means losses experienced by the relevant pool over the specified period and is calculated on a rate of return basis, i.e., dividing net performance by beginning equity. Loss is measured on the basis of monthly returns only, and does not
reflect intra-month figures.
|
5
|
Worst Peak-to-Valley Loss is the largest percentage decline in Net Asset Value per Share over the history of the pool. This need not be a
continuous decline, but can be a series of positive and negative returns where the negative returns are larger than the positive returns. Worst Peak-to-Valley Loss represents the greatest percentage decline from any month-end Net Asset Value per
Share that occurs without such month-end Net Asset Value per Share being equaled or exceeded as of a subsequent month-end.
|
6
|
Based on the latest calculated net asset value, as applicable to creations and redemptions of Creation Units, with respect to each period.
|
- 40 -
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investors should consider Managements Discussion and Analysis of Financial Condition and Results of Operations with respect to the VIX Funds, which section is incorporated by reference to our Annual
Report on Form 10-K for the year ended December 31, 2012, as amended, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.
- 41 -
CHARGES
Breakeven Table
The projected twelve month breakeven analysis for the VIX Funds is set forth in the Breakeven Table below. For purposes of calculating the amounts in the Breakeven Table for the Matching Fund, the
analysis assumes that the average daily NAV per Fund is $80.00. For purposes of calculating the amounts in the Breakeven Table for the Geared Fund, the analysis assumes that the average daily NAV per Fund is $40.00.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount and Percentage of Expenses per Fund
|
|
Expenses
(1)
|
|
ProShares VIX
Short-Term Futures ETF
|
|
|
ProShares Ultra VIX
Short-Term Futures ETF
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Selling price per share
|
|
|
80.00
|
|
|
|
|
|
|
|
40.00
|
|
|
|
|
|
Management fee
(2)
|
|
|
0.68
|
|
|
|
0.85
|
%
|
|
|
0.38
|
|
|
|
0.95
|
%
|
Brokerage commissions and fees
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.25
|
|
|
|
0.63
|
%
|
Other expenses
|
|
|
0.00
|
|
|
|
0.00
|
%
|
|
|
0.00
|
|
|
|
0.00
|
%
|
Total fees and expenses
|
|
|
0.68
|
|
|
|
0.85
|
%
|
|
|
0.63
|
|
|
|
1.58
|
%
|
Interest income
(3)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)%
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)%
|
Amount of trading income required for the NAV at the end of one year to equal the initial selling price per share (12-Month
breakeven)
(4)
|
|
|
0.66
|
|
|
|
0.83
|
%
|
|
|
0.62
|
|
|
|
1.56
|
%
|
(1)
|
The breakeven analysis set forth in this table assumes that the Shares have a constant month end NAV and is based on $80.00 as the NAV per Share of the Matching Fund,
and 40.00 as the NAV per Share of the Geared Fund. The actual NAV of each VIX Fund differs and is likely to change on a daily basis. The numbers provided in this chart have been rounded to the nearest 0.01. The breakeven analysis reflects all fees
and expenses, including estimated rebalancing expenses, that are anticipated to be incurred by each VIX Fund during the first year of an investors investment.
|
(2)
|
From the Management Fee, though not contractually required, the Sponsor is responsible for paying the fees and expenses of the Administrator, Custodian, Distributor,
ProFunds Distributors, Inc. (PDI), Transfer Agent and all routine operational, administrative and other ordinary expenses of each Fund, including fees payable to index providers and, for the Matching Fund only, brokerage commissions on
its VIX futures contracts. Please note that these fees and expenses are not included in the above breakeven table.
|
(3)
|
Based on current U.S. Treasury securities yields and anticipated investment levels in the various VIX Funds, the breakeven analysis assumes an interest rate of 0.02%
for the Funds.
|
(4)
|
Investors may pay customary brokerage commissions in connection with purchases of the Shares. Because such brokerage commission rates will vary from investor to
investor, such brokerage commissions have not been included in the Breakeven Table. Investors are encouraged to review the terms of their brokerage accounts for applicable charges.
|
Operational Stage
Management Fee
The Geared Fund pays the Sponsor a management fee
(the Management Fee), monthly in arrears, in an amount equal to 0.95% per annum of its average daily net assets and the Matching Fund pays the Sponsor a Management Fee, monthly in arrears, in an amount equal to 0.85% per annum
of its average daily net assets, except as noted under Initial Offering Costs, above.
No other management fee is
paid by the Funds. The Management Fee is paid in consideration of the Sponsors trading advisory services and the other services provided to the Funds that the Sponsor pays directly.
Licensing Fee
The Sponsor pays S&P a licensing fee for use of
the Short-Term Index as the index for the VIX Funds.
- 42 -
Routine Operational, Administrative and Other Ordinary Expenses
The Sponsor pays all of the routine operational, administrative and other ordinary expenses of each Fund, generally, as determined by the
Sponsor, including, but not limited to, fees and expenses of the Administrator, Custodian, Distributor, PDI and Transfer Agent, licensing fees, accounting and audit fees and expenses, tax preparation expenses, legal fees not in excess of $100,000
per annum, ongoing SEC registration fees not exceeding 0.021% per annum of the net assets of the Funds, Financial Industry Regulatory Authority, Inc. (FINRA) filing fees, individual K-1 preparation and mailing fees not exceeding
0.10% per annum of the net assets of the Funds, and report preparation and mailing expenses.
Non-Recurring Fees and Expenses
The Funds pay all of their non-recurring and unusual fees and expenses, if any, as determined by the Sponsor.
Non-recurring and unusual fees and expenses are fees and expenses which are unexpected or unusual in nature, such as legal claims and liabilities and litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and
expenses also include material expenses which are not currently anticipated obligations of the Funds. Routine operational, administrative and other ordinary expenses are not deemed extraordinary expenses.
Selling Commission
Retail investors may purchase and sell Shares through traditional brokerage accounts. Investors are expected to be charged a customary
commission by their brokers in connection with purchases of Shares that will vary from investor to investor. Investors are encouraged to review the terms of their brokerage accounts for applicable charges. The price at which an Authorized
Participant sells a Share may be higher or lower than the price paid by such Authorized Participant in connection with the creation of such Share in a Creation Unit.
Brokerage Commissions and Fees
The Geared Fund pays all of its
respective brokerage commissions, including applicable exchange fees, NFA fees and give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with trading activities for each Funds investments in
CFTC regulated investments. The Sponsor is currently paying brokerage commissions on VIX futures contracts for the Matching Fund.
Other
Transaction Costs
The Funds bear other transaction costs including the effects of trading spreads and financing
costs/fees, if any, associated with the use of Financial Instruments, and costs relating to the purchase of U.S. Treasury securities or similar high credit quality short-term fixed-income or similar securities (such as shares of money market funds
and collateralized repurchase agreements).
- 43 -
FUTURES COMMISSION MERCHANTS
Each of Goldman, Sachs & Co. (Goldman Sachs), Jefferies Bache, LLC (JBL) (formerly Prudential Bache
Commodities, LLC), Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) and RBC Capital Markets, LLC (RBC) (formerly RBC Capital Markets Corporation), in its capacity as a registered FCM, serves as the
Funds clearing broker and as such arranges for the execution and clearing of the Funds futures transactions. Each of Goldman Sachs, JBL, Merrill Lynch and RBC acts as clearing broker for many other funds and individuals. A variety of
executing brokers may execute futures transactions on behalf of the Funds. The executing brokers will give up all such transactions to Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable.
Investors should be advised that none of Goldman Sachs, JBL, Merrill Lynch or RBC are affiliated with or act as a supervisor of the Funds
or the Funds commodity pool operators, commodity trading advisors, investment managers, trustees, general partners, administrators, transfer agents, registrars or organizers, as applicable. Additionally, none of Goldman Sachs, JBL, Merrill
Lynch or RBC are acting as underwriters or sponsors of the offering of any Shares or interests in the Funds or have passed upon the merits of participating in this offering.
None of Goldman Sachs, JBL, Merrill Lynch or RBC have passed upon the adequacy of this Prospectus or on the accuracy of the information contained herein. Additionally, none of Goldman Sachs, JBL, Merrill
Lynch or RBC provide any commodity trading advice regarding the Funds trading activities. Investors should not rely upon Goldman Sachs, JBL, Merrill Lynch or RBC in deciding whether to invest in the Funds or retain their interests in the
Funds. Investors should also note that the Funds may select additional clearing brokers or replace Goldman Sachs, JBL, Merrill Lynch and/or RBC as the Funds clearing broker.
Litigation and Regulatory Disclosure Relating to FCMs
Goldman Sachs & Co. (Goldman Sachs)
Goldman Sachs, in addition to being a registered futures commission merchant, is a registered broker-dealer. From time to time, Goldman Sachs and its affiliates are involved in judicial, regulatory and
arbitration concerning matters arising in connection with the conduct of its business. Goldman Sachs management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a
material adverse effect on Goldman Sachs financial condition, but may be material to Goldman Sachs operating results for any particular period, depending, in part, upon the results for such period. For further information, please refer
to the periodic public filings by The Goldman Sachs Group, Inc. (GS Group) as periodically filed with the SEC and to Goldman Sachs Form BD as periodically filed with FINRA.
IPO Process Matters
Goldman Sachs is among numerous financial services companies that have been named as defendants in a variety of lawsuits alleging improprieties in the process by which those companies participated in the
underwriting of public offerings in recent years.
Goldman Sachs has been named as a defendant in a number of related lawsuits
filed in the U.S. District Court for the Southern District of New York alleging, among other things, that the prospectuses for the offerings violated the federal securities laws by failing to disclose the existence of alleged arrangements tying
allocations in certain offerings to higher customer brokerage commission rates as well as purchase orders in the aftermarket, and that the alleged arrangements resulted in market manipulation. On October 5, 2009, the district court approved a
settlement agreement entered into by the parties. Goldman Sachs has paid into a settlement fund the full amount that Goldman Sachs would contribute in the settlement. Certain objectors appealed certain aspects of the settlements approval, but
all such appeals have been withdrawn or finally dismissed, thereby concluding the matter.
- 44 -
Goldman Sachs was among numerous underwriting firms named as defendants in a number of
complaints filed commencing October 3, 2007, in the U.S. District Court for the Western District of Washington alleging violations of Section 16 of the Securities Exchange Act of 1934, as amended (the 1934 Act) in connection
with offerings of securities for 15 issuers during 1999 and 2000. The complaints generally asserted that the underwriters, together with each issuers directors, officers and principal shareholders, entered into purported agreements to tie
allocations in the offerings to increased brokerage commissions and aftermarket purchase orders. The complaints further alleged that, based upon these and other purported agreements, the underwriters violated the reporting provisions of, and are
subject to short-swing profit recovery under, Section 16 of the 1934 Act. The district court granted defendants motions to dismiss on the grounds that the plaintiffs demands were inadequate with respect to certain actions and that
the remaining actions were time-barred. On December 2, 2010, the appellate court affirmed in part and reversed in part, upholding the dismissal of seven of the actions in which Goldman Sachs is a defendant that were dismissed based on the
deficient demands but remanding the remaining eight actions in which Goldman Sachs is a defendant that were dismissed as time-barred for consideration of other bases for dismissal. On March 26, 2012, the U.S. Supreme Court vacated the appellate
courts determination that the actions were timely and remanded the actions to determine if the claims were subject to equitable tolling in further proceedings consistent with the Supreme Courts opinion. On July 8, 2012, pursuant to
the plaintiffs notices of voluntary dismissal, all of the actions were dismissed with prejudice as to the deficiency of the demand letters and without prejudice as to all other issues, bringing this matter to conclusion.
Goldman Sachs has been named as a defendant in an action commenced on May 15, 2002 in New York Supreme Court, New York County, by an
official committee of unsecured creditors on behalf of eToys, Inc., alleging that Goldman Sachs intentionally underpriced eToys, Inc.s initial public offering. The action seeks, among other things, unspecified compensatory damages resulting
from the alleged lower amount of offering proceeds. On appeal from rulings on Goldman Sachs motion to dismiss, the New York Court of Appeals dismissed claims for breach of contract, professional malpractice and unjust enrichment, but permitted
claims for breach of fiduciary duty and fraud to continue. On remand, the lower court granted Goldman Sachs motion for summary judgment and, on December 8, 2011, the appellate court affirmed the lower courts decision. On
September 6, 2012, the New York Court of Appeals granted the creditors motion for leave to appeal.
Research
Matters
Goldman Sachs is subject to a number of investigations and reviews by various governmental and regulatory bodies
and self-regulatory organizations relating to research practices, including, among other things, research analysts methods for obtaining receipt and distribution of information and communications among research analysts, sales and trading
personnel and clients. On June 9, 2011, pursuant to a settlement, a consent order was entered by the Massachusetts Securities Division pursuant to which Goldman Sachs paid a $10 million civil penalty and agreed to various undertakings regarding
certain of its research practices. On April 12, 2012, the SEC and FINRA issued orders in connection with Goldman Sachs settlement of charges relating to matters similar to those involved in the Massachusetts settlement. Pursuant to these
settlements, Goldman Sachs paid $11 million to each of the SEC and FINRA and agreed to various undertakings with regard to its policies and procedures.
Adelphia Communications Fraudulent Conveyance Litigation
Goldman Sachs is
named a defendant in two adversary proceedings commenced in the U.S. Bankruptcy Court for the Southern District of New York, one on July 6, 2003 by a creditors committee, and the second on or about July 31, 2003 by an equity committee of
Adelphia Communications, Inc. Those proceedings were consolidated in a single amended complaint filed by the Adelphia Recovery Trust on October 31, 2007. The complaint seeks, among other things, to recover, as fraudulent conveyances,
approximately $62.9 million allegedly paid to Goldman Sachs by Adelphia Communications, Inc. and its affiliates in respect of margin calls made in the ordinary course of business on accounts owned by members of the family that formerly controlled
Adelphia Communications, Inc. The district court assumed jurisdiction over the action and on April 8, 2011 granted Goldman Sachs motion for summary judgment. The plaintiff appealed on May 6, 2011.
- 45 -
Treasury Matters
Goldman Sachs was named as a defendant in a purported class action filed on March 10, 2004 in the U.S. District Court for the
Northern District of Illinois on behalf of holders of short positions in 30-year U.S. Treasury futures and options on the morning of October 31, 2001. The complaint alleged that Goldman Sachs purchased 30-year bonds and futures prior to a
forthcoming U.S. Treasury refunding announcement that morning based on non-public information about that announcement, and that such purchases increased the costs of covering such short positions. The complaint also named as defendants the
Washington, D.C.-based political consultant who allegedly was the source of the information, a former Goldman Sachs economist who allegedly received the information, and another company and one of its employees who also allegedly received and traded
on the information prior to its public announcement. The complaint alleged violations of the federal commodities and antitrust laws, as well as Illinois statutory and common law, and seeks, among other things, unspecified damages including treble
damages under the antitrust laws. The district court dismissed the antitrust and Illinois state law claims but permitted the federal commodities law claims to proceed. Plaintiffs motion for class certification was denied. Goldman Sachs moved
for summary judgment, and the district court granted the motion but only insofar as the claim relates to the trading of treasury bonds. On October 13, 2009, the parties filed an offer of judgment and notice of acceptance with respect to
plaintiffs individual claim. The plaintiff attempted to pursue an appeal of the denial of class certification, as did another individual trader who had previously litigated and lost an individual claim and unsuccessfully sought to intervene in
the purported class action. On August 5, 2011, the U.S. Court of Appeals for the Seventh Circuit affirmed the lower courts rulings that neither the plaintiff nor the proposed intervenor could pursue the class issues on appeal, but
remanded for further consideration as to the amount of pre-judgment interest on the plaintiffs individual claim. The appellants petition for reconsideration en banc was denied on October 19, 2011. On remand, the district court
entered a final stipulation and order on December 7, 2011 regarding calculation of pre-judgment interest, which concluded the matter.
Fannie Mae Litigation
Goldman Sachs was added as a defendant in an amended
complaint filed on August 14, 2006 in a purported class action pending in the U.S. District Court for the District of Columbia. The complaint asserts violations of the federal securities laws generally arising from allegations concerning Fannie
Maes accounting practices in connection with certain Fannie Mae-sponsored REMIC transactions that were allegedly arranged by Goldman Sachs. The complaint does not specify a dollar amount of damages. The other defendants include Fannie Mae,
certain of its past and present officers and directors, and accountants. By a decision dated May 8, 2007, the district court granted Goldman Sachs motion to dismiss the claim against it. The time for an appeal will not begin to run until
disposition of the claims against other defendants. A motion to stay the action filed by the Federal Housing Finance Agency (FHFA), which took control of the foregoing action following Fannie Maes conservatorship, was denied on
November 14, 2011.
Mortgage-Related Matters
On April 16, 2010, the SEC brought an action (the SEC Action) under the U.S. federal securities laws in the U.S. District
Court for the Southern District of New York against Goldman Sachs and Fabrice Tourre, a former employee, in connection with a CDO offering made in early 2007 (ABACUS 2007-AC1 transaction), alleging that the defendants made materially false and
misleading statements to investors and seeking, among other things, unspecified monetary penalties. Investigations of Goldman Sachs by FINRA and of GSI by the FSA were subsequently initiated and resolved, and GS Group and certain of its affiliates
have received subpoenas and requests for information from other regulators, regarding CDO offerings, including the ABACUS 2007-AC1 transaction, and related matters.
On July 14, 2010, Goldman Sachs entered into a consent agreement with the SEC, settling all claims made against Goldman Sachs in the SEC Action, pursuant to which Goldman Sachs paid $550 million of
disgorgement and civil penalties, and which was approved by the U.S. District Court for the Southern District of New York on July 20, 2010.
- 46 -
On January 6, 2011, ACA Financial Guaranty Corp. filed an action against Goldman Sachs
in respect of the ABACUS 2007-AC1 transaction in New York Supreme Court, New York County. The complaint includes allegations of fraudulent inducement, fraudulent concealment and unjust enrichment and seeks at least $30 million in compensatory
damages, at least $90 million in punitive damages and unspecified disgorgement. On April 25, 2011, the plaintiff filed an amended complaint and, on June 3, 2011, Goldman Sachs moved to dismiss the amended complaint. By a decision dated
April 23, 2012, the court granted the motion to dismiss as to the unjust enrichment claim and denied the motion as to the other claims, and on May 29, 2012, Goldman Sachs appealed the decision to the extent that its motion was denied and
filed counterclaims for breach of contract and fraudulent inducement, and third-party claims against ACA Management, LLC for breach of contract, unjust enrichment and indemnification. ACA Financial Guaranty Corp. and ACA Management, LLC moved to
dismiss Goldman Sachs counterclaims and third-party claims on August 31, 2012. On January 31, 2013, ACA filed an amended complaint naming a third party to the ABACUS 2007-AC1 transaction as an additional defendant.
Beginning April 22, 2010, a number of putative shareholder derivative actions were filed in New York Supreme Court, New York County,
and the U.S. District Court for the Southern District of New York against GS Group, its board (the Board) and certain officers and employees of GS Group and its affiliates in connection with mortgage-related matters between 2004 and
2007, including the ABACUS 2007-AC1 transaction and other CDO offerings. These derivative complaints generally included allegations of breach of fiduciary duty, corporate waste, abuse of control, mismanagement, unjust enrichment, misappropriation of
information, securities fraud and insider trading, and challenge the accuracy and adequacy of GS Groups disclosure. These derivative complaints seek, among other things, declaratory relief, unspecified compensatory damages, restitution and
certain corporate governance reforms. In addition, the plaintiffs in the compensation-related Delaware Court of Chancery actions twice amended their complaint, including to assert allegations similar to those in the derivative claims referred to
above, the Delaware court granted the defendants motion to dismiss the second amended complaint and the Delaware Supreme Court affirmed the dismissal on May 3, 2012. The federal court cases were consolidated, plaintiffs filed a
consolidated amended complaint on August 1, 2011, and, on October 6, 2011, the defendants moved to dismiss the action. On June 25, 2012, in light of the decision of the Delaware Supreme Court, the parties in the New York state action
stipulated to a voluntary dismissal, which the court has entered.
Beginning April 26, 2010, a number of purported
securities law class actions have been filed in the U.S. District Court for the Southern District of New York challenging the adequacy of GS Groups public disclosure of, among other things, Goldman Sachs activities in the CDO market and
the SEC investigation that led to the SEC Action. The purported class action complaints, which name as defendants GS Group and certain officers and employees of GS Group and its affiliates, have been consolidated, generally allege violations of
Sections 10(b) and 20(a) of the Exchange Act and seek unspecified damages. Plaintiffs filed a consolidated amended complaint on July 25, 2011. On October 6, 2011, the defendants moved to dismiss, and by a decision, dated June 21,
2012, the district court dismissed the claims based on GS Groups not disclosing that it had received a Wells notice from the staff of the SEC related to the ABACUS 2007-AC1 transaction, but permitted the plaintiffs other
claims to proceed.
Since April 23, 2010, the Board has received letters from shareholders demanding that the Board take
action to address alleged misconduct by Goldman Sachs, the Board and certain officers and employees of GS Group and its affiliates. These demands, which the Board has rejected, generally alleged misconduct in connection with Goldman Sachs
securitization practices, including the ABACUS 2007-AC1 transaction, the alleged failure by GS Group to adequately disclose the SEC investigation that led to the SEC Action, and GS Groups 2009 compensation practices. In addition, the
Board has received books and records demands from several shareholders for materials relating to, among other subjects, Goldman Sachs mortgage servicing and foreclosure activities, participation in federal programs providing assistance to
financial institutions and homeowners, loan sales to Fannie Mae and Freddie Mac, mortgage-related activities and conflicts management.
Goldman Sachs is a defendant in a putative class action commenced on December 11, 2008 in the U.S. District Court for the Southern District of New York brought on behalf of purchasers of various
mortgage
- 47 -
pass-through certificates and asset-backed certificates issued by various securitization trusts established by Goldman Sachs and underwritten by Goldman Sachs in 2007. The complaint generally
alleges that the registration statement and prospectus supplements for the certificates violated the federal securities laws, and seeks unspecified compensatory damages and rescission or rescissionary damages. Following dismissals of certain of the
plaintiffs claims under the initial and three amended complaints, on May 5, 2011, the court granted plaintiffs motion for entry of a final judgment dismissing all its claims, thereby allowing the plaintiff to appeal. The plaintiff
appealed from the dismissal with respect to all 17 of the offerings included in its original complaint. By a decision dated September 6, 2012, the U.S. Court of Appeals for the Second Circuit affirmed the district courts dismissal of
plaintiffs claims with respect to 10 of the offerings included in plaintiffs original complaint but vacated the dismissal and remanded the case to the district court with instructions to reinstate the plaintiffs claims with respect
to the other seven offerings. On March 18, 2013, the U.S. Supreme Court denied the defendants petition for certiorari from the Second Circuit decision. On October 31, 2012, the plaintiff served a fourth amended complaint relating to
those seven offerings, plus seven additional offerings. On June 3, 2010, another investor (who had unsuccessfully sought to intervene in the action) filed a separate putative class action asserting substantively similar allegations relating to
one of the offerings included in the initial plaintiffs complaint. The district court twice granted defendants motions to dismiss this separate action, both times with leave to replead. On July 9, 2012, that separate plaintiff filed
a second amended complaint, and the defendants moved to dismiss on September 21, 2012. On December 26, 2012, that separate plaintiff filed a motion to amend the second amended complaint to add claims with respect to two additional
offerings included in the initial plaintiffs complaint, which defendants have opposed. The securitization trusts issued, and Goldman Sachs underwrote, approximately $11 billion principal amount of certificates to all purchasers in the 14
offering at issue in the complaints.
Goldman Sachs is among the defendants in a separate putative class action commenced on
February 6, 2009 in the U.S. District Court for the Southern District of New York brought on behalf of purchasers of various mortgage pass-through certificates and asset-backed certificates issued by various securitization trusts established by
Goldman Sachs and underwritten by Goldman Sachs in 2006. The other original defendants include three current or former GS Group employees and various rating agencies. The second amended complaint generally alleges that the registration statement and
prospectus supplements for the certificates violated the federal securities laws, and seeks unspecified compensatory and rescissionary damages. Defendants moved to dismiss the second amended complaint. On January 12, 2011, the district court
granted the motion to dismiss with respect to offerings in which plaintiff had not purchased securities as well as all claims against the rating agencies, but denied the motion to dismiss with respect to a single offering in which the plaintiff
allegedly purchased securities. These trusts issued, and Goldman Sachs underwrote, approximately $698 million principal amount of certificates to all purchasers in the offerings at issue in the complaint (excluding those offerings for which the
claims have been dismissed). On February 2, 2012, the district court granted the plaintiffs motion for class certification and on June 13, 2012, the U.S. Court of Appeals for the Second Circuit granted defendants petition to
review that ruling. On July 31, 2012, the parties reached a settlement, subject to court approval. The firm has paid the full amount of the proposed settlement in an escrow account.
On September 30, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York against
Goldman Sachs, GS Group and two former Goldman Sachs employees on behalf of investors in $821 million of notes issued in 2006 and 2007 by two synthetic CDOs (Hudson Mezzanine 2006-1 and 2006-2). The complaint, which was amended on
February 4, 2011, asserts federal securities law and common law claims, and seeks unspecified compensatory, punitive and other damages. The defendants moved to dismiss on April 5, 2011, and the motion was granted as to plaintiffs
claim of market manipulation and denied as to the remainder of plaintiffs claims by a decision dated March 21, 2012. On May 21, 2012, the defendants counterclaimed for breach of contract and fraud. On December 17, 2012, the
plaintiff moved for class certification.
Goldman Sachs, GSMC and GSMSC are among the defendants in a lawsuit filed in August
2011 by CIFG Assurance of North America, Inc. (CIFG) in New York Supreme Court, New York County. The complaint
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alleges that CIFG was fraudulently induced to provide credit enhancement for a 2007 securitization sponsored by GSMC, and seeks, among other things, the repurchase of $24.7 million in aggregate
principal amount of mortgages that CIFG had previously stated to be non-conforming, an accounting for any proceeds associated with mortgages discharged from the securitization and unspecified compensatory damages. On October 11, 2011, the
Goldman Sachs defendants moved to dismiss. By a decision dated May 1, 2012, the court dismissed the fraud and accounting claims but denied the motion as to certain breach of contract claims that were also alleged. On June 6, 2012, the
Goldman Sachs defendants filed counterclaims for breach of contract. In addition, the parties have each appealed the courts May 1, 2012 decision to the extent adverse. By an order dated May 7, 2013, the appellate court reversed the
dismissal of the fraud claim but otherwise affirmed the trial courts May 1, 2012 decision.
In addition, on
January 15, 2013, CIFG filed a complaint against Goldman Sachs in New York Supreme Court, New York County, alleging that Goldman Sachs falsely represented that a third party would independently select the collateral for a 2006 CDO. CIFG
seeks unspecified compensatory and punitive damages, including claims for approximately $10 million in connection with its purchase of notes, which CIFG has agreed to refer to arbitration with FINRA, and claims for over $30 million for
payments to discharge alleged liabilities arising from its issuance of a financial guaranty insurance policy guaranteeing payment on a credit default swap referencing the CDO, which CIFG has agreed to stay until the arbitration of the notes-related
claims has concluded.
Various alleged purchasers of, and counterparties involved in transactions relating to, mortgage
pass-through certificates, CDOs and other mortgage-related products (including certain Allstate affiliates, Aozora Bank, Ltd., Bank Hapoalim B.M., Basis Yield Alpha Fund (Master), Bayerische Landesbank, the Charles Schwab Corporation, Deutsche
Zentral-Genossenschaftbank, the FDIC (as receiver for Guaranty Bank), the Federal Home Loan Banks of Boston, Chicago, Indianapolis and Seattle, the FHFA (as conservator for Fannie Mae and Freddie Mac), HSH Nordbank, IKB Deutsche Industriebank AG,
Landesbank Baden-Württemberg, Joel I. Sher (Chapter 11 Trustee) on behalf of TMST, Inc. (TMST), f/k/a Thornburg Mortgage, Inc. and certain TMST Affiliates, John Hancock and related parties), Massachusetts Mutual Life Insurance
Company, MoneyGram Payment Systems, Inc., National Australia Bank, the National Credit Union Administration, Phoenix Light SF Limited and related parties, Prudential Insurance Company of America and related parties, Royal Park Investments SA/NV,
Sealink Funding Limited, The Union Central Life Insurance Company, Ameritas Life Insurance Corp., Acacia Life Insurance Company, Watertown Savings Bank, and The Western and Southern Life Insurance Co.) have filed complaints or summonses with notice
in state and federal court or initiated arbitration proceedings against firm affiliates, generally alleging that the offering documents for the securities that they purchased contained untrue statements of material fact and material omissions and
generally seeking rescission and/or damages. Certain of these complaints allege fraud and seek punitive damages. Certain of these complaints also name other firms as defendants.
A number of other entities (including American International Group, Inc. (AIG), Deutsche Bank National Trust Company, John
Hancock and related parties, M&T Bank, Norges Bank Investment Management, Selective Insurance Company and U.S. Bank) have threatened to assert claims of various types against Goldman Sachs in connection with various mortgage-related
transactions, and Goldman Sachs has entered into agreements with a number of these entities to toll the relevant statute of limitations.
As of the date hereof, the aggregate notional amount of mortgage-related securities sold to plaintiffs in active cases brought against Goldman Sachs where those plaintiffs are seeking rescission of such
securities was approximately $19.7 billion (which does not reflect adjustment for any subsequent paydowns or distributions or any residual value of such securities, statutory interest or any other adjustments that may be claimed). This amount does
not include the threatened claims noted above, potential claims by these or other purchasers in the same or other mortgage-related offerings that have not actually been brought against Goldman Sachs, or claims that have been dismissed.
Goldman Sachs is among the numerous financial services firms named as defendants in a qui tam action originally filed by a realtor on
April 7, 2010 purportedly on behalf of the City of Chicago and State of Illinois in
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Cook County, Illinois Circuit Court asserting claims under the Illinois Whistleblower Reward and Protection Act and Chicago False Claims Act, based on allegations that defendants had falsely
certified compliance with various Illinois laws, which were purportedly violated in connection with mortgage origination and servicing activities. The complaint, which was originally filed under seal, seeks treble damages and civil penalties.
Plaintiff filed an amended complaint on December 28, 2011, naming Goldman Sachs, among others, as an additional defendant and a second amended complaint on February 8, 2012. On March 12, 2012, the action was removed to the U.S.
District Court for the Northern District of Illinois, and on September 17, 2012, the district court granted plaintiffs motion to remand the action to state court. On November 16, 2012, the defendants moved to dismiss, and
discovery has been stayed pending a ruling on the motion to dismiss.
Goldman Sachs has also received, and continues to
receive, requests for information and/or subpoenas from federal, state and local regulators and law enforcement authorities, relating to the mortgage-related securitization process, subprime mortgages, CDOs, synthetic mortgage-related products,
particular transactions involving these products, and servicing and foreclosure activities, and is cooperating with these regulators and other authorities, including in some cases agreeing to the tolling of the relevant statute of limitations. See
also Financial Crisis-Related Matters below.
On February 24, 2012, Goldman Sachs received a
Wells notice from the staff of the SEC with respect to the disclosures contained in the offering documents used in connection with a late 2006 offering of approximately $1.3 billion of subprime residential mortgage-backed securities
underwritten by Goldman Sachs. On August 6, 2012, Goldman Sachs was notified by the SEC staff that the investigation into this offering has been completed as to Goldman Sachs and that the staff does not intend to recommend any enforcement
action by the SEC against Goldman Sachs with respect to this offering.
Washington Mutual Securities Litigation
Goldman Sachs is among numerous underwriters named as defendants in a putative securities class action amended complaint
filed on August 5, 2008 in the U.S. District Court for the Western District of Washington. As to the underwriters, plaintiffs allege that the offering documents in connection with various securities offerings by Washington Mutual, Inc. failed
to describe accurately the companys exposure to mortgage-related activities in violation of the disclosure requirements of the federal securities laws. The defendants include past and present directors and officers of Washington Mutual, the
companys former outside auditors, and numerous underwriters. On June 30, 2011, the underwriter defendants and plaintiffs entered into a definitive settlement agreement, pursuant to which Goldman Sachs would contribute to a settlement
fund. On November 4, 2011, the court approved the settlement, and the time to appeal has run, thereby concluding the matter. Goldman Sachs has paid the full amount of Goldman Sachs contribution to the settlement fund.
IndyMac Pass-Through Certificates Litigation
Goldman Sachs is among numerous underwriters named as defendants in a putative securities class action filed on May 14, 2009 in the U.S. District Court for the Southern District of New York. As to
the underwriters, plaintiffs allege that the offering documents in connection with various securitizations of mortgage-related assets violated the disclosure requirements of the federal securities laws. The defendants include IndyMac-related
entities formed in connection with the securitizations, the underwriters of the offerings, certain ratings agencies which evaluated the credit quality of the securities, and certain former officers and directors of IndyMac affiliates. On
November 2, 2009, the underwriters moved to dismiss the complaint. The motion was granted in part on February 17, 2010 to the extent of dismissing claims based on offerings in which no plaintiff purchased, and the court reserved judgment
as to the other aspects of the motion. By a decision dated June 21, 2010, the district court formally dismissed all claims relating to offerings in which no named plaintiff purchased certificates (including all offerings underwritten by Goldman
Sachs), and both granted and denied the defendants motions to dismiss in various other respects. On November 16, 2012, the district court denied the plaintiffs motion seeking reinstatement of claims relating to 42 offerings
previously dismissed for lack of standing (one of which was co-underwritten by Goldman Sachs) without prejudice to renewal depending on the
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outcome of the now-denied petition for a writ of certiorari to the U.S. Supreme Court with respect to the Second Circuits decision described under Mortgage-Related Matters
above. By an order dated March 26, 2013, the district court stayed the action for 60 days and directed the parties to mediate. On May 17, 2010, four additional investors filed a motion seeking to intervene in order to assert claims based
on additional offerings (including two underwritten by Goldman Sachs). The defendants opposed the motion on the ground that the putative intervenors claims were time-barred and, on June 21, 2011, the court denied the motion to intervene
with respect to, among others, the claims based on the offerings underwritten by Goldman Sachs. Certain of the putative intervenors (including those seeking to assert claims based on two offerings underwritten by Goldman Sachs) have appealed.
Goldman Sachs underwrote approximately $751 million principal amount of securities to all purchasers in the offerings at
issue in the May 2010 motion to intervene. On July 11, 2008, IndyMac Bank was placed under an FDIC receivership, and on July 31, 2008, IndyMac Bancorp, Inc. filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court in Los Angeles,
California.
RALI Pass-Through Certificates Litigation
Goldman Sachs is among numerous underwriters named as defendants in a putative securities class action initially filed in September 2008
in New York Supreme Court, and subsequently removed to the U.S. District Court for the Southern District of New York. As to the underwriters, plaintiffs allege that the offering documents in connection with various offerings of mortgage-backed
pass-through certificates violated the disclosure requirements of the federal securities laws. In addition to the underwriters, the defendants include Residential Capital, LLC (ResCap), Residential Accredit Loans, Inc.
(RALI), Residential Funding Corporation (RFC), Residential Funding Securities Corporation (RFSC), and certain of their officers and directors. On March 31, 2010, the defendants motion to dismiss was
granted in part and denied in part by the district court, resulting in dismissal on the basis of standing of all claims relating to offerings in which no plaintiff purchased securities. In June and July 2010, the lead plaintiff and five additional
investors moved to intervene in order to assert claims based on additional offerings (including two underwritten by Goldman Sachs). On April 28, 2011, the court granted defendants motion to dismiss as to certain of these claims (including
those relating to one offering underwritten by Goldman Sachs based on a release in an unrelated settlement), but otherwise permitted the intervenor case to proceed. By an order dated January 3, 2013, the district court denied the
defendants motions to dismiss certain of the intervenors remaining claims as time barred. Class certification of the claims based on the pre-intervention offerings was initially denied by the district court, and that denial was upheld on
appeal; however, following remand, on October 15, 2012, the district court certified a class in connection with the pre-intervention offerings. By an order dated January 3, 2013, the district court granted plaintiffs application
to modify the class definition to include only initial purchasers who bought the securities directly from the underwriters or their agents no later than ten trading days after the offering date (rather than just on the offering date). On
March 26, 2013, the U.S. Court of Appeals for the Second Circuit denied the defendants petition seeking leave to appeal the district courts class certification orders. On April 30, 2013, the district court
granted, in part, plaintiffs request to reinstate a number of the claims, including claims related to seven offerings underwritten by Goldman Sachs, that were previously dismissed on March 31, 2010.
Goldman Sachs underwrote approximately $5.51 billion principal amount of securities to all purchasers in the offerings for which claims
have not been dismissed or which have been reinstated. On May 14, 2012, ResCap, RALI and RFC filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York and the action has been stayed with respect to them,
RFSC and certain of their officers and directors.
MF Global Securities Litigation
Goldman Sachs is among numerous underwriters named as defendants in class action complaints filed in the U.S. District Court for the
Southern District of New York commencing November 18, 2011. These complaints generally allege that the offering materials for two offerings of MF Global Holdings Ltd. (MF Global)
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convertible notes (aggregating approximately $575 million in principal amount) in February 2011 and July 2011, among other things, failed to describe adequately the nature, scope and risks of MF
Globals exposure to European sovereign debt, in violation of the disclosure requirements of the federal securities laws. On August 20, 2012, the plaintiffs filed a consolidated amended complaint and on October 19, 2012, the
defendants filed motions to dismiss the amended complaint. Numerous parties, including Goldman Sachs, have commenced a mediation relating to various MF Global-related proceedings. Goldman Sachs underwrote an aggregate principal amount of
approximately $214 million of the notes. On October 31, 2011, MF Global filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Manhattan, New York.
Goldman Sachs has also received inquiries from various governmental and regulatory bodies and self-regulatory organizations concerning certain transactions with MF Global prior to its bankruptcy filing.
GS Group is cooperating with all such inquiries.
Employment-Related Matters
On May 27, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York by several
contingent technology workers who were employees of third-party vendors. The plaintiffs are seeking overtime pay for alleged hours worked in excess of 40 per work week. The complaint alleges that the plaintiffs were de facto employees of
Goldman Sachs and that Goldman Sachs is responsible for the overtime pay under federal and state overtime laws. The complaint seeks class action status and unspecified damages. On March 21, 2011, the parties agreed to the terms of a settlement
in principle and on February 10, 2012, the court approved the terms of the settlement. Goldman Sachs has reserved the full amount of the proposed settlement.
On September 15, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York by three former female employees alleging that GS Group and Goldman Sachs
have systematically discriminated against female employees in respect of compensation, promotion, assignments, mentoring and performance evaluations. The complaint alleges a class consisting of all female employees employed at specified levels by GS
Group and Goldman Sachs since July 2002, and asserts claims under federal and New York City discrimination laws. The complaint seeks class action status, injunctive relief and unspecified amounts of compensatory, punitive and other damages. GS Group
and Goldman Sachs filed a motion to stay the claims of one of the named plaintiffs and to compel individual arbitration with that individual, based on an arbitration provision contained in an employment agreement between GS Group and that
individual. On April 28, 2011, the magistrate judge to whom the district judge assigned the motion denied the motion and the district court affirmed the magistrate judges decision on November 15, 2011. On March 21, 2013, the
U.S. Court of Appeals for the Second Circuit reversed the district courts decision, holding that arbitration should be compelled. On June 13, 2011, GS Group and Goldman Sachs moved to strike the class allegations of one of the three
named plaintiffs based on her failure to exhaust administrative remedies. On September 29, 2011, the magistrate judge recommended denial of the motion to strike and, on January 10, 2012, the district court denied the motion to
strike. On July 22, 2011, GS Group and Goldman Sachs moved to strike all of the plaintiffs class allegations, and for partial summary judgment as to plaintiffs disparate impact claims. By a decision dated
January 19, 2012, the magistrate judge recommended that defendants motion be denied as premature. The defendants filed objections to that recommendation with the district judge and on July 17, 2012, the district court
issued a decision granting in part GS Groups and Goldman Sachs motion to strike plaintiffs class allegations on the ground that plaintiffs lacked standing to pursue certain equitable remedies and denying in part GS Groups and
Goldman Sachs motion to strike plaintiffs class allegations in their entirety as premature.
Hellenic
Republic (Greece) Matters
GS Group and certain of its affiliates have been subject to a number of investigations and
reviews by various governmental and regulatory bodies and self-regulatory organizations in connection with Goldman Sachs transactions with the Hellenic Republic (Greece), including financing and swap transactions, as well as trading and
research activities with respect to Greek sovereign debt. GS Group has cooperated with the investigations and reviews.
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Investment Management Services
GS Group and certain of its affiliates are parties to various civil litigation and arbitration proceedings and other disputes with clients
relating to losses allegedly sustained as a result of Goldman Sachs investment management services. These claims generally seek, among other things, restitution or other compensatory damages and, in some cases, punitive damages. In addition,
GS Group and its affiliates are subject from time to time to investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations in connection with Goldman Sachs investment management services. GS Group
is cooperating with all such investigations and reviews.
Financial Advisory Services
GS Group and certain of its affiliates are parties to various civil litigation and arbitration proceedings and other disputes with clients
and third parties relating to the firms financial advisory activities. These claims generally seek, among other things, compensatory damages and, in some cases, punitive damages, and in certain cases allege that the firm did not appropriately
disclose or deal with conflicts of interest. In addition, GS Group and its affiliates are subject from time to time to investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations in connection with
conflicts of interest. GS Group is cooperating with all such investigations and reviews.
GS Group, Goldman Sachs and The
Goldman, Sachs & Co. L.L.C. are defendants in an action brought by the founders and former majority shareholders of Dragon Systems, Inc. (Dragon) on November 18, 2008, alleging that the plaintiffs incurred losses due to Goldman
Sachs financial advisory services provided in connection with the plaintiffs exchange of their purported $300 million interest in Dragon for stock of Lernout & Hauspie Speech Products, N.V. (L&H) in 2000. L&H filed for
Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Wilmington, Delaware on November 29, 2000. The action is pending in the United States District Court for the District of Massachusetts. The complaint sought unspecified compensatory,
punitive and other damages, and alleged breach of fiduciary duty, violation of Massachusetts unfair trade practices laws, negligence, negligent and intentional misrepresentation, gross negligence, willful misconduct and bad faith. Former minority
shareholders of Dragon brought a similar action against Goldman Sachs with respect to their purported $49 million interest in Dragon, and this action was consolidated with the action described above. By an order dated October 31, 2012, the
court granted summary judgment with respect to certain counterclaims and an indemnification claim brought by the Goldman Sachs defendants against one of the shareholders, but denied summary judgment with respect to all other claims. On
January 23, 2013, a jury found in favor of the Goldman Sachs defendants on the plaintiffs claims for negligence, negligent and intentional misrepresentation, gross negligence and breach of fiduciary duty. The plaintiffs claims for
violation of Massachusetts unfair trade practices laws will be addressed by the district court and have not yet been decided.
Sales, Trading and Clearance Practices
GS Group and certain of its affiliates are subject to a number of investigations and reviews, certain of which are industry-wide, by various governmental and regulatory bodies and self-regulatory
organizations relating to the sales, trading and clearance of corporate and government securities and other financial products, including compliance with the SECs short sale rule, algorithmic and quantitative trading, futures trading,
transaction reporting, securities lending practices, trading and clearance of credit derivative instruments, commodities trading, private placement practices and compliance with the U.S. Foreign Corrupt Practices Act.
The European Commission announced in April 2011 that it was initiating proceedings to investigate further numerous financial services
companies, including GS Group, in connection with the supply of data related to credit default swaps and in connection with profit sharing and fee arrangements for clearing of credit default swaps, including potential anti-competitive practices. The
proceedings in connection with the supply of data related to credit default swaps are ongoing. GS Groups current understanding is that the proceedings related to profit sharing and fee arrangements for clearing of credit default swaps have
been suspended indefinitely.
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Goldman Sachs has received civil investigative demands from the U.S. Department of Justice (DOJ) for information on similar matters. Goldman Sachs is among the numerous defendants in a putative
antitrust class action filed on May 3, 2013 in the U.S. District Court for the Northern District of Illinois. The complaint generally alleges that defendants violated federal antitrust laws by conspiring to inflate bid-ask spreads for
credit derivatives. The complaint seeks declaratory and injunctive relief as well as treble damages in an unspecified amount.
The CFTC has been investigating the role of Goldman Sachs Execution & Clearing, L.P. (GSEC), as the clearing broker for an SEC-registered broker-dealer client. The CFTC staff has
orally advised GSEC that it intends to recommend that the CFTC bring aiding and abetting, civil fraud and supervision-related charges against GSEC arising from its provision of clearing services to this broker-dealer client based on allegations that
GSEC knew or should have known that the clients subaccounts maintained at GSEC were actually accounts belonging to customers of the broker-dealer client and not the clients proprietary accounts. GSEC has been discussing a potential
resolution. GS Group is cooperating with the investigations and reviews.
In December 2012, Goldman Sachs, without admitting
or denying the findings, consented to a civil monetary penalty in the amount of $1.5 million and a cease and desist order from the CFTC in connection with CFTC findings that Goldman Sachs failed to ensure that certain aspects of its risk management,
compliance and supervision programs comported with its obligations to supervise diligently the trading activities of an associated person (the trader), whose trading activities on seven days in mid-November and mid-December 2007 in the
e-mini S&P 500 futures contract traded on the CME resulted in a substantial loss to Goldman Sachs. Specifically, in violation of CFTC Regulation 166.3, Goldman Sachs was alleged to have failed to have procedures reasonably designed to detect and
prevent the manual entry of fabricated futures trades into its front office systems, which aggregated manually entered and electronically executed trades in the same product. As a result, the trader entered fabricated e-mini S&P 500 sell trades
into its manual trading system, which artificially offset and camouflaged e-mini S&P buy trades the trader had executed in the market. In particular, the trader established an $8.3 billion e-mini S&P 500 position in a firm trading account
causing Goldman Sachs a loss of over $118 million in unwinding the traders position. Separately, after the trader was discharged, Goldman Sachs withheld certain key information from the NFA and the CFTC until after the CFTCs Division of
Enforcement commenced its investigation. In addition to the civil monetary penalty, Goldman Sachs agreed to cease and desist from violating CFTC Regulation 166.3.
Insider Trading Investigations
From time to time, Goldman Sachs and its
employees are the subject of or otherwise involved in regulatory investigations relating to insider trading, the potential misuse of material nonpublic information and the effectiveness of Goldman Sachs insider trading controls and information
barriers. It is Goldman Sachs practice to cooperate fully with any such investigations.
Research Investigations
From time to time, GS Group is the subject of or otherwise involved in regulatory investigations relating to research
practices, including research independence and interactions between research analysts and other firm personnel, including investment banking personnel. It is the firms practice to cooperate fully with any such investigations.
Municipal Securities Matters
GS Group and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations relating to transactions
involving municipal securities, including wall-cross procedures and conflict of interest disclosure with respect to state and municipal clients, the trading and structuring of municipal derivative instruments in connection with municipal
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offerings, political contribution rules, underwriting of Build America Bonds, municipal advisory services and the possible impact of credit default swap transactions on municipal issuers. GS
Group is cooperating with the investigations and reviews.
On August 21, 2008, Goldman Sachs entered into a settlement in
principle with the Office of the Attorney General of the State of New York and the Illinois Securities Department (on behalf of the North American Securities Administrators Association) regarding auction rate securities. Under the agreement, GS
Group agreed, among other things, (i) to offer to repurchase at par the outstanding auction rate securities that its private wealth management clients purchased through Goldman Sachs prior to February 11, 2008, with the exception of those
auction rate securities where auctions were clearing, (ii) to continue to work with issuers and other interested parties, including regulatory and governmental entities, to expeditiously provide liquidity solutions for institutional investors,
and (iii) to pay a $22.5 million fine. The settlement is subject to approval by the various states. Goldman Sachs has entered into consent orders with New York, Illinois and most other states and is in the process of doing so with the remaining
states.
Beginning in February 2012, Goldman Sachs was named as respondent in four FINRA arbitrations filed, respectively, by
the cities of Houston, Texas and Reno, Nevada, a California school district, and a North Carolina municipal power authority, based on Goldman Sachs role as underwriter and broker-dealer of the claimants issuances of an aggregate of over
$1.8 billion of auction rate securities from 2003 through 2007 (in the Houston arbitration, two other financial services firms were named as respondents, and in the North Carolina arbitration, one other financial services firm was named)). Each
claimant alleges that Goldman Sachs failed to disclose that it had a practice of placing cover bids on auctions, and failed to offer the claimant the option of a formulaic maximum rate (rather than a fixed maximum rate), and that, as a result, the
claimant was forced to engage in a series of expensive refinancing and conversion transactions after the failure of the auction market (at an estimated cost, in the case of Houston, of approximately $90 million). Houston and Reno also allege that
Goldman Sachs advised them to enter into interest rate swaps in connection with their auction rate securities issuances, causing them to incur additional losses (including, in the case of Reno, a swap termination obligation of over $8 million).
The claimants assert claims for breach of fiduciary duty, fraudulent concealment, negligent misrepresentation, breach of contract, violations of the 1934 Act and state securities laws, and breach of duties under the rules of the Municipal Securities
Rulemaking Board and the NASD, and seek unspecified damages. In federal court, Goldman Sachs has filed complaints and motions seeking to enjoin the Reno, California school district and North Carolina arbitrations pursuant to the exclusive forum
selection clauses in the transaction documents. On November 26, 2012, Goldman Sachs motion to enjoin was denied with regard to the Reno arbitration, and Goldman Sachs appealed on March 11, 2013. On
February 8, 2013, Goldman Sachs motion to enjoin was granted with regard to the California school district arbitration, and the California school district appealed on March 5, 2013. On April 26, 2013, Goldman
Sachs filed its formal motion to enjoin the North Carolina arbitration, and the North Carolina municipal power authority filed a motion to dismiss Goldman Sachs complaint for lack of venue.
Financial Crisis-Related Matters
GS Group and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations and litigation relating to the
2008 financial crisis. Goldman Sachs is cooperating with the investigations and reviews.
In the second quarter of 2011, a
Staff Report of the Senate Permanent Subcommittee on Investigations concerning the key causes of the financial crisis was issued. Goldman Sachs and another financial institution were used as case studies with respect to the role of investment banks.
The report was referred to the DOJ and the SEC for review. Goldman Sachs has cooperated with the investigations arising from this referral. On August 9, 2012, the DOJ announced that it had concluded its investigation and would not be bringing
criminal charges against Goldman Sachs or any of its current or former employees in connection with this matter.
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Jefferies Bache, LLC (JBL)
From time to time JBL (in its capacity as a commodities broker) and its principals may be involved in numerous legal actions, some of
which individually and all of which in the aggregate, seek significant or indeterminate damages. However, except for the action described below, during the five years preceding the date of this offering memorandum there has been no administrative,
civil, or criminal action against JBL or any of its principals which is material, in light of all the circumstances, to an investors decision to invest.
In December 2009, JBL was served with a Statement of Claim in an arbitration brought before the National Futures Association. The claimant, an oil company involved in the marketing, supply and
transportation of petroleum products, alleged that JBL knew that one of claimants employees, who had been an authorized trader for the claimant, engaged in unauthorized trading and that JBL permitted him to do so. Claimant alleged actual
damages of $7 million and, to the extent it also alleged that JBL violated the RICO statute, claimed treble damages, or $21 million.
In February 2010, JBL filed an answer which denied any responsibility for the conduct of the claimants employee. Pursuant to the sale of JBL earlier in 2011, Prudential Financial, Inc. retained
responsibility for this matter, although JBL remained as the respondent in the arbitration. In October 2011, Prudential Financial and the claimant reached a settlement of this matter; JBL did not contribute any monies to the settlement.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch)
Merrill Lynch has been named as a defendant in various legal actions and proceedings, including arbitrations, class actions and other
litigation arising in connection with its activities as a global, diversified, financial services institution.
Some of the
legal actions and proceedings include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or
otherwise in financial distress. Merrill Lynch is also involved in investigations and/or proceedings by governmental and self-regulatory agencies.
Bank of America Corporation (Bank of America), Merrill Lynchs ultimate parent, and Merrill Lynch & Co., Inc. (the Parent), Merrill Lynchs direct corporate
parent, make all required disclosures in their Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, which may be updated in reports on Form 8-K, all of which are filed or furnished with the SEC (Regulatory Filings). Merrill
Lynch makes all required disclosures in its Form BD and ADV filings (Form BD and ADV Filings) with FINRA. Those Regulatory Filings and Form BD and ADV Filings include disclosures of regulatory inquiries as required by federal law and
applicable regulations. The Regulatory Filings are publicly available on the SECs website at
www.sec.gov
. The Form BD filings are publicly available on the FINRA BrokerCheck system at
http://www.finra.org/Investors/Tools
Calculators/BrokerCheck/index.htm
. The Form ADV filings are publicly available on the SECs Investment Adviser Search website at:
http://www.adviserinfo.sec.gov
.
In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly where the claimants
seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, Merrill Lynch generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the
ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
In accordance with applicable accounting guidance, Merrill Lynch establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable
and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, Merrill Lynch does not establish an accrued liability. As a litigation or regulatory matter
develops, Merrill Lynch, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and
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estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for
further developments that would make such loss contingency both probable and estimable. Once the loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, Merrill Lynch will establish an accrued
liability with respect to such loss contingency and record a corresponding amount of litigation-related expense. Merrill Lynch continues to monitor the matter for further developments that could affect the amount of the accrued liability that has
been previously established.
In some of the matters described below, loss contingencies are not both probable and estimable
in the view of Merrill Lynch management, and accordingly, an accrued liability has not been established for those matters. Information is provided below regarding the nature of these contingencies and, where specified, the amount of the claim
associated with these loss contingencies. Based on current knowledge, management does not believe that loss contingencies arising from pending matters, will have a material adverse effect on Merrill Lynchs consolidated financial position or
liquidity. However, in light of the inherent uncertainties involved in these matters, , some of which are beyond Merrill Lynchs control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or
more of these matters could be material to Merrill Lynch for any particular reporting period.
The actions against Merrill
Lynch include, but are not limited to, the following:
Auction Rate Securities Litigation
Since October 2007, Merrill Lynch and certain affiliates have been named as defendants in a variety of lawsuits and other proceedings
brought by customers and both individual and institutional investors, and issuers regarding auction rate securities (ARS). These actions generally allege that the defendants (i) misled the plaintiffs into believing that there was a
deeply liquid market for ARS, and (ii) failed to adequately disclose their or their affiliates practice of placing their own bids to support ARS auctions. Plaintiffs assert that ARS auctions started failing from August 2007 through
February 2008 when defendants and other broker-dealers stopped placing those support bids. In addition to the matters described in more detail below, arbitrations and individual lawsuits have been filed against Merrill Lynch and certain
affiliates by parties who purchased ARS and are seeking relief that includes compensatory and punitive damages, as well as rescission, among other relief.
Merrill Lynch and the Parent face civil actions relating to the sales of ARS and management of ARS auctions, including two putative class action lawsuits in which the plaintiffs seek to recover the
alleged losses in market value of ARS securities purportedly caused by the defendants actions. Plaintiffs also seek unspecified damages, including rescission, other compensatory and consequential damages, costs, fees and interest. The first
action,
In Re Merrill Lynch Auction Rate Securities Litigation
, is the result of the consolidation of two separate class action suits in the U.S. District Court for the Southern District of New York. These suits were brought by two customers
of Merrill Lynch, on behalf of all persons who purchased ARS in auctions managed by Merrill Lynch and other affiliates, against the Parent and Merrill Lynch. On March 31, 2010, the U.S. District Court for the Southern District of New York
granted Merrill Lynchs motion to dismiss. Plaintiffs appealed and on November 14, 2011, the U.S. Court of Appeals for the Second Circuit affirmed the district courts dismissal. Plaintiffs time to seek a writ of certiorari to
the U.S. Supreme Court expired on February 13, 2012, and, as a result, this action is now concluded. The second action,
Bondar v. Bank of America Corporation
, was brought by a putative class of ARS purchasers against Bank of America and
BAS. On February 24, 2011, the U.S. District Court for the Northern District of California dismissed the amended complaint and directed plaintiffs to state whether they will file a further amended complaint or appeal the courts dismissal.
Following the Second Circuits decision in
In Re Merrill Lynch Auction Rate Securities Litigation
, plaintiffs voluntarily dismissed their action on January 4, 2012. The dismissal is subject to the district courts approval.
Bank of America Merger-related Matters
Since January 2009, Bank of America, Parent and/or certain of their current and former officers and directors, among others, have been named as defendants in a variety of securities actions filed in
federal courts
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relating to Bank of Americas acquisition of Parent (the Acquisition). The claims in these actions generally concern (i) the Acquisition; (ii) the financial condition
and 2008 fourth quarter losses experienced by Bank of America and Parent; (iii) due diligence conducted in connection with the Acquisition; (iv) the Acquisition agreements terms regarding Parents ability to pay bonuses to
Parent employees up to $5.8 billion; (v) Bank of Americas discussions with government officials in December 2008 regarding Bank of Americas consideration of invoking the material adverse change clause in the Acquisition agreement
and the possibility of obtaining government assistance in completing the Acquisition; and/or (vi) alleged material misrepresentations and/or material omissions in the proxy statement and related materials for the Acquisition.
Plaintiffs in
In re Bank of America Securities, Derivative and Employment Retirement Income Security Act (ERISA)
Litigation
(the Securities Plaintiffs), a putative class action pending in the U.S. District Court for the Southern District of New York, represent all (i) purchasers of the Bank of America common and preferred securities
between September 15, 2008 and January 21, 2009 and its January 2011 options, (ii) holders of Bank of America common stock as of October 10, 2008, and (iii) purchasers of Bank of Americas common stock issued in the
offering that occurred on or about October 7, 2008. During the purported class period, Bank of America common shares declined from $33.74 on September 12, 2008 to $6.68 on January 21, 2009. Securities Plaintiffs claim violations of
Sections 10(b), 14(a) and 20(a) of the 1934 Act, and SEC rules promulgated thereunder. Bank of America and its co-defendants filed motions to dismiss, which the court granted in part by dismissing certain of the Securities Plaintiffs claims
under Section 10(b) of the 1934 Act. Securities Plaintiffs filed a second amended complaint which repleaded some of the dismissed claims as well as added claims under Sections 10(b) and 20(a) of the 1934 Act on behalf of holders of certain
debt, preferred securities and option securities. Securities Plaintiffs amended complaint also alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended the (1933 Act) related to the offering of
Bank of Americas common stock that occurred on or about October 7, 2008, and names Merrill Lynch, among others, as defendants on certain claims. Bank of America and its co-defendants filed motions to dismiss, which the court granted in
part in August 2010 by dismissing certain of the Securities Plaintiffs claims under Section 10(b) of the 1934 Act. In July 2011, the court granted in part defendants motion to dismiss the second amended complaint. As a result of the
courts July 2011 ruling, the Securities Plaintiffs were (in addition to the claims sustained in the courts August 2010 ruling) permitted to pursue a claim under Section 10(b) asserting that defendants should have made additional
disclosures in connection with the Acquisition about the financial condition and 2008 fourth-quarter losses experienced by Parent. Securities Plaintiffs seek unspecified monetary damages, legal costs and attorneys fees. On February 6,
2012, the court granted Securities Plaintiffs motion for class certification. On February 21, 2012, Bank of America filed a petition requesting that the U.S. Court of Appeals for the Second Circuit review the district courts order
granting Securities Plaintiffs motion for class certification.
Several individual plaintiffs have opted to pursue
claims apart from the
In re Bank of America Securities, Derivative, and Employment Retirement Income Security Act (ERISA) Litigation
and, accordingly, have initiated individual actions in the U.S. District Court for the Southern District of
New York relying on substantially the same facts and claims as the Securities Plaintiffs.
Benistar Litigation
In
Gail A. Cahaly, et al. v. Benistar Property Exchange Trust Company, Inc, et al
.
(Benistar)
, a matter
filed on August 1, 2001, in the Massachusetts Superior Court, Suffolk County, plaintiffs alleged that Merrill Lynch aided and abetted a fraud and breach of fiduciary duty allegedly perpetrated by Benistar, a former client of Merrill Lynch. On
June 25, 2009, the jury in the second trial in this matter found in favor of plaintiffs on all counts. Plaintiffs filed discovery-related sanctions motions, as well as a petition seeking attorneys fees and costs. On January 11, 2011,
the court issued rulings denying plaintiffs request for sanctions and punitive damages but awarding consequential damages and attorneys fees to plaintiffs in an amount not material to Merrill Lynchs results of operations.
Plaintiffs and Merrill Lynch appealed the courts January 11, 2011 rulings on damages and sanctions. On December 26, 2012, plaintiffs and Merrill Lynch agreed to settle for an amount not material to Merrill Lynchs results of
operations.
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Good Reason Litigation
Since 2009, Merrill Lynch and certain affiliates have been named as defendants in lawsuits and arbitrations brought by former Merrill
Lynch employees, primarily financial advisors, who participated in certain Merrill Lynch equity and contingent long term incentive compensation plans (the Plans). These actions generally allege that the former employees had good
reason to resign as that term is defined under the change in control provisions of the applicable Plans and, as such, are entitled to immediate vesting and payment of forfeited awards and/or monetary sums under those Plans.
In addition, a putative class action was filed in October 2009, entitled
Chambers et al v. Merrill Lynch & Co. et al.
in
the U.S. District Court for the Southern District of New York, seeking certification of a putative class of financial advisors and seeking damages and other payments under the good reason provisions of certain contingent incentive compensation
plans. On November 26, 2012, the parties entered into an agreement to settle
Chambers
. The settlement amount has been fully accrued. On December 13, 2012, the court issued an order granting preliminary approval to the settlement and
providing for notice to potential class members. The agreement is subject to the courts final approval. Other actions asserting good reason claims remain pending.
Illinois Funeral Directors Association Matters
Commencing in 1979, the
Illinois Funeral Directors Association (IFDA), an Illinois not-for-profit corporation that serves as a trade association representative for the Illinois funeral industry, began providing trust services to Illinois consumers for the
deposit of payments for pre-paid funeral services. Illinois law regulates the sale of pre-paid funeral goods and services and requires that proceeds of those sales be held in trust. In 1986, the IFDA began offering a tax-advantaged pre-need trust
administered by its subsidiary, IFDA Services, Inc. (IFDA Services). The tax-advantaged pre-need trust invested primarily in variable universal life insurance (VUL) policies written against the lives of keymen of
IFDA, its members and its affiliates. In response to the stated investment objectives of IFDAs executive director and its board of directors, Merrill Lynch recommended the purchase of the VUL policies to IFDA for the tax-advantaged pre-need
trust, and Merrill Lynch Life Agency, Inc. (MLLA), sold the pre-need trust approximately 270 VUL policies as investment vehicles.
During IFDA Services operation of the pre-need trust, it credited IFDA members with earnings on deposits into the pre-need trust based on a rate of return set by IFDA Services, even though the
crediting rate sometimes exceeded the actual earnings on the trust investments. As a result, a deficit developed between the amounts that the IFDA credited to IFDA members and the actual earnings of the trust. The Illinois Office of the Comptroller,
the trusts regulator, removed IFDA Services as trustee of the trust in 2008, and asked Merrill Lynch Bank & Trust Company, FSB (MLBTC), to serve as successor trustee.
On February 10, 2012, the State of Illinois Office of the Secretary of State, Securities Department (ISD) entered into a
consent order with Merrill Lynch to resolve the ISDs investigation of the sale of life insurance policies to the pre-need trust. The consent order provided for payment by Merrill Lynch of an amount not material to Merrill Lynchs results
of operations as restitution to the tax-advantaged pre-need trust and its beneficiaries to mitigate any potential loss or injuries that Illinois pre-need patrons or funeral homes might otherwise suffer and fund the anticipated funeral costs of
Illinois pre-need patrons. In addition, the consent order provided for payment by Merrill Lynch of the costs of the ISDs investigation and of administration and distribution of the ISD settlement funds.
On June 16, 2009, a purported class action on behalf of a proposed class of pre-need contract holders,
David Tipsword as Trustee
of Mildred E. Tipsword Trust, individually and on behalf of all others similarly situated v. I.F.D.A. Services Inc., et al.
, was filed in the U.S. District Court for the Southern District of Illinois against Merrill Lynch, among other
defendants. The complaint alleged that Merrill Lynch breached purported fiduciary duties and committed negligence and seeks compensatory and punitive damages, reasonable attorneys fees, and costs. The court denied Merrill Lynchs motion
to dismiss.
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On June 30, 2009, a purported class action on behalf of a proposed class of funeral
directors,
Clancy-Gernon Funeral Home, Inc., et al.
v. Merrill Lynch, et al., was filed in the Illinois Circuit Court, Cook County, alleging that Merrill Lynch and MLLA, among other defendants, committed consumer fraud, civil conspiracy,
unjust enrichment, and conversion. Merrill Lynch and MLLA removed the complaint to the U.S. District Court for the Northern District of Illinois, and the case ultimately transferred to the U.S. District Court for the Southern District of Illinois.
On November 9, 2010, plaintiffs filed a third amended complaint, which added new parties, including MLBT-FSB, and additional claims for fraud, breach of fiduciary duty, negligence and aiding and abetting fiduciary duty against Merrill Lynch and
MLLA, and breach of fiduciary duty and negligence against MLBT-FSB. The third amended complaint sought disgorgement and remittance of all commissions, premiums, fees and compensation; an accounting; compensatory damages; pre-judgment and
post-judgment interest; and reasonable attorneys and experts fees and costs. The court denied MLBT-FSBs motion to dismiss and permitted Merrill Lynch and MLLA to withdraw their motions to dismiss.
On December 9, 2010, a purported class action on behalf of a proposed class of funeral directors,
Pettett Funeral Home, Ltd., et
al. v. Merrill Lynch, et al.
, was filed in the U.S. District Court for the Southern District of Illinois. The allegations and relief sought in the
Pettett
matter were virtually identical to the claims in
Clancy-Gernon
.
On July 28, 2010, Charles G. Kurrus, III, P.C., a funeral director and owner of a funeral home, filed an action in the Illinois
Circuit Court, St. Clair County, against Merrill Lynch, MLLA and MLBT-FSB, among others, including present and former Merrill Lynch employees. The complaint, entitled
Charles F. Kurrus, III, P.C. v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., et al.
, asserted causes of action for breach of the Illinois Consumer Fraud and Deceptive Business Practices Act and civil conspiracy against all defendants; breach of fiduciary duty against Merrill Lynch and MLBT-FSB; and negligence and
aiding and abetting breach of fiduciary duty against Merrill Lynch. The complaint sought declaratory relief; disgorgement of all commissions, fees and revenues received by Merrill Lynch, MLLA and MLBT-FSB; pre-judgment and post-judgment interest; an
accounting; and attorneys fees. Defendants filed motions to dismiss.
On February 15, 2012, the parties to the
above-referenced litigations executed a settlement agreement to fully resolve the claims asserted in the class action litigations and the
Kurrus
litigation, and fully release and bar any civil claims against Merrill Lynch, its employees or
affiliates with respect to the IFDA pre-need trust. The settlement agreement provided for a payment by Merrill Lynch in an amount not material to Merrill Lynchs results of operations (which amount was fully accrued as of December 31,
2011). On June 12, 2012, the court entered a final order approving the class action settlement and entered judgments dismissing the three class action lawsuits (
Tipsword
,
Clancy-Vernon
and
Pettett
) with prejudice. On
August 2, 2012, the court in
Kurrus
dismissed the matter with prejudice.
In re Initial Public Offering
Securities Litigation
The Parent, Merrill Lynch and certain of their subsidiaries, along with other underwriters, and
various issuers and others, were named as defendants in a number of putative class action lawsuits that have been consolidated in the U.S. District Court for the Southern District of New York as
In re Initial Public Offering Securities
Litigation
. Plaintiffs contended, among other things, that defendants failed to make certain required disclosures in the registration statements and prospectuses for applicable offerings regarding alleged agreements with institutional investors
that tied allocations in certain offerings to the purchase orders by those investors in the aftermarket. Plaintiffs alleged that such agreements allowed defendants to manipulate the price of the securities sold in these offerings in violation of
Section 11 of the 1933 Act and Section 10(b) of the 1934 Act and SEC rules promulgated thereunder. The parties agreed to settle the matter, for which the court granted final approval in an amount that was not material to Merrill
Lynchs results of operations. Some putative class members have filed an appeal, which remains pending, in the U.S. Court of Appeals for the Second Circuit seeking reversal of the final approval. On August 25, 2011, the district court, on
remand from the U.S. Court of Appeals for the Second Circuit, dismissed the objection by the last remaining putative class member, concluding that he was not a class member. On January 9, 2012, that objector dismissed with prejudice an appeal
of the
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courts dismissal pursuant to a settlement agreement. On November 28, 2011, an objector whose appeals were dismissed by the Second Circuit filed a petition for a writ of certiorari with
the U.S. Supreme Court that was rejected as procedurally defective. On January 17, 2012, the Supreme Court advised the objector that the petition was untimely and should not be resubmitted to the Supreme Court.
Lehman Brothers Holdings, Inc. Litigation
Beginning in September 2008, Merrill Lynch, including BAS, along with other underwriters and individuals, were named as defendants in several putative class action lawsuits filed in federal and
state courts. All of these cases were transferred or conditionally transferred to the U.S. District Court for the Southern District of New York under the caption
In re Lehman Brothers Securities and ERISA Litigation. Plaintiffs alleged that the
underwriter defendants violated Section 11 of the Securities Act of 1933, as well as various state laws, by making false or misleading disclosures about the real estate-related investments and mortgage lending practices of Lehman Brothers
Holdings, Inc. (LBHI) in connection with various debt and convertible stock offerings of LBHI. Plaintiffs sought unspecified damages. On June 4, 2010, defendants filed a motion to dismiss the complaint. On July 27, 2011, the
court granted in part and denied in part the motion. Certain of the allegations in the complaint that purported to support the Section 11 claim against the underwriter defendants were dismissed; others were not dismissed relating to alleged
misstatements regarding LBHIs leverage and financial condition, risk management and risk concentrations.
On
September 23, 2011, the majority of the underwriter defendants, including BAS, the Company and approximately 40 others, reached an agreement in principle with the lead plaintiffs to settle the securities class action as to the settling
underwriters. On May 2, 2012, the court gave final approval to the settlement. The Companys portion of the settlement was not material to its results of operations or financial condition.
MBIA Insurance Corporation CDO Litigation
On April 30, 2009, MBIA Insurance Corporation (MBIA) and LaCrosse Financial Products, LLC filed a complaint in New York State Supreme Court, New York County, against Merrill Lynch and
Merrill Lynch International (MLI) under the caption
MBIA Insurance Corporation and LaCrosse Financial Products, LLC v. Merrill Lynch Pierce Fenner and Smith Inc., and Merrill Lynch International (MLI)
. The complaint
related to certain credit default swap and insurance agreements by which plaintiffs provided credit protection to Merrill Lynch and MLI and other parties on CDO securities. Plaintiffs claimed that Merrill Lynch and MLI did not adequately disclose
the credit quality and other risks of the CDO securities and underlying collateral. The complaint alleged claims for fraud, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing and breach of contract and seeks
rescission and unspecified compensatory and punitive damages, among other relief. On April 9, 2010, the court granted defendants motion to dismiss as to the fraud, negligent misrepresentation, and breach of the implied covenant of good
faith and fair dealing and rescission claims, as well as a portion of the breach of contract claim. Plaintiffs appealed the dismissal of their claims and MLI cross-appealed the denial of its motion to dismiss the breach of contract claim in its
entirety. On February 1, 2011, the appellate court dismissed the case against MLI in its entirety. On July 11, 2011, the parties reached an agreement to settle the litigation. The settlement did not require any payment by Merrill Lynch.
Mortgage-Backed Securities Litigation
The Parent, Merrill Lynch and certain of their affiliates have been named as defendants in several cases relating to their various roles as issuer, originator, seller, depositor, sponsor, underwriter
and/or controlling entity in mortgage-backed securities (MBS) offerings, pursuant to which the MBS investors were entitled to a portion of the cash flow from the underlying pools of mortgages. These cases generally include actions by
individual MBS purchasers. Although the allegations vary by lawsuit, these cases generally allege that the registration statements, prospectuses and prospectus supplements for securities issued by securitization trusts contained material
misrepresentations and omissions, in violation of Sections 11 and 12 of the 1933 Act, Sections 10(b) and/or 20 of the 1934 Act and/or state securities laws and other state statutory and/or common laws.
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These cases generally involve allegations of false and misleading statements regarding
(i) the process by which the properties that served as collateral for the mortgage loans underlying the MBS were appraised; (ii) the percentage of equity that mortgage borrowers had in their homes; (iii) the borrowers ability to
repay their mortgage loans; (iv) the underwriting practices by which those mortgage loans were originated; (v) the ratings given to the different tranches of MBS by rating agencies; and (vi) the validity of each issuing trusts
title to the mortgage loans comprising the pool for the securitization (collectively, MBS Claims). Plaintiffs in these cases generally seek unspecified compensatory damages, unspecified costs and legal fees and, in some instances, seek
rescission. A number of other entities have threatened legal actions against Merrill Lynch and its affiliates concerning MBS offerings. On January 11, 2013, Merrill Lynch preliminarily agreed on a settlement amount with the National Credit
Union Administration (NCUA) to resolve claims concerning certain MBS offerings that the NCUA had threatened to bring against Merrill Lynch and certain of its affiliates. The agreement is subject to the negotiation and execution of mutually agreeable
settlement documentation and approval by the NCUA board. The settlement amount would be covered by existing reserves.
AIG
Litigation
On August 8, 2011, American International Group, Inc. and certain of its affiliates (collectively,
AIG) filed a complaint in New York Supreme Court, New York County, in a case entitled
American International Group, Inc. et al. v. Bank of America Corporation et al.
AIG has named, among others, Merrill Lynch and a number of its
related entities as defendants. AIGs complaint asserts certain MBS Claims pertaining to 158 MBS offerings and two MBS private placements relating to Merrill Lynch affiliates, in which AIG alleges that it purchased securities between 2005 and
2007. AIG seeks rescission of its purchases or a rescissory measure of damages or, in the alternative, compensatory damages of not less than $10 billion as to all defendants; punitive damages; and other unspecified relief. Defendants removed the
case to the U.S. District Court for the Southern District of New York. The district court has denied AIGs motion to remand the case to state court. On April 24, 2012, the U.S. Court of Appeals for the Second Circuit granted
plaintiffs petition for leave to appeal the ruling of the district court in the Southern District of New York denying plaintiffs motion to remand the case to New York Supreme Court. The appeal is pending.
Bayerische Landesbank, New York Branch (Merrill Lynch) Litigation
On May 2, 2012, Bayerische Landesbank, New York Branch, filed a complaint against the Parent, Merrill Lynch, Merrill Lynch Mortgage
Investors, Inc. (MLMI) and Merrill Lynch Mortgage Lending, Inc. (MLML), in New York Supreme Court, New York County, entitled
Bayerische Landesbank, New York Branch v. Merrill Lynch & Co., et al.
The complaint
asserted certain MBS Claims in connection with alleged purchases in thirteen offerings of Merrill Lynch-related MBS issued between 2006 and 2007. Plaintiff sought unspecified compensatory damages, punitive damages, interest and legal fees, and
rescission or rescissory damages. On September 27, 2012, the case was settled for an amount not material to Merrill Lynchs results of operations.
Dexia (Merrill Lynch) Litigation
On March 29, 2012, Dexia SA/NV,
Dexia Holdings, Inc., FSA Asset Management LLC and Dexia Crédit Local SA (Dexia) filed a complaint against the Parent, Merrill Lynch, MLMI, MLML and First Franklin Financial Corporation in New York Supreme Court, New York County,
entitled
Dexia, et al. v. Merrill Lynch & Co. et al
. The complaint asserted certain MBS Claims in connection with its alleged purchase of fifteen MBS that were issued and/or underwritten by the Company and related entities between
2006 and 2007. Dexia sought unspecified compensatory damages, rescission, interest and legal fees. The action was removed to the U.S. District Court for the Southern District of New York. On September 27, 2012, the case was settled for an
amount not material to Merrill Lynchs results of operations.
Federal Housing Finance Agency Litigation
On September 2, 2011, the Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae
(FNMA) and Freddie Mac (FHLMC), filed complaints in the U.S. District Court for the Southern District of
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New York against Bank of America, Merrill Lynch and certain related entities, and certain current and former officers and directors of these entities. The actions are entitled
Federal Housing
Finance Agency v. Bank of America Corporation, et al.
(the FHFA Bank of America Litigation) and
Federal Housing Finance Agency v. Merrill Lynch & Co., Inc., et al.
(the FHFA Merrill Lynch Litigation). The
complaints assert certain MBS Claims relating to MBS issued and/or underwritten by Bank of America, Merrill Lynch and related entities in 23 MBS offerings and in 72 MBS offerings, respectively, between 2005 and 2008 and allegedly purchased by
either FNMA or FHLMC. The FHFA seeks among other relief, rescission of the consideration FNMA and FHLMC paid for the securities or alternatively damages allegedly incurred by FNMA and FHLMC, including consequential damages. The FHFA also seeks
recovery of punitive damages in the FHFA Merrill Lynch Litigation.
The FHFA Bank of America Litigation and the FHFA Merrill
Lynch Litigation, along with fourteen other cases filed by the FHFA against other financial institutions, have been coordinated before a single judge in the U.S. District Court for the Southern District of New York. One action,
FHFA v. UBS
Americas, Inc., et al.
(the UBS Action), was designated the lead action with respect to allegations and claims common to the pending FHFA cases. On May 4, 2012, the court denied in part and granted in part a motion to dismiss in
the UBS Action. The court subsequently denied motions to dismiss in the FHFA Merrill Lynch Litigation and the FHFA Bank of America Litigation on November 8, 2012 and November 28, 2012, respectively. On August 14, 2012, the U.S. Court
of Appeals for the Second Circuit granted the UBS defendants application for an interlocutory appeal of the district courts ruling pertaining to the statute of repose on the federal and state securities law claims and the statute of
limitations on the federal securities law claims asserted in the UBS Action. The FHFA has asserted similar claims in the FHFA Merrill Lynch Litigation and the FHFA Bank of America Litigation.
Merrill Lynch MBS Litigation
The Parent, Merrill Lynch, Merrill Lynch Mortgage Investors, Inc. (MLMI) and certain current and former directors of MLMI are named as defendants in a consolidated class action in the U.S.
District Court in the Southern District of New York, entitled
Public Employees Ret. System of Mississippi v. Merrill Lynch & Co. Inc.
Plaintiffs assert certain MBS Claims in connection with their purchase of MBS. In March 2010,
the court dismissed claims related to 65 of 84 offerings with prejudice due to lack of standing as no named plaintiff purchased securities in those offerings. On November 8, 2010, the court dismissed claims related to one additional offering on
separate grounds. On May 7, 2012, the court granted final approval of a settlement providing for a payment in an amount not material to Merrill Lynchs results of operations (which was fully accrued as of December 31, 2011).
Stichting Pensioenfonds Litigation
On August 19, 2010, Stichting Pensioenfonds ABP (ABP) filed a complaint against Merrill Lynch related entities, and certain current and former directors of MLMI, and certain other
defendants, in New York Supreme Court, New York County, entitled
Stichting Pensioenfonds v. Merrill Lynch & Co., Inc., et al.
The action was removed to the U.S. District Court for the Southern District of New York. ABPs
original complaint asserted certain MBS Claims in connection with alleged purchases in 13 offerings of Merrill Lynch-related MBS issued between 2006 and 2007. On October 12, 2011, ABP filed an amended complaint regarding the same offerings and
adding additional federal securities law and state law claims. ABP seeks unspecified compensatory damages, interest and legal fees, or alternatively rescission.
Regulatory Investigations
Merrill Lynch, has received a number of
subpoenas and other requests for information from regulators and governmental authorities regarding MBS and other mortgage-related matters, including inquiries, investigations and potential proceedings related to a number of transactions involving
Merrill Lynchs underwriting and issuance of MBS and its participation in certain CDO offerings. These inquiries and investigations include, among others: an investigation by the SEC related to Merrill Lynchs risk control, valuation,
structuring,
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marketing and purchase of CDOs; and an investigation by the New York State Attorney General concerning the purchase, securitization and underwriting of mortgage loans and MBS. Merrill Lynch has
provided documents and testimony and continues to cooperate fully with these inquiries and investigations.
Rosen Capital
Partners LP & Rosen Capital Institutional LPs FINRA Arbitration
On May 28, 2008, two former hedge fund
clients of Merrill Lynch Professional Clearing Corporation (MLPCC), Rosen Capital Partners LP and Rosen Capital Institutional LP (collectively, the Rosen Funds), filed a statement of claim asserting claims for breach of
contract, fraud, and negligence against MLPCC in connection with alleged losses in the fall of 2008. On July 5, 2011, a FINRA panel awarded the Rosen Funds $64 million plus pre-judgment interest On December 23, 2011, the California
Superior Court granted the Rosen Funds motion to confirm the award and on February 15, 2012 entered judgment on the award and pre-judgment interest, an amount that was fully accrued. On February 5, 2013, the Court of Appeals affirmed
the decision of the California Superior Court.
Regulatory Actions
Squawk Box Settlement
The SEC alleged, and Merrill Lynch neither admitted nor denied, that Merrill Lynch failed to maintain policies and procedures reasonably designed to prevent the misuse of customer order information as
required by Section 15(f) of the 1934 Act and Section 204A of the Advisers Act. The order (1) requires that Merrill Lynch cease and desist from committing or causing any future violations of the provisions charged, (2) censures
Merrill Lynch, (3) imposed a civil money penalty in the amount of $7,000,000, and (4) orders Merrill Lynch to comply with undertakings regarding the enhancement of certain policies and procedures. On March 11, 2009, without admitting
or denying the SECs findings, Merrill Lynch consented to the entry of an administrative SEC order finding violations of Section 15(f) of the 1934 Act and Section 204A of the Advisers Act for allegedly failing to maintain written
policies and procedures reasonably designed to prevent the misuse of customer order information. The order requires Merrill Lynch to comply with undertakings to implement (or to continue) and maintain policies and procedures to, among things:
(1) inform employees that information concerning customer order information is confidential, (2) address employee access to the equity squawk box, and (3) train employees who use squawk box related technology. In addition, Merrill
Lynchs internal audit department shall conduct periodic reviews of these policies and procedures and provide the SEC staff with a copy of the audit report.
Consulting Services Settlement
On January 30, 2009, Merrill Lynch,
without admitting or denying any findings of misconduct by the SEC, consented to the entry of an administrative order by the SEC that (1) found that Merrill Lynch violated Sections 204 and 206(2) of the Advisers Act, and Rule 204-2(a)(14)
thereunder; (2) required that Merrill Lynch cease and desist from committing or causing any violation or further violations of the provisions charged; (3) censured Merrill Lynch pursuant to Section 203(e) of the Advisers Act; and
(4) required Merrill Lynch to pay a civil money penalty of $1 million. The order found that Merrill Lynch, through its pension consulting services advisory program, breached its fiduciary duty to certain current and prospective pension fund
clients by misrepresenting and omitting to disclose material information.
Multi-State Auction Rate Securities Settlement
The Commonwealth of Massachusetts Office of the Secretary of the Commonwealth Securities Division (MSD)
alleged that Merrill Lynch violated the Massachusetts Uniform Securities Act, which, in part, prohibits unethical or dishonest conduct or practices in the securities business, concerning the sale of ARS to retail and other customers by Merrill
Lynch. Without admitting or denying the allegations, Merrill Lynch entered into a settlement with the MSD, in which it agreed to certain undertakings, including offering to buy back eligible ARS
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from eligible investors. Merrill Lynch agreed to pay the MSD a civil penalty of $1,598,650.90, as part of a $125,000,000 fine that will be allocated at the Commonwealth of Massachusetts and other
states discretion to resolve all underlying conduct relating to the sale of ARS.
Banc of America Investment
Services, Inc./Banc of America Securities LLC Auction Rate Securities Settlement
As the result of the merger of Banc of
America Investment Services, Inc. (BAI) with and into Merrill Lynch on October 23, 2009 and the merger of Banc of America Securities LLC (BAS) with and into Merrill Lynch on November 1, 2010, Merrill Lynch assumed
the liabilities of BAI and BAS in the following matter: The SEC alleged that BAI and BAS (together, the Firms), misled customers regarding the fundamental nature and increasing risks associated with ARS that the Firms underwrote,
marketed, and sold. The SEC also alleged that, by engaging in such conduct, the Firms violated Section 15(c) of the 1934 Act. The Firms neither admit nor deny these allegations. Among other undertakings, the Firms have, through their affiliate
Blue Ridge Investments, L.L.C., offered to purchase at par from Individual Investors (as defined in the Consent of Defendants Banc of America Securities LLC and Banc of America Investment Services, Inc.) certain ARS, and have
substantially completed the purchase of those ARS. The Firms have also agreed to pay a total civil penalty of $50,000,000 that will be distributed among the states and U.S. territories that enter into administrative or civil consent orders related
to ARS.
Multi-State Client Associate Registration Settlement
The Texas State Securities Board (the Board) alleged that in connection with the sale of securities in Texas by certain of
Merrill Lynchs client associates who were not registered in Texas, Merrill Lynch failed to establish a supervisory system reasonably designed to achieve compliance with the Texas Securities Act and Rules and Regulations of the Texas State
Securities Board (the Board Rules) and failed to enforce its established written procedures in violation of §§ 115.10(a) and (b)(1) of the Board Rules, respectively. Without admitting or denying the findings of fact or
conclusions of law, Merrill Lynch entered into a Consent Order with the Board in which it agreed to a reprimand, to cease and desist from engaging in the sale of securities in Texas through unregistered agents, and to comply with certain
undertakings. Merrill Lynch agreed to pay the State of Texas $1,568,985.00, as part of a total payment, consisting of fines, penalties and any other monetary sanctions, of $26,563,094.50 that will be allocated among the 50 states, the District of
Columbia, Puerto Rico, and the U.S. Virgin Islands. Merrill Lynch also agreed to pay $25,000.00 to the North American Securities Administrators Association (NASAA) as consideration for financial assistance provided by NASAA in connection
with the multi-state investigation.
Muni Derivatives Settlement
As the result of the merger of BAS with and into Merrill Lynch on November 1, 2010, Merrill Lynch assumed the liabilities of BAS in
the following matter: On December 7, 2010, the SEC issued an administrative and cease-and-desist order finding that BAS willfully violated Section 15(c)(1)(A) of the 1934 Act when certain employees participated in improper bidding
practices involving the temporary investment of proceeds of tax-exempt municipal securities in reinvestment products during the period 1998-2002. The order censured BAS, ordered BAS to cease and desist from committing or causing such violations and
future violations, and ordered BAS to pay disgorgement plus prejudgment interest in the amount of $36,096,442.00. BAS consented to the order without admitting or denying the SECs findings.
Prop Trading Settlement
Pursuant to an offer of settlement made by Merrill Lynch, the SEC issued on January 25, 2011 an order finding that between February 2003 and February 2005 Merrill Lynch market makers executing
institutional customer orders for securities sometimes shared information concerning those trades with traders on a Merrill Lynch securities proprietary trading desk. The order found that, at times, Merrill Lynchs securities proprietary
traders used that information to place trades for Merrill Lynch after execution of the institutional customer order.
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The order found that this disclosure and use of institutional customer order information by Merrill Lynchs traders was improper and contrary to Merrill Lynchs confidentiality
representations to its customers. The order also found instances between 2002 and 2007 when Merrill Lynch charged institutional and high net worth customers undisclosed mark-ups and mark-downs on riskless securities principal trades for which
Merrill Lynch had agreed to charge the customer only a commission equivalent fee. The order found that, in doing so, Merrill Lynch acted improperly and contrary to its agreements with its customers. The order also found that from 2002 through 2007
Merrill Lynch failed in many instances to make records of its agreements with institutional customers to guarantee an execution price, which agreements were part of the terms and conditions of the institutional customer orders. The order found that,
as a result of its conduct, Merrill Lynch willfully violated Section 15(c)(1)(A) of the 1934 Act by effecting transactions in securities by means of manipulative, deceptive or other fraudulent devices or contrivances, and willfully violated
Section 15(g) of the 1934 Act by failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information. The order also found that under Section 15(b)(4)(E)
of the 1934 Act, Merrill Lynch failed reasonably to supervise its traders with a view towards preventing them from violating the federal securities laws. The order also found that Merrill Lynch willfully violated Section 17(a) of the 1934 Act
and Rule 17a-3(a)(6) thereunder by failing to record certain terms and conditions of customer orders. Merrill Lynch neither admitted nor denied the findings in the order. The findings in the order are not binding on any person or entity other than
Merrill Lynch. On December 17, 2010, Merrill Lynch submitted an offer of settlement to the SEC. In the offer of settlement, Merrill Lynch agreed to consent to the entry of the order, without admitting or denying the findings contained therein
(other than those relating to jurisdiction). The order was issued on January 25, 2011. The order (1) required that Merrill Lynch cease and desist from committing or causing any violations and any future violations of Sections 15(c)(1)(A),
15(g) and 17(a) of the 1934 Act and Rule 17a-3(a)(6) thereunder; (2) censured Merrill Lynch pursuant to Section 15(b)(4) of the 1934 Act; and (3) required pursuant to Section 15(b)(4) and Section 21B of the 1934 Act that
Merrill Lynch pay a civil money penalty in the amount of $10 million. The penalty was paid on February 1, 2011.
RBC Capital
Markets LLC (RBC)
RBC is a large broker-dealer subject to many different complex legal and regulatory requirements. As
a result, certain of RBCs regulators may from time to time conduct investigations, initiate enforcement proceedings and/or enter into settlements with RBC with respect to issues raised in various investigations. RBC complies fully with its
regulators in all investigations being conducted and in all settlements it reaches. In addition, RBC is and has been subject to a variety of civil legal claims in various jurisdictions, a variety of settlement agreements and a variety of orders,
awards and judgments made against it by courts and tribunals, both in regard to such claims and investigations. RBC complies fully with all settlements it reaches and all orders, awards and judgments made against it.
RBC has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation including those
described below, arising in connection with its activities as a broker-dealer. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. RBC
is also involved, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding RBCs business, including among other matters, accounting and operational matters, certain of
which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.
RBC contests liability
and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations
and proceedings are in the early stages, RBC cannot predict the loss or range of loss, if any, related to such matters; how or if such matters will be resolved; when they will ultimately be resolved; or what the eventual settlement, fine, penalty or
other relief, if any, might be. Subject to the foregoing, RBC believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial
condition of RBC.
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On June 12, 2012, the State of Illinois Secretary of State Securities Department
consented to entry of a judgment enjoining the firm for violation of the Illinois Securities Law of 1953. RBC undertook to repurchase auction rate securities from certain customers before June 30, 2009. RBC also undertook to use best efforts to
provide, by December 31, 2009, liquidity opportunities for customers ineligible for the buyback. RBC undertook to provide periodic reports to regulator. RBC paid a penalty of $1,400,139.82.
On May 10, 2012, FINRA commenced and settled an administrative proceeding against RBC for violations of FINRA Rules 1122 and 2010
and NASD Rules 2110 and 3010 for failing to establish, maintain and enforce written supervisory procedures reasonably designed to achieve compliance with applicable rules concerning short-term transactions in closed end funds. RBC paid a fine of
$200,000.
On May 2, 2012, the Massachusetts Securities Division entered a consent order settling an administrative
complaint against RBC, which alleged that RBC recommended unsuitable products to its brokerage and advisory clients and failed to supervise its registered representatives sales of inverse and leveraged ETFs in violation of
Section 204(a)(2) of the Massachusetts Uniform Securities Act (MUSA). Without admitting or denying the allegations of fact, RBC consented to permanently cease and desist from violations of MUSA, pay restitution of $2.9 million to
the investors who purchased the inverse and leveraged ETFs and pay a civil monetary penalty of $250,000.
As of April 17,
2012, RBC has been involved in the following recent actions with the SEC. On February 24, 2009, the SEC commenced and settled an administrative proceeding against RBC for willful violations of Section 15B(c)(1) of the 1934 Act and
Municipal Securities Rulemaking Board Rules G-17, G-20 and G-27, related to municipal expenses in connection with ratings agency trips. The firm was censured and paid a civil monetary penalty of $125,000.
On June 9, 2009, the SEC commenced and settled a civil action against RBC for willful violations of Section 15(c) of the 1934
Act, in connection with auction rate securities (ARS). The firm agreed to repurchase ARS owned by certain retail customers and to use best efforts to provide ineligible customers opportunities to liquidate ARS, and other ancillary relief.
On September 27, 2011, the SEC commenced and settled an administrative proceeding against RBC for willful violations of
Sections 17(a)(2) and 17(a)(3) of the 1933 Act for negligently selling the collateralized debt obligations to five Wisconsin school districts despite concerns about the suitability of the product. The firm agreed to pay disgorgement of $6.6 million,
prejudgment interest of $1.8 million, and a civil monetary penalty of $22 million.
Please see RBCs Form BD for more
details.
Margin Levels Expected to be Held at the FCMs
The following is based on how the VIX Funds have been managed as of the date of this Prospectus. While the portfolio composition may vary
over time, it is not expected that the Matching Fund will ever have futures exposure greater than 1x the Funds assets, or that the Ultra Fund will ever have futures exposure greater than two times (2x) the Funds assets. Thus the
maximum margin held at an FCM would not exceed two times the margin requirement for the Ultra Fund. The margin levels described below are based upon current exchange requirements for non-hedger accounts. It is possible that the VIX Funds FCMs
will require margins greater than the levels set by the relevant exchange and it is also possible that the Funds may qualify for the lower margin levels available to hedge accounts. However, because there is no certainty as to these probabilities,
the estimates are made with the assumption that the applicable margin levels for the VIX Funds are the current exchange margin levels for non-hedger accounts. The expected amount is listed first and the maximum amount is listed second. These amounts
are based on current margin requirements and current futures levels. They will fluctuate with changes to either factor.
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As of May 31, 2013, ProShares VIX Short-Term Futures ETF had futures contracts with
notional amounts equal to approximately 100% of Fund assets. As of May 31, 2013, the minimum margin requirement as a percentage of futures notional was approximately 28%. Thus, the minimum margin held at FCMs was approximately 28% of Fund
assets for ProShares VIX Short-Term Futures ETF.
As of May 31, 2013, ProShares Ultra VIX Short-Term Futures ETF had
futures contracts with notional amounts equal to approximately 200% of Fund assets. As of May 31, 2013, the minimum margin requirement as a percentage of futures notional was approximately 28%. Thus, the minimum margin held at FCMs was
approximately 56% of Fund assets for ProShares Ultra VIX Short-Term Futures ETF.
The VIX Funds receive the income on any
securities or other property of the Funds transferred to the FCMs to fulfill requirements for margin to be held by the FCMs in respect of commodity interests, and receive a negotiated portion of any income derived by the FCMs in respect of any cash
transferred to the FCMs and held for this purpose.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material U.S. federal (and certain state and local) income tax considerations
associated with the purchase, ownership and disposition of Shares as of the date hereof by U.S. Shareholders (as defined below) and non-U.S. Shareholders (as defined below). Except where noted, this discussion deals only with Shares held as capital
assets by shareholders who acquired Shares by purchase and does not address special situations, such as those of:
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dealers in securities or commodities;
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financial institutions;
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regulated investment companies;
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real estate investment trusts;
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partnerships and persons in their capacity as partners;
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tax-exempt organizations;
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persons holding Shares as a part of a hedging, integrated or conversion transaction or a straddle;
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traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; or
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persons liable for alternative minimum tax.
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Furthermore, the discussion below is based upon the provisions of the Code, the Regulations, and administrative and judicial interpretations thereof, all as of the date hereof, and such authorities may be
repealed, revoked, modified or subject to differing interpretations, possibly on a retroactive basis, so as to result in U.S. federal income tax consequences different from those described below.
A U.S. Shareholder of Shares means a beneficial owner of Shares that is for U.S. federal income tax purposes:
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an individual that is a citizen or resident of the United States;
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a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States, any state thereof or the
District of Columbia;
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an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to
control all substantial decisions of such trust or (2) has a valid election in effect under applicable Regulations to be treated as a U.S. person.
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A non-U.S. Shareholder of Shares means a beneficial owner of Shares that is for U.S. federal income tax purposes:
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an individual that is a nonresident alien;
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If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Shares, the tax treatment of a partner will generally depend upon the status of the
partner and the activities of the partnership. If an investor is a partner of a partnership holding Shares, the Trust urges such investor to consult its own tax adviser.
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No statutory, administrative or judicial authority directly addresses the treatment of
Shares or instruments similar to Shares for U.S. federal income tax purposes. As a result, the Trust cannot assure investors that the IRS or the courts will agree with the tax consequences described herein. A different treatment from that described
below could adversely affect the amount, timing and character of income, gain or loss in respect of an investment in the Shares.
If an investor is considering the purchase of Shares, the Trust urges investors to consult their own tax adviser
concerning the particular U.S. federal income tax consequences to investors of the purchase, ownership and disposition of Shares, as well as any consequences to investors arising under the laws of any other taxing jurisdiction
.
Status of the VIX Funds
Under Section 7704 of the Code, unless certain exceptions apply, a publicly traded partnership is generally treated and taxed as a corporation, and not as a partnership, for U.S. federal income tax
purposes. A partnership is a publicly traded partnership if (1) interests in the partnership are traded on an established securities market or (2) interests in the partnership are readily tradable on a secondary market or the substantial
equivalent thereof. It is expected that initially or in the future each VIX Fund may be treated as a publicly traded partnership. If 90% or more of the income of a publicly traded partnership during each taxable year consists of qualifying
income and the partnership is not required to register under the Investment Company Act, it will be treated as a partnership, and not as an association or publicly traded partnership taxable as a corporation, for U.S. federal income tax
purposes (the qualifying income exception). Qualifying income includes dividends, interest, capital gains from the sale or other disposition of stocks and debt instruments and, in the case of a partnership a principal activity of which
is the buying and selling of commodities or certain positions with respect to commodities, income and gains derived from certain swap agreements or regulated futures contracts with respect to commodities. Each VIX Fund anticipates that at least 90%
of its gross income for each taxable year will constitute qualifying income within the meaning of Section 7704(d) of the Code.
Sidley Austin LLP has acted as counsel to the Trust in connection with this offering. Under current law and assuming full compliance with the terms of the Trust Agreement (and other relevant documents)
and based on factual representations made by each VIX Fund, in the opinion of Sidley Austin LLP, each VIX Fund will be classified as a partnership for U.S. federal income tax purposes. The factual representations upon which Sidley Austin LLP has
relied are: (1) the VIX Funds have not elected and will not elect to be treated as a corporation for U.S. federal income tax purposes; and (2) for each taxable year, 90% or more of a VIX Funds gross income will be qualifying income.
Shareholders should be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinion. Each VIX Funds sponsor will use its best efforts to
cause the operation of a VIX Fund in such manner as is necessary for a VIX Fund to continue to meet the qualifying income exception.
While it is expected that each VIX Fund will operate so that it will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership
taxable as a corporation, given the highly complex nature of the rules governing partnerships, the ongoing importance of factual determinations, the lack of direct guidance with respect to the application of tax laws to the activities the VIX Funds
are undertaking and the possibility of future changes in its circumstances, it is possible that a VIX Fund will not so qualify for any particular year. Sidley Austin LLP has no obligation to advise a VIX Fund or its shareholders of any subsequent
change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. A VIX Funds taxation as a partnership will depend on such VIX Funds ability to meet, on a continuing basis, through actual operating
results, the qualifying income exception, the compliance of which will not be reviewed by Sidley Austin LLP. Accordingly, no assurance can be given that the actual results of a VIX Funds operations for any taxable year will satisfy the
qualifying income exception.
If for any reason a VIX Fund becomes taxable as a corporation for U.S. federal income tax
purposes, such VIX Funds items of income and deduction would not pass through to the VIX Funds shareholders and shareholders would be treated for U.S. federal income tax purposes as stockholders in a corporation. The VIX Fund would be
required to pay income tax at corporate rates on its net income. Distributions by the VIX Fund to
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the shareholders would constitute dividend income taxable to such shareholders, to the extent of the VIX Funds earnings and profits, and the payment of these distributions would not be
deductible by the VIX Fund. These consequences would have a material adverse effect on the VIX Fund, the VIX Funds shareholders and the value of the Shares.
If at the end of any taxable year a VIX Fund fails to meet the qualifying income exception, the VIX Fund may still qualify as a partnership if the VIX Fund is entitled to relief under the Code for an
inadvertent termination of partnership status. This relief will be available if (1) the failure is cured within a reasonable time after discovery, (2) the failure is determined by the IRS to be inadvertent, and (3) the VIX Fund agrees
to make such adjustments or to pay such amounts as are determined by the IRS. It is not possible to state whether a VIX Fund would be entitled to this relief in any or all circumstances. It also is not clear under the Code whether this relief is
available for the VIX Funds first taxable year as a publicly traded partnership. If this relief provision is not applicable to a particular set of circumstances involving a VIX Fund, it will not qualify as a partnership for U.S. federal income
tax purposes. Even if this relief provision applies and a VIX Fund retains its partnership qualification, the VIX Fund or its shareholders (during the failure period) will be required to pay such amounts as determined by the IRS.
The remainder of this discussion assumes that each VIX Fund will qualify to be taxed as a partnership for U.S. federal income tax
purposes.
U.S. Shareholders
Treatment of VIX Fund Income
A partnership does not incur U.S.
federal income tax liability. Instead, each partner of a partnership is required to take into account its share of items of income, gain, loss, deduction and other items of the partnership. Accordingly, each shareholder in a VIX Fund is required to
include in income its allocable share of a VIX Funds income, gain, loss, deduction and other items for a VIX Funds taxable year ending with or within its taxable year. In computing a partners U.S. federal income tax liability, such
items must be included, regardless of whether cash distributions are made by the partnership. Thus, shareholders in a VIX Fund may be required to take into account taxable income without a corresponding current receipt of cash if a VIX Fund
generates taxable income but does not make cash distributions in an amount equal to, or if the shareholder is not able to deduct, in whole or in part, such shareholders allocable share of a VIX Funds expenses or capital losses. Each VIX
Funds taxable year ends on December 31 unless otherwise required by law. Each VIX Fund uses the accrual method of accounting.
Shareholders must take into account their share of ordinary income realized by the respective VIX Funds investments, including from accruals of interest on the U.S. Treasury securities or other cash
and cash equivalents held in a VIX Funds portfolio. Each VIX Fund may hold U.S. Treasury securities or other debt instruments with acquisition discount or original issue discount, in which case shareholders in such VIX
Fund are required to include accrued amounts in taxable income on a current basis even though receipt of those amounts may occur in a subsequent year. Each VIX Fund may also acquire U.S. Treasury securities with market discount. Upon
disposition of such obligations, gain would generally be required to be treated as interest income to the extent of the market discount, and shareholders in such VIX Fund would be required to include as ordinary income their share of such market
discount that accrued during the period the obligations were held by such VIX Fund. Income or loss from transactions involving certain derivative instruments, such as periodic and certain non-periodic payments in swap transactions, will also
generally constitute ordinary income or loss and may result in recognition of taxable income to a U.S. Shareholder on a current basis even though receipt of those amounts may occur in a subsequent year.
The character and timing of income that a VIX Fund earns from the positions in its investment strategy depends on the particular U.S.
federal income tax treatment of each such position. The U.S. federal income tax treatment of certain positions is not always clear, and the IRS and Congress sometimes take steps which change
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the manner in which certain positions are taxed. For example, the IRS has issued guidance indicating that a position that certain taxpayers were previously accounting for as prepaid forward
contracts for U.S. federal income tax purposes should, instead, be accounted for under the U.S. federal income tax rules for non-dollar denominated debt instruments. The IRS has also released a Notice seeking comments from practitioners about the
application of U.S. federal income tax rules to certain derivative positions, including derivative positions in commodities. The Notice asks for comments about, among other questions, when investors in these positions should have income, the
character of income and gain or loss from these positions and whether the U.S. federal constructive ownership rules should apply to these positions. It is not possible to predict what changes, if any, will be adopted or when any such
changes would take effect. However, any such changes could affect the amount, timing and character of income, gain and loss in respect of a VIX Funds investments, possibly with retroactive effect. As the VIX Funds pass-through their items of
income, gain and loss to Shareholders, any change in the manner in which a VIX Fund accounts for these items could have an adverse impact on the shareholders of that VIX Fund.
The Code generally applies a mark-to-market system of taxing unrealized gains and losses on, and otherwise provides for special rules of taxation with respect to, Section 1256 Contracts.
A Section 1256 Contract includes certain regulated futures contracts, certain non-equity options and certain non-U.S. currency forward contracts. The Sponsor expects substantially all of its futures contracts and foreign currency forward
contracts to qualify as Section 1256 Contracts. Swap agreements are generally not Section 1256 Contracts. Section 1256 Contracts held by the VIX Funds at the end of a taxable year of the VIX Funds will be treated for U.S. federal
income tax purposes as if they were sold by the VIX Funds at their fair market value on the last business day of the taxable year. The net gain or loss, if any, resulting from these deemed sales (known as marking-to-market), together
with any gain or loss resulting from any actual sales of Section 1256 Contracts (or other termination of a VIX Funds obligations under such contracts), must be taken into account by a VIX Fund in computing its taxable income for the year.
If a Section 1256 Contract held by a VIX Fund at the end of a taxable year is sold in the following year, the amount of any gain or loss realized on the sale will be adjusted to reflect the gain or loss previously taken into account under the
mark-to-market rules.
Capital gains and losses from Section 1256 Contracts generally are characterized as short-term
capital gains or losses to the extent of 40% of the gains or losses and as long-term capital gains or losses to the extent of 60% of the gains or losses. Shareholders of a VIX Fund will generally take into account their
pro rata
share of the
long-term capital gains and losses and short-term capital gains and losses from Section 1256 Contracts held by a VIX Fund. If a noncorporate taxpayer incurs a net capital loss for a year, the portion of the loss, if any, which consists of a net
loss on Section 1256 Contracts may, at the election of the taxpayer, be carried back three years. A loss carried back to a year by a noncorporate taxpayer may be deducted only to the extent (1) the loss does not exceed the net gain on
Section 1256 Contracts for the year and (2) the allowance of the carryback does not increase or produce a net operating loss for the year. Due to the VIX Funds investment strategy, it is also likely that a significant portion of any
capital gain or loss realized by the VIX Funds with respect to non-Section 1256 Contracts will be short-term.
Allocation of the VIX
Funds Profits and Losses
For U.S. federal income tax purposes, a shareholders distributive share of a VIX
Funds income, gain, loss, deduction and other items are determined by the Trust Agreement, unless an allocation under the agreement does not have substantial economic effect, in which case the allocations will be determined in
accordance with the partners interests in the partnership. Subject to the discussions below under Monthly Allocation and Revaluation Conventions and Section 754 Election, the allocations pursuant to the
Trust Agreement should be considered to have substantial economic effect or deemed to be made in accordance with the partners interests in the partnership.
If the allocations provided by the Trust Agreement were successfully challenged by the IRS, the amount of income or loss allocated to shareholders for U.S. federal income tax purposes under the agreement
could be increased or reduced, or the character of the income or loss could be modified.
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As described in more detail below, the U.S. tax rules that apply to partnerships are complex
and their application is not always clear. Additionally, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded partnerships. Each VIX Fund will apply certain assumptions and conventions intended to
comply with the intent of the rules and to report income, gain, deduction, loss and credit to shareholders in a manner that reflects the economic gains and losses, but these assumptions and conventions may not comply with all aspects of the
applicable Regulations. It is possible, therefore, that the IRS will successfully assert that assumptions made and/or conventions used do not satisfy the technical requirements of the Code or the Regulations and will require that tax items be
adjusted or reallocated in a manner that could adversely impact an investor.
Monthly Allocation and Revaluation Conventions
In general, each VIX Funds taxable income and losses are determined monthly and are apportioned among the
shareholders of a VIX Fund in proportion to the number of Shares treated as owned by each of them as of the close of the last trading day of the preceding month;
provided
,
however
, such items for the period beginning on the closing
date and ending on the last day of the month in which the option closing date or the expiration of the over-allotment option occurs shall be allocated to the shareholders as of the opening of the NYSE Arca on the first business day of the next
succeeding month. By investing in Shares, a U.S. Shareholder agrees that, in the absence of an administrative determination or judicial ruling to the contrary, it will report income and loss under the monthly allocation and revaluation conventions
described below, except for the period beginning on the closing date and ending on the last day of the month in which the option closing date or the expiration of the over-allotment option occurs, in which case the allocation shall take place as
described above.
Under the monthly allocation convention, whoever is treated for U.S. federal income tax purposes as holding
Shares as of the close of the last trading day of the preceding month will be treated as continuing to hold the Shares until immediately before the close of the last trading day of the following month. For the initial month during which a VIX Fund
becomes operational, the shareholders at the close of trading at month-end will also receive that months allocation. As a result, a holder who has disposed of Shares prior to the close of the last trading day of a month may be allocated
income, gain, loss and deduction realized after the date of transfer.
The Code generally requires that items of partnership
income and deductions be allocated between transferors and transferees of partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is
completed without regard to a VIX Funds monthly convention for allocating income and deductions. If this were to occur, a VIX Funds allocation method might be deemed to violate that requirement.
In addition, for any month in which a creation or redemption of Shares takes place, a VIX Fund generally credits or debits, respectively,
the book capital accounts of the holders of existing Shares with any unrealized gain or loss in that VIX Funds assets. This results in the allocation of items of a VIX Funds income, gain, loss, deduction and credit to
existing holders of Shares to account for the difference between the tax basis and fair market value of property owned by such VIX Fund at the time new Shares are issued or old Shares are redeemed, or the reverse section 704(c) allocations. The
intended effect of these allocations is to allocate any built-in gain or loss in a VIX Funds assets at the time of a creation or redemption of Shares to the investors that economically have earned such gain or loss.
As with the other allocations described above, each VIX Fund generally will use a monthly convention for purposes of the reverse section
704(c) allocations. More specifically, each VIX Fund generally credits or debits, respectively, the book capital accounts of the holders of existing Shares with any unrealized gain or loss in a VIX Funds assets based on a
calculation utilizing the creation/redemption price of a VIX Funds Shares during the month in which the creation or redemption transaction takes place, rather than the fair market value of its assets at the time of such creation or redemption,
or the revaluation convention. As a result, it is possible that, for U.S. federal income tax purposes, (1) a purchaser of newly issued Shares will be allocated some or all of the
- 73 -
unrealized gain in a VIX Funds assets at the time it acquires the Shares or (2) a purchase of newly issued Shares will not be allocated its entire share in the loss in a VIX
Funds assets accruing after the time of such acquisition. Furthermore, the applicable Regulations generally require that the book capital accounts will be adjusted based on the fair market value of partnership property on the date
of adjustment and do not explicitly allow the adoption of a monthly revaluation convention. The Sponsor, in an attempt to eliminate book-tax disparities, allocates items of income, gain, or loss for U.S. federal income tax purposes among the Members
under the principles of the remedial method of Section 1.704-3(d) of the Regulations.
The Code and applicable
Regulations generally require that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis, and that adjustments to book capital accounts be made based on the
fair market value of partnership property on the date of adjustment. The Code and Regulations do not contemplate monthly allocation or revaluation conventions.
If the IRS does not accept a VIX Funds monthly allocation or revaluation convention, the IRS may contend that taxable income or losses of the VIX Funds must be reallocated among the shareholders. If
such a contention were sustained, the holders respective tax liabilities would be adjusted to the possible detriment of certain holders. The Sponsor is authorized to revise the VIX Funds allocation and revaluation methods in order to
comply with applicable law or to allocate items of partnership income and deductions in a manner that reflects more accurately the shareholders interests in the VIX Funds.
Section 754 Election
Each VIX Fund has made or intends to make
the election permitted by Section 754 of the Code. Such an election, once made, is irrevocable without the consent of the IRS. The making of such election by a VIX Fund generally has the effect of requiring a purchaser of Shares in that VIX
Fund to adjust, utilizing the lowest closing price during the month, its proportionate share of the basis in that VIX Funds assets, or the inside basis, pursuant to Section 743(b) of the Code to fair market value (as reflected in the
purchase price for the purchasers Shares), as if it had acquired a direct interest in that VIX Funds assets. The Section 743(b) adjustment is attributed solely to a purchaser of Shares and is not added to the basis of a VIX
Funds assets associated with all of the other shareholders. Depending on the relationship between a holders purchase price for Shares and its unadjusted share of a VIX Funds inside basis at the time of the purchase, the
Section 754 election may be either advantageous or disadvantageous to the holder as compared to the amount of gain or loss a holder would be allocated absent the Section 754 election.
The calculations under Section 754 of the Code are complex, and there is little legal authority concerning the mechanics of the
calculations, particularly in the context of publicly traded partnerships. Therefore, in making the election under Section 754 of the Code, a VIX Fund applies certain conventions in determining and allocating the Section 743 basis
adjustments to help reduce the complexity of those calculations and the resulting administrative costs to a VIX Fund. It is possible that the IRS will successfully assert that some or all of such conventions utilized by a VIX Fund do not satisfy the
technical requirements of the Code or the Regulations and, thus, will require different basis adjustments to be made.
In
order to make the basis adjustments permitted by Section 754, each VIX Fund is required to obtain information regarding each holders secondary market transactions in Shares, as well as creations and redemptions of Shares. Each VIX Fund
seeks such information from the record holders of Shares, and, by purchasing Shares, each beneficial owner of Shares will be deemed to have consented to the provision of such information by the record owner of such beneficial owners Shares.
Notwithstanding the foregoing, however, there can be no guarantee that a VIX Fund will be able to obtain such information from record owners or other sources, or that the basis adjustments that a VIX Fund makes based on the information it is able to
obtain will be effective in eliminating disparity between a holders outside basis in its share of the VIX Fund interests and its share of inside basis.
- 74 -
Constructive Termination
A VIX Fund will be considered to have terminated for tax purposes if there is a sale or exchange of 50% or more of the total Shares in
that VIX Fund within a twelve-month period. A constructive termination results in the closing of a VIX Funds taxable year for all holders of Shares in that VIX Fund. In the case of a holder of Shares reporting on a taxable year other than the
taxable year used by a VIX Fund (which is a fiscal year ending December 31), the early closing of a VIX Funds taxable year may result in more than twelve months of its taxable income or loss being includable in such holders taxable
income for the year of termination. A VIX Fund would be required to make new tax elections after a termination, including a new election under Section 754. A termination could also result in penalties if a VIX Fund were unable to determine that
the termination had occurred.
Treatment of Distributions
Distributions of cash by a partnership are generally not taxable to the distributee to the extent the amount of cash does not exceed the
distributees tax basis in its partnership interest. Thus, any cash distributions made by a VIX Fund will be taxable to a shareholder only to the extent such distributions exceed the shareholders tax basis in the partnership interests it
is treated as owning. (See U.S. ShareholdersTax Basis in Shares below.) Any cash distributions in excess of a shareholders tax basis generally will be considered to be gain from the sale or exchange of the Shares. See
U.S. ShareholdersDisposition of Shares below. The VIX Funds do not currently expect to make any cash distributions.
Creation and Redemption of Creation Units
Shareholders, other than Authorized Participants (or holders for which an Authorized Participant is acting), generally will not recognize gain or loss as a result of an Authorized Participants
creation or redemption of a Creation Unit. If a VIX Fund disposes of assets in connection with the redemption of a Creation Unit of Shares, however, the disposition may give rise to gain or loss that will be allocated in part to investors. An
Authorized Participants creation or redemption of a Creation Unit may also affect an investors share of a VIX Funds tax basis in its assets, which could affect the amount of gain or loss allocated to an investor on the sale or
disposition of portfolio assets by a VIX Fund.
Disposition of Shares
If a U.S. Shareholder transfers Shares of a VIX Fund, in a sale or other taxable disposition, the U.S. Shareholder will generally be
required to recognize gain or loss measured by the difference between the amount realized on the sale and the U.S. Shareholders adjusted tax basis in the Shares. The amount realized will include the U.S. Shareholders share of a VIX
Funds liabilities, as well as any proceeds from the sale. The gain or loss recognized will generally be taxable as capital gain or loss.
Capital gain of non-corporate U.S. Shareholders is eligible to be taxed at reduced rates when the Shares are held for more than one year. The maximum rate is currently 20%. Capital gain of corporate U.S.
Shareholders is taxed at the same rate as ordinary income. Any capital loss recognized by a U.S. Shareholder on a sale of Shares will generally be deductible only against capital gains, except that a non-corporate U.S. Shareholder may generally also
offset up to $3,000 per year of ordinary income.
Medicare Tax on Investment Income
Certain U.S. shareholders that are individuals, estates or trusts must pay an additional 3.8% tax on their net investment
income. U.S. Shareholders should consult their own tax advisors regarding the effect, if any, of this tax on their investment in the VIX Funds.
- 75 -
Tax Basis in Shares
A U.S. Shareholders initial tax basis in the partnership interests it is treated as holding will equal the sum of (1) the amount of cash paid by such U.S. Shareholder for its Shares and
(2) such U.S. Shareholders share of a VIX Funds liabilities. A U.S. Shareholders tax basis in the Shares will be increased by (1) the U.S. Shareholders share of a VIX Funds taxable income, including capital
gain, (2) the U.S. Shareholders share of a VIX Funds income, if any, that is exempt from tax and (3) any increase in the U.S. Shareholders share of a VIX Funds liabilities. A U.S. Shareholders tax basis in
Shares will be decreased (but not below zero) by (1) the amount of any cash distributed (or deemed distributed) to the U.S. Shareholder, (2) the U.S. Shareholders share of a VIX Funds losses and deductions, (3) the U.S.
Shareholders share of a VIX Funds expenditures that is neither deductible nor properly chargeable to its capital account and (4) any decrease in the U.S. Shareholders share of a VIX Funds liabilities.
Limitations on Deductibility of Certain Losses and Expenses
The deductibility for U.S. federal income tax purposes of a U.S. Shareholders share of losses and expenses of a VIX Fund is subject to certain limitations, including, but not limited to, rules
providing that: (1) a U.S. Shareholder may not deduct a VIX Funds losses that are allocated to it in excess of its adjusted tax basis in its Shares; (2) individuals and personal holding companies may not deduct the losses allocable
to a particular activity in excess of the amount that they are considered to have at risk with respect to the activity; (3) the ability of individuals to take certain itemized deductions may be limited by the
alternative minimum tax; and (4) a noncorporate U.S. Shareholder may deduct its share of expenses of a VIX Fund only to the extent that such share, together with such noncorporate U.S. Shareholders other miscellaneous itemized
deductions, exceeds 2% of such noncorporate U.S. Shareholders adjusted gross income. In addition, in the case of individuals whose U.S. federal adjusted gross income exceeds a certain inflation-adjusted threshold, the aggregate itemized
deductions allowable for the year will be reduced by the lesser of (i) 3% of the excess of U.S. federal adjusted gross income over the applicable threshold; or (ii) 80% of the aggregate itemized deductions otherwise allowable for the
taxable year (determined after giving effect to the 2% limitation described above and any other applicable limitations). It is anticipated that Management Fees that each VIX Fund will pay will constitute miscellaneous itemized deductions. To the
extent that a loss or expense that cannot be deducted currently is allocated to a U.S. Shareholder, such U.S. Shareholder may be required to report taxable income in excess of its economic income or cash distributions on the Shares. Prospective
shareholders are urged to consult their own tax advisors with regard to these and other limitations on the ability to deduct losses or expenses with respect to an investment in a VIX Fund.
Under Section 709(b) of the Code, amounts paid or incurred to organize a partnership may, at the election of the partnership, be
treated as deferred expenses, which are allowed as a deduction ratably over a period of not less than 180 months. Each VIX Fund has elected, or is expected to elect, to treat such expenses as ratably deductable over 180 months, beginning with the
month the VIX Fund is considered to have started its investment activities for federal tax purposes. A non-corporate U.S. Shareholders allocable share of such organizational expenses would constitute miscellaneous itemized deductions.
Expenditures in connection with the issuance and marketing of Shares (so-called syndication fees) are not eligible for the 180-month amortization provision and are not deductible.
Transferor/Transferee Allocations
In general, a VIX Funds
taxable income and losses are determined monthly and are apportioned among a VIX Funds shareholders in proportion to the number of Shares owned by each of them as of the close of the last trading day of the preceding month;
provided
,
however
, such items for the period beginning on the closing date and ending on the last day of the month in which the option closing date or the expiration of the over-allotment option occurs shall be allocated to the shareholders as of the
opening of the NYSE Arca on the first business day of the next succeeding month. With respect to any Share that was not treated as outstanding as of the close of the last trading day of the preceding month, the first person that is treated as
holding such Share (other than an
- 76 -
underwriter or other person holding in a similar capacity and except with respect to the period beginning on the closing date and ending on the last day of the month in which the option closing
date or the expiration of the over-allotment option occurs) for U.S. federal income tax purposes will be treated as holding such Share for this purpose as of the close of the last trading day of the preceding month. As a result, a shareholder
transferring its Shares may be allocated income, gain, loss and deduction realized after the date of transfer.
Section 706 of the Code generally requires that items of partnership income and deductions be allocated between transferors and
transferees of partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to a VIX Funds convention for
allocating income and deductions. In that event, a VIX Funds allocation method might be considered a monthly convention that does not literally comply with that requirement.
If the IRS treats transfers of Shares as occurring throughout each month and a monthly convention is not allowed by the Regulations (or
only applies to transfers of less than all of a shareholders Shares), or if the IRS otherwise does not accept a VIX Funds convention, the IRS may contend that taxable income or losses of a VIX Fund must be reallocated among the
shareholders. If such a contention were sustained, the shareholders respective tax liabilities would be adjusted to the possible detriment of certain shareholders. Each VIX Funds Sponsor is authorized to revise a VIX Funds methods
of allocation between transferors and transferees (as well as among shareholders whose interests otherwise vary during a taxable period).
Tax Reporting by each VIX Fund
Information returns will be filed with the IRS as required with respect to income, gain, loss, deduction and other items derived from Shares of each VIX Fund. Each VIX Fund will file a partnership return
with the IRS and a Schedule K-1 to the shareholders.
Treatment of Securities Lending Transactions Involving Shares
A shareholder whose Shares are loaned to a short seller to cover a short sale of Shares may be considered as having disposed
of those Shares. If so, such shareholder would no longer be a beneficial owner of a
pro rata
portion of the partnership interests with respect to those Shares during the period of the loan and may recognize gain or loss from the disposition.
As a result, during the period of the loan, (1) any of the relevant VIX Funds income, gain, loss, deduction or other items with respect to those Shares would not be reported by the shareholder, and (2) any cash distributions received
by the shareholder as to those Shares could be fully taxable, likely as ordinary income. Accordingly, shareholders who desire to avoid the risk of income recognition from a loan of their Shares to a short seller are urged to modify any applicable
brokerage account agreements to prohibit their brokers from borrowing their Shares.
Audits and Adjustments to Tax Liability
Under the Code, adjustments in tax liability with respect to a VIX Funds items generally will be made at the VIX
Fund level in a partnership proceeding rather than in separate proceedings with each shareholder. Pursuant to the Trust Agreement, the Sponsor will represent each VIX Fund as such VIX Funds Tax Matters Partner during any audit and
in any dispute with the IRS. Each shareholder will be informed of the commencement of an audit of a VIX Fund. In general, the Tax Matters Partner may enter into a settlement agreement with the IRS on behalf of, and that is binding upon, the
shareholders.
Adjustments resulting from an IRS audit may require each shareholder to adjust a prior years liability,
and possibly may result in an audit of its return. Any audit of a shareholders return could result in adjustments not related to a VIX Funds returns as well as those related to the VIX Funds returns.
The Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against shareholders for items in a VIX
Funds returns. The Tax Matters Partner may bind a shareholder with less than a
- 77 -
1% profits interest in a VIX Fund to a settlement with the IRS unless that shareholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax
Matters Partner may seek judicial review, by which all the shareholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any shareholder
having at least a 1% interest in profits or by any group of shareholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward, and each shareholder with an interest in the outcome
may participate.
Foreign Tax Credits
Subject to generally applicable limitations, U.S. Shareholders will be able to claim foreign tax credits with respect to certain foreign income taxes paid or incurred by a VIX Fund, withheld on payments
made to the Trust or paid by the Trust on behalf of VIX Fund shareholders (if any of such foreign income taxes are so paid, incurred or withheld). U.S. Shareholders must include in their gross income, for U.S. federal income tax purposes, both their
share of a VIX Funds items of income and gain and also their share of the amount which is deemed to be the shareholders portion of foreign income taxes paid with respect to, or withheld from interest or other income derived by, a VIX
Fund. U.S. Shareholders may then subtract from their U.S. federal income tax the amount of such taxes withheld, or else treat such foreign taxes as deductions from gross income; however, as in the case of investors receiving income directly from
foreign sources, the tax credit or deduction described above is subject to certain limitations. Even if the shareholder is unable to claim a credit, he or she must include all amounts described above in income. U.S. Shareholders are urged to consult
their tax advisers regarding this election and its consequences to them.
Tax Shelter Disclosure Rules
There are circumstances under which certain transactions must be disclosed to the IRS in a disclosure statement attached to a
taxpayers U.S. federal income tax return. (A copy of such statement must also be sent to the IRS Office of Tax Shelter Analysis.) In addition, the Code imposes a requirement on certain material advisers to maintain a list of
persons participating in such transactions, which list must be furnished to the IRS upon written request. These provisions can apply to transactions not conventionally considered to involve abusive tax planning. Consequently, it is possible that
such disclosure could be required by a VIX Fund or the shareholders (1) if a shareholder incurs a loss (in each case, in excess of a threshold computed without regard to offsetting gains or other income or limitations) from the disposition
(including by way of withdrawal) of Shares, or (2) possibly in other circumstances. Furthermore, a VIX Funds material advisers could be required to maintain a list of persons investing in that VIX Fund pursuant to the Code. While the tax
shelter disclosure rules generally do not apply to a loss recognized on the disposition of an asset in which the taxpayer has a qualifying basis (generally a basis equal to the amount of cash paid by the taxpayer for such asset), such rules will
apply to a taxpayer recognizing a loss with respect to interests in a pass-through entity (such as the Shares) even if its basis in such interests is equal to the amount of cash it paid. In addition, under recently enacted legislation, significant
penalties may be imposed in connection with a failure to comply with these reporting requirements. U.S. Shareholders are urged to consult their tax advisers regarding the tax shelter disclosure rules and their possible application to them.
U.S. Shareholders should consult their own tax advisers regarding any tax reporting or filing obligations they may have as a
result of their acquisition, ownership or disposition of Shares.
Non-U.S. Shareholders
Except as described below, each VIX Fund anticipates that a non-U.S. Shareholder will not be subject to U.S. federal income tax on such
shareholders distributive share of a VIX Funds income,
provided
that such income is not considered to be income of the shareholder that is effectively connected with the conduct of a trade or business within the United States. In
the case of an individual non-U.S. Shareholder, such shareholder will be
- 78 -
subject to U.S. federal income tax on gains on the sale of Shares in a VIX Funds or such shareholders distributive share of gains if such shareholder is present in the United States
for 183 days or more during a taxable year and certain other conditions are met.
If the income from a VIX Fund is
effectively connected with a U.S. trade or business carried on by a non-U.S. Shareholder (and, if certain income tax treaties apply, is attributable to a U.S. permanent establishment), then such shareholders share of any income and
any gains realized upon the sale or exchange of Shares will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens and residents and domestic corporations. Non-U.S. Shareholders that are corporations may also be
subject to a 30% U.S. branch profits tax (or lower treaty rate, if applicable) on their effectively connected earnings and profits that are not timely reinvested in a U.S. trade or business.
To the extent any interest income allocated to a non-U.S. Shareholder is considered portfolio interest, generally neither the
allocation of such interest income to the non-U.S. Shareholder nor a subsequent distribution of such interest income to the non-U.S. Shareholder will be subject to withholding,
provided
that the non-U.S. Shareholder is not otherwise engaged
in a trade or business in the United States and provides the relevant VIX Fund with a timely and properly completed and executed IRS Form W-8BEN or other applicable form. In general, portfolio interest is interest paid on debt
obligations issued in registered form, unless the recipient owns 10% or more of the voting power of the issuer.
Non-U.S. Shareholders that are individuals will be subject to U.S. federal estate tax on the value of U.S. situs property owned at the
time of their death (unless a statutory exemption or tax treaty exemption applies). It is unclear whether partnership interests such as the Shares will be considered U.S. situs property. Accordingly, non-U.S. Shareholders may be subject to U.S.
federal estate tax on all or part of the value of the Shares owned at the time of their death.
Non-U.S. Shareholders are
advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Shares.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (FATCA) generally impose a new reporting and 30% withholding tax regime with respect to certain
items of U.S. source income (including dividends and interest) and gross proceeds from the sale or other disposal of property that can produce U.S. source interest or dividends (Withholdable Payments). As a general matter, the new rules
are designed to require U.S. persons direct and indirect ownership of non-U.S. accounts and non-U.S. entities to be reported to the IRS. The 30% withholding tax regime applies if there is a failure to provide required information regarding
U.S. ownership. The new withholding rules generally apply to Withholdable Payments (other than gross proceeds of the type described above) made after December 31, 2013 and payments of gross proceeds of the type described above with respect to a
sale or disposition occurring after December 31, 2016.
The new rules may subject a non-U.S. Shareholders share of
Withholdable Payments received by a VIX Fund to 30% withholding tax unless such shareholder provides information, representations and waivers of non-U.S. law as may be required to comply with the provisions of the new rules, including information
regarding certain U.S. direct and indirect owners of such non-U.S. Shareholder. A non-U.S. Shareholder that is treated as a foreign financial institution will generally be subject to withholding unless it agrees to report certain
information to the IRS regarding its U.S. accountholders and those of its affiliates.
Although the application of the new
withholding rules to a sale or other disposal of an interest in a partnership is unclear, it is possible that the gross proceeds of the sale or other disposal of an interest in a VIX Fund will be subject to tax under the new withholding rules if
such proceeds are treated as an indirect disposal of the non-U.S. Shareholders interest in assets that can produce U.S. source interest or dividends, unless the selling non-U.S. Shareholder provides appropriate reporting information.
Prospective shareholders should consult their own advisors regarding the requirements under FATCA with respect to their own situation.
- 79 -
Regulated Investment Companies (RICs)
The treatment of a RICs investment in a VIX Fund will depend, in part, on whether a VIX Fund is classified as a qualified publicly
traded partnership (PTP) for purposes of the RIC rules. RICs are only allowed to invest up to 25% of their assets in qualified PTPs and to treat net income derived from such investments as qualifying income for purposes of certain rules
relevant to determining whether an entity qualifies as a RIC. Similarly, interests in a qualified PTP are treated as issued by such PTP and a RIC is not required to look through to the underlying partnership assets when testing compliance with
certain asset diversification tests applicable to determining whether an entity qualified as a RIC. On the other hand, an investment by a RIC in a publicly traded partnership that is not a qualified PTP is not counted against the 25% limit on a
RICs investments in qualified PTPs and the RIC is treated as owning its proportionate share of the partnerships assets and earning its proportionate share of the partnerships income for purposes of the income and asset tests
relevant to determining whether an entity qualifies as a RIC.
It is generally expected that the VIX Funds will not be
qualified PTPs. Prospective RIC investors should consult a tax adviser regarding the treatment of an investment in a VIX Fund under current tax rules and in light of their particular circumstances.
Tax-Exempt Organizations
An organization that is otherwise exempt from U.S. federal income tax is nonetheless subject to taxation with respect to its unrelated business taxable income, or UBTI, to the extent that its
UBTI from all sources exceeds $1,000 in any taxable year. Except as noted below with respect to certain categories of exempt income, UBTI generally includes income or gain derived (either directly or through a partnership) from a trade or business,
the conduct of which is substantially unrelated to the exercise or performance of the organizations exempt purpose or function.
UBTI generally does not include passive investment income, such as dividends, interest and capital gains, whether realized by the organization directly or indirectly through a partnership (such as the VIX
Funds) in which it is a partner. This type of income is exempt, subject to the discussion of unrelated debt-financed income below, even if it is realized from securities-trading activity that constitutes a trade or business.
UBTI includes not only trade or business income or gain as described above, but also unrelated debt-financed income. This
latter type of income generally consists of (1) income derived by an exempt organization (directly or through a partnership) from income producing property with respect to which there is acquisition indebtedness at any time during
the taxable year and (2) gains derived by an exempt organization (directly or through a partnership) from the disposition of property with respect to which there is acquisition indebtedness at any time during the twelve-month period ending with
the date of the disposition. Each VIX Fund does not expect to incur a significant amount of acquisition indebtedness with respect to its assets.
To the extent a VIX Fund recognizes gain from property with respect to which there is acquisition indebtedness, the portion of the gain that will be treated as UBTI will be equal to the amount
of the gain multiplied by a fraction, the numerator of which is the highest amount of the acquisition indebtedness with respect to the property during the twelve-month period ending with the date of their disposition, and the denominator
of which is the average amount of the adjusted basis of the property during the period that such property is held by a VIX Fund during the taxable year. In determining the unrelated debt-financed income of a VIX Fund, an allocable
portion of deductions directly connected with a VIX Funds debt-financed property will be taken into account. In making such a determination, for instance, a portion of losses from debt-financed securities (determined in the manner described
above for evaluating the portion of any gain that would be treated as UBTI) would offset gains treated as UBTI. A charitable remainder trust is subject to a 100% federal excise tax on any UBTI that it earns; in view of the potential for UBTI, the
Shares may not be a suitable investment for a charitable remainder trust.
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Certain State and Local Taxation Matters
Prospective shareholders should consider, in addition to the U.S. federal income tax consequences described above, the potential state and
local tax consequences of investing in the Shares.
State and local laws often differ from U.S. federal income tax laws with
respect to the treatment of specific items of income, gain, loss, deduction and credit. A shareholders distributive share of the taxable income or loss of a VIX Fund generally will be required to be included in determining the
shareholders reportable income for state and local tax purposes in the jurisdiction in which the shareholder is a resident. A VIX Fund may conduct business in one or more jurisdictions that will subject a shareholder to tax (and require a
shareholder to file an income tax return with the jurisdiction with respect to the shareholders share of the income derived from that business). A prospective shareholder should consult its tax adviser with respect to the availability of a
credit for such tax in the jurisdiction in which the shareholder is resident.
Backup Withholding
In certain circumstances, shareholders may be subject to backup withholding on certain payments paid to them if they do not establish that
they are exempt from the backup withholding rules or if they do not furnish their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to an investor may be refunded or credited against an investors U.S. federal income tax liability, if any,
provided
that the required
information is furnished to the IRS.
Shareholders should be aware that certain aspects of the U.S. federal, state and local
income tax treatment regarding the purchase, ownership and disposition of Shares are not clear under existing law. Thus, shareholders are urged to consult their own tax advisers to determine the tax consequences of ownership of the Shares in their
particular circumstances, including the application of U.S. federal, state, local and foreign tax laws.
- 81 -
PART TWO
GENERAL POOL DISCLOSURE
This Prospectus has two parts: the offered
series disclosure and the general pool disclosure. These parts are bound together and are incomplete if not distributed together to prospective participants.
PERFORMANCE OF THE OTHER COMMODITY POOLS OPERATED BY THE COMMODITY POOL OPERATOR
The following performance information is presented in accordance with CFTC regulations. The performance of the VIX Funds will differ materially in certain respects from the performance of the Other
Funds which is included herein.
The performance of the Other Funds, which is summarized herein, is materially different
in certain respects from the Geared Fund and the Matching Fund, and the past performance summaries of the Other Funds below are generally not representative of how the Geared Fund or the Matching Fund might perform in the future.
All summary performance information is as of May 31, 2013. Performance information is set forth, in accordance with CFTC
regulations, since each funds inception of trading.
|
|
|
Name of Pool:
|
|
ProShares Ultra DJ-UBS Commodity
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$41,711,516
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$1,941,346
|
Net Asset Value as of May 31, 2013:
|
|
$4,254,274
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$21.27
|
Worst Monthly Loss:
4
|
|
-27.91%
|
|
|
(September 2011)
|
Worst Peak-to-Valley Loss:
5
|
|
-49.29%
|
|
|
(April 2011 May 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-11.51
|
%
|
|
|
-14.51
|
%
|
|
|
1.63
|
%
|
|
|
4.65
|
%
|
|
|
4.64
|
%
|
February
|
|
|
|
|
|
|
-9.37
|
%
|
|
|
6.89
|
%
|
|
|
2.58
|
%
|
|
|
5.24
|
%
|
|
|
-8.17
|
%
|
March
|
|
|
|
|
|
|
5.85
|
%
|
|
|
-2.89
|
%
|
|
|
4.06
|
%
|
|
|
-8.43
|
%
|
|
|
0.76
|
%
|
April
|
|
|
|
|
|
|
0.66
|
%
|
|
|
3.56
|
%
|
|
|
6.11
|
%
|
|
|
-1.16
|
%
|
|
|
-5.52
|
%
|
May
|
|
|
|
|
|
|
26.77
|
%
|
|
|
-13.83
|
%
|
|
|
-10.53
|
%
|
|
|
-17.71
|
%
|
|
|
-4.66
|
%
|
June
|
|
|
|
|
|
|
-4.85
|
%
|
|
|
0.16
|
%
|
|
|
-10.87
|
%
|
|
|
10.78
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
5.57
|
%
|
|
|
13.55
|
%
|
|
|
6.50
|
%
|
|
|
12.77
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-1.97
|
%
|
|
|
-5.36
|
%
|
|
|
1.52
|
%
|
|
|
2.35
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
2.33
|
%
|
|
|
14.71
|
%
|
|
|
-27.91
|
%
|
|
|
3.16
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
5.82
|
%
|
|
|
9.65
|
%
|
|
|
13.16
|
%
|
|
|
-7.85
|
%
|
|
|
|
|
November
|
|
|
-1.59
|
%
|
|
|
6.47
|
%
|
|
|
-1.44
|
%
|
|
|
-4.74
|
%
|
|
|
-0.16
|
%
|
|
|
|
|
December
|
|
|
-9.91
|
%
|
|
|
3.47
|
%
|
|
|
22.04
|
%
|
|
|
-7.73
|
%
|
|
|
-5.34
|
%
|
|
|
|
|
Annual
|
|
|
-11.34
|
%
|
|
|
27.25
|
%
|
|
|
28.95
|
%
|
|
|
-28.84
|
%
|
|
|
-5.78
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-12.78
|
%
|
See accompanying Footnotes to Performance Information.
- 82 -
|
|
|
Name of Pool:
|
|
ProShares UltraShort DJ-UBS Commodity
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$95,173,240
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$8,650,362
|
Net Asset Value as of May 31, 2013:
|
|
$3,606,348
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$60.11
|
Worst Monthly Loss:
4
|
|
-23.20%
|
|
|
(May 2009)
|
Worst Peak-to-Valley Loss:
5
|
|
-74.41%
|
|
|
(February 2009 April 2011)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
8.25
|
%
|
|
|
15.02
|
%
|
|
|
-2.66
|
%
|
|
|
-5.44
|
%
|
|
|
-4.91
|
%
|
February
|
|
|
|
|
|
|
7.52
|
%
|
|
|
-8.21
|
%
|
|
|
-3.16
|
%
|
|
|
-5.47
|
%
|
|
|
8.48
|
%
|
March
|
|
|
|
|
|
|
-10.44
|
%
|
|
|
1.86
|
%
|
|
|
-5.66
|
%
|
|
|
8.11
|
%
|
|
|
-1.25
|
%
|
April
|
|
|
|
|
|
|
-3.46
|
%
|
|
|
-4.33
|
%
|
|
|
-6.50
|
%
|
|
|
0.31
|
%
|
|
|
4.61
|
%
|
May
|
|
|
|
|
|
|
-23.20
|
%
|
|
|
14.14
|
%
|
|
|
9.15
|
%
|
|
|
20.41
|
%
|
|
|
4.27
|
%
|
June
|
|
|
|
|
|
|
0.93
|
%
|
|
|
-1.55
|
%
|
|
|
11.01
|
%
|
|
|
-11.11
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-8.52
|
%
|
|
|
-12.92
|
%
|
|
|
-6.96
|
%
|
|
|
-12.82
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-0.65
|
%
|
|
|
4.72
|
%
|
|
|
-2.99
|
%
|
|
|
-3.00
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-4.80
|
%
|
|
|
-13.42
|
%
|
|
|
35.06
|
%
|
|
|
-3.84
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-7.91
|
%
|
|
|
-10.27
|
%
|
|
|
-13.06
|
%
|
|
|
7.73
|
%
|
|
|
|
|
November
|
|
|
1.14
|
%
|
|
|
-7.92
|
%
|
|
|
-1.01
|
%
|
|
|
3.77
|
%
|
|
|
-0.57
|
%
|
|
|
|
|
December
|
|
|
5.97
|
%
|
|
|
-4.66
|
%
|
|
|
-19.03
|
%
|
|
|
7.04
|
%
|
|
|
5.15
|
%
|
|
|
|
|
Annual
|
|
|
7.18
|
%
|
|
|
-45.43
|
%
|
|
|
-34.35
|
%
|
|
|
18.60
|
%
|
|
|
-4.97
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
%
|
|
|
N/A
|
|
|
|
11.11
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Ultra DJ-UBS Crude Oil
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$4,717,192,520
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$(69,546,997)
|
Net Asset Value as of May 31, 2013:
|
|
$261,706,707
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$27.70
|
Worst Monthly Loss:
4
|
|
-40.05%
|
|
|
(December 2008)
|
Worst Peak-to-Valley Loss:
5
|
|
-73.02%
|
|
|
(Inception October 2012)
|
- 83 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-29.62
|
%
|
|
|
-17.41
|
%
|
|
|
-0.76
|
%
|
|
|
-1.50
|
%
|
|
|
11.40
|
%
|
February
|
|
|
|
|
|
|
-22.51
|
%
|
|
|
16.44
|
%
|
|
|
-0.93
|
%
|
|
|
16.39
|
%
|
|
|
-12.31
|
%
|
March
|
|
|
|
|
|
|
6.57
|
%
|
|
|
9.05
|
%
|
|
|
16.17
|
%
|
|
|
-8.66
|
%
|
|
|
10.30
|
%
|
April
|
|
|
|
|
|
|
-10.92
|
%
|
|
|
6.28
|
%
|
|
|
11.89
|
%
|
|
|
1.99
|
%
|
|
|
-8.84
|
%
|
May
|
|
|
|
|
|
|
58.86
|
%
|
|
|
-30.86
|
%
|
|
|
-21.14
|
%
|
|
|
-32.85
|
%
|
|
|
-4.07
|
%
|
June
|
|
|
|
|
|
|
7.46
|
%
|
|
|
-1.02
|
%
|
|
|
-15.38
|
%
|
|
|
-5.48
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-5.61
|
%
|
|
|
6.72
|
%
|
|
|
-1.08
|
%
|
|
|
5.40
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-6.46
|
%
|
|
|
-16.13
|
%
|
|
|
-16.65
|
%
|
|
|
18.59
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-1.64
|
%
|
|
|
17.69
|
%
|
|
|
-22.33
|
%
|
|
|
-9.61
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
16.57
|
%
|
|
|
1.00
|
%
|
|
|
35.20
|
%
|
|
|
-13.83
|
%
|
|
|
|
|
November
|
|
|
-1.38
|
%
|
|
|
-1.68
|
%
|
|
|
4.12
|
%
|
|
|
15.54
|
%
|
|
|
4.23
|
%
|
|
|
|
|
December
|
|
|
-40.05
|
%
|
|
|
-2.91
|
%
|
|
|
17.17
|
%
|
|
|
-4.15
|
%
|
|
|
4.52
|
%
|
|
|
|
|
Annual
|
|
|
-40.88
|
%
|
|
|
-14.59
|
%
|
|
|
-0.99
|
%
|
|
|
-18.23
|
%
|
|
|
-28.11
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-5.77
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares UltraShort DJ-UBS Crude Oil
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$2,056,924,084
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$138,038,168
|
Net Asset Value as of May 31, 2013:
|
|
$219,336,091
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$40.10
|
Worst Monthly Loss:
4
|
|
-40.18%
|
|
|
(May 2009)
|
Worst Peak-to-Valley Loss:
5
|
|
-83.85%
|
|
|
(February 2009 February 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
20.65
|
%
|
|
|
19.06
|
%
|
|
|
-1.93
|
%
|
|
|
-0.18
|
%
|
|
|
-10.82
|
%
|
February
|
|
|
|
|
|
|
15.74
|
%
|
|
|
-17.55
|
%
|
|
|
-1.17
|
%
|
|
|
-15.40
|
%
|
|
|
12.92
|
%
|
March
|
|
|
|
|
|
|
-23.29
|
%
|
|
|
-9.94
|
%
|
|
|
-16.39
|
%
|
|
|
7.52
|
%
|
|
|
-10.12
|
%
|
April
|
|
|
|
|
|
|
2.31
|
%
|
|
|
-7.28
|
%
|
|
|
-12.36
|
%
|
|
|
-3.25
|
%
|
|
|
7.27
|
%
|
May
|
|
|
|
|
|
|
-40.18
|
%
|
|
|
37.38
|
%
|
|
|
17.41
|
%
|
|
|
45.59
|
%
|
|
|
2.47
|
%
|
June
|
|
|
|
|
|
|
-11.11
|
%
|
|
|
-2.10
|
%
|
|
|
13.87
|
%
|
|
|
-0.84
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-1.14
|
%
|
|
|
-8.74
|
%
|
|
|
-0.90
|
%
|
|
|
-8.47
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
3.15
|
%
|
|
|
16.03
|
%
|
|
|
11.34
|
%
|
|
|
-17.32
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-4.21
|
%
|
|
|
-16.55
|
%
|
|
|
21.29
|
%
|
|
|
8.99
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-17.10
|
%
|
|
|
-3.48
|
%
|
|
|
-30.03
|
%
|
|
|
12.73
|
%
|
|
|
|
|
November
|
|
|
-2.35
|
%
|
|
|
-1.21
|
%
|
|
|
-6.34
|
%
|
|
|
-15.40
|
%
|
|
|
-6.95
|
%
|
|
|
|
|
December
|
|
|
19.09
|
%
|
|
|
1.00
|
%
|
|
|
-15.66
|
%
|
|
|
1.48
|
%
|
|
|
-5.36
|
%
|
|
|
|
|
Annual
|
|
|
16.28
|
%
|
|
|
-52.91
|
%
|
|
|
-25.70
|
%
|
|
|
-23.66
|
%
|
|
|
3.84
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-0.52
|
%
|
See accompanying Footnotes to Performance Information.
- 84 -
|
|
|
Name of Pool:
|
|
ProShares Ultra DJ-UBS Natural Gas
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
October 4, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$185,265,202
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$19,798,672
|
Net Asset Value as of May 31, 2013:
|
|
$33,229,933
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$46.16
|
Worst Monthly Loss:
4
|
|
-39.34%
|
|
|
(March 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-81.26%
|
|
|
(Inception May 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-33.79
|
%
|
|
|
-2.67
|
%
|
February
|
|
|
|
|
|
|
-7.98
|
%
|
|
|
2.40
|
%
|
March
|
|
|
|
|
|
|
-39.34
|
%
|
|
|
29.13
|
%
|
April
|
|
|
|
|
|
|
-0.48
|
%
|
|
|
13.20
|
%
|
May
|
|
|
|
|
|
|
-0.06
|
%
|
|
|
-18.86
|
%
|
June
|
|
|
|
|
|
|
21.89
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
25.46
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-28.03
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
23.97
|
%
|
|
|
|
|
October
|
|
|
-3.23
|
%
|
|
|
3.06
|
%
|
|
|
|
|
November
|
|
|
-24.05
|
%
|
|
|
-14.18
|
%
|
|
|
|
|
December
|
|
|
-30.62
|
%
|
|
|
-13.68
|
%
|
|
|
|
|
Annual
|
|
|
-49.01
|
%
|
|
|
-61.71
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
18.20
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares UltraShort DJ-UBS Natural Gas
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
October 4, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$63,425,772
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$28,498,197
|
Net Asset Value as of May 31, 2013:
|
|
$25,988,504
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$17.92
|
Worst Monthly Loss:
4
|
|
-28.95%
|
|
|
(June 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-68.85%
|
|
|
(March 2012 April 2013)
|
- 85 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
30.13
|
%
|
|
|
-1.67
|
%
|
February
|
|
|
|
|
|
|
0.98
|
%
|
|
|
-5.48
|
%
|
March
|
|
|
|
|
|
|
56.44
|
%
|
|
|
-24.30
|
%
|
April
|
|
|
|
|
|
|
-4.32
|
%
|
|
|
-15.15
|
%
|
May
|
|
|
|
|
|
|
-8.88
|
%
|
|
|
17.55
|
%
|
June
|
|
|
|
|
|
|
-28.95
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-27.12
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
30.80
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-23.39
|
%
|
|
|
|
|
October
|
|
|
0.57
|
%
|
|
|
-6.83
|
%
|
|
|
|
|
November
|
|
|
27.35
|
%
|
|
|
11.11
|
%
|
|
|
|
|
December
|
|
|
39.41
|
%
|
|
|
11.43
|
%
|
|
|
|
|
Annual
|
|
|
78.55
|
%
|
|
|
7.26
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-29.81
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Ultra Gold
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
December 1, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$502,336,728
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$140,420,022
|
Net Asset Value as of May 31, 2013:
|
|
$195,593,494
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$57.53
|
Worst Monthly Loss:
4
|
|
-23.82%
|
|
|
(December 2011)
|
Worst Peak-to-Valley Loss:
5
|
|
-47.98%
|
|
|
(August 2011 May 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
10.61
|
%
|
|
|
-2.22
|
%
|
|
|
-11.26
|
%
|
|
|
28.64
|
%
|
|
|
0.48
|
%
|
February
|
|
|
|
|
|
|
6.21
|
%
|
|
|
4.96
|
%
|
|
|
12.66
|
%
|
|
|
2.55
|
%
|
|
|
-9.22
|
%
|
March
|
|
|
|
|
|
|
-8.60
|
%
|
|
|
0.81
|
%
|
|
|
3.57
|
%
|
|
|
-12.33
|
%
|
|
|
1.03
|
%
|
April
|
|
|
|
|
|
|
-7.93
|
%
|
|
|
11.30
|
%
|
|
|
13.40
|
%
|
|
|
-1.83
|
%
|
|
|
-16.74
|
%
|
May
|
|
|
|
|
|
|
21.19
|
%
|
|
|
4.29
|
%
|
|
|
-0.32
|
%
|
|
|
-11.53
|
%
|
|
|
-10.49
|
%
|
June
|
|
|
|
|
|
|
-8.76
|
%
|
|
|
5.47
|
%
|
|
|
-4.33
|
%
|
|
|
4.62
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
0.44
|
%
|
|
|
-12.14
|
%
|
|
|
16.53
|
%
|
|
|
2.48
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
3.04
|
%
|
|
|
13.12
|
%
|
|
|
22.50
|
%
|
|
|
2.91
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
7.95
|
%
|
|
|
9.62
|
%
|
|
|
-21.35
|
%
|
|
|
15.51
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
8.54
|
%
|
|
|
5.68
|
%
|
|
|
12.10
|
%
|
|
|
-6.65
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
26.93
|
%
|
|
|
4.89
|
%
|
|
|
2.19
|
%
|
|
|
0.43
|
%
|
|
|
|
|
December
|
|
|
23.30
|
%
|
|
|
-15.05
|
%
|
|
|
2.65
|
%
|
|
|
-23.82
|
%
|
|
|
-8.05
|
%
|
|
|
|
|
Annual
|
|
|
23.30
|
%
|
|
|
42.95
|
%
|
|
|
57.02
|
%
|
|
|
9.71
|
%
|
|
|
10.35
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-31.32
|
%
|
See accompanying Footnotes to Performance Information.
- 86 -
|
|
|
Name of Pool:
|
|
ProShares UltraShort Gold
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
December 1, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$519,061,037
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$268,402,722
|
Net Asset Value as of May 31, 2013:
|
|
$186,724,212
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$84.99
|
Worst Monthly Loss:
4
|
|
-24.37%
|
|
|
(January 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-88.74%
|
|
|
(Inception September 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-12.44
|
%
|
|
|
0.61
|
%
|
|
|
11.62
|
%
|
|
|
-24.37
|
%
|
|
|
-1.47
|
%
|
February
|
|
|
|
|
|
|
-8.58
|
%
|
|
|
-6.45
|
%
|
|
|
-11.95
|
%
|
|
|
-3.48
|
%
|
|
|
9.42
|
%
|
March
|
|
|
|
|
|
|
4.35
|
%
|
|
|
-2.01
|
%
|
|
|
-4.43
|
%
|
|
|
12.18
|
%
|
|
|
-1.44
|
%
|
April
|
|
|
|
|
|
|
6.15
|
%
|
|
|
-11.01
|
%
|
|
|
-12.72
|
%
|
|
|
0.60
|
%
|
|
|
14.63
|
%
|
May
|
|
|
|
|
|
|
-18.90
|
%
|
|
|
-5.46
|
%
|
|
|
-0.84
|
%
|
|
|
11.02
|
%
|
|
|
9.24
|
%
|
June
|
|
|
|
|
|
|
8.14
|
%
|
|
|
-6.70
|
%
|
|
|
3.70
|
%
|
|
|
-6.17
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-1.67
|
%
|
|
|
12.44
|
%
|
|
|
-15.13
|
%
|
|
|
-3.57
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-4.12
|
%
|
|
|
-12.50
|
%
|
|
|
-21.72
|
%
|
|
|
-3.63
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-8.81
|
%
|
|
|
-9.53
|
%
|
|
|
21.16
|
%
|
|
|
-14.63
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-9.09
|
%
|
|
|
-6.43
|
%
|
|
|
-12.90
|
%
|
|
|
6.40
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
-22.76
|
%
|
|
|
-6.35
|
%
|
|
|
-3.74
|
%
|
|
|
-1.39
|
%
|
|
|
|
|
December
|
|
|
-22.47
|
%
|
|
|
15.24
|
%
|
|
|
-4.06
|
%
|
|
|
28.00
|
%
|
|
|
8.09
|
%
|
|
|
|
|
Annual
|
|
|
-22.47
|
%
|
|
|
-45.91
|
%
|
|
|
-45.83
|
%
|
|
|
-27.18
|
%
|
|
|
-22.78
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
33.06
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Ultra Silver
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
December 1, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$2,337,427,567
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$1,108,022,337
|
Net Asset Value as of May 31, 2013:
|
|
$532,310,827
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$22.85
|
Worst Monthly Loss:
4
|
|
-50.93%
|
|
|
(September 2011)
|
Worst Peak-to-Valley Loss:
5
|
|
-87.62%
|
|
|
(April 2011 May 2013)
|
- 87 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
30.91
|
%
|
|
|
-9.19
|
%
|
|
|
-19.29
|
%
|
|
|
39.92
|
%
|
|
|
13.30
|
%
|
February
|
|
|
|
|
|
|
10.07
|
%
|
|
|
-3.77
|
%
|
|
|
44.19
|
%
|
|
|
21.64
|
%
|
|
|
-18.79
|
%
|
March
|
|
|
|
|
|
|
-3.39
|
%
|
|
|
16.36
|
%
|
|
|
25.05
|
%
|
|
|
-25.33
|
%
|
|
|
-2.67
|
%
|
April
|
|
|
|
|
|
|
-8.72
|
%
|
|
|
11.87
|
%
|
|
|
62.43
|
%
|
|
|
-8.23
|
%
|
|
|
-29.79
|
%
|
May
|
|
|
|
|
|
|
48.18
|
%
|
|
|
-2.78
|
%
|
|
|
-43.56
|
%
|
|
|
-19.70
|
%
|
|
|
-15.45
|
%
|
June
|
|
|
|
|
|
|
-20.90
|
%
|
|
|
0.64
|
%
|
|
|
-19.37
|
%
|
|
|
-8.46
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-5.87
|
%
|
|
|
-12.07
|
%
|
|
|
25.13
|
%
|
|
|
7.40
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
11.41
|
%
|
|
|
13.00
|
%
|
|
|
6.12
|
%
|
|
|
16.30
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
25.22
|
%
|
|
|
35.55
|
%
|
|
|
-50.93
|
%
|
|
|
27.12
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-0.05
|
%
|
|
|
16.11
|
%
|
|
|
22.20
|
%
|
|
|
-13.81
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
17.86
|
%
|
|
|
25.47
|
%
|
|
|
-17.46
|
%
|
|
|
11.96
|
%
|
|
|
|
|
December
|
|
|
14.42
|
%
|
|
|
-13.40
|
%
|
|
|
25.30
|
%
|
|
|
-21.78
|
%
|
|
|
-24.27
|
%
|
|
|
|
|
Annual
|
|
|
14.42
|
%
|
|
|
99.56
|
%
|
|
|
173.63
|
%
|
|
|
-44.69
|
%
|
|
|
-0.52
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-46.83
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares UltraShort Silver
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
December 1, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$1,958,520,348
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$374,521,246
|
Net Asset Value as of May 31, 2013:
|
|
$119,911,680
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$79.49
|
Worst Monthly Loss:
4
|
|
-42.41%
|
|
|
(April 2011)
|
Worst Peak-to-Valley Loss:
5
|
|
-99.20%
|
|
|
(Inception November 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-30.75
|
%
|
|
|
6.25
|
%
|
|
|
17.54
|
%
|
|
|
-32.75
|
%
|
|
|
-14.21
|
%
|
February
|
|
|
|
|
|
|
-12.75
|
%
|
|
|
-1.65
|
%
|
|
|
-33.03
|
%
|
|
|
-20.18
|
%
|
|
|
21.21
|
%
|
March
|
|
|
|
|
|
|
-3.04
|
%
|
|
|
-17.28
|
%
|
|
|
-26.55
|
%
|
|
|
27.37
|
%
|
|
|
1.17
|
%
|
April
|
|
|
|
|
|
|
4.15
|
%
|
|
|
-13.65
|
%
|
|
|
-42.41
|
%
|
|
|
6.34
|
%
|
|
|
28.38
|
%
|
May
|
|
|
|
|
|
|
-37.42
|
%
|
|
|
-3.39
|
%
|
|
|
20.59
|
%
|
|
|
20.84
|
%
|
|
|
14.53
|
%
|
June
|
|
|
|
|
|
|
18.90
|
%
|
|
|
-5.63
|
%
|
|
|
16.50
|
%
|
|
|
3.78
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
0.97
|
%
|
|
|
10.64
|
%
|
|
|
-26.91
|
%
|
|
|
-9.59
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-16.54
|
%
|
|
|
-14.05
|
%
|
|
|
-13.79
|
%
|
|
|
-15.77
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-26.33
|
%
|
|
|
-28.05
|
%
|
|
|
38.68
|
%
|
|
|
-25.12
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-4.39
|
%
|
|
|
-18.10
|
%
|
|
|
-28.46
|
%
|
|
|
14.03
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
-19.82
|
%
|
|
|
-26.17
|
%
|
|
|
15.21
|
%
|
|
|
-12.57
|
%
|
|
|
|
|
December
|
|
|
-21.60
|
%
|
|
|
11.08
|
%
|
|
|
-24.65
|
%
|
|
|
14.07
|
%
|
|
|
29.28
|
%
|
|
|
|
|
Annual
|
|
|
-21.60
|
%
|
|
|
-76.00
|
%
|
|
|
-78.79
|
%
|
|
|
-61.57
|
%
|
|
|
-32.99
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
54.67
|
%
|
See accompanying Footnotes to Performance Information.
- 88 -
|
|
|
Name of Pool:
|
|
ProShares Ultra Euro
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$31,586,320
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$3,272,169
|
Net Asset Value as of May 31, 2013:
|
|
$3,506,166
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$23.37
|
Worst Monthly Loss:
4
|
|
-16.10%
|
|
|
(January 2009)
|
Worst Peak-to-Valley Loss:
5
|
|
-35.67%
|
|
|
(November 2009 July 2012)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-16.10
|
%
|
|
|
-6.28
|
%
|
|
|
4.70
|
%
|
|
|
1.94
|
%
|
|
|
5.71
|
%
|
February
|
|
|
|
|
|
|
-2.14
|
%
|
|
|
-3.74
|
%
|
|
|
1.57
|
%
|
|
|
3.62
|
%
|
|
|
-7.71
|
%
|
March
|
|
|
|
|
|
|
9.48
|
%
|
|
|
-1.78
|
%
|
|
|
5.42
|
%
|
|
|
0.05
|
%
|
|
|
-3.75
|
%
|
April
|
|
|
|
|
|
|
-0.98
|
%
|
|
|
-2.97
|
%
|
|
|
9.16
|
%
|
|
|
-1.62
|
%
|
|
|
5.39
|
%
|
May
|
|
|
|
|
|
|
14.01
|
%
|
|
|
-15.18
|
%
|
|
|
-5.62
|
%
|
|
|
-12.87
|
%
|
|
|
-2.75
|
%
|
June
|
|
|
|
|
|
|
-1.71
|
%
|
|
|
-0.90
|
%
|
|
|
1.50
|
%
|
|
|
4.59
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
3.03
|
%
|
|
|
13.32
|
%
|
|
|
-1.85
|
%
|
|
|
-5.68
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
1.01
|
%
|
|
|
-5.63
|
%
|
|
|
-0.09
|
%
|
|
|
4.30
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
4.06
|
%
|
|
|
15.54
|
%
|
|
|
-13.16
|
%
|
|
|
4.23
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
1.04
|
%
|
|
|
4.08
|
%
|
|
|
6.42
|
%
|
|
|
1.53
|
%
|
|
|
|
|
November
|
|
|
-3.10
|
%
|
|
|
4.00
|
%
|
|
|
-13.15
|
%
|
|
|
-5.83
|
%
|
|
|
0.53
|
%
|
|
|
|
|
December
|
|
|
20.70
|
%
|
|
|
-9.23
|
%
|
|
|
5.95
|
%
|
|
|
-7.32
|
%
|
|
|
2.79
|
%
|
|
|
|
|
Annual
|
|
|
16.96
|
%
|
|
|
3.03
|
%
|
|
|
-14.48
|
%
|
|
|
-7.28
|
%
|
|
|
1.93
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-3.76
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Short Euro
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
June 26, 2012
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$4,000,200
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$4,000,200
|
Net Asset Value as of May 31, 2013:
|
|
$3,807,243
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$38.07
|
Worst Monthly Loss:
4
|
|
-2.88%
|
|
|
(January 2013)
|
Worst Peak-to-Valley Loss:
5
|
|
-9.81%
|
|
|
(July 2012 January 2013)
|
- 89 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-2.88
|
%
|
February
|
|
|
|
|
|
|
3.91
|
%
|
March
|
|
|
|
|
|
|
1.70
|
%
|
April
|
|
|
|
|
|
|
-2.76
|
%
|
May
|
|
|
|
|
|
|
1.24
|
%
|
June
*
|
|
|
-1.32
|
%
|
|
|
|
|
July
|
|
|
2.68
|
%
|
|
|
|
|
August
|
|
|
-2.27
|
%
|
|
|
|
|
September
|
|
|
-2.23
|
%
|
|
|
|
|
October
|
|
|
-0.93
|
%
|
|
|
|
|
November
|
|
|
-0.40
|
%
|
|
|
|
|
December
|
|
|
-1.51
|
%
|
|
|
|
|
Annual
|
|
|
-5.90
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
1.04
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares UltraShort Euro
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$2,132,121,095
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$460,145,139
|
Net Asset Value as of May 31, 2013:
|
|
$518,052,045
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$19.44
|
Worst Monthly Loss:
4
|
|
-18.61%
|
|
|
(December 2008)
|
Worst Peak-to-Valley Loss:
5
|
|
-36.77%
|
|
|
(November 2008 April 2011)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
17.58
|
%
|
|
|
6.32
|
%
|
|
|
-5.04
|
%
|
|
|
-2.49
|
%
|
|
|
-5.76
|
%
|
February
|
|
|
|
|
|
|
1.29
|
%
|
|
|
3.37
|
%
|
|
|
-1.95
|
%
|
|
|
-3.88
|
%
|
|
|
7.90
|
%
|
March
|
|
|
|
|
|
|
-9.86
|
%
|
|
|
1.30
|
%
|
|
|
-5.56
|
%
|
|
|
-0.47
|
%
|
|
|
3.51
|
%
|
April
|
|
|
|
|
|
|
0.18
|
%
|
|
|
2.58
|
%
|
|
|
-8.81
|
%
|
|
|
1.33
|
%
|
|
|
-5.46
|
%
|
May
|
|
|
|
|
|
|
-12.88
|
%
|
|
|
16.81
|
%
|
|
|
5.21
|
%
|
|
|
14.31
|
%
|
|
|
2.46
|
%
|
June
|
|
|
|
|
|
|
0.93
|
%
|
|
|
0.30
|
%
|
|
|
-2.15
|
%
|
|
|
-4.86
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-3.45
|
%
|
|
|
-12.37
|
%
|
|
|
1.32
|
%
|
|
|
5.50
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-1.43
|
%
|
|
|
5.33
|
%
|
|
|
-0.58
|
%
|
|
|
-4.52
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-4.24
|
%
|
|
|
-14.03
|
%
|
|
|
14.26
|
%
|
|
|
-4.43
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-1.41
|
%
|
|
|
-4.60
|
%
|
|
|
-6.97
|
%
|
|
|
-1.83
|
%
|
|
|
|
|
November
|
|
|
2.93
|
%
|
|
|
-4.32
|
%
|
|
|
14.26
|
%
|
|
|
5.48
|
%
|
|
|
-0.81
|
%
|
|
|
|
|
December
|
|
|
-18.61
|
%
|
|
|
9.68
|
%
|
|
|
-6.11
|
%
|
|
|
7.49
|
%
|
|
|
-2.97
|
%
|
|
|
|
|
Annual
|
|
|
-16.22
|
%
|
|
|
-10.84
|
%
|
|
|
8.66
|
%
|
|
|
0.22
|
%
|
|
|
-6.49
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
1.95
|
%
|
See accompanying Footnotes to Performance Information.
*
|
Represents rate of return from inception to June 29, 2012, as the inception of trading date for the pool was after June 1, 2012.
|
- 90 -
|
|
|
Name of Pool:
|
|
ProShares Ultra Yen
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$11,322,654
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$3,929,709
|
Net Asset Value as of May 31, 2013:
|
|
$3,089,328
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$20.59
|
Worst Monthly Loss:
4
|
|
-15.60%
|
|
|
(February 2009)
|
Worst Peak-to-Valley Loss:
5
|
|
-44.18%
|
|
|
(August 2011 May 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
1.67
|
%
|
|
|
6.21
|
%
|
|
|
-2.25
|
%
|
|
|
1.83
|
%
|
|
|
-10.24
|
%
|
February
|
|
|
|
|
|
|
-15.60
|
%
|
|
|
2.89
|
%
|
|
|
0.55
|
%
|
|
|
-12.23
|
%
|
|
|
-2.89
|
%
|
March
|
|
|
|
|
|
|
-3.21
|
%
|
|
|
-9.78
|
%
|
|
|
-3.51
|
%
|
|
|
-3.77
|
%
|
|
|
-3.21
|
%
|
April
|
|
|
|
|
|
|
0.49
|
%
|
|
|
-1.08
|
%
|
|
|
4.97
|
%
|
|
|
7.33
|
%
|
|
|
-7.13
|
%
|
May
|
|
|
|
|
|
|
6.81
|
%
|
|
|
6.40
|
%
|
|
|
-1.08
|
%
|
|
|
3.66
|
%
|
|
|
-6.03
|
%
|
June
|
|
|
|
|
|
|
-2.48
|
%
|
|
|
5.51
|
%
|
|
|
2.38
|
%
|
|
|
-4.03
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
3.30
|
%
|
|
|
4.39
|
%
|
|
|
9.24
|
%
|
|
|
4.50
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
3.19
|
%
|
|
|
5.59
|
%
|
|
|
0.78
|
%
|
|
|
-0.57
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
7.30
|
%
|
|
|
0.99
|
%
|
|
|
-1.62
|
%
|
|
|
0.57
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
-0.79
|
%
|
|
|
7.47
|
%
|
|
|
-2.89
|
%
|
|
|
-4.61
|
%
|
|
|
|
|
November
|
|
|
3.03
|
%
|
|
|
8.35
|
%
|
|
|
-7.64
|
%
|
|
|
1.40
|
%
|
|
|
-6.36
|
%
|
|
|
|
|
December
|
|
|
10.44
|
%
|
|
|
-14.04
|
%
|
|
|
5.91
|
%
|
|
|
1.29
|
%
|
|
|
-9.85
|
%
|
|
|
|
|
Annual
|
|
|
13.79
|
%
|
|
|
-8.11
|
%
|
|
|
28.13
|
%
|
|
|
8.90
|
%
|
|
|
-22.73
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-26.37
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares UltraShort Yen
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
November 24, 2008
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$1,160,920,654
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$443,816,074
|
Net Asset Value as of May 31, 2013:
|
|
$544,383,757
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$66.80
|
Worst Monthly Loss:
4
|
|
-10.60%
|
|
|
(December 2008)
|
Worst Peak-to-Valley Loss:
5
|
|
-47.04%
|
|
|
(March 2009 January 2012)
|
- 91 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
-2.56
|
%
|
|
|
-6.25
|
%
|
|
|
1.85
|
%
|
|
|
-2.11
|
%
|
|
|
10.61
|
%
|
February
|
|
|
|
|
|
|
17.12
|
%
|
|
|
-3.39
|
%
|
|
|
-0.87
|
%
|
|
|
13.43
|
%
|
|
|
2.19
|
%
|
March
|
|
|
|
|
|
|
2.07
|
%
|
|
|
10.27
|
%
|
|
|
2.79
|
%
|
|
|
3.44
|
%
|
|
|
2.86
|
%
|
April
|
|
|
|
|
|
|
-1.17
|
%
|
|
|
0.74
|
%
|
|
|
-5.14
|
%
|
|
|
-7.26
|
%
|
|
|
6.29
|
%
|
May
|
|
|
|
|
|
|
-7.18
|
%
|
|
|
-7.31
|
%
|
|
|
0.74
|
%
|
|
|
-3.88
|
%
|
|
|
5.69
|
%
|
June
|
|
|
|
|
|
|
1.58
|
%
|
|
|
-5.58
|
%
|
|
|
-2.64
|
%
|
|
|
3.81
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
-3.95
|
%
|
|
|
-4.67
|
%
|
|
|
-8.79
|
%
|
|
|
-4.54
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
-3.66
|
%
|
|
|
-5.79
|
%
|
|
|
-1.49
|
%
|
|
|
0.25
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
-7.28
|
%
|
|
|
-1.61
|
%
|
|
|
1.33
|
%
|
|
|
-0.86
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
0.16
|
%
|
|
|
-7.23
|
%
|
|
|
2.26
|
%
|
|
|
4.51
|
%
|
|
|
|
|
November
|
|
|
-3.07
|
%
|
|
|
-8.10
|
%
|
|
|
7.93
|
%
|
|
|
-1.62
|
%
|
|
|
6.38
|
%
|
|
|
|
|
December
|
|
|
-10.60
|
%
|
|
|
15.36
|
%
|
|
|
-6.09
|
%
|
|
|
-1.51
|
%
|
|
|
10.53
|
%
|
|
|
|
|
Annual
|
|
|
-13.35
|
%
|
|
|
-1.10
|
%
|
|
|
-26.84
|
%
|
|
|
-12.90
|
%
|
|
|
23.92
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
30.61
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Ultra Australian Dollar
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
July 17, 2012
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$4,000,200
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$4,000,200
|
Net Asset Value as of May 31, 2013:
|
|
$3,583,153
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$35.83
|
Worst Monthly Loss:
4
|
|
-14.54%
|
|
|
(May 2013)
|
Worst Peak-to-Valley Loss:
5
|
|
-15.02%
|
|
|
(March 2013 May 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.94
|
%
|
February
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-3.77
|
%
|
March
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.28
|
%
|
April
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-0.56
|
%
|
May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-14.54
|
%
|
June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.03
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-2.91
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.27
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.59
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.50
|
%
|
|
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-0.42
|
%
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.98
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-13.91
|
%
|
See accompanying Footnotes to Performance Information.
*
|
Represents rate of return from inception to July 31, 2012, as the inception of trading date for the pool was after July 1, 2012.
|
- 92 -
|
|
|
Name of Pool:
|
|
ProShares UltraShort Australian Dollar
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
July 17, 2012
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$15,947,907
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$15,947,907
|
Net Asset Value as of May 31, 2013:
|
|
$17,175,553
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$42.94
|
Worst Monthly Loss:
4
|
|
-4.35%
|
|
|
(March 2013)
|
Worst Peak-to-Valley Loss:
5
|
|
-7.73%
|
|
|
(Inception March 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-1.26
|
%
|
February
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.60
|
%
|
March
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-4.35
|
%
|
April
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.10
|
%
|
May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.30
|
%
|
June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-4.17
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.68
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-1.71
|
%
|
|
|
|
|
October
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-0.91
|
%
|
|
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-1.76
|
%
|
|
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.15
|
%
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-5.70
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
13.91
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares Short VIX Short-Term Futures ETF
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
October 3, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$778,520,122
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$19,664,879
|
Net Asset Value as of May 31, 2013:
|
|
$61,114,877
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$87.30
|
Worst Monthly Loss:
4
|
|
-26.85%
|
|
|
(May 2012)
|
Worst Peak-to-Valley Loss:
5
|
|
-29.34%
|
|
|
(March 2012 May 2012)
|
*
|
Represents rate of return from inception to July 31, 2012, as the inception of trading date for the pool was after July 1, 2012.
|
- 93 -
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
|
|
|
|
31.19
|
%
|
|
|
25.87
|
%
|
February
|
|
|
|
|
|
|
4.50
|
%
|
|
|
-6.34
|
%
|
March
|
|
|
|
|
|
|
39.60
|
%
|
|
|
18.25
|
%
|
April
|
|
|
|
|
|
|
-3.41
|
%
|
|
|
-2.00
|
%
|
May
|
|
|
|
|
|
|
-26.85
|
%
|
|
|
-3.39
|
%
|
June
|
|
|
|
|
|
|
29.53
|
%
|
|
|
|
|
July
|
|
|
|
|
|
|
5.11
|
%
|
|
|
|
|
August
|
|
|
|
|
|
|
16.20
|
%
|
|
|
|
|
September
|
|
|
|
|
|
|
23.02
|
%
|
|
|
|
|
October
|
|
|
27.51
|
%
|
|
|
-7.76
|
%
|
|
|
|
|
November
|
|
|
-10.40
|
%
|
|
|
22.09
|
%
|
|
|
|
|
December
|
|
|
13.17
|
%
|
|
|
-13.67
|
%
|
|
|
|
|
Annual
|
|
|
29.29
|
%
|
|
|
155.84
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
31.97
|
%
|
See accompanying Footnotes to Performance Information.
|
|
|
Name of Pool:
|
|
ProShares VIX Mid-Term Futures ETF
|
Type of Pool:
|
|
Public, Exchange-listed Commodity Pool
|
Date of Inception of Trading:
|
|
January 3, 2011
|
Aggregate Gross Capital Subscriptions
1
as of May 31, 2013:
|
|
$318,550,392
|
Aggregate Net Capital Subscriptions
2
as of May 31, 2013:
|
|
$156,834,714
|
Net Asset Value as of May 31, 2013:
|
|
$67,194,574
|
Net Asset Value per Share
3
as of May 31, 2013:
|
|
$26.09
|
Worst Monthly Loss:
4
|
|
-18.65%
|
|
|
(January 2013)
|
Worst Peak-to-Valley Loss:
5
|
|
-72.49%
|
|
|
(September 2011 April 2013)
|
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Rate of Return:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
January
|
|
|
-10.88
|
%
|
|
|
-9.76
|
%
|
|
|
-18.65
|
%
|
February
|
|
|
-3.79
|
%
|
|
|
1.25
|
%
|
|
|
-3.13
|
%
|
March
|
|
|
-1.77
|
%
|
|
|
-17.42
|
%
|
|
|
-3.31
|
%
|
April
|
|
|
-6.98
|
%
|
|
|
-0.83
|
%
|
|
|
-6.78
|
%
|
May
|
|
|
-2.60
|
%
|
|
|
13.10
|
%
|
|
|
5.89
|
%
|
June
|
|
|
1.15
|
%
|
|
|
-12.30
|
%
|
|
|
|
|
July
|
|
|
-3.41
|
%
|
|
|
-5.77
|
%
|
|
|
|
|
August
|
|
|
28.73
|
%
|
|
|
-2.59
|
%
|
|
|
|
|
September
|
|
|
16.65
|
%
|
|
|
-17.84
|
%
|
|
|
|
|
October
|
|
|
-16.01
|
%
|
|
|
-5.90
|
%
|
|
|
|
|
November
|
|
|
7.47
|
%
|
|
|
-10.69
|
%
|
|
|
|
|
December
|
|
|
-8.29
|
%
|
|
|
-0.53
|
%
|
|
|
|
|
Annual
|
|
|
-7.31
|
%
|
|
|
-53.21
|
%
|
|
|
|
|
Year-to-Date
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-24.79
|
%
|
See accompanying Footnotes to Performance Information.
- 94 -
Footnotes to Performance Information
1
|
Aggregate Gross Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, including those of investors who
subsequently redeemed their investments.
|
2
|
Aggregate Net Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, excluding those of investors who
subsequently redeemed their investments.
|
3
|
Net Asset Value per Share is the net asset value, based on the pricing policies of the Trust and determined in accordance with Generally
Accepted Accounting Principles, of the pool divided by the total number of Shares outstanding as of May 31, 2013. Please see Description of the Shares; The Funds; Certain Material Terms of the Trust AgreementNet Asset Value
(NAV) for additional information regarding the pricing policies of the Trust.
|
4
|
Worst Monthly Loss is the largest single month loss sustained since inception of trading. Loss as used in this section of the
Prospectus means losses experienced by the relevant pool over the specified period and is calculated on a rate of return basis, i.e., dividing net performance by beginning equity. Loss is measured on the basis of monthly returns only, and does not
reflect intra-month figures.
|
5
|
Worst Peak-to-Valley Loss is the largest percentage decline in Net Asset Value per Share over the history of the pool. This need not be a
continuous decline, but can be a series of positive and negative returns where the negative returns are larger than the positive returns. Worst Peak-to-Valley Loss represents the greatest percentage decline from any month-end Net Asset Value per
Share that occurs without such month-end Net Asset Value per Share being equaled or exceeded as of a subsequent month-end.
|
6
|
Based on the latest calculated net asset value, as applicable to creations and redemptions of Creation Units, with respect to each period.
|
- 95 -
USE OF PROCEEDS
Substantially all of the proceeds of the offering of the Shares of the Funds are, or will be, used to enter into Financial Instruments in
which a Fund invests, in combination with cash or cash equivalents and/or U.S. Treasury securities or other high credit quality, short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase
agreements) that may in part be used for direct investment or deposited with the FCMs as margin in connection with futures contracts or in segregated accounts at the Funds custodian bank as collateral for swap agreements, as applicable. To the
extent that the Funds do not invest the proceeds of the offering of the Shares in the manner described above on the day such proceeds are received, such proceeds will be deposited with the Custodian in a non-interest bearing account.
To the extent that the Funds trade in futures contracts on U.S. exchanges, the assets deposited by the Funds with the FCMs (or another
eligible financial institution, as applicable) as margin must be segregated pursuant to the regulations of the CFTC. Such segregated funds may be invested only in a limited range of instrumentsprincipally U.S. government obligations to margin
futures contract positions.
The Sponsor has selected Goldman, Sachs & Co. (Goldman Sachs), Jefferies Bache, LLC
(JBL), Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) and RBC Capital Markets, LLC (RBC) as its FCMs. JBL currently is an indirect, wholly owned subsidiary of Jefferies Group, LLC, which in turn is an indirect, wholly
owned subsidiary of Leucadia National Corporation. Prior to July 1, 2011, JBL had been an indirect, wholly owned subsidiary of Prudential Financial, Inc. operating under the name Prudential Bache Commodities, LLC. Each of Goldman Sachs, JBL,
Merrill Lynch and RBC, in its capacity as a registered FCM, serves as a clearing broker to the Trust and the Funds and as such arranges for the execution and clearing of the Funds futures transactions. Each of Goldman Sachs, JBL, Merrill Lynch
and RBC acts as clearing broker for many other funds and individuals. A variety of executing brokers may execute futures transactions on behalf of the Funds. The executing brokers will give-up all such transactions to Goldman Sachs, JBL, Merrill
Lynch or RBC, as applicable. Each of Goldman Sachs, JBL, Merrill Lynch and RBC is registered as an FCM with the CFTC and is a member of the NFA. Goldman Sachs, JBL and RBC are clearing members of the CBOT, CME, NYMEX, and all other major U.S.
commodity exchanges. Merrill Lynch is a clearing member of the CBOT and the CME, and is either a clearing member or member of all other principal U.S. futures and futures options exchanges. With regard to those domestic futures and futures options
exchanges of which it is not a clearing member, Merrill Lynch has entered into third party brokerage relationships with FCMs that are clearing members of those exchanges. None of Goldman Sachs, JBL, Merrill Lynch or RBC are affiliated with or act as
a supervisor of the Trust, the Funds, the Sponsor, the Trustee, or BBH&Co. (the Administrator and the Custodian). None of Goldman Sachs, JBL, Merrill Lynch or RBC, in their capacity as FCMs, are acting as underwriters or sponsors of the offering
of the Shares, or have passed upon the merits of participating in this offering. None of Goldman Sachs, JBL, Merrill Lynch or RBC have passed upon the adequacy of this Prospectus or on the accuracy of the information contained herein. None of
Goldman Sachs, JBL, Merrill Lynch or RBC provide any commodity trading advice regarding the Funds trading activities. Investors should not rely upon Goldman Sachs, JBL, Merrill Lynch or RBC in deciding whether to invest in the Funds or retain
their interests in the Funds. Prospective investors should also note that the Sponsor may select additional clearing brokers or replace Goldman Sachs, JBL, Merrill Lynch and/or RBC as the Funds clearing broker.
To the extent, if any, that the Funds enter into trades in futures on markets other than regulated U.S. futures exchanges, funds
deposited to margin positions held on such exchanges are invested in bank deposits or in instruments of a credit standing generally comparable to those authorized by the CFTC for investment of customer segregated funds, although
applicable CFTC rules prohibit funds employed in trading on foreign exchanges from being deposited in customer segregated fund accounts.
The Sponsor, a registered commodity pool operator, is responsible for the cash management activities of the Funds, including investing in cash equivalents that may be used as margin for the Financial
Instruments as described above.
- 96 -
WHO MAY SUBSCRIBE
Only Authorized Participants may create or redeem Creation Units. Each Authorized Participant must (1) be a registered broker-dealer
or other securities market participant such as a bank or other financial institution which is not required to register as a broker-dealer to engage in securities transactions, (2) be a participant in DTC, and (3) have entered into an
agreement with the Trust and the Sponsor (an Authorized Participant Agreement).
CREATION AND
REDEMPTION OF SHARES
Each Fund creates and redeems Shares from time to time, but only in one or more Creation Units. A
Creation Unit is a block of 50,000 Shares of the Geared Fund or 25,000 Shares of the Matching Fund. Except when aggregated in Creation Units, the Shares are not redeemable securities.
The manner by which Creation Units are purchased and redeemed is dictated by the terms of the Authorized Participant Agreement and
Authorized Participant Handbook. By placing a purchase order, an Authorized Participant agrees to deposit cash with the Custodian of the Funds (unless as provided otherwise by this Prospectus). If permitted by the Sponsor in its sole discretion with
respect to a Fund, an Authorized Participant may also agree to enter into or arrange for an exchange of futures contract for related position (EFCRP) or block trade with the relevant Fund whereby the Authorized Participant would also
transfer to such Fund a number and type of exchange-traded futures contracts at or near the closing settlement price for such contracts on the purchase order date. Similarly, the Sponsor in its sole discretion may agree with an Authorized
Participant to use an EFCRP to effect an order to redeem Creation Units.
An EFCRP is a technique permitted by the rules of
certain futures exchanges that, as utilized by a Fund in the Sponsors discretion, would allow such Fund to take a position in a futures contract from an Authorized Participant, or give futures contracts to an Authorized Participant, in the
case of a redemption, rather than to enter the futures exchange markets to obtain such a position. An EFCRP by itself will not change either partys net risk position materially. Because the futures position that a Fund would otherwise need to
take in order to meet its investment objective can be obtained without unnecessarily impacting the financial or futures markets or their pricing, EFCRPs can generally be viewed as transactions beneficial to a Fund. A block trade is a technique that
permits the VIX Fund to obtain a futures position without going through the market auction system and can generally be viewed as a transaction beneficial to the Fund.
Authorized Participants pay a fixed transaction fee of up to $500 in connection with each order to create or redeem a Creation Unit in order to compensate BBH&Co., as the Administrator, the Custodian
and the Transfer Agent of each Fund and its Shares, for services in processing the creation and redemption of Creation Units and to offset the costs of increasing or decreasing derivative positions. Authorized Participants also may pay a variable
transaction fee to the Fund of up to 0.10% of the value of the Creation Unit that is purchased or redeemed unless the transaction fee is waived or otherwise adjusted by the Sponsor. The Sponsor provides such Authorized Participant with prompt notice
in advance of any such waiver or adjustment of the transaction fee. Authorized Participants may sell the Shares included in the Creation Units they purchase from the Funds to other investors. Further detail on the fees is set forth in the Authorized
Participant Handbook.
The form of Authorized Participant Agreement and the related Authorized Participant Handbook set forth
the procedures for the creation and redemption of Creation Units and for the payment of cash required for such creations and redemptions. The Sponsor may delegate its duties and obligations under the form of Authorized Participant Agreement to SEI
or the Administrator without consent from any shareholder or Authorized Participant. The form of Authorized Participant Agreement and the related procedures attached thereto may be amended by the Sponsor without the consent of any shareholder or
Authorized Participant. Authorized Participants who purchase Creation Units from the Funds receive no fees, commissions or other form of compensation or inducement of any kind from either the Sponsor or the Funds, and no such person has any
obligation or responsibility to the Sponsor or the Fund to effect any sale or resale of Shares.
- 97 -
Authorized Participants are cautioned that some of their activities may result in their
being deemed participants in a distribution in a manner which would render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the 1933 Act, as described in Plan of Distribution.
Each Authorized Participant must be registered as a broker-dealer under the 1934 Act and regulated by FINRA, or exempt from
being, or otherwise not required to be, so regulated or registered, and must be qualified to act as a broker or dealer in the states or other jurisdictions where the nature of its business so requires. Certain Authorized Participants may be
regulated under federal and state banking laws and regulations. Each Authorized Participant must have its own set of rules and procedures, internal controls and information barriers as it determines is appropriate in light of its own regulatory
regime.
Authorized Participants may act for their own accounts or as agents for broker-dealers, custodians and other
securities market participants that wish to create or redeem Creation Units.
Persons interested in purchasing Creation Units
should contact the Sponsor or the Administrator to obtain the contact information for the Authorized Participants. Shareholders who are not Authorized Participants are only able to redeem their Shares through an Authorized Participant.
Pursuant to the Authorized Participant Agreement, the Sponsor agreed to indemnify the Authorized Participants against certain
liabilities, including liabilities under the 1933 Act, and to contribute to the payments the Authorized Participants may be required to make in respect of those liabilities.
The following description of the procedures for the creation and redemption of Creation Units is only a summary and an investor should refer to the relevant provisions of the Trust Agreement and the form
of Authorized Participant Agreement for more detail. The Trust Agreement and the form of Authorized Participant Agreement are filed as exhibits to the Registration Statement of which this Prospectus is a part.
Creation Procedures
On any Business Day, an Authorized Participant may place an order with the Distributor to create one or more Creation Units. For purposes of processing both purchase and redemption orders, a
Business Day for each VIX Fund means any day on which the NAV of such Fund is determined.
Purchase orders must be
placed by the cut-off time shown on page 3 or earlier if the NYSE, a Funds primary listing exchange or other exchange material to the valuation or operation of such Fund (any Exchange) closes before the cut-off time. If a purchase order is
received prior to the applicable cut-off time, the day on which SEI receives a valid purchase order is the purchase order date. If the purchase order is received after the applicable cut-off time, the purchase order date will be the next day.
Purchase orders are irrevocable. By placing a purchase order, and prior to delivery of such Creation Units, an Authorized Participants DTC account will be charged the non-refundable transaction fee due for the purchase order.
Determination of Required Payment
The total payment required to create each Creation Unit is the NAV of 50,000 Shares of the applicable Geared Fund, or 25,000 Shares of the Matching Fund, on the purchase order date plus the applicable
transaction fee. For each Fund, Authorized Participants have create/redeem cut-off times prior to the NAV calculation time, which may be different from the close of U.S. markets, as shown in the table on page 3.
Delivery of Cash
Cash required for settlement will typically be transferred to the Custodian through: (1) the Continuous Net Settlement
(CNS) clearing process of NSCC, as such processes have been enhanced to effect creations and redemptions of Creation Units; or (2) the facilities of DTC on a Delivery Versus Payment (DVP) basis, which is
- 98 -
the procedure in which the buyers payment for securities is due at the time of delivery. Security delivery and payment are simultaneous. If the Custodian does not receive the cash by the
market close on the first Business Day following the purchase order date (T+1), such order may be charged interest for delayed settlement or cancelled. The Sponsor reserves the right to extend the deadline for the Custodian to receive the cash
required for settlement up to the third Business Day following the purchase order date (T+3). In the event a purchase order is cancelled, the Authorized Participant will be responsible for reimbursing the Fund for all costs associated with
cancelling the order including costs for repositioning the portfolio. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. Additional fees may apply for special settlement. The Creation Unit will be delivered to the
Authorized Participant upon the Custodians receipt of the purchase amount.
Delivery of Exchange of Futures Contract for Related
Position (EFCRP) Futures Contracts or Block Trades
In the event that the Sponsor shall have determined to permit the
Authorized Participant to transfer futures contracts pursuant to an EFCRP or to engage in a block trade purchase of futures contracts from the Authorized Participant with respect to a Fund, as well as to deliver cash, in the creation process,
futures contracts required for settlement must be transferred directly to the Funds account at its FCM. If the cash is not received by the market close on the third Business Day following the purchase order date (T+3); such order may be
charged interest for delayed settlements or cancelled. In the event a purchase order is cancelled, the Authorized Participant will be responsible for reimbursing a Fund for all costs associated with cancelling the order including costs for
repositioning the portfolio. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. The Creation Unit will be delivered to the Authorized Participant upon the Custodians receipt of the cash purchase amount and the
futures contracts.
Suspension or Rejection of Purchase Orders
In respect of any Fund, the Sponsor may, in its discretion, suspend the right to purchase, or postpone the purchase settlement date,
(1) for any period during which any of the NYSE, NYSE Arca, CBOE, CFE, CME (including CBOT and NYMEX) or ICE or other exchange material to the valuation or operation of the Funds is closed or when trading is suspended or restricted on such
exchanges in any of the underlying VIX futures contracts; (2) for any period during which an emergency exists as a result of which the fulfillment of a purchase order is not reasonably practicable; or (3) for such other period as the
Sponsor determines to be necessary for the protection of the shareholders. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
The Sponsor also may reject a purchase order if:
|
|
|
it determines that the purchase order is not in proper form;
|
|
|
|
the Sponsor believes that the purchase order would have adverse tax consequences to a Fund or its shareholders;
|
|
|
|
the order would be illegal; or
|
|
|
|
circumstances outside the control of the Sponsor make it, for all practical purposes, not feasible to process creations of Creation Units.
|
None of the Sponsor, the Administrator or the Custodian will be liable for the suspension or rejection of
any purchase order.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or more Creation Units mirror the procedures for the creation of Creation
Units. On any Business Day, an Authorized Participant may place an order with the Distributor to redeem one or more Creation Units. If a redemption order is received prior to the
- 99 -
applicable cut-off time, or earlier if any Exchange closes before the cut-off time, the day on which SEI receives a valid redemption order is the redemption order date. If the redemption order is
received after the applicable cut-off time, the redemption order date will be the next day. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to redeem Creation Units. Individual shareholders may not redeem
directly from a Fund.
By placing a redemption order, an Authorized Participant agrees to deliver the Creation Units to be
redeemed through DTCs book-entry system to the applicable Fund not later than noon (Eastern Time), on the first Business Day immediately following the redemption order date (T+1). The Sponsor reserves the right to extend the deadline for the
Fund to receive the Creation Units required for settlement up to the third Business Day following the redemption order date (T+3). By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant must wire to
the Custodian the non-refundable transaction fee due for the redemption order or any proceeds due will be reduced by the amount of the fee payable. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. Additional fees may
apply for special settlement.
Upon request of an Authorized Participant made at the time of a redemption order, the Sponsor
at its sole discretion may determine, in addition to delivering redemption proceeds, to transfer futures contracts to the Authorized Participant pursuant to an EFCRP or to a block trade sale of futures contracts to the Authorized Participant.
Determination of Redemption Proceeds
The redemption proceeds from a Fund consist of the cash redemption amount and, if permitted by the Sponsor in its sole discretion with respect to a Fund, an EFCRP or block trade with the relevant Fund as
described in Creation and Redemption of Shares above. The cash redemption amount is equal to the NAV of the number of Creation Unit(s) of such Fund requested in the Authorized Participants redemption order as of the time of
the calculation of such Funds NAV on the redemption order date, less transaction fees and any amounts attributable to any applicable EFCRP or block trade.
Delivery of Redemption Proceeds
The redemption proceeds due from a
Fund are delivered to the Authorized Participant at noon (Eastern Time), on the third Business Day immediately following the redemption order date if, by such time on such Business Day immediately following the redemption order date, a Funds
DTC account has been credited with the Creation Units to be redeemed. The Fund should be credited through: (1) the CNS clearing process of NSCC, as such processes have been enhanced to effect creations and redemptions of Creation Units; or
(2) the facilities of DTC on a Delivery Versus Payment basis. If a Funds DTC account has not been credited with all of the Creation Units to be redeemed by such time, the redemption distribution is delivered to the extent whole Creation
Units are received. Any remainder of the redemption distribution is delivered on the next Business Day to the extent any remaining whole Creation Units are received if: (1) the Sponsor receives the fee applicable to the extension of the
redemption distribution date which the Sponsor may, from time to time, determine, and (2) the remaining Creation Units to be redeemed are credited to the Funds DTC account by noon (Eastern Time), on such next Business Day. Any further
outstanding amount of the redemption order may be cancelled. The Authorized Participant will be responsible for reimbursing a Fund for all costs associated with cancelling the order including costs for repositioning the portfolio.
The Sponsor is also authorized to deliver the redemption distribution notwithstanding that the Creation Units to be redeemed are not
credited to a Funds DTC account by noon (Eastern Time), on the third Business Day immediately following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the Creation Units through DTCs
book-entry system on such terms as the Sponsor may determine from time to time.
- 100 -
In the event that the Authorized Participant shall have requested, and the Sponsor shall
have determined to permit the Authorized Participant to receive futures contracts pursuant to an EFCRP, as well as the cash redemption proceeds, in the redemption process, futures contracts required for settlement shall be transferred directly from
the Funds account at its FCM to the account of the Authorized Participant at its FCM.
Suspension or Rejection of Redemption
Orders
In respect of any Fund, the Sponsor may, in its discretion, suspend the right of redemption, or postpone the
redemption settlement date, (1) for any period during which any of the NYSE, NYSE Arca, CBOE, CFE, CME (including CBOT and NYMEX) or ICE or other exchange material to the valuation or operation of the Funds is closed or when trading is
suspended or restricted on such exchanges in any of the underlying VIX futures contracts; (2) for any period during which an emergency exists as a result of which the redemption distribution is not reasonably practicable; or (3) for such
other period as the Sponsor determines to be necessary for the protection of the shareholders. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
The Sponsor will reject a redemption order if the order is not in proper form as described in the form of Authorized Participant
Agreement or if the fulfillment of the order might be unlawful.
Creation and Redemption Transaction Fee
To compensate BBH&Co. for services in processing the creation and redemption of Creation Units and to offset some or
all of the transaction costs, an Authorized Participant may be required to pay a fixed transaction fee to BBH&Co. of up to $500 per order to create or redeem Creation Units and may pay a variable transaction fee to a Fund of up to 0.10% of the
value of a Creation Unit. An order may include multiple Creation Units. The transaction fee(s) may be reduced, increased or otherwise changed by the Sponsor at its sole discretion.
Special Settlement
The Sponsor may allow for
early settlement of purchase or redemption orders. Such arrangements may result in additional charges to the Authorized Participant.
- 101 -
LITIGATION
As of the date of this Prospectus, there is no pending legal proceeding, other than ordinary routine litigation incidental to the
business of the Trust and that which is described below, to which the Trust or a Fund is a claimant or defendant or to which any of their property is the subject.
As of the date of this Prospectus, there are no material administrative, civil or criminal actions, whether pending or concluded, within five years preceding the date of the Prospectus, against the
Sponsor. Louis Mayberg and Michael Sapir, both principals of the Sponsor, have been named as defendants in a purported class action lawsuit in the United States District Court for the Southern District of New York, styled I
n re ProShares Trust
Securities Litigation, Civ. No. 09-cv-6935
. The Trust is also a defendant in this action, along with several others. The action was initially brought by Steven Novick, on behalf of himself and all others similarly situated, in a complaint
filed August 5, 2009, and was consolidated on April 28, 2011, with 33 related putative class actions. The second amended complaint alleges that the defendants violated Sections 11 and 15 of the 1933 Act by including untrue statements of
material fact and omitting material facts in the Registration Statement for one or more of ProShares exchange-traded funds (ETFs) and allegedly failing to adequately disclose the funds investment objectives and risks.
Claimants, all purchasers of shares of ETFs sold by the Trust or ProShares Trust, seek class certification, compensatory damages, punitive damages, litigation costs, expectation damages and declaratory judgment. The six other series of the Trust
named in the complaint are ProShares Ultra Silver, ProShares Ultra Gold, ProShares UltraShort Gold, ProShares UltraShort DJ-UBS Crude Oil, ProShares Ultra DJ-UBS Crude Oil, and ProShares UltraShort Silver. On September 10, 2012, the District
Court issued an Opinion and Order dismissing the class action lawsuit in its entirety. On December 17, 2012, the plaintiffs filed an appeal brief to the United States Court of Appeals for the Second Circuit. Oral argument on plaintiffs
appeal before the United States Court of Appeals for the Second Circuit was held on May 2, 2013. The Trust believes the complaint is without merit and that the anticipated outcome will not adversely impact the operation of the Trust or any of
its funds. Accordingly, no loss contingency has been recorded in the balance sheet and the amount of loss, if any, cannot be reasonably estimated at this time.
JBL currently is an indirect, wholly owned subsidiary of Jefferies Group, LLC, which in turn is an indirect, wholly owned subsidiary of Leucadia National Corporation. Prior to July 1, 2011, JBL had
been an indirect, wholly owned subsidiary of Prudential Financial, Inc., operating under the name Prudential Bache Commodities, LLC. JBL is registered as an FCM with the CFTC and is a member of the NFA. Goldman Sachs, JBL and RBC are clearing
members of the CBOT, CME, NYMEX, and all other major U.S. commodity exchanges. Merrill Lynch is registered as an FCM with the CFTC and is a member of the NFA. Merrill Lynch is a clearing member of the CBOT and the CME, and is either a clearing
member or member of all other principal U.S. futures and futures options exchanges. With regard to those domestic futures and futures options exchanges of which it is not a clearing member, Merrill Lynch has entered into third party brokerage
relationships with FCMs that are clearing members of those exchanges.
From time to time each of Goldman Sachs, JBL, Merrill
Lynch and RBC (in its capacity as a commodities broker) and its respective principals may be involved in numerous legal actions, some of which individually and all of which in the aggregate, seek significant or indeterminate damages. However, except
for the actions described in the section entitled Futures Commission MerchantsLitigation and Regulatory Disclosure Relating to FCMs beginning on page 44, each of Goldman Sachs, JBL, Merrill Lynch and RBC has advised that during the
five years preceding the date of this Prospectus there has been no material administrative, civil, or criminal action against it or any of its respective principals.
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DESCRIPTION OF THE SHARES; THE FUNDS;
CERTAIN MATERIAL TERMS OF THE TRUST AGREEMENT
The following summary describes in brief the Shares and certain aspects of the operation of the Trust, the Funds, and the respective responsibilities of the Trustee and the Sponsor concerning the Trust
and the material terms of the Trust Agreement. Prospective investors should carefully review the Trust Agreement filed as an exhibit to the Registration Statement of which this Prospectus is a part and consult with their own advisers concerning the
implications to such prospective investors of investing in a series of a Delaware statutory trust. Capitalized terms used in this section and not otherwise defined shall have such meanings assigned to them under the Trust Agreement.
Description of the Shares
Each Fund issues, or will issue, common units of beneficial interest, or Shares, which represent units of fractional undivided beneficial interest in and ownership of the Funds.
The Shares may be purchased from the Funds or redeemed on a continuous basis, but only by Authorized Participants and only in Creation
Units. Individual Shares may not be purchased or redeemed from the Funds. Shareholders that are not Authorized Participants may not purchase or redeem any Shares or Creation Units from the Funds.
Principal Office; Location of Records; Fiscal Year
The Trust is organized as a statutory trust under the DSTA. The Trust is managed by the Sponsor, whose office is located at 7501 Wisconsin
Avenue, Suite 1000, Bethesda, Maryland 20814.
The books and records of the Funds are maintained as follows: all marketing
materials are maintained at the offices of SEI, One Freedom Valley Drive, Oaks, Pennsylvania 19456. Creation Unit creation and redemption books and records, certain financial books and records (including Fund accounting records, ledgers with respect
to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related details) and certain trading and related documents received from FCMs are maintained by BBH&Co., 50 Milk Street, Boston, Massachusetts 02109.
All other books and records of the Funds (including minute books and other general corporate records, trading records and
related reports) are maintained at the Funds principal office, c/o ProShare Capital Management LLC, 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814.
Trust books and records located at the foregoing addresses, are available for inspection and copying (upon payment of reasonable reproduction costs) by Fund shareholders or their representatives for any
purposes reasonably related to such shareholders interest as a beneficial owner during regular business hours as provided in the Trust Agreement. The Sponsor will maintain and preserve the Trusts books and records for a period of not
less than six years.
The fiscal year of each Fund ends on December 31 of each year.
The Funds
The Trust is formed and operated in a manner such that each Fund is liable only for obligations attributable to such Fund and shareholders of a Fund are not subject to the losses or liabilities of any
other series of the Trust. If any creditor or shareholder in a Fund asserted against a Fund a valid claim with respect to its indebtedness or Shares, the creditor or shareholder would only be able to recover money from that particular Fund and its
assets. Accordingly, the debts, liabilities, obligations and expenses, or collectively, claims, incurred, contracted for or otherwise existing solely with respect to a particular Fund are enforceable only against the assets of that Fund,
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and not against any other series of the Trust or the Trust generally, or any of their respective assets. The assets of each Fund include only those funds and other assets that are paid to, held
by or distributed to the Fund on account of and for the benefit of that Fund, including, without limitation, funds delivered to the Trust for the purchase of Shares or Creation Units in a Fund. This limitation on liability is referred to as the
Inter-Series Limitation on Liability. The Inter-Series Limitation on Liability is expressly provided for under the DSTA, which provides that if certain conditions (as set forth in Section 3804(a)) are met, then the debts of any
particular series will be enforceable only against the assets of such series and not against the assets of any other series of the Trust or the Trust generally.
The Trustee
Wilmington Trust Company, a
Delaware trust company, is the sole Trustee of the Trust. The rights and duties of the Trustee and the Sponsor with respect to the offering of the Shares and Fund management and the shareholders are governed by the provisions of the DSTA and by the
Trust Agreement. The Trustee will accept service of legal process on the Trust in the State of Delaware and will make certain filings under the DSTA. The Trustee does not owe any other duties to the Trust, the Sponsor or the shareholders of a Fund.
The Trustees principal offices are located at 1100 North Market Street, Wilmington, Delaware 19890. The Trustee is unaffiliated with the Sponsor.
The Trustee is permitted to resign upon at least sixty (60) days notice to the Trust,
provided
, that any such resignation will not be effective until a successor Trustee is appointed by
the Sponsor. The Trustee is compensated by the Funds, as appropriate, and is indemnified by the Funds, as appropriate, against any expenses it incurs relating to or arising out of the formation, operation or termination of such Fund, as appropriate,
or the performance of its duties pursuant to the Trust Agreement, except to the extent that such expenses result from the gross negligence or willful misconduct of the Trustee. The Sponsor has the discretion to replace the Trustee.
Only the assets of the Trust and the Sponsor are subject to issuer liability under the federal securities laws for the information
contained in this Prospectus and under federal securities laws with respect to the issuance and sale of the Shares. Under such laws, neither the Trustee, either in its capacity as Trustee or in its individual capacity, nor any director, officer or
controlling person of the Trustee is, or has any liability as, the issuer or a director, officer or controlling person of the issuer of the Shares. The Trustees liability in connection with the issuance and sale of the Shares is limited solely
to the express obligations of the Trustee set forth in the Trust Agreement.
Under the Trust Agreement, the Sponsor has
exclusive management and control of all aspects of the Trusts business. The Trustee has no duty or liability to supervise the performance of the Sponsor, nor will the Trustee have any liability for the acts or omissions of the Sponsor. The
shareholders have no voice in the day-to-day management of the business and operations of the Funds and the Trust, other than certain limited voting rights as set forth in the Trust Agreement. In the course of its management of the business and
affairs of the Funds and the Trust, the Sponsor may, in its sole and absolute discretion, appoint an affiliate or affiliates of the Sponsor as additional sponsors and retain such persons, including affiliates of the Sponsor, as it deems necessary to
effectuate and carry out the purposes, business and objectives of the Trust.
Because the Trustee has no authority over the
Trusts operations, the Trustee itself is not registered in any capacity with the CFTC.
The Sponsor
ProShare Capital Management LLC, is the Sponsor of the Trust, the Funds and the other series of the Trust. As noted above,
the Sponsor has exclusive management and control of all aspects of the business of the Funds. The Trustee has no duty or liability to supervise the performance of the Sponsor, nor will the Trustee have any liability for the acts or omissions of the
Sponsor.
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The Sponsor serves as the Trusts commodity pool operator.
Specifically, with respect to the Trust, the Sponsor:
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selects the Funds service providers;
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negotiates various agreements and fees;
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performs such other services as the Sponsor believes that the Trust may require from time to time;
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selects the FCM and Financial Instrument counterparties, if any;
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manages the Funds portfolio of other assets, including cash equivalents; and
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manages the Funds with a view toward achieving the Funds investment objectives.
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The Shares are not deposits or other obligations of the Sponsor, the Trustee or any of their respective subsidiaries or affiliates or any
other bank, are not guaranteed by the Sponsor, the Trustee or any of their respective subsidiaries or affiliates or any other bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. An investment in
the Shares of the Funds offered hereby is speculative and involves a high degree of risk.
The principal office of the Sponsor
is located at 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814. The telephone number of the Sponsor is (240) 497-6400.
Background and Principals
The Sponsor currently serves as the commodity pool operator of the Trust and the Funds, and previously also served as the commodity trading advisor to the Trust and the Funds. The Sponsor is registered as
a commodity pool operator with the CFTC and is a member in good standing of the NFA. The Sponsors membership with the NFA was originally approved on June 11, 1999. It withdrew its membership with the NFA on August 31, 2000 but later
re-applied and had its membership subsequently approved on January 8, 2001. Its membership with the NFA is currently effective. The Sponsors registration as a commodity trading advisor was approved on June 11, 1999. On
February 17, 2013, the Sponsors commodity trading advisor registration was withdrawn. The Sponsors registration as a commodity pool operator was originally approved on June 11, 1999. It withdrew its registration as a commodity
pool operator on August 30, 2000 but later re-applied and had its registration subsequently approved on November 28, 2007. Its registration as a commodity pool operator is currently effective. As a registered commodity pool operator, with
respect to the Trust, the Sponsor must comply with various regulatory requirements under the CEA, and the rules and regulations of the CFTC and the NFA, including investor protection requirements, antifraud prohibitions, disclosure requirements, and
reporting and recordkeeping requirements. The Sponsor is also subject to periodic inspections and audits by the CFTC and NFA. Its principal place of business is 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814, and its telephone number is
(240) 497-6400. The registration of the Sponsor with the CFTC and its membership in the NFA must not be taken as an indication that either the CFTC or the NFA has recommended or approved the Sponsor, the Trust and the Funds.
In its capacity as a commodity pool operator, the Sponsor is an organization which operates or solicits funds for commodity pools; that
is, an enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures contracts. For past performance of commodity pools operated by the Sponsor, see the section entitled Performance of the Offered
Commodity Pools Operated by the Commodity Pool Operator beginning on page 39 and the section entitled Performance of Other Commodity Pools Operated by the Commodity Pool Operator beginning on page 82.
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Executive Officers of the Trust and Principals and Significant Employees of the Sponsor
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Name
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Position
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Michael L. Sapir
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Chief Executive Officer and Principal of the Sponsor
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Louis M. Mayberg
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Principal Executive Officer of the Trust; Chief Financial Officer and Principal of the Sponsor
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William E. Seale
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Principal of the Sponsor
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Sapir Family Trust
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Principal of the Sponsor
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Northstar Trust
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Principal of the Sponsor
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Edward J. Karpowicz
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Principal Financial Officer of the Trust
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Todd B. Johnson
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Chief Investment Officer and Principal of the Sponsor
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Howard S. Rubin
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Director, Portfolio Management and Associated Person of the Sponsor
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Michael Neches
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Senior Portfolio Manager and Associated Person of the Sponsor
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Jeffrey Ploshnick
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Senior Portfolio Manager and Associated Person of the Sponsor
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Ryan Dofflemeyer
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Portfolio Manager and Associated Person of the Sponsor
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Lisa P. Johnson
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Principal of the Sponsor
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Victor M. Frye
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Principal of the Sponsor
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Denotes principal of the Sponsor who supervises persons who participate in making trading decisions for the Funds.
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The following is a biographical summary of the business experience of the executive officers of the Trust and the principals and
significant employees of the Sponsor.
ProFund Advisors LLC (PFA) and ProShare Advisors LLC (PSA) are
investment advisers registered under the Investment Advisers Act of 1940 (the Advisers Act). PFA is also a commodity trading advisor registered under the CEA.
Michael L. Sapir
, Chairman, Chief Executive Officer and a listed principal of the Sponsor since August 14, 2008; Chairman, Chief Executive Officer and a member of PFA since April 1997, and a
listed principal of PFA since November 26, 2012; and Chairman, Chief Executive Officer and a member of PSA since January 2005. As Chairman and Chief Executive Officer of the Sponsor, PSA and PFA, Mr. Sapirs responsibilities include
oversight of all aspects of the Sponsor, PSA and PFA, respectively.
Louis M. Mayberg
, Chief Financial Officer, a
member and a listed principal of the Sponsor since June 9, 2008; a member of PFA since April 1997 and a listed principal of PFA since November 26, 2012; and a member of PSA, since January 2005. Principal Executive Officer of the Trust
since June 2008. As Chief Financial Officer of the Sponsor, Mr. Maybergs responsibilities include oversight of the financial matters of the Sponsor. As Principal Executive Officer of the Trust, his responsibilities include oversight of
operations of the Trust.
William E. Seale, Ph.D.
, a member of the Sponsor and a listed principal of the Sponsor since
June 11, 1999; a member of PFA since April 1997; and a member of PSA since April 2005. He served as Chief Investment Officer of PFA from January 2003 to July 2005 and from October 2006 to June 2008 and Director of Portfolio from January 1997 to
January 2003. He served as Chief Investment Officer of PSA from October 2006 to June 2008. In these roles, Dr. Seales responsibilities included oversight of the investment management activities of the respective entities. Dr. Seale
is a former commissioner of the CFTC.
Sapir Family Trust
, a listed principal of the Sponsor. The Sapir Family Trust
has ownership interest in the Sponsor and PSA. The Sapir Family Trust has passive ownership interest in the Sponsor and exercises no management authority over the Funds.
Northstar Trust
, a listed principal of the Sponsor. Northstar Trust has ownership interest in the Sponsor and PFA. Northstar Trust has passive ownership interest in the Sponsor and exercises no
management authority over the Funds.
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Edward J. Karpowicz
, Principal Financial Officer of the Trust since July 2008.
Mr. Karpowicz has been employed by PFA since July 2002 as Vice President of Financial Administration.
Todd B.
Johnson
, a registered swap associated person of the Sponsor since January 4, 2013, a registered associated person of the Sponsor since January 29, 2010, a listed principal of the Sponsor since January 16, 2009 and Chief Investment
Officer of the Sponsor since February 27, 2009. In this role, Mr. Johnsons responsibilities include oversight of the investment management activities of the Sponsor. Mr. Johnson has served as Chief Investment Officer of PSA and
PFA since December 2008 and has been registered as an associated person of PFA since December 5, 2012 and listed as a principal of PFA since November 26, 2012. Mr. Johnson served from 2002 to December 2008 at World Asset Management (a
financial services firm), working as President and Chief Investment Officer from January 2006 to December 2008, and as Managing Director and Chief Investment Officer of Quantitative Investments of Munder Capital Management, an asset management firm,
from January 2002 to December 2005.
Howard Rubin, CFA
, a registered associated person and an NFA associate member
of the Sponsor since July 14, 2008 and Director, Portfolio Management of the Sponsor since December 1, 2009. In these roles, Mr. Rubins responsibilities include day-to-day portfolio management of the Funds. Mr. Rubin has
been registered as an associated person of PFA since December 5, 2012. Mr. Rubin has served as Senior Portfolio Manager of PSA since December 2007 and Senior Portfolio Manager of the Sponsor from November 27, 2008 through
November 30, 2009. Mr. Rubin has also served as Senior Portfolio Manager of PFA since November 2004 and Portfolio Manager of PFA from April 2000 through November 2004. Mr. Rubin holds the Chartered Financial Analyst (CFA) designation.
Michael Neches
, a registered associated person and an NFA associate member of the Sponsor since November 16, 2011
and Senior Portfolio Manager of the Sponsor since June 27, 2012. In these roles, Mr. Neches responsibilities include day-to-day portfolio management of certain series of the Trust. Mr. Neches has been registered as an associated
person of PFA since December 5, 2012. Mr. Neches also serves as a Senior Portfolio Manager of PSA since December 2009; has served as Associate Portfolio Manager from January 2007 through November 2009; and has served as Portfolio
Analyst from November 2004 through December 2006.
Jeffrey Ploshnick
, a registered associated person and an NFA
associate member of the Sponsor since April 12, 2011 and Senior Portfolio Manager of the Sponsor since April 12, 2011. In these roles, Mr. Ploshnicks responsibilities include day-to-day portfolio management of certain series of
the Trust. Mr. Ploshnick has been registered as an associated person of PFA since December 5, 2012. Mr. Ploshnick also serves as a Senior Portfolio Manager of PFA since May 2007 and has served as Portfolio Manager from February 2001
to April 2007.
Ryan Dofflemeyer
, a registered associated person and an NFA associate member of the Sponsor since
October 26, 2010 and Portfolio Manager of the Sponsor since January 3, 2011. In these roles, Mr. Dofflemeyers responsibilities include day-to-day portfolio management of the VIX Funds and certain other series of the Trust.
Mr. Dofflemeyer has been registered as an associated person of PFA since December 5, 2012. Mr. Dofflemeyer also serves as a Portfolio Manager of PFA since August 2007 and was a Portfolio Analyst between October 2003 and August
2007. In addition, Mr. Dofflemeyer also serves as Portfolio Manager for Horizon BetaPro Funds (investment funds) since May 2008 and Portfolio Manager of PSA since March 2010. Mr. Dofflemeyer worked as a Research Assistant for the
Investment Company Institute (investment funds trade organization) from September 2001 to August 2003.
Lisa Johnson
, a
listed principal of the Sponsor since November 11, 2008 and a listed principal of PFA since November 26, 2012. Ms. Johnsons responsibilities include the review and approval of advertising material of the Sponsor.
Ms. Johnson has been employed with PDI since April 2008 as Head of Compliance. Prior to her employment with PDI, Ms. Johnson was the Senior Corporate Compliance Officer for ICMA Retirement Corporation (a financial services company) where
she was employed from February 2005 to April 2008. She served as Senior Compliance Officer for Delaware Investments (a financial services firm) from January 2001 to
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February 2005. Ms. Johnson is FINRA registered and holds Series 7, 24 and 63 licenses. She also possesses a Certified Regulatory and Compliance Professional designation, from the NASD
Institute at Wharton.
Victor Frye
, a listed principal of the Sponsor since December 2, 2008 and a listed
principal of PFA since November 26, 2012. Mr. Fryes responsibilities include the review and approval of advertising material of the Sponsor. Mr. Frye has been employed by PFA since October 2002 as Chief Compliance Officer.
Fiduciary and Regulatory Duties of the Sponsor
The general fiduciary duties which would otherwise be imposed on the Sponsor (which would make its operation of the Trust as described
herein impracticable due to the strict prohibition imposed by such duties on, for example, conflicts of interest on behalf of a fiduciary in its dealings with its beneficiaries), are replaced by the terms of the Trust Agreement (to which terms all
shareholders, by subscribing to the Shares, are deemed to consent).
The Trust Agreement provides that the Sponsor and its
affiliates shall have no liability to the Trust or to any shareholder for any loss suffered by the Trust arising out of any action or inaction of the Sponsor or its affiliates or their respective directors, officers, shareholders, partners, members,
managers or employees (the Sponsor Related Parties), if the Sponsor Related Parties, in good faith, determined that such course of conduct was in the best interests of the Funds and such course of conduct did not constitute gross
negligence or willful misconduct by the Sponsor Related Parties. The Trust has agreed to indemnify the Sponsor Related Parties against claims, losses or liabilities based on their conduct relating to the Trust,
provided
that the conduct
resulting in the claims, losses or liabilities for which indemnity is sought did not constitute gross negligence or willful misconduct and was done in good faith and in a manner reasonably believed to be in the best interests of the Funds.
Under Delaware law, a beneficial owner of a statutory trust (such as a shareholder of a Fund) may, under certain
circumstances, institute legal action on behalf of himself and all other similarly situated beneficial owners (a class action) to recover damages for violations of fiduciary duties, or on behalf of a statutory trust (a derivative
action) to recover damages from a third party where there has been a failure or refusal to institute proceedings to recover such damages. In addition, beneficial owners may have the right, subject to certain legal requirements, to bring class
actions in federal court to enforce their rights under the federal securities laws and the rules and regulations promulgated thereunder by the SEC. Beneficial owners who have suffered losses in connection with the purchase or sale of their
beneficial interests may be able to recover such losses from the Sponsor where the losses result from a violation by the Sponsor of the anti-fraud provisions of the federal securities laws.
Under certain circumstances, shareholders also have the right to institute a reparations proceeding before the CFTC against the Sponsor
(a registered commodity pool operator), an FCM, as well as those of their respective employees who are required to be registered under the CEA, and the rules and regulations promulgated thereunder. Private rights of action are conferred by the CEA.
Investors in futures and in commodity pools may, therefore, invoke the protections provided thereunder.
The foregoing summary
describing in general terms the remedies available to shareholders under federal law is based on statutes, rules and decisions as of the date of this Prospectus. As this is a rapidly developing and changing area of the law, shareholders who believe
that they may have a legal cause of action against any of the foregoing parties should consult their own counsel as to their evaluation of the status of the applicable law at such time.
Ownership or Beneficial Interest in the Funds
As of the date of this Prospectus, the Sponsor owns one Share of ProShares VIX Short-Term Futures ETF. As of the date of this Prospectus,
the Sponsor does not own any Shares of ProShares Ultra VIX Short-Term Futures ETF. As of the date of this Prospectus, none of the principals of the Sponsor have an ownership or beneficial interest in any Fund.
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Although the Sponsor does not currently trade or hold any commodity interests for its own
account as of the date of this Prospectus, the Sponsor and its principals reserve the right to trade commodity interests for their own accounts. Fund investors will not be permitted to inspect the records of such persons trades or any written
policies related to such trading.
Management; Voting by Shareholders
The shareholders of the Funds take no part in the management or control, and have no voice in the Trusts operations or business.
The Sponsor has the right unilaterally to amend the Trust Agreement as it applies to the Funds
provided
that the
shareholders have the right to vote only if expressly required under Delaware or federal law or rules or regulations of the NYSE Arca, or if submitted to the shareholders by the Sponsor in its sole discretion. No amendment affecting the Trustee
shall be binding upon or effective against the Trustee unless consented to by the Trustee in writing.
Recognition of the Trust and the Funds in Certain States
A number of states do not have statutory trust statutes such as that under which the Trust has been formed in the State of
Delaware. It is possible, although unlikely, that a court in such a state could hold that, due to the absence of any statutory provision to the contrary in such jurisdiction, the shareholders, although entitled under Delaware law to the same
limitation on personal liability as stockholders in a private corporation for profit organized under the laws of the State of Delaware, are not so entitled in such state.
Possible Repayment of Distributions Received by Shareholders
The Shares are limited liability investments; investors may not lose more than the amount that they invest plus any profits recognized on their investment. However, shareholders of the Funds could be
required, as a matter of bankruptcy law, to return to the estate of a Fund any distribution they received at a time when such Fund was in fact insolvent or in violation of the Trust Agreement.
Shares Freely Transferable
The Shares of each Fund trade, or will trade, on the NYSE Arca and provide institutional and retail investors with direct access to each Fund. Each Funds Shares may be bought and sold on the NYSE
Arca like any other exchange-listed security.
Book-Entry Form
Individual certificates will not be issued for the Shares. Instead, global certificates are deposited by the Trust with DTC and registered
in the name of Cede & Co., as nominee for DTC. The global certificates evidence all of the Shares outstanding at any time. Under the Trust Agreement, shareholders are limited to (1) participants in DTC such as banks, brokers, dealers
and trust companies (DTC Participants), (2) those who maintain, either directly or indirectly, a custodial relationship with a DTC Participant (Indirect Participants), and (3) those banks, brokers, dealers, trust
companies and others who hold interests in the Shares through DTC Participants or Indirect Participants. The Shares are only transferable through the book-entry system of DTC. Shareholders who are not DTC Participants may transfer their Shares
through DTC by instructing the DTC Participant holding their Shares (or by instructing the Indirect Participant or other entity through which their Shares are held) to transfer the Shares. Transfers are made in accordance with standard securities
industry practice.
Reports to Shareholders
The Sponsor will furnish an annual report of the Funds in the manner required by the rules and regulations of the SEC as well as with
those reports required by the CFTC and the NFA, including, but not limited to, annual
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audited financial statements of the Funds examined and certified by independent registered public accountants and any other reports required by any other governmental authority that has
jurisdiction over the activities of the Funds. Monthly account statements conforming to CFTC and NFA requirements are posted on the Sponsors website at
www.ProShares.com
. Shareholders of record will also be provided with appropriate
information to permit them to file U.S. federal and state income tax returns with respect to Shares held. Additional reports may be posted on the Sponsors website at the discretion of the Sponsor or as required by regulatory authorities.
The Sponsor will notify shareholders of any change in the fees paid by the Trust or of any material changes to the Funds by
filing with the SEC a supplement to this Prospectus and a Form 8-K, as applicable, which will be publicly available at
www.sec.gov
and at the Sponsors website at
www.ProShares.com
. Any such notification will include a description
of shareholders voting rights.
Net Asset Value (NAV)
The NAV in respect of a Fund, means the total assets of that Fund including, but not limited to, all cash and cash equivalents or other
debt securities less total liabilities of such Fund, consistently applied under the accrual method of accounting. In particular, the NAV includes any unrealized profit or loss on open Financial Instruments, and any other credit or debit accruing to
a Fund but unpaid or not received by a Fund. The NAV per Share of a Fund is computed by dividing the value of the net assets of such Fund (
i.e.
, the value of its total assets less total liabilities) by its total number of Shares outstanding.
Expenses and fees are accrued daily and taken into account for purposes of determining the NAV. Each Funds NAV is calculated on each day other than a day when one (or more) of such Funds Exchanges is closed for regular trading. The Funds
compute their NAVs at the time set forth below or an earlier time as set forth on www.ProShares.com if necessitated by an Exchange closing early.
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Fund
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NAV Calculation Time
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ProShares Ultra VIX Short-Term Futures ETF
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4:15 p.m. (Eastern Time)
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ProShares VIX Short-Term Futures ETF
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In calculating the NAV of a Fund, the settlement value of the Funds non-exchange-traded Financial
Instruments, is determined by applying the then-current disseminated levels for the applicable index to the terms of such Funds non-exchange-traded Financial Instruments. However, in the event that an underlying VIX futures contract is not
trading due to the operation of daily limits or otherwise, the Sponsor may, in its sole discretion, choose to fair value the index level in order to value the Funds non-exchange-traded Financial Instruments for purposes of the NAV calculation.
Such fair value prices would generally be determined based on available inputs about the current value of the underlying VIX futures contract and would be based on principles that the Sponsor deems fair and equitable so long as such principles are
consistent with normal industry standards.
Futures contracts traded on a U.S. exchange are calculated at their then current
market value, which is based upon the settlement price (for VIX Funds) or the last traded price before the NAV time, for that particular futures contract traded on the applicable U.S. exchange on the date with respect to which the NAV is being
determined. If a futures contract traded on a U.S. exchange could not be liquidated on such day, due to the operation of daily limits or other rules of the exchange upon which that position is traded or otherwise, the Sponsor may, in its sole
discretion, choose to determine a fair value price as the basis for determining the market value of such position for such day. Such fair value prices would generally be determined based on available inputs about the current value of the underlying
VIX futures contract and would be based on principles that the Sponsor deems fair and equitable so long as such principles are consistent with normal industry standards.
The Funds may use a variety of money market instruments to invest excess cash. Short-term debt instruments used in this capacity and expected to be held-to-maturity will be priced for NAV purposes at
amortized cost.
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Indicative Optimized Portfolio Value (IOPV)
The IOPV is an indicator of the value of a Funds net assets at the time the IOPV is disseminated. The IOPV is calculated and
disseminated every 15 seconds throughout the trading day. The IOPV is generally calculated using the prior days closing net assets of a Fund as a base and updating throughout the trading day changes in the value of the Financial Instruments
held by a Fund. The IOPV should not be viewed as an actual real time update of the NAV because NAV is calculated only once at the end of each trading day. The IOPV also should not be viewed as a precise value of the Shares.
The NYSE Arca disseminates the IOPV. In addition, the IOPV is published on the NYSE Arcas website and is available through on-line
information services such as Bloomberg and/or Reuters.
Termination Events
The Trust, or, as the case may be, a Fund, may be dissolved at any time and for any reason by the Sponsor with written notice to the
shareholders.
DISTRIBUTIONS
The Sponsor does not expect to make distributions. Depending on a Funds performance and an investors own tax situation, an
investors income tax liability for his, her or its allocable share of such Funds net ordinary income or loss and capital gain or loss may exceed the capital gains an investor may realize from selling his, her or its shares of such Fund
in a taxable year.
THE ADMINISTRATOR
The Sponsor and the Trust, on behalf of itself and on behalf of the Funds, have appointed BBH&Co. as the Administrator of the Funds
and BBH&Co. has entered into an administrative agency agreement (the Administrative Agency Agreement) with the Trust (for itself and on behalf of the Funds) and the Sponsor in connection therewith. In addition, BBH&Co. serves as
Transfer Agent of the Funds pursuant to the Administrative Agency Agreement. A copy of the Administrative Agency Agreement is available for inspection at BBH&Co.s offices identified above.
The Administrators fees are paid on behalf of the Funds by the Sponsor out of the Management Fee.
Pursuant to the terms of the Administrative Agency Agreement and under the supervision and direction of the Sponsor, BBH&Co. prepares
and files certain regulatory filings on behalf of the Funds. BBH&Co. may also perform other services for the Funds pursuant to the Administrative Agency Agreement as mutually agreed to from time to time.
The Administrator and any of its affiliates may from time to time purchase or sell Shares for their own account, as agent for their
customers and for accounts over which they exercise investment discretion.
The Sponsor, on behalf of the Funds, is expected
to retain the services of one or more additional service providers to assist with certain tax reporting requirements of the Funds and their shareholders.
BBH&Co., a private bank founded in 1818, is not a publicly held company nor is it insured by the Federal Deposit Insurance Corporation. BBH&Co. is authorized to conduct a commercial banking
business in accordance with the provisions of Article IV of the New York State Banking Law, New York Banking Law §§ 160 181, and is subject to regulation, supervision, and examination by the New York State Banking Department.
BBH&Co. is also licensed to conduct a commercial banking business by the Commonwealths of Massachusetts and Pennsylvania and is subject to supervision and examination by the banking supervisors of those states.
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THE CUSTODIAN
BBH&Co. serves as the Custodian of the Funds and has entered into a custodian agreement (the Custodian Agreement) with
the Trust (for itself and on behalf of the Funds) in connection therewith. Pursuant to the terms of the Custodian Agreement, BBH&Co. is responsible for the holding and safekeeping of assets delivered to it by the Funds, and performing various
administrative duties in accordance with instructions delivered to BBH&Co. by the Funds. The Custodians fees are paid on behalf of the Funds by the Sponsor out of the Management Fee.
THE TRANSFER AGENT
BBH&Co. serves as the Transfer Agent of the Funds for Authorized Participants and has entered into the Administrative Agency Agreement referred to above in connection therewith. Pursuant to the terms
of the Administrative Agency Agreement, BBH&Co. is responsible for processing purchase and redemption orders and maintaining records of the ownership of the Funds. The Transfer Agent fees are paid on behalf of the Funds by the Sponsor out of the
Management Fee.
THE DISTRIBUTOR
SEI serves as the Distributor of the Funds and assists the Sponsor and the Administrator with functions and duties relating to
distribution and marketing, which include the following: taking creation and redemption orders, and consulting with the marketing staff of the Sponsor and its affiliates with respect to compliance matters in connection with marketing efforts.
SEI retains all marketing materials separately for the Funds, at the offices of SEI, One Freedom Valley Drive, Oaks,
Pennsylvania 19456; and its telephone number is (610) 676-1000.
The Sponsor, out of the relevant Management Fee, pays
SEI for performing its duties on behalf of the Funds. For more information on the compensation paid to SEI, see the section entitled Plan of DistributionGeneral on page 118.
Description of SEI
SEI is a wholly owned
subsidiary of SEI Investments Company, which is a public company and a global provider of investment processing, fund processing, and investment management business outsourcing solutions.
THE SECURITIES DEPOSITORY; BOOK-ENTRY ONLY SYSTEM; GLOBAL SECURITY
DTC acts as securities depository for the Shares. DTC is a limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of section 17A of the 1934 Act. DTC
was created to hold securities of DTC Participants and to facilitate the clearance and settlement of transactions in such securities among the DTC Participants through electronic book-entry changes. This eliminates the need for physical movement of
securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. Access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly. DTC has agreed to administer its book-entry system in accordance
with its rules and bylaws and the requirements of law.
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Individual certificates will not be issued for the Shares. Instead, global certificates are
signed by the Sponsor on behalf of the Funds, registered in the name of Cede & Co., as nominee for DTC, and deposited with the Trust on behalf of DTC. The global certificates evidence all of the Shares of the Funds outstanding at any time.
The representations, undertakings and agreements made on the part of the Funds in the global certificates are made and intended for the purpose of binding only the Funds and not the Trustee or the Sponsor individually.
Upon the settlement date of any creation, transfer or redemption of Shares, DTC credits or debits, on its book-entry registration and
transfer system, the amount of the Shares so created, transferred or redeemed to the accounts of the appropriate DTC Participants. The Sponsor and the Authorized Participants designate the accounts to be credited and charged in the case of creation
or redemption of Shares.
Beneficial ownership of the Shares is limited to DTC Participants, Indirect Participants and persons
holding interests through DTC Participants and Indirect Participants. Owners of beneficial interests in the Shares is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants), the
records of DTC Participants (with respect to Indirect Participants) and the records of Indirect Participants (with respect to shareholders that are not DTC Participants or Indirect Participants). Shareholders are expected to receive from or through
the DTC Participant maintaining the account through which the shareholder has purchased their Shares a written confirmation relating to such purchase.
Shareholders that are not DTC Participants may transfer the Shares through DTC by instructing the DTC Participant or Indirect Participant through which the shareholders hold their Shares to transfer the
Shares. Shareholders that are DTC Participants may transfer the Shares by instructing DTC in accordance with the rules of DTC. Transfers are made in accordance with standard securities industry practice.
DTC may decide to discontinue providing its service with respect to Creation Units and/or the Shares of the Funds by giving notice to the
Trust and the Sponsor. Under such circumstances, the Sponsor will either find a replacement for DTC to perform its functions at a comparable cost or, if a replacement is unavailable, terminate the Funds.
The rights of the shareholders generally must be exercised by DTC Participants acting on their behalf in accordance with the rules and
procedures of DTC. Because the Shares can only be held in book-entry form through DTC and DTC Participants, investors must rely on DTC, DTC Participants and any other financial intermediary through which they hold the Shares to receive the benefits
and exercise the rights described in this section. Investors should consult with their broker or financial institution to find out about procedures and requirements for securities held in book-entry form through DTC.
SHARE SPLITS OR REVERSE SPLITS
If the Sponsor believes that the per Share price of a Fund in the secondary market has fallen outside a desirable trading price range,
the Sponsor may direct the Trust to declare a split or reverse split in the number of Shares outstanding and, if necessary in the Sponsors opinion, to make a corresponding change in the number of Shares of a Fund constituting a Creation Unit.
CONFLICT OF INTEREST
The Sponsor has not established formal procedures to resolve all potential conflicts of interest. Consequently, investors may be
dependent on the good faith of the respective parties subject to such conflicts to resolve them equitably. The Sponsor does not expect that material conflicts of interest will arise in the operation of the Funds, each of which operates independently
of the others.
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MATERIAL CONTRACTS
Administrative Agency Agreement
BBH&Co. serves as the Funds Administrator pursuant to the terms of the Administrative Agency Agreement among the Trust, on behalf of itself and on behalf of the Funds, the Administrator and the
Sponsor. The Administrator performs or supervises the performance of services necessary for the operation and administration of the Funds (other than making investment decisions or providing services provided by other service providers), including
the NAV calculations, accounting and other fund administrative services.
BBH&Co. serves as the Funds Transfer
Agent. Pursuant to the Administrative Agency Agreement among the Trust, on behalf of itself and on behalf of the Funds, the Transfer Agent and the Sponsor, the Transfer Agent serves as the Funds transfer agent and agent in connection with
certain other activities as provided under the Administrative Agency Agreement. Under the Administrative Agency Agreement, the Transfer Agents services include, among other things, assisting the Funds with the issuance and redemption of
Creation Units to and from Authorized Participants, recording the issuance of Creation Units and maintaining a record of the total number of Creation Units that are authorized, issued and outstanding based upon data provided to the Transfer Agent by
the Funds or the Sponsor.
The Administrative Agency Agreement has an initial term of one year and, after the initial term,
will continue in effect for successive one year periods unless terminated on at least seventy-five (75) days prior written notice by any party to the other parties. Notwithstanding the foregoing, any party may terminate the Administrative
Agency Agreement at any time upon thirty (30) days prior written notice to the other party if either party is adjudged bankrupt or insolvent, or there shall be commenced against such party a case under any applicable bankruptcy,
insolvency or other similar law.
In its capacity as Administrator and Transfer Agent, BBH&Co. is both exculpated and
indemnified under the Administrative Agency Agreement.
Custodian Agreement
BBH&Co. serves as the Funds Custodian. Pursuant to the Custodian Agreement between the Trust, on its own behalf and on behalf of
the Funds, and the Custodian, the Custodian serves as custodian of all securities and cash at any time delivered to the Custodian by the Funds during the term of the Custodian Agreement and has authorized the Custodian to hold its securities in its
name or the names of its nominees. Pursuant to the terms of the Custodian Agreement, the Custodian may deposit and/or maintain the investment assets of the Funds in a securities depository and may appoint a subcustodian to hold investment assets of
the Funds. The Custodian establishes and maintains one or more securities accounts and cash accounts for the Funds pursuant to the Custodian Agreement. The Custodian maintains separate and distinct books and records segregating the assets of the
Funds.
The Custodian Agreement had an initial term of one year. After the initial term, the Custodian Agreement continued and
will continue in effect for successive one year periods unless the Trust, on behalf of the Funds, independently, or the Custodian terminates the Custodian Agreement by giving to the other party a notice in writing specifying the date of such
termination, which will not be less than seventy-five (75) days after the date of such notice. In the event of the appointment of a successor custodian, the parties agree that the investment assets of the Funds held by the Custodian or any
subcustodian shall be delivered to the successor custodian in accordance with reasonable instructions described in the Custodian Agreement. The parties further agree to cooperate in the execution of documents and performance of other actions
necessary or desirable in order to facilitate the succession of the new custodian. If no successor custodian is appointed, the Custodian shall in like manner transfer the Funds investment assets in accordance with the instructions set forth in
the Custodian Agreement. If no instructions are given as of the effective date of termination, the Custodian may, at any time on or after such termination date and upon ten (10) consecutive calendar days written notice to the Fund,
either: (1) deliver the investment assets held under the Custodian Agreement to the Fund; or (2) deliver any investment
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assets held under the Custodian Agreement to a bank or trust company that meets the criteria set forth in the Custodian Agreement, with such delivery being at the risk of the Funds. In the event
that investment assets or moneys of the Funds remain in the custody of the Custodian or its subcustodians after the date of termination of the Custodian Agreement due to the failure of the Fund to issue instructions with respect to its disposition
or the fact that such disposition could not be accomplished in accordance with such instructions despite diligent efforts of the Custodian, the Custodian shall be entitled to compensation for its services with respect to such investments and moneys
during such period as the Custodian or its subcustodians retain possession of such items, and the provisions of the Custody Agreement shall remain in full force and effect until the disposition of the investment assets.
The Custodian is both exculpated and indemnified under the Custodian Agreement.
Distribution Agreement
Pursuant to a
distribution agreement (the Distribution Agreement) between the Trust and SEI, SEI assists the Sponsor and the Administrator with certain functions and duties relating to distribution and marketing of Shares including reviewing and
approving marketing materials.
The Distribution Agreement became effective on the date of the offering of the Shares of the
Geared Fund and the Distribution Agreement will continue until December 19, 2014, continuing automatically for successive periods of three years. The Distribution Agreement may be terminated by either party at the end of the initial term or the
end of any renewal term on ninety (90) days prior written notice. Notwithstanding the foregoing, either party may terminate the Distribution Agreement in the event of a material breach of the agreement by the other party, upon forty-five
(45) days prior written notice, if such breach is not cured. The Distribution Agreement will automatically terminate in the event of a liquidation of the Trust.
Futures Account Agreement
Each of Goldman
Sachs, JBL, Merrill Lynch and RBC, in its capacity as a registered FCM, serves as the Funds clearing broker and as such arranges for the execution and clearing of the Funds futures transactions. Pursuant to futures account agreements
(each, a Futures Account Agreement) between Goldman Sachs and the Funds, JBL and the Funds, Merrill Lynch and the Funds and RBC and the Funds, the Funds agree to indemnify and hold harmless each of Goldman Sachs, JBL, Merrill Lynch and
RBC, its directors, officers, employees, agents and affiliates from and against all claims, damages, losses and costs (including reasonable attorneys fees) incurred by Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, in connection
with: (1) any failure by the Funds to perform its obligations under the Futures Account Agreement and any exercise by Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, of its rights and remedies thereunder; (2) any failure by the
Funds to comply with the applicable law; (3) any action reasonably taken by Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, or its affiliates or agents to comply with the applicable law; and (4) any reliance by Goldman Sachs, JBL,
Merrill Lynch or RBC, as applicable, on any instruction, notice or communication that Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable reasonably believes to originate from a person authorized to act on behalf of the Funds. Also, the Funds
agree to remain liable for and pay to Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable, on demand the amount of any deficiency in the Funds Accounts, and the Funds shall reimburse, compensate and indemnify Goldman Sachs, JBL, Merrill
Lynch or RBC, as applicable, for any and all costs, losses, penalties, fines, taxes and damages that Goldman Sachs, JBL, Merrill Lynch or RBC, as applicable may incur in collecting such deficiency or otherwise exercising its rights and remedies
under the Futures Account Agreement.
The Futures Account Agreement may be terminated at any time by the Funds, or Goldman
Sachs, JBL, Merrill Lynch or RBC, as applicable, by written notice to the other.
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PURCHASES BY EMPLOYEE BENEFIT PLANS
General
The following section sets forth certain consequences under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, and the Code, which a fiduciary of an employee benefit
plan as defined in and subject to ERISA or of a plan as defined in and subject to Section 4975 of the Code who has investment discretion should consider before deciding to invest the plans assets in a Fund (such
employee benefit plans and plans being referred to herein as Plans, and such fiduciaries with investment discretion being referred to herein as Plan Fiduciaries). The following summary is not intended
to be complete, but only to address certain questions under ERISA and the Code which are likely to be raised by the Plan Fiduciarys own counsel.
In general, the terms employee benefit plan as defined in and subject to Title I of ERISA and plan as defined in Section 4975 of the Code together refer to any plan or account
of various types which provide retirement benefits or welfare benefits to an individual or to an employers employees and their beneficiaries. Such plans and accounts include, but are not limited to, corporate pension and profit-sharing plans,
simplified employee pension plans, plans for self-employed individuals (including partners), individual retirement accounts described in Section 408 of the Code and medical plans.
Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in a Fund,
which may include, among other things, the role that such an investment would play in the Plans overall investment portfolio. Each Plan Fiduciary, before deciding to invest in a Fund, must be satisfied that such investment is prudent for the
Plan, that the investments of the Plan, including the investment in a Fund, are diversified so as to minimize the risk of large losses and that an investment in a Fund complies with the Plan documents and that the purchase will not result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Code.
EACH PLAN FIDUCIARY CONSIDERING ACQUIRING
SHARES ON BEHALF OF A PLAN MUST CONSULT WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO. AN INVESTMENT IN A FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. NONE OF THE FUNDS IS INTENDED AS A COMPLETE INVESTMENT PROGRAM.
Plan Assets
ERISA and a regulation issued thereunder by the U.S. Department of Labor contain rules for determining when an investment by a Plan in an equity interest of an entity will result in the underlying assets
of such entity being considered to constitute assets of the Plan for purposes of ERISA and Section 4975 of the Code (
i.e.
, plan assets). Those rules provide that assets of an entity will not be considered assets of a Plan
which purchases an equity interest in the entity if one or more exceptions apply, including (1) an exception applicable if the equity interest purchased is a publicly offered security (the Publicly Offered Security
Exception), and (2) an exception applicable if equity interests purchased by a plan are not significant.
The
Publicly Offered Security Exception applies if the equity interest is a security that is (1) freely transferable, (2) part of a class of securities that is widely held and (3) either (a) part of a class of
securities registered under Section 12(b) or 12(g) of the 1934 Act, or (b) sold to the Plan as part of a public offering pursuant to an effective registration statement under the 1933 Act and the class of which such security is a part is
registered under the 1934 Act within 120 days (or such later time as may be allowed by the SEC) after the end of the fiscal year of the issuer in which the offering of such security occurred.
The Trust expects that the Publicly Offered Security Exception should apply with respect to the Shares of each Fund.
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Ineligible Purchasers
Among other considerations, Shares generally may not be purchased with the assets of a Plan if the Sponsor, the FCMs or any of their
respective affiliates, any of their respective employees or any employees of their respective affiliates: (1) has investment discretion with respect to the investment of such plan assets; (2) has authority or responsibility to give or
regularly gives investment advice with respect to such plan assets, for a fee, and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to such plan assets and that such
advice will be based on the particular investment needs of the Plan; or (3) is an employer maintaining or contributing to such Plan. A party that is described in clause (1) or (2) of the preceding sentence would be a fiduciary under
ERISA and the Code with respect to the Plan, and unless an exemption applies, any such purchase might result in a prohibited transaction under ERISA and the Code.
Except as otherwise set forth, the foregoing statements regarding the consequences under ERISA and the Code of an investment in Shares of the Funds are based on the provisions of the Code and ERISA as
currently in effect, and the existing administrative and judicial interpretations thereunder. No assurance can be given that administrative, judicial or legislative changes will not occur that will not make the foregoing statements incorrect or
incomplete.
THE PERSON WITH INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY AND FINANCIAL ADVISERS AS TO THE
PROPRIETY OF AN INVESTMENT IN SHARES IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN AND CURRENT TAX LAW.
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PLAN OF DISTRIBUTION
Buying and Selling Shares
Most investors buy and sell shares in secondary market transactions through brokers. Shares of the Funds trade on the NYSE Arca under the ticker symbols listed in this Prospectus. Shares are bought and
sold throughout the trading day like other publicly traded securities. When buying or selling Shares through a broker, most investors incur customary brokerage commissions and charges.
Authorized Participants
The Funds continuously
offer Shares in Creation Units to Authorized Participants. Shares of the Funds are to be offered to Authorized Participants in Creation Units at each Funds respective NAV.
Authorized Participants may offer to the public, from time to time, Shares of a Fund from any Creation Units they create. Shares of a
Fund offered to the public by Authorized Participants are offered at a per Share market price that varies depending on, among other factors, the trading price of the Shares of each Fund on the NYSE Arca, the NAV per Share and the supply of and
demand for the Shares at the time of the offer. Shares initially comprising the same Creation Unit but offered by Authorized Participants to the public at different times may have different offering prices. Additionally, the price at which an
Authorized Participant sells a Share may be higher or lower than the price paid by such Authorized Participant in connection with the creation of such Share in a Creation Unit. Authorized Participants do not receive from any Fund, the Sponsor or any
of their affiliates, any fee or other compensation in connection with their sale of Shares to the public, although investors are expected to be charged a customary commission by their brokers in connection with the purchase and sale of Shares that
varies from investor to investor. Investors are encouraged to review the terms of their brokerage accounts for applicable charges.
As of the date of this Prospectus, ABN AMRO Clearing Chicago LLC, Banca IMI Securities Corp., Barclays Capital Inc., BNP Paribas Securities Corp., Credit Suisse Securities (USA) LLC, Deutsche Bank
Securities Inc., EWT, LLC, Goldman, Sachs & Co., Goldman Sachs Execution & Clearing, L.P., Jefferies LLC, J.P. Morgan Securities Inc., Knight Clearing Services LLC, Newedge USA LLC, Nomura Securities International, Inc., RBC
Capital Markets, LLC, SG Americas Securities, LLC, Timber Hill, LLC, UBS Securities LLC, Virtu Financial BD LLC and Wedbush Morgan Securities, Inc. have each executed an Authorized Participant Agreement and are the only Authorized Participants.
Likelihood of Becoming a Statutory Underwriter
Each Fund issues Shares in Creation Units to Authorized Participants from time to time in exchange for cash. Because new Shares can be
created and issued on an ongoing basis at any point during the life of each Fund, a distribution, as such term is used in the 1933 Act, will be occurring. An Authorized Participant, other broker-dealer firm or its client could be deemed
a statutory underwriter, and thus would be subject to the prospectus delivery and liability provisions of the 1933 Act, if it purchased a Creation Unit from each Fund, broke the Creation Unit down into the constituent Shares and sold the Shares to
its customers; or if it chose to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for the Shares. A determination of whether one is an underwriter must take into account
all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that would lead to
categorization as an underwriter. Authorized Participants, other broker-dealers and other persons are cautioned that some of their activities may result in their being deemed participants in a distribution in a manner which would render them
statutory underwriters and subject them to the prospectus delivery and liability provisions of the 1933 Act.
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Dealers who are neither Authorized Participants nor underwriters but are
participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that are part of an unsold allotment within the meaning of section 4(3)(C) of the 1933 Act, would be unable to take
advantage of the prospectus delivery exemption provided by section 4(3) of the 1933 Act.
Summary of Certain Items Paid by the Trust or the
Sponsor in Connection with the Distribution
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Payment
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Recipient
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Payor
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Maximum Payment
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Services Provided
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Distribution/Services Fee
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SEI Investments Distribution, Inc. (SEI)
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ProShare Capital Management LLC (the Sponsor)
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$2,593,167 (equal to approximately 0.01% of maximum gross offering proceeds)*
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Taking purchase and redemption orders for Creation Units; Providing a prospectus with respect to the above orders; Reviewing any permitted advertising or marketing material; and
Archiving associated records.
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Wholesaling Support and Distribution and Shareholder Services Fee
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ProFunds Distributors, Inc. (PDI), an affiliated broker-dealer of the Sponsor
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ProShare Capital Management LLC (the Sponsor)
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$2,337,639 (equal to approximately 0.09% of minimum gross offering proceeds)*
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Wholesaling support, including promoting the sale of investment products; Conducting training seminars on investment products; Creating and maintaining advertising and sales
literature files; and retaining associated records.
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*
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Gross offering proceeds includes proceeds from other series of the Trust that are registered on the same registration statement as the VIX Funds but are not
offered by this Prospectus. These series are: ProShares Ultra DJ-UBS Crude Oil, ProShares UltraShort DJ-UBS Crude Oil, ProShares Ultra Gold, ProShares UltraShort Gold, ProShares Ultra Silver, ProShares UltraShort Silver, ProShares UltraShort Euro
and ProShares UltraShort Yen.
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For additional details, see below.
General
Retail investors may purchase and sell Shares through traditional brokerage accounts. Investors who purchase Shares through a commission/fee based brokerage account may pay commissions/fees charged by the
brokerage account. Investors are encouraged to review the terms of their brokerage accounts for applicable charges.
The
Sponsor (from its own assets) pays SEI for performing its duties on behalf of the Funds. The fees paid to SEI represent the greater of (i) a fixed amount per fund of the Trust per annum or (ii) 0.0040% of the aggregate average daily net
assets of the Trust on assets that are less than or equal to $30 billion and 0.0035% of
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the aggregate average daily assets of the Trust on assets that exceed $30 billion. Assuming the minimum gross offering proceeds are sold, the amount payable to SEI is estimated to be $427,500,
equal to approximately 0.02% of gross offering proceeds. Assuming the maximum gross offering proceeds are sold, the maximum amount payable to SEI will be $2,593,167, an amount equal to approximately 0.01% of gross offering proceeds. These amounts
include reimbursements to SEI for marketing material review. Gross offering proceeds, as used in this section, includes proceeds from other series of the Trust that are registered on the same registration statement as the VIX Funds but
are not offered by this Prospectus. These series are: ProShares Ultra DJ-UBS Crude Oil, ProShares UltraShort DJ-UBS Crude Oil, ProShares Ultra Gold, ProShares UltraShort Gold, ProShares Ultra Silver, ProShares UltraShort Silver, ProShares UltraShort
Euro and ProShares UltraShort Yen. For a description of services provided by SEI, see the section entitled The Distributor on page 112.
Also, the Sponsor (from its own assets) pays ProFunds Distributors, Inc. (PDI), an affiliated broker-dealer of the Sponsor and a FINRA member, to provide wholesaling and distribution/shareholder services
support for all funds that it manages. For its services, the Sponsor pays PDI: 1) a fixed amount split among the Sponsor and two of its investment adviser affiliates pro rata based on the amount of net assets managed by that entity; and 2)
reimbursements for any sales-related expenses PDI incurs on behalf of the Sponsor. Irrespective of the amount sold, the amount payable to PDI is estimated to be $2,337,639. This amount includes a portion of the fixed amount payable to PDI along with
reimbursements for non-transaction based compensation (salaries), gifts, business entertainment expenses, training and education. Assuming the minimum gross offering proceeds are sold, this amount would constitute 0.09% of gross offering proceeds.
Assuming the maximum gross offering proceeds are sold, this amount would constitute approximately 0.01% of gross offering proceeds.
The offering of Creation Units is being made in compliance with FINRA Rule 2310. Accordingly, the Authorized Participants may not make any sales to any account over which they have discretionary authority
without the prior written approval of a purchaser of Shares. in any event, the maximum amount of all items of value, including compensation paid from the offering proceeds and in the form of trail commissions, to be paid to FINRA
members, including to SEI and PDI, in connection with the offering of the Shares by a Fund will not exceed 10% of gross offering proceeds.
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LEGAL MATTERS
Sidley Austin LLP has advised the Sponsor in connection with the Shares being offered. Sidley Austin LLP also advises the Sponsor with
respect to its responsibilities as sponsor of, and with respect to matters relating to, the Trust and the Funds. Sidley Austin LLP has prepared the sections Material U.S. Federal Income Tax Considerations with respect to U.S. federal
income tax laws and Purchases By Employee Benefit Plans with respect to ERISA. Sidley Austin LLP has not represented, nor will it represent, the Trust, the Funds or the shareholders in matters relating to the Trust or the Funds and no
other counsel has been engaged to act on their behalf.
Richards, Layton & Finger, P.A. has represented the Trust in
connection with the legality of the Shares being offered hereby.
Certain opinions of counsel have been filed with the SEC as
exhibits to the Registration Statement of which this Prospectus is a part.
EXPERTS
The financial statements and managements assessment of the effectiveness of internal control over financial
reporting (which is included in Managements Report of Internal Control over Financial Reporting) incorporated in this Prospectus by reference to ProShares Trust IIs Amendment No. 1 on Form 10-K/A for the year ended December 31,
2012, have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE INVESTORS CAN FIND MORE INFORMATION
The Trust has filed a Registration Statement on Form S-3 with the SEC under the 1933 Act. This Prospectus constitutes part of the
Registration Statement filed by the Trust for itself and on behalf of each Fund. Additionally, as further discussed under Incorporation by Reference of Certain Documents, we have incorporated by reference certain historical information.
This Prospectus does not contain all of the information set forth in such Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits thereto
(for example, the form of the Authorized Participant Agreement). The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries and may not be complete; the exhibits themselves may be
inspected without charge at the Public Reference Room maintained by the SEC at 100 F Street, NE, Washington, DC 20549, and copies of all or part thereof may be obtained from the SEC upon payment of the prescribed fees. Investors may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically
with the SEC. The address of such site is
www.sec.gov
.
RECENT FINANCIAL INFORMATION AND
ANNUAL REPORTS
You should read the financial statements and the notes to those financial statements in the Trusts
Annual Report on Form 10 K for the year ended December 31, 2012 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, along with any amendments thereto, which have been incorporated by reference into this Prospectus
and, subsequent to the date of this Prospectus, future filings with the SEC will be automatically deemed incorporated into this Prospectus, including subsequent financial statements, data and related notes with respect to all of the Funds. Please
refer to the section entitled Incorporation by Reference of Certain Documents in this Prospectus. The Sponsor will furnish an annual report of the Funds in the manner
- 121 -
required by the rules and regulations of the SEC as well as with those reports required by the CFTC and the NFA, including, but not limited to, annual audited financial statements of the Funds
examined and certified by independent registered public accountants and any other reports required by any other governmental authority that has jurisdiction over the activities of the Funds. Monthly account statements conforming to CFTC and NFA
requirements, as well as the current annual and quarterly reports and other filings made with the SEC, are posted on the Sponsors website at www.ProShares.com. Shareholders of record will also be provided with appropriate information to permit
them to file U.S. federal and state income tax returns with respect to Shares held. Additional reports may be posted on the Sponsors website at the discretion of the Sponsor or as required by regulatory authorities.
- 122 -
PRIVACY POLICY
The Trusts Commitment to Investors
The Sponsor and the Trust are committed to respecting the privacy of personal information investors entrust to the Trust in the course of doing business.
The Information the Trust Collects About Investors
The Sponsor, on behalf of the Trust, collects non-public personal information from various sources. For instance, forms may include names,
addresses, and social security numbers. The Funds receive information from transactions in investors accounts, including account balances, and from correspondence between investors and the Funds or third parties, such as the Funds
service providers. The Sponsor, on behalf of the Funds, uses such information provided by investors or their representative to process transactions, to respond to inquiries from investors, to deliver reports, products, and services, and to fulfill
legal and regulatory requirements.
How the Trust Handles Investors Personal Information
The Sponsor does not disclose any non-public personal information about investors to anyone unless permitted by law or approved by the
affected investor. The Sponsor may share information about investors with certain third parties who are not affiliated with the Trust to process or service a transaction that investors have requested or as permitted by law. For example, sharing
information with non-affiliated third parties that maintain or service investors accounts for the Funds is essential.
The Sponsor may also share information with companies that perform administrative or marketing services for the Funds including research
firms. When the Funds enter into such a relationship, such third parties use of customers information is restricted and they are prohibited from sharing it or using it for any purposes other than those for which they were hired. The
Sponsor also requires service providers to maintain physical, electronic and procedural safeguards that comply with federal standards to guard investors non-public personal information.
How the Trust Safeguards Investors Personal Information
The Sponsor maintains physical, electronic, and procedural safeguards to protect investors personal information. Within the Funds, access to personal information is restricted to those employees who
require access to that information in order to provide products or services to customers such as processing transactions and handling inquiries. Use of customer information is restricted and customer information is required to be held in strict
confidence.
The Sponsor will adhere to the policies and practices described in this notice for both current and former
customers of the Funds.
INCORPORATION BY REFERENCE OF CERTAIN DOCUMENTS
The SEC allows the Trust to incorporate by reference into this Prospectus certain information that the Trust files with the
SEC, meaning it can disclose important information to an investor by referring to those documents on file with the SEC.
The
information that the Trust incorporates by reference is an important part of this Prospectus, and later information that is filed with the SEC will automatically update and, where applicable, supersede any information contained in this Prospectus or
incorporated by reference in this Prospectus. The Trust incorporates
- 123 -
by reference the documents listed below, and any future filings it may make with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act, including those filed prior to the
effectiveness of the Registration Statement containing this Prospectus.
This filing incorporates by reference the following
documents:
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|
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Our Annual Report on Form 10-K for the year ended December 31, 2012;
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Our Amendment No. 1 on Form 10-K/A, dated July 15, 2013, to our Annual Report on Form 10-K for the year ended December 31, 2012;
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Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013;
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All other reports filed pursuant to Section 13(a) or 15(d) of the 1934 Act since December 31, 2012, except for information furnished on
Form 8-K, which is not deemed filed and not incorporated herein by reference; and
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Any documents filed under Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act subsequent to the date of this Prospectus and prior to the
termination of the offering made under this Prospectus.
|
Any statement contained in a document that is
incorporated by reference will be modified or superseded for all purposes to the extent that a statement contained in this Prospectus (or in any other document that is subsequently filed with the SEC and incorporated by reference) modifies or is
contrary to that previous statement. Any statement so modified or superseded will not be deemed a part of this Prospectus except as so modified or superseded.
The Trust will provide to you a copy of the filings that have been incorporated by reference in this Prospectus upon your request, at no cost. In addition, the Trust will also provide you with information
regarding the other series of the Trust upon your request, at no cost. Any request may be made by writing or calling at the following address or telephone number:
ProShares Trust II
c/o ProShare Capital Management LLC
7501 Wisconsin Avenue
Suite 1000
Bethesda, Maryland 20814
Telephone: (240) 497-6400
These documents may also be accessed through the web at
www.ProShares.com
or as described under Where Investors Can Find More Information. The information and other content contained on
or linked from the website are not incorporated by reference in this Prospectus and should not be considered a part of this Prospectus.
Annual, quarterly and current reports and other information are on file with the SEC. You may read and copy these materials at the SECs Public Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site at
www.sec.gov
that contains reports, proxy and information statements and other
information regarding the Trust and the Funds.
- 124 -
APPENDIX A GLOSSARY
The Glossary below defines certain of the terms and meanings used throughout this Prospectus. Each term also is defined the first time it
is used in this Prospectus.
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1933 Act
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Securities Act of 1933, as amended
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1934 Act
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Securities Exchange Act of 1934, as amended
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1940 Act
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Investment Company Act of 1940, as amended
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Administrator
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Brown Brothers Harriman & Co., as administrator for the Funds
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Advisers Act
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The Investment Advisers Act of 1940
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Authorized Participant
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Those who may purchase (
i.e.
, create) or redeem Creation Units directly from the Funds
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BBH&Co.
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Brown Brothers Harriman & Co.
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Business Day
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Any day on which the NAV of a specified Fund is determined.
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CBOE
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Chicago Board Options Exchange, Incorporated
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CBOT
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Chicago Board of Trade
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CEA
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Commodity Exchange Act, as amended
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CFE
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CBOE Futures Exchange
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CFTC
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United States Commodity Futures Trading Commission
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CME
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Chicago Mercantile Exchange
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Creation Unit
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A block of 25,000 or 50,000 Shares, as applicable, that is created for sale by the Trust to Authorized Participants and/or submitted to the Trust for redemption by an Authorized
Participant.
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Custodian
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Brown Brothers Harriman & Co., as custodian for the Funds
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Distributor
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SEI Investments Distribution Co., as distributor for the Funds
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DSTA
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Delaware Statutory Trust Act
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DTC
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Depository Trust Company
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Exchange
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The NYSE, a Funds primary listing exchange or other exchange material to the valuation or operation of such Fund.
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FCM
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Futures Commission Merchant
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Financial Instrument
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Futures contracts, swap agreements and other instruments whose value is based on an equity market volatility index.
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FINRA
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Financial Industry Regulatory Authority, Inc.
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Fund(s)
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One or more of the series of the Trust.
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Goldman Sachs
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Goldman, Sachs & Co.
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ICE
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Intercontinental Exchange
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IRS
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United States Internal Revenue Service
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JBL
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Jefferies Bache, LLC
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LME
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London Metal Exchange
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Merrill Lynch
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Merrill Lynch, Pierce, Fenner & Smith Incorporated
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NAV
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Net Asset Value
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NFA
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National Futures Association
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- 1 -
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NSCC
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National Securities Clearing Corporation
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NYMEX
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New York Mercantile Exchange
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NYSE
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New York Stock Exchange
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NYSE Arca
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New York Stock Exchange Archipelago
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Other Fund
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A series of the Trust that is not being offered pursuant to this Prospectus.
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PDI
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ProFunds Distributors, Inc.
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PTP
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Publicly traded partnership
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RBC
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RBC Capital Markets, LLC
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S&P
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Standard & Poors
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SEC
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United States Securities & Exchange Commission
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SEI
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SEI Investments Distribution Co.
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Shares
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Common units of beneficial interest that represent units of fractional undivided beneficial interest in and ownership of the Funds.
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Sponsor
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ProShare Capital Management LLC
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Transfer Agent
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Brown Brothers Harriman & Co., as transfer agent for the Funds
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Trust
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ProShares Trust II
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Trustee
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Wilmington Trust Company
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U.S.
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United States of America
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VIX
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CBOE Volatility Index
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VIX Fund(s)
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One or more series of the Trust offered herein.
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- 2 -
PART II
Information Not Required in Prospectus
Item 14.
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Other Expenses of Issuance and Distribution.
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The following chart reflects estimated amounts required to prepare and file this Registration Statement and complete the offering of the Shares registered hereby.
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Approximate
Amount
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Securities and Exchange Commission Registration Fee
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$
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177,320
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*
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FINRA Filing Fee
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$
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500
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Printing Expenses
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$
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12,500
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Fees of Certified Public Accountants
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$
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2,500
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Fees of Counsel
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$
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50,000
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Total
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$
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242,820
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*
|
This Registration Statement also partially terminates certain amounts of the aggregate offering proceeds by decreasing the aggregate offering proceeds of the registered
and unissued common units of beneficial interests in the amounts of: $400,000,000 with respect to ProShares Ultra DJ-UBS Crude Oil; $200,000,000 with respect to ProShares Ultra Silver; $200,000,000 with respect to ProShares UltraShort Silver;
$300,000,000 with respect to ProShares UltraShort Euro; and $200,000,000 with respect to ProShares VIX Short-Term Futures ETF (collectively, the Reallocated Amounts), which amounts were registered and paid for with the Registrants
Form S-3 Registration Statement filed on April 9, 2013 (File No. 333-187820). As provided in the Fee Table above, the registration fees from those Reallocated Amounts will be used by the Registrant pursuant to Rule 457(p) under the 1933 Act to fully
offset the registration fees due in connection with this filing.
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Item 15.
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Indemnification of Directors and Officers.
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The amended and restated Trust Agreement of the Trust provides for, and as amended from time-to-time, will provide for, the indemnification of the
Sponsor. The Sponsor (including Covered Persons as will be provided under each amended and restated Trust Agreement) shall be indemnified by the Trust (or any Fund separately to the extent the matter in question relates to a single Fund or is
otherwise disproportionate), against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by it 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 Sponsor may be or may have been involved as a party or otherwise or with which such Sponsor may be or may have been threatened, while in office or thereafter, by reason
of any alleged act or omission as the Sponsor or by reason of his or her being or having been the Sponsor except with respect to any matter as to which such Sponsor shall have been finally adjudicated in any such action, suit or other proceeding not
to have acted in good faith in the reasonable belief that such Sponsors action was in the best interests of the Trust and except that the Sponsor shall not be indemnified against any liability to the Trust or its Shareholders by reason of
willful misconduct or gross negligence of such Sponsor.
The following
documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement:
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(a)
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Exhibits. The following exhibits are filed herewith:
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Exhibit
Number
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Description of Document
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4.1
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Amended and Restated Trust Agreement of ProShares Trust II(1)
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4.2
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Form of Authorized Participant Agreement(2)
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5.1
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Opinion of Richards, Layton & Finger, P.A. as to legality(3)
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8.1
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Opinion of Sidley Austin LLP as to income tax matters(3)
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10.1
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Form of Sponsor Agreement(4)
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10.2
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Form of Administration and Transfer Agency Services Agreement(2)
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10.3
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Form of Custodian Agreement(5)
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10.4
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Form of Distribution Agreement(2)
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10.5
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Form of Futures Account Agreement(2)
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10.6
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Form of Institutional Master Futures Client Account Agreement(6)
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23.1
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Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.1)
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23.2
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Consent of Sidley Austin LLP (included in Exhibit 8.1)
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23.3
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Consent of PricewaterhouseCoopers LLP(3)
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(1)
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Incorporated by reference to the Trusts Registration Statement, filed on September 18, 2008.
|
(2)
|
Incorporated by reference to the Trusts Registration Statement, filed on November 17, 2008.
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(4)
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Incorporated by reference to the Trusts Registration Statement, filed on August 15, 2008.
|
(5)
|
Incorporated by reference to the Trusts Registration Statement, filed on October 22, 2008.
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(6)
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Incorporated by reference to the Trusts Registration Statement filed on September 16, 2011.
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(b)
|
Financial Statements. No financial statements are filed herewith:
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(a)
|
The undersigned registrant hereby undertakes:
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(1)
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To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement;
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(i)
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To include any prospectus required by section 10(a)(3) of the Securities Act of 1933, as amended;
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(ii)
|
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement.
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Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 per cent
change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement;
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(iii)
|
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such
information in the registration statement;
|
Provided
,
however
, that:
|
(A)
|
Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration statement is on Form S8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement; and
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(B)
|
Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the registration statement is on Form S3 or Form F3 and the information
required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.
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(2)
|
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
bona fide
offering thereof.
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(3)
|
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
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(4)
|
That each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to this offering, other than registration statements relying on Rule
430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in this registration statement as of the date it is first used after effectiveness.
Provided
,
however
, that no statement made in
a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into a registration statement or prospectus that is part of the registration statement will, as
to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately
prior to such date of first use.
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(5)
|
That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
|
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant
pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned
registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
|
(i)
|
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
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(ii)
|
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
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(iii)
|
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or their securities provided
by or on behalf of the undersigned registrant; and
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|
(iv)
|
Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
|
|
(b)
|
The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the
registrants annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an
|
|
employee benefit plans annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial
bona fide
offering thereof.
|
|
(c)
|
Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to
the provisions described in Item 15 above, or otherwise, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 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 director, officer or controlling person of the registrant in the successful defense of
any such action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of their respective counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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|
(i)
|
The undersigned registrant hereby undertakes that:
|
|
(1)
|
For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it
was declared effective.
|
|
(2)
|
For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial
bona fide
offering thereof.
|
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Bethesda, State of
Maryland, on the 15
th
of July, 2013.
|
|
|
ProShares Trust II
|
|
|
By:
|
|
/s/ L
OUIS
M
AYBERG
|
Name:
|
|
Louis Mayberg
|
Title:
|
|
Principal Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-3
has been signed by the following persons in the capacities and on the date indicated.
|
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|
|
|
|
|
|
/
S
/ L
OUIS
M
AYBERG
Name: Louis Mayberg
|
|
Principal Executive Officer
|
|
July 15, 2013
|
|
|
|
/
S
/ E
DWARD
K
ARPOWICZ
Name: Edward Karpowicz
|
|
Principal Financial Officer
Principal Accounting Officer
|
|
July 15, 2013
|
Each of the undersigned members of ProShare Capital Management LLC, the sponsor of the Registrant, hereby
constitutes Louis M. Mayberg and Amy R. Doberman, individually and not jointly, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement, and any additional related registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (including post-effective amendments to the
registration statement and any such related registration statements), and to file the same, with all exhibits thereto, and any other documents in connection therewith, granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the
Securities Act of 1933, this Registration Statement on Form S-3 has been signed by the following persons on behalf of the Sponsor in the capacities and on the date indicated.
|
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|
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|
|
/
S
/ L
OUIS
M
AYBERG
Name: Louis Mayberg
|
|
Member of the Sponsor
(Director)
|
|
July 15, 2013
|
|
|
|
/
S
/ M
ICHAEL
L.
S
APIR
Name: Michael L. Sapir
|
|
Member of the Sponsor
(Director)
|
|
July 15, 2013
|