Statement of Additional Information
Dated December 10, 2012
This Statement of Additional Information (the SAI) is not a prospectus. It should be read in conjunction with the current prospectus (the Prospectus) for the following Funds of the
FlexShares Trust (the Trust) as such Prospectus may be revised or supplemented from time to time:
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Fund
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Ticker
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Stock Exchange
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FlexShares
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Quality
Dividend Index Fund
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QDF
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NYSE Arca
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FlexShares
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Quality
Dividend Dynamic Index Fund
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QDYN
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NYSE Arca
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FlexShares
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Quality
Dividend Defensive Index Fund
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QDEF
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NYSE Arca
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FlexShares
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International
Quality Dividend Index Fund
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IQDF
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NYSE Arca
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FlexShares
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International
Quality Dividend Dynamic Index Fund
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IQDY
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NYSE Arca
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FlexShares
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International
Quality Dividend Defensive Index Fund
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IQDE
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NYSE Arca
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The Prospectus for the Funds of the FlexShares Trust included in this SAI is dated December 10,
2012. Capitalized terms used herein that are not defined have the same meanings as in the Prospectus, unless otherwise noted. Copies of the Prospectus may be obtained without charge by visiting www.flexshares.com, writing to FlexShares ETFs, c/o
Foreside Fund Services, LLC, 3 Canal Plaza, Portland, Maine 04101 or calling 1-855-FLEXETF (1-855-353-9383).
FlexShares
®
is a registered trademark of Northern Trust Investments, Inc. (NTI or the
Investment Adviser).
An investment in a Fund is not a deposit of any bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation (FDIC), any other government agency or The Northern Trust Company, its affiliates, subsidiaries or any other bank. An investment in a Fund involves investment risks, including possible loss of principal.
TABLE OF CONTENTS
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ii
GENERAL DESCRIPTION OF THE TRUST AND ITS FUNDS
The Trust was formed as a Maryland Statutory Trust on May 13, 2010, originally named NT ETF Trust, and renamed FlexShares Trust as
of April 12, 2011. The Trust is authorized to have multiple series or portfolios. The Trust is an open-end, management investment company, registered under the Investment Company Act of 1940, as amended (the 1940 Act). The offering
of the Trusts shares is registered under the Securities Act of 1933, as amended (the Securities Act). This SAI relates to the following diversified funds (each, a Fund and collectively, the Funds):
FlexShares Quality Dividend Index Fund
FlexShares Quality Dividend Dynamic Index Fund
FlexShares Quality Dividend Defensive Index Fund
FlexShares International Quality Dividend Index Fund
FlexShares International Quality Dividend Dynamic Index Fund
FlexShares International Quality
Dividend Defensive Index Fund
The investment objective of each Fund is to seek investment results that correspond generally
to the price and yield performance, before fees and expenses, of a specified benchmark index (each an Underlying Index). Each Fund is managed by NTI, an indirect subsidiary of Northern Trust Corporation.
The Funds offer and issue shares at their net asset value per share (NAV) only in aggregations of a specified number of
shares (each, a Creation Unit or a Creation Unit Aggregation), generally in exchange for a specified basket of securities (the Deposit Securities), together with the deposit of a specified cash payment (the
Cash Component). The shares of each Fund is or will be listed and expected to be traded on the NYSE Arca, Inc., a national securities exchange (the Listing Exchange). Shares trade in the secondary market and elsewhere at
market prices that may be at, above or below NAV. Shares are redeemable only in Creation Unit Aggregations, and, generally, in exchange for portfolio securities and a Cash Component. The number of shares of a Creation Unit of each Fund are as
follows:
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NAME OF FUND
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NUMBER OF SHARES
PER CREATION UNIT
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FlexShares Quality Dividend Index Fund
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100,000
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FlexShares Quality Dividend Dynamic Index Fund
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100,000
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FlexShares Quality Dividend Defensive Index Fund
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100,000
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FlexShares International Quality Dividend Index Fund
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100,000
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FlexShares International Quality Dividend Dynamic Index Fund
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100,000
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FlexShares International Quality Dividend Defensive Index Fund
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100,000
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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 on deposit with the Trust cash at least equal to 110%, which percentage NTI may change from time to time, of the
market value of the missing Deposit Securities. See the Purchase and Redemption of Creation Unit Aggregations section of this SAI. In each instance of cash creations or redemptions, transaction fees may be imposed that will be higher
than the transaction fees associated with in-kind creations or redemptions. In all cases, such conditions and fees will be limited in accordance with the requirements of the U.S. Securities and Exchange Commission (the SEC) applicable to
management investment companies offering redeemable securities.
ADDITIONAL INVESTMENT INFORMATION
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an investment in each Fund is contained in the Prospectus in the Shareholder Information section. The discussion below
supplements, and should be read in conjunction with, that section of the Prospectus.
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Shares of each Fund are listed for trading on at least one Listing Exchange, such as the
NYSE Arca, Inc., and trade throughout the day on the Listing Exchange and other secondary markets. In addition, certain Funds may be traded on certain foreign exchanges. There can be no assurance that the requirements of a Listing Exchange necessary
to maintain the listing of shares of any Fund will continue to be met. A Listing Exchange may, but is not required to, remove the shares of a Fund from listing if (1) following the initial twelve-month period beginning upon the commencement of
trading of a Fund, there are fewer than fifty (50) record and/or beneficial holders of the Fund for thirty (30) or more consecutive trading days, (2) the value of the Underlying Index on which the Fund is based is no longer calculated
or available, (3) the indicative optimized portfolio value (IOPV) of a Fund is no longer calculated or available, or (4) any other event shall occur or condition exist that, in the opinion of the Listing Exchange,
makes further dealings on the Listing Exchange inadvisable. A Listing Exchange will remove the shares of a Fund from listing and trading upon termination of the Fund.
As in the case of other publicly-traded securities, brokers commissions on transactions will be based on negotiated commission rates at customary levels.
In order to provide additional information regarding the indicative value of shares of each Fund, a Listing Exchange disseminates every
fifteen seconds, through the facilities of the Consolidated Tape Association, an updated IOPV for each Fund as calculated by an information provider or market data vendors. 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 value component and a cash component. The securities values included in an IOPV are the values of the Deposit Securities for the applicable 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 Aggregation, it does not necessarily reflect the precise composition of the current portfolio of securities held by the applicable Fund at a particular point in time because the current
portfolio of the Fund may include securities that are not a part of the Deposit Securities. Therefore, a Funds IOPV disseminated during the Listing Exchange trading hours should not be viewed as a real time update of the Funds NAV, which
is calculated only once a day.
In addition to the securities component described in the preceding paragraph, the IOPV for
each Fund includes a cash component consisting of estimated accrued 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 foreign
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 applicable Fund.
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
The
following supplements the information contained in the Prospectus concerning the investment objectives and strategies of the Funds.
The investment objective of each Fund may be changed without shareholder approval. Except as expressly noted below, each Funds investment strategies may be changed without shareholder approval. In
addition to the instruments discussed below and in the Prospectus, each Fund may purchase other types of financial instruments, however designated, whose investment and credit quality characteristics are determined by NTI to be substantially similar
to those of any other investment otherwise permitted by a Funds investment strategies. Each Fund operates as an index fund and will not be actively managed. Adverse performance of a security in a Funds portfolio will ordinarily not
result in the elimination of the security from a Funds portfolio. Each Fund generally will invest under normal circumstances at least 80% of its total assets in the securities of its Underlying Index and, with respect to the FlexShares
International Quality Dividend Index Fund, FlexShares
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International Quality Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Index Fund, in American Depositary Receipts (ADRs) and Global Depositary
Receipts (GDRs) (collectively Depositary Receipts) based on the securities in its Underlying Index. To the extent consistent with its investment policies, each Fund may also invest up to 20% of its assets in cash and cash
equivalents, including shares of money market funds advised by NTI or its affiliates, futures contracts, options on futures contracts, forward currency contracts, options and swaps, as well as securities not included in the Underlying Index, but
which NTI believes will help the Fund track its Underlying Index.
NTI uses a representative sampling strategy to manage the
Funds. However, each Fund reserves the right to use a replication indexing strategy if NTI determines that it is in the best interests of the Fund. Representative sampling is investing in a representative sample of securities that
collectively has an investment profile similar to the Underlying Index. Securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental
characteristics (such as return variability, earnings valuation, duration, maturity and yield) and liquidity measures similar to those of the Underlying Indexes. The Funds may or may not hold all of the securities that are included in the Underlying
Indexes. Replication is an indexing strategy in which a fund invests in substantially all of the securities in its underlying index in approximately the same proportions as in the underlying index.
Each Fund has adopted a non-fundamental investment policy in accordance with Rule 35d-1 under the 1940 Act to invest, under normal
circumstances, at least 80% of the value of its net assets, plus the amount of any borrowings for investment purposes, in securities of the Funds Underlying Index and, with respect to the FlexShares International Quality Dividend Index Fund,
FlexShares International Quality Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Index Fund, in Depositary Receipts. Each Fund has also adopted a policy to provide its shareholders with at least 60 days
prior written notice of any change in such policy. If, subsequent to an investment, the 80% requirement is no longer met, a Funds future investments will be made in a manner that will bring the Fund into compliance with this policy. For these
purposes, net assets is measured at the time of purchase.
DEPOSITARY RECEIPTS.
The FlexShares
International Quality Dividend Index Fund, FlexShares International Quality Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Index Funds investment in securities of non-U.S. issuers may also be in the form of
ADRs and/or GDRs based on the securities in its Underlying Index. ADRs are receipts that are traded in the United States evidencing ownership of the underlying foreign securities and are denominated in U.S. dollars. GDRs are receipts issued by a
non-U.S. financial institution evidencing ownership of underlying foreign or U.S. securities and usually are denominated in foreign currencies. GDRs may not be denominated in the same currency as the securities they represent. Generally, GDRs are
designed for use in the foreign securities markets.
To the extent a Fund invests in ADRs, such ADRs will be listed on a
national securities exchange. To the extent a Fund invests in GDRs, such GDRs will be listed on a foreign exchange. A Fund will not invest in any unlisted Depositary Receipt, any Depositary Receipt that NTI deems to be illiquid or any Depositary
Receipt for which pricing information is not readily available. Generally, all depositary receipts must be sponsored.
EQUITY SWAPS, TOTAL RATE OF RETURN SWAPS AND CURRENCY SWAPS.
Each of the Funds may invest up to 20% of its total assets in swap
agreements if NTI believes that it will help the Fund track its Underlying Index. Swap agreements may be structured in different ways.
Each of the Funds may enter into equity swap agreements to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment is restricted for legal
reasons or is otherwise impracticable. The counterparty to an equity swap agreement will typically be a bank, investment banking firm or broker/dealer. Equity swap agreements may be structured in different ways. For example, a counterparty may agree
to pay a Fund the amount, if any, by which the notional amount of the equity swap agreement would have increased in value had it been invested in particular stocks (or an index of stocks), plus the
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dividends that would have been received on those stocks. In these cases, the Fund may agree to pay to the counterparty the amount, if any, by which that notional amount would have decreased in
value had it been invested in the stocks. Therefore, the return to the Fund on any equity swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount. In
other cases, the counterparty and the Fund may each agree to pay the other the difference between the relative investment performances that would have been achieved if the notional amount of the equity swap agreement had been invested in different
stocks (or indexes of stocks).
Each Fund may enter into total rate of return swaps, which are contracts that obligate a party
to pay or receive interest in exchange for the payment by the other party of the total return generated by a security, a basket of securities, an index or an index component. The FlexShares International Quality Dividend Index Fund, FlexShares
International Quality Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Index Fund also may enter into currency swaps, which involve the exchange of the rights of a Fund and another party to make or receive payments
in specific currencies. Currency swaps involve the exchange of rights of the Fund and another party to make or receive payments in specific currencies.
Some swap transactions, such as total return swaps, are entered into on a net basis,
i.e
., the two payment streams are netted out, with a Fund receiving or paying, as the case may be, only the net
amount of the two payments. A Fund will enter into equity swaps only on a net basis. Payments may be made at the conclusion of the swap agreement or periodically during its term. These swaps do not involve the delivery of securities or other
underlying assets. Accordingly, the risk of loss with respect to equity swaps is limited to the net amount of payments that a Fund is contractually obligated to make. If the other party to an equity swap, or any other swap entered into on a net
basis, defaults, a Funds risk of loss consists of the net amount of payments that such Fund is contractually entitled to receive, if any. In contrast, other transactions may involve the payment of the gross amount owed. For example, currency
swaps usually involve the delivery of the entire principal amount of one designated currency in exchange for the other designated currency. Therefore, the entire principal value of a currency swap is subject to the risk that the other party to the
swap will default on its contractual delivery obligations. To the extent that the amount payable by a Fund under a swap is offset by segregated cash or liquid assets, the Fund and the Investment Adviser believe that such transactions do not
constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to a Funds borrowing restrictions.
A Fund will not enter into any swap transactions unless the unsecured commercial paper, senior debt or claims-paying ability of the other party is rated either A, or A-1 or better by Standard &
Poors Rating Service (S&P) or Fitch Ratings (Fitch); or A or Prime-1 or better by Moodys Investors Service, Inc. (Moodys), or has received a comparable rating from another organization that is recognized
as a nationally recognized statistical rating organization (NRSRO) or, if unrated by such rating organization, is determined to be of comparable quality by the Investment Adviser. If there is a default by the other party to a swap
transaction, a Fund will have contractual remedies pursuant to the agreements related to the transaction. These contractual remedies, however, may be subject to bankruptcy and insolvency laws that may affect such Funds rights as a creditor
(
e.g.
, a Fund may not receive the net amount of payments that it is contractually entitled to receive). The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with markets for other similar instruments which are traded in the interbank market.
The use of equity, total rate of return and currency swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities transactions. If the Investment Adviser is incorrect in its forecasts of market values, interest rates and/or currency exchange rates, the investment performance of a Fund
would be less favorable than it would have been if this investment technique were not used.
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FIXED-INCOME SECURITIES.
Each Fund may invest in fixed-income securities up to 20% of
its total assets to help track its Underlying Index. Fixed-income securities, including corporate debt obligations, generally expose a Fund to the following types of risk: (1) interest rate risk (the potential for fluctuations in bond prices
due to changing interest rates); (2) income risk (the potential for a decline in a Funds income due to falling market interest rates); (3) credit risk (the possibility that a bond issuer will fail to make timely payments of either
interest or principal to a Fund); (4) prepayment risk or call risk (the likelihood that, during periods of falling interest rates, securities with high stated interest rates will be prepaid, or called prior to maturity, requiring a
Fund to invest the proceeds at generally lower interest rates); and (5) extension risk (the likelihood that as interest rates increase, slower than expected principal payments may extend the average life of fixed-income securities, which will
have the effect of locking in a below-market interest rate, increasing the securitys duration and reducing the value of the security).
In periods of declining interest rates, the yield (income from a fixed-income security held by a Fund over a stated period of time) of a fixed-income security may tend to be higher than prevailing market
rates, and in periods of rising interest rates, the yield of a fixed-income security may tend to be lower than prevailing market rates. The value of fixed-income securities in a Funds portfolio generally varies inversely with changes in
interest rates. Prices of fixed-income securities with longer effective maturities are more sensitive to interest rate changes than those with shorter effective maturities.
Corporate debt obligations generally offer less current yield than securities of lower quality, but lower-quality securities generally have less liquidity, greater credit and market risk, and as a result,
more price volatility.
FOREIGN CURRENCY TRANSACTIONS.
To the extent consistent with its investment policies, the
FlexShares International Quality Dividend Index Fund, FlexShares International Quality Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Index Fund may enter into forward foreign currency exchange contracts. These
Funds may enter into forward foreign currency exchange contracts to facilitate local settlements or to protect against currency exposure in connection with its distributions to shareholders. These Funds, however, do not expect to engage in currency
transactions for speculative purposes or for purposes of hedging against declines in the value of a Funds assets that are denominated in a foreign currency.
Forward foreign currency exchange contracts involve an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities, but rather allow a Fund to establish a rate of exchange for a future point in time.
When entering into a contract for the purchase or sale of a security, a Fund may enter into a forward foreign currency exchange contract for the amount of the purchase or sale price to protect against
variations, between the date the security is purchased or sold and the date on which payment is made or received, in the value of the foreign currency relative to the U.S. dollar or other foreign currency.
With respect to any forward foreign currency contract, it generally will not be possible to match precisely the amount covered by that
contract and the value of the securities involved due to the changes in the values of such securities resulting from market movements between the date the forward contract is entered into and the date it matures. In addition, while forward contracts
may offer protection from losses resulting from declines or appreciation in the value of a particular foreign currency, they also limit potential gains, which might result from changes in the value of such currency. A Fund also may incur costs in
connection with forward foreign currency exchange contracts and conversions of foreign currencies and U.S. dollars.
Liquid
assets equal to the amount of a Funds assets that could be required to consummate forward contracts will be segregated except to the extent the contracts are otherwise covered. The segregated assets will
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be valued at market or fair value. If the market or fair value of such assets declines, additional liquid assets will be segregated daily so that the value of the segregated assets will equal the
amount of such commitments by the Fund. A forward contract to sell a foreign currency is covered if a Fund owns the currency (or securities denominated in the currency) underlying the contract, or holds a forward contract (or call
option) permitting a Fund to buy the same currency at a price that is: (i) no higher than the Funds price to sell the currency; or (ii) greater than the Funds price to sell the currency provided the Fund segregates liquid
assets in the amount of the difference. A forward contract to buy a foreign currency is covered if a Fund holds a forward contract (or call option) permitting the Fund to sell the same currency at a price that is: (i) as high as or
higher than the Funds price to buy the currency; or (ii) lower than the Funds price to buy the currency provided the Fund segregates liquid assets in the amount of the difference.
FOREIGN INVESTMENTS GENERAL.
The FlexShares International Quality Dividend Index Fund, FlexShares International Quality
Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Index Fund will invest primarily in foreign equity securities. Each Fund also may invest in U.S. dollar-denominated obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies, instrumentalities or sponsored enterprises, as well as other foreign issuers. These obligations may be issued by supranational entities, including international organizations
(such as the European Coal and Steel Community) designed or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies.
Investment in foreign securities involves special risks. These include market risk, interest rate risk and the risks of investing in
securities of foreign issuers and of companies whose securities are principally traded outside the United States on foreign exchanges or foreign over-the-counter markets and in investments denominated in foreign currencies. Market risk involves the
possibility that security prices will decline over short or even extended periods. The markets tend to be cyclical, with periods of generally rising prices and periods of generally declining prices. These cycles will affect the value of a Fund to
the extent that it invests in foreign securities. In addition, the performance of investments in securities denominated in a foreign currency will depend on the strength of the foreign currency against the U.S. dollar and the interest rate
environment in the country issuing the currency. Absent other events which could otherwise affect the value of a foreign security (such as a change in the political climate or an issuers credit quality), appreciation in the value of the
foreign currency generally can be expected to increase the value of a foreign currency-denominated security in terms of U.S. dollars. A rise in foreign interest rates or decline in the value of the foreign currency relative to the U.S. dollar
generally can be expected to depress the value of a foreign currency-denominated security.
There are other risks and costs
involved in investing in foreign securities which are in addition to the usual risks inherent in domestic investments. Investment in foreign securities involves higher costs than investment in U.S. securities, including higher transaction and
custody costs as well as the imposition of additional taxes by foreign governments. Foreign investments also involve risks associated with the level of currency exchange rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political instability. Future political and economic developments, the possible imposition of withholding taxes on dividend income, the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental restrictions might adversely affect an investment in foreign securities. Additionally, foreign banks and foreign branches of domestic banks are subject to less stringent
reserve requirements, and to different accounting, auditing and recordkeeping requirements. Also, the legal remedies for investors may be more limited than the remedies available in the U.S. Additionally, many countries throughout the world are
dependent on a healthy U.S. economy and are adversely affected when the U.S. economy weakens or its markets decline. For example, the decline in the U.S. subprime mortgage market quickly spread throughout global credit markets, triggering a
liquidity crisis that affected fixed-income and equity markets around the world.
European countries can be significantly
affected by the tight fiscal and monetary controls that the European Economic and Monetary Union (EMU) imposes for membership. Europes economies are diverse,
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its governments are decentralized, and its cultures vary widely. Several European Union (EU) countries, including Greece, Ireland, Italy, Spain and Portugal, have faced budget issues,
some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the euro and the accompanying coordination of fiscal and wage policy among EMU
member countries. Member countries are required to maintain tight control over inflation, public debt, and budget deficit to qualify for membership in the EMU. These requirements can severely limit the ability of EMU member countries to implement
monetary policy to address regional economic conditions.
Although a Fund may invest in securities denominated in foreign
currencies, its portfolio securities and other assets are valued in U.S. dollars. Currency exchange rates may fluctuate significantly over short periods of time causing, together with other factors, the Funds NAV to fluctuate as well. Currency
exchange rates can be affected unpredictably by the intervention or the failure to intervene by U.S. or foreign governments or central banks, or by currency controls or political developments in the U.S. or abroad. To the extent that a Funds
total assets, adjusted to reflect the Funds net position after giving effect to currency transactions, are denominated in the currencies of foreign countries, the Fund will be more susceptible to the risk of adverse economic and political
developments within those countries.
Each Fund also is subject to the possible imposition of exchange control regulations or
freezes on the convertibility of currency. In addition, through the use of forward currency exchange contracts with other instruments, any net currency positions of the FlexShares International Quality Dividend Index Fund, FlexShares International
Quality Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Index Fund may expose it to risks independent of its securities positions. Although the net long and short foreign currency exposure of a Fund will not
exceed its total asset values, to the extent that the Fund is fully invested in foreign securities while also maintaining currency positions, it may be exposed to greater risk than it would have if it did not maintain the currency positions.
Dividends and interest payable on a Funds foreign portfolio securities may be subject to foreign withholding taxes. To
the extent such taxes are not offset by credits or deductions allowed to investors under U.S. federal income tax law, they may reduce the net return to the shareholders. A Funds income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in which it invests, and treaties between the U.S. and such countries may not be available in some cases to reduce the otherwise applicable tax rates. See
Taxes on page 52.
Investors should understand that the expense ratio of the FlexShares International Quality
Dividend Index Fund, FlexShares International Quality Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Index Fund can be expected to be higher than those Funds investing primarily in domestic securities. The costs
attributable to investing abroad usually are higher for several reasons, such as the higher cost of investment research, higher costs of custody of foreign securities, higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving foreign securities.
Foreign markets also have
different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in
settlement could result in temporary periods when a portion of the assets of a Fund remain uninvested and no return is earned on such assets. The inability of a Fund to make intended security purchases or sales due to settlement problems could
result in missed attractive investment opportunities, losses to the Fund due to subsequent declines in value of the portfolio securities or, if the Fund has entered into a contract to sell the securities, possible liability to the purchaser.
The FlexShares International Quality Dividend Index Fund, FlexShares International Quality Dividend Dynamic Index Fund and
FlexShares International Quality Dividend Defensive Index Fund may each invest a significant percentage of its assets in the securities of issuers located in geographic regions with securities
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markets that are highly developed, liquid and subject to extensive regulation, including Europe and Japan. The Economic and Monetary Union of the European Union (EU) requires
compliance with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. Decreasing imports or exports, changes in governmental or EU
regulations on trade, changes in the exchange rate of the euro, the default or threat of default by an EU member country on its sovereign debt, and recessions in EU economies may have a significant adverse effect on the economies of EU member
countries and their trading partners. The European financial markets have recently experienced volatility and adverse trends due to concerns about the rising government debt levels of several European countries, including Greece, Spain, Ireland
Italy and Portugal. Recent concerns over the level and sustainability of the sovereign debt of the United States have aggravated this volatility. A default or debt restructuring by any European country would adversely impact holders of that
countrys debt and sellers of credit default swaps linked to that countrys creditworthiness, which may be located in countries other than those listed above. These events have adversely affected the value and exchange rate of the euro and
may continue to significantly affect the economies of every country in Europe, including countries that do not use the euro and non-EU member countries.
In recent years, Japans economic growth has been substantially below the level of earlier decades, and its economy has experienced periods of recession. Similar to many European countries, Japan is
experiencing a deterioration of its competitiveness. Although Japan is attempting to reform its political process and deregulate its economy to address the situation, there is no guarantee that these efforts will succeed.
Japans economy is heavily dependent upon international trade, and is especially sensitive to trade barriers and disputes. Domestic
or foreign trade sanctions or other protectionist measures may also adversely impact Japans economy. In particular, Japan relies on large imports of agricultural products, raw materials and fuels. Increases in the price of crude oil, a
substantial rise in other commodity prices, or a fall-off in Japans manufactured exports, may affect Japans economy adversely. Additionally, slowdowns in the economies of key trading partners such as the United States, China and
countries in Southeast Asia could have a negative impact on the Japanese economy.
The Japanese yen has fluctuated widely at
times and any increase in its value may cause a decline in exports that could weaken the economy. The Japanese yen may also be affected by currency volatility elsewhere in Asia, particularly Southeast Asia.
The Japanese securities markets are less regulated than the U.S. markets. Evidence has emerged from time to time of distortion of market
prices to serve political or other purposes. Shareholders rights also are not always enforced.
Japan has had
territorial disputes and/or defense issues with China, North Korea, South Korea and Russia, among others. In the past several years, Japans relationship with North Korea has been especially strained because of increased nuclear and military
activity by North Korea. Japans disputes with neighboring countries have the potential to cause uncertainty in the Japanese markets and affect the overall Japanese economy in times of crisis.
In addition, Japan is vulnerable to earthquakes, volcanoes and other natural disasters. The March 2011 earthquakes and tsunami in Japan
have caused volatility in the Japanese securities markets. The longstanding impact of these natural disasters, however, remains unclear.
FUTURES CONTRACTS AND RELATED OPTIONS.
The FlexShares Quality Dividend Index Fund, FlexShares Quality Dividend Dynamic Index Fund and FlexShares Quality Dividend Defensive Index Fund each may
invest up to 20% of its assets in U.S. futures contracts and the FlexShares International Quality Dividend Index Fund, FlexShares International Quality Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Fund may
invest up to 20% of its assets in U.S. and foreign futures
- 8 -
contracts if NTI believes that it will help the Fund track its Underlying Index. Each of these Funds may purchase and sell call and put options on futures contracts. These futures contracts and
options will be used to simulate full investment in the respective Underlying Index, to facilitate trading or to reduce transaction costs. Each of these Funds will only enter into futures contracts and options on futures contracts that are traded on
a U.S. or foreign exchange as applicable. No Fund will use futures or options for speculative purposes.
The Trust, on behalf
of each Fund, has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act, and, therefore, is not subject to registration or regulation as a pool operator under that Act with respect
to the Funds. The Funds will engage in transactions in futures contracts and related options only to the extent such transactions are consistent with the requirement of the Internal Revenue Code of 1986, as amended (the Code) for
maintaining their qualifications as regulated investment companies for federal income tax purposes.
Participation in foreign
futures and foreign options transactions involves the execution and clearing of trades on or subject to the rules of a foreign board of trade. Neither the National Futures Association (the NFA) nor any domestic exchange regulates
activities of any foreign boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures
or foreign options transaction occurs. For these reasons, persons who trade foreign futures or foreign options contracts may not be afforded certain of the protective measures provided by the Commodity Exchange Act, the Commodity Futures Trading
Commissions (the CFTC) regulations and the rules of the NFA and any domestic exchange, including the right to use reparations proceedings before the CFTC and arbitration proceedings provided them by the NFA or any domestic futures
exchange. In particular, a Funds investments in foreign futures or foreign options transactions may not be provided the same protections in respect of transactions on United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract may be affected by any variance in the foreign exchange rate between the time an order is placed and the time it is liquidated, offset or exercised.
In connection with a Funds position in a futures contract or related option, the Fund will segregate liquid assets or will
otherwise cover its position in accordance with applicable SEC requirements.
For a further description of futures contracts
and related options, see Appendix B to this SAI.
ILLIQUID OR RESTRICTED SECURITIES.
To the extent consistent with its
investment policies, each Fund may invest up to 15% of its net assets in securities that are illiquid. The Funds may purchase commercial paper issued pursuant to Section 4(2) of the Securities Act and securities that are not registered under
the Securities Act but can be sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act (Rule 144A Securities). These securities will not be considered illiquid so long as the Investment
Adviser determines, under guidelines approved by the Trusts Board of Trustees, that an adequate trading market exists. This practice could increase the level of illiquidity for Rule 144A Securities during any period that qualified
institutional buyers become uninterested in purchasing these securities.
INVESTMENT COMPANIES.
With respect to the
investments of the Funds in the securities of other investment companies, such investments will be limited so that, as determined after a purchase is made, either: (a) not more than 3% of the total outstanding stock of such investment company
will be owned by a Fund, the Trust as a whole and its affiliated persons (as defined in the 1940 Act); or (b) (i) not more than 5% of the value of the total assets of a Fund will be invested in the securities of any one investment company,
(ii) not more than 10% of the value of its total assets will be invested in the aggregate securities of investment companies as a group and (iii) not more than 3% of the outstanding voting stock of any one investment company will be owned
by the Fund. These limits will not apply to the investment of uninvested cash balances in shares of registered or
- 9 -
unregistered money market funds whether affiliated or unaffiliated. The foregoing exemption, however, only applies to an unregistered money market fund that (i) limits its investments to
those in which a money market fund may invest under Rule 2a-7 of the 1940 Act, and (ii) undertakes to comply with all the other provisions of Rule 2a-7.
Investments by the Funds in other investment companies, including exchange-traded funds (ETFs), will be subject to the limitations of the 1940 Act except as permitted by SEC orders.
Certain investment companies whose securities are purchased by the Funds may not be obligated to redeem such securities in an
amount exceeding 1% of the investment companys total outstanding securities during any period of less than 30 days. Therefore, such securities that exceed this amount may be illiquid.
If required by the 1940 Act, each Fund expects to vote the shares of other investment companies that are held by it in the same
proportion as the vote of all other holders of such securities.
A Fund may adhere to other limitations with respect to its
investments in securities issued by other investment companies if required or permitted by the SEC or deemed to be in the best interests of the Trust.
MISCELLANEOUS.
Securities may be purchased on margin only to obtain such short-term credits as necessary for the clearance of purchase and sales of securities.
OPTIONS.
Each Fund may invest up to 20% of its total assets in options. Each Fund may buy put options, buy call options and write
covered call and secured put options if NTI believes that it will help the Fund track its Underlying Index. Such options may relate to particular securities, foreign and domestic stock indexes, financial instruments, foreign currencies or the yield
differential between two securities (yield curve options) and may or may not be listed on a domestic or foreign securities exchange or issued by the Options Clearing Corporation. A call option for a particular security or currency gives
the purchaser of the option the right to buy, and a writer the obligation to sell, the underlying security at the stated exercise price prior to the expiration of the option, regardless of the market price of the security or currency. The premium
paid to the writer is in consideration for undertaking the obligation under the option contract. A put option for a particular security or currency gives the purchaser the right to sell the security or currency at the stated exercise price to the
expiration date of the option, regardless of the market price of the security or currency. In contrast to an option on a particular security, an option on an index provides the holder with the right to make or receive a cash settlement upon exercise
of the option. The amount of this settlement will be equal to the difference between the closing price of the index at the time of exercise and the exercise price of the option expressed in dollars, times a specified multiple.
Options trading is a highly specialized activity, which entails greater than ordinary investment risk. Options on particular securities
may be more volatile than the underlying instruments and, therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying instruments themselves.
The Funds will write call options only if they are covered. In the case of a call option on a security or currency, the
option is covered if a Fund owns the security or currency underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, liquid
assets in such amount are segregated) upon conversion or exchange of other securities held by it. For a call option on an index, the option is covered if a Fund maintains with its custodian a portfolio of securities substantially replicating the
index, or liquid assets equal to the contract value. A call option also is covered if a Fund holds a call on the same security, currency or index as the call written where the exercise price of the call held is: (i) equal to or less than the
exercise price of the call written; or (ii) greater than the exercise price of the call written provided the Fund segregates liquid assets in the amount of the difference.
- 10 -
All put options written by a Fund would be covered, which means that such Fund will
segregate cash or liquid assets with a value at least equal to the exercise price of the put option or will use the other methods described in the next sentence. A put option also is covered if a Fund holds a put option on the same security or
currency as the option written where the exercise price of the option held is: (i) equal to or higher than the exercise price of the option written; or (ii) less than the exercise price of the option written provided the Fund segregates
liquid assets in the amount of the difference.
With respect to yield curve options, a call (or put) option is covered if a
Fund holds another call (or put) option on the spread between the same two securities and segregates liquid assets sufficient to cover the Funds net liability under the two options. Therefore, a Funds liability for such a covered option
generally is limited to the difference between the amount of the Funds liability under the option written by the Fund less the value of the option held by the Fund. Yield curve options also may be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the option is traded and applicable laws and regulations.
A
Funds obligation to sell subject to a covered call option written by it, or to purchase a security or currency subject to a secured put option written by it, may be terminated prior to the expiration date of the option by the Funds
execution of a closing purchase transaction, which is effected by purchasing on an exchange an option of the same series (
i.e
., same underlying security or currency, exercise price and expiration date) as the option previously written. Such a
purchase does not result in the ownership of an option. A closing purchase transaction will ordinarily be effected to realize a profit on an outstanding option, to prevent an underlying instrument from being called, to permit the sale of the
underlying security or currency or to permit the writing of a new option containing different terms on such underlying security. The cost of such a liquidation purchase plus transaction costs may be greater than the premium received upon the
original option, in which event the Fund will have incurred a loss in the transaction. There is no assurance that a liquid secondary market will exist for any particular option. An option writer, unable to effect a closing purchase transaction, will
not be able to sell the underlying security or currency (in the case of a covered call option) or liquidate the segregated assets (in the case of a secured put option) until the option expires or the optioned security or currency is delivered upon
exercise with the result that the writer in such circumstances will be subject to the risk of market decline or appreciation in the instrument during such period.
When a Fund purchases an option, the premium paid by it is recorded as an asset of the Fund. When a Fund writes an option, an amount equal to the net premium (the premium less the commission) received by
the Fund is included in the liability section of the Funds statement of assets and liabilities as a deferred credit. The amount of this asset or deferred credit will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale price or, in the absence of a sale, the current bid price. If an option purchased by a Fund expires unexercised, the Fund realizes a loss equal to the premium paid. If a
Fund enters into a closing sale transaction on an option purchased by it, the Fund will realize a gain if the premium received by the Fund on the closing transaction is more than the premium paid to purchase the option, or a loss if it is less. If
an option written by a Fund expires on the stipulated expiration date or if a Fund enters into a closing purchase transaction, it will realize a gain (or loss if the cost of a closing purchase transaction exceeds the net premium received when the
option is sold) and the deferred credit related to such option will be eliminated. If an option written by a Fund is exercised, the proceeds of the sale will be increased by the net premium originally received and the Fund will realize a gain or
loss.
There are several risks associated with transactions in certain options. For example, there are significant differences
between the securities, currency and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on an exchange, may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities or
- 11 -
currencies; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
REAL ESTATE INVESTMENT TRUSTS.
To the extent consistent with their
respective investment objectives and strategies, the Funds may invest in real estate investment trusts (REITs). REITs are pooled investment vehicles which invest primarily in real estate or real estate related loans. REITs are generally
classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value. Equity REITs may further be categorized by the type of real estate securities they own, such as apartment properties, retail shopping centers, office and industrial
properties, hotels, healthcare facilities, manufactured housing and mixed property types. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Hybrid REITs combine
the characteristics of both equity and mortgage REITs. Like regulated investment companies such as the Funds, REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the Code. A Fund will
indirectly bear its proportionate share of any expenses paid by REITs in which it invests in addition to the expenses paid by the Fund.
Investing in REITs involves certain unique risks. Equity REITs may be affected by changes in the value of the underlying property owned by such REITs, while mortgage REITs may be affected by the quality
of any credit extended. REITs are dependent upon management skills, are not diversified (except to the extent the Code requires), and are subject to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by
borrowers, self-liquidation, and the possibilities of failing to qualify for the exemption from tax for distributed income under the Code and failing to maintain their exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject
to interest rate risks. Investing in REITs also involves risks similar to those associated with investing in small capitalization companies. That is, they may have limited financial resources, may trade less frequently and in a limited volume and
may be subject to abrupt or erratic price movements in comparison to larger capitalization companies.
In addition, the value
of such securities may fluctuate in response to the markets perception of the creditworthiness of the issuers of mortgage-related securities owned by a Fund. Because investments in mortgage-related securities are interest sensitive, the
ability of the issuer to reinvest or to reinvest favorably in underlying mortgages may be limited by government regulation or tax policy. For example, action by the Board of Governors of the Federal Reserve System to limit the growth of the
nations money supply may cause interest rates to rise and thereby reduce the volume of new residential mortgages. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private
guarantees and/or insurance, there is no assurance that private guarantors or insurers will be able to meet their obligation.
REPURCHASE AGREEMENTS.
To the extent consistent with its investment policies, each Fund may agree to purchase portfolio securities
from financial institutions subject to the sellers agreement to repurchase them at a mutually agreed upon date and price (repurchase agreements). Repurchase agreements are considered to be loans under the 1940 Act. Although the
securities subject to a repurchase agreement may bear maturities exceeding one year, settlement for the repurchase agreement will never be more than one year after the Funds acquisition of the securities and normally will be within a shorter
period of time. Securities subject to repurchase agreements normally are held either by the Trusts custodian or sub-custodian (if any), or in the Federal Reserve/Treasury Book-Entry System. The seller under a repurchase agreement will be
required to maintain the value of the securities subject to the agreement in an amount exceeding the repurchase price
- 12 -
(including accrued interest). Default by the seller would, however, expose the Fund to possible loss because of adverse market action or delay in connection with the disposition of the underlying
obligations. In addition, in the event of a bankruptcy, a Fund could suffer additional losses if a court determines that the Funds interest in the collateral is unenforceable. If a Fund enters into a repurchase agreement with a foreign
financial institution, it may also be subject to risks associated with foreign investments.
REVERSE REPURCHASE AGREEMENTS.
To the extent consistent with its investment policies, each Fund may borrow funds by selling portfolio securities to financial institutions such as banks and broker/dealers and agreeing to repurchase them at a mutually specified date and price
(reverse repurchase agreements). The Funds may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the
reverse repurchase agreement. Reverse repurchase agreements are considered to be borrowings under the 1940 Act. Reverse repurchase agreements involve the risk that the market value of the securities sold by the Fund may decline below the repurchase
price. The Funds will pay interest on amounts obtained pursuant to a reverse repurchase agreement. While reverse repurchase agreements are outstanding, the Funds will segregate liquid assets in an amount at least equal to the market value of the
securities, plus accrued interest, subject to the agreement.
SHORT-TERM INSTRUMENTS AND TEMPORARY INVESTMENTS
.
To the extent consistent with its investment policies, 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 NTI); (ii) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities (including
government-sponsored enterprises); (iii) negotiable certificates of deposit (CDs), bankers acceptances, fixed time deposits, bank notes and other obligations of U.S. and foreign banks (including foreign branches) and similar
institutions; (iv) commercial paper rated at the date of purchase Prime-1 by Moodys, A-1 by S&P or, if unrated, of comparable quality as determined by NTI; (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 foreign banks (including U.S. branches) that, in the opinion of NTI, 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 a 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. Commercial paper represents short-term
unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return. Bankers acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are accepted by a bank, meaning, in effect, that
the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by
the investor, but may be subject to early withdrawal penalties that vary depending upon market conditions and the remaining maturity of the obligation. There are no contractual restrictions on the right to transfer a beneficial interest in a fixed
time deposit to a third party. Bank notes generally rank junior to deposit liabilities of banks and pari passu with other senior, unsecured obligations of the bank. Bank notes are classified as other borrowings on a banks balance
sheet, while deposit notes and certificates of deposit are classified as deposits. Bank notes are not insured by the FDIC or any other insurer. Deposit notes are insured by the FDIC only to the extent of $250,000 per depositor per bank.
The FlexShares International Quality Dividend Index Fund, FlexShares International Quality Dividend Dynamic Index Fund and FlexShares
International Quality Dividend Defensive Index Fund may each invest a
- 13 -
portion of its assets in the obligations of foreign banks and foreign branches of domestic banks. Such obligations include Eurodollar Certificates of Deposit (ECDs), which are U.S.
dollar-denominated certificates of deposit issued by offices of foreign and domestic banks located outside the United States; Eurodollar Time Deposits (ETDs), which are U.S. dollar-denominated deposits in a foreign branch of a U.S. bank
or a foreign bank; Canadian Time Deposits (CTDs), which are essentially the same as ETDs except that they are issued by Canadian offices of major Canadian banks; Schedule Bs, which are obligations issued by Canadian branches of foreign
or domestic banks; Yankee Certificates of Deposit (Yankee CDs), which are U.S. dollar-denominated certificates of deposit issued by a U.S. branch of a foreign bank and held in the United States; and Yankee Bankers Acceptances
(Yankee BAs), which are U.S. dollar-denominated bankers acceptances issued by a U.S. branch of a foreign bank and held in the United States.
TRACKING VARIANCE.
As discussed in the Prospectus, the Funds are subject to the risk of tracking variance. Tracking variance may result from share purchases and redemptions, transaction costs,
expenses and other factors. Share purchases and redemptions may necessitate the purchase and sale of securities by a Fund and the resulting transaction costs which may be substantial because of the number and the characteristics of the securities
held. In addition, transaction costs are incurred because sales of securities received in connection with spin-offs and other corporate reorganizations are made to conform a Funds holdings to its investment objective. Tracking variance also
may occur due to factors such as the size of a Fund, the maintenance of a cash reserve pending investment or to meet expected redemptions, changes made in the Funds designated index or the manner in which the index is calculated or because the
indexing and investment approach of the Investment Adviser does not produce the intended goal of the Fund. Tracking variance is monitored by the Investment Adviser at least quarterly. In the event the performance of a Fund is not comparable to the
performance of its Underlying Index, the Trusts Board of Trustees will evaluate the reasons for the deviation and the availability of corrective measures.
U.S. GOVERNMENT OBLIGATIONS.
Examples of the types of U.S. government obligations that may be acquired by the Funds include U.S. Treasury Bills, Treasury Notes and Treasury Bonds and the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, the Federal National
Mortgage Association, the Government National Mortgage Association, General Services Administration, Central Bank for Cooperatives, the Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks and the Maritime Administration.
Securities guaranteed as to principal and interest by the U.S. government or by its agencies, instrumentalities or sponsored
enterprises also are deemed to include (i) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. government or by any agency, instrumentality or sponsored enterprise thereof,
and (ii) participations in loans made to foreign governments or their agencies that are so guaranteed.
To the extent
consistent with their respective investment objectives and strategies, the Funds may invest in a variety of U.S. Treasury obligations and obligations issued by or guaranteed by the U.S. government or by its agencies, instrumentalities or sponsored
enterprises. Not all government obligations carry the same credit support. No assurance can be given that the U.S. government would provide financial support to its agencies, instrumentalities or sponsored enterprises if it were not obligated to do
so by law. There is no assurance that these commitments will be undertaken or complied with in the future. In addition, the secondary market for certain participations in loans made to foreign governments or their agencies may be limited. In the
absence of a suitable secondary market, such participations generally are considered illiquid.
WARRANTS.
To the extent
consistent with their investment policies, the Funds may purchase warrants and similar rights, which are privileges issued by corporations enabling the owners to subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. The prices of warrants do not necessarily correlate with the prices of the underlying shares. The purchase of
- 14 -
warrants involves the risk that a Fund could lose the purchase value of a warrant if the right to subscribe to additional shares is not exercised prior to the warrants expiration. Also, the
purchase of warrants involves the risk that the effective price paid for the warrant added to the subscription price of the related security may exceed the value of the subscribed securitys market price such as when there is no movement in the
level of the underlying security.
YIELDS AND RATINGS.
The yields on certain obligations, including the instruments in
which the Funds may invest, are dependent on a variety of factors, including general market conditions, conditions in the particular market for the obligation, financial condition of the issuer, size of the offering, maturity of the obligation and
ratings of the issue. The ratings of S&P, Dominion, Moodys and Fitch represent their respective opinions as to the quality of the obligations they undertake to rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may have different market prices.
ZERO COUPON
AND CAPITAL APPRECIATION BONDS AND PAY-IN-KIND SECURITIES.
To the extent consistent with their respective investment objectives and strategies, the Funds may invest in zero coupon bonds, capital appreciation bonds and pay-in-kind
(PIK) securities. Zero coupon and capital appreciation bonds are debt securities issued or sold at a discount from their face value and which do not entitle the holder to any periodic payment of interest prior to maturity or a specified
date. The original issue discount varies depending on the time remaining until maturity or cash payment date, prevailing interest rates, the liquidity of the security and the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest coupons, the coupons themselves or receipts or certificates representing interests in such stripped debt obligations or coupons. The market prices of zero coupon bonds,
capital appreciation bonds and PIK securities generally are more volatile than the market prices of interest bearing securities and are likely to respond to a greater degree to changes in interest rates than interest bearing securities having
similar maturities and credit quality.
PIK securities may be debt obligations or preferred shares that provide the issuer
with the option of paying interest or dividends on such obligations in cash or in the form of additional securities rather than cash. Similar to zero coupon bonds, PIK securities are designed to give an issuer flexibility in managing cash flow. PIK
securities that are debt securities can either be senior or subordinated debt and generally trade flat (i.e., without accrued interest). The trading price of PIK debt securities generally reflects the market value of the underlying debt plus an
amount representing accrued interest since the last interest payment.
Zero coupon bonds, capital appreciation bonds and PIK
securities involve the additional risk that, unlike securities that periodically pay interest to maturity, a Fund will realize no cash until a specified future payment date unless a portion of such securities is sold and, if the issuer of such
securities defaults, the Fund may obtain no return at all on its investment. In addition, even though such securities do not provide for the payment of current interest in cash, the Fund is nonetheless required to accrue income on such investments
for each taxable year and generally is required to distribute such accrued amounts (net of deductible expenses, if any) to avoid being subject to tax. Because no cash generally is received at the time of the accrual, a Fund may be required to
liquidate other portfolio securities to obtain sufficient cash to satisfy federal tax distribution requirements applicable to the Fund.
THE INDEXES
Brief descriptions of the Underlying Indexes of the Funds are provided below. Additional information about each
Funds Underlying Index, including the components and weightings of the Underlying Index, as well as the rules that govern inclusion and weighting in the Underlying Index, is or will be available as of the commencement of investment operations
of the Fund at http://www.northerntrust.com/insights-research/asset-management-research/investment-insights/index-services.
- 15 -
Eligible Securities
In order to be eligible for inclusion in the Northern Trust Quality Dividend Indices, a security must be a constituent of the Northern Trust 1250 Index
SM
. In order to be eligible for inclusion in the Northern Trust
International Quality Dividend Indices, a security must be a constituent of the Northern Trust International Large Cap
Index
SM
. The Northern Trust 1250 Index is a float-adjusted
market capitalization weighted index comprised of the 1250 largest U.S. domiciled companies by market capitalization. The Northern Trust International Large Cap Index is a float-adjusted market capitalization weighted index comprised of eligible
large capitalization securities of developed or emerging market countries as determined by the Index Provider, pursuant to its index methodology. Additional information about the Northern Trust 1250 Index and Northern Trust International Large Cap
Index (also referenced herein as a benchmark or benchmark index), including the components and weightings of the indexes, as well as the rules that govern inclusion and weighting in each of the indexes, is or will be available as of the commencement
of investment operations of the relevant Funds at http://www.northerntrust.com/insights-research/asset-management-research/investment-insights/index-services.
Methodology
The construction of the Underlying Indexes begins with a universe of eligible
securities (above). Securities ranking in the lowest quintile of quality based on a proprietary scoring model, as well as those which do not pay a dividend are removed prior to optimization. All remaining eligible securities are then optimized based
on their exposure to quantitative factors such as: Quality (as defined by the proprietary scoring model), Dividend yield and Beta. The main objective of the optimization is to maximize exposure to the quality factor, realize a dividend yield above
the benchmark index, and achieve the desired beta target all while minimizing the overall risk of the portfolio versus its benchmark as measured by standard risk models.
Rebalancing and Reconstitution
The Underlying Indexes are reconstituted on a quarterly
basis (on the last business day of February/May/August/November), and adjusted intra-quarter only in connection with errors, securities eligibility, and corporate actions, including, but not limited to, initial public offerings and spin-offs.
All changes to constituents and weightings will be announced to the public at least two days prior to reconstitution or rebalancing, and with definitive weights after the close of the reconstitution or rebalancing date before the following
days market opening.
Northern Trust Quality Dividend Index
NUMBER OF COMPONENTS: APPROXIMATELY 181
INCEPTION DATE: December 3, 2012
INDEX DESCRIPTION. The Northern Trust Quality Dividend Index
SM
is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with
an emphasis on long-term capital growth and a targeted overall beta that is similar to that of the Northern Trust 1250 Index (the benchmark). Companies included in the index are selected based on expected dividend payment and fundamental factors
such as profitability, solid management, and reliable cash flow.
Northern Trust Quality Dividend Dynamic Index
NUMBER OF COMPONENTS: APPROXIMATELY 194
INCEPTION DATE: December 3, 2012
INDEX DESCRIPTION. The Northern Trust Quality Dividend Dynamic
Index
SM
is designed to provide exposure to a high-quality
income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is generally between 1.0 to 1.5 times that of the Northern Trust 1250 Index (the benchmark). Companies
included in the index are selected based on expected dividend payment and fundamental factors such as profitability, solid management, and reliable cash flow.
- 16 -
Northern Trust Quality Dividend Defensive Index
NUMBER OF COMPONENTS: APPROXIMATELY 178
INCEPTION DATE: December 3, 2012
INDEX DESCRIPTION. The Northern Trust Quality Dividend Defensive
Index
SM
is designed to provide exposure to a high-quality
income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is generally between 0.5 to 1.0 times that of the Northern Trust 1250 Index (the benchmark). Companies
included in the index are selected based on expected dividend payment and fundamental factors such as profitability, solid management, and reliable cash flow.
Northern Trust International Quality Dividend Index
NUMBER OF COMPONENTS: APPROXIMATELY
232
INCEPTION DATE: December 3, 2012
INDEX DESCRIPTION. The Northern Trust International Quality Dividend
Index
SM
is designed to provide exposure to a high-quality
income-oriented portfolio of long-only international equity securities issued by non-U.S.-based companies, with an emphasis on long-term capital growth and a targeted overall beta that is similar to that of the Northern Trust International Large Cap
Index (the benchmark). Companies that are included in the index are selected based on expected dividend payment and fundamental factors such as profitability, solid management and reliable cash flow.
Northern Trust International Quality Dividend Dynamic Index
NUMBER OF COMPONENTS: APPROXIMATELY 215
INCEPTION DATE: December 3, 2012
INDEX DESCRIPTION. The Northern Trust International Quality Dividend Dynamic Index
SM
is designed to provide exposure to a high-quality income-oriented
portfolio of long-only international equity securities issued by non-U.S.-based companies, with an emphasis on long-term capital growth and a targeted overall beta that is generally between 1.0 to 1.5 times that of the Northern Trust International
Large Cap Index (the benchmark). Companies that are included in the index are selected based on expected dividend payment and fundamental factors such as profitability, solid management and reliable cash flow.
Northern Trust International Quality Dividend Defensive Index
NUMBER OF COMPONENTS: APPROXIMATELY 223
INCEPTION DATE: December 3, 2012
INDEX DESCRIPTION. The Northern Trust International Quality Dividend Defensive Index
SM
is designed to provide exposure to a high-quality income-oriented
portfolio of long-only international equity securities issued by non-U.S.-based companies, with an emphasis on long-term capital growth and a targeted overall beta that is generally between 0.5 to 1.0 times that of the Northern Trust International
Large Cap Index (the benchmark). Companies that are included in the index are selected based on expected dividend payment and fundamental factors such as profitability, solid management and reliable cash flow.
INVESTMENT RESTRICTIONS
Each Fund is subject to the fundamental investment restrictions enumerated below which may be changed with respect to a particular Fund only by a vote of the holders of a majority of such Funds
outstanding shares as described in Description of Shares on page 38.
- 17 -
No Fund may:
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1)
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Make loans, except through: (a) the purchase of debt obligations in accordance with the Funds investment objective and strategies, (b) repurchase
agreements with banks, brokers, dealers and other financial institutions, (c) loans of securities, and (d) loans to affiliates of the Fund to the extent permitted by law.
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2)
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Purchase or sell real estate or real estate limited partnerships, but this restriction shall not prevent a Fund from investing directly or indirectly in portfolio
instruments secured by real estate or interests therein or from acquiring securities of real estate investment trusts or other issuers that deal in real estate.
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3)
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Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Funds (i) from
purchasing or selling options, futures contracts or other derivative instruments, or (ii) from investing in securities or other instruments backed by physical commodities).
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4)
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Act as underwriter of securities, except as a Fund may be deemed to be an underwriter under the Securities Act in connection with the purchase and sale of portfolio
instruments in accordance with its investment objective and portfolio management strategies.
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5)
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Borrow money, except that to the extent permitted by applicable law (a) a Fund may borrow from banks, other affiliated investment companies and other persons, and
may engage in reverse repurchase agreements and other transactions which involve borrowings, in amounts up to 33 1/3% of its total assets (including the amount borrowed) or such other percentage permitted by law, (b) a Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (c) a Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of portfolio securities, and (d) a Fund may purchase securities on margin.
If due to market fluctuations or other reasons a Funds borrowings exceed the limitations stated above, the Trust will promptly reduce the borrowings of a Fund in accordance with the 1940 Act.
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6)
|
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.
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7)
|
Concentrate its investments (
i.e.,
invest 25% or more of its total assets in the securities of a particular industry of group of industries), except that a Fund
will concentrate to approximately the same extent that its Underlying Index concentrates in the securities of such 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.
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8)
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With respect to 75% of the Funds assets (i) purchase securities of any issuer (except securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements involving such securities) if, as a result, more than 5% of the total assets of the Fund would be invested in the securities of such issuer, or (ii) acquire more than 10% of the outstanding voting
securities of any one issuer.
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Notwithstanding other fundamental investment restrictions (including, without
limitation, those restrictions relating to issuer diversification, industry concentration and control), each Fund may purchase securities of other investment companies to the full extent permitted under Section 12 or any other provision of the
1940 Act (or any successor provision thereto) or under any regulation or order of the SEC.
- 18 -
For the purpose of industry concentration, in determining industry classification, the Trust
may use any one or more of the following: the Bloomberg Industry Group Classification, Standard & Poors, J.J. Kenny Municipal Purpose Codes, FT Interactive Industrial Codes, Securities Industry Classification Codes, Global Industry
Classification Standard or the Morgan Stanley Capital International industry classification titles. Also for the purpose of industry concentration, industrial development bonds issued by non-governmental issuers may be considered to be issued by
members of an industry. Non-governmental issuers are issuers other than the U.S. government (including its agencies and instrumentalities) and state or municipal governments and their political subdivisions.
Any Investment Restriction which involves a maximum percentage (other than the restriction set forth above in Investment Restriction
No. 5) will not be considered violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of securities or assets of a Fund. The 1940 Act requires that if the asset coverage for
borrowings at any time falls below the limits described in Investment Restriction No. 5, the Fund will, within three days thereafter (not including Sundays and holidays), reduce the amount of its borrowings to an extent that the net asset
coverage of such borrowings shall conform to such limits.
CONTINUOUS OFFERING
The method by which Creation Unit Aggregations of shares are created and traded may raise certain issues under applicable securities laws.
Because new Creation Unit Aggregations of shares are issued and sold by the Funds on an ongoing basis, at any point a distribution, as such term is used in the Securities Act, may occur. Broker-dealers and other persons are cautioned
that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery requirement
and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an order with the Distributor, breaks them down into constituent shares, and sells such shares directly to customers, or if it chooses to couple the creation of a supply of new shares
with an active selling effort involving solicitation of secondary market demand for shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the
activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms
should also note that dealers who are not underwriters but are effecting transactions in shares, whether or not participating in the distribution of shares, generally are required to deliver a prospectus. This is because the prospectus
delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. Firms that incur a prospectus delivery obligation with respect to shares of the Funds
are reminded that, pursuant to Rule 153 under the Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in connection with a sale on the Listing Exchange is satisfied by the fact
that the prospectus is available at the Listing Exchange upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange.
PORTFOLIO HOLDINGS
The Board of Trustees of the
Trust has adopted a policy on disclosure of portfolio holdings, which it believes is in the best interest of the Funds shareholders. The policy provides that neither the Funds nor their Investment Adviser, Distributor or any agent, or any
employee thereof (Fund Representative) will disclose a Funds portfolio holdings information to any person other than in accordance with the policy. For purposes of the policy, portfolio holdings information means a
Funds actual portfolio holdings, as well as non-public information about its trading strategies or pending transactions including the portfolio holdings, trading strategies or pending transactions of any commingled fund portfolio which
contains identical holdings as the Fund. Under the policy,
- 19 -
neither a Fund nor any Fund Representative may solicit or accept any compensation or other consideration in connection with the disclosure of portfolio holdings information. A Fund Representative
may provide portfolio holdings information to third parties if such information has been included in a Funds public filings with the SEC or is disclosed on the Funds publicly accessible website. Information posted on a Funds
website may be separately provided to any person commencing the day after it is first published on the Funds website.
Under the policy, each business day each Funds portfolio holdings information will be provided to the Distributor or other agent
for dissemination through the facilities of the National Securities Clearing Corporation (NSCC) and/or other fee based subscription services to NSCC members and/or subscribers to those other fee-based subscription services, including
Authorized Participants (defined below) and to entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary market. The Distributor may
also make available portfolio holdings information to other institutional market participants and entities that provide information services. This information typically reflects each Funds anticipated holdings on the following business day.
The Authorized Participants are generally large institutional investors that have been authorized by the Distributor to purchase and redeem large blocks of shares (known as Creation Units) pursuant to legal requirements, including the
exemptive order granted by the SEC, to which the Funds offer and redeem shares.
Other than portfolio holdings information
made available in connection with the creation/redemption process, as discussed above, portfolio holdings information that is not filed with the SEC or posted on the publicly available website may be provided to third parties only in limited
circumstances. Third-party recipients will be required to keep all portfolio holdings information confidential and prohibited from trading on the information they receive. Disclosure to such third parties must be approved in advance by the
Trusts Chief Compliance Officer (CCO). Disclosure to providers of auditing, custody, proxy voting and other similar services for the Funds, as well as rating and ranking organizations, will generally be permitted; however,
information may be disclosed to other third parties (including, without limitation, individuals, institutional investors, and Authorized Participants that sell shares of a Fund) only upon approval by the CCO, who must first determine that the Fund
has a legitimate business purpose for doing so. In general, each recipient of non-public portfolio holdings information must sign a confidentiality and non-trading agreement, although this requirement will not apply when the recipient is otherwise
subject to a duty of confidentiality as determined by the CCO. In accordance with the policy, the recipients who receive non-public portfolio holdings information on an ongoing basis are as follows: the Investment Adviser and its affiliates, the
Funds independent registered public accounting firm, the Funds distributor, administrator and custodian, the Funds legal counsel, Drinker Biddle & Reath LLP, the non-interested Trustees counsel, K&L Gates LLP,
the Funds financial printer, R.R. Donnelly, and the Funds proxy voting service (RiskMetrics Group). These entities are obligated to keep such information confidential. Third-party providers of custodial or accounting services to a Fund
may release non-public portfolio holdings information of the Fund only with the permission of Fund Representatives. From time to time, portfolio holdings information may be provided to broker-dealers solely in connection with a Fund seeking
portfolio securities trading recommendations. In providing this information, reasonable precautions, including limitations on the scope of the portfolio holdings information disclosed, are taken in an effort to avoid any potential misuse of the
disclosed information.
Each Fund discloses its portfolio holdings and the percentages they represent of the Funds net
assets at least monthly, and as often as each day the Fund is open for business, on the Funds website. More information about this disclosure is available at www.flexshares.com. A Fund may publish on the website complete portfolio holdings
information more frequently if it has a legitimate business purpose for doing so. Portfolio holdings will be disclosed through required filings with the SEC. Each Fund files its portfolio holdings with the SEC for each fiscal quarter on Form N-CSR
(with respect to each annual period and semiannual period) and Form N-Q (with respect to the first and third quarters of the Funds fiscal year). Shareholders may obtain a Funds Forms N-CSR and N-Q filings on the SECs website at
www.sec.gov. In addition, the Funds Forms N-CSR and N-Q filings may be reviewed and copied at the SECs public reference room in Washington, DC. You may call the SEC at 1-800-SEC-0330 for information about the SECs website or the
operation of the public reference room.
- 20 -
Under the policy, the Board is to receive information, on a quarterly basis, regarding any
other disclosures of non-public portfolio holdings information that were permitted during the preceding quarter.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Board of Trustees of the Trust is responsible for the management and business and affairs of the Trust. Set forth below is information
about the Trustees and Officers of the FlexShares Trust as of the date of this SAI. A brief statement of their present positions and principal occupations during the past five years is also provided.
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|
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NAME, ADDRESS
(1)
,
AGE, POSITIONS HELD
WITH TRUST AND
LENGTH OF
SERVICE AS TRUSTEE
(2)
|
|
PRINCIPAL OCCUPATIONS DURING PAST FIVE
YEARS
|
|
NUMBER OF
FUNDS IN
FUND
COMPLEX
(3)
OVERSEEN
BY TRUSTEE
|
|
OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE DURING THE
PAST FIVE YEARS
(4)
|
NON-INTERESTED TRUSTEES
|
|
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|
Sarah N. Garvey
Age: 60
Trustee since July 2011
|
|
Vice President of Corporate Relations of The Boeing Company (a
manufacturer of commercial and military airplanes and aerospace products) from 2007 to 2008 and Vice President of State and Local Government Relations from 2004 to 2007;
Chairman of the Board of John G. Shedd Aquarium since 2009;
Chairman of
the Board of Navy Pier since 2011;
Member of the Board of Directors of the Metropolitan Pier and Exposition Authority
since 2010;
Member of the Board of Directors of The Civic Federation since
2004.
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14
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None
|
- 21 -
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NAME, ADDRESS
(1)
,
AGE, POSITIONS HELD
WITH TRUST AND
LENGTH OF
SERVICE AS TRUSTEE
(2)
|
|
PRINCIPAL OCCUPATIONS DURING PAST FIVE
YEARS
|
|
NUMBER OF
FUNDS IN
FUND
COMPLEX
(3)
OVERSEEN
BY TRUSTEE
|
|
OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE DURING THE
PAST FIVE YEARS
(4)
|
Philip G. Hubbard
Age: 61
Trustee since July 2011
|
|
Managing Partner of Solidian Fund, LP and Solidian Management,
LLC (a fund of hedge funds platform for family and friends investments) since 2001;
President of Hubbard Management Group, LLC (a personal investment vehicle) since 2001;
Chairman of the Board of Trustees of the Wheaton College Trust Company, N.A. since
2004;
Member since 1998 of the Board of Trustees of Wheaton College; Vice Chairman since
2009;
Chairman of the Board of Directors of the English Language Institute/China (a
nonprofit educational organization) since 1993;
Member of the Board of Directors of The Film Department, LLC (an independent movie company) from 2008 to 2010;
Member of the
Board of Directors of BMO Harris Bank Winnetka N.A. from 1996 to 2009.
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|
14
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|
None
|
|
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|
|
Eric T. McKissack
Age: 59
Trustee and Chairman
since July
2011
|
|
CEO and Chief Investment Officer of Channing Capital
Management, LLC (a, SEC registered investment adviser) since 2004;
Member of the Board of Directors of ICMA Retirement Corporation (an SEC registered investment adviser providing retirement administration services) since 2005;
Member of the
Board of Trustees, the Investment Committee, and the Finance Committee of the Art Institute of Chicago since 2002;
Member of the RIC Tree of Life Board of the Rehabilitation Institute of Chicago
since 2001.
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14
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None
|
- 22 -
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NAME, ADDRESS
(1)
,
AGE, POSITIONS HELD
WITH TRUST AND
LENGTH OF
SERVICE AS TRUSTEE
(2)
|
|
PRINCIPAL OCCUPATIONS DURING PAST FIVE
YEARS
|
|
NUMBER OF
FUNDS IN
FUND
COMPLEX
(3)
OVERSEEN
BY TRUSTEE
|
|
OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE DURING THE
PAST FIVE YEARS
(4)
|
INTERESTED TRUSTEE
|
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Shundrawn A. Thomas
(5)
Age: 39
Trustee and President
of the Trust
since July 2011
|
|
Managing Director and Global Business Head of the
Exchange-Traded Funds Group at Northern Trust Global Investments since 2010;
President of Northern Trust Securities, Inc. (a wholly owned subsidiary of Northern Trust Corporation) from 2008 to 2010;
Head of
Corporate Strategy at the Northern Trust Corporation from 2005 to 2008;
Member of the Board of Trustees of Wheaton College and Secretary of the Finance Committee, Investment Committee and Compensation Committee since May 2009;
Member of the
Board of Trustees of the Wheaton College Trust Company since 2009;
Member of the Board of Directors of Urban Ministries, Inc. (a publishing and communications company) since 2006;
Partner at
Tree of Life Resources, LLP (a multi media company) since 2005.
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14
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None
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(1)
|
Each Non-Interested Trustee may be contacted by writing to the Trustee, c/o Paul Dykstra, K&L Gates LLP, 70 West Madison Street, Suite 3100, Chicago, IL 60602.
Mr. Thomas may be contacted by writing to him at 50 S. LaSalle St., Chicago, Illinois 60603.
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(2)
|
Each Trustee will hold office for an indefinite term until the earliest of: (i) the next meeting of shareholders, if any, called for the purpose of considering the
election or re-election of such Trustee and until the election and qualification of his or her successor, if any, elected at such meeting; or (ii) the date a Trustee resigns or retires, or a Trustee is removed by the Board of Trustees or
shareholders, in accordance with the Trusts Agreement and Declaration of Trust.
|
(3)
|
The Fund Complex consists of the Trust.
|
(4)
|
This column includes only directorships of companies required to report to the SEC under the Securities Exchange Act of 1934, as amended (
i.e
., public companies)
or other investment companies registered under the 1940 Act.
|
(5)
|
An interested person, as defined by the 1940 Act. Mr. Thomas is deemed to be an interested Trustee because he is an officer of NTI and its
parent company.
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- 23 -
OFFICERS OF THE TRUST
|
|
|
NAME, ADDRESS, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH
OF
SERVICE
(1)
|
|
PRINCIPAL OCCUPATIONS DURING PAST FIVE
YEARS
|
Craig R. Carberry, Esq.
Age: 52
50 South LaSalle Street
Chicago, IL 60603
Secretary since July 2011
|
|
Senior Legal Counsel at The Northern Trust Company since May 2000; Secretary of Northern Trust Investments, Inc. since 2000; Secretary of NT Alpha Strategies Fund since 2004;
Secretary of Northern Trust Global Advisers, Inc. from 2007 to 2012; Secretary of The Northern Trust Company of Connecticut since 2009; Secretary of NETS Trust from 2008 to 2009; Secretary of Northern Institutional Funds since 2010; Secretary of
Northern Funds since 2010; Secretary of Northern Trust Equity Long/Short Strategies Fund since 2011.
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Joseph H. Costello
Age: 38
50 South LaSalle Street
Chicago, IL 60603
Chief Compliance Officer since July 2011
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|
Vice President, The Northern Trust Company and Compliance Manager for Northern Trust Global Investments, since 2003.
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Randal Rein
Age: 42
50 South LaSalle Street
Chicago, IL 60603
Treasurer and Principal Financial Officer
since July 2011
|
|
Senior Vice President of Northern Trust Investments, Inc. since 2010 and Senior Vice President of Fund Administration of the Northern Trust Company through 2010; Vice President of
Fund Administration of The Northern Trust Company from 2007 to 2010; Second Vice President of Fund Administration of The Northern Trust Company from 2002 to 2007.
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Peter K. Ewing
Age: 54
50 South LaSalle Street
Chicago, IL 60603
Vice President since July 2011
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|
Director of ETF Product Management, Northern Trust Investments, Inc. and Senior Vice President, The Northern Trust Company, since September 2010; Chief Operating Officer of
Guggenheim Transparent Value, from July 2009 to January 2010; Senior Vice President, Managing Director of ETF Group, Northern Trust Investments, N.A., and Senior Vice President, The Northern Trust Company, from November 2006 to June
2009.
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Marie E. Dzanis
Age: 45
50 South LaSalle Street
Chicago, IL 60603
Vice President since July 2011
|
|
Director of ETF Sales and Servicing, Northern Trust Investments, Inc. since 2011; Principal and Eastern U.S. Manager for iShares at BlackRock Institutional Trust Company from 2007
to 2010; Vice President and Eastern U.S. Sales Manager, J.P. Morgan Asset Management from 2002 to 2007. Various roles in branch sales/management, Repo Matched Book trader and product sales and development at Smith Barney from 1990 to
2002.
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Peter J. Flood
Age: 55
50 South LaSalle Street
Chicago, IL 60603
Vice President since July 2011
|
|
Director of ETF Investment Strategy, Northern Trust Investments, Inc. since 2010; Portfolio Manager, Northern Trust Investments, Inc. since 2007; Director of Fixed Income Strategy,
Northern Trust Investments, Inc., from 2004 to 2010; Director of Fixed Income Research, Northern Trust Investments, Inc., from 1998 to 2004.
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- 24 -
|
|
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NAME, ADDRESS, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH
OF
SERVICE
(1)
|
|
PRINCIPAL OCCUPATIONS DURING PAST FIVE
YEARS
|
Allison Grant Williams
Age: 56
50 South LaSalle Street
Chicago, IL 60603
Vice President since July 2011
|
|
Chief Administrative Officer of the Exchange-Traded Funds Group at Northern Trust Investments, Inc. since 2011; President and Manager, Grant Partners, L.L.C. from 2006 to 2010;
Managing Director of Client Service and Business Strategy, Holland Capital Management, L.P. from 2004 to 2006.
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Darlene Chappell
Age: 49
50 South LaSalle Street
Chicago, IL 60603
Anti-Money Laundering Officer since
July 2011
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|
Anti-Money Laundering Compliance Officer for Northern Trust Investments, Inc., Northern Trust Securities, Inc. and The Northern Trust Company of Connecticut and NT Alpha Strategies
Fund since 2009 and NT Long/Short Equity Strategies Fund since 2011; Vice President and Compliance Consultant for The Northern Trust Company since 2006; Audit ManagerCompliance Department of National Futures Association from 2000 to
2006.
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Kelli OBrien
Age: 30
70 Fargo Street
Boston, MA 02210
Assistant Secretary since June 2012
|
|
Vice President, Regulatory Administration Advisor, J.P. Morgan Chase Bank, N.A. since 2011; Assistant Vice President, Investor Services Associate Counsel, Brown Brothers Harriman
& Co. from 2008 to 2011; Investor Services Associate, Brown Brothers Harriman & Co. 2006 to 2008.
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(1)
|
Officers hold office at the pleasure of the Board of Trustees until their successors are duly elected and qualified, or until they die, resign, are removed or become
disqualified.
|
Certain officers hold comparable positions with certain other investment companies of which NTI,
JP Morgan Chase Bank, N.A. or an affiliate thereof is the investment adviser, administrator, custodian, or transfer agent.
BOARD
COMMITTEES
The Board has established a standing Audit Committee and a Governance Committee in connection with its
governance of the Trust.
The Audit Committee consists of Mr. Hubbard (chair), Mr. McKissack and Ms. Garvey.
The Board has determined that each member of the Audit Committee is not an interested person as defined in the 1940 Act (an Independent Trustee). The responsibilities of the Audit Committee are to assist the Board in
overseeing the Trusts independent registered public accounting firm, accounting policies and procedures and other areas relating to the Trusts auditing processes. The Audit Committee is responsible for selecting and recommending to the
full Board an independent registered public accounting firm to audit the books and records of the Trust for the ensuing year, and reviews with the firm the scope and results of each audit. The Audit Committee also is responsible for pre-approving
all audit services and any permitted non-audit services to be provided by the independent registered public accounting firm directly to the Trust. The Audit Committee also is responsible for pre-approving permitted non-audit services to be provided
by the independent registered public accounting firm to (1) the Investment Adviser and (2) any entity in a control relationship with the Investment Adviser that provides ongoing services to the Trust, provided that the engagement of the
independent registered public accounting firm relates directly to the operation and financial reporting of the Trust. The scope of the Audit Committees responsibilities is oversight. It is managements responsibility to maintain
appropriate systems for accounting and internal control and the independent registered public accounting firms responsibility to plan and carry out an audit in accordance with the standards of the Public Company Accounting Oversight Board. The
Audit Committee met four times during the last fiscal year ended October 31, 2012.
- 25 -
The Governance Committee consists of Ms. Garvey (chair), Mr. Hubbard and
Mr. McKissack. The Board has determined that each member of the Governance Committee is an Independent Trustee. The functions performed by the Governance Committee include, among other things, selecting and nominating candidates to serve as
Independent Trustees, reviewing and making recommendations regarding Trustee compensation and developing policies regarding Trustee education. In filling Board vacancies, the Governance Committee will consider nominees recommended by shareholders.
Nominee recommendations should be submitted to the Trust at its mailing address stated in the Funds Prospectus and should be directed to the attention of the FlexShares Trust Governance Committee, care of the Secretary of the Trust. The
Governance Committee met three times during the last fiscal year ended October 31, 2012.
LEADERSHIP STRUCTURE AND QUALIFICATIONS OF
THE BOARD OF TRUSTEES
The Board is responsible for oversight of the Trust. The Trust has engaged the Investment Adviser to
manage the Funds of the Trust on a day-to-day basis. The Board oversees the Investment Adviser and certain other principal service providers in the operations of the Funds. The Board currently is composed of four Trustees, three of whom are
Independent Trustees. The Board believes that having Mr. Thomas serve as an interested Trustee brings management insight that is important to certain of the Boards decisions and also in the best interest of shareholders. The Board meets
in-person at regularly scheduled meetings currently anticipated to occur four times in a year. In addition, the Board members may meet in-person or by telephone at special meetings or on an informal basis at other times. The Independent Trustees
also expect to meet separately in executive session, including with independent trustee counsel. The Trustees believe that these meetings will help mitigate conflicts of interest. The Trustees also believe that the executive sessions will allow the
Independent Trustees to deliberate candidly and constructively, separately from management, in a manner that affords honest disagreement and critical questioning.
As stated above, the Board has established a standing Audit Committee and a Governance Committee to assist the Board in fulfilling its oversight responsibilities. The Board also may establish ad hoc
committees or working groups from time to time to aid in its oversight. The Independent Trustees have engaged independent legal counsel to assist them in fulfilling their responsibilities.
The Board is chaired by Eric McKissack, an Independent Trustee. As Chair, this Independent Trustee leads the Board in its activities.
Also, the Chair acts as a member of the Audit and Governance Committees (and may serve as a member of each subsequently established standing or ad hoc committee). The Trustees have determined that the Boards leadership and committee structure
is appropriate because the Board believes that it sets the proper tone to the relationships between the Trust, on the one hand, and the Investment Adviser and certain other principal service providers, on the other, and facilitates the exercise of
the Boards independent judgment in evaluating and managing the relationships.
The Board has concluded that, based on
each Board members experience, qualifications, attributes or skills on an individual basis and in combination with those of the other Board members, each Board member should serve as a Board member. Among other attributes common to all Board
members are their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the various service providers to the Trust, and to exercise reasonable business judgment in the performance of
their duties as Board members. In addition, the Board will take into account the actual service and commitment of the Board members during their tenure in determining whether each should continue to serve. A Board members ability to perform
his or her duties effectively may have been attained through a Board members educational background or professional training; business, consulting, public service or academic positions; experience from service as a Board member of other funds,
public companies, or non-profit entities or other organizations; or other experiences. Set forth below is a brief discussion of the specific experience, qualifications, attributes or skills of each Trustee that led the Board to conclude that he or
she should serve as a Board member.
Ms. Garvey
. Ms. Garvey is a former partner of Deloitte &
Touche LLP and has more than 20 years experience in tax accounting. She previously served as Vice President of Corporate Relations and Vice
- 26 -
President of State and Local Government Relations for Boeing Co. She is chair of the Board of both Chicagos Shedd Aquarium and Navy Pier. She is a Certified Public Accountant and holds
bachelors and masters degrees in accounting.
Mr. Hubbard
. Mr. Hubbard has served for 10 years as
president of the Hubbard Management Group, LLC, and as managing partner for Solidian Fund, L.P. and Solidian Management, LLC. He previously served for 13 years on the Board of Harris Bank Winnetka and is a Certified Public Accountant. In addition,
Mr. Hubbard serves on the Board of Trustees of Wheaton College, is the chairman of the Wheaton College Trust Company and of the English Language Institute/China. He holds a bachelors degree in economics and a masters degree in business
administration.
Mr. McKissack
. Mr. McKissack is the Chief Executive Officer and Chief Investment
Officer of Channing Capital Management, LLC, a registered investment adviser. He also serves on the board of the ICMA Retirement Corporation, a non-profit provider of retirement administration services. Mr. McKissack also serves on the Board of
the Art Institute of Chicago and on the Board of the Rehabilitation Institute of Chicago. He is a Chartered Financial Analyst.
Mr. Thomas
.
Mr. Thomas is the Managing Director and Global Business Head of the Exchange-Traded Funds Group of
Northern Trust Global Investments. Previously he was President and Chief Executive Officer of Northern Trust Securities, Inc. He also served as Senior Vice President, Head of Corporate Strategy for Northern Trust Corporation. Mr. Thomas also is
on the boards of several non-profit corporations and colleges. He holds a bachelors degree in accounting and a masters of business administration.
RISK OVERSIGHT
Investing in general and the operation of funds involve a
variety of risks, such as investment risk, compliance risk, and operational risk, among others. The Board oversees risk as part of its oversight of the Trust. Risk oversight is addressed as part of various regular Board and Audit Committee
activities. The Board reviews reports from, among others, the Investment Adviser, the Trusts Chief Compliance Officer, the Trusts independent registered public accounting firm and counsel, as appropriate, regarding risks faced by the
Trust and the risk management programs of the Investment Adviser and certain service providers. The actual day-to-day risk management with respect to the Trust resides with the Investment Adviser and other service providers to the Trust. The
Investment Adviser has a dedicated risk management function that is headed by a chief risk officer. Although the risk management policies of the Investment Adviser and the service providers are designed to be effective, those policies and their
implementation vary among service providers and over time, and there is no guarantee that they will be effective. Not all risks that may affect the Trust can be identified or processes and controls developed to eliminate or mitigate their occurrence
or effects, and some risks are simply beyond any control of the Trust or the Investment Adviser, its affiliates or other service providers.
TRUSTEE OWNERSHIP OF FUND SHARES
The following table shows the dollar range of shares of the Funds owned by each Trustee in the Funds.
Information as of December 31, 2011
|
|
|
|
|
Name of Non-Interested Trustee
|
|
Dollar Range of Equity Securities in each
Fund
|
|
Aggregate Dollar Range of
Equity
Securities in All
Registered
Investment
Companies Overseen by
Trustee in
Family of Investment
Companies *
|
Sarah N. Garvey
|
|
None
|
|
None
|
Philip G. Hubbard
|
|
None
|
|
None
|
Eric T. McKissack
|
|
None
|
|
None
|
- 27 -
Information as of December 31, 2011
|
|
|
|
|
Name of Interested Trustee
|
|
Dollar Range of Equity Securities in each
Fund
|
|
Aggregate Dollar Range of
Equity
Securities in All
Registered
Investment
Companies Overseen by
Trustee in
Family of Investment
Companies *
|
Shundrawn A. Thomas
|
|
None
|
|
$50,001 $100,000
|
*
|
The Family of Investment Companies consists only of the Funds of FlexShares Trust.
|
TRUSTEE AND OFFICER COMPENSATION
The Trust pays
each Trustee who is not an officer, director or employee of Northern Trust Corporation or its subsidiaries annual fees for his or her services as a Trustee of the Trust and as a member of Board committees. In recognition of their services, the fees
paid to the Board and Committee chairpersons may be larger than the fees paid to other members of the Trusts Board and Committees. The Trustees also are reimbursed for travel expenses incurred in connection with attending such meetings. The
Trust also may pay the incidental costs of a Trustee to attend training or other types of conferences relating to the investment company industry. The Trust does not provide pension or retirement benefits to its Trustees. The Trust has adopted a
deferred compensation plan (the DC Plan) for its Independent Trustees. Under the DC Plan, an Independent Trustee may elect to defer all or a portion of his or her compensation. The amount deferred is adjusted periodically based upon the
performance of the investment options(s) selected by the Trustees. The investment options currently under the DC Plan are the FlexShares Morningstar US Market Factor Tilt Index Fund and the FlexShares iBoxx 5-Year Target Duration TIPS Index Fund.
The following table sets forth important information with respect to the compensation of each non-interested and interested
Trustee of the Trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Aggregate
Compensation
from Trust
|
|
|
FlexShares
Quality
Dividend
Index Fund*
|
|
|
FlexShares
Quality
Dividend
Dynamic
Index Fund*
|
|
|
FlexShares
Quality
Dividend
Defensive
Index Fund*
|
|
|
FlexShares
International
Quality
Dividend
Index Fund*
|
|
|
FlexShares
International
Quality
Dividend
Dynamic
Index Fund*
|
|
|
FlexShares
International
Quality
Dividend
Defensive
Index Fund*
|
|
Non-Interested Trustees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sarah N. Garvey
|
|
$
|
50,000
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
Philip G. Hubbard
|
|
$
|
50,000
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
Eric T. McKissack
|
|
$
|
50,000
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
|
$
|
580
|
|
Interested Trustee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shundrawn A. Thomas
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
*As of
October 31, 2012, the Fund had not yet commenced operations. Trustee compensation amounts reflect estimated amounts for the fiscal year ending October 31, 2013.
The Trusts officers do not receive fees from the Trust for services in such capacities. NTI receives fees from the Trust as Investment Adviser. Messrs. Carberry, Costello, Ewing, Flood, Rein and
Thomas and Mses. Chappell, Dzanis and Williams are officers of NTI and/or its affiliates.
CONTROL PERSONS AND
PRINCIPAL HOLDERS OF SECURITIES
As of the date of this SAI, there were no record or beneficial owners of 5% or more of the
shares of the Funds. The Trustees and officers of the Trust collectively owned less than 1% of each of the Funds outstanding shares as of the date of this SAI.
- 28 -
CODE OF ETHICS
The Trust and its Investment Adviser have adopted codes of ethics (the Codes of Ethics) under Rule 17j-1 of the 1940 Act.
The Codes of Ethics permit personnel, subject to the Codes of Ethics and their provisions, to invest in securities, including securities that may be purchased or held by the Trust.
INVESTMENT ADVISER
NTI, a subsidiary of The
Northern Trust Company (TNTC) and an indirect subsidiary of Northern Trust Corporation, serves as the Investment Adviser of the Funds. Northern Trust Corporation is regulated by the Board of Governors of the Federal Reserve System as a
financial holding company under the U.S. Bank Holding Company Act of 1956, as amended. NTI is located at 50 South LaSalle Street, Chicago, Illinois 60603.
NTI is an Illinois State Banking Corporation and an investment adviser registered under the Investment Advisers Act of 1940, as amended. It primarily manages assets for institutional and individual
separately managed accounts, investment companies and bank common and collective funds.
TNTC is the principal subsidiary of
Northern Trust Corporation. TNTC is located at 50 South LaSalle Street, Chicago, Illinois 60603.
TNTC is a member of the
Federal Reserve System. Since 1889, TNTC has administered and managed assets for individuals, institutions and corporations. Unless otherwise indicated, NTI and TNTC are referred to collectively in this SAI as Northern Trust.
As of June 30, 2012, Northern Trust Corporation, through its affiliates, had assets under custody of $4.56 trillion, and assets
under investment management of $704.3 billion.
Investment Advisory and Ancillary Services Agreement
Under the Trusts Investment Advisory and Ancillary Services Agreement with the Investment Adviser for the Funds (the Advisory
Agreement), the Investment Adviser, subject to the general supervision of the Trusts Board of Trustees, makes decisions with respect to, and places orders for, all purchases and sales of portfolio securities for each Fund and also
provides certain ancillary services.
The Investment Adviser also is responsible for monitoring and preserving the records
required to be maintained under the regulations of the SEC (with certain exceptions unrelated to its activities for the FlexShares Trust). In making investment recommendations for the Funds, if any, investment advisory personnel may not inquire or
take into consideration whether issuers of securities proposed for purchase or sale for the Funds accounts are customers of TNTCs commercial banking department. These requirements are designed to prevent investment advisory personnel for
the Funds from knowing which companies have commercial business with TNTC and from purchasing securities where they know the proceeds will be used to repay loans to the bank.
The Advisory Agreement has been approved by the Board of Trustees, including the non-interested Trustees and the initial shareholder of each Fund prior to the initial offering of shares of the
Fund.
The Advisory Agreement provides that generally in selecting brokers or dealers to place orders for transactions on:
(i) common and preferred stocks, the Investment Adviser shall use its best judgment to obtain the best overall terms available; and (ii) on bonds and other fixed-income obligations, the Investment Adviser shall attempt to obtain best net
price and execution or, use its best judgment to obtain the best overall terms available.
Transactions on U.S. stock
exchanges, and increasingly equity securities traded over-the-counter, involve the payment of negotiated brokerage commissions. Over-the-counter transactions in equity securities also may involve the payment of negotiated commissions to brokers.
Transactions on foreign stock exchanges involve payment for brokerage commissions, which generally are fixed by applicable regulatory bodies. Many
- 29 -
over-the-counter issues, including corporate debt and government securities, are normally traded on a net basis (
i.e
., without commission) through dealers, or otherwise involve
transactions directly with the issuer of an instrument. With respect to over-the-counter transactions, the Investment Adviser will often deal directly with dealers who make a market in the instruments involved except in those circumstances where
more favorable prices and execution are available elsewhere. The cost of foreign and domestic securities purchased from underwriters includes an underwriting commission or concession, and the prices at which securities are purchased from and sold to
dealers include a dealers mark-up or mark-down. On exchanges on which commissions are negotiated, the cost of transactions may vary among different brokers. In assessing the best overall terms available for any transaction, the Investment
Adviser is to consider all factors it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission,
if any, both for the specific transaction and on a continuing basis. In evaluating the best overall terms available and in selecting the broker or dealer to execute a particular transaction, the Investment Adviser may consider the brokerage and
research services provided to the Funds and/or other accounts over which the Investment Adviser or an affiliate exercises investment discretion. A broker or dealer providing brokerage and/or research services may receive a higher commission than
another broker or dealer would receive for the same transaction. These brokerage and research services may include but are not limited to, furnishing of advice, either directly or through publications or writings, as to the value of securities, the
advisability of investing in securities and the availability of securities or purchasers or sellers of securities. The Investment Adviser also may obtain economic statistics, forecasting services, industry and company analyses, portfolio strategies,
quantitative data, quotation services, order management systems for certain purposes, certain news services, credit rating services, testing services, execution services, market information systems, consulting services from economists and political
analysts and computer software or on-line data feeds. These services and products may disproportionately benefit other accounts. For example, research or other services paid for through the Funds commissions may not be used in managing the
Funds. In addition, other accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with products or services that may be provided to the Funds and to such other accounts. To the
extent that the Investment Adviser uses soft dollars, it will not have to pay for those products or services itself. The Investment Adviser may receive research that is bundled with the trade execution, clearing, and/or settlement services provided
by a particular broker-dealer. In that event, the research will effectively be paid for by client commissions that will also be used to pay for execution, clearing and settlement services provided by the broker-dealer and will not be paid by the
Investment Adviser.
The Investment Adviser and its affiliates also receive products and services that provide both research
and non-research benefits to them (mixed-use items). The research portion of mixed-use items may be paid for with soft dollars. When paying for the research portion of mixed-use items with soft dollars, the Investment Adviser must make a
good faith allocation between the cost of the research portion and the cost of the non-research portion of the mixed-use items. The Investment Adviser will pay for the non-research portion of the mixed-use items with hard dollars.
Supplemental research information so received is in addition to, and not in lieu of, services required to be performed by the Investment
Adviser and does not reduce the advisory fees payable to the Investment Adviser by the Funds. The Trustees will periodically review the commissions paid by the Funds to consider whether the commissions paid over representative periods of time appear
to be reasonable in relation to the benefits inuring to the Funds. It is possible that certain of the supplemental research or other services received will primarily benefit one or more other investment companies or other accounts. Conversely, a
Fund may be the primary beneficiary of the research or services received as a result of portfolio transactions effected for such other account or investment company.
The Funds may participate, if and when practicable, in bidding for the purchase of portfolio securities directly from an issuer in order to take advantage of the lower purchase price available to members
of a bidding group. The Funds will engage in this practice, however, only when the Investment Adviser believes such practice to be in the Funds interests.
- 30 -
On occasions when the Investment Adviser deems the purchase or sale of a security to be in
the best interests of a Fund as well as other fiduciary or agency accounts of the Investment Adviser, the Advisory Agreement provides that the Investment Adviser, to the extent permitted by applicable laws and regulations, may aggregate the
securities to be sold or purchased for the Funds with those to be sold or purchased for such other accounts in order to obtain the best net price and execution. In such an event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Adviser in the manner it considers to be most equitable and consistent with its fiduciary obligations to the Fund and its other accounts involved. In some instances, this procedure
may adversely affect the size of the position obtainable for a Fund or the amount of the securities that are able to be sold for a Fund. To the extent that the execution and price available from more than one broker or dealer are believed to be
comparable, the Advisory Agreement permits the Investment Adviser, at its discretion but subject to applicable law, to select the executing broker or dealer on the basis of the Investment Advisers opinion of the reliability and quality of the
broker or dealer.
The Advisory Agreement provides that the Investment Adviser may render similar services to others so long
as its services under the Advisory Agreement are not impaired thereby. The Advisory Agreement also provides that the Trust will indemnify the Investment Adviser against certain liabilities (including liabilities under the federal securities laws
relating to untrue statements or omissions of material fact and actions that are in accordance with the terms of the Advisory Agreement) or, in lieu thereof, contribute to resulting losses.
Pursuant to the Advisory Agreement, the Investment Adviser is responsible for most of the operating expenses of the Funds, except:
(i) its advisory fees payable under the Advisory Agreement; (ii) distribution fees and expenses paid by the Trust under any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act; (iii) interest expenses;
(iv) brokerage expenses and other expenses (such as stamp taxes) in connection with the execution of portfolio transactions or in connection with creation and redemption transactions; (v) compensation and expenses of the non-interested
trustees; (vi) compensation and expenses of counsel to the non-interested trustees; (vii) tax expenses; and (viii) extraordinary expenses, as determined under generally accepted accounting principles. For its services to each Fund,
the Investment Adviser is entitled to an advisory fee, computed daily and payable monthly, at annual rates set forth in the table below (expressed as a percentage of each Funds respective average daily net assets).
|
|
|
NAME OF FUND
|
|
INVESTMENT ADVISORY FEE
|
FlexShares Quality Dividend Index Fund
|
|
0.37%
|
FlexShares Quality Dividend Dynamic Index Fund
|
|
0.37%
|
FlexShares Quality Dividend Defensive Index Fund
|
|
0.37%
|
FlexShares International Quality Dividend Index Fund
|
|
0.47%
|
FlexShares International Quality Dividend Dynamic Index Fund
|
|
0.47%
|
FlexShares International Quality Dividend Defensive Index Fund
|
|
0.47%
|
Unless sooner terminated, the Trusts Advisory Agreement will continue in effect with respect to a
particular Fund until June 30, 2013, and thereafter for successive 12-month periods, provided that the continuance is approved at least annually (i) by the vote of a majority of the Trustees who are not parties to the agreement or
interested persons (as such term is defined in the 1940 Act) of any party thereto, cast in person at a meeting called for the purpose of voting on such approval and (ii) by the Trustees or by the vote of a majority of the
outstanding shares of such Fund (as defined under Description of Shares). The Advisory Agreement is terminable at any time without penalty by the Trust (by specified Trustee or shareholder action) or by the Investment Adviser on 60
days written notice.
NTI has contractually agreed to reimburse each Fund the fees and expenses of the non-interested
trustees and the legal counsel to the non-interested trustees allocated to such Fund until December 10, 2013. After this date,
- 31 -
NTI and a Fund may mutually agree to extend the contractual arrangement. The Board of Trustees may terminate the contractual arrangement at any time if it determines that it is in the best
interest of a Fund and its shareholders.
Under the Advisory Agreement with FlexShares Trust, Northern Trust Corporation
agrees that the name FlexShares may be used in connection with the Trusts business on a royalty-free basis. Northern Trust Corporation has reserved to itself the right to grant the non-exclusive right to use the name
FlexShares to any other person. The Advisory Agreement provides that at such time as the Agreement is no longer in effect, the Trust will cease using the name FlexShares.
PORTFOLIO MANAGERS
|
|
|
NAME OF FUND
|
|
PORTFOLIO MANAGERS
|
FlexShares Quality Dividend Index Fund
|
|
Chad M. Rakvin, Shaun Murphy and Jordan Dekhayser
|
FlexShares Quality Dividend Dynamic Index Fund
|
|
Chad M. Rakvin, Shaun Murphy and Jordan Dekhayser
|
FlexShares Quality Dividend Defensive Index Fund
|
|
Chad M. Rakvin, Shaun Murphy and Jordan Dekhayser
|
FlexShares International Quality Dividend Index Fund
|
|
Chad M. Rakvin, Shaun Murphy and Jordan Dekhayser
|
FlexShares International Quality Dividend Dynamic Index Fund
|
|
Chad M. Rakvin, Shaun Murphy and Jordan Dekhayser
|
FlexShares International Quality Dividend Defensive Index Fund
|
|
Chad M. Rakvin, Shaun Murphy and Jordan Dekhayser
|
Accounts Managed by Portfolio Managers
The table below discloses accounts within each type of category listed below for which
Chad M. Rakvin
was jointly and primarily responsible for day-to-day portfolio management as of June 30,
2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Accounts
|
|
Total # of
Accounts
Managed
|
|
|
Total Assets
(in
Millions)
|
|
|
# of Accounts
Managed that
Advisory Fee
is Based on
Performance
|
|
|
Total Assets that
Advisory Fee
is Based on
Performance
|
|
Other Registered Investment Companies*:
|
|
|
28
|
|
|
$
|
21,086.3
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Pooled Investment Vehicles:
|
|
|
55
|
|
|
$
|
110,092.2
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Accounts:
|
|
|
68
|
|
|
$
|
32,653.2
|
|
|
|
0
|
|
|
$
|
0
|
|
*This includes other FlexShares Funds other than each Fund.
The table below discloses accounts within each type of category listed below for which
Shaun Murphy
was jointly and primarily responsible for
day-to-day portfolio management as of June 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Accounts
|
|
Total # of
Accounts
Managed
|
|
|
Total Assets
(in
Millions)
|
|
|
# of Accounts
Managed that
Advisory Fee
is Based on
Performance
|
|
|
Total Assets that
Advisory Fee
is Based on
Performance
|
|
Other Registered Investment Companies*:
|
|
|
10
|
|
|
$
|
5,402.2
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Pooled Investment Vehicles:
|
|
|
23
|
|
|
$
|
23,877.2
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Accounts:
|
|
|
21
|
|
|
$
|
12,046.2
|
|
|
|
0
|
|
|
$
|
0
|
|
*This includes other FlexShares Funds other than each Fund.
- 32 -
The table below discloses accounts within each type of category listed below for which
Jordan Dekhayser
was jointly and primarily responsible for day-to-day portfolio management as of June 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Accounts
|
|
Total # of
Accounts
Managed
|
|
|
Total Assets
(in
Millions)
|
|
|
# of Accounts
Managed that
Advisory Fee
is Based on
Performance
|
|
|
Total Assets that
Advisory Fee
is Based on
Performance
|
|
Other Registered Investment Companies*:
|
|
|
7
|
|
|
$
|
2,700.0
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Pooled Investment Vehicles:
|
|
|
13
|
|
|
$
|
4,800.0
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Accounts:
|
|
|
11
|
|
|
$
|
7,000.0
|
|
|
|
0
|
|
|
$
|
0
|
|
*This includes other FlexShares Funds other than each Fund.
Material Conflicts of Interest
The Investment Advisers portfolio managers are often responsible for managing one or more FlexShares Trust Funds, as well as other accounts, including mutual funds, separate accounts and other
pooled investment vehicles. A Funds manager may manage a mutual fund, separate account or other pooled investment vehicle that may have a materially higher or lower fee arrangement with the Investment Adviser than the Fund. The side-by-side
management of these accounts may raise potential conflicts of interest relating to cross trading, the allocation of investment opportunities and the aggregation and allocation of trades. In addition, while portfolio managers generally only manage
accounts with similar investment strategies, it is possible, due to varying investment restrictions among accounts and for other reasons, that certain investments could be made for some accounts and not others or conflicting investment positions
could be taken among accounts. The Investment Adviser has a fiduciary responsibility to manage all client accounts in a fair and equitable manner. It seeks to provide best execution of all securities transactions and aggregate and then allocate
securities to client accounts in a fair and timely manner. To this end, the Investment Adviser has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. In
addition, the Investment Adviser and the Trust have adopted policies limiting the circumstances under which cross-trades may be effected between the Funds and another client account. The Investment Adviser conducts periodic reviews of trades for
consistency with these policies.
The Investment Adviser will give advice to and make investment decisions for the Trust as it
believes is in the fiduciary interest of the Trust. Advice given to the Trust or investment decisions made for the Trust may differ from, and may conflict with, advice given or investment decisions made for the Investment Adviser or its affiliates
or other funds or accounts managed by the Investment Adviser or its affiliates. For example, other funds or accounts managed by the Investment Adviser may sell short securities of an issuer in which the Trust has taken, or will take, a long position
in the same securities. The subsequent purchase may result in an increase of the price of the underlying position in the short sale exposure of the Trust and such increase in price would be to the Trusts detriment. Conflicts may also arise
because portfolio decisions regarding the Trust may benefit the Investment Adviser or its affiliates or another account or fund managed by the Investment Adviser or its affiliates. For example, the sale of a long position or establishment of a short
position by the Trust may impair the price of the same security sold short by (and therefore benefit) another account or fund managed by the Investment Adviser or its affiliates, and the purchase of a security or covering a short position in a
security by the Trust may increase the price of the same security held by (and therefore benefit) another account or fund managed by the Investment Adviser or its affiliates. Actions taken with respect to the Investment Adviser and its
affiliates other funds or accounts managed by them may adversely impact the Funds, and actions taken by the Funds may benefit the Investment Adviser or its affiliates or its other funds or accounts.
To the extent permitted by applicable law, the Investment Adviser may make payments to authorized dealers and other financial
intermediaries (Intermediaries) from time to time to promote the Funds. These payments may be made out of the Investment Advisers assets, or amounts payable to the Investment Adviser
- 33 -
rather than as a separately identifiable charge to the Funds. These payments may compensate Intermediaries for, among other things: marketing the Funds; access to the Intermediaries
registered representatives or salespersons, including at conferences and other meetings; assistance in training and education of personnel; marketing support; and/or other specified services intended to assist in the distribution and marketing of
the Funds. The payments may also, to the extent permitted by applicable regulations, contribute to various non-cash and cash incentive arrangements to promote certain products, as well as sponsor various educational programs, sales contests and/or,
administrative services.
Portfolio Manager Compensation Structure
The compensation for the portfolio managers of the Funds is based on the competitive marketplace and consists of a fixed base salary plus
a variable annual cash incentive award. In addition, non-cash incentives, such as stock options or restricted stock of Northern Trust Corporation, may be awarded from time to time. The annual incentive award is discretionary and is based on a
quantitative and qualitative evaluation of each portfolio managers investment performance and contribution to his or her respective team plus the financial performance of the investment business unit and Northern Trust Corporation as a whole.
The annual incentive award is not based on performance of the Funds or the amount of assets held in the Funds. Moreover, no material differences exist between the compensation structure for Fund accounts and other types of accounts.
Disclosure of Securities Ownership
As of the date of this SAI, no portfolio manager owned shares of any Fund.
PROXY VOTING
The Trust has delegated the voting of portfolio securities to its Investment Adviser. The Investment
Adviser has adopted proxy voting policies and procedures applicable to Northern Trust Corporation and its affiliates (the Proxy Voting Policy) for the voting of proxies on behalf of client accounts for which the Investment Adviser has
voting discretion, including the Funds. Under the Proxy Voting Policy, shares are to be voted in the best interests of the Funds.
A Proxy Committee comprised of senior investment and compliance officers of the Investment Adviser has adopted certain guidelines (the Proxy Guidelines) concerning various corporate governance
issues. The Proxy Committee has the responsibility for the content, interpretation and application of the Proxy Guidelines and may apply these Proxy Guidelines with a measure of flexibility. The Investment Adviser has retained an independent third
party (the Service Firm) to review proxy proposals and to make voting recommendations to the Proxy Committee in a manner consistent with the Proxy Guidelines. The Proxy Committee will apply the Proxy Guidelines as discussed below to any
such recommendation.
The Proxy Guidelines provide that the Investment Adviser will generally vote for or against various
proxy proposals, usually based upon certain specified criteria. As an example, the Proxy Guidelines provide that the Investment Adviser will generally vote in favor of proposals to:
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Repeal existing classified boards and elect directors on an annual basis;
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Adopt a written majority voting or withhold policy (in situations in which a company has not previously adopted such a policy);
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Lower supermajority shareholder vote requirements for charter and bylaw amendments;
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Lower supermajority shareholder vote requirements for mergers and other business combinations;
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Increase common share authorizations for a stock split;
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Implement a reverse stock split;
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Approve an ESOP (employee stock ownership plan) or other broad based employee stock purchase or ownership plan, or increase authorized shares for
existing plans; and
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Adopt certain social and environmental issues regarding discrimination, disclosures of environmental impact and corporate sustainability, when
appropriate.
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The Proxy Guidelines also provide that the Investment Adviser will generally vote against
proposals to:
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Classify the board of directors;
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Require that poison pill plans be submitted for shareholder ratification;
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Adopt dual class exchange offers or dual class recapitalizations;
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Require a supermajority shareholder vote to approve mergers and other significant business combinations;
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Require a supermajority shareholder vote to approve charter and bylaw amendments; and
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Adopt certain social and environmental proposals deemed unwarranted by the companys board of directors.
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In certain circumstances, the Proxy Guidelines provide that proxy proposals will be addressed on a case-by-case basis, including those regarding
executive and director compensation plans, mergers and acquisitions, ratification of poison pill plans, a change in the companys state of incorporation and an increase in authorized common stock.
Except as otherwise provided in the Proxy Voting Policy, the Proxy Committee may vote proxies contrary to the recommendations of the
Service Firm if it determines that such action is in the best interest of the Fund. In exercising its discretion, the Proxy Committee may take into account a variety of factors relating to the matter under consideration, the nature of the proposal
and the company involved. As a result, the Proxy Committee may vote in one manner in the case of one company and in a different manner in the case of another where, for example, the past history of the company, the character and integrity of its
management, the role of outside directors, and the companys record of producing performance for investors justifies a high degree of confidence in the company and the effect of the proposal on the value of the investment. Similarly, poor past
performance, uncertainties about management and future directions, and other factors may lead the Proxy Committee to conclude that particular proposals present unacceptable investment risks and should not be supported. The Proxy Committee also
evaluates proposals in context. A particular proposal may be acceptable standing alone, but objectionable when part of an existing or proposed package. Special circumstances may also justify casting different votes for different clients with respect
to the same proxy vote.
The Investment Adviser may occasionally be subject to conflicts of interest in the voting of proxies
due to business or personal relationships with persons having an interest in the outcome of certain votes. For example, the Investment Adviser may provide trust, custody, investment management, brokerage, underwriting, banking and related services
to accounts owned or controlled by companies whose management is soliciting proxies. Occasionally, the Investment Adviser may also have business or personal relationships with other proponents of proxy proposals, participants in proxy contests,
corporate directors or candidates for directorships. The Investment Adviser may also be required to vote proxies for securities issued by Northern Trust Corporation or its affiliates or on matters in which the Investment Adviser has a direct
financial interest, such as shareholder approval of a change in the advisory fees paid by a Fund. The Investment Adviser seeks to address such conflicts of interest through various measures, including the establishment, composition and authority of
the Proxy Committee and the retention of the Service Firm to perform proxy review and vote recommendation functions. The Proxy Committee has the responsibility to determine whether a proxy vote involves a conflict of interest and how the conflict
should be addressed in conformance with the Proxy Voting Policy. The Proxy Committee may resolve such conflicts in any of a variety of ways, including without limitation the following: (i) voting in accordance with the Proxy Guidelines based
recommendation of the Service Firm; (ii) voting in accordance with the recommendation of an independent fiduciary appointed for that purpose; (iii) voting pursuant to client direction by seeking instructions from the Board of Trustees;
(iv) or by voting pursuant to a mirror voting arrangement under which shares are voted in the same manner and proportion as shares over which the
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Investment Adviser does not have voting discretion. The method selected by the Proxy Committee may vary depending upon the facts and circumstances of each situation.
The Investment Adviser may choose not to vote proxies in certain situations. This may occur, for example, in situations where the
exercise of voting rights could restrict the ability to freely trade the security in question (as is the case, for example, in certain foreign jurisdictions known as blocking markets). In circumstances in which the Service Firm does not
provide recommendations for a particular proxy, the Proxy Committee may obtain recommendations from analysts at the Investment Adviser who review the issuer in question or the industry in general. The Proxy Committee will apply the Proxy Guidelines
as discussed above to any such recommendation.
This summary of the Trusts Proxy Voting Policies and Proxy Guidelines is
also posted in the resources section of the Trusts website. You may also obtain, upon request and without charge, a paper copy of the Trusts Proxy Voting Policies and Proxy Guidelines or a Statement of Additional Information by calling
1-855-FLEXETF (1-855-353-9383).
Information regarding how the Funds voted proxies, if any, relating to portfolio securities
for the 12-month period ended June 30, 2013 will be made available, without charge, upon request, by contacting the Investment Adviser or by visiting the SECs website at www.sec.gov.
ADMINISTRATOR
J.P. Morgan Chase Bank, N.A. (the Administrator), One Beacon Street, Boston, Massachusetts 02108, acts as Administrator for the Funds under a Fund Servicing Agreement with the Trust. Subject
to the general supervision of the Trusts Board of Trustees, the Administrator provides supervision of all aspects of the Trusts non-investment advisory operations and performs various administration, compliance, accounting and regulatory
services, including but not limited to: (i) providing office facilities and furnishing corporate officers for the Trust; (ii) coordination, preparation and review of financial statements; (iii) monitoring compliance with federal tax
and securities laws; (iv) performing certain functions ordinarily performed by the office of a corporate treasurer, and furnishing the services and facilities ordinarily incident thereto, such as expense accrual monitoring and payment of the
Trusts bills, preparing monthly reconciliation of the Trusts expense records, updating projections of annual expenses, preparing materials for review by the Board of Trustees and compliance testing; (v) maintaining the Trust books
and records in accordance with applicable statutes, rules and regulations; (vi) preparing post-effective amendments to the Trusts registration statement; (vii) calculating each Funds NAV; (viii) accounting for dividends
and interest received and distributions made by the Trust; and (ix) preparing and filing the Trusts federal and state tax returns (other than those required to be filed by the Trusts Custodian and Transfer Agent) and providing
shareholder tax information to the Trusts Transfer Agent.
Subject to the limitations described below, as compensation
for their administrative services and the assumption of related expenses, the Administrator is entitled to asset-based fees in the amount of .015% of assets under management for accounting services and .025% of assets under management for
administration services, subject to a certain minimum fee. The initial term of the Administration Agreement is three years. The Administration Agreement will renew each year following the initial term, unless at least sixty days notice is given
prior to the end of a term. Under the Advisory Agreement, the Investment Adviser has contractually assumed the Trusts obligation to pay the fees of the Administrator.
DISTRIBUTOR
Foreside Fund Services, LLC
(Foreside or the Distributor), a Delaware limited liability company, serves as the distributor of Creation Units for the Funds on an agency basis. The Trust has entered into a Distribution Agreement under which Foreside, as
agent, receives orders from Authorized Participants to create and redeem shares in Creation Unit Aggregations and transmits such orders to the Trusts Custodian and Transfer Agent. The Distributors principal address is 3 Canal Plaza,
Portland, Maine 04101. The Distributor is a
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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). Shares
will be continuously offered for sale by the Trust through the Distributor only in whole Creation Units, as described in the section of this SAI entitled Purchase and Redemption of Creation Units Aggregations
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The Distributor also
acts as an agent for the Trust for those activities described within the Distribution Agreement. The Distributor will deliver a prospectus to Authorized Participants purchasing Shares in Creation Units and will maintain records of both orders placed
with it and confirmations of acceptance furnished by it to Authorized Participants. The Distributor has no role in determining the investment policies of the Funds or which securities are to be purchased or sold by the Funds. No compensation is
payable by the Trust to Foreside for such distribution services. However, the Investment Adviser has entered into an agreement with Foreside under which it makes payments to Foreside in consideration for its services under the Distribution
Agreement. The payments made by the Investment Adviser to Foreside do not represent an additional expense to the Trust or its shareholders.
DISTRIBUTION AND SERVICE PLAN
As stated in the Funds Prospectus, the Trust has adopted a Distribution and Service Plan pursuant to Rule 12b-1 with respect to shares of the Funds. However, no 12b-1 fee is currently charged to the
Funds, and the Funds do not expect to pay any 12b-1 fees during the current and next fiscal years. Pursuant to the Plan, the Funds may enter into agreements from time to time with financial intermediaries providing for support and/or distribution
services to customers of the financial intermediaries who are the beneficial owners of Fund shares. Under the agreements, the Funds may pay financial intermediaries up to 0.25% (on an annualized basis) of the average daily NAV of the shares
beneficially owned by their customers. Distribution services may include: (i) services in connection with distribution assistance, or (ii) payments to financial institutions and other financial intermediaries, such as broker-dealers and
mutual fund supermarkets, as compensation for services or reimbursement of expenses incurred in connection with distribution assistance.
Any amendment to increase materially the costs under the Distribution and Service Plan with respect to a Fund must be approved by the holders of a majority of the outstanding shares of the Fund. So long
as the Distribution and Service Plan is in effect, the selection and nomination of the members of the Board of Trustees who are not interested persons (as defined in the 1940 Act) of the Trust will be committed to the discretion of such
Non-Interested Trustees.
TRANSFER AGENT
Under its Agency Services Agreement with the Trust, JP Morgan Chase Bank, N.A. (Transfer Agent) as Transfer Agent has
undertaken to perform some or all of the following services: (i) perform and facilitate the performance of purchases and redemptions of Creation Units; (ii) prepare and transmit payments for dividends and distributions; (iii) record
the issuance of shares and maintain records of the number of authorized shares; (iv) prepare and transmit information regarding purchases and redemptions of shares; (v) communicate information regarding purchases and redemptions of shares
and other relevant information to appropriate parties; (vi) maintain required books and records; and (vii) perform other customary services of a transfer agent and dividend disbursing agent for an ETF (exchange traded fund).
As compensation for the services rendered by the Transfer Agent under the Agency Services Agreement the Transfer Agent is entitled to
reasonable out-of-pocket or incidental expenses as provided under the Agency Services Agreement. The initial term of the Agency Services Agreement is three years. The Agency Services Agreement will renew each year following the initial term, unless
at least sixty days notice is given prior to the end of a term. Under the Advisory Agreement, the Investment Adviser has contractually assumed the Trusts obligation to pay the expenses of the Transfer Agent.
CUSTODIAN
Under its Global Custody Agreement with the Trust, JP Morgan Chase Bank, N.A. (the Custodian): (i) holds each Funds cash and securities; (ii) maintains such cash and securities
in separate accounts in the name
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of each Fund; (iii) receives, delivers and releases securities on behalf of each Fund; (iv) collects and receives all income, principal and other payments in respect of each Funds
investments held by the Custodian; and (v) maintains a statement of account for each account of the Trust. The Custodian may employ one or more sub-custodians, provided that the Custodian shall be liable for direct losses due to the
sub-custodians insolvency or the sub-custodians failure to use reasonable care, fraud or willful default in the provision of its services. The Custodian will enter into agreements with financial institutions and depositories located in
foreign countries with respect to the custody of the Funds foreign securities.
As compensation for the services
rendered under the Global Custody Agreement with respect to the Trust by the Custodian to each Fund, the Custodian is entitled to fees and reasonable out-of-pocket expenses. The initial term of the Global Custody Agreement is three years. The Global
Custody Agreement will renew each year following the initial term, unless at least sixty days notice is given prior to the end of a term. Under the Advisory Agreement, the Investment Adviser has contractually assumed the Trusts obligation to
pay the fees and expenses of the Custodian.
DESCRIPTION OF SHARES
The Declaration of Trust of the Trust (the Declaration) permits the Trusts Board of Trustees to cause the Trust to issue
an unlimited number of full and fractional shares of beneficial interest of one or more separate series representing interests in one or more investment portfolios. The Trustees or Trust may create additional series and each series may be divided
into classes.
Under the terms of the Declaration, each share of each Fund has a par value of $0.0001, and represents a
proportionate interest in the particular Fund with each other share of its class in the same Fund and is entitled to such dividends and distributions out of the assets belonging to the Fund as are authorized by the Trustees and declared by the
Trust. Upon any liquidation of a Fund, shareholders of each class of a Fund are entitled to share pro rata in the net assets belonging to that class available for distribution. Shares do not have any preemptive or conversion rights. The right of
redemption is described under Shareholder Information in the Prospectus. In addition, pursuant to the terms of the 1940 Act, the right of a shareholder to redeem shares and the date of payment by a Fund may be suspended for more than
seven days (i) for any period during which the New York Stock Exchange is closed, other than the customary weekends or holidays, or trading in the markets the Fund normally utilizes is closed or is restricted as determined by the SEC,
(ii) during any emergency, as determined by the SEC, as a result of which it is not reasonably practicable for the Fund to dispose of instruments owned by it or fairly to determine the value of its net assets, or (iii) for such other
period as the SEC may by order permit for the protection of the shareholders of the Fund. The Trust also may suspend or postpone the recording of the transfer of its shares upon the occurrence of any of the foregoing conditions. In addition, shares
of each Fund are redeemable at the unilateral option of the Trust. The Declaration permits the Board to alter the number of shares constituting a Creation Unit or to specify that shares of beneficial interest of the Trust may be individually
redeemable. Shares when issued as described in the Prospectus are validly issued, fully paid and nonassessable. In the interests of economy and convenience, certificates representing shares of the Funds are not issued.
Following the creation of the initial Creation Unit Aggregation(s) of a Fund and immediately prior to the commencement of trading in such
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.
The proceeds received by each Fund for each issue or sale of its shares, and all net investment income, realized and unrealized gain and
proceeds thereof, subject only to the rights of creditors, will be specifically allocated to and constitute the underlying assets of that Fund. The underlying assets of each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to that Fund and with a share of the general liabilities of the Trust. Expenses with respect to the Funds normally are allocated in proportion to the NAV of the respective Funds except where allocations of direct expenses
can otherwise be fairly made.
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Each Fund and other Funds of the Trust entitled to vote on a matter will vote in the
aggregate and not by Fund, except as required by law or when the matter to be voted on affects only the interests of shareholders of a particular Fund or Funds.
Rule 18f-2 under the 1940 Act provides that any matter required by the provisions of the 1940 Act or applicable state law, or otherwise, to be submitted to the holders of the outstanding voting securities
of an investment company such as the Trust shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each investment portfolio affected by such matter. Rule 18f-2 further
provides that an investment portfolio shall be deemed to be affected by a matter unless the interests of each investment portfolio in the matter are substantially identical or the matter does not affect any interest of the investment portfolio.
Under the Rule, the approval of an investment advisory agreement, a distribution plan subject to Rule 12b-1 under the 1940 Act or any change in a fundamental investment policy would be effectively acted upon with respect to an investment portfolio
only if approved by a majority of the outstanding shares of such investment portfolio. However, the Rule also provides that the ratification of the appointment of independent accountants, the approval of principal underwriting contracts and the
election of Trustees are exempt from the separate voting requirements stated above.
The Trust is not required to hold annual
meetings of shareholders and does not intend to hold such meetings. In the event that a meeting of shareholders is held, each share of the Trust will be entitled, as determined by the Trustees without the vote or consent of shareholders, either to
one vote for each share or to one vote for each dollar of NAV represented by such shares on all matters presented to shareholders, including the election of Trustees (this method of voting being referred to as dollar-based voting).
However, to the extent required by the 1940 Act or otherwise determined by the Trustees, series and classes of the Trust will vote separately from each other. Shareholders of the Trust do not have cumulative voting rights in the election of Trustees
and, accordingly, the holders of more than 50% of the aggregate voting power of the Trust may elect all of the Trustees, irrespective of the vote of the other shareholders. Meetings of shareholders of the Trust, or any series or class thereof, may
be called by the Trustees or upon the written request of holders of at least a majority of the shares entitled to vote at such meeting. The shareholders of the Trust will have voting rights only with respect to the limited number of matters
specified in the Declaration and such other matters as the Trustees may determine or may be required by law.
The Declaration
authorizes the Trustees, without shareholder approval (except as stated in the next paragraph), to cause the Trust, or any series thereof, to merge or consolidate with any corporation, association, trust or other organization or sell or exchange all
or substantially all of the property belonging to the Trust, or any series thereof. In addition, the Trustees, without shareholder approval, may adopt a master-feeder structure by investing substantially all of the assets of a series of
the Trust in the securities of another open-end investment company or pooled portfolio.
The Declaration also authorizes the
Trustees, in connection with the termination or other reorganization of the Trust or any series or class by way of merger, consolidation, the sale of all or substantially all of the assets, or otherwise, to classify the shareholders of any class
into one or more separate groups and to provide for the different treatment of shares held by the different groups, provided that such termination or reorganization is approved by a majority of the outstanding voting securities (as defined in the
1940 Act) of each group of shareholders that are so classified.
The Declaration permits the Trustees to amend the Declaration
without a shareholder vote. However, shareholders of the Trust have the right to vote on any amendment: (i) that would adversely affect the voting rights of shareholders specified in the Declaration; (ii) that is required by law to be
approved by shareholders; (iii) to the amendment section of the Declaration; or (iv) that the Trustees determine to submit to shareholders.
The Declaration permits the termination of the Trust or of any series or class of the Trust: (i) by a majority of the affected shareholders at a meeting of shareholders of the Trust, series or class;
or (ii) by a
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majority of the Trustees without shareholder approval if the Trustees determine that such action is in the best interest of the Trust or its shareholders. The factors and events that the Trustees
may take into account in making such determination include: (i) the inability of the Trust or any series or class to maintain its assets at an appropriate size; (ii) changes in laws or regulations governing the Trust, or any series or
class thereof, or affecting assets of the type in which it invests; or (iii) economic developments or trends having a significant adverse impact on their business or operations.
In the event of a termination of the Trust or the Fund, the Board, in its sole discretion, could determine to permit the shares to be
redeemable in aggregations smaller than Creation Unit Aggregations 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.
Under the Maryland Statutory Trust Act (the Maryland Act), shareholders are not personally liable for obligations of the
Trust. The Maryland Act entitles shareholders of the Trust to the same limitation of liability as is available to stockholders of corporations incorporated in the State of Maryland. However, no similar statutory or other authority limiting business
trust shareholder liability exists in many other states. As a result, to the extent that the Trust or a shareholder is subject to the jurisdiction of courts in such other states, those courts may not apply Maryland law and may subject the
shareholders to liability. To offset this risk, the Declaration: (i) contains an express disclaimer of shareholder liability for acts or obligations of the Trust and provides that notice of such disclaimer may be given in each agreement,
obligation and instrument entered into or executed by the Trust or its Trustees; and (ii) provides for indemnification out of the property of the applicable series of the Trust of any shareholder held personally liable for the obligations of
the Trust solely by reason of being or having been a shareholder and not because of the shareholders acts or omissions or for some other reason. Thus, the risk of a shareholder incurring financial loss beyond his or her investment because of
shareholder liability is limited to circumstances in which all of the following factors are present: (i) a court refuses to apply Maryland law; (ii) the liability arises under tort law or, if not, no contractual limitation of liability is
in effect; and (iii) the applicable series of the Trust is unable to meet its obligations.
The Declaration provides that
the Trustees will not be liable to any person other than the Trust or a shareholder and that a Trustee will not be liable for any act as a Trustee. Additionally, subject to applicable federal law, no person who is or who has been a Trustee or
officer of the Trust shall be liable to the Trust or to any shareholder for money damages except for liability resulting from: (a) actual receipt of an improper benefit or profit in money, property or services; or (b) active and deliberate
dishonesty established by a final judgment and which is material to the cause of action. However, nothing in the Declaration protects a Trustee against any liability to which he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. The Declaration requires indemnification of Trustees and officers of the Trust unless the recipient is liable by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office.
The
Declaration provides that each shareholder, by virtue of becoming such, will be held to have expressly assented and agreed to the terms of the Declaration and the Bylaws of the Trust.
The Declaration provides that a shareholder of the Trust may bring a derivative action on behalf of the Trust only if the following
conditions are met: (i) shareholders who hold at least 10% of the outstanding shares of the Trust, or 10% of the outstanding shares of the series or class to which such action relates, must join in the request for the Trustees to commence such
action; and (ii) the Trustees must be afforded a reasonable amount of time to consider such shareholder request and to investigate the basis of such claim. The Declaration also provides that no person, other than the Trustees, who is not a
shareholder of a particular series or class shall be entitled to bring any derivative action, suit or other proceeding on behalf of or with respect to such series or class. The Trustees will be entitled to retain counsel or other advisers in
considering the merits of the request and may require an undertaking by the shareholders making such request to reimburse the Trust for the expense of any such advisers in the event that the Trustees determine not to bring such action.
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The Trustees may appoint separate Trustees with respect to one or more series or classes of
the Trusts shares (the Series Trustees). To the extent provided by the Trustees in the appointment of Series Trustees, Series Trustees: (i) may, but are not required to, serve as Trustees of the Trust or any other series or
class of the Trust; (ii) may have, to the exclusion of any other Trustee of the Trust, all the powers and authorities of Trustees under the Declaration with respect to such series or class; and/or (iii) may have no power or authority with
respect to any other series or class.
The term majority of the outstanding shares of either the Trust or a
particular Fund or investment portfolio means, with respect to the approval of an investment advisory agreement, a distribution plan or a change in a fundamental investment policy, the vote of the lesser of (i) 67% or more of the shares of the
Trust or such Fund or portfolio present at a meeting, if the holders of more than 50% of the outstanding shares of the Trust or such Fund or portfolio are present or represented by proxy, or (ii) more than 50% of the outstanding shares of the
Trust or such Fund or portfolio.
Absent an applicable exemption or other relief from the SEC or its staff, beneficial owners
of more than 5% of the shares of a Fund may be subject to the reporting provisions of Section 13 of the 1934 Act and the SECs rules promulgated thereunder. In addition, absent an applicable exemption or other relief from the SEC staff,
Officers and Trustees of a Fund and beneficial owners of 10% of the shares of a Fund (Insiders) may be subject to the insider reporting, short-swing profit and short sale provisions of Section 16 of the 1934 Act and the SECs
rules promulgated thereunder. Beneficial owners and Insiders should consult with their own legal counsel concerning their obligations under Sections 13 and 16 of the 1934 Act.
BOOK-ENTRY ONLY SYSTEM
The following
information supplements and should be read in conjunction with the Shareholder Information section in the Prospectus.
The
Depository Trust Company (DTC) acts as Securities Depository for the Shares of the Trust. 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 (the 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 a
subsidiary of the Depository Trust and Clearing Corporation (DTCC), which is owned by its member firms including international broker/dealers, correspondent and clearing banks, mutual fund companies and investment banks. 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 (the 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 Fund 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.
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Beneficial Owners of shares are not entitled to have shares registered in their names, will
not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial Owner must rely on the procedures of DTC, the DTC Participant and any
Indirect Participant through which such Beneficial Owner holds its interests, to exercise any rights of a holder of shares. The Trust understands that under existing industry practice, in the event the Trust requests any action of holders of shares,
or a Beneficial Owner desires to take any action that DTC, as the record owner of all outstanding shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that the DTC Participants would authorize the Indirect
Participants and Beneficial Owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial Owners owning through them. As described above, the Trust recognizes DTC or its nominee as the
owner of all shares for all purposes.
Conveyance of all notices, statements and other communications to Beneficial Owners is
effected 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 share holdings of each DTC Participant. The
Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding shares of the Funds, 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 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 aspects 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 determine 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 either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement
is unavailable, to issue and deliver printed certificates representing ownership of shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Listing Exchange on which shares are listed.
PURCHASE AND REDEMPTION OF CREATION UNIT AGGREGATIONS
CREATION UNIT AGGREGATIONS
The Trust issues and
sells shares of each Fund only in Creation Unit Aggregations. The Board of Trustees 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 of Trustees.
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PURCHASE AND ISSUANCE OF CREATION UNIT AGGREGATIONS
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. A Business Day with respect to each Fund is any day on which the
Listing Exchange is open for business. As of the date of this SAI, each Listing Exchange observes the following holidays, as observed: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Portfolio Deposit.
Unless cash
purchases are specified for a Fund, the consideration for purchase of a Creation Unit of shares of a Fund generally consists of the in-kind deposit of a designated portfolio of securities and other instruments (the Deposit Securities)
generally corresponding pro rata (except in certain circumstances) to the Funds portfolio positions and an amount of cash computed as described below (the Cash Component). Together, the Deposit Securities and the Cash Component
constitute the Portfolio Deposit, which represents the minimum initial and subsequent investment amount for shares of a Fund. The Cash Component is an amount equal to the Balancing Amount (as defined below). The Balancing
Amount is an amount equal to the difference between (x) the NAV (per Creation Unit) of the Fund and (y) the Deposit Amount which is the market value (per Creation Unit) of the securities deposited with the Trust. The
Balancing Amount serves the function of compensating for any differences between the NAV per Creation Unit and the Deposit Amount. If the Balancing Amount is a positive number (
i.e.,
the NAV per Creation Unit is more than the Deposit Amount),
the Authorized Participant will deliver the Balancing Amount. If the Balancing Amount is a negative number (
i.e.,
the NAV per Creation Unit is less than the Deposit Amount), the Authorized Participant will receive the Balancing 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 that purchased the Creation Unit. The Authorized
Participant must ensure that all Deposit Securities properly denote change in beneficial ownership.
NTI makes available
through the National Securities Clearing Corporation (NSCC) on each Business Day, prior to the opening of business on the Listing Exchange (currently 9:30 a.m., Eastern time), the list of the names and the required quantity of each
Deposit Security to be included in the current Portfolio Deposit (based on information at the end of the previous Business Day) for each Fund. Such Portfolio Deposit is applicable, subject to any adjustments as described below, in order to effect
purchases of Creation Units of a given Fund until such time as the next-announced Portfolio Deposit composition is made available.
The identity and number of shares of the Deposit Securities required for a Portfolio Deposit for each Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by
NTI with a view to the investment objective of the Fund. The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the securities constituting the relevant Underlying Index.
On a given Business Day, the Trust may require all Authorized Participants purchasing Creation Units on that day to deposit an amount of
cash (that is a cash in lieu amount) to replace any Deposit Security that may not be eligible for transfer through the systems of DTC or the Clearing Process (discussed below) or, in the case of a non-U.S. Deposit Security, the security
or instrument is not eligible for trading due to local trading restrictions, local restrictions on securities transfers or other similar circumstances. The Trust also reserves the right to permit a cash in lieu to replace any Deposit
Security which may not be available in sufficient quantity or which may not be eligible for trading by an Authorized Participant or the investor on whose behalf the Authorized Participant is acting. The Trust may in its discretion require an
Authorized Participant to purchase Creation Units of a Fund in cash, rather than in-kind. On a given Business Day, the Trust may announce before the open of trading that all purchases of Creation Units of a Fund on that day will be made entirely in
cash or, upon receiving a purchase order for Creation Units of a Fund from an Authorized Participant, the Trust may determine to require that purchase to be made entirely in cash.
- 43 -
In addition to the list of names and numbers of securities constituting the current Deposit
Securities of a Portfolio Deposit, on each Business Day, the Cash Component effective through and including the previous Business Day, per outstanding Creation Unit of each Fund, will be made available.
Procedures For Creation of Creation Units.
To be eligible to place orders with the Distributor and to
create a Creation Unit of a Fund, an entity must be: (i) a Participating Party,
i.e
., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC (the Clearing
Process), a clearing agency that is registered with the SEC; or (ii) a DTC Participant, and must have executed an agreement with the Distributor, with respect to creations and redemptions of Creation Units (Participant
Agreement) (discussed below). A Participating Party or DTC Participant who has executed a Participant Agreement is referred to as an Authorized Participant. Investors should contact the Distributor for the names of Authorized
Participants. All shares of a Fund, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant.
Except as described below, all creation orders must be placed for one or more Creation Units and, whether through a Participating Party or a DTC Participant, must be received by the Distributor in proper
form no later than the closing time of the regular trading session of the Listing Exchange (Closing Time) (normally 4:00 p.m., Eastern time) on any Business Day in order for creation of Creation Units to be effected based on the NAV of
shares of a Fund as next determined on such date. The FlexShares International Quality Dividend Index Fund, FlexShares International Quality Dividend Dynamic Index Fund and FlexShares International Quality Dividend Defensive Fund are hereinafter
referred to as the Foreign Funds. All other Funds discussed in this SAI are hereinafter referred to as Domestic Funds. The date on which an order to create Creation Units (or an order to redeem Creation Units, as discussed
below) is timely received in proper form is referred to as the Transmittal Date. Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement, as described below. Economic or market disruptions or changes, or telephone or other communication failure, may impede the ability to reach the Distributor or an Authorized Participant.
All orders to create Creation Units shall be placed with an Authorized Participant in the form required by such Authorized Participant.
In addition, an Authorized Participant may request that an investor make certain representations or enter into agreements with respect to an order (
e.g
., to provide for payments of cash). Investors should be aware that their particular broker
may not have executed a Participant Agreement and, therefore, orders to create Creation Units of a Fund will have to be placed by the investors broker through an Authorized Participant. In such cases, there may be additional charges to such
investor. A limited number of broker-dealers have executed a Participant Agreement and only a small number of such Authorized Participants have international capabilities. Investors placing orders for Creation Units of Domestic Funds through the
Clearing Process should afford sufficient time to permit proper submission of the order to the Distributor prior to the Closing Time on the Transmittal Date. Orders for Creation Units of Domestic Funds that are effected outside the Clearing Process
are likely to require transmittal by the DTC Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and
the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component.
Investors placing orders for Creation Units of the Foreign Funds should ascertain the applicable deadline for cash transfers by
contacting the operations department of the broker or depositary institution making 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 applicable
Listing Exchange. Investors should be aware that the Authorized Participant may require orders for Creation Units placed with it to be in the form required by the individual Authorized Participant, which form may not be the same as the form of
purchase order specified by the Trust that the Authorized Participant must deliver to the Distributor.
- 44 -
Placement of Creation Orders For Domestic Funds Using The
Clearing Process.
The Clearing Process is the process of creating or redeeming Creation Units. Fund Deposits made through the Clearing Process must be delivered through a Participating Party that has executed a Participant Agreement. The
Participant Agreement authorizes the Distributor to transmit through the Transfer Agent (also known as the Index Receipt Agent) to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the Participating
Partys creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the requisite Deposit Securities and the Cash Component to the Trust, together with such additional information as may be required by
the Distributor. An order to create Creation Units through the Clearing Process is deemed received by the Distributor on the Transmittal Date if: (i) such order is received by the Distributor not later than the Closing Time on such Transmittal
Date; and (ii)
all other procedures set forth in the Participant Agreement are properly followed.
Placement of
Creation Orders For Domestic Funds Not Using The Clearing Process.
Fund Deposits made outside the Clearing Process must be delivered through a DTC Participant that has executed a Participant Agreement. A DTC participant who wishes to place an
order creating Creation Units to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that the creation of Creation Units will
instead be effected through a transfer of securities (other than U.S. government securities) directly through DTC, or through a transfer of U.S. government securities and cash directly through the Federal Reserve System. The Fund Deposit transfer
must be ordered by the DTC Participant on the Transmittal Date in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities through DTC to the account of the Fund by no later than 2:00 p.m., Eastern time, on the
Settlement Date. The Settlement Date is typically the third Business Day following the Transmittal Date. In certain cases Authorized Participants will create and redeem Creation Units of the same Fund on the same trade date. In these
instances, the Trust reserves the right to settle these transactions on a net basis. All questions as to the number of Deposit Securities to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any
tendered securities, will be determined by the Trust, whose determination shall be final and binding.
The amount of cash
equal to the Cash Component must be transferred directly to the Custodian through the Federal Reserve Bank wire transfer system in a timely manner so as to be received by the Custodian no later than 2:00 p.m., Eastern time, on the Settlement Date.
An order to create Creation Units outside the Clearing Process is deemed received by the Distributor on the Transmittal Date if: (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date; and
(ii) all other procedures set forth in the Participant Agreement are properly followed. However, if the Custodian does not receive both the required Deposit Securities and the Cash Component by 2:00 p.m., Eastern time on the Settlement Date,
such order may be canceled. Upon written notice to the Distributor, such canceled order may be resubmitted the following Business Day using a Fund Deposit as newly constituted to reflect the then current NAV of the Fund. The delivery of Creation
Units so created generally will occur no later than the Settlement Date. Creation Units of Domestic Funds may be created in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these
circumstances, the initial deposit will have a value greater than the NAV of the shares on the date the order is placed in proper form since, in addition to available Deposit Securities, cash must be deposited in an amount equal to the sum of:
(i) the Cash Component; plus (ii) at least 110%, which NTI may change from time to time, of the market value of the undelivered Deposit Securities (the Additional Cash Deposit) with the Fund pending delivery of any missing
Deposit Securities.
If an Authorized Participant determines to post an additional cash deposit as collateral for any
undelivered Deposit Securities, such Authorized Participant must deposit with the Custodian the appropriate amount of federal funds by 2:00 p.m., Eastern time, on the date of requested settlement. If the Authorized Participant does not place its
purchase order by the closing time or the Custodian does not receive federal funds in the appropriate amount by such time, then the order may be deemed to be rejected and the Authorized Participant shall be liable to the Fund for any resulting
losses. An additional amount of cash shall be required to be deposited with Custodian, pending delivery of the missing Deposit Securities to the extent necessary to
- 45 -
maintain the Additional Cash Deposit with the Trust in an amount at least equal to 110%, which NTI may change from time to time, of the daily marked to market value of the missing Deposit
Securities. To the extent that missing Deposit Securities are not received by 2:00 p.m., Eastern time, on the Settlement Date or in the event a marked-to-market payment is not made within one Business Day following notification by the Distributor
that such a payment is required, the Trust may use the cash on deposit to purchase the missing Deposit Securities. Authorized Participants will be liable to the Trust for the costs incurred by the Trust in connection with any such purchases. These
costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the transmittal date plus the brokerage and related transaction costs associated with such
purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian or purchased by the Trust and deposited into the Trust. In addition, a
transaction fee, as listed below, will be charged. The delivery of Creation Units so created generally will occur no later than the Settlement Date.
Placement of Creation Orders For The Foreign Funds.
For the Foreign Funds, NTI shall cause the sub-custodians of a Fund 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 Portfolio Deposit (or the cash value of all or 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(s). Orders to purchase Creation Unit
Aggregations must be received by the Distributor from an Authorized Participant on its own or the applicable Listing Exchange on the relevant Business Day. However, when a relevant local market is closed due to local market holidays, the local
market settlement process will not commence until the end of the local holiday period. Settlement must occur by 2:00 p.m., Eastern time, on the contractual settlement date.
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.
Acceptance of Purchase Order.
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 NTI) 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 of the Fund, 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 acceptance of a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchase order is not in proper form; (b) the purchaser or group of purchasers, upon
obtaining the shares ordered, would own 80% or more of the currently outstanding shares of any Fund; (c) the Deposit Securities delivered are not as specified by NTI as described above; (d) acceptance of the Deposit Securities would have
certain adverse tax consequences to the Fund; (e) the acceptance of the Portfolio Deposit would, in the opinion of counsel, be unlawful; (f) the acceptance of the Portfolio Deposit would otherwise, in the discretion of the Trust or NTI,
have an adverse effect on the Trust or the rights of beneficial owners; or (g) in the event that circumstances outside the control of the Trust, the Distributor, Transfer Agent, Custodian, a sub-custodian or NTI make it for all practical
purposes impossible to process purchase orders. Examples of such circumstances include acts of God; public service or utility problems; fires, floods or extreme weather conditions; power outages resulting in telephone, telecopy or computer failures;
market conditions or activities causing trading halts; systems failures involving computer or other informational
- 46 -
systems affecting the Trust, the Distributor, DTC, NSCC, NTI, Transfer Agent, Custodian, a sub-custodian or any other participant in the creation process; and similar extraordinary events. The
Distributor shall notify a prospective creator of a Creation Unit and/or Authorized Participant acting behalf of such creator of its rejection of the purchase order. The Trust, Transfer Agent, Custodian, any 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 either of them incur any liability for the failure to give any such notification. The Trust reserves the right, in its sole
discretion, to suspend the offering of Shares of a Fund or to reject purchase orders when, in its judgment, such suspension or rejection would be in the best interests of the Trust or the Fund.
Issuance of a Creation Unit.
Except as provided herein, a Creation Unit of shares of a Fund will not be
issued until the transfer of good title to the Trust of the Deposit Securities and the payment of the Cash Component, or transfer of cash, as applicable, have been completed. With respect to any non-U.S. Deposit Securities, when the applicable local
sub-custodian(s) have confirmed to the Custodian that the required securities included in the Portfolio Deposit (or the cash value thereof) have been delivered to the account of the applicable local sub-custodian or sub-custodians, the Distributor
and the Investment 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 (that is three Business Days after trade date).
However, as discussed in Appendix A, each Fund reserves the right to settle Creation Unit transactions on a basis other than T+3 in order to accommodate foreign market holiday schedules, to account for different treatment among foreign and U.S.
markets of dividend record dates and ex-dividend dates (that is the last day the holder of a security can sell the security and still receive dividends payable on the security), and in certain other circumstances.
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 110%, which NTI may change from time to time, of the value of the missing Deposit
Securities. Such cash collateral must be delivered no later than 2:00 p.m., Eastern time, on the contractual settlement date. The only collateral that is acceptable to the Trust is cash in U.S. Dollars. 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 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.
In certain cases, Authorized Participants will
create and redeem Creation Units on the same trade date. In these instances, the Trust reserves the right to settle these transactions on a net basis. 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.
Although the Trust does not ordinarily permit cash purchases of Creation Units,
when cash purchases of Creation Units are available or specified for a Fund, they will be effected in essentially the same manner as in-kind purchases thereof. The Trust may in its discretion make creation units of any of the Funds available
partially or entirely for cash. For the cash purchase portion, the investor must pay the cash equivalent of the designated subset of 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 per Creation Unit. The transaction fees for in-kind and cash purchases of Creation Units are described below.
- 47 -
Purchase Transaction Fee.
Purchasers of Creation Units are
responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust.
Investors who use the services of a broker, or other such intermediary, may be charged a fee for such services.
A fixed
purchase transaction fee payable to the Trust is imposed to compensate the Trust for the transfer and other transaction costs of a Fund associated with the issuance of Creation Units. The standard purchase transaction fee will be the same regardless
of the number of Creation Units purchased by the purchaser on the same day. The Authorized Participant may also be required to pay an additional variable charge to compensate the Fund for certain brokerage, tax, foreign exchange, execution, market
impact and other costs and expenses related to the execution of trades resulting from cash purchases of Creation Units (up to the maximum amount shown below). Where the Trust permits an in-kind purchaser to substitute cash in lieu of depositing a
portion of the Deposit Securities, the purchaser also will be assessed an additional variable transaction charge (up to the maximum amount shown below). To the extent the Fund cannot recoup the amount of transaction costs incurred in connection with
a purchase, those transaction costs will be borne by the Funds shareholders and negatively affect the Funds performance. The purchase transaction fees for in-kind purchases and cash purchases (when available) are listed in the table
below. This table is subject to revision from time to time.
|
|
|
|
|
|
|
|
|
NAME OF FUND
|
|
Fee for In-Kind and
Cash Purchases
|
|
|
Maximum Additional
Variable Charge for
Cash Purchase*
|
|
FlexShares Quality Dividend Index Fund
|
|
$
|
1,000
|
|
|
|
3.0
|
%
|
FlexShares Quality Dividend Dynamic Index Fund
|
|
$
|
1,000
|
|
|
|
3.0
|
%
|
FlexShares Quality Dividend Defensive Index Fund
|
|
$
|
1,000
|
|
|
|
3.0
|
%
|
FlexShares International Quality Dividend Index Fund
|
|
$
|
5,000
|
|
|
|
3.0
|
%
|
FlexShares International Quality Dividend Dynamic Index Fund
|
|
$
|
5,000
|
|
|
|
3.0
|
%
|
FlexShares International Quality Dividend Defensive Index Fund
|
|
$
|
5,000
|
|
|
|
3.0
|
%
|
*
|
As a percentage of the net asset value per Creation Unit.
|
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 Fund through 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 Fund 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.
With respect to each Fund, NTI makes available through the NSCC prior to the opening of business on the Listing Exchange (currently 9:30 a.m., Eastern time) on each Business Day, the portfolio securities
or instruments that will be applicable (subject to possible correction) to redemption requests received in proper form (as defined below) on that day (Fund Securities). Unless cash redemptions are specified for a Fund, the redemption
proceeds for a Creation Unit generally consist of Fund Securities as announced by NTI through the NSCC on the Business Day of the request for redemption, 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 (Cash Redemption Amount). The redemption transaction fee described below is deducted
from such redemption proceeds. In the event that the Fund Securities have a value greater than the NAV of the Fund shares, a compensating cash payment equal to such difference is required to be made by or through an Authorized Participant by the
redeeming shareholder. On a given Business Day, the Trust may require all Authorized Participants purchasing Creation Units on that day to receive an amount of cash (that is a cash in lieu amount) to replace any Fund Security that may
not be eligible for transfer through the systems of DTC or the Clearing Process (discussed above) or, in the case of a non-U.S. Fund Security, the security or instrument is not eligible for trading due to local trading restrictions, local
restrictions on securities transfers or other similar circumstances. The Trust also reserves the right to permit a
- 48 -
cash in lieu to replace any Fund Security which may not be eligible for trading by an Authorized Participant or the investor on whose behalf the Authorized Participant is acting or if
a shareholder would be subject to unfavorable income tax treatment if the shareholder received redemption proceeds in kind. On a given Business Day, the Trust may announce before the open of trading that all redemptions of Creation Units of a Fund
on that day will be made entirely in cash or, upon receiving a redemption order for Creation Units of the Fund from an Authorized Participant, the Trust may determine to require that redemption to be made entirely in cash.
When cash redemptions of Creation Units are specified for a Fund, they will be effected in essentially the same manner as in-kind
redemptions thereof. The investor will receive the cash equivalent of the designated Fund Securities it would otherwise have received through an in-kind redemption, plus the same Cash Redemption Amount required to be paid to an in-kind redeemer. In
addition, to offset the Trusts brokerage and other transaction costs associated with a cash redemption, the investor will be required to pay a fixed redemption transaction fee, plus an additional variable charge for cash redemptions, which is
expressed as a percentage of the value per Creation Unit. The transaction fees for in-kind and cash redemptions of Creation Units are described below.
Investors will bear the costs of transferring the Fund Securities from the Trust to their account. Investors who use the services of a broker or other such intermediary may be charged a fee for such
services. A fixed redemption transaction fee payable to the Trust 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 Authorized Participant may also be required to pay a variable transaction fee to compensate the relevant Fund for certain brokerage, tax, foreign exchange, execution, market impact and
other costs and expenses related to the execution of trades resulting from cash redemptions of Creation Units (up to the maximum amount shown below). Where the Trust requires or permits an in-kind redeemer to substitute cash in lieu of receiving a
portion of the Deposit Securities, the redeemer also will be assessed an additional variable transaction charge (up to the maximum amount shown below). To the extent the Fund cannot recoup the amount of transaction costs incurred in connection with
a redemption, those transaction costs will be borne by the Funds remaining shareholders and negatively affect the Funds performance. The redemption transaction fee for redemptions in kind and for cash and the additional variable charge
for cash redemptions (when cash redemptions are available or specified) are listed in the table below.
|
|
|
|
|
|
|
|
|
NAME OF FUND
|
|
Fee for In-Kind and
Cash Redemptions
|
|
|
Maximum Additional
Variable Charge for
Cash Redemption*
|
|
FlexShares Quality Dividend Index Fund
|
|
$
|
1,000
|
|
|
|
2.0
|
%
|
FlexShares Quality Dividend Dynamic Index Fund
|
|
$
|
1,000
|
|
|
|
2.0
|
%
|
FlexShares Quality Dividend Defensive Index Fund
|
|
$
|
1,000
|
|
|
|
2.0
|
%
|
FlexShares International Quality Dividend Index Fund
|
|
$
|
5,000
|
|
|
|
2.0
|
%
|
FlexShares International Quality Dividend Dynamic Index Fund
|
|
$
|
5,000
|
|
|
|
2.0
|
%
|
FlexShares International Quality Dividend Defensive Index Fund
|
|
$
|
5,000
|
|
|
|
2.0
|
%
|
*
|
As a percentage of the net asset value per Creation Unit, inclusive of the standard transaction fee.
|
Placement of Redemption Orders For Domestic Funds Using The Clearing Process.
Orders to redeem Creation
Units of Domestic Funds through the Clearing Process must be delivered through a Participating Party that has executed the Participant Agreement. An order to redeem Creation Units using the Clearing Process is deemed received by the Trust on the
Transmittal Date if: (i) such order is received by the Transfer Agent not later than the Closing Time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed. Such order will be
effected based on the NAV of the Fund as next determined. An order to redeem Creation Units using the Clearing Process made in proper form but received by the Trust after the Closing Time, will be deemed received on the next Business Day immediately
following the Transmittal Date and will be effected at the NAV next determined on such Business Day. The requisite Fund Securities and
- 49 -
the Cash Redemption Amount will be transferred by the third NSCC Business Day following the date on which such request for redemption is deemed received.
Placement of Redemption Orders For Domestic Funds Outside The Clearing Process.
Orders to redeem
Creation Units of Domestic Funds outside the Clearing Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units to be effected
outside the Clearing Process does not need to be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Units will instead be effected through transfer of shares
directly through DTC. An order in good form to redeem Creation Units outside the Clearing Process is deemed received by the Trust on the Transmittal Date if: (i) such order is received by the Transfer Agent not later than the Closing Time on
such Transmittal Date; (ii) such order is accompanied or followed by the requisite number of shares of the Fund specified in such order, which delivery must be made through DTC to the Transfer Agent no later than 10:00 a.m., Eastern time, on
the contracted settlement date; and (iii) all other procedures set forth in the Participant Agreement are properly followed. After the Trust has deemed an order for redemption outside the Clearing Process received, the Trust will initiate
procedures to transfer the requisite Fund Securities which are generally expected to be delivered within three Business Days and the Cash Redemption Amount to the Authorized Participant on behalf of the redeeming Beneficial Owner by the Settlement
Date. In certain cases Authorized Participants will redeem and create Creation Units of the same Fund on the same trade date. In these instances, the Trust reserves the right to settle these transactions on a net basis.
Placement of Redemption Orders For The Foreign Funds.
Orders to redeem Creation Units must be delivered
through an Authorized Participant. An order in good form to redeem Creation Units is deemed received by the Trust on the Transmittal Date if: (i) a request in satisfactory form to the Trust is received by the Transfer Agent not later than the
Closing Time on the Transmittal Date; (ii) such order is accompanied or followed by the requisite number of shares of the Fund specified in such order, which delivery must be made through DTC to the Transfer Agent no later than 10:00 a.m.,
Eastern time, on the next Business Day following the Transmittal Date; and (iii) all other procedures set forth in the Participant Agreement are properly followed. Deliveries of Fund Securities to redeeming investors generally will be made
within three Business Days. Due to the schedule of holidays in certain countries, however, the delivery of in-kind redemption proceeds for the Foreign Funds may take longer than three Business Days after the Transmittal Date. In such cases, the
local market settlement procedures will not commence until the end of local holiday periods. See Appendix A for a list of local holidays in the non-U.S. countries relevant to the Foreign Funds.
Investors should be aware that their particular broker may not have executed a 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 a Participant Agreement. At any given time there will be only a limited number of broker-dealers that have executed 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.
In connection with
taking delivery of shares of non-U.S. Fund Securities upon redemption of shares of the Fund, 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.
To the extent contemplated by an Authorized Participants agreement with the Distributor, in the event the Authorized Participant
that has submitted a redemption request in proper form is unable to transfer all or part
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of the Creation Units of shares to be redeemed to the Transfer Agent, at or prior to 10:00 a.m., Eastern time, on the Listing Exchange business day after the date of submission of such redemption
request, the Distributor will nonetheless accept the redemption request in reliance on the undertaking by the Authorized Participant to deliver the missing shares as soon as possible, which undertaking shall be secured by the Authorized
Participants delivery and maintenance of collateral consisting of cash having a value at least equal to 110%, which NTI may change from time to time. Such cash collateral must be delivered no later than 2:00 p.m., Eastern time, on the
contractual settlement date. The only collateral that is acceptable to the Trust is cash in U.S. dollars. The Trusts current procedures for collateralization of missing shares require, among other things, that any cash collateral shall be in
the form of U.S. dollars in immediately available funds and shall be held by the Trusts Custodian and marked to market daily, and that the fees of the Custodian and any sub-custodians in respect of the delivery, maintenance and redelivery of
the cash collateral shall be payable by the Authorized Participant. 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. The Participant Agreement permits the Trust to purchase the missing shares or acquire the portfolio securities and the Cash Component underlying such shares at any time and subjects the Authorized Participant to
liability for any shortfall between the cost to the Trust of purchasing such shares, portfolio securities or Cash Component and the cash collateral.
The calculation of the value of the Fund Securities and the Cash Redemption Amount to be delivered upon redemption will be made by the Trust according to the procedures set forth under Determination
of Net Asset Value above computed on the Business Day on which a redemption order is deemed received in good form by the Trust. Therefore, if a redemption order in proper form is submitted to the Transfer Agent by a DTC Participant not later
than Closing Time on the Transmittal Date, and the requisite number of shares of the relevant Fund are delivered to Transfer Agent prior to the DTC Cut-Off-Time, then the value of the Fund Securities and the Cash Redemption Amount to be delivered
will be determined by Trust on such Transmittal Date. If, however, a redemption order is submitted to the Transfer Agent by a DTC Participant not later than the Closing Time on the Transmittal Date but either (i) the requisite number of shares
of the relevant Fund are not delivered by the DTC Cut-Off-Time, as described above, on such Transmittal Date, or (ii) the redemption order is not submitted in proper form, then the redemption order will not be deemed received as of the
Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount to be delivered will be computed on the Business Day that such order is deemed received by the Trust, (
i.e.
, the Business Day on which the shares
of the relevant Fund are delivered through DTC to the Transfer Agent by the DTC Cut-Off-Time) on such Business Day pursuant to a properly submitted redemption order.
If it is not possible to effect deliveries of the portfolio securities, 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 addition, an investor may request a redemption in cash that the Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the net asset value
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. An Authorized Participant or an investor for which it is acting subject to a legal restriction with respect to a particular securities included in the Fund Securities applicable to the redemption of a
Creation Unit may be paid an equivalent amount of cash. The Authorized Participant may request the redeeming Beneficial Owner of the shares to complete an order form or to enter into agreements with respect to such matters as compensating cash
payment.
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Because the portfolio securities of the Foreign Funds may trade on the relevant exchange(s)
on days that the Listing Exchange is closed or are otherwise not Business Days for the Funds, shareholders may not be able to redeem their shares of the Fund, or to purchase or sell shares of the Fund on the Listing Exchange, on days when the NAV of
the Fund could be significantly affected by events in the relevant foreign markets.
The right of redemption may be suspended
or the date of payment postponed with respect to any Fund (1) for any period during which the New York Stock Exchange is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the New York
Stock Exchange is suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of the Funds portfolio securities or determination of its NAV is not reasonably practicable; or
(4) in such other circumstance as is permitted by the SEC.
TAXES
The following summarizes certain additional tax considerations generally affecting the Funds and their shareholders that are not
described in the Prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Funds or their shareholders, and the discussions here and in the Prospectus are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to their own tax situations.
The discussions of
the federal tax consequences in the Prospectus and this SAI are based on the Code and the regulations issued under it, and court decisions and administrative interpretations, as in effect on the date of this SAI. Future legislative or administrative
changes or court decisions may significantly alter the statements included herein, and any such changes or decisions may be retroactive.
FEDERAL - GENERAL INFORMATION
Each Fund intends to qualify as a regulated investment company under Subchapter M of
Subtitle A, Chapter 1, of the Code. As a regulated investment company, each Fund generally will be exempt from federal income tax on its net investment income and realized capital gains that it distributes to shareholders. To qualify for treatment
as a regulated investment company, it must meet three important tests each year.
First, each Fund must derive with respect to
each taxable year at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, other income derived with respect
to the Funds business of investing in stock, securities or currencies, or net income derived from interests in qualified publicly traded partnerships.
Second, generally, at the close of each quarter of the Funds taxable year, at least 50% of the value of each Funds assets must consist of cash and cash items, U.S. government securities,
securities of other regulated investment companies, and securities of other issuers as to which (a) the Fund has not invested more than 5% of the value of its total assets in securities of the issuer and (b) the Fund does not hold more
than 10% of the outstanding voting securities of the issuer, and no more than 25% of the value of each Funds total assets may be invested in the securities of (1) any one issuer (other than U.S. government securities and securities of
other regulated investment companies), (2) two or more issuers that the Fund controls and which are engaged in the same or similar trades or businesses or (3) one or more qualified publicly traded partnerships.
Third, each Fund must distribute an amount equal to at least the sum of 90% of its investment company taxable income (net investment
income and the excess of net short-term capital gain over net long-term capital loss), before taking into account any deduction for dividends paid, and 90% of its tax-exempt income, if any, for the year.
Each Fund intends to comply with these requirements. If a Fund were to fail to make sufficient distributions, it could be liable for
corporate income tax and for excise tax in respect of the shortfall or, if the
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shortfall is large enough, the Fund could be disqualified as a regulated investment company. If for any taxable year a Fund were not to qualify as a regulated investment company, all its taxable
income would be subject to tax at regular corporate rates without any deduction for distributions to shareholders. In that event, taxable shareholders would recognize dividend income on distributions (including distributions attributable to
tax-exempt income) to the extent of the Funds current and accumulated earnings and profits, and corporate shareholders could be eligible for the dividends-received deduction.
The Code imposes a nondeductible 4% excise tax on regulated investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net income (excess of capital gains over capital losses) by the end of each calendar year. Each Fund intends to make sufficient distributions or deemed distributions of its
ordinary taxable income and capital gain net income each calendar year to avoid liability for this excise tax.
The Funds
intend to distribute quarterly to their shareholders substantially all of the Funds investment company taxable income, and the Funds intend to distribute annually 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, such Fund will 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 tax paid by such 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 the amount of undistributed capital gains included in the shareholders income reduced by their proportionate share of the taxes paid. 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 such Fund upon filing appropriate returns or claims for refund with the Internal Revenue Service.
Distributions of net realized long-term capital gains, if any, that a Fund designates as capital gains dividends are taxable as long-term
capital gains, regardless of how long a shareholder has held shares of such 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.
If an individual trust or estate receives a regular dividend or qualified
dividends 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 his shares of such Fund, and as a capital gain thereafter (if the
shareholder holds his shares of such 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. Dividends paid by a Fund that are attributable to dividends received by a
Fund from domestic corporations may qualify for the federal dividends-received deduction for corporations.
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Investors considering buying shares just prior to a dividend or capital gain distribution
should be aware that, although the price of shares just 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 stock
on the record date for any dividends payable with respect to such stock, such dividends will be included in such Funds gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect
to such dividends (that is, the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date such Fund acquired such stock. 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.
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: (1) has failed to provide a correct taxpayer identification
number; (2) is subject to backup withholding by the Internal Revenue Service; (3) has failed to certify to a Fund that such shareholder is not subject to backup withholding; or (4) has not certified that such shareholder is a U.S.
person (including a U.S. resident alien).
SECTIONS 351 AND 362
The Trust on behalf of each Fund has the right to reject an order for a purchase of shares of a 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, such 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.
QUALIFIED DIVIDEND INCOME
Distributions by each Fund of investment company taxable income (excluding 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 15% (5% for individuals in lower tax brackets) to the extent each Fund receives qualified dividend income on the securities it holds and such Fund designates the distribution
as qualified dividend income. Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain foreign corporations (
e.g.
, foreign corporations incorporated in a possession of the United States or in
certain countries with a comprehensive tax treaty with the United States, or the stock of which is readily tradable on an established securities market in the United States). A dividend 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 more than 60 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 (and each Fund also satisfies those holding period requirements with respect to the securities it holds that paid the dividends distributed to the shareholder); (ii) 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. Absent further
legislation, the maximum 15% rate on qualified dividend income will not apply to dividends received in taxable years beginning after December 31, 2012. Distributions by each Fund of its net short-term capital gains will be taxable as ordinary
income. Capital gain distributions consisting of each Funds net capital gains will be taxable as long-term capital gains.
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CORPORATE DIVIDENDS RECEIVED DEDUCTION
A Funds dividends that are paid to its corporate shareholders and are attributable to qualifying dividends it received from U.S.
domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations.
NET CAPITAL LOSS CARRYFORWARDS
Net capital loss carryforwards from a taxable year retain their characterization as short-term or long-term capital losses and may be applied against any capital gains recognized in each succeeding year.
EXCESS INCLUSION INCOME
Certain types of income received by a Fund from real estate investment Trusts (REITs), real estate mortgage investment conduits (REMICs), taxable mortgage pools or other
investments may cause a Fund to designate some or all of its distributions as excess inclusion income. To Fund shareholders such excess inclusion income may (1) constitute taxable income, as unrelated business taxable
income (UBTI) 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; (2) as UBTI cause a charitable
remainder Trust to be subject to a 100% excise tax on its UBTI; (3) not be offset against net operating losses for tax purposes; (4) not be eligible for reduced U.S. withholding for non-U.S. shareholders even from tax treaty countries; and
(5) cause a Fund to be subject to tax if certain disqualified organizations as defined by the Code are Fund shareholders.
TAXATION OF INCOME FROM CERTAIN FINANCIAL INSTRUMENTS, REITS AND PFICS
The tax principles applicable to transactions in financial instruments and futures contracts and options that may be engaged in by a Fund
including the effect of fluctuations in the value of foreign currencies, and investments in REITS and passive foreign investment companies (PFICs), are complex and, in some cases, uncertain. Such transactions and investments may cause a
Fund to recognize taxable income prior to the receipt of cash, thereby requiring such Fund to liquidate other positions, or to borrow money, so as to make sufficient distributions to shareholders to avoid corporate-level tax. Moreover, some or all
of the taxable income recognized may be ordinary income or short-term capital gain, so that the distributions may be taxable to shareholders as ordinary income.
In addition, in the case of any shares of a PFIC in which a Fund invests, such Fund may be liable for corporate-level tax on any ultimate gain or distributions on the shares if such Fund fails to make an
election to recognize income annually during the period of its ownership of the shares.
SALES OF SHARES
Upon the sale or exchange of his shares, a shareholder will realize a taxable gain or loss equal to the difference between
the amount realized and his basis in his shares. A redemption of shares by a Fund will be treated as a sale for this purpose. Except as provided below, 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 a 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.
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OTHER TAXES
Dividends, distributions and redemption proceeds may also be subject to additional state, local and foreign 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 backup
withholding at the appropriate rate.
In general, United States 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.
For foreign shareholders of a Fund a distribution attributable to such Funds sale of a real estate investment Trust or other U.S.
real property holding company may be treated as real property gain subject to 35% withholding tax if 50% or more of the value of such Funds assets are invested in real estate investment trusts and other U.S. real property holding corporations
and if the foreign shareholder has held more than 5% of a class of stock at any time during the one-year period ending on the date of the distribution. A distribution from a Fund will be treated as attributable to a U.S. real property interest if
such distribution is attributable to a distribution received by such Fund from a real estate investment trust. Restrictions apply regarding wash sales and substitute payment transactions.
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 may be required to file with the Internal Revenue Service 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 regulated investment company 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. Certain tax-exempt entities and their managers may be subject to excise tax if they are parties to certain reportable transactions.
The foregoing discussion is a summary 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 foreign 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
Statement of Additional Information. Changes in applicable authority could materially affect the conclusions discussed above, and such changes often occur.
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NET ASSET VALUE
Securities are valued at fair value. Securities traded on U.S. securities exchanges or in the NASDAQ National Market System are valued at
the regular trading session closing price on the exchange or system in which such securities are principally traded. If there are no sales on the exchange or system on the valuation date, then the value is determined on the basis of last sale price
on any other exchange or system. If any such security is not traded on a valuation date, it is valued at fair value as determined in good faith by the Investment Adviser under the supervision of the Board of Trustees. Certain over-the-counter
securities that are not reported in the NASDAQ National Market System generally are valued on the basis of the mean between the bid and asked quotes based upon quotes furnished by primary market makers for those securities. Fixed-income securities,
however, may be valued on the basis of evaluated prices provided by independent pricing services when such prices are believed to reflect the fair market value of such securities. Such prices may be determined taking into account securities prices,
yields, maturities, call features, ratings, institutional size trading in similar groups of securities and developments related to specific securities. The values of securities of foreign issuers generally are based upon the closing prices reported
on the foreign exchanges on which they are principally traded. Foreign fixed-income securities, however, may, like domestic fixed-income securities, be valued based on evaluated prices provided by independent pricing services when such prices are
believed to reflect the fair market value of such securities. Shares of open-end investment companies are valued at NAV. Shares of exchange-traded funds are valued at their closing price on the exchange or system on which such securities are
principally traded. Spot and forward currency exchange contracts generally are valued using an independent pricing service. Exchange-traded financial futures and options are valued at the settlement price as established by the exchange on which they
are traded. Over-the-counter options are valued at broker-provided bid prices, as are swaps. The foregoing prices may be obtained from one or more independent pricing services or, as needed or applicable, independent broker-dealers. Short-term
investments are valued at amortized cost, which the Investment Adviser has determined, pursuant to Board authorization, approximates fair value. Any securities for which market quotations are not readily available or are believed to be incorrect are
valued at fair value as determined in good faith by the Investment Adviser under the supervision of the Board of Trustees. Circumstances in which securities may be fair valued include periods when trading in a security is limited, corporate actions
and announcements take place, or regulatory news is released such as government approvals. Additionally the Trust, in its discretion, may make adjustments to the prices of securities held by a Fund if an event occurs after the publication of market
values normally used by a Fund but before the time as of which the Fund calculates its NAV, depending on the nature and significance of the event, consistent with applicable regulatory guidance. This may occur particularly with respect to certain
foreign securities held by a Fund, in which case the Trust may use adjustment factors obtained from an independent evaluation service that are intended to reflect more accurately the fair value of those securities as of the time the Funds NAV
is calculated. Other events that can trigger fair valuing of foreign securities include, for example, significant fluctuations in general market indicators, government actions, or natural disasters. The use of fair valuation involves the risk that
the values used by the Funds to price their investments may be higher or lower than the values used by other investment companies and investors to price the same investments.
The time at which transactions and shares are priced and the time by which orders must be received may be changed in case of an emergency or if regular trading on the New York Stock Exchange is stopped at
a time other than 4:00 p.m. Eastern Standard Time. The Trust reserves the right to reprocess purchase and redemption transactions that were processed at a NAV other than the Funds official closing NAV. For instance, if a pricing error is
discovered that impacts a Funds NAV, the corrected NAV would be the official closing NAV and the erroneous NAV would be a NAV other than the Funds official closing NAV. Those transactions that were processed using the erroneous NAV may
then be reprocessed using the official closing NAV. The Trust reserves the right to advance the time by which purchase and redemption orders must be received for same business day credit as otherwise permitted by the SEC. In addition, each Fund may
compute its NAV as of any time permitted pursuant to any exemption, order or statement of the SEC or its staff.
The
Investment Adviser is not required to calculate the NAV of a Fund on days during which no shares are tendered to a Fund for redemption and no orders to purchase or sell shares are received by a Fund, or on days
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on which there is an insufficient degree of trading in a Funds portfolio securities for changes in the value of such securities to affect materially the NAV per share.
DIVIDENDS AND DISTRIBUTIONS
GENERAL POLICIES
Dividends from net investment
income, including any net foreign currency gains, are generally declared and paid quarterly and any net realized securities gains, if any, generally are distributed at least annually. In order to improve tracking error or comply with the
distribution requirements of the Internal Revenue Code of 1986, dividends may be declared and paid more frequently than annually for certain Funds. Dividends and securities gains distributions are distributed in U.S. dollars and cannot be
automatically reinvested in additional shares of the Funds. The Trust reserves the right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve the status of the Fund as a RIC or to avoid
imposition of income or excise taxes on undistributed income.
Dividends and other distributions on Fund Shares are
distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds received from the Fund.
DIVIDEND REINVESTMENT SERVICE
No dividend reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of Funds for reinvestment of
their dividend distributions. Beneficial Owners should contact their broker to determine the availability and costs of the service and the details of participation therein. Brokers may require Beneficial Owners to adhere to specific procedures and
timetables. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole shares of the same Fund purchased in the secondary market.
OTHER INFORMATION
COUNSEL
Drinker Biddle & Reath LLP,
with offices at One Logan Square, Ste. 2000, Philadelphia, PA 19103-6996, is counsel to the Trust.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP, located at 111 South Wacker Drive, Chicago, Illinois
60606-4301, serves as the independent registered public accounting firm of the Trust, audits the Funds financial statements and may perform other services.
ADDITIONAL INFORMATION
The Prospectus and this
SAI do not contain all the information included in the Registration Statement filed with the SEC under the Securities Act with respect to the securities offered by the Trusts Prospectus. Certain portions of the Registration Statement have been
omitted from the Prospectus and this SAI pursuant to the rules and regulations of the SEC. The Registration Statement, including the exhibits filed therewith, may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this SAI as to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement of which the Prospectus and this SAI form a part, each such statement being qualified in
all respects by such reference.
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