The following table describes the
fees and expenses that you will incur if you own shares of the Fund.
You will also incur usual and customary brokerage commissions when
buying or selling shares of the Fund, which are not reflected in the example that follows:
A Further Discussion of Principal Risks
Each Fund is subject, unless otherwise indicated, to the principal risks noted below, any of which may adversely affect the Funds NAV,
trading price, yield, total return and ability to meet its investment objective. You could lose all or part of your investment in the Fund, and the Fund could underperform other investments. Risk information is applicable to all Funds unless
otherwise noted.
Credit Risk.
The Funds performance could be hurt if an issuer of a debt security suffers an adverse
change in financial condition that results in a payment default, security downgrade or inability to meet a financial obligation. Credit risk is greater for lower-rated securities.
Because the issuers of high-yield debt securities or junk bonds (debt securities rated below the fourth highest category) may be in uncertain
financial health, the prices of their debt securities can be more vulnerable to bad economic news or even the expectation of bad news, than investment-grade debt securities.
Some securities issued by U.S. government agencies or instrumentalities are backed by the full faith and credit of the U.S. government. Other
securities that are supported only by the credit of the issuing agency or instrumentality are subject to greater credit risk than securities backed by the full faith and credit of the U.S. government. This is because the U.S. government might
provide financial support, but has no obligation to do so, if there is a potential or actual loss of principal or failure to make interest payments.
Because of the rising U.S. government debt burden, it is possible that the U.S. government may not be able to meet its financial obligations
or that securities issued by the U.S. government may experience credit downgrades. Such a credit event may also adversely impact the financial markets.
For securities that rely on third-party guarantors to support their credit quality, the same risks may apply if the financial condition of the
guarantor deteriorates or the guarantor ceases insuring municipal bonds. Because guarantors may insure many types of bonds, including subprime mortgage bonds and other high-risk bonds, their financial condition could deteriorate as a result of
events that have little or no connection to securities owned by the fund.
14
Management Risk.
Any actively managed fund is subject to the risk that its investment
adviser will make poor security selections. The Adviser and Sub-Adviser apply their own investment techniques and risk analyses in making investment decisions for each Fund, but there can be no guarantee that they will produce the desired results.
The duration and maturity decisions made by the Adviser and Sub-Adviser will also affect each Funds yield, and in unusual circumstances potentially could affect its share price. To the extent that the Adviser and Sub-Adviser anticipate
interest rate trends imprecisely, each Funds yield at times could lag those of others similarly managed funds.
Derivatives
Risk.
Risks associated with derivatives include the risk that the derivative is not well correlated with the security, index or currency to which it relates; the risk that derivatives may result in losses or missed opportunities; the risk that
the Funds will be unable to sell the derivative because of an illiquid secondary market; the risk that a counterparty is unwilling or unable to meet its obligation; and the risk that the derivative transaction could expose the Funds to the effects
of leverage, which could increase the Funds exposure to the market and magnify potential losses.
A swap contract is an
agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or
other instruments. Most swap agreements are generally not entered into or traded on exchanges and often there is no central clearing or guaranty function for swaps and therefore they are often subject to the risk of default or non-performance by the
counterparty.
Interest rate swaps consist of an agreement between two parties to exchange their respective commitments to pay or receive
interest (e.g., an exchange of floating rate payments for fixed rate payments). Interest rate swaps do not involve the delivery of securities, other underlying assets, or principal. Accordingly, the risk of loss with respect to interest rate and
total rate of return swaps is typically limited to the net amount of interest payments that the Fund is contractually obligated to make.
A credit default swap consists of an agreement between two parties in which the buyer agrees to pay to the seller a
periodic stream of payments over the term of the contract and the seller agrees to pay the buyer the par (or other agreed-upon) value of a referenced debt obligation upon the occurrence of a credit event with respect to the issuer of that referenced
debt obligation. Generally, a credit event means bankruptcy, failure to pay, obligation acceleration or modified restructuring. The Fund may be either the buyer or seller in a credit default swap. The Fund will generally earmark or segregate cash or
liquid assets to cover any potential obligation under a credit default swap sold by the Fund. The use of credit default swaps could result in losses to the Fund if the Adviser and/or Sub-Adviser fail to correctly evaluate the creditworthiness of the
issuer of the referenced debt obligation.
Total return swaps give the Fund the right to receive the appreciation in the value of a
specified security, index or other instrument in return for a fee paid to the counterparty, which will typically be based on an agreed upon interest rate. Total return swap agreements are subject to the risk that a counterparty will default on its
payment obligations to the Fund thereunder. If the counterparty fails to meet its obligations, the Fund may lose money. The Fund may also lose money if the underlying asset or reference does not perform as anticipated.
There is no guarantee that derivatives, to the extent employed, will have the intended effect, and their use could cause lower returns or even
losses to the Funds. The use of derivatives by the Fund to hedge risk may reduce the opportunity for gain by offsetting the positive effect of favorable price movements.
Security Selection Risk.
The securities in the Funds portfolio may decline in value. Portfolio management could be wrong in its
analysis of industries, companies, economic trends, the relative attractiveness of different securities or other matters.
Counterparty
Risk.
A financial institution or other counterparty with whom the Funds do business, or that underwrites, distributes or guarantees any investments or contracts that the Funds own or is otherwise exposed to, may decline in financial health and
become unable to honor its commitments, which could cause losses for each Fund or could delay the return or delivery of collateral or other assets to each Fund.
Liquidity Risk.
In certain situations, it may be difficult or impossible to sell an investment in an orderly fashion at an acceptable
price.
This risk can be ongoing for any security that does not trade actively or in large volumes, for any security that trades primarily
on smaller markets, and for investments that typically trade only among a limited number of large investors (such as certain types of derivatives or restricted securities). In unusual market conditions, even normally liquid securities may be
affected by a degree of liquidity risk. This may affect only certain securities or an overall securities market.
15
Market Risk.
Deteriorating market conditions might cause a general weakness in the market
that reduces the overall level of securities prices in that market.
Prepayment and Extension Risk.
When interest rates fall,
issuers of high interest debt obligations may pay off the debts earlier than expected (prepayment risk), and the Funds may have to reinvest the proceeds at lower yields. When interest rates rise, issuers of lower interest debt obligations may pay
off the debts later than expected (extension risk), thus keeping the Funds assets tied up in lower interest debt obligations. Ultimately, any unexpected behavior in interest rates could increase the volatility of the Funds share price
and yield and could hurt fund performance. Prepayments could also create capital gains tax liability in some instances.
Pricing
Risk.
If market conditions make it difficult to value some investments, the Funds may value these investments using more subjective methods, such as fair value pricing. In such cases, the value determined for an investment could be different
than the value realized upon such investments sale. As a result, you could pay more than the market value when buying fund shares or receive less than the market value when selling fund shares.
Secondary markets may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may prevent
the Funds from being able to realize full value and thus sell a security for its full valuation. This could cause a material decline in the Funds net asset value.
Interest Rate Risk.
When interest rates rise, prices of debt securities generally decline. The longer the effective duration of the
Funds debt securities, the more sensitive it will be to interest rate changes. (As a general rule, a 1% rise in interest rates means a 1% fall in value for every year of duration.)
Cash Redemption Risk.
The Funds may pay out a portion of their redemption proceeds in cash rather than through the in-kind delivery of
portfolio securities. Each Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. This may cause a Fund to recognize a capital gain that it might not have incurred if it had made a
redemption in-kind. As a result a Fund may pay out higher annual capital gains distributions than if the in-kind redemption process was used.
Valuation Risk.
Because non-U.S. exchanges may be open on days when a Fund does not price its shares, the value of the securities in
the Funds portfolio may change on days when shareholders will not be able to purchase or sell the Funds shares.
Non-Diversification Risk.
Each Fund is non-diversified and may invest a large percentage of its assets in securities issued by or
representing a small number of issuers. As a result, each Fund may be more exposed to the risks associated with and developments affecting an individual issuer or a smaller number of issuers than a fund that invests more widely. This may increase a
Funds volatility and cause the performance of a relatively smaller number of issuers to have a greater impact on the Funds performance.
Certain other principal risks that are attributed to each Fund are discussed below:
db X-trackers Ultra-Short Duration Bond Fund
Credit Risk.
When purchasing senior loans, the Fund faces the risk that the creditworthiness of the borrower may decline, causing the
value of the Funds interest in a loan to decline. In addition, a borrower may not be able to make timely payments on the interest and principal on the debt obligations it has outstanding. In the event of bankruptcy of a borrower, the Fund
could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing a senior loan. Senior loans and other floating rate debt securities that are below investment grade are considered speculative
because of the credit risk of the borrowers. Such borrowers may be more likely to default on payments of interest and principal in response to changes in economic conditions or circumstances. The value of senior loans made to such borrowers is
likely to be more sensitive to adverse news about the borrower, markets or economy. Any non-payment of principal or interest could result in a reduction of income to the Fund, a reduction in the value of the Funds interest in the senior loan
and a reduction in the Funds net asset value. There can be no assurance that the liquidation of any collateral securing a senior loan would satisfy the borrowers obligation in the event of non-payment of scheduled interest or principal
payments, or that such collateral could be readily liquidated.
Senior Loans Risk.
Senior loans may not be rated by a rating
agency, registered with the Securities and Exchange Commission or any state securities commission or listed on any national securities exchange. Therefore, there may be less publicly available information about them than for registered or
exchange-listed securities. Also, because portfolio management relies mainly on its own evaluation of the creditworthiness of borrowers, the Fund is particularly dependent on portfolio managements analytical abilities. Senior loans involve
other risks, including conflict of interest risk, credit risk, interest rate risk, liquidity risk, and prepayment and extension risk.
16
Affiliates of the Adviser may participate in the primary and secondary market for senior
loans. Because of limitations imposed by applicable law, the presence of the Advisers affiliates in the senior loan market may restrict the Funds ability to participate in a restructuring of a senior loan or to acquire some senior loans,
or affect the timing or price of such acquisition. If the Adviser wishes to invest in the publicly traded securities of a borrower, it may not have access to material non-public information regarding the borrower to which other lenders have access.
Foreign Securities Risk.
The Fund faces the risks inherent in foreign investing. Adverse political, economic or social
developments could undermine the value of the Funds investments or prevent the Fund from realizing their full value. Financial reporting standards for companies based in foreign markets differ from those in the U.S. Additionally, foreign
securities markets generally are smaller and less liquid than U.S. markets. To the extent that the Fund invests in non-U.S. dollar denominated foreign securities, changes in currency exchange rates may affect the U.S. dollar value of foreign
securities or the income or gain received on these securities.
Foreign governments may restrict investment by foreigners, limit
withdrawal of trading profit or currency from the country, restrict currency exchange or seize foreign investments. The investments of the Fund may also be subject to foreign withholding taxes. Foreign brokerage commissions and other fees are
generally higher than those for U.S. investments, and the transactions and custody of foreign assets may involve delays in payment, delivery or recovery of money or investments.
Foreign markets can have liquidity risks beyond those typical of U.S. markets. Because foreign exchanges generally are smaller and less liquid
than U.S. exchanges, buying and selling foreign investments can be more difficult and costly. Relatively small transactions can sometimes materially affect the price and availability of securities. In certain situations, it may become virtually
impossible to sell an investment in an orderly fashion at a price that approaches portfolio managements estimate of its value. For the same reason, it may at times be difficult to value the Funds foreign investments.
Emerging Markets Risk.
Investment in emerging markets subjects the Fund to a greater risk of loss than investments in a developed
market. This is due to, among other things, (i) greater market volatility, (ii) lower trading volume, (iii) political and economic instability, (iv) high levels of inflations, deflation or currency devaluation, (v) greater
risk of market shut down, (vi) more governmental limitations on foreign investments and limitations on repatriation of invested capital than those typically found in a developed market, and (vii) the risk that companies may be held to
lower disclosure, corporate governance, auditing and financial reporting standards than companies in more developed markets.
The
financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility in the Funds investments in emerging
market countries, which may be magnified by currency fluctuations relative to the U.S. dollar.
Settlement practices for transactions in
foreign markets may differ from those in U.S. markets. Such differences include delays beyond periods customary in the United States and practices, such as delivery of securities prior to receipt of payment, which increase the likelihood of a
failed settlement. Failed settlements can result in losses to the Fund. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle, and governments or trade groups may compel local agents
to hold securities in designated depositories that are not subject to independent evaluation. Local agents are held only to the standards of care of their local markets.
Mortgage- and Asset-Backed Securities Risks.
Mortgage-backed Securities (MBS) (residential and commercial) and asset-backed
securities represent interests in pools of mortgages or other assets, including consumer loans or receivables held in trust. The characteristics of these MBS and asset-backed securities differ from traditional fixed income securities.
Like traditional fixed income securities, the value of MBS or asset-backed securities typically increases when interest rates fall and decreases when interest rates rise. However, a main difference is that the principal on MBS or asset-backed
securities may normally be prepaid at any time, which will reduce the yield and market value of these securities. Therefore, MBS and asset-backed backed securities are subject to prepayment risk and extension risk. Because of prepayment risk and
extension risk, MBS react differently to changes in interest rates than other fixed income securities.
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Small movements in interest rates (both increases and decreases) may quickly and significantly
reduce the value of certain MBS. The Funds investments in asset-backed securities are subject to risks similar to those associated with MBS, as well as additional risks associated with the nature of the assets and the servicing of those
assets. These securities also are subject to the risk of default on the underlying mortgage or assets, particularly during periods of economic downturn. Certain MBS are issued in several classes with different levels of yield and credit protection.
The Funds investments in MBS with several classes may be in the lower classes that have greater risks than the higher classes, including greater interest rate, credit and prepayment risks.
MBS may be either pass-through securities or CMOs. Pass-through securities represent a right to receive principal and interest payments
collected on a pool of mortgages, which are passed through to security holders. CMOs are created by dividing the principal and interest payments collected on a pool of mortgages into several revenue streams (tranches) with different priority rights
to portions of the underlying mortgage payments. The Fund will not invest in CMO tranches which represent a right to receive interest only (IOs), principal only (POs) or an amount that remains after other floating-rate
tranches are paid (an inverse floater). If the Fund invests in CMO tranches (including CMO tranches issued by government agencies) and interest rates move in a manner not anticipated by Fund management, it is possible that the Fund could lose all or
substantially all of its investment.
There is also risk associated with the roll market for pass-through MBS. First, the value and safety
of the roll depends entirely upon the counterpartys ability to redeliver the security at the termination of the roll. Therefore, the counterparty to a roll must meet the same credit criteria as any existing repurchase counterparty. Second, the
security which is redelivered at the end of the roll period must be substantially the same as the initial security,
i.e.
, must have the same coupon, be issued by the same agency and be of the same type, have the same original stated term to
maturity, be priced to result in similar market yields and be good delivery. Within these parameters, however, the actual pools that are redelivered could be less desirable than those originally rolled, especially with respect to
prepayment and/or delinquency characteristics. In addition, the Funds use of mortgage dollar rolls may give rise to a form of leverage, which could exaggerate the effects on NAV of any increase or decrease in the market value of the
Funds portfolio securities. The Fund will earmark or segregate assets determined to be liquid by the Investment Adviser to cover its obligations under mortgage dollar rolls which may give rise to a form of leverage.
The residential mortgage market in the United States has experienced difficulties that may adversely affect the performance and market value
of certain of the Funds mortgage-related investments. Delinquencies and losses on residential mortgage loans (especially subprime and second-lien mortgage loans) generally have increased since 2007 and may continue to increase, and a decline
in or flattening of housing values (as has recently been experienced and may continue to be experienced in many housing markets) may exacerbate such delinquencies and losses. Reduced investor demand for mortgage loans and mortgage-related securities
and increased investor yield requirements have caused limited liquidity in the secondary market for mortgage-related securities, which can adversely affect the market value of mortgage-related securities. It is possible that such limited liquidity
in such secondary markets could continue or worsen.
Asset-backed securities entail certain risks not presented by MBS, including the risk
that in certain states it may be difficult to perfect the liens securing the collateral backing certain asset-backed securities. In addition, certain asset-backed securities are based on loans that are unsecured, which means that there is no
collateral to seize if the underlying borrower defaults. Certain MBS in which the Fund may invest may also provide a degree of investment leverage, which could cause the Fund to lose all or substantially all of its investment.
Liquidity Risk.
No active trading market may exist for some senior loans and certain senior loans may be subject to restrictions on
resale. The inability to dispose of senior loans in a timely fashion could result in losses to the Fund. Because some senior loans that the Fund invests in have a limited secondary market, liquidity risk is more pronounced for the Fund than for
funds that invest primarily in equity securities.
Market Risk.
In addition, an increase in demand for floating rate loans may
adversely affect the rate of interest payable on loans acquired by the Fund, thus reducing fund returns. During periods of limited supply of senior loans, the Funds yield may be lower.
Interest Rate Risk.
Senior loans typically have adjustable interest rates. As a result, it is expected that the value of senior loans
held by the Fund will fluctuate less in response to interest rate changes than will fixed-rate debt securities. This could result in less volatility than would be expected for a fund that invests primarily in fixed-rate debt securities. However,
because floating rates on senior loans only reset periodically, changes in prevailing interest rates may cause a fluctuation in the Funds value. In addition, extreme increases in prevailing interest rates may cause an increase in senior loan
defaults, which may cause a further decline in the Funds value. Finally, a decrease in interest rates could adversely affect the income earned by the Fund from its senior loans.
18
db X-trackers Managed Municipal Bond Fund
Municipal Securities Risk.
Municipal securities are subject to the risk that litigation, legislation or other political events, local
business or economic conditions or the bankruptcy of the issuer could have a significant effect on an issuers ability to make payments of principal and/or interest. In addition, there is a risk that, as a result of the current economic crisis,
the ability of any issuer to pay, when due, the principal or interest on its municipal bonds may be materially affected.
Municipal
securities can be significantly affected by political changes as well as uncertainties in the municipal market related to taxation, legislative changes or the rights of municipal security holders. Because many municipal securities are issued to
finance similar projects, especially those relating to education, health care, transportation and utilities, conditions in those sectors can affect the overall municipal market. Municipal securities may include revenue bonds, which are generally
backed by revenue from a specific project or tax. The issuer of a revenue bond makes interest and principal payments from revenues generated from a particular source or facility, such as a tax on particular property or revenues generated from a
municipal water or sewer utility or an airport. Revenue bonds generally are not backed by the full faith and credit and general taxing power of the issuer. Municipal securities backed by current or anticipated revenues from a specific project or
specific assets can be negatively affected by the discontinuance of the taxation supporting the project or assets or the inability to collect revenues for the project or from the assets.
If the Internal Revenue Service (IRS) determines that an issuer of a municipal security has not complied with applicable tax
requirements, interest from the security could become taxable and the security could decline significantly in value.
The market for
municipal bonds may be less liquid than for taxable bonds. There may also be less information available on the financial condition of issuers of municipal securities than for public corporations. This means that it may be harder to buy and sell
municipal securities, especially on short notice, and municipal securities may be more difficult for the Fund to value accurately than securities of public corporations. Since the Fund invest a significant portion of their portfolio in municipal
securities, the Funds portfolio may have greater exposure to liquidity risk than a fund that invests in non-municipal securities. In addition, the value and liquidity of many municipal securities have decreased as a result of the recent
financial crisis, which has also adversely affected many municipal securities issuers and may continue to do so. The markets for many credit instruments, including municipal securities, have experienced periods of illiquidity and extreme volatility
since the latter half of 2007. In response to the global economic downturn, governmental cost burdens may be reallocated among federal, state and local governments. In addition, issuers of municipal securities may seek protection under the
bankruptcy laws.
Private Activity Bonds Risk.
The issuers of private activity bonds in which the Fund may invest may be
negatively impacted by conditions affecting either the general credit of the user of the private activity project or the project itself. Conditions such as regulatory and environmental restrictions and economic downturns may lower the need for these
facilities and the ability of users of the project to pay for the facilities. This could cause a decline in the Funds value. The Funds private activity bond holdings also may pay interest subject to the AMT. See Dividends and
Distributions for more details.
Pre-Refunded Bonds Risk.
Pre-refunded bonds are bonds that have been refunded to a call
date prior to the final maturity of principal, or, in the case of pre-refunded bonds commonly referred to as escrowed-to-maturity bonds, to the final maturity of principal, and remain outstanding in the municipal market. The payment of
principal and interest of the pre-refunded bonds held by the Fund is funded from securities held in a designated escrow account where such securities typically (but not always) are obligations of and carry the full faith and credit of the U.S.
Treasury. The securities held in the escrow fund pledged to pay the principal and interest of the pre- refunded bond do not guarantee the price of the bond. Investment in pre-refunded bonds held by the Fund may subject the Fund to interest rate and
reinvestment risk. In addition, if the Fund sells pre-refunded bonds prior to maturity, the price received may be more or less than the original cost, depending on market conditions at the time of sale.
Focus Risk.
To the extent that the Fund focuses on investments from a single state, region or sector of the municipal securities
market, its performance can be more volatile than that of a fund that invests more broadly. As an example, factors affecting a state, region or sector such as severe fiscal difficulties, an economic downturn, court rulings, increased expenditures on
domestic security or reduced monetary support from the federal government could over time impair a states, region or sectors ability to repay its obligations.
Certain other examples of focus risk in the municipal bond market are set forth below:
Electric Utilities Bond Risk.
The electric utilities industry has been experiencing, and will continue to experience,
increased competitive pressures. Federal legislation may open transmission access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other risks include: (a) the availability and cost of
fuel; (b) the availability and cost of capital; (c) the effects of conservation on energy demand; (d) the effects of rapidly changing environmental, safety and licensing requirements, and other federal, state and local regulations;
(e) timely and sufficient rate increases; and (f) the effects of opposition to nuclear power.
19
Industrial Development Bond Risk.
These revenue bonds are issued by or on
behalf of public authorities to obtain funds to finance various public and/or privately operated facilities, including those for business and manufacturing, housing, sports, pollution control, airport, mass transit, port and parking facilities.
These bonds are normally secured only by the revenues from the project and not by state or local government tax payments. Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities financed by
the bonds and any guarantor to meet its financial obligations. These bonds are subject to a wide variety of risks, many of which relate to the nature of the specific project. Generally, the value and credit quality of these bonds are sensitive to
the risks related to an economic slowdown.
Transportation Bond Risk.
Transportation debt may be issued to finance
the construction of airports, toll roads, highways or other transit facilities. Airport bonds are dependent on the general stability of the airline industry and on the stability of a specific carrier who uses the airport as a hub. Air traffic
generally follows broader economic trends and is also affected by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general
economic health of an area. Fuel costs and availability also affect other transportation related securities, as do the presence of alternate forms of transportation, such as public transportation.
Education Bond Risk.
In general, there are two types of education related bonds: those issued to finance projects for
public and private colleges and universities, and those representing pooled interests in student loans. Bonds issued to supply educational institutions with funds are subject to the risk of unanticipated revenue decline, primarily the result of
decreasing student enrollment or decreasing state and federal funding. Among the factors that may lead to declining or insufficient revenues are restrictions on students ability to pay tuition, availability of state and federal funding and
general economic conditions. Student loan revenue bonds are generally offered by state (or substate) authorities or commissions and are backed by pools of student loans. Underlying student loans may be guaranteed by state guarantee agencies and may
be subject to reimbursement by the United States Department of Education through its guaranteed student loan program. Others may be private, uninsured loans made to parents or students which are supported by reserves or other forms of credit
enhancement. Recoveries of principal due to loan defaults may be applied to redemption of bonds or may be used to re-lend, depending on program latitude and demand for loans. Cash flows supporting student loan revenue bonds are impacted by numerous
factors, including the rate of student loan defaults, seasoning of the loan portfolio and student repayment deferral periods of forbearance. Other risks associated with student loan revenue bonds include potential changes in federal legislation
regarding student loan revenue bonds, state guarantee agency reimbursement and continued federal interest and other program subsidies currently in effect.
Water and Sewer Bond Risk.
Water and sewer revenue bonds are often considered to have relatively secure credit as a
result of their issuers importance, monopoly status and generally unimpeded ability to raise rates. Despite this, lack of water supply due to insufficient rain, run off or snow pack is a concern that has led to past defaults. Further, public
resistance to rate increases, costly environmental litigation and federal environmental mandates are challenges faced by issuers of water and sewer bonds.
Resource Recovery Bond Risk.
Resource recovery bonds are a type of revenue bond issued to build facilities such as
solid waste incinerators or waste-to-energy plants. Typically, a private corporation is involved, at least during the construction phase, and the revenue stream is secured by fees or rents paid by municipalities for use of the facilities. The
viability of a resource recovery project, environmental protection regulations, and project operator tax incentives may affect the value and credit quality of resource recovery bonds.
Lease Obligations Risk.
Lease obligations may have risks not normally associated with general obligation or other
revenue bonds. Leases and installment purchase or conditional sale contracts (which may provide for title to the leased asset to pass eventually to the issuer) have developed as a means for governmental issuers to acquire property and equipment
without the necessity of complying with the constitutional statutory requirements generally applicable for the issuance of debt.
Certain lease obligations contain non appropriation clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is appropriated for that purpose by the appropriate legislative body on an annual or other periodic basis. Consequently, continued lease payments on those lease obligations
containing non appropriation clauses are dependent on future legislative actions. If these legislative actions do not occur, the holders of the lease obligation may experience difficulty in exercising their rights, including disposition
of the property.
20
Special Tax Bond Risk.
Special tax bonds are usually backed and payable
through a single tax, or series of special taxes such as incremental property taxes. The failure of the tax levy to generate adequate revenue to pay the debt service on the bonds may cause the value of the bonds to decline.
Health Care Bond Risk.
The health care industry is subject to regulatory action by a number of private and governmental
agencies, including federal, state and local governmental agencies. A major source of revenues for the health care industry is payments from Medicare and Medicaid programs. As a result, the industry is sensitive to legislative changes and reductions
in governmental spending for such programs. Numerous other factors may also affect the health care industry, as well as the value and credit quality of health care bonds, such as general and local economic conditions, demand for services, expenses
(including malpractice insurance premiums) and competition among health care providers. In the future, the following elements may adversely affect health care facility operations: implementation of a national health insurance program; other state or
local health care reform measures; medical and technological advances which dramatically alter the need for health services or the way in which such services are delivered; changes in medical coverage which alter the traditional fee-for-service
revenue stream; and efforts by employers, insurers, and governmental agencies to reduce the costs of health insurance and health care services.
Tobacco Bond Risk.
Tobacco settlement revenue bonds are generally neither general nor legal obligations of a state or
any of its political subdivisions and neither the full faith and credit nor the taxing power nor any other assets or revenues of a state or of any political subdivision will be pledged to the payment of any such bonds. In addition, tobacco
companies profits from the sale of tobacco products are inherently variable and difficult to estimate. There can be no guarantee that tobacco companies will earn enough revenues to cover the payments due under tobacco bonds.
Housing Bond Risk.
Housing revenue bonds are generally issued by a state, county, city, local housing authority or
other public agency. They generally are secured by the revenues derived from mortgages purchased with the proceeds of the bond issue. It is extremely difficult to predict the supply of available mortgages to be purchased with the proceeds of an
issue or the future cash flow from the underlying mortgages. Consequently, there are risks that proceeds will exceed supply, resulting in early retirement of bonds, or that homeowner repayments will create an irregular cash flow. Many factors may
affect the financing of multi- family housing projects, including acceptable completion of construction, proper management, occupancy and rent levels, economic conditions and changes to current laws and regulations.
Inverse Floating Rate Securities Risk.
The interest payment received on inverse floating rate securities (inverse floaters)
generally will decrease when short-term interest rates increase. Inverse floaters are derivatives that involve leverage and could magnify the Funds gains or losses.
Tax Risk.
Income from municipal securities held by the Fund could be declared taxable because of unfavorable changes in tax laws,
adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a securities issuer. Further, a portion of the Funds otherwise exempt-interest distributions may be taxable to those shareholders
subject to the federal AMT.
Market Risk.
Developments in a particular class of debt securities or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of debt securities as an investment. Also, to the extent that the Fund emphasizes debt securities from any given state or region, it could be hurt if that state or region does not do
well.
Statement of Additional Information
Dated February 26, 2014
This combined Statement of Additional Information (SAI) is not a prospectus. It should be read in conjunction with the current
prospectus (the Prospectus) for the following funds (each a Fund and collectively the Funds) of DBX ETF Trust (the Trust), as such Prospectus may be revised or supplemented from time to time:
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Ticker
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Stock Exchange
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db X-trackers Ultra-Short Duration Bond Fund
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LQID
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NYSE Arca, Inc.
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db X-trackers Managed Municipal Bond Fund
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AMUN
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NYSE Arca, Inc.
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The Prospectus for the Funds included in this SAI is dated February 26, 2014. Capitalized terms used
herein that are not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained without charge by writing to the Trusts distributor, ALPS Distributors, Inc. (the
Distributor), at 1290 Broadway, Suite 1100, Denver, Colorado 80203, calling 1-855-329-3837 (1-855-DBX-ETFS) or visiting www.dbxus.com.
TABLE OF CONTENTS
i
General Description of the Trust and its Funds
The Trust currently consists of sixteen investment series or portfolios. The Trust was organized as a Delaware statutory trust on
October 7, 2010 and is authorized to have multiple series or portfolios. The Trust is an open-end management investment company registered with the Securities and Exchange Commission (the SEC) under the Investment Company Act of
1940, as amended (the 1940 Act). The offering of each Funds shares (the Shares) is registered under the Securities Act of 1933, as amended (the 1933 Act).
The investment objective of the db X-trackers Ultra-Short Duration Bond Fund is to provide current income consistent with total return. The
investment objective of the db X-trackers Managed Municipal Bond Fund is to provide income exempt from regular federal income tax. The Funds are managed by DBX Advisors LLC (the Adviser) and are sub-advised by Deutsche Investment
Management Americas Inc. (the Sub-Adviser or DIMA).
Each Fund offers and issues Shares at their net asset value
(NAV) per Share only in aggregations of a specified number of Shares (Creation Units), generally in exchange for a basket of securities and other instruments (the Deposit Securities), together with the deposit of
a specified cash payment (the Cash Component). Shares of the Funds are expected to be listed and trade on NYSE Arca, Inc. (the Exchange). Shares trade in the secondary market at market prices that may be at, above or below
NAV. Shares are redeemable only in Creation Units, and, partially for cash and partially in-kind for securities and other instruments. A Creation Unit consists of 50,000 Shares thereof.
The Trust reserves the right to offer a cash option for creations and redemptions of Shares. Shares may be issued in advance of
receipt of Deposit Securities subject to various conditions, including a requirement to maintain with the Trust a cash deposit, equal to at least 115%, which the Adviser may change from time to time, of the market value of the omitted Deposit
Securities. See the Creation and Redemption of Creation Units section of this SAI. Transaction fees for cash creations and redemptions may be higher than the transaction fees associated with in-kind creations and redemptions.
Exchange Listing and Trading
A discussion of exchange listing and trading matters associated with an investment in each Fund is contained in the Shareholder Information
section of the Funds Prospectus. The discussion below supplements, and should be read in conjunction with, that section of the Prospectus.
Shares of each Fund will be listed for trading and will trade throughout the day on the Exchange. There can be no assurance that the
requirements of the Exchange necessary to maintain the listing of Shares of any Fund will continue to be met. The Exchange may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period
beginning upon the commencement of trading of Fund Shares, there are fewer than 50 beneficial owners of Shares of the Fund for 30 or more consecutive trading days, (ii) the indicative optimized portfolio value (IOPV) of
a Fund is no longer calculated or available or (iii) any other event shall occur or condition shall exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will also remove Shares of a Fund
from listing and trading upon termination of the Fund.
As in the case of other publicly-traded securities, when you buy or sell Shares
through a broker you will incur a brokerage commission determined by that broker.
In order to provide additional information regarding
the indicative value of Shares of the Fund, the Exchange or a market data vendor disseminates every 15 seconds through the facilities of the Consolidated Tape Association or other widely disseminated means an updated IOPV for the Fund as calculated
by an information provider or market data vendor. The Trust is not involved in or responsible for any aspect of the calculation or dissemination of the IOPVs and makes no representation or warranty as to the accuracy of the IOPVs.
An IOPV has a securities component and a cash component. The securities values included in an IOPV are the values of the Deposit Securities
for a Fund. While the IOPV reflects the current market value of the Deposit Securities required to be deposited in connection with the purchase of a Creation Unit, it does not necessarily reflect the precise composition of the current portfolio of
securities held by a Fund at a particular point in time because the current portfolio of the Fund may include securities that are not a part of the current Deposit Securities. Therefore, a Funds IOPV disseminated during the Exchange trading
hours should not be viewed as a real-time update of the Funds NAV, which is calculated only once a day.
1
The cash component included in an IOPV consists of estimated accrued interest, dividends and
other income, less expenses. If applicable, each IOPV also reflects changes in currency exchange rates between the U.S. dollar and the applicable currency.
The Trust reserves the right to adjust the Share prices of Funds in the future to maintain convenient trading ranges for investors. Any
adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of the Fund.
Investment Strategies and Risks
db X-trackers Ultra-Short Duration Bond Fund
Under normal circumstances, the Fund invests at least 65% of its net assets in debt securities. Debt securities include securities of U.S. and
foreign government agencies and instrumentalities, corporate securities, mortgage-backed and asset backed securities, taxable municipal and tax-exempt municipal bonds, adjustable rate loans that have a senior right to payment (senior
loans), and other floating-rate debt securities.
The Fund may invest in investment-grade (rated BBB- or higher by
Standard & Poors Rating Services, Inc. (S&P) and Fitch, Inc. (Fitch) or Baa3 or higher by Moodys Investor Service, Inc. (Moodys) or, if unrated, determined by the Funds Adviser
and/or Sub-Adviser to be of comparable quality) and high yield debt securities (rated BB+ or lower by S&P and Fitch or Ba1 or lower by Moodys, or, if unrated, determined by the Funds Adviser and/or Sub-Adviser to be of comparable
quality) debt securities of U.S. and foreign issuers, including issuers located in countries with new or emerging securities markets. Under normal market conditions, the Fund currently does not intend to hold more than 10% of its total assets in
non-U.S. dollar denominated debt securities. The Funds investments in high yield debt securities, including non-investment grade senior loans and other non-investment grade floating-rate debt securities, will be limited to 50% of its total
assets.
The senior loans in which the Fund will invest generally will be loans rated by a Nationally Recognized Statistical Rating
Organization (NRSRO). However, the Fund also may invest in senior loans that (i) may not be rated by a NRSRO or any state securities commission, or listed on any national exchange; or (ii) are not secured by collateral.
The Fund may invest in mortgage-backed and asset-backed securities. Mortgage-backed securities are mortgage-related securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, or issued by non-government entities. Mortgage-related securities represent pools of mortgage loans assembled for sale to investors by various government agencies such as
Government National Mortgage Association (GNMA) and government-related organizations such as Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), as well as by
non-governmental issuers such as commercial banks, savings and loan institutions, mortgage bankers and private mortgage insurance companies. Other asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans
or interests in mortgage loans, the underlying assets may include items such as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements and
from sales of personal property. Asset-backed securities typically have no U.S. Government backing. The Fund will limit investments in mortgage-backed and asset-backed securities issued or guaranteed by non-government entities to 15% of the
Funds net assets.
The Fund may invest a portion of its assets in U.S. agency mortgage pass-through securities. The term U.S.
agency mortgage pass-through security refers to a category of pass-through securities backed by pools of mortgages and issued by one of several U.S. government-sponsored enterprises: GNMA, FNMA, or FHLMC.
The Fund may hold up to 20% of its total assets in cash or money market instruments in order to maintain liquidity, or in the event portfolio
management determines that securities meeting the Funds investment objective are not otherwise readily available for purchase.
If
market conditions make it difficult to value some investments, the Fund may value these investments using more subjective methods, such as fair value pricing. In such cases, the value determined for an investment could be different than the value
realized upon such investments sale. As a result, you could pay more than the market value when buying fund shares or receive less than the market value when selling fund shares. Secondary markets may be subject to irregular trading activity,
wide bid/ask spreads and extended trade settlement periods, which may prevent the Fund from being able to realize full value and thus sell a security for its full valuation. This could cause a material decline in the Funds net asset value.
2
db X-trackers Managed Municipal Bond Fund
Under normal circumstances, the Fund invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in
securities issued by municipalities across the United States (including the Commonwealth of Puerto Rico and U.S. territories such as the U.S. Virgin Islands and Guam) whose income is free from regular federal income tax. The Fund considers any
investments in municipal securities that pay interest subject to the alternative minimum tax (AMT) as part of the 80% of the Funds net assets that must be invested in municipal securities.
The Fund may buy municipal securities of all maturities. These may include revenue bonds (which are backed by revenues from a particular
source) and general obligation bonds (which are typically backed by the issuers ability to levy taxes). They may also include municipal lease obligations and investments representing an interest therein.
The Fund normally invests at least 65% of total assets in municipal securities of the top credit quality (rated AAA+ through A- by S&P and
Fitch or Aaa1 through A3 by Moodys or, if unrated, determined by the Funds Adviser and/or Sub-Adviser to be of comparable quality). The Fund may invest up to 10% of total assets in high yield debt securities (commonly referred to as
junk bonds) rated BB+ or lower by S&P and Fitch or Ba1 or lower by Moodys or, if unrated, determined by the Funds Adviser and/or Sub-Adviser to be of comparable quality.
To the extent that the db X-trackers Managed Municipal Bond Fund concentrates its investments in a single state, region or sector of the
municipal securities market, its performance can be more volatile than that of a fund that invests more broadly. As an example, factors affecting a state, region or sector such as severe fiscal difficulties, an economic downturn, court rulings,
increased expenditures on domestic security or reduced monetary support from the federal government could over time impair a states, region or sectors ability to repay its obligations.
Diversification Status.
Each Fund is classified as non-diversified. A non-diversified fund is a fund that is not limited by
the 1940 Act with regard to the percentage of its assets that may be invested in the securities of a single issuer. The securities of a particular issuer (or securities of issuers in particular industries) may dominate the underlying index of such a
fund and, consequently, the funds investment portfolio. This may adversely affect the funds performance or subject the funds Shares to greater price volatility than that experienced by more diversified investment companies.
Each Fund intends to maintain the required level of diversification and otherwise conduct its operations so as to qualify as a regulated
investment company (RIC) for purposes of the U.S. Internal Revenue Code of 1986, as amended (the Code), and to relieve the Fund of any liability for U.S. federal income tax to the extent that its earnings are distributed to
shareholders, provided that the Fund satisfies a minimum distribution requirement. Compliance with the diversification requirements of the Code may limit the investment flexibility of the Funds and may make it less likely that such Funds will meet
their investment objective.
Bonds.
Each Fund invests in U.S. registered, dollar-denominated bonds. A bond is an interest-bearing
security issued by a company, governmental unit or, in some cases, a non-U.S. entity. The issuer of a bond has a contractual obligation to pay interest at a stated rate on specific dates and to repay principal (the bonds face value)
periodically or on a specified maturity date. An issuer may have the right to redeem or call a bond before maturity, in which case the investor may have to reinvest the proceeds at lower market rates. Most bonds bear interest income at a
coupon rate that is fixed for the life of the bond. The value of a fixed rate bond usually rises when market interest rates fall, and falls when market interest rates rise. Accordingly, a fixed rate bonds yield (income as a percent
of the bonds current value) may differ from its coupon rate as its value rises or falls. Other types of bonds bear income at an interest rate that is adjusted periodically. Bonds may be senior or subordinated obligations. Senior obligations
generally have the first claim on a corporations earnings and assets and, in the event of liquidation, are paid before subordinated obligations. Bonds may be unsecured (backed only by the issuers general creditworthiness) or secured
(also backed by specified collateral).
Corporate Bonds.
The db X-trackers Ultra-Short Duration Bond Fund may invest in
investment grade corporate bonds. The investment return of corporate bonds reflects interest on the security and changes in the market value of the security. The market value of a corporate bond may be affected by the credit rating of the
corporation, the corporations performance and perceptions of the corporation in the market place. There is a risk that the issuers of the securities may not be able to meet their obligations on interest or principal payments at the time called
for by an instrument.
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High Yield Securities.
Each Fund may invest in high yield securities (junk
bonds), which are debt securities that are rated below investment grade by nationally recognized statistical rating organizations, or are unrated securities that the Investment Adviser believes are of comparable quality. Investing in high
yield debt securities involves risks that are greater than the risks of investing in higher quality debt securities. These risks include: (i) changes in credit status, including weaker overall credit conditions of issuers and risks of default;
(ii) industry, market and economic risk; and (iii) greater price variability and credit risks of certain high yield securities such as zero coupon and payment-in-kind securities. While these risks provide the opportunity for maximizing
return over time, they may result in greater volatility of the value of a Fund than a fund that invests in higher-rated securities.
Furthermore, the value of high yield securities may be more susceptible to real or perceived adverse economic, company or industry conditions
than is the case for higher quality securities. The market values of certain of these lower-rated and unrated debt securities tend to reflect individual corporate developments to a greater extent than do higher-rated securities which react primarily
to fluctuations in the general level of interest rates, and tend to be more sensitive to economic conditions than are higher-rated securities. Adverse market, credit or economic conditions could make it difficult at certain times to sell certain
high yield securities held by a Fund.
The secondary market on which high yield securities are traded may be less liquid than the market
for higher grade securities. Less liquidity in the secondary trading market could adversely affect the price at which a Fund could sell a high yield security, and could adversely affect the daily net asset value per share of the Fund. When secondary
markets for high yield securities are less liquid than the market for higher grade securities, it may be more difficult to value the securities because there is less reliable, objective data available. However, when investing in high yield
securities the Funds intend to invest primarily in high yield securities that the Investment Adviser believes have greater liquidity than the broader high yield securities market as a whole.
The use of credit ratings as a principal method of selecting high yield securities can involve certain risks. For example, credit ratings
evaluate the safety of principal and interest payments, not the market value risk of high yield securities. Also, credit rating agencies may fail to change credit ratings in a timely fashion to reflect events since the security was last rated.
U.S. Government Obligations.
Each Fund may invest a portion of its assets in various types of U.S. Government obligations. U.S.
Government obligations are a type of bond. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities. Payment of principal and interest on U.S.
Government obligations (i) may be backed by the full faith and credit of the United States (as with U.S. Treasury obligations and GNMA certificates) or (ii) may be backed solely by the issuing or guaranteeing agency or instrumentality
itself (as with FNMA), FHLMC and Federal Home Loan Bank notes. In the latter case, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may
be privately owned. There can be no assurance that the U.S. Government would provide financial support to its agencies or instrumentalities where it is not obligated to do so. As a general matter, the value of debt instruments, including U.S.
Government obligations, declines when market interest rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms.
Convertible Securities.
The db X-trackers Ultra-Short Duration Bond Fund may invest in convertible securities. Convertible
securities include bonds, debentures, notes, preferred stocks and other securities that may be converted into a prescribed amount of common stock or other equity securities at a specified price and time. The holder of convertible securities is
entitled to receive interest paid or accrued on debt, or dividends paid or accrued on preferred stock, until the security matures or is converted. The value of a convertible security depends on interest rates, the yield of similar nonconvertible
securities, the financial strength of the issuer and the seniority of the security in the issuers capital structure. Convertible securities may be illiquid and may be required to convert at a time and at a price that is unfavorable to the
Fund. To the extent that the Fund invest in convertible securities with credit ratings below investment grade, such securities may have a higher likelihood of default, although this may be somewhat offset by the convertibility feature.
Mortgage-Backed and Asset-Backed Securities.
The db X-trackers Ultra-Short Duration Bond Fund may invest in mortgage-backed and
asset-backed securities. Mortgage-backed securities are mortgage-related securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, or issued by non-government entities. Mortgage-related securities represent pools of
mortgage loans assembled for sale to investors by various government agencies such as GNMA and government-related organizations such as FNMA and FHLMC, as well as by non-government issuers such as commercial banks, savings and loan institutions,
mortgage bankers and private mortgage insurance companies. Although certain mortgage-related securities are guaranteed by a third party or otherwise similarly secured, the market value of the security, which may fluctuate, is not so secured.
4
Other asset-backed securities are structured like mortgage-backed securities, but instead of
mortgage loans or interests in mortgage loans, the underlying assets may include items such as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card
agreements and from sales of personal property. Asset-backed securities typically have no U.S. Government backing. Additionally, the ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be
limited.
If the Fund purchases a mortgage-backed or other asset-backed security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from changes in interest rates or prepayments in the underlying collateral. As with other interest-bearing securities, the prices of such securities are inversely affected by changes in
interest rates. Although the value of a mortgage-backed or other asset-backed security may decline when interest rates rise, the converse is not necessarily true, since in periods of declining interest rates the mortgages and loans underlying the
securities are prone to prepayment, thereby shortening the average life of the security and shortening the period of time over which income at the higher rate is received. When interest rates are rising, the rate of prepayment tends to decrease,
thereby lengthening the period of time over which income at the lower rate is received. For these and other reasons, a mortgage-backed or other asset-backed securitys average maturity may be shortened or lengthened as a result of interest rate
fluctuations and, therefore, it is not possible to predict accurately the securitys return.
Mortgage Pass-Through
Securities.
The db X-trackers Ultra-Short Duration Bond Fund may invest a portion of its assets in U.S. agency mortgage pass-through securities. The term U.S. agency mortgage pass-through security refers to a category of pass-through
securities backed by pools of mortgages and issued by one of several U.S. government-sponsored enterprises: GNMA, FNMA or FHLMC. In the basic mortgage pass-through structure, mortgages with similar issuer, term and coupon characteristics are
collected and aggregated into a pool consisting of multiple mortgage loans. The pool is assigned a CUSIP number and undivided interests in the pool are traded and sold as pass-through securities. The holder of the security is entitled to
a pro rata share of principal and interest payments (including unscheduled prepayments) from the pool of mortgage loans.
An
investment in a specific pool of pass-through securities requires an analysis of the specific prepayment risk of mortgages within the covered pool (since mortgagors typically have the option to prepay their loans). The level of prepayments on a pool
of mortgage securities is difficult to predict and can impact the subsequent cash flows and value of the mortgage pool. In addition, when trading specific mortgage pools, precise execution, delivery and settlement arrangements must be negotiated for
each transaction. These factors combine to make trading in mortgage pools somewhat cumbersome.
For the foregoing and other reasons, the
Fund seeks to obtain exposure to U.S. agency mortgage pass-through securities primarily through the use of to-be-announced or TBA transactions. TBA refers to a commonly used mechanism for the forward settlement of
U.S. agency mortgage pass-through securities, and not to a separate type of mortgage-backed security. Most transactions in mortgage pass-through securities occur through the use of TBA transactions. TBA transactions generally are conducted in
accordance with widely-accepted guidelines which establish commonly observed terms and conditions for execution, settlement and delivery. In a TBA transaction, the buyer and seller decide on general trade parameters, such as agency, settlement date,
par amount, and price. The actual pools delivered generally are determined two days prior to settlement date.
Default by or bankruptcy of
a counterparty to a TBA transaction would expose the Fund to possible loss because of adverse market action, expenses or delays in connection with the purchase or sale of the pools of mortgage pass-through securities specified in the TBA
transaction. To minimize this risk, the Fund will enter into TBA transactions only with established counterparties (such as major broker-dealers) and the Investment Adviser will monitor the creditworthiness of such counterparties. In addition, the
Fund may accept assignments of TBA transactions from Authorized Participants (as defined below) from time to time. The Funds use of TBA rolls may cause the Fund to experience higher portfolio turnover, higher transaction costs and
to pay higher capital gain distributions to shareholders (which may be taxable).
Most transactions in fixed-rate mortgage pass-through
securities occur through standardized contracts for future delivery in which the exact mortgage pools to be delivered are not specified until a few days prior to settlements (a TBA transaction). The Fund may enter into such contracts on
a regular basis. The Fund, pending settlement of such contracts, will invest its assets in high-quality, liquid short-term instruments, including shares of money market funds. The Fund will assume its pro rata share of the fees and expenses of any
money market fund that it may invest in, in addition to the Funds own fees and expenses. The Fund may also acquire interests in mortgage pools through means other than such standardized contracts for future delivery. The Fund may also invest
the cash collateral it holds as part of its TBA transactions in repurchase agreements.
5
Bank Instruments.
The db X-trackers Ultra-Short Duration Bond Fund may invest in
certificates of deposit (CDs), time deposits and bankers acceptances from U.S. banks. A bankers acceptance is a bill of exchange or time draft drawn on and accepted by a commercial bank. A CD is a negotiable interest-bearing
instrument with a specific maturity. CDs are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. A time deposit is a nonnegotiable receipt
issued by a bank in exchange for the deposit of funds. Like a CD, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market.
Loans.
Loans consist generally of obligations of companies and other entities (collectively, borrowers) incurred for the
purpose of reorganizing the assets and liabilities of a borrower; acquiring another company; taking over control of a company (leveraged buyout); temporary refinancing; or financing internal growth or other general business purposes. Loans are often
obligations of borrowers who have incurred a significant percentage of debt compared to equity issued and thus are highly leveraged. All or a significant portion of the loans in which the db X-trackers Ultra-Short Duration Bond Fund will invest may
be below investment grade quality.
Loans may be acquired by direct investment as a lender at the inception of the loan or by
assignment of a portion of a loan previously made to a different lender or by purchase of a participation interest. If the Fund makes a direct investment in a loan as one of the lenders, it generally acquires the loan at par. This means the Fund
receives a return at the full interest rate for the loan. If the Fund acquires its interest in loans in the secondary market or acquires a participation interest, the loans may be purchased or sold above, at, or below par, which can result in a
yield that is below, equal to, or above the stated interest rate of the loan. The Fund will generally purchase loans from banks or other financial institutions through assignments or participations.
When the Fund acts as one of a group of lenders originating a senior loan, it may participate in structuring the senior loan and have a direct
contractual relationship with the borrower, may enforce compliance by the borrower with the terms of the loan agreement and may have rights with respect to any funds acquired by other lenders through set-offs. Lenders also have full voting and
consent rights under the applicable loan agreement. Action subject to lender vote or consent generally requires the vote or consent of the holders of some specified percentage of the outstanding principal amount of the senior loan. Certain
decisions, such as reducing the amount of interest on or principal of a senior loan, releasing collateral, changing the maturity of a senior loan or a change in control of the borrower, frequently require the unanimous vote or consent of all lenders
affected.
When the Fund is a purchaser of an assignment, it succeeds to all the rights and obligations under the loan agreement of the
assigning lender and becomes a lender under the loan agreement with the same rights and obligations as the assigning lender. These rights include the ability to vote along with the other lenders on such matters as enforcing the terms of the loan
agreement (
e.g.
, declaring defaults, initiating collection action, etc.). Taking such actions typically requires at least a vote of the lenders holding a majority of the investment in the loan and may require a vote by lenders holding
two-thirds or more of the investment in the loan. Because the Fund usually does not hold a majority of the investment in any loan, it will not be able by itself to control decisions that require a vote by the lenders. Assignments may be arranged
through private negotiations and the rights and obligations acquired by the purchase of an assignment may differ from, and be more limited than, those held by the assigning lender.
Historically, the amount of public information available about a specific loan has been less extensive than if the loan were registered or
exchange-traded.
The loans in which the Fund may invest will often be secured and senior to other indebtedness of the borrower. Each loan
will generally be secured by collateral such as accounts receivable, inventory, equipment, real estate, intangible assets such as trademarks, copyrights and patents, and securities of subsidiaries or affiliates. Collateral may also include
guarantees or other credit support by affiliates of the borrower. The value of the collateral generally will be determined by reference to financial statements of the borrower, by an independent appraisal, by obtaining the market value of such
collateral, in the case of cash or securities if readily ascertainable, or by other customary valuation techniques considered appropriate by the Investment Adviser. The value of collateral may decline after the Funds investment, and collateral
may be difficult to sell in the event of default. Consequently, the Fund may not receive all the payments to which it is entitled. The loan agreement may or may not require the borrower to pledge additional collateral to secure the senior loan if
the value of the initial collateral declines. In certain circumstances, the loan agreement may authorize the agent to liquidate the collateral and to distribute the liquidation proceeds pro rata among the lenders. By virtue of their senior position
and collateral, senior loans typically provide lenders with the first right to cash flows or proceeds from the sale of a borrowers collateral if the borrower becomes insolvent (subject to the limitations of bankruptcy law, which may provide
higher priority to certain claims such as employee salaries, employee pensions, and taxes). This means senior loans are generally repaid before unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and preferred or common
stockholders. To the extent that the Fund invests in unsecured loans, if the borrower defaults on such loan, there is no specific collateral on which the lender can foreclose. If the borrower defaults on a subordinated loan, the collateral may not
be sufficient to cover both the senior and subordinated loans. In addition, if the loan is foreclosed, the Fund could become part owner of any collateral and could bear the costs and liabilities of owning and disposing of the collateral.
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The Fund may purchase and retain in its portfolio senior loans of borrowers that have filed for
protection under the federal bankruptcy laws or that have had involuntary bankruptcy petitions filed against them by creditors. Investing in senior loans involves investment risk, and some borrowers default on their senior loan payments.
Senior loans typically pay interest at least quarterly at rates which equal a fixed percentage spread over a base rate such as the London
Inter-Bank Offered Rate (LIBOR). For example, if LIBOR were 3% and the borrower was paying a fixed spread of 2.50%, the total interest rate paid by the borrower would be 5.50%. Although a base rate such as LIBOR can change every day,
loan agreements for senior loans typically allow the borrower the ability to choose how often the base rate for its loan will change. A single loan may have multiple reset periods at the same time, with each reset period applicable to a designated
portion of the loan. Such periods can range from one day to one year, with most borrowers choosing monthly or quarterly reset periods. During periods of rising interest rates, borrowers will tend to choose longer reset periods, and during periods of
declining interest rates, borrowers will tend to choose shorter reset periods. The fixed spread over the base rate on a senior loan typically does not change.
Senior loans usually have mandatory and optional prepayment provisions. Because of prepayments, the actual remaining maturity of senior loans
may be considerably less than their stated maturity. Senior loans generally are arranged through private negotiations between a borrower and several financial institutions represented by an agent who is usually one of the originating lenders. In
larger transactions, it is common to have several agents; however, generally only one such agent has primary responsibility for ongoing administration of a senior loan. Agents are typically paid fees by the borrower for their services.
The agent is primarily responsible for negotiating the loan agreement which establishes the terms and conditions of the senior loan and the
rights of the borrower and the lenders. The agent is paid a fee by the borrower for its services. The agent generally is required to administer and manage the senior loan on behalf of other lenders. The agent also is responsible for monitoring
collateral and for exercising remedies available to the lenders such as foreclosure upon collateral. The agent may rely on independent appraisals of specific collateral. The agent need not, however, obtain an independent appraisal of assets pledged
as collateral in all cases. The agent generally is also responsible for determining that the lenders have obtained a perfected security interest in the collateral securing a senior loan. The Fund normally relies on the agent to collect principal of
and interest on a senior loan. Furthermore, the Fund also relies in part on the agent to monitor compliance by the borrower with the restrictive covenants in the loan agreement and to notify the Fund (or the lender from whom the Fund has purchased a
participation) of any adverse change in the borrowers financial condition. Insolvency of the agent or other persons positioned between the Fund and the borrower could result in losses for the Fund.
Participation Interests.
The db X-trackers Ultra-Short Duration Bond Fund may purchase participations in corporate loans. Participation
interests generally will be acquired from a commercial bank or other financial institution (a Lender) or from other holders of a participation interest (a Participant). The purchase of a participation interest either from a
Lender or a Participant will not result in any direct contractual relationship with the borrowing company (the Borrower). The Fund generally will have no right directly to enforce compliance by the Borrower with the terms of the credit
agreement. Instead, the Fund will be required to rely on the Lender or the Participant that sold the participation interest, both for the enforcement of the Funds rights against the Borrower and for the receipt and processing of payments due
to the Funds under the loans. Under the terms of a participation interest, the Funds may be regarded as a member of the Participant, and thus the Funds are subject to the credit risk of both the Borrower and a Participant. Participation interests
are generally subject to restrictions on resale. Generally, the Funds consider participation interests to be illiquid and therefore subject to the Funds percentage limitations for investments in illiquid securities.
Commercial Instruments.
The db X-trackers Ultra-Short Duration Bond Fund may invest in commercial interests, including commercial
paper, asset-backed commercial paper and other short-term corporate instruments. Commercial paper normally represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations, finance companies and
other issuers. Commercial paper may be traded in the secondary market after its issuance. Asset-backed commercial paper is issued by a special purpose entity that is organized to issue the commercial paper and to purchase trade receivables or other
financial assets. The credit quality of asset backed commercial paper depends primarily on the quality of these assets and the level of any additional credit support.
Zero-Coupon and Pay-in-Kind Securities.
The Funds may invest in zero-coupon or pay-in-kind securities. These securities are debt
securities that do not make regular cash interest payments. Zero-coupon securities are sold at a deep discount to their face value. Pay-in-kind securities pay interest through the issuance of additional securities. Because zero-coupon and
pay-in-kind securities do not pay
7
current cash income, the price of these securities can be volatile when interest rates fluctuate. While these securities do not pay current cash income, federal tax law requires the holders of
zero-coupon and pay-in-kind securities to include in income each year the portion of the original issue discount (or deemed discount) and other non-cash income on such securities accrued during that year. In order to qualify as a regulated
investment company under the Code, and to avoid certain excise taxes, the Funds may be required to distribute a portion of such discount and income and may be required to dispose of other portfolio securities, which could occur during periods
of adverse market prices, in order to generate sufficient cash to meet these distribution requirements.
Delayed Delivery
Transactions.
The Funds may use delayed delivery transactions as an investment technique. Delayed delivery transactions, also referred to as forward commitments, involve commitments by the Funds to dealers or issuers to acquire or sell
securities at a specified future date beyond the customary settlement for such securities. These commitments may fix the payment price and interest rate to be received or paid on the investment. The Funds may purchase securities on a delayed
delivery basis to the extent that it can anticipate having available cash on the settlement date. Delayed delivery agreements will not be used as a speculative or leverage technique.
Investment in securities on a delayed delivery basis may increase the Funds exposure to market fluctuation and may increase the
possibility that the Funds will incur short-term gains subject to federal taxation or short-term losses if the Funds must engage in portfolio transactions in order to honor a delayed delivery commitment. Until the settlement date, the Funds will
segregate liquid assets of a dollar value sufficient at all times to make payment for the delayed delivery transactions. Such segregated liquid assets will be marked-to-market daily, and the amount segregated will be increased if necessary to
maintain adequate coverage of the delayed delivery commitments.
The delayed delivery securities, which will not begin to accrue interest
or dividends until the settlement date, will be recorded as an asset of the Funds and will be subject to the risk of market fluctuation. The purchase price of the delayed delivery securities is a liability of the Funds until settlement. The Funds
may enter into buy/sell back transactions (a form of delayed delivery agreement). In a buy/sell back transaction, the Funds enter a trade to sell securities at one price and simultaneously enters a trade to buy the same securities at another price
for settlement at a future date.
When-Issued Securities.
The Funds may purchase when-issued securities. Purchasing securities on a
when-issued basis means that the date for delivery of and payment for the securities is not fixed at the date of purchase, but is set after the securities are issued. The payment obligation and, if applicable, the interest rate that will
be received on the securities are fixed at the time the buyer enters into the commitment. The Funds will only make commitments to purchase such securities with the intention of actually acquiring such securities, but the Funds may sell these
securities before the settlement date if it is deemed advisable.
Securities purchased on a when-issued basis and the securities held in a
Funds portfolio are subject to changes in market value based upon the publics perception of the creditworthiness of the issuer and, if applicable, the changes in the level of interest rates. Therefore, if a Fund is to remain
substantially fully invested at the same time that it has purchased securities on a when-issued basis, there will be a possibility that the market value of the Funds assets will fluctuate to a greater degree. Furthermore, when the time comes
for a Fund to meet its obligations under when-issued commitments, the Fund will do so by using then available cash flow, by sale of the segregated liquid assets, by sale of other securities, or although it would not normally expect to do so, by
directing the sale of when-issued securities themselves (which may have a market value greater or less than the Funds payment obligation).
Investment in securities on a when-issued basis may increase a Funds exposure to market fluctuation and may increase the possibility
that the Fund will incur short-term gains subject to federal taxation or short-term losses if the Fund must sell another security in order to honor a when-issued commitment. A Fund will employ techniques designed to reduce such risks. If a Fund
purchases a when-issued security, the Fund will segregate liquid assets in an amount equal to the when-issued commitment. If the market value of such segregated assets declines, additional liquid assets will be segregated on a daily basis so that
the market value of the segregated assets will equal the amount of a Funds when-issued commitments.
Repurchase
Agreements.
Each Fund may enter into repurchase agreements. A repurchase agreement is an instrument under which the purchaser (
i.e.
, a Fund) acquires the security and the seller agrees, at the time of the sale, to repurchase the security
at a mutually agreed upon time and price, thereby determining the yield during the purchasers holding period. Repurchase agreements may be construed to be collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. If a repurchase agreement is construed to be a collateralized loan, the underlying securities will not be considered to be owned by each Fund but only to constitute collateral for the sellers obligation to pay the
repurchase price, and, in the event of a default by the seller, each Fund may suffer time delays and incur costs or losses in connection with the disposition of the collateral.
8
In any repurchase transaction, collateral for a repurchase agreement may include cash items,
obligations issued by the U.S. government or its agencies or instrumentalities, obligations rated in the highest category by at least two NRSROs, or, if unrated, determined to be of comparable quality by the Adviser and/or Sub-Adviser. Collateral,
however, is not limited to the foregoing and may include for example obligations rated below the highest category by NRSROs. Collateral for a repurchase agreement may also include securities that a Fund could not hold directly without the repurchase
obligation. Irrespective of the type of collateral underlying the repurchase agreement, a repurchase obligation with a particular counterparty must satisfy the credit quality standards applicable to the acquisition of an instrument issued by such
counterparty in compliance with Rule 2a-7 under the 1940 Act.
Repurchase agreements pose certain risks for a Fund that utilizes
them. Such risks are not unique to the Funds but are inherent in repurchase agreements. The Funds seek to minimize such risks but because of the inherent legal uncertainties involved in repurchase agreements, such risks cannot be eliminated. Lower
quality collateral and collateral with longer maturities may be subject to greater price fluctuations than higher quality collateral and collateral with shorter maturities. If the repurchase agreement counterparty were to default, lower quality
collateral may be more difficult to liquidate than higher quality collateral. Should the counterparty default and the amount of collateral not be sufficient to cover the counterpartys repurchase obligation, a Fund would retain the status of an
unsecured creditor of the counterparty (
i.e.
, the position the Fund would normally be in if it were to hold, pursuant to its investment policies, other unsecured debt securities of the defaulting counterparty) with respect to the amount of
the shortfall. As an unsecured creditor, a Fund would be at risk of losing some or all of the principal and income involved in the transaction.
Reverse Repurchase Agreements.
Each Fund may enter into reverse repurchase agreements, which involve the sale of securities with an
agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowing. Generally the effect of such transactions is that the Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase agreement, while in many cases the Fund is able to keep some of the interest income associated with those securities. Such transactions are advantageous only if the Fund has an
opportunity to earn a rate of interest on the cash derived from these transactions that is greater than the interest cost of obtaining the same amount of cash. Opportunities to realize earnings from the use of the proceeds equal to or greater than
the interest required to be paid may not always be available and each Fund intends to use the reverse repurchase technique only when the Adviser and/or Sub-Adviser believe it will be advantageous to the Fund. The use of reverse repurchase agreements
may exaggerate any interim increase or decrease in the value of each Funds assets. The Funds exposure to reverse repurchase agreements will be covered by assets having a value equal to or greater than such commitments. Each Fund
maintains liquid assets in connection with reverse repurchase agreements. Under the 1940 Act, reverse repurchase agreements are considered borrowings.
Currency Transactions.
The db X-trackers Ultra-Short Duration Bond Fund may enter into forward currency contracts designed to offset a
Funds exposure to non-U.S. currencies. In addition, the Fund may enter into foreign currency forward contracts and foreign currency futures contracts to facilitate local securities settlements or to protect against currency exposure in
connection with distributions to Shareholders.
A foreign currency forward exchange contract (forward contract) involves an
obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no margin deposit requirement, and no commissions are charged at any stage for trades.
A non-deliverable forward contract (NDF) is a forward contract where there is no physical settlement of two currencies at
maturity. NDFs are contracts between parties in which a net settlement amount based on the change in the specified foreign exchange rate is paid by one party to the other. The Funds obligations with respect to each NDF is accrued on a daily
basis and an amount of cash or liquid securities at least equal to such amount maintained in an account at the Trusts custodian bank. The risk of loss with respect to NDFs generally is limited to the net amount of payments that a Fund is
contractually obligated to make or receive.
A foreign currency futures contract is a contract involving an obligation to deliver or
acquire the specified amount of a specific currency, at a specified price and at a specified future time. Futures contracts may be settled on a net cash payment basis rather than by the sale and delivery of the underlying currency.
Short-Term Instruments and Temporary Investments
. Each Fund may invest in short-term instruments, including money market instruments,
on an ongoing basis to provide liquidity or for other reasons. Money market instruments are generally short-term investments that may include but are not limited to: (i) Shares of money market funds (including those advised by the Adviser
and/or Sub-Adviser); (ii) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities (including government-
9
sponsored enterprises); (iii) negotiable certificates of deposit (CDs), bankers acceptances, fixed-time deposits and other obligations of U.S. and non-U.S. banks (including
non-U.S. branches) and similar institutions; (iv) commercial paper rated, at the date of purchase, Prime-1 by Moodys
®
Investors Service, Inc. or A-1 by
S&P, or if unrated, of comparable quality as determined by the Adviser and/or Sub-Adviser; (v) non-convertible corporate debt securities (
e.g.
, bonds and debentures) with remaining maturities at the date of purchase of not more than
397 days and that satisfy the rating requirements set forth in Rule 2a-7 under the 1940 Act; (vi) repurchase agreements; and (vii) short-term U.S. dollar-denominated obligations of non-U.S. banks (including U.S. branches) that, in the
opinion of the Adviser and/or Sub-Adviser, are of comparable quality to obligations of U.S. banks which may be purchased by a Fund. Any of these instruments may be purchased on a current or forward-settled basis. Time deposits are non-negotiable
deposits maintained in banking institutions for specified periods of time at stated interest rates. Bankers acceptances are time drafts drawn on commercial banks by borrowers, usually in connection with international transactions.
Foreign Securities.
The Funds may invest in fixed income securities issued by entities outside the U.S. Investing in the securities of
foreign issuers involves special risks and considerations not typically associated with investing in U.S. issuers. These include differences in accounting, auditing and financial reporting standards, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations, political instability which could affect U.S. investments in foreign countries, and potential restrictions on the flow of international capital. Foreign issuers may be subject
to less governmental regulation than U.S. issuers. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payment positions.
Restricted Securities/Rule 144A Securities.
The Funds may invest
in securities offered pursuant to Rule 144A under the 1933 Act (Rule 144A securities), which are restricted securities. They may be less liquid and more difficult to value than other investments because such securities may not be readily
marketable in broad public markets. The Funds may not be able to sell a restricted security promptly or at a reasonable price. Although there is a substantial institutional market for Rule 144A securities, it is not possible to predict exactly how
the market for Rule 144A securities will develop. A restricted security that was liquid at the time of purchase may subsequently become illiquid and its value may decline as a result. Restricted securities that are deemed illiquid will count towards
a Funds 15% limitation on illiquid securities. In addition, transaction costs may be higher for restricted securities than for more liquid securities. The Funds may have to bear the expense of registering Rule 144A securities for resale and
the risk of substantial delays in effecting the registration.
Securities of Investment Companies.
Each Fund may invest in the
securities of other investment companies (including money market funds) and real estate investment trusts (REITs) to the extent allowed by law. Pursuant to the 1940 Act, a Funds investment in investment companies is limited to,
subject to certain exceptions: (i) 3% of the total outstanding voting stock of any one investment company; (ii) 5% of the Funds total assets with respect to any one investment company and (iii) 10% of the Funds total
assets with respect to investment companies in the aggregate. To the extent allowed by law or regulation, each Fund may invest its assets in the securities of investment companies that are money market funds, including those advised by the Adviser
and/or Sub-Adviser or otherwise affiliated with the Adviser and/or Sub-Adviser, in excess of the limits discussed above. Other investment companies in which a Fund invests can be expected to incur fees and expenses for operations, such as investment
advisory and administration fees that would be in addition to those incurred by the Fund.
Illiquid Securities.
Each Fund may
invest up to an aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment). Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments that lack
readily available markets.
Futures and Options.
Each Fund may enter into futures contracts and options. These futures
contracts and options will be used to facilitate trading or reduce transaction costs. Each Fund will enter into futures contracts and options that are traded on a U.S. or non-U.S. exchange. No Fund will use futures or options for speculative
purposes. Each Fund intends to use futures and options in accordance with Rule 4.5 promulgated under the Commodity Exchange Act (CEA). The Adviser, on behalf of each Fund, has claimed an exclusion from the definition of the term
commodity pool operator in accordance with Rule 4.5 so that each Fund is not subject to registration or regulation as a commodity pool operator under the CEA.
Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific instrument or
index at a specified future time and at a specified price. Each Fund may enter into futures contracts to purchase the value of one or more securities indexes when the Adviser and/or Sub-Adviser anticipate purchasing the underlying securities and
believe prices will rise before the purchase will be made. To the extent required by law, liquid assets committed to futures contracts will be maintained.
10
A call option gives a holder the right to purchase a specific security at a specified price
(exercise price) within a specified period of time. A put option gives a holder the right to sell a specific security at a specified exercise price within a specified period of time. The initial purchaser of a call option pays the
writer a premium, which is paid at the time of purchase and is retained by the writer whether or not such option is exercised. Each Fund may purchase put options to hedge its portfolio against the risk of a decline in the market value of
securities held and may purchase call options to hedge against an increase in the price of securities it is committed to purchase. Each Fund may write put and call options along with a long position in options to increase its ability to hedge
against a change in the market value of the securities it holds or is committed to purchase. Investments in futures contracts and other investments that contain leverage may require each Fund to maintain liquid assets. Generally, each Fund maintains
an amount of liquid assets equal to its obligations relative to the position involved, adjusted daily on a marked-to-market basis. With respect to futures contracts that are contractually required to cash-settle, each Fund maintains
liquid assets in an amount at least equal to each Funds daily marked-to-market obligation (
i.e.
, each Funds daily net liability, if any), rather than the contracts notional value. By maintaining assets equal to its net
obligation under cash-settled futures contracts, the Fund may employ leverage to a greater extent than if each Fund set aside assets equal to the futures contracts full notional value. Each Fund bases its asset maintenance policies on methods
permitted by the staff of the SEC and may modify these policies in the future to comply with any changes in the guidance articulated from time to time by the SEC or its staff.
Options on Futures Contracts.
An option on a futures contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in the underlying futures contract at a specified exercise price at any time prior to the expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writers futures margin account that represents the amount by which the market price of the futures
contract exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the futures contract. The potential for loss related to the purchase of an option on a futures contract is limited to the premium
paid for the option plus transaction costs. Because the value of the option is fixed at the point of sale, there are no daily cash payments by the purchaser to reflect changes in the value of the underlying contract; however, the value of the option
changes daily and that change would be reflected in the NAV of each Fund. The potential for loss related to writing call options is unlimited. The potential for loss related to writing put options is limited to the agreed upon price per Share, also
known as the strike price, less the premium received from writing the put.
Each Fund may purchase and write put and call options on
futures contracts that are traded on an exchange as a hedge against changes in value of its portfolio securities, or in anticipation of the purchase of securities, and may enter into closing transactions with respect to such options to terminate
existing positions. There is no guarantee that such closing transactions can be affected.
Upon entering into a futures contract, a Fund
will be required to deposit with the broker an amount of cash or cash equivalents known as initial margin, which is in the nature of a performance bond or good faith deposit on the contract and is returned to each Fund upon termination
of the futures contract, assuming all contractual obligations have been satisfied. Subsequent payments, known as variation margin, to and from the broker will be made daily as the price of the index underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as marking-to-market. At any time prior to the expiration of a futures contract, each Fund may elect to close the position by
taking an opposite position, which will operate to terminate a Funds existing position in the contract.
Restrictions on the Use
of Futures Contracts and Options on Futures Contracts.
Pursuant to a claim for exclusion filed with the National Futures Association (NFA) on behalf of each Fund, the Trust is not deemed to be a commodity pool operator
(CPO), under the CEA, and it is not subject to registration or regulation as such under the CEA. The Investment Adviser is not deemed to be a commodity trading advisor with respect to its services as an investment adviser to
each Fund. In February 2012, the CFTC adopted certain regulatory changes that may subject the Investment Adviser to register with the CFTC as CPO if a Fund is unable to comply with certain trading and marketing limitations on its investments in
futures and certain other instruments. With respect to investments in swap transactions, commodity futures, commodity options or certain other derivatives used for purposes other than bona fide hedging purposes, the Trust, on behalf of each Fund
must meet one of the following tests under the amended regulations in order to claim an exclusion from the definition of a CPO. First, the aggregate initial margin and premiums required to establish a Funds positions in such investments may
not exceed five percent of the liquidation value of the Funds portfolio (after accounting for unrealized profits and unrealized losses on any such investments). Alternatively, the aggregate net notional value of such instruments, determined at
the time of the most recent position established, may not exceed one hundred percent (100%) of the liquidation value of the Funds portfolio (after accounting for unrealized profits and unrealized losses on any such positions). In addition
to meeting one of the foregoing trading limitations, a Fund may not market itself as a commodity pool or otherwise as a vehicle for trading in the commodity futures, commodity options or swaps and derivatives markets. In the event that the
Investment Adviser is required to register as a CPO with respect to a Fund, the disclosure and operations of the Fund would need to comply with all applicable CFTC regulations. Compliance with these additional registration and regulatory
requirements could increase operational expenses. Other potentially adverse regulatory initiatives could also develop.
11
Swap Agreements.
Over-the-counter (OTC) swap agreements are contracts
between parties in which one party agrees to make periodic payments to the other party based on the change in market value or level of a specified rate, index or asset. In return, the other party agrees to make periodic payments to the first party
based on the return of a different specified rate, index or asset. Swap agreements will usually be performed on a net basis, with each Fund receiving or paying only the net amount of the two payments. The net amount of the excess, if any, of a
Funds obligations over its entitlements with respect to each swap is accrued on a daily basis and an amount of liquid assets having an aggregate value at least equal to the accrued excess will be maintained by each Fund. Cleared swap
agreements are contracts in which payments are guaranteed by a central clearinghouse.
The use of interest-rate and index swaps is a
highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions. These transactions generally do not involve the delivery of securities or other underlying
assets or principal.
A Fund may be required to cover its potential economic exposure to certain derivatives transactions by holding an
offsetting financial position and/or earmarking or segregating cash or liquid assets equal in value to a Funds potential economic exposure under the transaction. A Fund will cover such transactions as described herein or in such other manner
in accordance with applicable laws and regulations. Assets used to cover derivatives transactions cannot be sold while the derivatives position is open, unless they are replaced by other appropriate assets. Earmarked or segregated cash or liquid
assets and assets held in margin accounts are not otherwise available to a Fund for investment purposes. If a large portion of a Funds assets are used to cover derivatives transactions or are otherwise earmarked or segregated, it could affect
portfolio management or a Funds ability to meet redemption requests or other current obligations. With respect to derivatives which are cash-settled (i.e., have no physical delivery requirement), a Fund is permitted to set aside liquid assets
in an amount equal to a Funds daily marked-to-market net obligations (i.e., a Funds daily net liability) under the derivative, if any, rather than the derivatives full notional value or the market value of the instrument underlying
the derivative, as applicable. By setting aside assets equal to only its net obligations under cash-settled derivatives, a Fund will have the ability to employ leverage to a greater extent than if a Fund were required to segregate assets equal to
the full notional amount of the derivative or the market value of the underlying instrument, as applicable.
Specific Risks Applicable to the db
X-trackers Managed Municipal Bond Fund
Municipal Securities Risk.
The market for municipal bonds may be less liquid than
for taxable bonds. There may also be less information available on the financial condition of issuers of municipal securities than for public corporations. This means that it may be harder to buy and sell municipal securities, especially on short
notice, and municipal securities may be more difficult for the Fund to value accurately than securities of public corporations. Since the Fund invests a significant portion of its portfolio in municipal securities, the Funds portfolio may have
greater exposure to liquidity risk than a fund that invests in non-municipal securities.
Municipal securities may include revenue bonds,
which are generally backed by revenue from a specific project or tax. The issuer of a revenue bond makes interest and principal payments from revenues generated from a particular source or facility, such as a tax on particular property or revenues
generated from a municipal water or sewer utility or an airport. Revenue bonds generally are not backed by the full faith and credit and general taxing power of the issuer.
Some longer-term municipal securities give the investor the right to put or sell the security at par (face value) within a
specified number of days following the investors request usually one to seven days. This demand feature enhances a securitys liquidity by shortening its effective maturity and enables it to trade at a price equal to or very close
to par. If a demand feature terminates prior to being exercised, the Fund would hold the longer-term security, which could experience substantially more volatility.
Municipal securities are subject to credit and market risk. Generally, prices of higher quality issues tend to fluctuate more with changes in
market interest rates than prices of lower quality issues and prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues.
Prices and yields on municipal securities are dependent on a variety of factors, including general money-market conditions, the financial
condition of the issuer, general conditions of the municipal securities market, the size of a particular offering, the maturity of the obligation and the rating of the issue. A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Available information about the financial condition of an issuer of municipal securities may not be as extensive as that which is made available by corporations whose securities are publicly traded. As a result,
municipal securities may be more difficult to value than securities of public corporations.
12
Lease Obligations Risk.
Lease obligations may have risks not normally associated with
general obligation or other revenue bonds. Leases and installment purchase or conditional sale contracts (which may provide for title to the leased asset to pass eventually to the issuer) have developed as a means for governmental issuers to acquire
property and equipment without the necessity of complying with the constitutional statutory requirements generally applicable for the issuance of debt. Certain lease obligations contain non-appropriation clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for that purpose by the appropriate legislative body on an annual or other periodic basis. Consequently, continued lease payments
on those lease obligations containing non-appropriation clauses are dependent on future legislative actions. If these legislative actions do not occur, the holders of the lease obligation may experience difficulty in exercising their
rights, including disposition of the property.
Tobacco Bond Risk.
Tobacco settlement revenue bonds are generally neither
general nor legal obligations of a state or any of its political subdivisions and neither the faith and credit nor the taxing power nor any other assets or revenues of a state or of any political subdivision will be pledged to the payment of any
such bonds. In addition, tobacco companies profits from the sale of tobacco products are inherently variable and difficult to estimate. There can be no guarantee that tobacco companies will earn enough revenues to cover the payments due under
tobacco bonds.
Education Bond Risk.
In general, there are two types of education-related bonds: those issued to finance projects
for public and private colleges and universities, and those representing pooled interests in student loans. Bonds issued to supply educational institutions with funds are subject to the risk of unanticipated revenue decline, primarily the result of
decreasing student enrollment or decreasing state and federal funding. Among the factors that may lead to declining or insufficient revenues are restrictions on students ability to pay tuition, availability of state and federal funding, and
general economic conditions. Student loan revenue bonds are generally offered by state (or substate) authorities or commissions and are backed by pools of student loans. Underlying student loans may be guaranteed by state guarantee agencies and may
be subject to reimbursement by the United States Department of Education through its guaranteed student loan program. Others may be private, uninsured loans made to parents or students which are supported by reserves or other forms of credit
enhancement. Recoveries of principal due to loan defaults may be applied to redemption of bonds or may be used to re-lend, depending on program latitude and demand for loans. Cash flows supporting student loan revenue bonds are impacted by numerous
factors, including the rate of student loan defaults, seasoning of the loan portfolio and student repayment deferral periods of forbearance. Other risks associated with student loan revenue bonds include potential changes in federal legislation
regarding student loan revenue bonds, state guarantee agency reimbursement and continued federal interest and other program subsidies currently in effect.
Electric Utilities Bond Risk
.
The electric utilities industry has been experiencing, and will continue to experience, increased
competitive pressures. Federal legislation in the last two years may open transmission access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other risks include: (a) the availability and
cost of fuel; (b) the availability and cost of capital; (c) the effects of conservation on energy demand; (d) the effects of rapidly changing environmental, safety and licensing requirements, and other federal, state and local
regulations, (e) timely and sufficient rate increases; and (f) the effects of opposition to nuclear power.
Housing Bond
Risk.
Housing revenue bonds are generally issued by a state, county, city, local housing authority or other public agency. They generally are secured by the revenues derived from mortgages purchased with the proceeds of the bond issue. It is
extremely difficult to predict the supply of available mortgages to be purchased with the proceeds of an issue or the future cash flow from the underlying mortgages. Consequently, there are risks that proceeds will exceed supply, resulting in early
retirement of bonds, or that homeowner repayments will create an irregular cash flow. Many factors may affect the financing of multi-family housing projects, including acceptable completion of construction, proper management, occupancy and rent
levels, economic conditions and changes to current laws and regulations.
Transportation Bond Risk.
Transportation debt may be
issued to finance the construction of airports, toll roads, highways or other transit facilities. Airport bonds are dependent on the general stability of the airline industry and on the stability of a specific carrier who uses the airport as a hub.
Air traffic generally follows broader economic trends and is also affected by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the
general economic health of an area. Fuel costs and availability also affect other transportation-related securities, as do the presence of alternate forms of transportation, such as public transportation.
13
Water and Sewer Bond Risk.
Water and sewer revenue bonds are often considered to have
relatively secure credit as a result of their issuers importance, monopoly status and generally unimpeded ability to raise rates. Despite this, lack of water supply due to insufficient rain, run-off or snow pack is a concern that has led to
past defaults. Further, public resistance to rate increases, costly environmental litigation, and federal environmental mandates are challenges faced by issuers of water and sewer bonds.
Industrial Development Bond Risk.
Industrial developments bonds are revenue bonds issued by or on behalf of public authorities to
obtain funds to finance various public and/or privately operated facilities, including those for business and manufacturing, housing, sports, pollution control, airport, mass transit, port and parking facilities. These bonds are normally secured
only by the revenues from the project and not by state or local government tax payments. Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities financed by the bonds and any guarantor to meet
its financial obligations. These bonds are subject to a wide variety of risks, many of which relate to the nature of the specific project. Generally, the value and credit quality of these bonds are sensitive to the risks related to an economic
slowdown.
Resource Recovery Risk.
Resource recovery bonds are a type of revenue bond issued to build facilities such as solid
waste incinerators or waste-to-energy plants. Typically, a private corporation is involved, at least during the construction phase, and the revenue stream is secured by fees or rents paid by municipalities for use of the facilities. The viability of
a resource recovery project, environmental protection regulations, and project operator tax incentives may affect the value and credit quality of resource recovery bonds.
Special Tax Bond Risk.
Special tax bonds are usually backed and payable through a single tax, or series of special taxes such as
incremental property taxes. The failure of the tax levy to generate adequate revenue to pay the debt service on the bonds may cause the value of the bonds to decline.
Health Care Bond Risk.
The health care industry is subject to regulatory action by a number of private and governmental agencies,
including federal, state and local governmental agencies. A major source of revenues for the health care industry is payments from Medicare and Medicaid programs. As a result, the industry is sensitive to legislative changes and reductions in
governmental spending for such programs. Numerous other factors may also affect the health care industry, as well as the value and credit quality of health care bonds, such as general and local economic conditions, demand for services, expenses
(including malpractice insurance premiums) and competition among health care providers. In the future, the following elements may adversely affect health care facility operations: implementation of a national health insurance program; other state or
local health care reform measures; medical and technological advances which dramatically alter the need for health services or the way in which such services are delivered; changes in medical coverage which alter the traditional fee-for-service
revenue stream; and efforts by employers, insurers, and governmental agencies to reduce the costs of health insurance and health care services.
Tax Risks.
As with any investment, you should consider how your investment in Shares of the Fund will be taxed. The tax information in
the Prospectus and this SAI is provided as general information. You should consult your own tax professional about the tax consequences of an investment in Shares of the Fund.
There is no guarantee that the Funds income will be exempt from federal or state income taxes. Events occurring after the date of
issuance of a municipal bond or after the Funds acquisition of a municipal bond may result in a determination that interest on that bond is includible in gross income for U.S. federal income tax purposes retroactively to its date of issuance.
Such a determination may cause a portion of prior distributions by the Fund to its shareholders to be taxable to those shareholders in the year of receipt. Federal or state changes in income or alternative minimum tax (AMT) rates or in
the tax treatment of municipal bonds may make municipal bonds less attractive as investments and cause them to lose value.
Municipal Market Disruption Risk.
The value of municipal securities may be affected by uncertainties in the municipal market related to
legislation or litigation involving the taxation of municipal securities or the rights of municipal securities holders in the event of a bankruptcy. Proposals to restrict or eliminate the federal income tax exemption for interest on municipal
securities are introduced before Congress from time to time. Proposals also may be introduced before state legislatures that would affect the state tax treatment of a municipal funds distributions. If such proposals were enacted, the
availability of municipal securities and the value of a municipal funds holdings would be affected. Municipal bankruptcies are relatively rare, and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear and
remain untested. Further, the application of state law to municipal issuers could produce varying results among the states or among municipal securities issuers within a state. These legal uncertainties could affect the municipal securities market
generally, certain specific segments of the market, or the relative credit quality of particular securities. There is also the possibility that as a result of litigation or other conditions, the power or ability of issuers to meet their obligations
for the payment of interest and principal on their municipal securities may be materially affected or their obligations
14
may be found to be invalid or unenforceable. Such litigation or conditions may from time to time have the effect of introducing uncertainties in the market for municipal securities or certain
segments thereof, or of materially affecting the credit risk with respect to particular bonds. Adverse economic, business, legal or political developments might affect all or a substantial portion of the Funds municipal securities in the same
manner. Any of these effects could have a significant impact on the prices of some or all of the municipal securities held by the Fund.
Proxy Voting
The Board has delegated responsibility for decisions regarding proxy voting for securities held by each Fund to the
Sub-Adviser. The Sub-Adviser votes such proxies in accordance with its proxy policies and procedures, which are summarized in Appendix A to this SAI. The Board will periodically review each Funds proxy voting record.
Information with respect to how the Sub-Adviser voted proxies relating to the Funds portfolio securities during the 12-month period
ended June 30 will be available: (i) without charge, upon request, by calling 1-855-329-3837 (1-855-DBX-ETFS); and (ii) on the SECs website at www.sec.gov.
Portfolio Holdings Information
The Trust has adopted a policy regarding the disclosure of information about the Trusts portfolio holdings. The Board must approve all
material amendments to this policy.
The Funds portfolio holdings are publicly disseminated each day the Funds are open for
business through financial reporting and news services, including publicly accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for Fund Shares, together
with estimates and actual cash components, is publicly disseminated daily prior to the opening of the Exchanges via the National Securities Clearing Corporation (NSCC). The basket represents one Creation Unit of each Fund. The Trust, the
Adviser and the Administrator will not disseminate non-public information concerning the Trust.
Investment Limitations
The Board has adopted as non-fundamental policies the investment objectives of the Funds discussed in this SAI. Therefore, each
of these Funds may change its investment objective without a Shareholder vote. The Board has adopted as fundamental policies for each Fund set forth below investment restrictions numbered 1 through 6 below. The restrictions for each Fund cannot be
changed without the approval of the holders of a majority of that Funds outstanding voting securities. A vote of a majority of the outstanding voting securities is defined in the 1940 Act as the lesser of (a) 67% or more of the voting
securities present at a fund meeting, if the holders of more than 50% of the outstanding voting securities are present or represented by proxy, and (b) more than 50% of outstanding voting securities.
Each Fund will not:
1. Borrow money, except that (i) each Fund may borrow from banks for temporary or
emergency (not leveraging) purposes, including the meeting of redemption requests which might otherwise require the untimely disposition of securities, and (ii) each Fund may, to the extent consistent with its investment policies, enter into
repurchase agreements, reverse repurchase agreements, forward roll transactions and similar investment strategies and techniques; to the extent that it engages in transactions described in (i) and (ii), each Fund will be limited so that no more
than 33 1/3% of the value of its total assets (including the amount borrowed) is derived from such transactions. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law;
2. Issue any senior security, except as permitted under the 1940 Act, as amended, and as
interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time;
3. Make loans, except as permitted under the 1940 Act, as interpreted, modified or otherwise
permitted by regulatory authority having jurisdiction, from time to time;
15
4. Purchase or sell real estate unless acquired as
a result of ownership of securities or other investments (but this restriction shall not prevent each Fund from investing in securities of companies engaged in the real estate business or securities or other instruments backed by real estate or
mortgages), or commodities or commodity contracts (but this restriction shall not prevent each Fund from trading in futures contracts and options on futures contracts, including options on currencies to the extent consistent with the Funds
investment objectives and policies); or
5. Engage in the business of underwriting
securities issued by other persons, except to the extent that each Fund may technically be deemed to be an underwriter under the 1933 Act, the disposing of portfolio securities.
The db X-trackers Ultra-Short Duration Bond Fund will not:
1. Concentrate its investments (
i.e.
, invest 25% or more of its total assets in the
securities of a particular industry or group of industries). For purposes of this limitation, securities of the U.S. government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. government securities, and
securities of state or municipal governments and their political subdivisions are not considered to be issued by members of any industry.
For purposes of this concentration policy, municipal securities with payments of principal or interest backed by the revenue of a specific
project are considered to be issued by a member of the industry which includes such specific project.
As a matter of fundamental policy, the db
X-trackers Managed Municipal Bond Fund will
:
1. Under normal circumstances,
have at least 80% of its net assets (plus the amount of any borrowings for investment purposes) invested in securities of municipalities across the United States and in other securities whose income is free from regular federal income tax. The Fund
considers any investments in municipal securities that pay interest subject to the AMT as part of the 80% of the Funds net assets that must be invested in municipal securities.
In addition to the investment limitations adopted as fundamental as set forth above, each Fund observes the following restrictions, which
may be changed by the Board without a Shareholder vote. A Fund will not:
1. Sell
securities short, unless the Fund owns or has the right to obtain securities equivalent in-kind and amount to the securities sold short at no added cost, and provided that transactions in options, futures contracts, options on futures contracts or
other derivative instruments are not deemed to constitute selling securities short;
2. Purchase securities on margin, except that the Fund may obtain such short-term credits as
are necessary for the clearance of transactions; and provided that margin deposits in connection with futures contracts, options on futures contracts or other derivative instruments shall not constitute purchasing securities on margin;
3. Purchase securities of open-end or closed-end investment companies except in compliance with
the 1940 Act, although the Fund may not acquire any securities of registered open-end investment companies or registered unit investment trusts in reliance on Sections 12(d)(1)(F) or 12(d)(1)(G) of the 1940 Act;
4. Invest in direct interests in oil, gas or other mineral exploration programs or leases;
however, the Fund may invest in the securities of issuers that engage in these activities); and
5. Invest in illiquid securities if, as a result of such investment, more than 15% of the
Funds net assets would be invested in illiquid securities.
If any percentage restriction described above is complied with at the
time of investment, a later increase or decrease in percentage resulting from any change in value or total or net assets will not constitute in a violation of such restriction, except that certain percentage limitations will be observed continuously
in accordance with applicable law.
Each Fund has adopted a non-fundamental investment policy such that each Fund may invest in shares of
other open-end management investment companies or unit investment trusts subject to the limitations of Section 12(d)(1) of the 1940 Act, including the rules, regulations and exemptive orders obtained thereunder; provided, however, that if the
Fund has knowledge that its Shares are purchased by another investment company investor in reliance on the provisions of subparagraphs (F) or (G) of Section 12(d)(1) of the 1940 Act, the Fund will not acquire any securities of other
open-end management investment companies or unit investment trusts in reliance on the provisions of subparagraphs (F) or (G) of Section 12(d)(1) of the 1940 Act.
16
Management
Trustees and Officers.
The Board has responsibility for the overall management and operations of the Funds, including general
supervision of the duties performed by the Adviser, the Sub-Adviser and other service providers. Each Trustee serves until his or her successor is duly elected or appointed and qualified. Each officer serves until he or she resigns, is removed,
dies, retires or becomes disqualified.
The Trust currently has four Trustees. Three Trustees have no affiliation or business connection
with the Adviser or Sub-Adviser or any of their affiliated persons and do not own any stock or other securities issued by the Adviser or Sub-Adviser. These are the non-interested or independent Trustees (the Independent
Trustees). The other Trustee (the Interested Trustee) is affiliated with the Adviser.
The Independent Trustees of
the Trust, their term of office and length of time served, their principal business occupations during the past five years, the number of portfolios in the Fund Complex (defined below) overseen by each Independent Trustee, and other directorships,
if any, held by the Trustee are shown below. The Fund Complex includes all open- and closed-end funds (including all of their portfolios) advised by the Adviser and any funds that have an investment adviser that is an affiliated person of the
Adviser. As of the date of this SAI, the Fund Complex consists of the Trusts sixteen funds and five exchange-traded funds advised by DBX Strategic Advisors LLC, an affiliate of the Adviser, as well as the mutual funds advised by certain other
affiliates of the Adviser.
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
Name, Address,
and Age
|
|
Position(s)
Held with
Fund
|
|
Terms of
Office and
Length of
Time
Served
|
|
Principal
Occupation(s)
During Past 5 Years
|
|
Number of Portfolios
in Fund
Complex Overseen
by Director
|
|
Other Directorships
held by
Director
During Past 5 Years
|
|
|
|
|
|
|
J. David Officer
Age: 65
60 Wall Street
New York,
New York 10005
|
|
Trustee, Member of the Audit and Nominating Committees
|
|
Since
2011
|
|
Independent Director;
Formerly, Vice
Chairman,
The Dreyfus Corporation (1998-2009); Chief Operating Officer, The Dreyfus Corporation (2006-2009); President, The Dreyfus Family of Funds, Inc.
(2006-2009).
|
|
16
|
|
Ilex Partners (Asia), LLC; Old Westbury Funds: & MAN Long/Short Fund; GLG Investment Series Trust; The Dreyfus Corporation; MBSC Securities Corporation; Dreyfus Services Corporation; MBSC, LLC; Dreyfus Transfer, Inc.; Dreyfus
Service Organization, Inc.; Mellon Residential Funding Corp.; Mellon United National Bank; Laurel Capital Advisors; Mellon United National Bank; Dreyfus Founders Funds, Inc.; Founders Asset Management.
|
17
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
Name, Address,
and Age
|
|
Position(s)
Held with
Fund
|
|
Terms of
Office and
Length of
Time
Served
|
|
Principal
Occupation(s)
During Past 5 Years
|
|
Number of Portfolios
in Fund
Complex Overseen
by Director
|
|
Other Directorships
held by Director
During Past 5
Years
|
|
|
|
|
|
|
Stephen R. Byers
Age: 60
60 Wall Street
New York,
New York 10005
|
|
Trustee, Member and Chairman of the Audit and Nominating Committees
|
|
Since
2011
|
|
Retired. Previously, Chief Investment Officer, The Dreyfus Corporation (2000-2006).
|
|
16
|
|
Sierra Income Corporation; College of William and Mary, Graduate School of Business.
|
|
|
|
|
|
|
George O. Elston
Age: 49
60 Wall Street
New York,
New York 10005
|
|
Trustee, Member of the Audit and Nominating Committees
|
|
Since
2011
|
|
M&A Advisor, Chief Financial, Operating and Business Officer, Optherion, Inc. (2008-2010); and Vice President, Finance and Government Affairs, Secretary and Treasurer, Elusys Therapeutics, Inc. (2000-2007).
|
|
16
|
|
Celldex Therapeutics.
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Interested Trustee
|
|
|
|
|
|
|
|
|
|
|
Name, Address,
and Age
|
|
Position(s)
Held with
Fund
|
|
Terms of
Office and
Length of
Time
Served
|
|
Principal
Occupation(s)
During Past 5 Years
|
|
Number of Portfolios
in Fund
Complex Overseen
by Director
|
|
Other Directorships
held by Director
During Past 5
Years
|
|
|
|
|
|
|
Alex Depetris
Age: 33
60 Wall Street
New York,
New York 10005
|
|
Trustee, Chairman of the Board, President, Chief Executive Officer and Secretary
|
|
Since
2010
|
|
Director in the Deutsche Asset and Wealth Management Passive Asset Management Group at Deutsche Bank AG since 2008; Associate, Arnold & Porter, 2006-2008.
|
|
21
|
|
Director, Chairman of the Board of db-X Exchange-Traded Funds Inc.
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Officers
|
|
|
|
|
|
|
Name, Address,
and Age
|
|
Position(s)
Held with
Fund
|
|
Terms of
Office and
Length of
Time
Served
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
|
|
|
Michael Gilligan
Age: 47
60 Wall Street
New York,
New York 10005
|
|
Treasurer, Chief Financial Officer and Controller
|
|
Since 2010
|
|
Director in the Finance Group at Deutsche Bank AG with CFO responsibility for DBX Strategic Advisors LLC and DB Commodity Services LLC since 2008; Chief Operating Officer, Americas Credit Trading, Credit Suisse, 2007-2008.
|
|
|
|
|
Martin Kremenstein
Age: 37
60 Wall Street
New York,
New York 10005
|
|
Chief Operating Officer
|
|
Since 2010
|
|
Managing Director in the Deutsche Asset and Wealth Management Passive Asset Management Group at Deutsche Bank AG with responsibility for providing investor solutions to the DB sales force in North America since 2006.
|
|
|
|
|
Frank Gecsedi
Age: 46
60 Wall Street
New York,
New York 10005
|
|
Chief Compliance Officer
|
|
Since 2010
|
|
Vice President in Deutsche Banks Global Markets Legal, Risk and Capital Division since 2010; Vice President and Compliance Manager at Bank of America Merrill Lynch (formerly Merrill Lynch), ( 2000 to 2010).
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18
Board Leadership, Structure and Oversight Responsibilities.
Board Structure.
As noted above, the Board is responsible for oversight of the Funds, including oversight of the duties performed by
the Adviser for the Funds under the investment advisory agreement (the Investment Advisory Agreement). The Board generally meets in regularly scheduled meetings four times a year, and may meet more often as required.
Mr. Depetris, an Interested Trustee, serves as chairman of the Board. The Board is comprised of a super-majority (75 percent) of
Independent Trustees. While the Board does not have a lead Independent Trustee, the chairmen of the Audit Committee and Nominating Committee (each of which consists solely of Independent Trustees) serve as liaisons between the Adviser and other
service providers and the other Independent Trustees. Each such chairman is an Independent Trustee. The Board regularly reviews its Committee structure and membership and believes that its current structure is appropriate based on the fact that the
Independent Trustees constitute a super-majority of the Board, the role of the Committee chairmen (who are Independent Trustees), the assets and number of Funds overseen by the Trustees, as well as the nature of the Funds business.
Risk Oversight.
The Funds are subject to a number of risks, including operational, investment and compliance risks. The Board, directly
and through its Committees, as part of its oversight responsibilities, oversees the services provided by the Adviser and the Trusts other service providers in connection with the management and operations of the Funds, as well as their
associated risks. Under the oversight of the Board, the Trust, the Adviser and other service providers have adopted policies, procedures and controls to address these risks. The Board, directly and through its Committees, receives and reviews
information from the Adviser, other service providers, the Trusts independent registered public accounting firm and Trust counsel to assist it in its oversight responsibilities. This information includes, but is not limited to, reports
regarding the Funds investments, including Fund performance and investment practices, valuation of Fund portfolio securities, and compliance. The Board also reviews, and must approve any proposed changes to, the Funds investment
objective, policies and restrictions, and reviews any areas of non-compliance with the Funds investment policies and restrictions. The Audit Committee monitors the Trusts accounting policies, financial reporting and internal control
system and reviews any internal audit reports impacting the Trust. As part of its compliance oversight, the Board reviews the annual compliance report issued by the Trusts Chief Compliance Officer on the policies and procedures of the Trust
and its service providers, proposed changes to the policies and procedures and quarterly reports on any material compliance issues that arose during the period.
Experience, Qualifications and Attributes.
The Board has concluded, based on each Trustees experience, qualifications and
attributes that each Board member should serve as a Trustee. Following is a brief summary of the information that led to this conclusion.
Mr. Stephen Byers. Mr. Byers gained extensive experience with a variety of financial, accounting, management, regulatory and
operational issues facing funds through his more than 30 years of experience on the boards and/or in senior management of such companies as The Dreyfus Corporation, Gruntal & Co., LLC, Painewebber, Citibank/Citicorp and American Airlines.
Mr. Byers possesses a strong understanding of the regulatory framework under which investment companies must operate and can provide management input and investment guidance to the Board.
Mr. George Elston. Through his prior positions on the boards and in senior management of such companies as Celldex Therapeutics,
Optherion, Inc. and Elusys Therapeutics, Mr. Elston has experience with a variety of financial, management, regulatory and operational issues as well as experience with marketing and distribution. Mr. Elston also has experience as a
general partner of Chatham Partners LLC.
Mr. David Officer. Mr. Officer has over 30 years of experience in the financial
services industry and related fields, including his positions on the boards and/or in senior management of such companies as The Bank of New York Mellon, The Dreyfus Corporation, Laurel Capital Advisors and Bank of New England. In addition to his
experience with financial, investment and regulatory matters, Mr. Officer has extensive accounting knowledge through his education and experience as a principal financial officer, principal accounting officer, controller, public accountant or
auditor at his previous positions.
Mr. Alex Depetris. In addition to his tenure as Director in the DBX Group at Deutsche Bank
AG, Mr. Depetris has experience as an attorney at the law firms of Arnold & Porter and Sullivan & Worcester. Therefore, Mr. Depetris has extensive knowledge of the regulatory framework under which investment companies
operate, including with respect to exchange-traded funds.
Committees of the Board of Trustees.
The Board has two standing
committees, the Audit Committee and the Nominating Committee, and has delegated certain responsibilities to those Committees.
Messrs.
Byers, Elston and Officer currently serve as members of the Audit Committee. The Audit Committee has the responsibility, among other things, to: (i) approve and recommend to the Board the selection of the Trusts independent registered
public accounting firm, (ii) review the scope of the independent registered public accounting firms audit activity, (iii) review the audited financial statements and (iv) review with such independent registered public accounting
firm the adequacy and the effectiveness of the Trusts internal controls. The Audit Committee met twice during the fiscal year ended May 31, 2013.
19
Messrs. Byers, Elston and Officer currently serve as members of the Nominating Committee. The
Nominating Committee has the responsibility, among other things, to identify and recommend individuals for Board membership, and evaluate candidates for Board membership. The Board will consider recommendations for trustees from Shareholders.
Nominations from Shareholders should be in writing and sent to the Secretary of the Trust to the attention of the Chairman of the Nominating Committee, as described below under the caption Shareholder Communications to the Board. During
the fiscal year ended May 31, 2013, the Nominating Committee did not meet.
Shareholder Communications to the Board.
Shareholders may send communications to the Trusts Board by addressing the communications directly to the Board (or individual Board members) and/or otherwise clearly indicating in the salutation that the communication is for the Board (or
individual Board members). The shareholder may send the communication to either the Trusts office or directly to such Board members at the address specified for each Trustee. Other shareholder communications received by the Trust not directly
addressed and sent to the Board will be reviewed and generally responded to by management. Such communications will be forwarded to the Board at managements discretion based on the matters contained therein.
Remuneration of` Trustees.
The Trust pays each Independent Trustee (i) an annual retainer of $25,000; (ii) $2,500 for each
Board meeting attended in person and $1,500 for each Board meeting attended telephonically; (iii) $1,500 to members of the Boards Audit Committee for each meeting of the Audit Committee attended; and (iv) a retainer of $2,000 to the
chairperson of the Audit Committee. The Trust also reimburses each Trustee for travel and other out-of-pocket expenses incurred by him/her in connection with attending such meetings.
The table below sets forth the compensation paid to each Trustee for the fiscal year ended May 31, 2013:
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Aggregate
Compensation from
the Trust
|
|
Pension or
Retirement
Benefits Accrued As
Part of Trust
Expenses
|
|
Estimated Annual
Benefits Upon
Retirement
|
|
Total
Compensation
From the Fund and
Fund Complex
|
|
|
|
|
|
J. David Officer
|
|
$ 41,000
|
|
Not Applicable
|
|
Not Applicable
|
|
$ 41,000
|
Stephen R. Byers
|
|
$ 43,000
|
|
Not Applicable
|
|
Not Applicable
|
|
$ 43,000
|
George O. Elston
|
|
$ 41,000
|
|
Not Applicable
|
|
Not Applicable
|
|
$ 41,000
|
Effective January 1, 2014, the Board approved a new compensation structure pursuant to which the
Trust will pay each Independent Trustee (i) an annual retainer of $40,000; (ii) $3,000 for each Board meeting attended in person ($2,000 if the Board meeting is scheduled as in person but a Trustee attends telephonically) and $1,500 for
each telephonic Board meeting; (iii) $1,500 to members of the Boards Audit Committee for each meeting of the Audit Committee attended; and (iv) a retainer of $4,000 to the chairperson of the Audit Committee. The Trust will continue
to reimburse each Trustee for travel and other out-of-pocket expenses incurred by him/her in connection with attending such meetings.
Control
Persons and Principal Holders of Securities.
As of February 1, 2014, the officers and Trustees, as a group owned
beneficially less than 1% of the shares of any of the Funds.
As of the date of this SAI, no person of record owned 5% or more of any
Funds outstanding Shares.
Potential Conflicts of Interest
The Adviser is owned by Deutsche Bank AG, a multi-national financial services company. Therefore, the Adviser is affiliated with a variety of
entities that provide, and/or engage in commercial banking, insurance, brokerage, investment banking, financial advisory, broker-dealer activities (including sales and trading), hedge funds, real estate and private equity investing, in addition to
the provision of investment management services to institutional and individual investors. Since Deutsche Bank AG, its affiliates, directors, officers and employees (the Firm) are engaged in businesses and have interests in addition to
managing asset management accounts, such wide ranging activities involve real, potential or apparent conflicts of interest. These interests and activities include potential advisory, transactional and financial activities and other interests in
securities and companies that may be directly or indirectly purchased or sold by the Firm for its clients advisory accounts.
20
The Adviser may take investment positions in securities in which other clients or related persons
within the Firm have different investment positions. There may be instances in which the Adviser is purchasing or selling for its client accounts, or pursuing an outcome in the context of a workout or restructuring with respect to, securities in
which the Firm is undertaking the same or differing strategy in other businesses or other client accounts. These are considerations of which advisory clients should be aware and which may cause conflicts that could be to the disadvantage of the
Advisers advisory clients, including the Fund. The Adviser has instituted business and compliance policies, procedures and disclosures that are designed to identify, monitor and mitigate conflicts of interest and, as appropriate, to report
them to a Funds Board.
Investment Advisory, Sub-Advisory, Administrative and Distribution Services
Investment Adviser and Sub-Adviser.
DBX Advisors LLC serves as investment adviser to each Fund pursuant to an Investment Advisory
Agreement between the Trust and the Adviser. The Adviser is a Delaware limited liability company and was registered as an investment adviser under the Investment Advisers Act of 1940, as amended, in August 2010. DBX Advisors LLC was formed in June
2010 and is an indirect, wholly-owned subsidiary of Deutsche Bank AG. Deutsche Investment Management Americas Inc. serves as the investment sub-adviser to each Fund pursuant to a Sub-Advisory Agreement.
Under the Investment Advisory Agreement, the Adviser, subject to the supervision of the Board and in conformity with the stated investment
policies of each Fund, manages and administers the Trust and manages the Sub-Adviser and manages or delegates to the Sub-Adviser the duties of the investment and reinvestment of each Funds assets. The Sub-Adviser manages the investment and
reinvestment of each Funds assets on an ongoing basis under the supervision of the Adviser.
For its investment advisory services to
the Funds, the Adviser is entitled to receive a unitary management fee from each Fund based on the Funds average daily net assets at an annual rate of: 0.25% with respect to db X-trackers Ultra-Short Duration Bond Fund and 0.40% with respect
to db X-trackers Managed Municipal Bond Fund.
Under the Investment Advisory Agreement, the Adviser is responsible for substantially all
expenses of the Funds (including the payments to each Sub-Adviser, the cost of transfer agency, custody, fund administration, compensation paid to the Independent Trustees in respect of the Independent Trustees service to the Fund
(Independent Trustee Fees), legal, audit and other services) except for the fee payments under the Investment Advisory Agreement, interest expense, taxes, brokerage expenses, future distribution fees or expenses, litigation expenses and
other extraordinary expenses.
The Investment Advisory Agreement with respect to each Fund continues in effect for two years from its
effective date, and thereafter is subject to annual approval by (i) the Board or (ii) the vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the applicable Fund, provided that in either event such
continuance also is approved by a majority of the Board who are not interested persons (as defined in the 1940 Act) of the applicable Fund, by a vote cast in person at a meeting called for the purpose of voting on such approval.
The Investment Advisory Agreement with respect to each Fund is terminable without penalty, on 60 days notice, by the Board or by a vote
of the holders of a majority of the applicable Funds outstanding voting securities (as defined in the 1940 Act). The Investment Advisory Agreement is also terminable upon 60 days notice by the Adviser and will terminate automatically in
the event of its assignment (as defined in the 1940 Act).
Under the Sub-Advisory Agreement, the Sub-Adviser will not be liable
for any error of judgment or mistake of law or for any loss suffered by a Fund in connection with the performance of the Sub-Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the
Sub-Adviser in the performance of its duties or from reckless disregard of its duties and obligations thereunder. The Sub-Advisory Agreement continues in effect until two years from its initial effective date, and thereafter only if approved
annually by the Board, including a majority of the Independent Trustees.
The Sub-Advisory Agreement terminates automatically upon
assignment and is terminable at any time without penalty as to the Fund by the Board, including a majority of the Independent Trustees, or by vote of the holders of a majority of that Funds outstanding voting securities on 60 days
written notice to the Sub-Adviser, by the Adviser on 60 days written notice to the Sub-Adviser or by a Sub-Adviser on 60 days written notice to the Adviser and the Trust.
21
Pursuant to the Sub-Advisory Agreement, the Adviser pays the Sub-Adviser on a monthly basis a
portion of the net advisory fees it receives from the db X-trackers Ultra-Short Duration Bond Fund at the annual rate of 0.10% and from the db X-trackers Managed Municipal Bond Fund at the annual rate of 0.15%.
The Sub-Adviser is located at 345 Park Avenue, New York, New York 10154.
Manager of Managers Structure.
The Adviser and the Trust may rely on an exemptive order (the Order) from the SEC that
permits the Adviser to enter into investment sub-advisory agreements with sub-advisers without obtaining shareholder approval. The Adviser, subject to the review and approval of the Board, selects sub-advisers for each Fund and supervises, monitors
and evaluates the performance of each sub-adviser.
The Order also permits the Adviser, subject to the approval of the Board, to replace
sub-advisers and amend investment sub-advisory agreements, including fees, without shareholder approval whenever the Adviser and the Board believe such action will benefit a Fund and its shareholders. The Adviser thus has the ultimate responsibility
(subject to the ultimate oversight of the Board) to recommend the hiring and replacement of sub-advisers as well as the discretion to terminate any sub-adviser and reallocate a Funds assets for management among any other sub-adviser(s) and
itself. This means that the Adviser is able to reduce the sub-advisory fees and retain a larger portion of the management fee, or increase the sub-advisory fees and retain a smaller portion of the management fee. The Adviser compensates each
sub-adviser out of its management fee.
Portfolio Managers.
Set forth below is additional information regarding the individuals identified in the Prospectus as primarily responsible for the day-to-day
management of the Funds (Portfolio Managers).
db X-trackers Ultra-Short Duration Bond Fund
DIMA supervises and manages the investment portfolio of the Fund and directs the purchase and sale of the Funds investment securities.
DIMA utilizes teams of investment professionals acting together to manage the assets of the Fund. The DIMA Portfolio Managers that have direct oversight responsibility and are primarily responsible for the day-to-day management of the Fund are:
William Chepolis, CFA, is a Managing Director of Deutsche Asset Management. He is currently the Head of the Core/Core Plus Fixed Income
Team. From 2012 to 2013 he was Co-Head of the Core/Core Plus Fixed Income Team. From 2008 to 2012 Mr. Chepolis was Head of US Taxable - DWS Funds. Mr. Chepolis joined Deutsche Asset Management in 1998. Prior to joining Deutsche Asset
Management, Mr. Chepolis had thirteen years of experience as vice president and portfolio manager for Norwest Bank where he managed the banks fixed income and foreign exchange portfolios. He obtained his undergraduate degree, Bachelor of
Individualized Studies, from the University of Minnesota.
Gary Russell, CFA, is a Managing Director of Deutsche Asset Management. Since
2008, Mr. Russell has been U.S. Head of High Yield Portfolio management. He joined Deutsche Asset Management in 1996 where he previously served as the head of the High Yield group in Europe and as an Emerging Markets portfolio manager. Prior to
joining Deutsche Asset Management, Mr. Russell had four years of experience at Citicorp as a research analyst and structurer of collateralized mortgage obligations. Prior to Citicorp, he served as an officer in the US Army from 1988 to 1991. He
obtained his MBA degree from New York University, Stern School of Business and his undergraduate degree, Bachelor of Science, from United States Military Academy (West Point).
Joseph Benevento is a Managing Director of Deutsche Asset Management. Since 2013, Mr. Benevento is the Global Head of Liquidity
Management and the Co-Head of the Global Credit Control Team. From 2008 to 2013 he had been Head of Americas Liquidity Management and the U.S. Head Global Credit Control Team. Mr. Benevento joined Deutsche Asset Management in 2002. He is Global
Head of Liquidity Management and Member of the Asset Management CIO Executive Committee in New York. Prior to his current role, Mr. Benevento served as Co-Head of Cash Management Research and before that as a Senior Portfolio Manager for
Tax-Exempt Money Market Funds. Prior to joining Deutsche Asset Management, he was a Cash Management Portfolio Manager at Citigroup Asset Management and a Long-Term Fixed Income Portfolio Manager at Smith Barney. Mr. Benevento has over
twenty-three years of investment industry experience. He obtained his undergraduate degree, Bachelor of Business Administration, from Bernard M. Baruch College.
22
John D. Ryan is a Director of Deutsche Asset Management. He is currently the Head of Emerging
Markets U.S. Mr. Ryan joined Deutsche Asset Management in 2010 as Head of Credit/Emerging Markets U.S. Prior to joining Deutsche Asset Management, Mr. Ryan served as a senior portfolio manager at Northern Trust from 2008-2010. Previously,
he served as a portfolio manager and head of credit trading for Deutsche Asset Management from 1998-2003. Mr. Ryan has over eighteen years of investment industry experience. He obtained his MBA degree from the University of Chicago and his
undergraduate degree, Bachelor of Arts in Economics, from the University of Chicago.
Geoffrey Gibbs is a Director of Deutsche Asset
Management. He is currently Americas Head of Liquidity Management Investments and Trading. From 2008 to 2012 he was Lead Portfolio Manager US Money Market Funds and Separately Managed Accounts. Mr. Gibbs joined Deutsche Asset Management in
1996. He is a lead Portfolio Manager for Money Market Funds and Separately Managed Accounts in New York. Prior to joining Deutsche Asset Management, Mr. Gibbs worked as an Analyst at Wilshire Associates. He obtained his Bachelor of Arts from
the University of California, Santa Barbara.
db X-trackers Managed Municipal Bond Fund
DIMA supervises and manages the investment portfolio of the Fund and directs the purchase and sale of the Funds investment securities.
DIMA utilizes teams of investment professionals acting together to manage the assets of the Fund. The DIMA Portfolio Managers that have direct oversight responsibility and are primarily responsible for the day-to-day management of the Fund are:
Philip G. Condon, Ashton P. Goodfield, Blair Ridley and Michael J. Generazo, each a Portfolio Manager, are primarily responsible for the
day-to-day management of the Fund. Each Portfolio Manager functions as a member of a portfolio manager team.
Philip G. Condon is a
Managing Director of Deutsche Asset Management. Since 2008, he has been Managing Director, Head of the Municipal Bond team, Chief Strategist for U.S. Fixed Income and a Portfolio Manager for DIMA. Mr. Condon joined Deutsche Asset Management in
1983. He obtained his MBA degree and his undergraduate degree, Bachelor of Arts, from the University of Massachusetts at Amherst.
Ashton
P. Goodfield, CFA, is a Managing Director of Deutsche Asset Management. Since 2008, she has been Managing Director, Head of Municipal Bond Trading and a Portfolio Manager for DIMA. Ms. Goodfield joined Deutsche Asset Management in 1986. She
obtained her undergraduate degree, Bachelor of Arts, from Duke University.
Blair Ridley is a Director of Deutsche Asset Management. From
2006 to 2010, he was Vice President, business manager and product specialist for DIMA. Since 2010, Mr. Ridley has been a Director and a Portfolio Manager for DIMA. Mr. Ridley joined Deutsche Asset Management in 1999. He obtained his MS in
Investment Management from Boston University and his undergraduate degree, Bachelor of Arts, from the University of California, San Diego.
Michael J. Generazo is a Director of Deutsche Asset Management. Since 2008, he has been a Director and a Portfolio Manager for DIMA.
Mr. Generazo joined Deutsche Asset Management in 1999. He obtained his MBA degree from Suffolk University and his undergraduate degree, Bachelor of Science, from Bryant College.
Other Accounts Managed
The Portfolio Managers were also primarily responsible for the day-to-day management of other accounts, as set forth in the tables below.
As of December 31, 2013, Mr. Chepolis was responsible for the day-to-day portfolio management of 16 registered investment companies,
no other pooled investment companies and no other accounts managed by Deutsche Asset Management.
As of December 31, 2013,
Mr. Russell was responsible for the day-to-day portfolio management of 17 registered investment companies, no other pooled investment companies and 3 other accounts managed by Deutsche Asset Management.
As of December 31, 2013, Mr. Benevento was responsible for the day-to-day portfolio management of 15 registered investment companies, 1
other pooled investment companies and 21 other accounts managed by Deutsche Asset Management.
23
As of December 31, 2013, Mr. Ryan was responsible for the day-to-day portfolio
management of 12 registered investment companies, no other pooled investment companies and no other accounts managed by Deutsche Asset Management.
As of December 31, 2013, Mr. Gibbs was responsible for the day-to-day portfolio management of 15 registered investment companies, 1 other
pooled investment companies and 21 other accounts managed by Deutsche Asset Management.
As of December 31, 2013, Mr. Condon was
responsible for the day-to-day portfolio management of 14 registered investment companies, no other pooled investment companies and no other accounts managed by Deutsche Asset Management.
As of December 31, 2013, Ms. Goodfield was responsible for the day-to-day portfolio management of 5 registered investment companies, no
other pooled investment companies and no other accounts managed by Deutsche Asset Management.
As of December 31, 2013, Mr. Ridley
was responsible for the day-to-day portfolio management of 1 registered investment company, no other pooled investment companies and 6 other accounts managed by Deutsche Asset Management.
As of December 31, 2013, Mr. Generazo was responsible for the day-to-day portfolio management of 4 registered investment companies, no
other pooled investment companies and 7 other accounts managed by Deutsche Asset Management.
The table below shows the number of other
accounts managed by each Portfolio Manager and the total assets in the accounts, as of December 31, 2013 for the db X-trackers Ultra-Short Duration Bond Fund Portfolio Managers and as of December 31, 2013 for the db X-trackers Managed Municipal Bond
Fund Portfolio Managers, except as otherwise noted, in each of the following categories: registered investment companies, other pooled investment vehicles and other accounts. For each category, the table also shows the number of accounts and the
total assets in the accounts with respect to which the advisory fee is based on account performance.
The following table provides
information relating to other accounts managed by William Chepolis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
16
|
|
|
|
0
|
|
|
|
0
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
7,592
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The following table provides information relating to other accounts managed by Gary Russell:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
17
|
|
|
|
0
|
|
|
|
3
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
6,160
|
|
|
$
|
0
|
|
|
$
|
673
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
24
The following table provides information relating to other accounts managed by Joseph
Benevento:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
15
|
|
|
|
1
|
|
|
|
21
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
34,916
|
|
|
$
|
13,630
|
|
|
$
|
8,005
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The following table provides information relating to other accounts managed by John D. Ryan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
12
|
|
|
|
0
|
|
|
|
0
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
5,251
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The following table provides information relating to other accounts managed by Geoffrey Gibbs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
15
|
|
|
|
1
|
|
|
|
21
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
34,916
|
|
|
$
|
13,630
|
|
|
$
|
8,005
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The following table provides information relating to other accounts managed by Philip G. Condon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
14
|
|
|
|
0
|
|
|
|
0
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
13,109
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The following table provides information relating to other accounts managed by Ashton P. Goodfield:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
5
|
|
|
|
0
|
|
|
|
0
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
7,529
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
25
The following table provides information relating to other accounts managed by Blair Ridley:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
1
|
|
|
|
0
|
|
|
|
6
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
8
|
|
|
$
|
0
|
|
|
$
|
211
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The following table provides information relating to other accounts managed by Michael J. Generazo:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
4
|
|
|
|
0
|
|
|
|
7
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
6,468
|
|
|
$
|
0
|
|
|
$
|
260
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Portfolio Manager Compensation
DIMA has the following major components in its compensation program for the Portfolio Managers:
|
|
|
Short Term Variable Pay
|
Variable pay can be delivered via a short-term and/or long-term vehicle, namely cash, restricted equity awards, and/or restricted incentive
awards. Variable pay comprises a greater proportion of total compensation as a portfolio managers seniority and total compensation level increase. The proportion of variable pay delivered via a long-term incentive award, which is subject to
clawback, will increase significantly as the amount of variable pay increases. All variable pay delivered via long-term incentive award is subject to clawback.
To evaluate its investment professionals, Deutsche Asset Management reviews investment performance for all accounts managed in relation to
both account peer group and benchmark related data (
i.e.
, appropriate Morningstar peer group universes and/or benchmark index(es) with respect to each account). The ultimate goal of this process is to evaluate the degree to which investment
professionals deliver investment performance that meets or exceeds their clients risk and return objectives. When determining Total Compensation, Deutsche Asset Management considers a number of quantitative and qualitative factors:
|
|
Quantitative measures (
e.g.
, one-, three- and five-year pre-tax returns versus the benchmark and appropriate peer group, taking risk targets
into account) are utilized to measure performance.
|
|
|
Qualitative measures (
e.g.
, adherence to, as well as contributions to, the enhancement of the investment process) are included in the
performance review.
|
|
|
Other factors (
e.g.
, teamwork, adherence to compliance rules, risk management and living the values of Deutsche Asset
Management) are included as part of a discretionary component of the review process, giving management the ability to consider additional markers of performance on a subjective basis.
|
Portfolio Manager Ownership of Fund Shares
As of February 1, 2014, none of the Portfolio Managers beneficially owned any Shares of the Funds.
26
Potential Conflicts of Interest
Because the Portfolio Managers manage multiple portfolios for multiple clients, the potential for conflicts of interest exists. The Portfolio
Managers may manage other portfolios that have a similar investment style as the Funds. However, the portfolios managed by a Portfolio Manager may not have portfolio compositions identical to those of the Funds managed by the Portfolio Manager due,
for example, to specific investment limitations or guidelines present in some portfolios or accounts, but not others. The Portfolio Managers may purchase securities for one portfolio and not another portfolio, and the performance of securities
purchased for one portfolio may vary from the performance of securities purchased for other portfolios. A Portfolio Manager may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on
behalf of the Fund, or make investment decisions that are similar to those made for the Fund, both of which have the potential to adversely impact the Fund depending on market conditions. For example, a Portfolio Manager may purchase a security in
one portfolio while appropriately selling that same security in another portfolio. In addition, some of these portfolios have fee structures that are or have the potential to be higher than the advisory fees paid by the Fund, which can cause
potential conflicts in the allocation of investment opportunities between the Fund and the other accounts. However, the compensation structure for Portfolio Managers does not generally provide incentive to favor one account over another because that
part of a managers bonus based on performance is not based on the performance of one account to the exclusion of others. There are many other factors considered in determining the Portfolio Managers bonus and there is no formula that is
applied to weight the factors listed (see Compensation of Portfolio Managers and Other Accounts Managed). In addition, current trading practices do not allow DIMA to intentionally favor one portfolio over another as trades are executed
as trade orders are received. Portfolios rebalancing dates also generally vary between fund families. Program trades created from the portfolio rebalance are executed at market on close. For additional information regarding potential conflicts
of interest faced by the Adviser, see Potential Conflicts of Interest.
Codes of Ethics.
The Trust, the Adviser,
the Sub-Adviser and the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1 of the 1940 Act. The Codes of Ethics permit personnel subject to the Codes of Ethics to invest in securities, subject to certain limitations, including
securities that may be purchased or held by the Fund. The Codes of Ethics are on public file with, and are available from, the SEC.
Anti-Money Laundering Requirements.
The Funds are subject to the USA PATRIOT Act (the Patriot Act). The Patriot Act is
intended to prevent the use of the U.S. financial system in furtherance of money laundering, terrorism or other illicit activities. Pursuant to requirements under the Patriot Act, a Fund may request information from Authorized Participants to enable
it to form a reasonable belief that it knows the true identity of its Authorized Participants. This information will be used to verify the identity of Authorized Participants or, in some cases, the status of financial professionals; it will be used
only for compliance with the requirements of the Patriot Act. The Funds reserve the right to reject purchase orders from persons who have not submitted information sufficient to allow the Fund to verify their identity. Each Fund also reserves the
right to redeem any amounts in a Fund from persons whose identity it is unable to verify on a timely basis. It is the Funds policy to cooperate fully with appropriate regulators in any investigations conducted with respect to potential money
laundering, terrorism or other illicit activities.
Administrator, Custodian and Transfer Agent.
The Bank of New York Mellon
(BNYM) serves as administrator, custodian and transfer agent for the Funds. BNYMs principal address is One Wall Street, New York, New York 10286. Pursuant to a Fund Administration and Accounting Agreement with the Trust, BNYM
provides necessary administrative, legal, tax and accounting and financial reporting services for the maintenance and operations of the Trust and each Fund. In addition, BNYM makes available the office space, equipment, personnel and facilities
required to provide such services. Pursuant to a Custody Agreement with the Trust, BNYM maintains in separate accounts cash, securities and other assets of the Trust and each Fund, keeps all necessary accounts and records and provides other
services. BNYM is required, upon the order of the Trust, to deliver securities held by BNYM and to make payments for securities purchased by the Trust for each Fund. Also, pursuant to the Custody Agreement, BNYM is authorized to appoint certain
foreign custodians or foreign custody managers for Fund investments outside the United States. Pursuant to a Transfer Agency and Service Agreement with the Trust, BNYM acts as a transfer agent for each Funds authorized and issued Shares of
beneficial interest, and as dividend disbursing agent of the Trust. As compensation for these services, BNYM receives certain out-of-pocket costs, transaction fees and asset-based fees which are accrued daily and paid monthly the Adviser from its
management fee.
Distributor.
The Distributors principal address is 1290 Broadway, Suite 1100, Denver, Colorado 80203.
The Distributor has entered into a Distribution Agreement with the Trust pursuant to which it distributes Shares of each Fund. The Distribution Agreement continues for two years from its effective date and is renewable annually. Shares are
continuously offered for sale by the Fund through the Distributor only in Creation Units, as described in the applicable Prospectus and below in the Creation and Redemption of Creation Units section of this SAI. Shares in less than Creation Units
are not distributed by the Distributor. The Distributor will deliver the applicable Prospectus and, upon request, the SAI to persons purchasing Creation Units and will maintain records of both orders placed with it and confirmations of acceptance
furnished by it. The Distributor is a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the 1934 Act), and a member of the Financial Industry Regulatory Authority (FINRA).
27
The Distribution Agreement for each Fund provides that it may be terminated at any time, without
the payment of any penalty, on at least 60 days prior written notice to the other party following (i) the vote of a majority of the Independent Trustees, or (ii) the vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the relevant Fund. The Distribution Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act).
The Distributor may also enter into agreements with securities dealers (Soliciting Dealers) who will solicit purchases of Creation
Units of Fund Shares. Such Soliciting Dealers may also be Authorized Participants (as defined below), DTC participants and/or investor services organizations.
The Adviser may, from time to time and from its own resources, pay, defray or absorb costs relating to distribution, including payments out of
its own resources to the Distributor, or to otherwise promote the sale of Shares. The Adviser currently pays the Distributor, from the Advisers own resources, an amount of approximately $20,000 per year per Fund for such purposes.
The Adviser and/or its subsidiaries or affiliates (db-X Entities) may pay certain broker-dealers and other financial
intermediaries (Intermediaries) for certain marketing activities related to the Fund or other funds advised by the Adviser or its affiliates (db-X Funds) (with such payments being Payments). Any Payments made by
db-X Entities will be made from their own assets and not from the assets of a Fund. Although a portion of db-X Entities revenue comes directly or indirectly in part from fees paid by the Funds and other db-X Funds, Payments do not increase the
price paid by investors for the purchase of shares of, or the cost of owning, a Fund or other db-X Funds. db-X Entities may make Payments for Intermediaries participating in activities that are designed to make registered representatives,
other professionals and individual investors more knowledgeable about the Funds or for other activities, such as participation in marketing activities and presentations, educational training programs, the support of technology platforms and/or
reporting systems (Education Costs). db-X Entities may also make Payments to Intermediaries for certain printing, publishing and mailing costs associated with a Fund or materials relating to other db-X Funds or exchange-traded funds in
general (Publishing Costs). In addition, db-X Entities may make Payments to Intermediaries that make shares of the Funds and certain other db-X Funds available to their clients or for otherwise promoting the Funds and other db-X Funds.
Payments of this type are sometimes referred to as revenue-sharing payments. Payments to an Intermediary may be significant to the Intermediary, and amounts that Intermediaries pay to your salesperson or other investment professional may also be
significant for your salesperson or other investment professional. Because an Intermediary may make decisions about which investment options it will recommend or make available to its clients or what services to provide for various products based on
payments it receives or is eligible to receive, Payments create conflicts of interest between the Intermediary and its clients and these financial incentives may cause the Intermediary to recommend the Funds and other db-X Funds over other
investments. The same conflict of interest exists with respect to your salesperson or other investment professional if he or she receives similar payments from his or her Intermediary firm.
db-X Entities may determine to make Payments based on any number of metrics. For example, db-X Entities may make Payments at year end or other
intervals in a fixed amount, based upon an Intermediarys services at defined levels or an amount based on the Intermediarys net sales of one or more db-X Funds in a year or other period, any of which arrangements may include an agreed
upon minimum or maximum payment, or any combination of the foregoing. Any payments made by the db-X Entities to an Intermediary may create the incentive for an Intermediary to encourage customers to buy shares of the Funds or other db-X Funds.
Brokerage Transactions
The Adviser and/or Sub-Adviser is generally responsible for placing orders for the purchase and sale of portfolio securities, including the
allocation of brokerage. Except as otherwise specified, references in this section to the Adviser should be read to include the Sub-Adviser, except as noted below.
The policy of the Adviser in placing orders for the purchase and sale of securities for a fund is to seek best execution, taking into account
such factors, among others, as price; commission (where applicable); the broker-dealers ability to ensure that securities will be delivered on settlement date; the willingness of the broker-dealer to commit its capital and purchase a thinly
traded security for its own inventory; whether the broker-dealer specializes in block orders or large program trades; the broker-dealers knowledge of the market and the security; the broker-dealers ability to maintain confidentiality;
the broker-dealers ability to provide access to new issues; the broker-dealers ability to provide support when placing a difficult trade; the financial condition of the broker-dealer; and whether the broker-dealer has the infrastructure
and operational capabilities to execute and settle the trade. The Adviser seeks to evaluate the overall reasonableness of brokerage commissions with commissions charged on comparable transactions and compares the brokerage commissions (if any) paid
by the funds to reported commissions paid by others. The Adviser routinely reviews commission rates, execution and settlement services performed and makes internal and external comparisons.
28
Purchases and sales of fixed-income securities and certain over-the-counter securities are
effected on a net basis, without the payment of brokerage commissions. Transactions in fixed income and certain over-the-counter securities are generally placed by the Adviser with the principal market makers for these securities unless the Adviser
reasonably believes more favorable results are available elsewhere. Transactions with dealers serving as market makers reflect the spread between the bid and asked prices. Purchases of underwritten issues will include an underwriting fee paid to the
underwriter. Money market instruments are normally purchased in principal transactions directly from the issuer or from an underwriter or market maker.
It is likely that the broker-dealers selected based on the considerations described in this section will include firms that also sell shares
of the funds to their customers. However, the Adviser does not consider sales of shares of the funds as a factor in the selection of broker-dealers to execute portfolio transactions for the funds and, accordingly, has implemented policies and
procedures reasonably designed to prevent its traders from considering sales of shares of the funds as a factor in the selection of broker-dealers to execute portfolio transactions for the funds.
The Adviser is permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended (1934 Act), when placing portfolio
transactions for a fund, to cause a fund to pay brokerage commissions in excess of that which another broker-dealer might charge for executing the same transaction in order to obtain research and brokerage services if the Adviser determines that
such commissions are reasonable in relation to the overall services provided. The Adviser may from time to time, in reliance on Section 28(e) of the 1934 Act, execute portfolio transactions with broker-dealers that provide research and
brokerage services to the Adviser. Consistent with the Advisers policy regarding best execution, where more than one broker is believed to be capable of providing best execution for a particular trade, the Adviser may take into consideration
the receipt of research and brokerage services in selecting the broker-dealer to execute the trade. Although certain research and brokerage services from broker-dealers may be useful to a fund and to the Adviser, it is the opinion of the Adviser
that such information only supplements its own research effort since the information must still be analyzed, weighed and reviewed by the Advisers staff. To the extent that research and brokerage services of value are received by the Adviser,
the Adviser may avoid expenses that it might otherwise incur. Research and brokerage services received from a broker-dealer may be useful to the Adviser and its affiliates in providing investment management services to all or some of its clients,
which includes a fund. Services received from broker-dealers that executed securities transactions for a fund will not necessarily be used by the Adviser specifically to service that fund.
Research and brokerage services provided by broker-dealers may include, but are not limited to, information on the economy, industries, groups
of securities, individual companies, statistical information, accounting and tax law interpretations, political developments, legal developments affecting portfolio securities, technical market action, pricing and appraisal services, credit
analysis, risk measurement analysis, performance analysis and measurement and analysis of corporate responsibility issues. Research and brokerage services are typically received in the form of written or electronic reports, access to specialized
financial publications, telephone contacts and personal meetings with security analysts, but may also be provided in the form of access to various computer software and meetings arranged with corporate and industry representatives.
The Adviser may also select broker-dealers and obtain from them research and brokerage services that are used in connection with executing
trades provided that such services are consistent with interpretations under Section 28(e) of the 1934 Act. Typically, these services take the form of computer software and/or electronic communication services used by the Adviser to facilitate
trading activity with those broker-dealers.
Research and brokerage services may include products obtained from third parties if the
Adviser determines that such product or service constitutes brokerage and research as defined in Section 28(e) and interpretations thereunder. Provided a Sub-Adviser is acting in accordance with any instructions and directions of the Adviser or
the Board, the Sub-Adviser is authorized to pay to a broker or dealer who provides third party brokerage and research services a commission for executing a portfolio transaction for a fund in excess of what another broker or dealer may charge, if
the Sub-Adviser determines in good faith that such commission was reasonable in relation to the value of the third party brokerage and research services provided by such broker or dealer.
The Adviser may use brokerage commissions to obtain certain brokerage products or services that have a mixed use (
i.e.
, it also serves
a function that does not relate to the investment decision-making process). In those circumstances, the Adviser will make a good faith judgment to evaluate the various benefits and uses to which it intends to put the mixed use product or service and
will pay for that portion of the mixed use product or service that it reasonably believes does not constitute research and brokerage services with its own resources.
The Adviser will monitor regulatory developments and market practice in the use of client commissions to obtain research and brokerage
services and may adjust its portfolio transactions policies in response thereto.
29
Investment decisions for a fund and for other investment accounts managed by the Adviser are made
independently of each other in light of differing conditions. However, the same investment decision may be made for two or more of such accounts. In such cases, simultaneous transactions are inevitable. To the extent permitted by law, the Adviser
may aggregate the securities to be sold or purchased for a fund with those to be sold or purchased for other accounts in executing transactions. Purchases or sales are then averaged as to price and commission and allocated as to amount in a manner
deemed equitable to each account. While in some cases this practice could have a detrimental effect on the price paid or received by, or on the size of the position obtained or disposed of for, a fund, in other cases it is believed that the ability
to engage in volume transactions will be beneficial to a fund.
The Adviser and its affiliates and each funds management team
manage other mutual funds and separate accounts, some of which use short sales of securities as a part of its investment strategy. The simultaneous management of long and short portfolios creates potential conflicts of interest including the risk
that short sale activity could adversely affect the market value of the long positions (and vice versa), the risk arising from sequential orders in long and short positions, and the risks associated with receiving opposing orders at the same time.
The Adviser has adopted procedures that it believes are reasonably designed to mitigate these potential conflicts of interest. Incorporated in the procedures are specific guidelines developed to ensure fair and equitable treatment for all clients.
The Adviser and the investment team have established monitoring procedures and a protocol for supervisory reviews, as well as compliance oversight to ensure that potential conflicts of interest relating to this type of activity are properly
addressed.
Deutsche Bank AG or one of its affiliates (including the Sub-Adviser or one of its affiliates) may act as a broker for
the funds and receive brokerage commissions or other transaction-related compensation from the funds in the purchase and sale of securities, when, in the judgment of the Adviser, and in accordance with procedures approved by the Board, the
affiliated broker will be able to obtain a price and execution at least as favorable as those obtained from other qualified brokers and if, in the transaction, the affiliated broker charges the funds a rate consistent with that charged to comparable
unaffiliated customers in similar transactions.
Additional Information Concerning the Trust
Shares.
The Trust currently is comprised of sixteen separate investment series or portfolios called funds. Each series issues Shares of
common stock, no par value. The Trust issues Shares of beneficial interests in each fund with no par value. The Board may designate additional funds.
Each Share issued by a fund has a pro rata interest in the assets of that fund. Shares have no preemptive, exchange, subscription or
conversion rights and are freely transferable. Each Share is entitled to participate equally in dividends and distributions declared by the Board with respect to the relevant fund, and in the net distributable assets of such fund on liquidation.
Each Share has one vote with respect to matters upon which the Shareholder is entitled to vote. In any matter submitted to Shareholders for a vote, each fund shall hold a separate vote, provided that Shareholders of all effected funds will vote
together when: (1) required by the 1940 Act or (2) the Trustees determine that the matter affects the interests of more than one fund. Under Delaware law, the Trust is not required to hold an annual meeting of Shareholders unless required
to do so under the 1940 Act. The policy of the Trust is not to hold an annual meeting of Shareholders unless required to do so under the 1940 Act. All Shares (regardless of the fund) have noncumulative voting rights in the election of members of the
Board. Under Delaware law, Trustees of the Trust may be removed by vote of the Shareholders.
Following the creation of the initial
Creation Unit(s) of Shares of a Fund and immediately prior to the commencement of trading in the Funds Shares, a holder of Shares may be a control person of the Fund, as defined in the 1940 Act. A Fund cannot predict the length of
time for which one or more Shareholders may remain a control person of the Fund.
Shareholders may make inquiries by writing to DBX
ETF Trust, c/o the Distributor, ALPS Distributors, Inc., 1290 Broadway, Suite 1100, Denver, Colorado 80203, by email by writing to dbxquestions@list.db.com or by telephone by calling 1-855-329-3837 or 1-855-DBX-ETFS (toll free).
Termination of the Trust or a Fund.
The Trust or a Fund may be terminated by a majority vote of the Board or the affirmative vote of a
supermajority of the holders of the Trust or such Fund entitled to vote on termination. Although the Shares are not automatically redeemable upon the occurrence of any specific event, the Trusts organizational documents provide that the Board
will have the unrestricted power to alter the number of Shares in a Creation Unit. In the event of a termination of the Trust or a Fund, the Board, in its sole discretion, could determine to permit the Shares to be redeemable in aggregations smaller
than Creation Units or to be individually redeemable. In such circumstance, the Trust may make redemptions in-kind, for cash or for a combination of cash or securities.
30
DTC as Securities Depository for Shares of the Funds.
Shares of each Fund are represented
by securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust
company, was created to hold securities of its participants (DTC Participants) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes
in accounts of the DTC Participants, thereby eliminating 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. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the NYSE Amex Equities and FINRA. 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 (Indirect Participants).
Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants
and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as Beneficial Owners) is shown on, and the transfer of ownership is effected only through, records
maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability
of certain investors to acquire beneficial interests in Shares.
Conveyance of all notices, statements and other communications to
Beneficial Owners is affected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the Shares of each Fund held
by each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies
of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or
indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory
requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the registered holder of all Shares
of the Trust. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants accounts with payments in amounts proportionate to their respective beneficial interests in Shares of each Fund as shown on the
records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in a street name, and will be the responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the records relating to or notices to Beneficial Owners, or payments made on
account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants or
the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants. DTC may decide to discontinue providing its service with respect to Shares of the Trust at any time by giving
reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action to find a replacement for DTC to perform its functions at a comparable cost.
Creation and Redemption of Creation Units
General.
The Trust issues and sells Shares of each Fund only in Creation Units on a continuous basis through the Distributor, without a
sales load, at the Funds NAV next determined after receipt, on any Business Day (as defined herein), of an order in proper form. The following table sets forth the number of Shares of a Fund that constitute a Creation Unit for such Fund:
|
|
|
Fund
|
|
Shares Per
Creation Unit
|
db X-trackers Ultra-Short Duration Bond Fund
|
|
50,000
|
db X-trackers Managed Municipal Bond Fund
|
|
50,000
|
31
The Board reserves the right to declare a split or a consolidation in the number of Shares
outstanding of any Fund of the Trust, and to make a corresponding change in the number of Shares constituting a Creation Unit, in the event that the per Share price in the secondary market rises (or declines) to an amount that falls outside the
range deemed desirable by the Board.
A Business Day with respect to each Fund is any day on which the Exchange on which the
Fund is listed for trading is open for business. As of the date of this SAI, each Exchange observes the following holidays, as observed: New Years Day, Dr. Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Fund Deposit.
The consideration for purchase of Creation Units of
a Fund generally consists of the in-kind deposit of a designated portfolio of securities (
i.e.
, the Deposit Securities) and/or an amount in cash in lieu of some or all of the Deposit Securities, as described below, and the Cash Component
computed as described below. Together, the Deposit Securities and the Cash Component constitute the Fund Deposit, which represents the minimum initial and subsequent investment amount for a Creation Unit of any Fund.
The Cash Component is an amount equal to the difference between the NAV of the Shares (per Creation Unit) and the Deposit Amount,
which is an amount equal to the market value of the Deposit Securities, and serves to compensate for any difference between the NAV per Creation Unit and the Deposit Amount. Payment of any stamp duty or other similar fees and expenses payable upon
transfer of beneficial ownership of the Deposit Securities shall be the sole responsibility of the Authorized Participant purchasing a Creation Unit.
The Adviser and/or Sub-Adviser makes available through the NSCC on each Business Day, prior to the opening of business on the Exchange, the
list of names and the required number of Shares of each Deposit Security to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for each Fund. Such Fund Deposit is applicable, subject to any
adjustments as described below, in order to effect purchases of Creation Units of Shares of a given Fund until such time as the next-announced Fund Deposit is made available.
The identity and number of Shares of the Deposit Securities pursuant to changes in composition of a Funds portfolio and changes as
rebalancing adjustments and corporate action events are reflected from time to time by the Adviser and/or Sub-Adviser with a view to the investment objective of the Fund.
The Trust reserves the right to permit or require the substitution of a cash in lieu amount to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient quantity for delivery or that may not be eligible for transfer through the systems of DTC of the Clearing Process (discussed below). The Trust also reserves the right to permit or
require a cash in lieu amount where the delivery of the Deposit Security by the Authorized Participant (as described below) would be restricted under applicable securities laws or where the delivery of the Deposit Security to the
Authorized Participant would result in the disposition of the Deposit Security by the Authorized Participant becoming restricted under applicable securities laws, or in certain other situations. The adjustments described above will reflect changes,
known to the Adviser and/or Sub-Adviser on the date of announcement to be in effect by the time of delivery of the Fund Deposit, in the composition of the subject index being tracked by the relevant Fund, or resulting from stock splits and other
corporate actions.
Role of the Authorized Participant.
Creation Units may be purchased only by or through a DTC Participant that
has entered into an Authorized Participant Agreement with the Distributor (an Authorized Participant). Such Authorized Participant will agree, pursuant to the terms of such Authorized Participant Agreement and on behalf of itself or any
investor on whose behalf it will act, to certain conditions, including that such Authorized Participant will make available in advance of each purchase of Shares an amount of cash sufficient to pay the Cash Component, once the NAV of a Creation Unit
is next determined after receipt of the purchase order in proper form, together with the transaction fee described below. The Authorized Participant may require the investor to enter into an agreement with such Authorized Participant with respect to
certain matters, including payment of the Cash Component. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should be aware that their particular broker may not be a DTC
Participant or may not have executed an Authorized Participant Agreement and that orders to purchase Creation Units may have to be placed by the investors broker through an Authorized Participant. As a result, purchase orders placed through an
Authorized Participant may result in additional charges to such investor. The Trust does not expect to enter into an Authorized Participant Agreement with more than a small number of DTC Participants. A list of current Authorized Participants may be
obtained from the Distributor.
32
Purchase Order.
To initiate an order for a Creation Unit, an Authorized Participant
must submit to the Distributor an irrevocable order to purchase Shares of a Fund. The Distributor will notify the Adviser and/or Sub-Adviser and the Custodian of such order. The Custodian will then provide such information to the appropriate
sub-custodian. For each Fund, the Custodian shall cause the sub-custodian to maintain an account into which the Authorized Participant shall deliver, on behalf of itself or the party on whose behalf it is acting, the securities included in the
designated Fund Deposit (or the cash value of all or a part of such securities, in the case of a permitted or required cash purchase or cash in lieu amount), with any appropriate adjustments as advised by the Trust. Deposit Securities
must be delivered to an account maintained at the applicable local sub-custodian. Those placing orders to purchase Creation Units through an Authorized Participant should allow sufficient time to permit proper submission of the purchase order to the
Distributor by the cut-off time on such Business Day.
The Authorized Participant must also make available on or before the
contractual settlement date, by means satisfactory to the Trust, immediately available or same day funds estimated by the Trust to be sufficient to pay the Cash Component next determined after acceptance of the purchase order, together with the
applicable purchase transaction fee. Any excess funds will be returned following settlement of the issue of the Creation Unit. Those placing orders should ascertain the applicable deadline for cash transfers by contacting the operations department
of the broker or depositary institution effectuating the transfer of the Cash Component. This deadline is likely to be significantly earlier than the closing time of the regular trading session on the Exchange.
Investors should be aware that an Authorized Participant may require orders for purchases of Shares placed with it to be in the particular
form required by the individual Authorized Participant.
Timing of Submission of Purchase Orders.
An Authorized Participant must
submit an irrevocable purchase order before 4:00 p.m., Eastern time on any Business Day in order to receive that days NAV. In the case of custom orders, the order must be received by the Distributor no later than 3:00 p.m., Eastern time on the
trade date. With respect to in-kind creations, a custom order may be placed by an Authorized Participant where cash replaces any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for trading
by such Authorized Participant or the investor for which it is acting or other relevant reason. Orders to create Shares of a Fund that are submitted on the Business Day immediately preceding a holiday or day (other than a weekend) when the equity
markets in the relevant foreign market are closed may not be accepted. The Distributor in its discretion may permit the submission of such orders and requests by or through an Authorized Participant at any time (including on days on which the
Exchange is not open for business) via communication through the facilities of the Distributors proprietary website maintained for this purpose. Purchase orders and redemption requests, if accepted by the Trust, will be processed based on the
NAV next determined after such acceptance in accordance with the Trusts standard cut-off times as provided in the Authorized Participant Agreement and disclosed in this SAI.
Acceptance of Order for Creation Unit.
Subject to the conditions that (i) an irrevocable purchase order has been submitted by the
Authorized Participant (either on its own or another investors behalf) and (ii) arrangements satisfactory to the Trust are in place for payment of the Cash Component and any other cash amounts which may be due, the Trust will accept the
order, subject to its right (and the right of the Distributor and the Adviser and/or Sub-Adviser) to reject any order until acceptance.
Once the Trust has accepted an order, upon next determination of the NAV of the Shares, the Trust will confirm the issuance of a Creation
Unit, against receipt of payment, at such NAV. The Distributor will then transmit a confirmation of acceptance to the Authorized Participant that placed the order.
The Trust reserves the absolute right to reject or revoke a creation order transmitted to it by the Distributor in respect of any Fund if
(i) the order is not in proper form; (ii) the investor(s) upon obtaining the Shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (iii) the Deposit Securities delivered do not conform to the identity
and number of Shares specified by the Adviser and/or Sub-Adviser, as described above; (iv) acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would, in the
opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit would, in the discretion of the Trust or the Adviser and/or Sub-Adviser, have an adverse effect on the Trust or the rights of beneficial owners; or (vii) circumstances
outside the control of the Trust, the Distributor and the Adviser and/or Sub-Adviser make it impracticable to process purchase orders. The Trust shall notify a prospective purchaser of a Creation Unit and/or the Authorized Participant acting on
behalf of such purchaser of its rejection of such order. The Trust, the Custodian, the sub-custodian and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Portfolio Deposits nor
shall any of them incur any liability for failure to give such notification.
33
Issuance of a Creation Unit.
Except as provided herein, a Creation Unit will not be
issued until the transfer of good title to the Trust of the Deposit Securities and the payment of the Cash Component have been completed. When the sub-custodian has confirmed to the Custodian that the securities included in the Fund Deposit (or the
cash value thereof) have been delivered to the account of the relevant sub-custodian or sub-custodians, the Distributor and the Adviser shall be notified of such delivery and the Trust will issue and cause the delivery of the Creation Unit. Creation
Units typically are issued on a T+3 basis (
i.e.
, three Business Days after trade date).
To the extent
contemplated by an Authorized Participants agreement with the Distributor, the Trust will issue Creation Units to such Authorized Participant notwithstanding the fact that the corresponding Portfolio Deposits have not been received in part or
in whole, in reliance on the undertaking of the Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by such Authorized Participants delivery and maintenance of collateral
having a value at least equal to 115%, which the Adviser and/or Sub-Adviser may change from time to time, of the value of the missing Deposit Securities in accordance with the Trusts then-effective procedures. The only collateral that is
acceptable to the Trust is cash in U.S. dollars or an irrevocable letter of credit in form, and drawn on a bank, that is satisfactory to the Trust. The cash collateral posted by the Authorized Participant may be invested at the risk of the
Authorized Participant, and income, if any, on invested cash collateral will be paid to that Authorized Participant. Information concerning the Trusts current procedures for collateralization of missing Deposit Securities is available from the
Distributor. The Authorized Participant Agreement will permit the Trust to buy the missing Deposit Securities at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such
securities and the cash collateral or the amount that may be drawn under any letter of credit.
In certain cases, Authorized Participants
may create and redeem Creation Units on the same trade date and in these instances, the Trust reserves the right to settle these transactions on a net basis or require a representation from the Authorized Participants that the creation and
redemption transactions are for separate beneficial owners. All questions as to the number of Shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be
determined by the Trust and the Trusts determination shall be final and binding.
Cash Purchase Method.
In the case of a cash
purchase, the investor must pay the cash equivalent of the Deposit Securities it would otherwise be required to provide through an in-kind purchase, plus the same Cash Component required to be paid by an in-kind purchaser. In addition, to offset the
Trusts brokerage and other transaction costs associated with using the cash to purchase the requisite Deposit Securities, the investor will be required to pay a fixed purchase transaction fee, plus an additional variable charge for cash
purchases, which is expressed as a percentage of the value of the Deposit Securities.
Creation Transaction Fee.
A standard
creation transaction fee is imposed to offset the transfer and other transaction costs associated with the issuance of Creation Units. The standard creation transaction fee will be the same regardless of the number of Creation Units purchased by a
purchaser on the same day. Purchasers of Creation Units for cash are required to pay an additional variable charge to compensate the relevant Fund for brokerage and market impact expenses. When the Trust permits an in-kind purchaser to substitute
cash in lieu of depositing a portion of the Deposit Securities, the purchaser will be assessed the additional variable charge for cash purchases on the cash in lieu portion of its investment up to a maximum additional variable charge as indicated in
the chart below. Investors will also bear the costs of transferring the Deposit Securities to the Trust. Investors who use the services of a broker or other such intermediary may be charged a fee for such services.
The following table sets forth each Funds standard maximum creation transaction fees and maximum additional variable charges:
|
|
|
|
|
|
|
|
|
Fund
|
|
Standard Creation
Transaction Fee
|
|
|
Maximum Additional
Variable Charge*
|
|
db X-trackers Ultra-Short Duration Bond Fund
|
|
|
$500
|
|
|
|
0%
|
|
db X-trackers Managed Municipal Bond Fund
|
|
|
$500
|
|
|
|
0%
|
|
*
|
As a percentage of the amount invested.
|
Redemption of Creation Units.
Shares of a Fund may be redeemed only in Creation Units at their NAV next determined after receipt of a
redemption request in proper form by the Distributor and only on a Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in the secondary market but must accumulate enough Shares
to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit. Investors
should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
34
Redemptions are effected partially for cash and partially in-kind. In the case of in-kind
redemptions, the Adviser and/or Sub-Adviser makes available through the NSCC, prior to the opening of business on the Exchange on each Business Day, the identity and number of Shares that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as defined below) on that day (Fund Securities). Fund Securities received on redemption may not be identical to Deposit Securities that are applicable to creations of Creation
Units.
Unless cash redemptions are available or specified for a Fund, the redemption proceeds for a Creation Unit generally consist of
Fund Securities plus cash in an amount equal to the difference between the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Fund Securities, less the redemption transaction fee
described below.
Redemption Transaction Fee.
A standard redemption transaction fee is imposed to offset transfer and other
transaction costs that may be incurred by the relevant Fund. The standard redemption transaction fee will be the same regardless of the number of Creation Units redeemed by an investor on the same day. The redeeming investor may be assessed an
additional variable charge on the cash in lieu portion of its redemption proceeds. The standard redemption transaction fees are set forth below. Investors will also bear the costs of transferring the Fund Securities from the Trust to their account
or on their order. Investors who use the services of a broker or other such intermediary may be charged a fee for such services.
The following table sets
forth each Funds standard redemption transaction fees:
|
|
|
|
|
Fund
|
|
Standard Redemption
Transaction Fee
|
|
db X-trackers Ultra-Short Duration Bond Fund
|
|
|
$ 500
|
|
db X-trackers Managed Municipal Bond Fund
|
|
|
$ 500
|
|
The maximum redemption fee, as a percentage of the amount redeemed, is 2%.
Redemption requests for Creation Units of any Fund must be submitted to the Distributor by or through an Authorized Participant. An Authorized
Participant must submit an irrevocable redemption request before 4:00 p.m., Eastern time on any Business Day in order to receive that days NAV. In the case of custom redemptions, the order must be received by the Distributor no later than 3:00
p.m., Eastern time. Investors other than through Authorized Participants are responsible for making arrangements for a redemption request to be made through an Authorized Participant. The Distributor will provide a list of current Authorized
Participants upon request.
The Authorized Participant must transmit the request for redemption in the form required by the Trust to the
Distributor in accordance with procedures set forth in the Authorized Participant Agreement. Investors should be aware that their particular broker may not have executed an Authorized Participant Agreement and that, therefore, requests to redeem
Creation Units may have to be placed by the investors broker through an Authorized Participant who has executed an Authorized Participant Agreement in effect. At any time, there may be only a limited number of broker-dealers that have an
Authorized Participant Agreement. Investors making a redemption request should be aware that such request must be in the form specified by such Authorized Participant. Investors making a request to redeem Creation Units should allow sufficient time
to permit proper submission of the request by an Authorized Participant and transfer of the Shares to the Trusts Transfer Agent; such investors should allow for the additional time that may be required to effect redemptions through their
banks, brokers or other financial intermediaries if such intermediaries are not Authorized Participants.
A redemption request is
considered to be in proper form if (i) an Authorized Participant has transferred or caused to be transferred to the Trusts Transfer Agent the Creation Unit being redeemed through the book-entry system of DTC so as to be
effective by the Exchange closing time on any Business Day, (ii) a request in form satisfactory to the Trust is received by the Distributor from the Authorized Participant on behalf of itself or another redeeming investor within the time
periods specified above and (iii) all other procedures set forth in the Participant Agreement are properly followed. If the Transfer Agent does not receive the investors Shares through DTCs facilities by 10:00 a.m., Eastern time, on
the Business Day next following the day that the redemption request is received, the redemption request shall be rejected. Investors should be aware that the deadline for such transfers of Shares through the DTC system may be significantly earlier
than the close of business on the Exchange. Those making redemption requests should ascertain the deadline applicable to transfers of Shares through the DTC system by contacting the operations department of the broker or depositary institution
affecting the transfer of the Shares.
35
Upon receiving a redemption request, the Distributor shall notify the Trust and the Trusts
Transfer Agent of such redemption request. The tender of an investors Shares for redemption and the distribution of the cash redemption payment in respect of Creation Units redeemed will be made through DTC and the relevant Authorized
Participant to the beneficial owner thereof as recorded on the book-entry system of DTC or the DTC Participant through which such investor holds, as the case may be, or by such other means specified by the Authorized Participant submitting the
redemption request.
A redeeming Beneficial Owner or Authorized Participant acting on behalf of such Beneficial Owner must maintain
appropriate security arrangements with a qualified broker-dealer, bank or other custody providers in each jurisdiction in which any of the Portfolio Securities are customarily traded, to which account such Portfolio Securities will be delivered.
If neither the redeeming Beneficial Owner nor the Authorized Participant acting on behalf of such redeeming Beneficial Owner has
appropriate arrangements to take delivery of Fund Securities in the applicable non-U.S. jurisdiction and it is not possible to make other such arrangements, or if it is not possible to effect deliveries of Fund Securities in such jurisdiction, the
Trust may in its discretion exercise its option to redeem such Shares in cash, and the redeeming Beneficial Owner will be required to receive its redemption proceeds in cash. In such case, the investor will receive a cash payment equal to the NAV of
its Shares based on the NAV of Shares of the relevant Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional variable charge for cash redemptions specified above, to offset the
Trusts brokerage and other transaction costs associated with the disposition of Portfolio Securities of the Fund). Redemptions of Shares for Fund Securities will be subject to compliance with applicable U.S. federal and state securities laws
and each Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Fund could not lawfully deliver specific Fund Securities upon redemptions or could not do so without
first registering the Fund Securities under such laws.
In the case of cash redemptions, proceeds will be paid to the Authorized
Participant redeeming Shares on behalf of the redeeming investor as soon as practicable after the date of redemption (within seven calendar days thereafter).
The right of redemption may be suspended or the date of payment postponed with respect to any Fund (i) for any period during which the
NYSE is closed (other than customary weekend and holiday closings), (ii) for any period during which trading on the NYSE is suspended or restricted, (iii) for any period during which an emergency exists as a result of which disposal of the
Shares of the Funds portfolio securities or determination of its NAV is not reasonably practicable or (iv) in such other circumstance as is permitted by the SEC.
An Authorized Participant submitting a redemption request is deemed to represent to the Trust that it (or its client) (i) owns outright
or has full legal authority and legal beneficial right to tender for redemption the requisite number of Fund shares to be redeemed and can receive the entire proceeds of the redemption, and (ii) the Fund shares to be redeemed have not been
loaned or pledged to another party nor are they the subject of a repurchase agreement, securities lending agreement or such other arrangement that would preclude the delivery of such fund shares to the Trust. The Trust reserves the right to verify
these representations at its discretion, but will typically require verification with respect to a redemption request from a Fund in connection with higher levels of redemption activity and/or short interest in the Fund. If the Authorized
Participant, upon receipt of a verification request, does not provide sufficient verification of its representations as determined by the Trust, the redemption request will not be considered to have been received in proper form and may be rejected
by the Trust.
Taxation on Creation and Redemptions of Creation Units.
An Authorized Participant generally will recognize either
gain or loss upon the exchange of Deposit Securities for Creation Units. This gain or loss is calculated by taking the market value of the Creation Units purchased over the Authorized Participants aggregate basis in the Deposit Securities
exchanged therefor. However, the Internal Revenue Service (the IRS) may apply the wash sales rules to determine that any loss realized upon the exchange of Deposit Securities for Creation Units is not currently deductible. Authorized
Participants should consult their own tax advisors.
Current federal tax laws dictate that capital gain or loss realized from the
redemption of Creation Units will generally create long-term capital gain or loss if the Authorized Participant holds the Creation Units for more than one year, or short-term capital gain or loss if the Creation Units were held for one year or less.
36
Taxes
Regulated Investment Company Qualifications.
Each Fund intends to qualify for treatment as a separate RIC under Subchapter M of the
Code. To qualify for treatment as a RIC, each Fund must annually distribute at least 90% of its investment company taxable income (which includes dividends, interest and net short-term capital gains) and meet several other requirements. Among such
other requirements are the following: (i) at least 90% of each Funds annual gross income must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities
or non-U.S. currencies, other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies, and net income derived from interests
in qualified publicly-traded partnerships (
i.e.
, partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends, capital
gains and other traditionally permitted mutual fund income); and (ii) at the close of each quarter of each Funds taxable year, (a) at least 50% of the market value of each Funds total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs and other securities, with such other securities limited for purposes of this calculation in respect of any one issuer to an amount not greater than 5% of the value of the Funds
assets and not greater than 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of each Funds total assets may be invested in the securities (other than U.S. government securities or the
securities of other RICs) of any one issuer, of two or more issuers of which 20% or more of the voting stock is held by the Fund and that are engaged in the same or similar trades or businesses or related trades or businesses or the securities of
one or more qualified publicly-traded partnerships. The Treasury Department is authorized to promulgate regulations under which gains from foreign currencies (and options, futures, and forward contracts on foreign currency) would constitute
qualifying income for purposes of the test described in (i) above only if such gains are directly related to investing in securities. To date, such regulations have not been issued.
Although in general the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to items attributable
to an interest in a qualified publicly-traded partnership. A Funds investments in partnerships, including in qualified publicly-traded partnerships, may result in a Fund being subject to state, local, or non-U.S. income, franchise or
withholding tax liabilities.
Taxation of RICs.
As a RIC, a Fund will not be subject to U.S. federal income tax on the portion
of its taxable investment income and capital gains that it distributes to its Shareholders, provided that it satisfies a minimum distribution requirement. To satisfy the minimum distribution requirement, a Fund must distribute to its Shareholders at
least the sum of (i) 90% of its investment company taxable income (
i.e.
, taxable income other than its net realized long-term capital gain over its net realized short-term capital loss), plus or minus certain adjustments, and
(ii) 90% of its net tax-exempt income for the taxable year. A Fund will be subject to income tax at regular corporation rates on any taxable income or gains that it does not distribute to its Shareholders. If a Fund fails to qualify for any
taxable year as a RIC or fails to meet the distribution requirement, all of its taxable income will be subject to tax at regular corporate income tax rates without any deduction for distributions to Shareholders, and such distributions generally
will be taxable to Shareholders as ordinary dividends to the extent of the Funds current and accumulated earnings and profits. In such event, distributions to individuals should be eligible to be treated as qualified dividend income and
distributions to corporate Shareholders generally should be eligible for the dividends received deduction. Although each Fund intends to distribute substantially all of its net investment income and its capital gains for each taxable year, each Fund
will be subject to U.S. federal income taxation to the extent any such income or gains are not distributed. If a Fund fails to qualify as a RIC in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again
as a RIC. If a Fund fails to qualify as a RIC for a period greater than two taxable years, the Fund may be required to recognize any net built-in gains with respect to certain of its assets (
i.e.
, the excess of the aggregate gains, including
items of income, over aggregate losses that would have been realized with respect to such assets if the Fund had been liquidated) if it qualifies as a RIC in a subsequent year.
Excise Tax.
A Fund will be subject to a 4% excise tax on certain undistributed income if it does not generally distribute to its
Shareholders in each calendar year an amount at least equal to the sum of 98% of its ordinary income for the calendar year (taking into account certain adjustments and deferrals) plus 98.2% of its capital gain net income for the 12 months ended
October 31 of such year. For this purpose, however, any ordinary income or capital gain net income retained by a Fund that is subject to corporate income tax in the taxable year ending within the relevant calendar year will be considered to
have been distributed. In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year.
Each Fund intends to declare and distribute dividends and distributions in the amounts and at the times necessary to avoid the application of this 4% excise tax.
Net Capital Loss Carryforwards.
Net capital loss carryforwards may be applied against any net realized capital gains in each succeeding
year.
37
Taxation of U.S. Shareholders.
Dividends and other distributions by a Fund are generally
treated under the Code as received by the Shareholders at the time the dividend or distribution is made. However, any dividend or distribution declared by a Fund in October, November or December of any calendar year and payable to Shareholders of
record on a specified date in such a month shall be deemed to have been received by each Shareholder on December 31 of such calendar year and to have been paid by the Fund not later than such December 31, provided such dividend is actually
paid by the Fund during January of the following calendar year.
Each Fund intends to distribute annually to its Shareholders
substantially all of its investment company taxable income and any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). However, if a Fund retains for investment an amount
equal to all or a portion of its net long-term capital gains in excess of its net short-term capital losses (including any capital loss carryovers), it will be subject to a corporate tax (currently at a maximum rate of 35%) on the amount retained.
In that event, the Fund may designate such retained amounts as undistributed capital gains in a notice to its Shareholders who (a) will be required to include in income for U.S. federal income tax purposes, as long-term capital gains, their
proportionate Shares of the undistributed amount, (b) will be entitled to credit their proportionate Shares of the 35% tax paid by the Fund on the undistributed amount against their U.S. federal income tax liabilities, if any, and to claim
refunds to the extent their credits exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their Shares by an amount equal to 65% of the amount of undistributed capital
gains included in the Shareholders income. Organizations or persons not subject to U.S. federal income tax on such capital gains will be entitled to a refund of their pro rata Share of such taxes paid by the Fund upon filing appropriate
returns or claims for refund with the IRS.
Distributions of net realized long-term capital gains, if any, that a Fund reports as capital
gains dividends are taxable as long-term capital gains, whether paid in cash or in Shares and regardless of how long a Shareholder has held Shares of the Fund. All other dividends of a Fund (including dividends from short-term capital gains) from
its current and accumulated earnings and profits (regular dividends) are generally subject to tax as ordinary income, subject to the discussion of qualified dividend income below.
If an individual receives a regular dividend qualifying for the long-term capital gains rates and such dividend constitutes an
extraordinary dividend, and the individual subsequently recognizes a loss on the sale or exchange of stock in respect of which the extraordinary dividend was paid, then the loss will be long-term capital loss to the extent of such
extraordinary dividend. An extraordinary dividend on common stock for this purpose is generally a dividend (i) in an amount greater than or equal to 10% of the taxpayers tax basis (or trading value) in a Share of stock,
aggregating dividends with ex-dividend dates within an 85-day period or (ii) in an amount greater than 20% of the taxpayers tax basis (or trading value) in a Share of stock, aggregating dividends with ex-dividend dates within a 365-day
period.
Distributions in excess of a Funds current and accumulated earnings and profits will, as to each Shareholder, be treated as
a tax-free return of capital to the extent of a Shareholders basis in Shares of the Fund, and as a capital gain thereafter (if the Shareholder holds Shares of the Fund as capital assets). Shareholders receiving dividends or distributions in
the form of additional Shares should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the Shareholders receiving cash dividends or distributions will receive and should have a
cost basis in the Shares received equal to such amount.
Investors considering buying Shares just prior to a dividend or capital gain
distribution should be aware that, although the price of Shares purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them. If a Fund is the holder of record of
any security on the record date for any dividends payable with respect to such security, such dividends will be included in the Funds gross income not as of the date received but as of the later of (a) the date such security became
ex-dividend with respect to such dividends (
i.e.
, the date on which a buyer of the security would not be entitled to receive the declared, but unpaid, dividends); or (b) the date the Fund acquired such security. Accordingly, in order to
satisfy its income distribution requirements, a Fund may be required to pay dividends based on anticipated earnings, and Shareholders may receive dividends in an earlier year than would otherwise be the case.
In certain situations, a Fund may, for a taxable year, defer all or a portion of its capital losses, currency losses and certain other losses
realized after October until the next taxable year in computing its investment company taxable income and net capital gain, which will defer the recognition of such realized losses. Such deferrals and other rules regarding gains and losses realized
after October may affect the tax character of Shareholder distributions.
For taxable years beginning after December 31, 2012, an
additional 3.8% Medicare tax will be imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a Fund and net gains from redemptions or other taxable dispositions of Fund Shares) of U.S.
individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceeds certain threshold
amounts.
38
Sales of Shares.
Upon the sale or exchange of Shares of a Fund, a Shareholder will
realize a taxable gain or loss equal to the difference between the amount realized and the Shareholders basis in Shares of a Fund. A redemption of Shares by a Fund will be treated as a sale for this purpose. Such gain or loss will be treated
as capital gain or loss if the Shares are capital assets in the Shareholders hands and will be long-term capital gain or loss if the Shares are held for more than one year and short-term capital gain or loss if the Shares are held for one year
or less. Any loss realized on a sale or exchange will be disallowed to the extent the Shares disposed of are replaced, including replacement through the reinvesting of dividends and capital gains distributions in the Fund, within a 61-day period
beginning 30 days before and ending 30 days after the disposition of the Shares. In such a case, the basis of the Shares acquired will be increased to reflect the disallowed loss. Any loss realized by a Shareholder on the sale of a Fund Share held
by the Shareholder for six months or less will be treated for U.S. federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of long-term capital gains received by the Shareholder with respect
to such Share.
If a Shareholder incurs a sales charge in acquiring Shares of a Fund, disposes of those Shares within 90 days and then
acquires, prior to February 1 of the following calendar year, shares in a mutual fund for which the otherwise applicable sales charge is reduced by reason of a reinvestment right (
e.g.
, an exchange privilege), the original sales charge
will not be taken into account in computing gain/loss on the original Shares to the extent the subsequent sales charge is reduced. Instead, the disregarded portion of the original sales charge will be added to the tax basis of the newly acquired
Shares. Furthermore, the same rule also applies to a disposition of the newly acquired Shares made within 90 days of the second acquisition. This provision prevents Shareholders from immediately deducting the sales charge by shifting their
investments within a family of mutual funds.
Legislation passed by Congress requires reporting of adjusted cost basis information for
covered securities, which generally include shares of a regulated investment company acquired after January 1, 2012, to the Internal Revenue Service and to taxpayers. Shareholders should contact their financial intermediaries with respect to
reporting of cost basis and available elections for their accounts.
Back-Up Withholding.
In certain cases, a Fund will be required
to withhold at the applicable withholding rate (currently 28%), and remit to the U.S. Treasury such amounts withheld from any distributions paid to a Shareholder who: (i) has failed to provide a correct taxpayer identification number;
(ii) is subject to back-up withholding by the IRS; (iii) has failed to certify to a Fund that such Shareholder is not subject to back-up withholding; or (iv) has not certified that such Shareholder is a U.S. person (including a U.S.
resident alien). Back-up withholding is not an additional tax and any amount withheld may be credited against a Shareholders U.S. federal income tax liability.
Sections 351 and 362.
The Trust, on behalf of each Fund, has the right to reject an order for a purchase of Shares of the Fund if the
purchaser (or group of purchasers) would, upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares of a given Fund and if, pursuant to Sections 351 and 362 of the Code, that Fund would have a basis in the securities different
from the market value of such securities on the date of deposit. If a Funds basis in such securities on the date of deposit was less than market value on such date, the Fund, upon disposition of the securities, would recognize more taxable
gain or less taxable loss than if its basis in the securities had been equal to market value. It is not anticipated that the Trust will exercise the right of rejection except in a case where the Trust determines that accepting the order could result
in material adverse tax consequences to a Fund or its Shareholders. The Trust also has the right to require information necessary to determine beneficial Share ownership for purposes of the 80% determination.
Taxation of Certain Derivatives.
A Funds transactions in zero coupon securities, non-U.S. currencies, forward contracts, options
and futures contracts (including options and futures contracts on non-U.S. currencies), to the extent permitted, will be subject to special provisions of the Code (including provisions relating to hedging transactions and
straddles) that, among other things, may affect the character of gains and losses realized by the Fund (
i.e.
, may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Fund and defer Fund
losses. These rules could therefore affect the character, amount and timing of distributions to Shareholders. These provisions also (a) will require a Fund to mark-to-market certain types of the positions in its portfolio (
i.e.
, treat
them as if they were closed out at the end of each year) and (b) may cause a Fund to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for
avoiding income and excise taxes. Each Fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any zero coupon security, non-U.S. currency, forward
contract, option, futures contract or hedged investment in order to mitigate the effect of these rules and prevent disqualification of the Fund as a RIC.
39
A Funds investment in so-called Section 1256 contracts, such as regulated
futures contracts, most non-U.S. currency forward contracts traded in the interbank market and options on most security indexes, are subject to special tax rules. All Section 1256 contracts held by a Fund at the end of its taxable year are
required to be marked to their market value, and any unrealized gain or loss on those positions will be included in the Funds income as if each position had been sold for its fair market value at the end of the taxable year. The resulting gain
or loss will be combined with any gain or loss realized by the Fund from positions in Section 1256 contracts closed during the taxable year. Provided such positions were held as capital assets and were not part of a hedging
transaction nor part of a straddle, 60% of the resulting net gain or loss will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or loss, regardless of the
period of time the positions were actually held by the Fund.
As a result of entering into swap contracts, a Fund may make or receive
periodic net payments. A Fund may also make or receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will generally constitute ordinary income or
deductions, while termination of a swap will generally result in capital gain or loss (which will be a long-term capital gain or loss if the Fund has been a party to the swap for more than one year). With respect to certain types of swaps, a Fund
may be required to currently recognize income or loss with respect to future payments on such swaps or may elect under certain circumstances to mark such swaps to market annually for tax purposes as ordinary income or loss. The tax treatment of many
types of credit default swaps is uncertain.
Original Issue Discount/Market Discount
. Some of the debt securities that may be
acquired by a Fund may be treated as debt securities that are issued with original issue discount (OID). Generally, the amount of the OID is treated as interest income and is included in income over the term of the debt security, even
though payment of that amount is not received until a later time, usually when the debt security matures. Additionally, some of the debt securities that may be acquired by a Fund in the secondary market may be treated as having market discount.
Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued
market discount on such debt security. A Fund may make one or more of the elections applicable to debt securities having market discount, which could affect the character and timing of recognition of income. A Fund generally will be required
to distribute dividends to shareholders representing discount on debt securities that is currently includable in income, even though cash representing such income may not have been received by the Fund. Cash to pay such dividends may be obtained
from sales proceeds of securities held by the Fund.
Below Investment Grade Instruments
. A Fund may invest a portion of its net
assets in below investment grade instruments. Investments in these types of instruments may present special tax issues for the Funds. U.S. federal income tax rules are not entirely clear about issues such as when a Fund may cease to accrue interest,
original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated between principal and income and whether
exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues will be addressed by the Funds to the extent necessary in order to seek to ensure that they distribute sufficient income that it does not become
subject to U.S. federal income or excise tax.
Qualified Dividend Income.
Distributions by a Fund of investment company taxable
income (including any short-term capital gains), whether received in cash or Shares, will be taxable either as ordinary income or as qualified dividend income, eligible for the reduced maximum rate to individuals of either 15% or 20% (depending on
whether the individuals income exceeds certain threshold amounts) to the extent the Fund receives qualified dividend income on the securities it holds and the Fund designates the distribution as qualified dividend income. Distributions by a
Fund of its net short-term capital gains will be taxable as ordinary income. Capital gain distributions consisting of a Funds net capital gains will be taxable as long-term capital gains. Qualified dividend income is, in general, dividend
income from taxable U.S. corporations (but generally not from U.S. REITs) and certain non-U.S. corporations (
e.g.
, non-U.S. corporations that are not passive foreign investment companies and which are incorporated in a possession
of the U.S. or in certain countries with a comprehensive tax treaty with the U.S., or the stock of which is readily tradable on an established securities market in the U.S.). Under current IRS guidance, the United States has appropriate
comprehensive income tax treaties with the following countries: Australia, Austria, Bangladesh, Barbados, Belgium, Bulgaria, Canada, China (but not with Hong Kong, which is treated as a separate jurisdiction for U.S. tax purposes), Cyprus, the Czech
Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Morocco, the Netherlands, New Zealand, Norway,
Pakistan, the Philippines, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Trinidad and Tobago, Tunisia, Turkey, Ukraine, the United Kingdom, and Venezuela.
40
A dividend from a Fund will not be treated as qualified dividend income to the extent that
(i) the Shareholder has not held the Shares on which the dividend was paid for 61 days during the 121-day period that begins on the date that is 60 days before the date on which the Shares become ex-dividend with respect to such dividend or the
Fund fails to satisfy those holding period requirements with respect to the securities it holds that paid the dividends distributed to the Shareholder (or, in the case of certain preferred stocks, the holding requirement of 91 days during the
181-day period beginning on the date that is 90 days before the date on which the stock becomes ex-dividend with respect to such dividend); (ii) the Fund or the Shareholder is under an obligation (whether pursuant to a short sale or otherwise)
to make related payments with respect to substantially similar or related property; or (iii) the Shareholder elects to treat such dividend as investment income under Section 163(d)(4)(B) of the Code. Dividends received by a Fund from a
REIT or another RIC may be treated as qualified dividend income only to the extent the dividend distributions are attributable to qualified dividend income received by such REIT or other RIC. It is expected that dividends received by a Fund from a
REIT and distributed to a Shareholder generally will be taxable to the Shareholder as ordinary income.
If you lend your Fund Shares
pursuant to securities lending arrangements you may lose the ability to use non-U.S. tax credits passed through by the Fund or to treat Fund dividends (paid while the Shares are held by the borrower) as qualified dividends. Consult your financial
intermediary or tax advisor. If you enter into a short sale with respect to Shares of the Fund, substitute payments made to the lender of such Shares may not be deductible. Consult your financial intermediary or tax advisor.
Corporate Dividends Received Deduction.
Each Fund does not expect dividends that are paid to its corporate Shareholders to be eligible,
in the hands of such Shareholders, for the corporate dividends received deduction.
Excess Inclusion Income.
Under current law, the
Funds serve to block unrelated business taxable income from being realized by their tax-exempt Shareholders. Notwithstanding the foregoing, a tax-exempt Shareholder could realize unrelated business taxable income by virtue of its investment in a
Fund if Shares in the Fund constitute debt-financed property in the hands of the tax-exempt Shareholder within the meaning of Code Section 514(b). Certain types of income received by a Fund from REITs, real estate mortgage investment conduits,
taxable mortgage pools or other investments may cause the Fund to designate some or all of its distributions as excess inclusion income. To Fund Shareholders, such excess inclusion income may (i) constitute taxable income, as
unrelated business taxable income for those Shareholders who would otherwise be tax-exempt such as individual retirement accounts, 401(k) accounts, Keogh plans, pension plans and certain charitable entities; (ii) not be offset by
otherwise allowable deductions for tax purposes; (iii) not be eligible for reduced U.S. withholding for non-U.S. Shareholders even from tax treaty countries; and (iv) cause the Fund to be subject to tax if certain disqualified
organizations as defined by the Code are Fund Shareholders. If a charitable remainder annuity trust or a charitable remainder unitrust (each as defined in Code Section 664) has UBTI for a taxable year, a 100% excise tax on the UBTI is imposed
on the trust.
Non-U.S. Investments.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange
rates between the time a Fund accrues income or receivables or expenses or other liabilities denominated in a non-U.S. currency and the time the Fund actually collects such income or pays such liabilities are generally treated as ordinary income or
ordinary loss. In general, gains (and losses) realized on debt instruments will be treated as Section 988 gain (or loss) to the extent attributable to changes in exchange rates between the U.S. dollar and the currencies in which the instruments
are denominated. Similarly, gain or losses on non-U.S. currency, non-U.S. currency forward contracts and certain non-U.S. currency options or futures contracts denominated in non-U.S currency, to the extent attributable to fluctuations in exchange
rates between the acquisition and disposition dates, are also treated as ordinary income or loss unless the Fund were to elect otherwise.
Each Fund may be subject to non-U.S. income taxes withheld at the source. Each Fund, if more than 50% of the value of its total assets at the
close of its taxable year consists of securities of foreign corporations, may elect to pass through to its investors the amount of non-U.S. income taxes paid by the Fund provided that the Fund held the security on the dividend settlement
date and for at least 15 additional days immediately before and/or thereafter, with the result that each investor with respect to Shares of the Fund held for a minimum 16-day holding period at the time of deemed distribution will (i) include in
gross income, even though not actually received, the investors pro rata Share of the Funds non-U.S. income taxes, and (ii) either deduct (in calculating U.S. taxable income) or credit (in calculating U.S. federal income tax) the
investors pro rata Share of the Funds non-U.S. income taxes. A non-U.S. person invested in the Fund in a year that the Fund elects to pass through its non-U.S. taxes may be treated as receiving additional dividend income
subject to U.S. withholding tax. A non-U.S. tax credit may not exceed the investors U.S. federal income tax otherwise payable with respect to the investors non-U.S. source income. For this purpose, Shareholders must treat as non-U.S.
source gross income (i) their proportionate Shares of non-U.S. taxes paid by the Fund; and (ii) the portion of any dividend paid by the Fund that represents income derived from non-U.S. sources; the Funds gain from the sale of
securities will generally be treated as U.S.-source income. Certain limitations will be imposed to the extent to which the non-U.S. tax credit may be claimed.
41
Reporting.
If a Shareholder recognizes a loss with respect to a Funds Shares of $2
million or more for an individual Shareholder or $10 million or more for a corporate Shareholder, the Shareholder must file with the IRS a disclosure statement on Form 8886. Direct Shareholders of portfolio securities are in many cases exempted from
this reporting requirement, but under current guidance, Shareholders of a RIC are not exempted. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayers treatment of the loss
is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
Other Taxes.
Dividends, distributions and redemption proceeds may also be subject to additional state, local and non-U.S. taxes
depending on each Shareholders particular situation.
Taxation of Non-U.S. Shareholders.
Dividends paid by a Fund to non-U.S.
Shareholders are generally subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income and short-term capital gains. In order to obtain a reduced rate of
withholding, a non-U.S. Shareholder will be required to provide an IRS Form W-8BEN certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. Shareholder who provides a Form
W-8ECI, certifying that the dividends are effectively connected with the non-U.S. Shareholders conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as
if the non-U.S. Shareholder were a U.S. Shareholder. A non-U.S. corporation receiving effectively connected dividends may also be subject to additional branch profits tax imposed at a rate of 30% (or lower treaty rate). A non-U.S.
Shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be subject to back-up withholding at the appropriate rate.
In general, U.S. federal withholding tax will not apply to any gain or income realized by a non-U.S. Shareholder in respect of any
distributions of net long-term capital gains over net short-term capital losses, exempt-interest dividends, or upon the sale or other disposition of Shares of a Fund.
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) makes a non-U.S. person subject to U.S. tax on disposition of a
U.S. real property interest as if such person were a U.S. person. Such gain is sometimes referred to as FIRPTA gain. The Code provides a look-through rule for distributions of FIRPTA gain by a RIC if all of the following
requirements are met: (i) the RIC is classified as a qualified investment entity (which includes a RIC if, in general, more than 50% of the RICs assets consists of interests in REITs and U.S. real property holding
corporations); and (ii) you are a non-U.S. shareholder that owns more than 5% of a Funds shares at any time during the one-year period ending on the date of the distribution. If these conditions are met, Fund distributions to you to the
extent derived from gain from the disposition of a U.S. real property interest (USRPI), may also be treated as USRPI gain and therefore subject to U.S. federal income tax, and requiring that you file a nonresident U.S. income tax return.
Also, such gain may be subject to a 30% branch profits tax in the hands of a non-U.S. shareholder that is a corporation. Even if a non-U.S. Shareholder does not own more than 5% of a Funds shares, Fund distributions that are attributable to
gain from the sale or disposition of a USRPI will be taxable as ordinary dividends subject to withholding at a 30% or lower treaty rate.
These rules apply to dividends paid by a Fund before January 1, 2014 (unless such sunset date is extended or made permanent). After such
sunset date, Fund distributions from a U.S. REIT attributable to FIRPTA gain will continue to be subject to the withholding rules described above provided the fund would otherwise be classified as a qualified investment entity.
Further, if a Fund is a U.S. real property holding corporation, any gain realized on the sale or exchange of Fund shares by a
foreign shareholder that owns more than 5% of a class of Fund shares would generally be taxed in the same manner as for a U.S. shareholder. A Fund will be a U.S. real property holding corporation if, in general, 50% or more of the fair
market value of its assets consists of U.S. real property interests, including stock of certain U.S. REITs.
For taxable years
beginning before January 1, 2014 (unless further extended by Congress), properly designated dividends received by a nonresident alien or foreign entity are generally exempt from U.S. federal withholding tax when they (a) are paid in
respect of a Funds qualified net interest income (generally, a Funds U.S. source interest income, reduced by expenses that are allocable to such income), or (b) are paid in connection with a Funds qualified
short-term capital gains (generally, the excess of a Funds net short-term capital gain over the Funds long-term capital loss for such taxable year). However, depending on the circumstances, a Fund may designate all, some or none of
the Funds potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, and a portion of the Funds distributions (
e.g.
, interest from non U.S. sources or any foreign currency gains)
would be ineligible for this potential exemption from withholding. Legislation has been proposed that would extend this exemption to certain taxable years beginning on or after January 1, 2014, but there can be no assurance as to whether or not
this legislation will be enacted.
42
Shares of a Fund held by a non-U.S. Shareholder at death will be considered situated within
the United States and generally will be subject to the U.S. estate tax.
Effective July 1, 2014, the Funds will be required to withhold
U.S. tax (at a 30% rate) on payments of taxable dividends and (effective January 1, 2017) redemption proceeds and certain capital gain dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new
reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the Funds to enable the Funds to determine
whether withholding is required.
Standby Commitments.
The db X-trackers Managed Municipal Bond Fund may purchase municipal
securities together with the right to resell the securities to the seller at an agreed upon price or yield within a specified period prior to the maturity date of the securities. Such a right to resell is commonly known as a put and is
also referred to as a standby commitment. The Fund may pay for a standby commitment either in cash or in the form of a higher price for the securities which are acquired subject to the standby commitment, thus increasing the cost of
securities and reducing the yield otherwise available. Additionally, the Fund may purchase beneficial interests in municipal securities held by trusts, custodial arrangements or partnerships and/or combined with third-party puts or other types of
features such as interest rate swaps; those investments may require the Fund to pay tender fees or other fees for the various features provided. The IRS has issued a revenue ruling to the effect that, under specified circumstances, a
regulated investment company will be the owner of tax-exempt municipal obligations acquired subject to a put option. The IRS has also issued private letter rulings to certain taxpayers (which do not serve as precedent for other taxpayers) to the
effect that tax-exempt interest received by a regulated investment company with respect to such obligations will be tax-exempt in the hands of the company and may be distributed to its shareholders as exempt-interest dividends. The IRS has
subsequently announced that it will not ordinarily issue advance ruling letters as to the identity of the true owner of property in cases involving the sale of securities or participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the seller or a third party. The Fund, where relevant, intends to take the position that it is the owner of any municipal obligations acquired subject to a standby commitment
or other third party put and that tax-exempt interest earned with respect to such municipal obligations will be tax-exempt in its hands. There is no assurance that the IRS will agree with such position in any particular case. If the Fund is not
viewed as the owner of such municipal obligations, it will not be permitted to treat the exempt interest paid on such obligations as belonging to it. This may affect the Funds eligibility to pay exempt-interest dividends to its shareholders.
Additionally, the federal income tax treatment of certain other aspects of these investments, including the treatment of tender fees paid by the Fund, in relation to various regulated investment company tax provisions is unclear. However, the
Adviser intends to manage the Funds portfolio in a manner designed to minimize any adverse impact from the tax rules applicable to these investments.
As described herein, in certain circumstances the Fund may be required to recognize taxable income or gain even though no corresponding
amounts of cash are received concurrently. The Fund may therefore be required to obtain cash to satisfy its distribution requirements by selling securities at times when it might not otherwise be desirable to do so or by borrowing the necessary
cash, thereby incurring interest expense. In certain situations, the Fund will, for a taxable year, defer all or a portion of its capital losses and currency losses realized after October 31 until the next taxable year in computing its
investment company taxable income and net capital gain, which will defer the recognition of such realized losses. Such deferrals and other rules regarding gains and losses realized after October 31 may affect the federal income tax character of
shareholder distributions.
Exempt-interest dividends.
Any dividends paid by the db X-trackers Managed Municipal Bond Fund that
are reported by the Fund as exempt-interest dividends will not be subject to regular federal income tax. The Fund will be qualified to pay exempt-interest dividends to its shareholders if, at the end of each quarter of the Funds taxable year,
at least 50% of the total value of the Funds assets consists of obligations of a state or political subdivision thereof the interest on which is exempt from federal income tax under Code section 103(a). Distributions that the Fund reports as
exempt-interest dividends are treated as interest excludable from shareholders gross income for federal income tax purposes but may result in liability for federal AMT purposes and for state and local tax purposes, both for individual and
corporate shareholders. For example, if the Fund invests in private activity bonds, certain shareholders may be subject to AMT on the part of the Funds distributions derived from interest on such bonds.
Interest on indebtedness incurred directly or indirectly to purchase or carry shares of the Fund will not be deductible to the extent it is
deemed related to exempt-interest dividends paid by the Fund. The portion of interest that is not deductible is equal to the total interest paid or accrued on the indebtedness, multiplied by the percentage of the Funds total distributions (not
including Capital Gain Dividends) paid to the shareholder that are exempt-interest dividends. Under rules used by the IRS to determine when borrowed funds are considered incurred for the purpose of purchasing or carrying particular assets, the
purchase of shares may be considered to have been made with borrowed funds even though such funds are not directly traceable to the purchase of shares. In addition, the Code may require a shareholder that receives exempt-interest dividends to treat
as taxable income a portion of certain otherwise non-taxable
43
social security and railroad retirement benefit payments. A portion of any exempt-interest dividend paid by the Fund that represents income derived from certain revenue or private activity bonds
held by the Fund may not retain its tax-exempt status in the hands of a shareholder who is a substantial user of a facility financed by such bonds, or a related person thereof. Moreover, some or all of the exempt-interest
dividends distributed by the Fund may be a specific preference item, or a component of an adjustment item, for purposes of the federal individual and corporate AMTs. The receipt of dividends and distributions from the Fund may affect a foreign
corporate shareholders federal branch profits tax liability and the federal excess net passive income tax liability of a shareholder that is a Subchapter S corporation. Shareholders should consult their own tax advisors
as to whether they are (i) substantial users with respect to a facility or related to such users within the meaning of the Code or (ii) subject to a federal AMT, the federal branch profits tax or the
federal excess net passive income tax. Additionally, any loss realized upon the sale or exchange of Fund shares with a tax holding period of six months or less will be disallowed to the extent of any distributions treated as
exempt-interest dividends with respect to such shares.
Shareholders that are required to file tax returns are required to report
tax-exempt interest income, including exempt-interest dividends, on their federal income tax returns. The Fund will inform shareholders of the federal income tax status of its distributions after the end of each calendar year, including the amounts,
if any, that qualify as exempt-interest dividends and any portions of such amounts that constitute tax preference items under the federal AMT. Shareholders who have not held shares of a Fund for a full taxable year may have designated as tax-exempt
or as a tax preference item a percentage of their distributions which is different from the percentage of the Funds income that was tax-exempt or comprising tax preference items during the period of their investment in the Fund. Shareholders
should consult their tax advisors for more information.
The foregoing discussion is a summary of certain material U.S. federal income tax
considerations only and is not intended as a substitute for careful tax planning. Purchasers of Shares should consult their own tax advisers as to the tax consequences of investing in such Shares, including under state, local and non-U.S tax laws.
Finally, the foregoing discussion is based on applicable provisions of the Code, regulations, judicial authority and administrative interpretations in effect on the date of this SAI. Changes in applicable authority could materially affect the
conclusions discussed above, and such changes often occur.
Miscellaneous Information
Counsel.
Dechert LLP, located at 1095 Avenue of the Americas, New York, New York 10036, is counsel to the Trust.
Independent Registered Public Accounting Firm.
Ernst & Young LLP, located at 5 Times Square, New York, New York 10036, serves
as the Trusts independent registered public accounting firm, audits the Funds financial statements, and may perform other services.
Financial Statements
Because the Funds have not commenced operations as of the date of this SAI, financial statements are not
provided for the Funds.
44
APPENDIX A
SUMMARY OF PROXY VOTING POLICIES AND PROCEDURES
I. INTRODUCTION
Deutsche Asset Management (AM) has adopted and implemented the following policies and procedures, which it believes are reasonably
designed to ensure that proxies are voted in the best economic interest of clients, in accordance with its fiduciary duties and local regulation. These Proxy Voting Policies, Procedures and Guidelines shall apply to all accounts managed by US
domiciled advisers and to all US client accounts managed by non US regional offices. Non US regional offices are required to maintain procedures and to vote proxies as may be required by law on behalf of their non US clients. In addition, AMs
proxy policies reflect the fiduciary standards and responsibilities for ERISA accounts.
The attached guidelines represent a set of global
recommendations that were determined by the Global Proxy Voting Sub-Committee (the GPVSC). These guidelines were developed to provide AM with a comprehensive list of recommendations that represent how AM will generally vote proxies for
its clients. The recommendations derived from the application of these guidelines are not intended to influence the various AM legal entities either directly or indirectly by parent or affiliated companies. In addition, the organizational structures
and documents of the various AM legal entities allows, where necessary or appropriate, the execution by individual AM subsidiaries of the proxy voting rights independently of any DB parent or affiliated company. This applies in particular to non
U.S. fund management companies. The individuals that make proxy voting decisions are also free to act independently, subject to the normal and customary supervision by the management/boards of these AM legal entities.
II. AMS PROXY VOTING RESPONSIBILITIES
Proxy votes are the property of AMs advisory clients.
1
As such, AMs authority
and responsibility to vote such proxies depend upon its contractual relationships with its clients. AM has delegated responsibility for effecting its advisory clients proxy votes to Institutional Shareholder Services (ISS), an
independent third-party proxy voting specialist. ISS votes AMs advisory clients proxies in accordance with AMs proxy guidelines or AMs specific instructions. Where a client has given specific instructions as to how a proxy
should be voted, AM will notify ISS to carry out those instructions. Where no specific instruction exists, AM will follow the procedures in voting the proxies set forth in this document. Certain Taft-Hartley clients may direct AM to have ISS vote
their proxies in accordance with Taft Hartley voting Guidelines.
Clients may in certain instances contract with their custodial
agent and notify AM that they wish to engage in securities lending transactions. In such cases, it is the responsibility of the custodian to deduct the number of shares that are on loan so that they do not get voted twice.
III. POLICIES
1. Proxy voting activities are conducted in the best economic interest of clients
AM has adopted the following policies and procedures to ensure that proxies are voted in accordance with the best economic interest of its
clients, as determined by AM in good faith after appropriate review.
2. The Global Proxy Voting
Sub-Committee
The Global Proxy Voting Sub-Committee (the GPVSC) is an internal working group established by the
applicable AMs Investment Risk Oversight Committee pursuant to a written charter. The GPVSC is responsible for overseeing AMs proxy voting activities, including:
(i) adopting, monitoring and updating guidelines, attached as Exhibit A (the
Guidelines), that provide how AM will generally vote proxies pertaining to a comprehensive list of common proxy voting matters;
1
For purposes of these Policies and Procedures, clients refers to persons or entities: for which AM serves as investment adviser or sub-adviser; for which AM votes proxies; and that have
an economic or beneficial ownership interest in the portfolio securities of issuers soliciting such proxies.
1
(ii) voting proxies where (A) the issues are
not covered by specific client instruction or the Guidelines; (B) the Guidelines specify that the issues are to be determined on a case-by-case basis; or (C) where an exception to the Guidelines may be in the best economic interest of
AMs clients; and
(iii) monitoring the Proxy Vendor Oversights proxy voting activities (see
below).
AMs Proxy Vendor Oversight, a function of AMs Operations Group, is responsible for coordinating with ISS to
administer AMs proxy voting process and for voting proxies in accordance with any specific client instructions or, if there are none, the Guidelines, and overseeing ISS proxy responsibilities in this regard.
3. Availability of Proxy Voting Policies and Procedures and proxy voting record
Copies of these Policies and Procedures, as they may be updated from time to time, are made available to clients as required by law and
otherwise at AMs discretion. Clients may also obtain information on how their proxies were voted by AM as required by law and otherwise at AMs discretion; however, AM must not selectively disclose its investment company clients
proxy voting records. The Proxy Vendor Oversight will make proxy voting reports available to advisory clients upon request. The investment companies proxy voting records will be disclosed to shareholders by means of publicly-available annual
filings of each companys proxy voting record for 12-month periods ended June 30 (see Recordkeeping below), if so required by relevant law.
IV. PROCEDURES
The key aspects of AMs proxy voting process are as follows:
1. The GPVSCs Proxy Voting Guidelines
The Guidelines set forth the GPVSCs standard voting positions on a comprehensive list of common proxy voting matters. The GPVSC has
developed, and continues to update the Guidelines based on consideration of current corporate governance principles, industry standards, client feedback, and the impact of the matter on issuers and the value of the investments.
The GPVSC will review the Guidelines as necessary to support the best economic interests of AMs clients and, in any event, at least
annually. The GPVSC will make changes to the Guidelines, whether as a result of the annual review or otherwise, taking solely into account the best economic interests of clients. Before changing the Guidelines, the GPVSC will thoroughly review and
evaluate the proposed change and the reasons therefore, and the GPVSC Chair will ask GPVSC members whether anyone outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as a AM advisory
client has requested or attempted to influence the proposed change and whether any member has a conflict of interest with respect to the proposed change. If any such matter is reported to the GPVSC Chair, the Chair will promptly notify the Conflicts
of Interest Management Sub-Committee (see below) and will defer the approval, if possible. Lastly, the GPVSC will fully document its rationale for approving any change to the Guidelines.
The Guidelines may reflect a voting position that differs from the actual practices of the public company(ies) within the Deutsche Bank
organization or of the investment companies for which AM or an affiliate serves as investment adviser or sponsor. Investment companies, particularly closed-end investment companies, are different from traditional operating companies. These
differences may call for differences in voting positions on the same matter. Further, the manner in which AM votes investment company proxies may differ from proposals for which a AM-advised or sponsored investment company solicits proxies from its
shareholders. As reflected in the Guidelines, proxies solicited by closed-end (and open-end) investment companies are generally voted in accordance with the pre-determined guidelines of ISS. See Section IV.3.B.
Funds (Underlying Funds) in which Topiary Fund Management Fund of Funds (each, a Fund) invest, may from time to time
seek to revise their investment terms (
i.e.
, liquidity, fees, etc.) or investment structure. In such event, the Underlying Funds may require approval/consent from its investors to effect the relevant changes. Topiary Fund Management has
adopted Proxy Voting Procedures which outline the process for these approvals.
2
2. Specific proxy voting decisions made by the GPVSC
The Proxy Vendor Oversight will refer to the GPVSC all proxy proposals (i) that are not covered by specific client instructions or the
Guidelines; or (ii) that, according to the Guidelines, should be evaluated and voted on a case-by-case basis.
Additionally, if, the
Proxy Vendor Oversight, the GPVSC Chair or any member of the GPVSC, a portfolio manager, a research analyst or a sub-adviser believes that voting a particular proxy in accordance with the Guidelines may not be in the best economic interests of
clients, that individual may bring the matter to the attention of the GPVSC Chair and/or the Proxy Vendor Oversight.
2
If the Proxy Vendor Oversight refers a proxy proposal to the GPVSC or the GPVSC determines that voting a particular proxy in accordance with
the Guidelines is not in the best economic interests of clients, the GPVSC will evaluate and vote the proxy, subject to the procedures below regarding conflicts.
The GPVSC endeavors to hold meetings to decide how to vote particular proxies sufficiently before the voting deadline so that the procedures
below regarding conflicts can be completed before the GPVSCs voting determination.
3. Certain
proxy votes may not be cast
In some cases, the GPVSC may determine that it is in the best economic interests of its clients not to
vote certain proxies. If the conditions below are met with regard to a proxy proposal, AM will abstain from voting:
Neither the Guidelines nor specific client instructions cover an issue;
ISS does not make a recommendation on the issue;
The GPVSC cannot convene on the proxy proposal at issue to make a determination as to
what would be in the clients best interest. (This could happen, for example, if the Conflicts of Interest Management Sub-committee found that there was a material conflict or if despite all best efforts being made, the GPVSC quorum requirement
could not be met).
In addition, it is AMs policy not to vote proxies of issuers subject to laws of those jurisdictions that impose
restrictions upon selling shares after proxies are voted, in order to preserve liquidity. In other cases, it may not be possible to vote certain proxies, despite good faith efforts to do so. For example, some jurisdictions do not provide adequate
notice to shareholders so that proxies may be voted on a timely basis. Voting rights on securities that have been loaned to third-parties transfer to those third-parties, with loan termination often being the only way to attempt to vote proxies on
the loaned securities. Lastly, the GPVSC may determine that the costs to the client(s) associated with voting a particular proxy or group of proxies outweighs the economic benefits expected from voting the proxy or group of proxies.
The Proxy Vendor Oversight will coordinate with the GPVSC Chair regarding any specific proxies and any categories of proxies that will not or
cannot be voted. The reasons for not voting any proxy shall be documented.
4. Conflict of Interest
Procedures
A. Procedures to Address Conflicts of Interest and Improper Influence
Overriding Principle
. In the limited circumstances where the GPVSC votes proxies,
3
the GPVSC will vote those proxies in accordance with what it, in good faith, determines to be the best economic interests of AMs clients.
4
2
The Proxy Vendor Oversight generally monitors upcoming proxy solicitations for
heightened attention from the press or the industry and for novel or unusual proposals or circumstances, which may prompt the Proxy Vendor Oversight to bring the solicitation to the attention of the GPVSC Chair. AM portfolio managers, AM research
analysts and sub-advisers also may bring a particular proxy vote to the attention of the GPVSC Chair, as a result of their ongoing monitoring of portfolio securities held by advisory clients and/or their review of the periodic proxy voting record
reports that the GPVSC Chair distributes to AM portfolio managers and AM research analysts.
3
As mentioned above, the GPVSC votes proxies (i) where neither a specific client
instruction nor a Guideline directs how the proxy should be voted, (ii) where the Guidelines specify that an issue is to be determined on a case by case basis or (iii) where voting in accordance with the Guidelines may not be in the best
economic interests of clients.
4
The Proxy Vendor Oversight, who serves as the
non-voting secretary of the GPVSC, may receive routine calls from proxy solicitors and other parties interested in a particular proxy vote. Any contact that attempts to exert improper pressure or influence shall be reported to the Conflicts of
Interest Management Sub-Committee.
3
Independence of the GPVSC
. As a matter of Compliance policy, the GPVSC and the Proxy
Vendor Oversight are structured to be independent from other parts of Deutsche Bank. Members of the GPVSC and the employee responsible for Proxy Vendor Oversight are employees of AM. As such, they may not be subject to the supervision or control of
any employees of Deutsche Bank Corporate and Investment Banking division (CIB).Their compensation cannot be based upon their contribution to any business activity outside of AM without prior approval of Legal and Compliance. They can
have no contact with employees of Deutsche Bank outside of the Private Client and Asset Management division (PCAM) regarding specific clients, business matters or initiatives without the prior approval of Legal and Compliance. They
furthermore may not discuss proxy votes with any person outside of AM (and within AM only on a need to know basis).
Conflict Review
Procedures
. There will be a committee (the Conflicts of Interest Management Sub-Committee) established within AM that will monitor for potential material conflicts of interest in connection with proxy proposals that are to be
evaluated by the GPVSC. Promptly upon a determination that a vote shall be presented to the GPVSC, the GPVSC Chair shall notify the Conflicts of Interest Management Sub-Committee. The Conflicts of Interest Management Sub-Committee shall promptly
collect and review any information deemed reasonably appropriate to evaluate, in its reasonable judgment, if AM or any person participating in the proxy voting process has, or has the appearance of, a material conflict of interest. For the purposes
of this policy, a conflict of interest shall be considered material to the extent that a reasonable person could expect the conflict to influence, or appear to influence, the GPVSCs decision on the particular vote at issue. GPVSC
should provide the Conflicts of Interest Management Sub-Committee a reasonable amount of time (no less than 24 hours) to perform all necessary and appropriate reviews. To the extent that a conflicts review cannot be sufficiently completed by the
Conflicts of Interest Management Sub-Committee the proxies will be voted in accordance with the standard guidelines.
The information
considered by the Conflicts of Interest Management Sub-Committee may include without limitation information regarding (i) AM client relationships; (ii) any relevant personal conflict known by the Conflicts of Interest Management
Sub-Committee or brought to the attention of that sub-committee; (iii) and any communications with members of the GPVSC (or anyone participating or providing information to the GPVSC) and any person outside of the AM organization (but within
Deutsche Bank and its affiliates) or any entity that identifies itself as a AM advisory client regarding the vote at issue. In the context of any determination, the Conflicts of Interest Management Sub-Committee may consult with, and shall be
entitled to rely upon, all applicable outside experts, including legal counsel.
Upon completion of the investigation, the Conflicts of
Interest Management Sub-Committee will document its findings and conclusions. If the Conflicts of Interest Management Sub-Committee determines that (i)AM has a material conflict of interest that would prevent it from deciding how to vote the proxies
concerned without further client consent or (ii) certain individuals should be recused from participating in the proxy vote at issue, the Conflicts of Interest Management Sub-Committee will so inform the GPVSC chair.
If notified that AM has a material conflict of interest as described above, the GPVSC chair will obtain instructions as to how the proxies
should be voted either from (i) if time permits, the effected clients, or (ii) in accordance with the standard guidelines. If notified that certain individuals should be recused from the proxy vote at issue, the GPVSC Chair shall do so in
accordance with the procedures set forth below.
Note: Any AM employee who becomes aware of a potential, material conflict of interest in
respect of any proxy vote to be made on behalf of clients shall notify Compliance. Compliance shall call a meeting of the conflict review committee to evaluate such conflict and determine a recommended course of action.
4
Procedures to be followed by the GPVSC. At the beginning of any discussion regarding how
to vote any proxy, the GPVSC Chair (or his or her delegate) will inquire as to whether any GPVSC member (whether voting or ex officio) or any person participating in the proxy voting process has a personal conflict of interest or has actual
knowledge of an actual or apparent conflict that has not been reported to the Conflicts of Interest Management Sub-Committee.
The GPVSC
Chair also will inquire of these same parties whether they have actual knowledge regarding whether any director, officer or employee outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as
a AM advisory client, has: (i) requested that AM, the Proxy Vendor Oversight (or any member thereof) or a GPVSC member vote a particular proxy in a certain manner; (ii) attempted to influence AM, the Proxy Vendor Oversight (or any member
thereof), a GPVSC member or any other person in connection with proxy voting activities; or (iii) otherwise communicated with a GPVSC member or any other person participating or providing information to the GPVSC regarding the particular proxy
vote at issue, and which incident has not yet been reported to the Conflicts of Interest Management Sub-Committee.
If any such incidents
are reported to the GPVSC Chair, the Chair will promptly notify the Conflicts of Interest Management Sub-Committee and, if possible, will delay the vote until the Conflicts of Interest Management Sub-Committee can complete the conflicts report. If a
delay is not possible, the Conflicts of Interest Management Sub-Committee will instruct the GPVSC whether anyone should be recused from the proxy voting process, or whether AM should vote the proxy in accordance with the standard guidelines, seek
instructions as to how to vote the proxy at issue from ISS or, if time permits, the effected clients. These inquiries and discussions will be properly reflected in the GPVSCs minutes.
Duty to Report
. Any AM employee, including any GPVSC member (whether voting or ex officio), that is aware of any actual or apparent
conflict of interest relevant to, or any attempt by any person outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as a AM advisory client to influence, how AM votes its proxies has a
duty to disclose the existence of the situation to the GPVSC Chair (or his or her designee) and the details of the matter to the Conflicts of Interest Management Sub-Committee. In the case of any person participating in the deliberations on a
specific vote, such disclosure should be made before engaging in any activities or participating in any discussion pertaining to that vote.
5
Recusal of Members
. The GPVSC will recuse from participating in a specific proxy vote any
GPVSC members (whether voting or ex officio) and/or any other person who (i) are personally involved in a material conflict of interest; or (ii) who, as determined by the Conflicts of Interest Management Sub-Committee, have actual
knowledge of a circumstance or fact that could effect their independent judgment, in respect of such vote. The GPVSC will also exclude from consideration the views of any person (whether requested or volunteered) if the GPVSC or any member thereof
knows, or if the Conflicts of Interest Management Sub-Committee has determined, that such other person has a material conflict of interest with respect to the particular proxy, or has attempted to influence the vote in any manner prohibited by these
policies.
If, after excluding all relevant GPVSC voting members pursuant to the paragraph above, there are three or more GPVSC voting
members remaining, those remaining GPVSC members will determine how to vote the proxy in accordance with these Policies and Procedures. If there are fewer than three GPVSC voting members remaining, the GPVSC Chair will vote the proxy in accordance
with the standard guidelines, will obtain instructions as to how to have the proxy voted from, if time permits, the effected clients and otherwise from ISS.
B. Investment Companies and Affiliated Public Companies
Investment Companies
. As reflected in the Guidelines, all proxies solicited by open-end and closed-end investment companies are voted
in accordance with the pre-determined guidelines of ISS, unless the investment company client directs AM to vote differently on a specific proxy or specific categories of proxies. However, regarding investment companies for which AM or an affiliate
serves as investment adviser or principal underwriter, such proxies are voted in the same proportion as the vote of all other shareholders (
i.e.
, mirror or echo voting). Master fund proxies solicited from feeder funds
are voted in accordance with applicable provisions of Section 12 of the Investment Company Act of 1940.
Subject to participation
agreements with certain Exchange Traded Funds (ETF) issuers that have received exemptive orders from the U.S. Securities and Exchange Commission allowing investing DWS funds to exceed the limits set forth in Section 12(d)(1)(A) and
(B) of the Investment Company Act of 1940, DeAM will echo vote proxies for ETFs in which Deutsche Bank holds more than 25% of outstanding voting shares globally when required to do so by participation agreements and SEC orders.
Affiliated Public Companies
. For proxies solicited by non-investment company issuers of or within the Deutsche Bank organization,
e.g.
, Deutsche bank itself, these proxies will be voted in the same proportion as the vote of other shareholders (
i.e.
, mirror or echo voting).
Note: With respect to the Central Cash Management Fund (registered under the Investment Company Act of 1940), the Fund is not required to
engage in echo voting and the investment adviser will use these Guidelines, and may determine, with respect to the Central Cash Management Fund, to vote contrary to the positions in the Guidelines, consistent with the Funds best interest.
C. Other Procedures That Limit Conflicts of Interest
AM and other entities in the Deutsche Bank organization have adopted a number of policies, procedures and internal controls that are designed
to avoid various conflicts of interest, including those that may arise in connection with proxy voting, including:
Deutsche Bank Americas Restricted Activities Policy
. This policy provides for,
among other things, independence of AM employees from CIB, and information barriers between AM and other affiliates. Specifically, no AM employee may be subject to the supervision or control of any employee of CIB. No AM employee shall have his or
her compensation based upon his or her contribution to any business activity within the Bank outside of the business of AM, without the prior approval of Legal or Compliance. Further, no employee of CIB shall have any input into the compensation of
a AM employee without the prior approval of Legal or Compliance. Under the information barriers section of this policy, as a general rule, AM employees who are associated with the investment process should have no contact with employees of Deutsche
Bank or its affiliates, outside of PCAM, regarding specific clients, business matters, or initiatives. Further, under no circumstances should proxy votes be discussed with any Deutsche Bank employee outside of AM (and should only be discussed on a
need-to-know basis within AM).
Other relevant internal policies include the Deutsche Bank Americas Code of Professional Conduct, the
Deutsche Asset Management Information Sharing Procedures, the Deutsche Asset Management Code of Ethics, the Sarbanes-Oxley Senior Officer Code of Ethics, and the Deutsche Bank Group Code of Conduct. The GPVSC expects that these policies, procedures
and internal controls will greatly reduce the chance that the GPVSC (or, its members) would be involved in, aware of or influenced by, an actual or apparent conflict of interest.
6
V. RECORDKEEPING
At a minimum, the following types of records must be properly maintained and readily accessible in order to evidence compliance with this
policy.
AM will maintain a record of each vote cast by AM that includes among other
things, company name, meeting date, proposals presented, vote cast and shares voted.
The Proxy Vendor Oversight maintains records for each of the proxy ballots it votes.
Specifically, the records include, but are not limited to:
The proxy statement (and
any additional solicitation materials) and relevant portions of annual statements.
Any additional information considered in the voting process that may be obtained from an
issuing company, its agents or proxy research firms.
Analyst worksheets created for
stock option plan and share increase analyses.
Proxy Edge print-screen of actual
vote election.
AM will retain these Policies and Procedures and the Guidelines; will maintain records of client requests for proxy voting
information; and will retain any documents the Proxy Vendor Oversight or the GPVSC prepared that were material to making a voting decision or that memorialized the basis for a proxy voting decision.
The GPVSC also will create and maintain appropriate records documenting its compliance with these Policies and Procedures, including records
of its deliberations and decisions regarding conflicts of interest and their resolution.
With respect to AMs investment company
clients, ISS will create and maintain records of each companys proxy voting record for 12-month periods ended June 30. AM will compile the following information for each matter relating to a portfolio security considered at any
shareholder meeting held during the period covered by the report and with respect to which the company was entitled to vote:
The name of the issuer of the portfolio security;
The exchange ticker symbol of the portfolio security (if symbol is available through
reasonably practicable means);
The Council on Uniform Securities Identification
Procedures number for the portfolio security (if the number is available through reasonably practicable means);
The shareholder meeting date;
A brief identification of the matter voted on;
Whether the matter was proposed by the issuer or by a security holder;
Whether the company cast its vote on the matter;
How the company cast its vote (
e.g.
, for or against proposal, or abstain; for or
withhold regarding election of directors); and
Whether the company cast its vote
for or against management.
7
Note: This list is intended to provide guidance only in terms of the records that must be
maintained in accordance with this policy. In addition, please note that records must be maintained in accordance with the applicable AM Records Management Policy.
With respect to electronically stored records, properly maintained is defined as complete, authentic (unalterable) usable and
backed-up. At a minimum, records should be retained for a period of not less than six years (or longer, if necessary to comply with applicable regulatory requirements), the first three years in an appropriate AM office.
VI. THE GPVSCS OVERSIGHT ROLE
In addition to adopting the Guidelines and making proxy voting decisions on matters referred to it as set forth above, the GPVSC will monitor
the proxy voting process by reviewing summary proxy information presented by ISS. The GPVSC will use this review process to determine, among other things, whether any changes should be made to the Guidelines. This review will take place at least
quarterly and will be documented in the GPVSCs minutes.
8
Attachment A Global Proxy Voting Guidelines
Deutsche Asset Management
Global Proxy Voting Guidelines
As Amended October 2010
[GRAPHIC OMITTED]
9
Table of contents
I
|
Board Of Directors And Executives
|
B
|
Classified Boards Of Directors
|
C
|
Board And Committee Independence
|
D
|
Liability And Indemnification Of Directors
|
E
|
Qualifications Of Directors
|
F
|
Removal Of Directors And Filling Of Vacancies
|
G
|
Proposals To Fix The Size Of The Board
|
H
|
Proposals to Restrict Chief Executive Officers Service on Multiple Boards
|
I
|
Proposals to Restrict Supervisory Board Members Service on Multiple Boards
|
J
|
Proposals to Establish Audit Committees
|
A
|
Authorization Of Additional Shares
|
B
|
Authorization Of Blank Check Preferred Stock
|
C
|
Stock Splits/Reverse Stock Splits
|
D
|
Dual Class/Supervoting Stock
|
F
|
Recapitalization Into A Single Class Of Stock
|
H
|
Reductions In Par Value
|
III
|
Corporate Governance Issues
|
C
|
Supermajority Voting Requirements
|
D
|
Shareholder Right To Vote
|
10
A
|
Establishment of a Remuneration Committee
|
B
|
Executive And Director Stock Option Plans
|
C
|
Employee Stock Option/Purchase Plans
|
E
|
Proposals To Limit Benefits Or Executive Compensation
|
G
|
Management board election and motion
|
H
|
Remuneration (variable pay)
|
I
|
Long-term incentive plans
|
J
|
Shareholder Proposals Concerning Pay For Superior Performance
|
K
|
Executive Compensation Advisory
|
V
|
Anti-Takeover Related Issues
|
A
|
Shareholder Rights Plans (Poison Pills)
|
D
|
Exemption From State Takeover Laws
|
E
|
Non-Financial Effects Of Takeover Bids
|
VI
|
Mergers & Acquisitions
|
VII
|
Social & Political Issues
|
F
|
Principles for Responsible Investment (PRI) Environmental Issues
|
11
A
|
Ratification Of Auditors
|
B
|
Limitation Of Non-Audit Services Provided By Independent Auditor
|
D
|
Transaction Of Other Business
|
E
|
Motions To Adjourn The Meeting
|
H
|
Proposals Related To The Annual Meeting
|
I
|
Reimbursement Of Expenses Incurred From Candidate Nomination
|
J
|
Investment Company Proxies
|
K
|
International Proxy Voting
|
12
These Guidelines may reflect a voting position that differs from the actual practices of the
public company(ies) within the Deutsche Bank organization or of the investment companies for which AM or an affiliate serves as investment adviser or sponsor.
NOTE: Because of the unique structure and regulatory scheme applicable to closed-end investment companies, the voting guidelines (particularly
those related to governance issues) generally will be inapplicable to holdings of closed-end investment companies. As a result, determinations on the appropriate voting recommendation for closed-end investment company shares will be made on a
case-by-case basis.
I.
|
Board of Directors and Executives
|
Routine: AM Policy is to vote for the uncontested election of directors. Votes for a director in an uncontested election will be
withheld in cases where a director has shown an inability to perform his/her duties in the best interests of the shareholders.
Proxy
contest: In a proxy contest involving election of directors, a case-by-case voting decision will be made based upon analysis of the issues involved and the merits of the incumbent and dissident slates of directors. AM will incorporate the decisions
of a third party proxy research vendor, currently, Institutional Shareholder Services (ISS) subject to review by the Proxy Voting Sub-Committee (GPVSC) as set forth in the AMs Proxy Voting Policies and Procedures.
Rationale: The large majority of corporate directors fulfill their fiduciary obligation and in most cases support for managements
nominees is warranted. As the issues relevant to a contested election differ in each instance, those cases must be addressed as they arise.
B.
|
Classified Boards of Directors
|
AM policy is to vote against proposals to classify the board and for proposals to repeal classified boards and elect directors annually.
Rationale: Directors should be held accountable on an annual basis. By entrenching the incumbent board, a classified board may be used as an
anti-takeover device to the detriment of the shareholders in a hostile take-over situation.
C.
|
Board and Committee Independence
|
AM policy is to vote:
1. For proposals that require that a certain percentage (majority up to 66 2/3%) of
members of a board of directors be comprised of independent or unaffiliated directors.
2. For proposals that require all members of a companys compensation, audit,
nominating, or other similar committees be comprised of independent or unaffiliated directors.
3. Against shareholder proposals to require the addition of special interest, or
constituency, representatives to boards of directors.
4. For separation of the
Chairman and CEO positions.
5. Against proposals that require a company to
appoint a Chairman who is an independent director.
Rationale: Board independence is a cornerstone of effective governance and
accountability. A board that is sufficiently independent from management assures that shareholders interests are adequately represented. However, the Chairman of the board must have sufficient involvement in and experience with the operations
of the company to perform the functions required of that position and lead the company.
13
No director qualifies as independent unless the board of directors affirmatively
determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).
Whether a director is in fact not independent will depend on the laws and regulations of the primary market for the security and
the exchanges, if any, on which the security trades.
D.
|
Liability and Indemnification of Directors
|
AM policy is to vote for management proposals to limit directors liability and to broaden the indemnification of directors,
unless broader indemnification or limitations on directors liability would effect shareholders interests in pending litigation.
Rationale: While shareholders want directors and officers to be responsible for their actions, it is not in the best interests of the
shareholders for them to be to risk averse. If the risk of personal liability is too great, companies may not be able to find capable directors willing to serve. We support expanding coverage only for actions taken in good faith and not for serious
violations of fiduciary obligation or negligence.
E.
|
Qualifications of Directors
|
AM policy is to follow managements recommended vote on either management or shareholder proposals that set retirement ages for directors
or require specific levels of stock ownership by directors.
Rationale: As a general rule, the board of directors, and not the
shareholders, is most qualified to establish qualification policies.
F.
|
Removal of Directors and Filling of Vacancies
|
AM policy is to vote against proposals that include provisions that directors may be removed only for cause or proposals that
include provisions that only continuing directors may fill board vacancies.
Rationale: Differing state statutes permit removal of
directors with or without cause. Removal of directors for cause usually requires proof of self-dealing, fraud or misappropriation of corporate assets, limiting shareholders ability to remove directors except under extreme circumstances.
Removal without cause requires no such showing.
Allowing only incumbent directors to fill vacancies can serve as an anti-takeover device,
precluding shareholders from filling the board until the next regular election.
G.
|
Proposals to Fix the Size of the Board
|
AM policy is to vote:
1. For proposals to fix the size of the board unless: (a) no specific reason
for the proposed change is given; or (b) the proposal is part of a package of takeover defenses.
2. Against proposals allowing management to fix the size of the board without
shareholder approval.
Rationale: Absent danger of anti-takeover use, companies should be granted a reasonable amount of flexibility in
fixing the size of its board.
H.
|
Proposals to Restrict Chief Executive Officers Service on Multiple Boards
|
AM policy is to vote For proposals to restrict a Chief Executive Officer from serving on more than three outside boards of
directors.
Rationale: Chief Executive Officer must have sufficient time to ensure that shareholders interests are represented
adequately.
14
Note: A directors service on multiple closed-end fund boards within a fund complex are
treated as service on a single Board for the purpose of the proxy voting guidelines.
I.
|
Proposals to Restrict Supervisory Board Members Service on Multiple Boards (For FFT Securities)
|
AM policy is to vote for proposals to restrict a Supervisory Board Member from serving on more than five supervisory boards.
Rationale: We consider a strong, independent and knowledgeable supervisory board as important counter-balance to executive management to
ensure that the interests of shareholders are fully reflected by the company.
Full information should be disclosed in the annual reports
and accounts to allow all shareholders to judge the success of the supervisory board controlling their company.
Supervisory Board Member
must have sufficient time to ensure that shareholders interests are represented adequately.
Note: A directors service on
multiple closed-end fund boards within a fund complex are treated as service on a single Board for the purpose of the proxy voting guidelines.
J.
|
Proposals to Establish Audit Committees (For FFT and U.S. Securities)
|
AM policy is to vote for proposals that require the establishment of audit committees.
Rationale: The audit committee should deal with accounting and risk management related questions, verifies the independence of the auditor
with due regard to possible conflicts of interest. It also should determine the procedure of the audit process
A.
|
Authorization of Additional Shares (For U.S. Securities)
|
AM policy is to vote for proposals to increase the authorization of existing classes of stock that do not exceed a 3:1 ratio of
shares authorized to shares outstanding for a large cap company, and do not exceed a 4:1 ratio of shares authorized to shares outstanding for a small-midcap company (companies having a market capitalization under one billion U.S. dollars.).
Rationale: While companies need an adequate number of shares in order to carry on business, increases requested for general financial
flexibility must be limited to protect shareholders from their potential use as an anti-takeover device. Requested increases for specifically designated, reasonable business purposes (stock split, merger, etc.) will be considered in light of those
purposes and the number of shares required.
B.
|
Authorization of Blank Check Preferred Stock (For U.S. Securities)
|
AM policy is to vote:
1. Against proposals to create blank check preferred stock or to increase the
number of authorized shares of blank check preferred stock unless the company expressly states that the stock will not be used for anti-takeover purposes and will not be issued without shareholder approval.
2. For proposals mandating shareholder approval of blank check stock placement.
Rationale: Shareholders should be permitted to monitor the issuance of classes of preferred stock in which the board of directors is
given unfettered discretion to set voting, dividend, conversion and other rights for the shares issued.
C.
|
Stock Splits/Reverse Stock Splits
|
AM policy is to vote for stock splits if a legitimate business purpose is set forth and the split is in the shareholders
best interests. A vote is cast for a reverse stock split only if the number of shares authorized is reduced in the same proportion as the reverse split or if the effective increase in authorized shares (relative to outstanding shares)
complies with the proxy guidelines for common stock increases (see, Section II.A, above).
15
Rationale: Generally, stock splits do not detrimentally effect shareholders. Reverse stock
splits, however, may have the same result as an increase in authorized shares and should be analyzed accordingly.
D.
|
Dual Class/Supervoting Stock
|
AM policy is to vote against proposals to create or authorize additional shares of super-voting stock or stock with unequal voting
rights.
Rationale: The one share, one vote principal ensures that no shareholder maintains a voting interest exceeding their
equity interest in the company.
E.
|
Large Block Issuance (For U.S. Securities)
|
AM policy is to address large block issuances of stock on a case-by-case basis, incorporating the recommendation of an independent third party
proxy research firm (currently ISS) subject to review by the GPVSC as set forth in AMs Proxy Policies and Procedures.
Additionally, AM supports
proposals requiring shareholder approval of large block issuances.
Rationale: Stock issuances must be reviewed in light of the business
circumstances leading to the request and the potential impact on shareholder value.
F.
|
Recapitalization into a Single Class of Stock
|
AM policy is to vote for recapitalization plans to provide for a single class of common stock, provided the terms are fair, with
no class of stock being unduly disadvantaged.
Rationale: Consolidation of multiple classes of stock is a business decision that may be
left to the board and/management if there is no adverse effect on shareholders.
AM
policy is to vote for share repurchase plans provided all shareholders are able to participate on equal terms.
Rationale:
Buybacks are generally considered beneficial to shareholders because they tend to increase returns to the remaining shareholders.
H.
|
Reductions in Par Value
|
AM policy is to vote for proposals to reduce par value, provided a legitimate business purpose is stated (
e.g.
, the
reduction of corporate tax responsibility).
Rationale: Usually, adjustments to par value are a routine financial decision with no
substantial impact on shareholders.
III.
|
Corporate Governance Issues
|
AM policy is to vote for proposals to provide for confidential voting and independent tabulation of voting results and to vote
against proposals to repeal such provisions.
Rationale: Confidential voting protects the privacy rights of all shareholders.
This is particularly important for employee-shareholders or shareholders with business or other affiliations with the company, who may be vulnerable to coercion or retaliation when opposing management. Confidential voting does not interfere with the
ability of corporations to communicate with all shareholders, nor does it prohibit shareholders from making their views known directly to management.
16
B.
|
Cumulative Voting (For U.S. Securities)
|
AM policy is to vote against shareholder proposals requesting cumulative voting and for management proposals to
eliminate it. The protections afforded shareholders by cumulative voting are not necessary when a company has a history of good performance and does not have a concentrated ownership interest. Accordingly, a vote is cast against
cumulative voting and for proposals to eliminate it if:
a)
|
The company has a five year return on investment greater than the relevant industry index,
|
b)
|
All directors and executive officers as a group beneficially own less than 10% of the outstanding stock, and
|
c)
|
No shareholder (or voting block) beneficially owns 15% or more of the company.
|
Thus, failure of any one of the three criteria results in a vote for cumulative voting in accordance with the general policy.
Rationale: Cumulative voting is a tool that should be used to ensure that holders of a significant number of shares may have board
representation; however, the presence of other safeguards may make their use unnecessary.
C.
|
Supermajority Voting Requirements
|
AM policy is to vote against management proposals to require a supermajority vote to amend the charter or bylaws and to vote
for shareholder proposals to modify or rescind existing supermajority requirements.
* Exception made when company holds a controlling position and seeks to lower threshold to
maintain control and/or make changes to corporate by-laws.
Rationale: Supermajority voting provisions violate the democratic principle
that a simple majority should carry the vote. Setting supermajority requirements may make it difficult or impossible for shareholders to remove egregious by-law or charter provisions. Occasionally, a company with a significant insider held position
might attempt to lower a supermajority threshold to make it easier for management to approve provisions that may be detrimental to shareholders. In that case, it may not be in the shareholders interests to lower the supermajority provision.
D.
|
Shareholder Right to Vote
|
AM policy is to vote against proposals that restrict the right of shareholders to call special meetings, amend the bylaws, or act
by written consent. Policy is to vote for proposals that remove such restrictions.
Rationale: Any reasonable means whereby
shareholders can make their views known to management or effect the governance process should be supported.
Annual Incentive Plans or Bonus Plans are often submitted to shareholders for approval. These plans typically award
cashtoexecutivesbasedoncompanyperformance.DeutscheBankbelievesthattheresponsibilityforexecutivecompensation decisions rest with the board of directors and/or the compensation committee, and its policy is not to second-guess the boards award of
cash compensation amounts to executives unless a particular award or series of awards is deemed excessive. If stock options are awarded as part of these bonus or incentive plans, the provisions must meet Deutsche Banks criteria regarding stock
option plans, or similar stock-based incentive compensation schemes, as set forth below.
A.
|
Establishment of a Remuneration Committee (For FFT Securities)
|
AM policy is to vote for proposals that require the establishment of a remuneration committee.
17
Rationale: Corporations should disclose in each annual report or proxy statement their policies
on remuneration. Essential details regarding executive remuneration including share options, long-term incentive plans and bonuses, should be disclosed in the annual report, so that investors can judge whether corporate pay policies and practices
meet the standard.
The remuneration committee shall not comprise any board members and should be sensitive to the wider scene on
executive pay. It should ensure that performance-based elements of executive pay are designed to align the interests of shareholders.
B.
|
Executive and Director Stock Option Plans
|
AM policy is to vote for stock option plans that meet the following criteria:
(1) The resulting dilution of existing shares is less than (a) 15 percent of outstanding
shares for large capital corporations or (b) 20 percent of outstanding shares for small-mid capital companies (companies having a market capitalization under one billion U.S. dollars).
(2) The transfer of equity resulting from granting options at less than FMV is no greater than
3% of the over-all market capitalization of large capital corporations, or 5% of market cap for small-mid capital companies.
(3) The plan does not contain express repricing provisions and, in the absence of an express
statement that options will not be repriced; the company does not have a history of repricing options.
(4) The plan does not grant options on super-voting stock.
AM will support performance-based option proposals as long as a) they do not mandate that all options granted by the company must be
performance based, and b) only certain high-level executives are subject to receive the performance based options.
AM will support
proposals to eliminate the payment of outside director pensions.
Rationale: Determining the cost to the company and to shareholders of
stock-based incentive plans raises significant issues not encountered with cash-based compensation plans. These include the potential dilution of existing shareholders voting power, the transfer of equity out of the company resulting from the
grant and execution of options at less than FMV and the authority to reprice or replace underwater options. Our stock option plan analysis model seeks to allow reasonable levels of flexibility for a company yet still protect shareholders from the
negative impact of excessive stock compensation. Acknowledging that small mid-capital corporations often rely more heavily on stock option plans as their main source of executive compensation and may not be able to compete with their large capital
competitors with cash compensation, we provide slightly more flexibility for those companies.
C.
|
Employee Stock Option/Purchase Plans
|
AM policy is to vote for employee stock purchase plans (ESPPs) when the plan complies with Internal Revenue Code 423, allowing
non-management employees to purchase stock at 85% of FMV.
AM policy is to vote for employee stock option plans (ESOPs)
provided they meet the standards for stock option plans in general. However, when computing dilution and transfer of equity, ESOPs are considered independently from executive and director option plans.
Rationale: ESOPs and ESPPs encourage rank-and-file employees to acquire an ownership stake in the companies they work for and have been
shown to promote employee loyalty and improve productivity.
AM policy is to vote for proposals to require shareholder approval of golden parachutes and for proposals that would limit golden
parachutes to no more than three times base compensation. Policy is to vote against more restrictive shareholder proposals to limit golden parachutes.
18
Rationale: In setting a reasonable limitation, AM considers that an effective parachute should be
less attractive than continued employment and that the IRS has opined that amounts greater than three times annual salary, are excessive.
E.
|
Proposals to Limit Benefits or Executive Compensation
|
AM policy is to vote against
1. Proposals to limit benefits, pensions or compensation and
2. Proposals that request or require disclosure of executive compensation greater than the
disclosure required by Securities and Exchange Commission (SEC) regulations.
Rationale: Levels of compensation and benefits are generally
considered to be day-to-day operations of the company, and are best left unrestricted by arbitrary limitations proposed by shareholders.
AM policy is to support proposals requesting companies to expense stock options.
Rationale: Although companies can choose to expense options voluntarily, the Financial Accounting Standards Board (FASB) does not yet require
it, instead allowing companies to disclose the theoretical value of options as a footnote. Because the expensing of stock options lowers earnings, most companies elect not to do so. Given the fact that options have become an integral component of
compensation and their exercise results in a transfer of shareholder value, AM agrees that their value should not be ignored and treated as no cost compensation. The expensing of stock options would promote more modest and appropriate
use of stock options in executive compensation plans and present a more accurate picture of company operational earnings.
G.
|
Management board election and motion (For FFT Securities)
|
AM policy is to vote against:
the election of board members with positions on either remuneration or audit committees;
the election of supervisory board members with too many supervisory board mandates;
automatic election of former board members into the supervisory board.
Rationale: Management as an entity, and each of its members, are responsible for all actions of the company, and are - subject to
applicable laws and regulations - accountable to the shareholders as a whole for their actions.
Sufficient information should be
disclosed in the annual company report and account to allow shareholders to judge the success of the company.
H.
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Remuneration (variable pay): (For FFT Securities)
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Executive remuneration for Management Board
AM policy is to vote for remuneration for Management Board that is transparent and linked to results.
Rationale: Executive compensation should motivate management and align the interests of management with the shareholders. The focus should be
on criteria that prevent excessive remuneration; but enable the company to hire and retain first-class professionals.
Shareholder
interests are normally best served when management is remunerated to optimize long-term returns. Criteria should include suitable measurements like return on capital employed or economic value added.
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Interests should generally also be correctly aligned when management own shares in the company
even more so if these shares represent a substantial portion of their own wealth.
Its disclosure shall differentiate between fixed
pay, variable (performance related) pay and long-term incentives, including stock option plans with valuation ranges as well as pension and any other significant arrangements.
Executive remuneration for Supervisory Board
AM policy
is to vote for remuneration for Supervisory Board that is at least 50% in fixed form.
Rationale: It would normally be
preferable if performance linked compensation were not based on dividend payments, but linked to suitable result based parameters. Consulting and procurement services should also be published in the company report.
I.
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Long-term incentive plans (For FFT Securities)
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AM policy is to vote for long-term incentive plans for members of a management board that reward for above average company
performance.
Rationale: Incentive plans will normally be supported if they:
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directly align the interests of members of management boards with those of shareholders;
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establish challenging performance criteria to reward only above average performance;
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measure performance by total shareholder return in relation to the market or a range of comparable companies;
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are long-term in nature and encourage long-term ownership of the shares once exercised through minimum holding periods;
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do not allow a repricing of the exercise price in stock option plans.
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J.
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Shareholder Proposals Concerning Pay for Superior Performance
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AM policy is to address pay for superior performance proposals on a case-by-case basis, incorporating the recommendation of an independent
third party proxy research firm (currently ISS) subject to review by the GPVSC as set forth in AMs Proxy Policies and Procedures.
Rationale: While AM agrees that compensation issues are better left to the discretion of management, they appreciate the need to monitor for
excessive compensation practices on a case by case basis. If, after a review of the ISS metrics, AM is comfortable with ISSs applying this calculation and will vote according to their recommendation.
K.
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Executive Compensation Advisory
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AM policy is to follow managements recommended vote on shareholder proposals to propose an advisory resolution seeking to ratify the
compensation of the companys named executive officers (NEOs) on an annual basis.
Rationale: AM believes that controls exist within
senior management and corporate compensation committees, ensuring fair compensation to executives. This might allow shareholders to require approval for all levels of managements compensation.
V.
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Anti-Takeover Related Issues
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A.
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Shareholder Rights Plans (Poison Pills)
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AM policy is to vote for proposals to require shareholder ratification of poison pills or that request boards to redeem poison
pills, and to vote against the adoption of poison pills if they are submitted for shareholder ratification.
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Rationale: Poison pills are the most prevalent form of corporate takeover defenses and can be
(and usually are) adopted without shareholder review or consent. The potential cost of poison pills to shareholders during an attempted takeover outweighs the benefits.
AM policy is to examine reincorporation proposals on a case-by-case basis. The voting decision is based on: (1) differences in state law
between the existing state of incorporation and the proposed state of incorporation; and (2) differences between the existing and the proposed charter/bylaws/articles of incorporation and their effect on shareholder rights. If changes resulting
from the proposed reincorporation violate the corporate governance principles set forth in these guidelines, the reincorporation will be deemed contrary to shareholders interests and a vote cast against.
Rationale: Reincorporations can be properly analyzed only by looking at the advantages and disadvantages to their shareholders. Care must be
taken that anti-takeover protection is not the sole or primary result of a proposed change.
AM policy is to vote for management fair-price proposals, provided that: (1) the proposal applies only to two-tier offers;
(2) the proposal sets an objective fair-price test based on the highest price that the acquirer has paid for a companys shares; (3) the supermajority requirement for bids that fail the fair-price test is no higher than two-thirds of
the outstanding shares; (4) the proposal contains no other anti-takeover provisions or provisions that restrict shareholders rights.
A vote is cast for shareholder proposals that would modify or repeal existing fair-price requirements that do not meet these standards.
Rationale: While fair price provisions may be used as anti-takeover devices, if adequate provisions are included, they provide some protection
to shareholders who have some say in their application and the ability to reject those protections if desired.
D.
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Exemption from state takeover laws
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AM policy is to vote for shareholder proposals to opt out of state takeover laws and to vote against management
proposals requesting to opt out of state takeover laws.
Rationale: Control share statutes, enacted at the state level, may harm long-term
share value by entrenching management. They also unfairly deny certain shares their inherent voting rights.
E.
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Non-financial Effects of Takeover Bids
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Policy is to vote against shareholder proposals to require consideration of non-financial effects of merger or acquisition
proposals.
Rationale: Non-financial effects may often be subjective and are secondary to AMs stated purpose of acting in its
clients best economic interest.
VI.
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Mergers & Acquisitions
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Evaluation of mergers, acquisitions and other special corporate transactions (
i.e.
, takeovers, spin-offs, sales of assets,
reorganizations, restructurings and recapitalizations) are performed on a case-by-case basis incorporating information from an independent proxy research source (currently ISS.) Additional resources including portfolio management and research
analysts may be considered as set forth in AMs Policies and Procedures.
VII.
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Social, Environmental & Political Issues
|
Social and environmental issues are becoming increasingly important to corporate success. We incorporate social and environmental
considerations into both our investment decisions and our proxy voting decisions particularly if the financial performance of the company could be impacted. In addition, AM has incorporated the Principles for Responsible Investment (PRI) in
these Proxy Voting Guidelines.
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AM policy is to vote against adopting global codes of conduct or workplace standards exceeding those mandated by law.
Rationale: Additional requirements beyond those mandated by law are deemed unnecessary and potentially burdensome to companies
1. AM policy is to vote against shareholder proposals to force equal employment
opportunity, affirmative action or board diversity.
Rationale: Compliance with State and Federal legislation along with information made
available through filings with the EEOC provides sufficient assurance that companies act responsibly and make information public.
2. AM policy is also to vote against proposals to adopt the Mac Bride Principles.
The Mac Bride Principles promote fair employment, specifically regarding religious discrimination.
Rationale: Compliance with the Fair
Employment Act of 1989 makes adoption of the Mac Bride Principles redundant. Their adoption could potentially lead to charges of reverse discrimination.
1. AM policy is to vote against adopting a pharmaceutical price restraint policy or
reporting pricing policy changes.
Rationale: Pricing is an integral part of business for pharmaceutical companies and should not be
dictated by shareholders (particularly pursuant to an arbitrary formula). Disclosing pricing policies may also jeopardize a companys competitive position in the marketplace.
2. AM policy is to vote against shareholder proposals to control the use or
labeling of and reporting on genetically engineered products.
Rationale: Additional requirements beyond those mandated by law are deemed
unnecessary and potentially burdensome to companies.
1. AM policy is to vote against shareholder proposals regarding the production or sale of
military arms or nuclear or space-based weapons, including proposals seeking to dictate a companys interaction with a particular foreign country or agency.
Rationale: Generally, management is in a better position to determine what products or industries a company can and should participate in.
Regulation of the production or distribution of military supplies is, or should be, a matter of government policy.
2. AM policy is to vote against shareholder proposals regarding political
contributions and donations.
Rationale: The Board of Directors and Management, not shareholders, should evaluate and determine the
recipients of any contributions made by the company.
3. AM policy is to vote
against shareholder proposals regarding charitable contributions and donations.
Rationale: The Board of Directors and
Management, not shareholders, should evaluate and determine the recipients of any contributions made by the company.
1. AM policy is to vote against shareholder proposals requesting additional
standards or reporting requirements for tobacco companies as well as against requesting companies to report on the intentional manipulation of nicotine content.
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Rationale: Where a tobacco companys actions meet the requirements of legal and industry
standards, imposing additional burdens may detrimentally effect a companys ability to compete. The disclosure of nicotine content information could affect the companys rights in any pending or future litigation.
2. Shareholder requests to spin-off or restructure tobacco businesses will be opposed.
Rationale: These decisions are more appropriately left to the Board and management, and not to shareholder mandate.
F.
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Principles for Responsible Investment
|
AM policy is to engage actively with companies on ESG issues and participate in collaborative engagement initiatives. In this context, AM is
willing to participate in the development of policy, regulation and standard setting (such as promoting and protecting shareholder rights).AM could support shareholder initiatives and also file shareholder resolutions with long term ESG
considerations and improved ESG disclosure, when applicable. In addition, AM could ask for standardized ESG reporting and issues to be integrated within annual financial reports.
AM policy is to vote for increased disclosure on CERES Principles, ESG issues or other similar environmental mandates
(
e.g.
, those relating to Greenhouse gas emissions or the use of nuclear power) and to follow managements recommended vote on all other matters related to the above issues.
Rationale: Environmental issues are extensively regulated by outside agencies and compliance with additional requirements often involves
significant cost to companies.
VIII. Miscellaneous
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Items
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A.
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Ratification of Auditors
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AM policy is to vote for a) the management recommended selection of auditors and b) proposals to require shareholder approval of
auditors.
Rationale: Absent evidence that auditors have not performed their duties adequately, support for managements nomination
is warranted.
B.
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Limitation of non-audit services provided by independent auditor
|
AM policy is to support proposals limiting non-audit fees to 50% of the aggregate annual fees earned by the firm retained as a companys
independent auditor.
Rationale: In the wake of financial reporting problems and alleged audit failures at a number of companies, AM
supports the general principle that companies should retain separate firms for audit and consulting services to avoid potential conflicts of interest. However, given the protections afforded by the recently enacted Sarbanes-Oxley Act of 2002 (which
requires Audit Committee pre-approval for non-audit services and prohibits auditors from providing specific types of services), and the fact that some non-audit services are legitimate audit-related services, complete separation of audit and
consulting fees may not be warranted. A reasonable limitation is appropriate to help ensure auditor independence and it is reasonable to expect that audit fees exceed non-audit fees.
AM policy is to support proposals seeking audit firm rotation unless the rotation period sought is less than five years.
Rationale: While the Sarbanes-Oxley Act mandates that the lead audit partner be switched every five years, AM believes that rotation of the
actual audit firm would provide an even stronger system of checks and balances on the audit function.
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D.
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Transaction of Other Business
|
AM policy is to vote against transaction of other business proposals.
Rationale: This is a routine item to allow shareholders to raise other issues and discuss them at the meeting. As the nature of these issues
may not be disclosed prior to the meeting, we recommend a vote against these proposals. This protects shareholders voting by proxy (and not physically present at a meeting) from having action taken at the meeting that they did not receive proper
notification of or sufficient opportunity to consider.
E.
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Motions to Adjourn the Meeting
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AM Policy is to vote against proposals to adjourn the meeting.
Rationale: Management may seek authority to adjourn the meeting if a favorable outcome is not secured. Shareholders should already have had
enough information to make a decision. Once votes have been cast, there is no justification for management to continue spending time and money to press shareholders for support.
AM policy is to vote against bundled proposals if any bundled issue would require a vote against it if proposed individually.
Rationale: Shareholders should not be forced to take the good with the bad in cases where the proposals could reasonably have been
submitted separately.
G.
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Change of Company Name
|
AM policy is to support management on proposals to change the company name. Rationale: This is generally considered a business decision for a
company.
H.
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Proposals Related to the Annual Meeting
|
AM Policy is to vote in favor of management for proposals related to the conduct of the annual meeting (meeting time, place, etc.)
Rationale: These are considered routine administrative proposals.
I.
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Reimbursement of Expenses Incurred from Candidate Nomination
|
AM policy is to follow managements recommended vote on shareholder proposals related to the amending of company bylaws to provide for
the reimbursement of reasonable expenses incurred in connection with nominating one or more candidates in a contested election of directors to the corporations board of directors.
Rationale: Corporations should not be liable for costs associated with shareholder proposals for directors.
J.
|
Investment Company Proxies
|
Proxies solicited by investment companies are voted in accordance with the recommendations of an independent third party, currently ISS.
However, regarding investment companies for which AM or an affiliate serves as investment adviser or principal underwriter, such proxies are voted in the same proportion as the vote of all other shareholders. Proxies solicited by master funds from
feeder funds will be voted in accordance with applicable provisions of Section 12 of the Investment Company Act of 1940.
Investment
companies, particularly closed-end investment companies, are different from traditional operating companies. These differences may call for differences in voting positions on the same matter. For example, AM could vote for staggered
boards of closed-end investment companies, although AM generally votes against staggered boards for operating companies. Further, the manner in which AM votes investment company proxies may differ from proposals for which a AM-advised
investment company solicits proxies from its shareholders. As reflected in the Guidelines, proxies solicited by closed-end (and open-end) investment companies are voted in accordance with the pre-determined guidelines of an independent third-party.
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Subject to participation agreements with certain Exchange Traded Funds (ETF) issuers
that have received exemptive orders from the U.S. Securities and Exchange Commission allowing investing DWS funds to exceed the limits set forth in Section 12(d)(1)(A) and (B) of the Investment Company Act of 1940, DeAM will echo vote
proxies for ETFs in which Deutsche Bank holds more than 25% of outstanding voting shares globally when required to do so by participation agreements and SEC orders.
Note: With respect to the Central Cash Management Fund (registered under the Investment Company Act of 1940), the Fund is not required to
engage in echo voting and the investment adviser will use these Guidelines, and may determine, with respect to the Central Cash Management Fund, to vote contrary to the positions in the Guidelines, consistent with the Funds best interest.
K.
|
International Proxy Voting
|
The above guidelines pertain to issuers organized in the United States, Canada and Germany. Proxies solicited by other issuers are voted in
accordance with international guidelines or the recommendation of ISS and in accordance with applicable law and regulation.
IMPORTANT: The information contained herein is the property of Deutsche Bank Group and may
not be copied, used or disclosed in whole or in part, stored in a retrieval system or transmitted in any form or by any means (electronic, mechanical, reprographic, recording or otherwise) without the prior written permission of Deutsche Bank Group.
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DBX ETF TRUST (THE REGISTRANT)