DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the section in the Prospectus entitled DISTRIBUTIONS.
GENERAL POLICIES
Dividends from
net investment income, if any, are generally declared and paid periodically, as described in the Prospectus, but may vary significantly from period to period. Distributions of net realized securities gains, if any, generally are declared and paid
once a year, but the Trust may make distributions on a more frequent basis for a Fund to improve index tracking or to comply with the distribution requirements of the Internal Revenue Code, in all events in a manner consistent with the provisions of
the 1940 Act.
Dividends and other distributions on 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 Trust.
Management of the Trust reserves the right to declare special dividends if, in its reasonable discretion, such action is necessary or advisable to preserve a Funds eligibility for treatment as a
regulated investment company (RIC) under the Internal Revenue Code or to avoid imposition of income or excise taxes at the Fund level.
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DIVIDEND REINVESTMENT
Broker dealers, at their own discretion, may offer a dividend reinvestment service under which Shares are purchased in the secondary market at current market prices. Investors should consult their broker
dealer for further information regarding any dividend reinvestment service offered by such broker dealer.
TAXES
The following is a summary of certain federal income tax considerations generally affecting the Funds and their shareholders that
supplements the discussion in the Prospectus. No attempt is made to present a comprehensive explanation of the federal, state, local or foreign tax treatment of the Funds or their shareholders, and the discussion here and in the Prospectus is not
intended to be a substitute for careful tax planning.
The following general discussion of certain federal income tax consequences is based on
the Internal Revenue Code and the regulations issued thereunder as in effect on the date of this Statement of Additional Information. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions
expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
The following information should be
read in conjunction with the section in the Prospectus entitled ADDITIONAL TAX INFORMATION.
TAXATION OF THE FUNDS. Each Fund has
elected or will elect and intends to qualify each year to be treated as a separate RIC under Subchapter M of the Internal Revenue Code. As such, each Fund should not be subject to federal income tax on its net investment income and capital gains, if
any, to the extent that it timely distributes such income and capital gains to its shareholders. In order to qualify for treatment as a RIC, a Fund must distribute annually to its shareholders at least the sum of 90% of its net investment income
(generally net investment income plus the excess of net short-term capital gains over net long-term capital losses) and 90% of its net tax exempt interest income, if any (the Distribution Requirement) and also must meet several
additional requirements. Among these requirements are the following: (i) at least 90% of a Funds gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to its business of investing in such stock, securities or currencies, and net income derived from interests in qualified publicly traded
partnerships (the Qualifying Income Requirement); and (ii) at the end of each quarter of the Funds taxable year, its assets must be diversified so that (a) at least 50% of the market value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater in value than 5% of the value of the
Funds total assets and to not more than 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities
of other RICs) of any one issuer, the securities (other than securities of other RICs) of two or more issuers that it controls and that are engaged in the same, similar, or related trades or businesses, or the securities of one or more qualified
publicly traded partnerships (the Diversification Requirement).
Each Fund is treated as a separate corporation for federal income
tax purposes. Each Fund therefore is considered to be a separate entity in determining its treatment under the rules for RICs described herein and in the Prospectus. Losses in one Fund do not offset gains in any other fund and the requirements
(other than certain organizational requirements) for qualifying RIC status are determined at the Fund level rather than at the Trust level.
Income derived from direct and indirect investments in commodities is not qualifying income for purposes of the Qualifying Income Requirement. Thus,
income from certain commodities-related investments may cause a Fund not to qualify as a regulated investment company. As noted above, each Fund may invest up to 25% of its total assets in qualified publicly traded partnerships (QPTPs)
without failing to meet the Diversification Requirement. Certain QPTPs invest in commodities-related instruments. Income from QPTPs is generally qualifying income. A QPTP is an entity that is treated as a partnership for federal income tax purposes,
subject to certain requirements. If an entity that would otherwise be treated as a QPTP fails to qualify as a QPTP, the income generated from a Funds investment in the entity may not be qualifying income. There is little regulatory guidance
concerning the application of the rules governing qualification as a QPTP, and it is possible that future guidance may adversely affect the qualification of entities as QPTPs. If a Fund fails to qualify as a regulated investment company, the Fund
will be subject to tax, which will reduce returns to the Funds shareholders. Such a failure will also alter the treatment of distributions to the Funds shareholders.
If a Fund fails to satisfy the Qualifying Income Requirement or the Diversification Requirement in any taxable year, such Fund may be eligible for relief provisions if the failures are due to reasonable
cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain
de minimis
failures of the Diversification Requirement where the Fund
corrects the failure within a specified period of time. In order to be eligible for the relief
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provisions with respect to a failure to meet the Diversification Requirement, a Fund may be required to dispose of certain assets. If these relief provisions were not available to a Fund and it
were to fail to qualify for treatment as a RIC for a taxable year, all of its taxable income would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and its distributions (including capital gains
distributions) generally would be taxable as ordinary income dividends to its shareholders, subject to the dividends-received deduction for corporate shareholders and the lower tax rates on qualified dividend income received by noncorporate
shareholders. To requalify for treatment as a RIC in a subsequent taxable year, the Fund would be required to satisfy the RIC qualification requirements for that year and to distribute any earnings and profits from any year in which the Fund failed
to qualify for tax treatment as a RIC. If a Fund failed to qualify as a RIC for a period greater than two taxable years, it would generally be required to pay a Fund-level tax on certain net built-in gains recognized with respect to certain of its
assets upon a disposition of such assets within ten years of qualifying as a RIC in a subsequent year. The Board reserves the right not to maintain the qualification of a Fund for treatment as a RIC if it determines such course of action to be
beneficial to shareholders.
Each Fund intends to distribute substantially all of its net investment income and its capital gains for each
taxable year. If a Fund meets the Distribution Requirement but retains some or all of its income or gains, it will be subject to federal income tax to the extent any such income or gains are not distributed. A Fund may designate certain amounts
retained as undistributed net capital gain in a notice to its shareholders, who (i) will be required to include in income for U.S. federal income tax purposes, as long-term capital gain, their proportionate shares of the undistributed amount so
designated, (ii) will be entitled to credit their proportionate shares of the income tax paid by the Fund on that undistributed amount against their federal income tax liabilities and to claim refunds to the extent such credits exceed their
liabilities and (iii) will be entitled to increase their tax basis, for federal income tax purposes, in their Shares in the Fund by an amount equal to the excess of the amount of undistributed net capital gain included in their respective
income over their respective income tax credits.
A Fund will be subject to a 4% excise tax on certain undistributed income if it does not
distribute to its shareholders in each calendar year an amount at least equal to 98% of its ordinary income for the calendar year plus 98.2% of its capital gain net income for the twelve months ended October 31 of such year, subject to an
increase for any shortfall in the prior years distribution. Each Fund intends to declare and distribute dividends and distributions in the amounts and at the times necessary to avoid the application of this 4% excise tax.
A Fund may elect to treat part or all of any qualified late year loss as if it had been incurred in the succeeding taxable year in
determining the Funds taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such qualified late year loss as if it had been incurred in the succeeding
taxable year in characterizing Fund distributions for any calendar year. A qualified late year loss generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the
current taxable year (commonly referred to as post-October losses) and certain other late-year losses.
Capital losses in excess
of capital gains (net capital losses) are not permitted to be deducted against a RICs net investment income. Instead, for U.S. federal income tax purposes, potentially subject to certain limitations, each Fund may carry net capital
losses from any taxable year forward to offset its capital gains in future years. A Fund is permitted to carry forward indefinitely a net capital loss to offset its capital gains, if any, in years following the year of the loss. To the extent
subsequent capital gains are offset by such losses, they would not result in U.S. federal income tax liability to the Fund and may not be distributed as capital gains to its shareholders. Generally, the Funds may not carry forward any losses other
than net capital losses.
TAXATION OF SHAREHOLDERSDISTRIBUTIONS. Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income (computed without regard to the deduction for dividends paid), its net tax-exempt income, if any, and any net capital gain (net recognized long-term capital gains in excess of net recognized
short-term capital losses, taking into account any capital loss carryovers). Each Fund will report to shareholders annually the amounts of dividends paid from ordinary income, the amount of distributions of net capital gain, the portion of dividends
which may qualify for the dividends received deduction, if any, and the portion of dividends which may qualify for treatment as qualified dividend income.
Subject to certain limitations, dividends reported by a Fund as qualified dividend income will be taxable to noncorporate shareholders at rates of up to 20%. Dividends may be reported by a Fund as
qualified dividend income if they are attributable to qualified dividend income received by the Fund. Qualified dividend income includes, in general, subject to certain holding period requirements and other requirements, dividend income from certain
U.S. and foreign corporations. Subject to certain limitations, eligible foreign corporations include those incorporated in possessions of the United States, those incorporated in certain countries with comprehensive tax treaties with the United
States and other foreign corporations if the stock with respect to which the dividends are paid is tradable on an established securities market in the United States. A dividend generally will not be treated as qualified dividend income to the extent
that (i) the shareholder has not held the stock 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 stock becomes ex-dividend with respect to such
dividend or, in the case
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of certain preferred stock, for more than 90 days during the 181-day period beginning 90 days before such date, (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 Internal Revenue Code. The holding
period requirements described in this paragraph apply to the shareholders investments in the Funds and to the Funds indirect investments in the underlying dividend paying stock. Dividends treated as received by a Fund from a REIT or
another RIC may be treated as qualified dividend income generally only to the extent the dividend distributions are attributable to qualified dividend income received by such REIT or RIC. It is expected that a Funds allocable share of
dividends received by a Fund from a REIT and distributed from that Fund to a shareholder generally will be taxable to the shareholder as ordinary income. If 95% or more of a Funds gross income (calculated without taking into account net
capital gain derived from sales or other dispositions of stock or securities) consists of qualified dividend income, that Fund may report all distributions of such income as qualified dividend income.
Distributions from net short-term capital gains will be taxable to shareholders as ordinary income. Distributions from a Funds net capital gain
will be taxable to shareholders at long-term capital gains rates, regardless of how long shareholders have held their Shares in the Fund. Long-term capital gains are taxed to noncorporate shareholders at rates of up to 20%.
Although dividends generally will be treated as distributed when paid, any dividend declared by a Fund in October, November or December and payable to
shareholders of record in such a month that is paid during the following January will be treated for U.S. federal income tax purposes as received by shareholders on December 31 of the calendar year in which it was declared.
If a Funds distributions exceed its earnings and profits, all or a portion of the distributions made in the taxable year may be treated as a return
of capital to shareholders. A return of capital distribution generally will not be taxable but will reduce the shareholders cost basis and result in a higher capital gain or lower capital loss when the Shares on which the distribution was
received are sold. After a shareholders basis in the Shares has been reduced to zero, distributions in excess of earnings and profits will be treated as gain from the sale of the shareholders Shares.
Distributions that are reinvested in additional Shares of a Fund through the means of a dividend reinvestment service, if offered by your broker-dealer,
will nevertheless be taxable dividends to the same extent as if such dividends had been received in cash.
U.S. individuals with income
exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their net investment income, which includes taxable interest, dividends, and certain capital gains (including capital gains
realized on the sale of Shares). This 3.8% tax also applies to all or a portion of the undistributed net investment income of certain shareholders that are estates and trusts.
Distributions of ordinary income and capital gains may also be subject to foreign, state and local taxes depending on a shareholders circumstances.
TAXATION OF SHAREHOLDERS SALE OF SHARES. In general, a sale of Shares results in capital gain or loss, and for individual shareholders, is taxable
at a federal rate dependent upon the length of time the Shares were held. A sale of Fund Shares held for a period of one year or less at the time of such sale will, for tax purposes, generally result in short-term capital gains or losses, and a sale
of those held for more than one year will generally result in long-term capital gains or losses. Long-term capital gains are taxed to noncorporate shareholders at rates of up to 20%.
Gain or loss on the sale of Shares in a Fund is measured by the difference between the amount received and the adjusted tax basis of the Shares. Shareholders should keep records of investments made
(including Shares acquired through the reinvestment of dividends and distributions) so they can compute the tax basis of their Shares.
A loss
realized on a sale of Shares of a Fund may be disallowed if other substantially identical Shares are acquired (whether through reinvestment of dividends or otherwise) within a sixty-one (61) day period beginning thirty (30) days before and
ending thirty (30) days after the date that the Shares are disposed of. In such a case, the basis of the Shares acquired must be adjusted to reflect the disallowed loss. Any loss upon the sale of Shares held for six (6) months or less is
treated as long-term capital loss to the extent of any amounts treated as distributions to the shareholder of long-term capital gain (including any amounts credited to the shareholder as undistributed capital gains).
TAXATION OF FUND INVESTMENTS. Dividends and interest received by a Fund on foreign securities may give rise to withholding and other taxes imposed by
foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. If a Fund meets certain requirements, which include a requirement that more than 50% of the value of the Funds total assets
at the close of its respective taxable year consists of stocks or securities of foreign corporations, then the Fund
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should be eligible to file an election with the Internal Revenue Service (the IRS) that may enable its shareholders, in effect, to receive either the benefit of a foreign tax credit,
or a tax deduction, with respect to certain foreign and U.S. possessions income taxes paid by the Fund, subject to certain limitations. Pursuant to this election, the Fund will treat those taxes as dividends paid to its shareholders. Each such
shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may
then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit the shareholder may be entitled to use against such
shareholders federal income tax. If a Fund makes this election, the Fund will report annually to its shareholders the respective amounts per share of the Funds income from sources within, and taxes paid to, foreign countries and U.S.
possessions. If the Fund does not make this election, the Fund will be entitled to claim a deduction for certain foreign taxes incurred by the Fund.
Certain of the Funds investments may be subject to complex provisions of the Internal Revenue Code (including provisions relating to hedging transactions, straddles, integrated transactions, foreign
currency contracts, forward foreign currency contracts, and notional principal contracts) that, among other things, may affect the character of gains and losses realized by the Funds (e.g., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund and defer losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also may require a Fund to mark-to-market certain types
of positions in its portfolio (i.e., treat them as if they were closed out) which may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the RIC distribution requirements for
avoiding income and excise taxes. The Funds intend to monitor their transactions, intend to make appropriate tax elections, and intend to make appropriate entries in their books and records in order to mitigate the effect of these rules and preserve
the Funds qualification for treatment as RICs.
If a Fund acquires any equity interest (under Treasury regulations that may be
promulgated in the future, generally including not only stock but also an option to acquire stock such as is inherent in a convertible bond) in certain foreign corporations (i) that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties, or capital gains) or (ii) where at least 50% of the corporations assets (computed based on average fair market value) either produce or are held for the production of
passive income (passive foreign investment companies or PFICs), the Fund could be subject to U.S. federal income tax and nondeductible interest charges on excess distributions received from such companies or on
gain from the sale of stock in such companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Fund would not be able to pass through to its shareholders any credit or deduction for such a tax.
A qualified electing fund election or a mark to market election may generally be available that would ameliorate these adverse tax consequences, but such elections could require a Fund to recognize taxable income or gain
(subject to the distribution requirements applicable to RICs, as described above) without the concurrent receipt of cash. In order to satisfy the distribution requirements and avoid a tax at the Fund level, a Fund may be required to liquidate
portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. Gains from the sale of stock of PFICs may also be treated as ordinary income. In order for a Fund to make a
qualified electing fund election with respect to a PFIC, the PFIC would have to agree to provide certain tax information to the Fund on an annual basis, which it might not agree to do. The Funds may limit and/or manage their holdings in PFICs to
limit their tax liability or maximize their returns from these investments.
Each Fund is required for federal income tax purposes to
mark-to-market and recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. Gain or loss from futures and options
contracts on broad-based indexes required to be marked to market will be 60% long-term and 40% short-term capital gain or loss. Application of this rule may alter the timing and character of distributions to shareholders. A Fund may be required to
defer the recognition of losses on futures contracts, options contracts and swaps to the extent of any unrecognized gains on offsetting positions held by the Fund. It is anticipated that certain net gain realized from the closing out of futures or
options contracts will be considered gain from the sale of securities and therefore will be qualifying income for purposes of the Qualifying Income Requirement.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified pension plans, individual retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt entities, generally
are exempt from federal income taxation except with respect to their unrelated business taxable income (UBTI). Under current law, a Fund generally serves to block UBTI from being realized by its tax-exempt
shareholders. However, notwithstanding the foregoing, tax-exempt shareholders could realize UBTI by virtue of their investment in a Fund where, for example, (i) the Fund invests in REITs that hold residual interests in real estate mortgage
investment conduits (REMICs) or (ii) Shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholders within the meaning of section 514(b) of the Internal Revenue Code. Charitable remainder trusts are
subject to special rules and should consult their tax advisors. There are no restrictions preventing a Fund from holding investments in REITs that hold residual interests in REMICs, and a Fund may do so. The IRS has issued guidance with
respect to these issues and prospective shareholders, especially charitable remainder trusts, are strongly encouraged to consult with their tax advisors regarding these issues.
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FOREIGN SHAREHOLDERS. Dividends paid by a Fund to shareholders who are nonresident aliens or foreign
entities (other than short-term capital gain dividends and interest-related dividends, described below) will be subject to a 30% United States withholding tax unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law to the extent derived from investment income and short-term capital gain or unless such income is effectively connected with a U.S. trade or business carried on through a permanent establishment in the United
States. Nonresident shareholders are urged to consult their own tax advisors concerning the applicability of the United States withholding tax and the proper withholding form(s) to be submitted to a Fund. A non-U.S. shareholder who fails to provide
an appropriate IRS Form W-8 may be subject to backup withholding at the appropriate rate.
Dividends reported by a Fund as
(i) interest-related dividends, to the extent such dividends are derived from the Funds qualified net interest income, or (ii) short-term capital gain dividends, to the extent such dividends are derived from the
Funds qualified short-term gain, are generally exempt from this 30% withholding tax. Qualified net interest income is a Funds net income derived from U.S.-source interest and original issue discount, subject to
certain exceptions and limitations. Qualified short-term gain generally means the excess of a Funds net short-term capital gain for the taxable year over its net long-term capital loss, if any. In the case of Shares held through an
intermediary, the intermediary may withhold even if a Fund reports the payment as an interest-related dividend or as a short-term capital gain dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of
these rules to their accounts. Absent future legislation, the withholding exemptions for interest-related dividends and short-term capital gain dividends only apply to dividends with respect to taxable years of a Fund beginning before
January 1, 2014.
Unless certain non-U.S. entities that hold Fund Shares comply with IRS requirements that will generally require them to
report information regarding U.S. persons investing in, or holding accounts with, such entities, a 30% withholding tax may apply to Fund distributions payable to such entities after June 30, 2014 (or, in certain cases, after later dates) and
redemptions and certain capital gain dividends payable to such entities after December 31, 2016. A non-U.S. shareholder may be exempt from the withholding described in this paragraph under an applicable intergovernmental agreement between the
U.S. and a foreign government, provided that the shareholder and the applicable foreign government comply with the terms of such agreement.
Non-U.S. persons are subject to U.S. tax on disposition of a United States real property interest (a USRPI). Gain on such a
disposition is sometimes referred to as FIRPTA gain. The Internal Revenue Code provides a look-through rule for distributions of FIRPTA gain if certain requirements are met. If the look-through rule applies, certain
distributions attributable to income received by a Fund from REITs may be treated as gain from the disposition of a USRPI, causing distributions to be subject to U.S. withholding tax at rates of up to 35%, and requiring non-U.S. investors to file
nonresident U.S. income tax returns. Also, gain may be subject to a 30% branch profits tax in the hands of a non-U.S. shareholder that is treated as a corporation for federal income tax purposes. Under certain circumstances, a Fund may
itself qualify as a USRPI, which would result in similar consequences to certain non-U.S. investors.
BACKUP WITHHOLDING. A Fund will be
required in certain cases to withhold (as backup withholding) on amounts payable to any shareholder who (1) has provided the Fund either an incorrect tax identification number or no number at all, (2) is subject to backup
withholding by the IRS for failure to properly report payments of interest or dividends, (3) has failed to certify to the 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). The backup withholding rate is 28%. Backup withholding will not be applied to payments that have been subject to the 30% withholding tax on shareholders who are neither citizens nor permanent residents
of the U.S.
CREATION UNITS. An Authorized Participant who exchanges securities for Creation Units generally will recognize a gain or a loss.
The gain or loss will be equal to the difference between the market value of the Creation Units at the time and the sum of the exchangers aggregate basis in the securities surrendered plus the amount of cash paid for such Creation Units. A
person who redeems Creation Units will generally recognize a gain or loss equal to the difference between the exchangers basis in the Creation Units and the sum of the aggregate market value of any securities received plus the amount of any
cash received for such Creation Units. The IRS, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing wash sales, or on the basis that there has
been no significant change in economic position.
Any capital gain or loss realized upon the creation of Creation Units will generally be
treated as long-term capital gain or loss if the securities exchanged for such Creation Units have been held for more than one year. Any capital gain or loss realized upon the redemption of Creation Units will generally be treated as long-term
capital gain or loss if the Shares comprising the Creation Units have been held for more than one year. Otherwise, such capital gains or losses will generally be treated as short-term capital gains or losses. Any loss upon a redemption of Creation
Units held for six (6) months or less will be treated as a long-term capital loss to the extent of any amounts treated as distributions to the applicable Authorized Participant of long-term capital gain with respect to the Creation Units
(including any amounts credited to the Authorized Participant as undistributed capital gains).
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A Fund has the right to reject an order for Creation Units if the purchaser (or group of purchasers) would,
upon obtaining the Shares so ordered, own 80% or more of the outstanding shares of the Fund and if, pursuant to section 351 of the Internal Revenue Code, the Fund would have a basis in the deposit securities different from the market value of such
securities on the date of deposit. A Fund also has the right to require information necessary to determine beneficial Share ownership for purposes of the 80% determination. If a Fund does issue Creation Units to a purchaser (or group of
purchasers) that would, upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares of the Fund, the purchaser (or group of purchasers) may not recognize gain or loss upon the exchange of securities for Creation Units.
Persons purchasing or redeeming Creation Units should consult their own tax advisors with respect to the tax treatment of any creation or
redemption transaction.
CERTAIN POTENTIAL TAX REPORTING REQUIREMENTS. Under promulgated Treasury regulations, if a shareholder recognizes a
loss on disposition of a Funds Shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder (or certain greater amounts over a combination of years), the shareholder must file with the IRS a
disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC are not excepted. Significant penalties may be imposed for
the failure to comply with the reporting requirements. 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 advisers to determine the applicability of these regulations in light of their individual circumstances.
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 advisors as to the tax consequences of investing in such Shares, including under state, local and other tax laws.
Finally, the foregoing discussion is based on applicable provisions of the Internal Revenue Code, regulations, judicial authority and administrative interpretations in effect on the date hereof. Changes in applicable authority could materially
affect the conclusions discussed above, and such changes often occur.
CAPITAL STOCK AND SHAREHOLDER
REPORTS
Each Fund issues Shares of beneficial interest, par value $.01 per Share. The Board may designate additional funds.
Each Share issued by the Trust has a pro rata interest in the assets of the corresponding series of the Trust. Shares have no preemptive, exchange,
subscription or conversion rights and are freely transferable. Each Share is entitled to participate equally in dividends and distributions declared by the Board with respect to each Fund, and in the net distributable assets of each Fund on
liquidation.
Each Share has one vote with respect to matters upon which a shareholder vote is required consistent with the requirements of
the 1940 Act and the rules promulgated thereunder. Shares of all series of the Trust (Funds) vote together as a single class except that if the matter being voted on affects only a particular fund it will be voted on only by that fund
and if a matter affects a particular fund differently from other Funds, that fund will vote separately on such matter. Under Massachusetts law, the Trust is not required to hold an annual meeting of shareholders unless required to do so under the
1940 Act. The policy of the Trust is not to hold an annual meeting of shareholders unless required to do so under the 1940 Act. All Shares of the Trust (regardless of the fund) have noncumulative voting rights for the election of Trustees. Under
Massachusetts law, Trustees of the Trust may be removed by vote of the shareholders.
Under Massachusetts law, shareholders of a business
trust may, under certain circumstances, be held personally liable as partners for obligations of the Trust. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust, requires that
Trust obligations include such disclaimer, and provides for indemnification and reimbursement of expenses out of the Trusts property for any shareholder held personally liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to circumstances in which the Trust itself would be unable to meet its obligations. Given the above limitations on shareholder personal liability, and the nature of each
Funds assets and operations, the risk to shareholders of personal liability is believed to be remote.
Shareholder inquiries may be made
by writing to the Trust, c/o the Distributor, State Street Global Markets, LLC at State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111.
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COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Bingham McCutchen LLP, 2020 K Street, NW, Washington, DC 20006, serves as counsel to the Trust.
[ ], [
address
], serves as the independent registered public accounting firm for the Trust. [ ]
performs annual audits of the Funds financial statements and provides other audit, tax and related services.
LOCAL MARKET HOLIDAY SCHEDULES
The Trust generally intends to effect deliveries of portfolio securities on a basis of T plus
three business days (i.e., days on which the NYSE is open) in the relevant foreign market of a Fund. The ability of the Trust to effect in-kind redemptions within three business days of receipt of a redemption request is subject, among other things,
to the condition that, within the time period from the date of the request to the date of delivery of the securities, there are no days that are local market holidays on the relevant business days. For every occurrence of one or more intervening
holidays in the local market that are not holidays observed in the United States, the redemption settlement cycle may be extended by the number of such intervening local holidays. In addition to holidays, other unforeseeable closings in a foreign
market due to emergencies may also prevent the Trust from delivering securities within three business days.
The securities delivery cycles
currently practicable for transferring portfolio securities to redeeming investors, coupled with local market holiday schedules, may require a delivery process longer than the standard settlement period. In certain circumstances during the calendar
year, the settlement period may be greater than seven calendar days. Such periods are listed in the table below, as are instances where more than seven days will be needed to deliver redemption proceeds. Since certain holidays may occur on different
dates in subsequent years, the number of days required to deliver redemption proceeds in any given year may exceed the maximum number of days listed in the table below. The proclamation of new holidays, the treatment by market participants of
certain days as informal holidays (e.g., days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of existing holidays, or changes in local securities delivery
practices, could affect the information set forth herein at some time in the future and longer (worse) redemption periods are possible.
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MARKET
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|
MAX SETL
CYCLE
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TRADE DATE(S) W/ SETTLEMENT OF GREATER THAN 7 CALENDAR DAYS (MAX DAYS IN PARENTHESIS)
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Australia
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7 days
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Austria
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10 days
|
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12/19/14 (10); 12/22/14 (8); 12/23/14 (8)
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Belgium
|
|
7 days
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|
|
Brazil
|
|
7 days
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|
|
Canada
|
|
7 days
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|
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Chile
|
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10 days
|
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9/12/14 (10); 9/15/14 (8); 9/16/14 (8)
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China
|
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11 days
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1/27/14 (8); 1/28/14 (8); 1/29/14 (8); 9/26/14 (11); 9/29/14 (8); 9/30/14 (8)
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Columbia
|
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7 days
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Czech Republic
|
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10 days
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12/19/14 (10); 12/22/14 (8); 12/23/14 (8)
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Denmark
|
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8 days
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4/14/14 (8); 4/15/14 (8); 4/16/14 (8)
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Egypt
|
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7 days
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Finland
|
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7 days
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France
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7 days
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Germany
|
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7 days
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Greece
|
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7 days
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Hong Kong
|
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7 days
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Hungary
|
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7 days
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India
|
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7 days
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Indonesia
|
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7 days
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Ireland
|
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7 days
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Israel
|
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10 days
|
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4/14/14 (9); 9/19/14 (10); 9/22/14 (8); 9/23/14 (8)
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Italy
|
|
10 days
|
|
12/19/14 (10); 12/22/14 (8); 12/23/14 (8)
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Japan
|
|
7 days
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|
Luxembourg
|
|
7 days
|
|
|
Malaysia
|
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7 days
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|
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Mexico
|
|
7 days
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Morocco
|
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7 days
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|
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Netherlands
|
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7 days
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New Zealand
|
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7 days
|
|
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Norway
|
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8 days
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4/14/14 (8); 4/15/14 (8); 4/16/14 (8)
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37
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MARKET
|
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MAX SETL
CYCLE
|
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TRADE DATE(S) W/ SETTLEMENT OF GREATER THAN 7 CALENDAR DAYS (MAX DAYS IN
PARENTHESIS)
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Pakistan
|
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7 days
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Peru
|
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7 days
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|
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Philippines
|
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7 days
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|
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Poland
|
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7 days
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Portugal
|
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7 days
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|
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Russia
|
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7 days
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|
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Singapore
|
|
7 days
|
|
|
South Africa
|
|
7 days
|
|
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South Korea
|
|
7 days
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|
|
Spain
|
|
7 days
|
|
|
Sweden
|
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10 days
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4/14/14 (8); 4/15/14 (8); 4/16/14 (8); 12/19/14 (10); 12/22/14 (8); 12/23/14 (8)
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Switzerland
|
|
10 days
|
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12/19/14 (10); 12/22/14 (8); 12/23/14 (8)
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Taiwan
|
|
8 days
|
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1/27/14 (8); 1/28/14 (8); 1/29/14 (8)
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Thailand
|
|
7 days
|
|
|
Turkey
|
|
7 days
|
|
|
United Kingdom
|
|
7 days
|
|
|
38
SSgA Funds Management, Inc. (SSgA FM) is a registered investment advisor and a wholly owned subsidiary of
State Street Corporation, a leading provider of financial services to institutional investors. As an investment manager, SSgA FM has discretionary proxy voting authority over most of its client accounts, and SSgA FM votes these proxies in the manner
that we believe will most likely protect and promote the long term economic value of client investments as described in the SSgA FM Global Proxy Voting and Engagement Principles.
SSgA FM maintains Proxy Voting Guidelines for select markets, including voting guidelines for the US, the EU, the UK, emerging markets and Japan. International markets that do not have specific voting
guidelines are reviewed and voted consistent with our SSgA FM Global Proxy Voting and Engagement Principles; however, SSgA FM also endeavors to show sensitivity to local market practices when voting in these various markets.
39
SSgA FMS APPROACH TO
PROXY VOTING AND ISSUER ENGAGEMENT
At SSgA FM, we take our fiduciary duties as an asset
manager very seriously. We have a dedicated team of corporate governance professionals, who help us carry out our duties as a responsible investor. These duties include engaging with companies, developing and enhancing in-house corporate governance
policies, analyzing corporate governance issues on a case-by-case basis at the company level, and exercising our voting rights, all to maximize shareholder value.
SSgA FMs Global Proxy Voting and Engagement Principles may take unique perspectives on common governance issues that vary from one market to another and likewise engagement activity may take
different forms in order to best achieve long term engagement goals. We believe that proxy voting and engagement with portfolio companies is often the most direct and productive way shareholders can exercise their ownership rights, and taken
together, we view these tools to be an integral part of the overall investment process.
We believe engagement and voting activity have a
direct relationship. As a result, the integration of our engagement activities, while leveraging the exercise of our voting rights, provides a meaningful shareholder tool that we believe protects and enhances the long term economic value of the
holdings in our client accounts. SSgA FM maximizes its voting power and engagement by maintaining a centralized proxy voting and active ownership process covering all holdings, regardless of strategy. Despite the different investment views and
objectives across SSgA FM, depending on the product or strategy, the fiduciary responsibilities of share ownership and voting for which SSgA FM has voting discretion is carried out with a single voice and objective.
SSgA FMs Global Proxy Voting and Engagement Principles support governance structures that we believe add to or maximize shareholder value at the
companies held in our clients portfolios. SSgA FM conducts issuer specific engagement with companies to discuss our principles, including sustainability related risks. In addition, we encourage issuers to find ways of increasing the amount of
direct communication board members have with shareholders. We believe direct communication with executive board members and independent non-executive directors is critical to helping companies understand shareholder concerns. Conversely, where
appropriate, we conduct collaborative engagement activities with multiple shareholders and communicate with company representatives about common concerns.
In conducting our engagement, SSgA FM also evaluates the various factors that play into the corporate governance framework of a country, including the macroeconomic conditions and broader political system
in a country, quality of regulatory oversight, enforcement of property and shareholder rights and the independence of the judiciary to name a few. SSgA FM understands that regulatory requirements and investor expectations relating to governance
practices and engagement activities differ from country-to-country. As a result, SSgA FM engages with issuers, regulators, or both, depending on the market. Also, SSgA FM is a member of various investor associations that seek to address broader
corporate governance related policy at the country level as well as issuer specific concerns at a company level.
To help mitigate company
specific risk, the team may collaborate with members of the active investment teams to engage with companies on corporate governance issues and address any specific concerns, or to get more information regarding shareholder items that are to be
voted on at upcoming shareholder meetings. Outside of proxy voting season, SSgA FM conducts issuer specific engagement with companies covering various corporate governance and sustainability related risks.
The SSgA FM Governance Team uses a blend of quantitative and qualitative research and data to support screens to help identify issuers where active
engagement may be necessary to protect and promote shareholder value. Issuer engagement may also be event driven, focusing on issuer specific corporate governance, sustainability concerns or wider industry related trends. SSgA FM also gives
consideration to the size of our total position of the issuer in question and/or the potential negative governance, performance profile, and circumstance at hand. As a result, SSgA FM believes issuer engagement can take many forms and be triggered
under numerous circumstances. The following methods represent how SSgA FM defines engagement methods:
2
Active
SSgA FM uses screening tools designed to capture a mix of company specific data including governance and sustainability profiles to help us focus our voting and engagement activity. SSgA FM will actively
seek direct dialogue with the board and management of companies we have identified through our screening processes. Such engagements may lead to further monitoring to ensure the company improves its governance or sustainability practices. In these
cases, the engagement process represents the most meaningful opportunity for SSgA FM to protect long term shareholder value from excessive risk due to poor governance and sustainability practices.
Recurring
SSgA FM has ongoing dialogue
with its largest holdings on corporate governance and sustainability issues. SSgA FM maintains regular face to face meetings with these issuers, allowing SSgA FM to reinforce key tenets of good corporate governance and actively advise these issuers
around concerns that SSgA FM feels may negatively impact long term shareholder value.
Reactive
Reactive engagement is initiated by the issuers. SSgA FM routinely discusses specific voting issues and items with the issuer community. Reactive
engagement is an opportunity to address not only voting items, but also a wide range of governance and sustainability issues.
Measurement
Assessing the effectiveness of our issuer engagement process is often difficult. To limit the subjectivity of measuring our success we
actively seek issuer feedback and monitor the actions issuers take post-engagement to identify tangible changes. By doing so, we are able to establish indicators to gauge how issuers respond to our concerns and to what degree these responses satisfy
our requests. It is also important to note that successful engagement activity can be measured over differing time periods depending on the facts and circumstances involved; engagements can last as short as a single meeting or span multiple years.
Depending on the issue and whether the engagement activity is reactive, recurring, or active, engagement with issuers can take the form of
written communication, conference calls, or face-to-face meetings.
SSgA FM believes active engagement is best conducted directly with company
management or board members. Collaborative engagement, where multiple shareholders communicate with company representatives, can serve as a potential forum for issues that are not identified by SSgA FM as requiring active engagement, such as
shareholder conference calls.
PROXY VOTING PROCEDURE
Oversight
The SSgA FM Corporate Governance Team is responsible for implementing the Proxy
Voting Guidelines, case-by-case voting items, issuer engagement activities, and research and analysis of governance-related issues. The implementation of the Proxy Voting Guidelines is overseen by the SSgA Global Proxy Review Committee (SSgA
PRC), a committee of investment, compliance and legal professionals, who provide guidance on proxy issues as described in greater detail below. Oversight of the proxy voting process is ultimately the responsibility of the SSgA Investment
Committee. The SSgA Investment Committee reviews and approves amendments to the Proxy Voting Guidelines. The SSgA PRC reports to the SSgA Investment Committee, and may refer certain significant proxy items to that committee.
Proxy Voting Process
In order to
facilitate SSgA FMs proxy voting process, SSgA FM retains Institutional Shareholder Services Inc. (ISS), a firm with expertise in proxy voting and corporate governance. SSgA FM utilizes ISSs services in three ways:
(1) as SSgA FMs proxy voting agent (providing SSgA FM with vote execution and administration services); (2) for applying SSgA FMs Proxy Voting Guidelines; and (3) as providers of research and analysis relating to general
corporate governance issues and specific proxy items.
3
The SSgA FM Corporate Governance Team reviews its Proxy Voting Guidelines with ISS on an annual basis or
on a case-by-case basis as needed. On most routine proxy voting items (e.g., ratification of auditors), ISS will affect the proxy votes in accordance with SSgA FMs Proxy Voting Guidelines. On matters not directly covered by our Proxy Voting
Guidelines, and where we conclude there is limited impact on shareholder value, ISS may affect proxy votes in accordance with its own recommendations.
In other cases, the Corporate Governance Team will evaluate the proxy solicitation to determine how to vote based on facts and circumstances, and consistent with SSgA FMs Global Proxy Voting and
Engagement Principles, and the accompanying Proxy Voting Guidelines, that seek to maximize the value of our client accounts.
In some
instances, the SSgA FM Corporate Governance Team may refer significant issues to the SSgA PRC for a determination of the proxy vote. In addition, in determining whether to refer a proxy vote to the SSgA PRC, the SSgA FM Corporate Governance Team
will consider whether a material conflict of interest exists between the interests of our client and those of SSgA FM or its affiliates (as explained in greater detail below under Conflict of Interest).
SSgA FM votes in all markets where it is feasible; however, SSgA FM may refrain from voting meetings when power of attorney documentation is required,
where voting will have a material impact on our ability to trade the security, or where issuer-specific special documentation is required or various market or issuer certifications are required. SSgA FM is unable to vote proxies when certain
custodians, used by our clients, do not offer proxy voting in a jurisdiction or when they charge a meeting specific fee in excess of the typical custody service agreement.
Conflict of Interest
From time to time, SSgA FM will review a proxy which may present a
potential conflict of interest. In general, we do not believe matters that fall within our Proxy Voting Guidelines and are voted consistently with the Proxy Voting Guidelines present any potential conflicts, since the vote on the matter has
effectively been determined without reference to the soliciting entity. However, where matters do not fall within our Proxy Voting Guidelines or where we believe that voting in accordance with the Proxy Voting Guidelines is unwarranted, we conduct
an additional review to determine whether there is a conflict of interest. Although various relationships could be deemed to give rise to a conflict of interest, SSgA FM has determined that two categories of relationships present a serious concern
to warrant an alternative process: (1) clients of SSgA FM or its affiliates which are among the top 100 clients of State Street Corporation or its affiliates based upon revenue; and (2) the 10 largest broker-dealers used by SSgA FM, based
upon revenue (a Material Relationship).
In circumstances where either (i) the matter does not fall clearly within the Proxy
Voting Guidelines or (ii) SSgA FM determines that voting in accordance with such policies or guidance is not in the best interests of its clients, the Head of SSgA FMs Corporate Governance Team will determine whether a Material
Relationship exists. If so the matter is referred to the SSgA PRC. The SSgA PRC then reviews the matter and determines whether a conflict of interest exists, and if so, how to best resolve such conflict. For example, the SSgA PRC may
(i) determine that the proxy vote does not give rise to a conflict due to the issues presented, (ii) refer the matter to the SSgA Investment Committee for further evaluation or (iii) retain an independent fiduciary to determine the
appropriate vote.
PROXY VOTING AND ENGAGEMENT PRINCIPLES
Directors and Boards
The election of directors is one of the most important fiduciary
duties SSgA FM performs as a shareholder. SSgA FM believes that well-governed companies can protect and pursue shareholder interests better and withstand the challenges of an uncertain economic environment. As such, SSgA FM seeks to vote director
elections, in a way, which we as a fiduciary, believe will maximize the long term value of each portfolios holdings.
Principally, a
board acts on behalf of shareholders by protecting their interests and preserving their rights. This concept establishes the standard by which board and director performance is measured. To achieve this fundamental principle, the role of the board,
in SSgA FMs view, is to carry out its responsibilities in the best long-term interest of the company and its shareholders. An independent and effective board oversees management, provides guidance on strategic matters, selects the CEO and
other senior executives, creates a succession plan, provides risk oversight and assess the performance of the CEO and management. In contrast, management implements the business and capital allocation strategies and runs the companys
day-to-day operations. As part of SSgA FMs engagement process, SSgA FM routinely discusses the importance of these responsibilities with the boards of issuers.
4
SSgA FM believes the quality of a board is a measure of director independence and company governance
practices. In voting to elect nominees, SSgA FM considers many factors. SSgA FM believes independent directors are crucial to good corporate governance and help management establish sound corporate governance policies and practices. A sufficiently
independent board will effectively monitor management, maintain appropriate governance practices, and perform oversight functions necessary to protect shareholder interests. SSgA FM also believes the right mix of skills, independence and
qualifications among directors provides boards with the knowledge and direct experience to deal with risks and operating structures that are often unique and complex from one industry to another.
Accounting and Audit Related Issues
SSgA FM believes audit committees are critical and necessary as part of the boards risk oversight role. The audit committee is responsible for
setting out an internal audit function to provide robust audit and internal control systems designed to effectively manage potential and emerging risks to the companys operations and strategy. SSgA FM believes the audit committees should have
independent directors as members and SSgA FM will hold the members of the audit committee responsible for overseeing the management of the audit function.
The disclosure and availability of reliable financial statements in a timely manner is imperative for the investment process. As a result, board oversight of the internal controls and the independence of
the audit process are essential if investors are to rely on financial statements. Also, it is important for the audit committee to appoint external auditors who are independent from management as we expect auditors to provide assurance as of a
companys financial condition.
Capital Structure, Reorganization and Mergers
The ability to raise capital is critical for companies to carry out strategy, grow and achieve returns above their cost of capital.
The approval of capital raising activities is fundamental to a shareholders ability to monitor the amounts of proceeds and to ensure capital is
deployed efficiently. Altering the capital structure of a company is a critical decision for boards and in making such a critical decision, SSgA FM believes the company should have a well explained business rationale that is consistent with
corporate strategy and not overly dilute its shareholders.
Mergers and the reorganization of the structure of a company often involve
proposals relating to reincorporation, restructurings, mergers, liquidations, and other major changes to the corporation. Proposals that are in the best interests of the shareholders, demonstrated by enhancing share value or improving the
effectiveness of the companys operations, will be supported. In evaluating mergers and acquisitions, SSgA FM considers the adequacy of the consideration and the impact of the corporate governance provisions to shareholders. In all cases, SSgA
FM uses its discretion in order to maximize shareholder value.
Occasionally, companies add anti-takeover provisions that reduce the chances
of a potential acquirer making an offer or reducing the likelihood of a successful offer. SSgA FM does not support proposals that reduce shareholders rights, entrench management or reduce the likelihood of shareholders right to vote on
reasonable offers.
Compensation
SSgA FM considers the boards responsibility to include setting the appropriate level of executive compensation. Despite the differences among the types of plans and the awards possible, there is a
simple underlying philosophy that guides SSgA FMs analysis of executive compensation; there should be a direct relationship between executive compensation and company performance over the long term.
Shareholders should have the opportunity to assess whether pay structures and levels are aligned with business performance. When assessing remuneration
reports, SSgA FM considers factors such as adequate disclosure of different remuneration elements, absolute and relative pay levels, peer selection and benchmarking, the mix of long term and short term incentives, alignment of pay structures with
shareholder interests as well as with corporate strategy and performance. SSgA FM may oppose remuneration reports where pay seems misaligned with shareholders interests. SSgA FM may also consider executive compensation practices when
re-electing members of the remuneration committee.
5
SSgA FM recognizes that compensation policies and practices are unique from market to market; often with
significant differences between the level of disclosures, the amount and forms of compensation paid, and the ability of shareholders to approve executive compensation practices. As a result, our ability to assess the appropriateness of executive
compensation is often dependent on market practices and laws.
Environmental and Social Issues
As a fiduciary, SSgA FM considers the financial and economic implications of environmental and social issues first and foremost. Environmental and social
factors may not only have an impact on the reputation of companies but may also represent significant operational risks and costs to business. Well-developed environmental and social management systems can generate efficiencies and enhance
productivity, both of which impact shareholder value in the long-term.
SSgA FM encourages companies to be transparent about the environmental
and social risks and opportunities they face and adopt robust policies and processes to manage such issues. In our view, companies that manage all risks and consider opportunities related to environmental and social issues are able to adapt faster
to changes and appear to be better placed to achieve sustainable competitive advantage in the long-term. Similarly, companies with good risk management systems, which include environmental and social policies, have a stronger position relative to
their peers to manage risk and change, which could be the result of anything from regulation and litigation, physical threats (severe weather, climate change), economic trends to shifts in consumer behavior.
In their public reporting, we expect companies to disclose information on relevant management tools, material environmental and social performance
metrics. We support efforts by companies to demonstrate how sustainability fits into operations and business activities. SSgA FMs team of analysts evaluates these risks and shareholder proposals relating to them on an issuer by issuer basis;
understanding that environmental and social risks can vary widely depending on a company, its industry, operations, and geographic footprint. SSgA FM may also take action against the re-election of board members if we have serious concerns over ESG
practices and the company has not been responsive to shareholder requests to amend them.
General/Routine
Although SSgA FM does not seek involvement in the day-to-day operations of an organization, SSgA FM recognizes the need for conscientious oversight and
input into management decisions that may affect a companys value. SSgA FM supports proposals that encourage economically advantageous corporate practices and governance, while leaving decisions that are deemed to be routine or constitute
ordinary business to management and the board of directors.
Securities on loan
SSgA FM may recall securities off loan for proxy voting purposes in instances where SSgA FM believes that a particular vote will have a material impact on
the fund(s) investment.
Reporting
SSgA FM publicly discloses all voting activity for our US registered mutual funds as part of our annual N-PX reporting requirements to the SEC.
6
SSgA Global Entities
Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services Licence (AFSL Number 238276). Registered office: Level 17, 420
George Street, Sydney, NSW 2000, Australia Telephone: +612 9240-7600 Facsimile: +612 9240-7611.
Belgium:
State Street Global Advisors Belgium, Office Park Nysdam, 92 Avenue Reine Astrid, B-1310 La Hulpe, Belgium. Telephone: 32 2 663
2036 Facsimile: 32 2 672 2077. Belgium is a branch of State Street Global Advisors Limited.
Canada:
State Street Global Advisors, Ltd., 770 Sherbrooke Street West Suite 1200, Montreal, Quebec H3A 1G1 Canada and 30 Adelaide Street East,
Suite 500, Toronto, Ontario, M5C 3G6 Canada.
Dubai:
State Street Bank and Trust Company (Representative Office), Suite 404 4th Floor, Building 4, Emaar Square, Dubai, United Arab Emirates. Telephone: +971 (0)4-4372800 Facsimile: +971
(0)4-4372818.
France:
State Street Global Advisors France. Authorised and regulated by the Autorité des Marchés Financiers. Registered with the Register of Commerce and Companies of Nanterre under the number 412 052 680.
Registered office: Immeuble Défense Plaza, 23-25 rue Delarivière-Lefoullon, 92064 Paris La Défense Cedex, France. Telephone: (+33) 1 44 45 40 00 Facsimile: (+33) 1 44 45 41 92.
Germany:
State Street
Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Telephone +49 (0)89-55878-400 Facsimile +49 (0)89-55878-440.
Hong Kong:
State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street,
Central, Hong Kong Telephone: +852 2103-0288 Facsimile: +852 2103-0200.
Japan:
State Street Global Advisors, Japan, 9-7-1 Akasaka, Minato-ku, Tokyo Telephone +813 4530 7380. Financial Instruments Business Operator, Kanto Local
Financial Bureau (Kinsho #345). Japan Securities Investment Advisers Association, Investment Trust Association, Japan Securities Dealers Association.
Ireland:
State Street Global Advisors Ireland Limited is regulated by the Central Bank
of Ireland. Incorporated and registered in Ireland at Two Park Place, Upper Hatch Street, Dublin 2. Registered number 145221. Member of the Irish Association of Investment Managers.
Italy:
State Street Global Advisors Ltd., Sede Secondaria di
MilanoVia dei Bossi, 4 20121 Milan, Italy. Telephone: +39 02 32066 100 Facsimile: +39 02 32066 155.
Netherlands:
State Street Global Advisors Netherlands, Adam Smith Building, Thomas Malthusstraat 1-3, 1066 JR Amsterdam,
Netherlands. Telephone: 31 20 7085600 Facsimile 31 20 7085601, SSgA Netherlands is a branch of State Street Global Advisors Limited.
Singapore:
State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower,
Singapore 068912 (Company Reg. No: 200002719D), Telephone: +65 6826-7500 Facsimile: +65 6826-7501.
Switzerland:
State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Telephone +41 (0)44 245 70 00 Facsimile +41 (0)44
245 70 16.
United Kingdom:
State Street Global Advisors Limited. Authorised and regulated by the Financial Services Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place,
Canary Wharf, London, E14 5HJ. Telephone: 020 3395 6000 Facsimile: 020 3395 6350.
United States:
State Street Global Advisors, One Lincoln Street, Boston, MA 02111-2900.
Web:
www.ssga.com
SSgA generally delegates commodities management for separately managed
accounts to SSgA FM, a wholly owned subsidiary of State Street and an affiliate of SSgA. SSgA FM is registered as a commodity trading advisor (CTA) with the Commodity Futures Trading Commission and National Futures Association.
This communication is not specifically directed to investors of separately managed accounts (SMA) utilizing futures, options on futures or
swaps. SSgA FM CTA clients should contact SSgA Relationship Management for important CTA materials.
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State Street Global Advisors is the investment management business
of State Street Corporation (NYSE: STT), one of the worlds
leading providers of financial
services to institutional investors.
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www.ssga.com
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©
2013 State Street Corporation. All
Rights Reserved.
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7
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ID2401-INST-3747 0313 Exp. Date: 3/31/2014
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SSgA FMs US Proxy Voting and Engagement Guidelines outline our expectations of companies listed on stock
exchanges in the US. This policy complements and should be read in conjunction with SSgA FMs Global Proxy Voting and Engagement Principles which provide a detailed explanation of SSgA FMs approach to voting and engaging with companies.
SSgA FMs US Proxy Voting and Engagement Guidelines address areas including board structure, audit related issues, capital structure,
executive compensation, environmental, social and other governance related issues. Principally, we believe the primary responsibility of the board of directors is to preserve and enhance shareholder value and protect shareholder interests. In order
to carry out their primary responsibilities, directors have to undertake activities that range from oversight of executive management to monitoring the risks that arise from a companys business, including risks related to sustainability
issues. Further, good corporate governance necessitates the existence of effective internal controls and risk management systems, which should be governed by the board.
When voting and engaging with companies in global markets, SSgA FM considers market specific nuances in
the manner that we believe will most likely protect and promote the long term economic value of client investments. SSgA FM expects companies to observe the relevant laws and regulations of their respective markets as well as country specific best
practice guidelines and corporate governance codes. In its analysis and research in to corporate governance issues in the US, SSgA FM expects all companies, to act in a transparent manner, conduct private ordering activity. Companies should provide
detailed explanations under the Codes comply or explain approach, especially where they fail to meet requirements and why any such non-compliance would serve shareholders long-term interests.
SSgA FMS PROXY VOTING AND ENGAGEMENT PHILOSOPHY
In our view, corporate governance and sustainability issues are an integral part of the investment process. The Corporate Governance Team consists of investment professionals with expertise in corporate
governance and company law, remuneration, accounting as well as environmental and social issues. SSgA FM has established robust corporate governance principles and practices that are backed with extensive analytical expertise to understand the
complexities of the corporate governance landscape. SSgA FM engages with companies to provide insight on the principles and practices that drive our voting decisions. We also conduct proactive engagement to address significant shareholder concerns
and ESG issues in a manner consistent with maximizing shareholder value.
The team works alongside members of SSgA FMs active investment
teams; collaborating on issuer engagement and providing input on company specific fundamentals. SSgA FM is also a member of various investor associations that seek to address broader corporate governance related policy issues in the US.
SSgA FM is a signatory to the United Nations Principles of Responsible Investment (UNPRI) and is compliant with the UK Stewardship Code. We are committed
to sustainable investing and are working to further integrate environmental, social and governance (ESG) principles into investment and corporate governance practice, where applicable and consistent with our fiduciary duty.
DIRECTORS AND BOARDS
Director related
proposals concern issues submitted to shareholders that deal with the composition of the board or impact the members of a corporations board of directors. In deciding which director nominee to support, SSgA FM considers numerous factors.
Director Elections
SSgA
FMs director election policy focuses on companies governance profile to identify if a company demonstrates appropriate governance practices or if it exhibits negative governance practices. Factors SSgA FM considers when evaluating
governance practices include, but are not limited to the following:
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Board independence; and
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If a
company demonstrates appropriate governance practices,
SSgA FM believes a director should be classified as independent based on the
relevant listing standards or local market practice standards. In such cases, the composition of the key oversight committees of a board should meet the minimum standards of independence. Accordingly, SSgA FM will vote against a nominee at a company
with appropriate governance practices if the director is classified as non-independent under relevant listing standards or local market practice AND serves on a key committee of the board (compensation, audit, nominating or committees required to be
fully independent by local market standards).
Conversely,
if a company demonstrates negative governance practices
, SSgA FM believes
the classification standards for director independence should be elevated. In such circumstances, we will evaluate all director nominees based on the following classification standards:
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Is the nominee an employee of or related to an employee of the issuer or its auditor;
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Does the nominee provide professional services to the issuer;
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Has the nominee attended an appropriate number of board meetings; or
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Has the nominee received non-board related compensation from the issuer.
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Where companies demonstrate negative governance practices,
these stricter standards will
apply not only to directors who are a member of a key committee but to all directors on the board as market practice permits. Accordingly, SSgA FM will vote against a nominee (with the exception of the CEO) where the board has inappropriate
governance practices and is considered not independent based on the above independence criteria.
Additionally, SSgA FM may withhold votes
based on the following:
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CEOs of public companies who sit on more than three public company boards;
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Nominees who sit on more than six public company boards;
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SSgA FM may withhold votes from all director nominees at companies that have ignored a shareholder proposal which received a majority of the shares
outstanding at the last annual or special meeting, unless management submits the proposal(s) on the ballot as a binding management proposal, recommending shareholders vote for the particular proposal(s);
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SSgA FM may withhold votes from compensation committee members where there is a weak relationship between executive pay and performance over a
five-year period;
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SSgA FM will withhold votes from audit committee members if non-audit fees exceed 50% of total fees paid to the auditors; and
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SSgA FM will withhold votes from directors who appear to have been remiss in their duties.
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Director Related Proposals
SSgA FM
generally votes for the following director related proposals:
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Discharge of board members duties, in the absence of pending litigation, governmental investigation, charges of fraud or other indications of
significant concern;
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Proposals to restore shareholders ability to remove directors with or without cause;
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Proposals that permit shareholders to elect directors to fill board vacancies; and
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Shareholder proposals seeking disclosure regarding the company, board, or compensation committees use of compensation consultants, such as
company name, business relationship(s) and fees paid.
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SSgA FM generally votes against the following director related
proposals:
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Requirements that candidates for directorships own large amounts of stock before being eligible to be elected;
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Proposals that relate to the transaction of other business as properly comes before the meeting, which extend blank check
powers to those acting as proxy; and
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Shareholder proposals requiring two candidates per board seat.
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Majority Voting
SSgA FM will generally support a majority vote standard based on votes
cast for the election of directors.
SSgA FM will generally vote to support amendments to bylaws that would require simple majority of voting
shares (i.e. shares cast) to pass or repeal certain provisions.
Annual Elections
SSgA FM generally supports the establishment of annual elections of the board of directors. Consideration is given to the overall level of board
independence and the independence of the key committees as well as whether there is a shareholders rights plan.
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Cumulative Voting
SSgA FM does not support cumulative voting structures for the election of directors.
Separation Chair/CEO
SSgA FM analyzes
proposals for the separation of Chair/CEO on a case-by-case basis taking into consideration numerous factors, including but not limited to, a companys performance and the overall governance structure of the company.
Proxy Access
SSgA FM will consider
proposals relating to Proxy Access on a case-by-case basis:
SSgA FM will evaluate the companys specific circumstances, the impact of the
proposal on the target company and its potential effect on shareholder value.
Considerations include but are not limited to the following:
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The ownership thresholds and holding duration proposed in the resolution;
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The binding nature of the proposal;
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The number of directors that shareholders may be nominate each year;
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Company governance structure;
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Shareholder rights; and
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Age/Term Limits
Generally, SSgA FM will
vote against limits to tenure.
Approve Remuneration of Directors
Generally, SSgA FM will support directors compensation, provided the amounts are not excessive relative to other issuers in the market or industry. In making our determination, we review whether the
compensation is overly dilutive to existing shareholders.
Indemnification
Generally, SSgA FM supports proposals to limit directors liability and/or expand indemnification and liability protection if he or she has not acted in bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Classified Boards
SSgA FM generally supports annual elections for the board of directors. In certain cases, SSgA FM will support a classified board structure, if the board
is composed of 80 percent of independent directors, the boards key committees (auditing, nominating and compensation) are composed of independent directors, and SSgA FM will consider other governance factors, including antitakeover devices.
Confidential Voting
SSgA FM
will support confidential voting.
Board Size
SSgA FM will support proposals seeking to fix the board size or designate a range for the board size and will vote against proposals that give management the ability to alter the size of the board outside
of a specified range without shareholder approval.
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AUDIT RELATED ISSUES
Ratifying Auditors and Approving Auditor Compensation
SSgA FM supports the approval of
auditors and auditor compensation provided that the issuer has properly disclosed audit and non-audit fees relative to market practice and the audit fees are not deemed excessive. SSgA FM deems audit fees to be excessive if the non-audit fees for
the prior year constituted 50% or more of the total fees paid to the auditor. SSgA FM will support the disclosure of auditor and consulting relationships when the same or related entities are conducting both activities and will support the
establishment of a selection committee responsible for the final approval of significant management consultant contract awards where existing firms are already acting in an auditing function.
In circumstances where other fees include fees related to initial public offerings, bankruptcy emergence, and spin-offs, and the company makes public disclosure of the amount and nature of
those fees which are determined to be an exception to the standard non-audit fee category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance
and preparation for purposes of determining whether non-audit fees are excessive.
SSgA FM will support the discharge of
auditors and requirements that auditors attend the annual meeting of shareholders.
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CAPITAL RELATED ISSUES
Capital structure proposals include requests by management for approval of amendments to the certificate of incorporation that will alter the capital structure of the company. The most common request is
for an increase in the number of authorized shares of common stock, usually in conjunction with a stock split or dividend. Typically, requests that are not unreasonably dilutive or enhance the rights of common shareholders are supported. In
considering authorized share proposals, the typical threshold for approval is 100% over current authorized shares. However, the threshold may be increased if the company offers a specific need or purpose (merger, stock splits, growth purposes,
etc.). All proposals are evaluated on a case-by-case basis taking into account the companys specific financial situation.
Increase
in Authorized Common Shares
In general, SSgA FM supports share increases for general corporate purposes up to 100% of current authorized
stock.
SSgA FM supports increases for specific corporate purposes up to 100% of the specific need plus 50% of current authorized common stock
for US firms and plus 100% of current authorized stock for international firms.
When applying the thresholds, SSgA FM will also consider the
nature of the specific need, such as mergers and acquisitions and stock splits.
Increase in Authorized Preferred Shares
SSgA FM votes on a case-by-case basis on proposals to increase the number of preferred shares.
Generally, SSgA FM will vote for the authorization of preferred stock in cases where the company specifies the voting, dividend, conversion, and other rights of such stock and the terms of the preferred
stock appear reasonable.
SSgA FM will support proposals to create declawed blank check preferred stock (stock that cannot be used
as a takeover defense).
However, SSgA FM will vote against proposals to increase the number of blank check preferred stock authorized for
issuance when no shares have been issued or reserved for a specific purpose.
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Unequal Voting Rights
SSgA FM will not support proposals authorizing the creation of new classes of common stock with superior voting rights and will vote against new classes of preferred stock with unspecified voting,
conversion, dividend distribution, and other rights. In addition, SSgA FM will not support capitalization changes that add blank check classes of stock (i.e. classes of stock with undefined voting rights) or classes that dilute the
voting interests of existing shareholders.
However, SSgA FM will support capitalization changes that eliminate other classes of stock and/or
unequal voting rights.
MERGERS AND ACQUISITIONS
Mergers and the reorganization structure of a company often involve proposals relating to reincorporation, restructurings, mergers, liquidations, and other major changes to the corporation. Proposals that
are in the best interests of the shareholders, demonstrated by enhancing share value or improving the effectiveness of the companys operations, will be supported. In general, provisions that are not viewed as economically sound or are thought
to be destructive to shareholders rights are not supported.
SSgA FM will generally support transactions that maximize shareholder
value. Some of the considerations include, but are not limited to the following:
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Board oversight of the process for the recommended transaction, including, director and/or management conflicts of interest;
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Offers made at a premium and where there are no other higher bidders; and
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Offers in which the secondary market price is substantially lower than the net asset value.
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SSgA FM may vote against a transaction considering the following:
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Offers with potentially damaging consequences for minority shareholders because of illiquid stock, especially in some non-US markets;
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Offers where we believe there is a reasonable prospect for an enhanced bid or other bidders; and
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At the time of voting, the current market price of the security exceeds the bid price.
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ANTITAKEOVER ISSUES
Typically,
proposals relating to requests by management to amend the certificate of incorporation or bylaws to add or delete a provision are deemed to have an antitakeover effect. The majority of these proposals deal with managements attempt to add some
provision that makes a hostile takeover more difficult or will protect incumbent management in the event of a change in control of the company.
Proposals that reduce shareholders rights or have the effect of entrenching incumbent management will not be supported. Proposals that enhance the
right of shareholders to make their own choices as to the desirability of a merger or other proposal are supported.
Shareholder Rights
Plans
SSgA FM will support mandates requiring shareholder approval of a shareholder rights plans (poison pill) and repeals of
various anti-takeover related provisions.
In general, SSgA FM will vote against the adoption or renewal of a US issuers shareholder
rights plan (poison pill).
SSgA FM will vote for an amendment to a shareholder rights plan (poison pill) where the
terms of the new plans are more favorable to shareholders ability to accept unsolicited offers (i.e. if one of the following conditions are met: (i) minimum trigger, flip-in or flip-over of 20%, (ii) maximum term of three years,
(iii) no dead hand, slow hand, no hand or similar feature that limits the ability of a future board to redeem the pill, and (iv) inclusion of a shareholder redemption feature (qualifying offer clause),
permitting ten percent of the shares to call a special meeting or seek a written consent to vote on rescinding the pill if the board refuses to redeem the pill 90 days after a qualifying offer is announced).
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Special Meetings
SSgA FM will vote for shareholder proposals related to special meetings at companies that do not provide shareholders the right to call for a special meeting in their by-laws if:
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The company also does not allow shareholders to act by written consent; or
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The company allows shareholders to act by written consent but the ownership threshold for acting by written consent is set above 25% of outstanding
shares.
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SSgA FM will vote for shareholder proposals related to special meetings at companies that give shareholders (with a
minimum 10% ownership threshold) the right to call for a special meeting in their by-laws if:
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The current ownership threshold to call for a special meeting is above 25% of outstanding shares.
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SSgA FM will vote for management proposals related to special meetings.
Written Consent
SSgA FM will vote for shareholder proposals on written consent at
companies if:
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The company does not have provisions in their by-laws giving shareholders the right to call for a special meeting; or
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The company allows shareholders the right to call for a special meeting but the current ownership threshold to call for a special meeting is above 25%
of outstanding shares; and
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The company has a poor governance profile.
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SSgA FM will vote management proposals on written consent on a case-by-case basis.
SuperMajority
SSgA FM will
generally vote against amendments to by-laws requiring super-majority shareholder votes to pass or repeal certain provisions. SSgA FM will vote for the reduction or elimination of super-majority vote requirements, unless management of the issuer was
concurrently seeking to or had previously made such a reduction or elimination.
REMUNERATION ISSUES
Despite the differences among the types of plans and the awards possible there is a simple underlying philosophy that guides the analysis of all
compensation plans; namely, are the terms of the plan designed to provide an incentive for executives and/or employees to align their interests with those of the shareholders and thus work toward enhancing shareholder value. Plans which benefit
participants only when the shareholders also benefit are those most likely to be supported.
Advisory Vote on Executive Compensation and
Frequency
SSgA FM believes executive compensation plays a critical role in aligning executives interest with shareholders,
attracting, retaining and incentivizing key talent, and ensuring positive correlation between the performance achieved by management and the benefits derived by shareholders. SSgA FM supports management proposals on executive compensation where
there is a strong relationship between executive pay and performance over a five-year period. SSgA FM seeks adequate disclosure of different compensation elements, absolute and relative pay levels, peer selection and benchmarking, the mix of long
term and short term incentives, alignment of pay structures with shareholder interests as well as with corporate strategy and performance. Further, shareholders should have the opportunity to assess whether pay structures and levels are aligned with
business performance on an annual basis.
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Employee Equity Award Plans
SSgA FM considers numerous criteria when examining equity award proposals. Generally, SSgA FM does not vote against plans for lack of performance or vesting criteria. Rather, the main criteria that will
result in a vote against an equity award plan are:
Excessive voting power dilution
: To assess the dilutive effect, we divide the
number of shares required to fully fund the proposed plan, the number of authorized but unissued shares and the issued but unexercised shares by the fully diluted share count. SSgA FM reviews that number in light of certain factors, including the
industry of the issuer.
Other criteria include the following:
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Number of participants or eligible employees;
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The variety of awards possible;
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The period of time covered by the plan.
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There are numerous factors that we view as negative, and together, may result in a vote against a proposal:
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Grants to individuals or very small groups of participants;
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Gun-jumping grants which anticipate shareholder approval of a plan or amendment;
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The power of the board to exchange underwater options without shareholder approval; this pertains to the ability of a company to reprice
options, not the actual act of repricing described above;
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Below market rate loans to officers to exercise their options;
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The ability to grant options at less than fair market value;
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Acceleration of vesting automatically upon a change in control; and
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Excessive compensation (i.e. compensation plans which are deemed by SSgA FM to be overly dilutive).
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Historical option grants
: Excessive historical option grants over the past three years. Plans that provide for historical grant patterns of
greater than eight to twelve percent are generally not supported.
Repricing
: SSgA FM will vote against any plan where repricing is
expressly permitted. If a company has a history of repricing underwater options, the plan will not be supported.
Share Repurchases
: If
a company makes a clear connection between a share repurchase program and its intent to offset dilution created from option plans and the company fully discloses the amount of shares being repurchased, the voting dilution calculation may be adjusted
to account for the impact of the buy back.
Companies who do not (i) clearly state the intentions of any proposed share buy-back plan or
(ii) disclose a definitive number of the shares to be bought back and, (iii) disclose the time frame during which the shares will be bought back, will not have any such repurchase plan factored into the dilution calculation.
162(m) Plan Amendments
: If a plan would not normally meet SSgA FM criteria described above, but is primarily being amended to add specific
performance criteria to be used with awards designed to qualify for performance-based exception from the tax deductibility limitations of Section 162(m) of the Internal Revenue Code, then SSgA FM will support the proposal to amend the plan.
Employee Stock Option Plans
SSgA FM generally votes for stock purchase plans with an exercise price of not less than 85% of fair market value. However, SSgA FM takes market practice
into consideration.
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Compensation Related Items
SSgA FM will generally support the following proposals:
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Expansions to reporting of financial or compensation-related information, within reason; and
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Proposals requiring the disclosure of executive retirement benefits if the issuer does not have an independent compensation committee.
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SSgA FM will generally vote against the following proposals:
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Retirement bonuses for non-executive directors and auditors.
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MISCELLANEOUS/ROUTINE ITEMS
SSgA FM generally supports the following miscellaneous/routine
governance items:
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Reimbursement of all appropriate proxy solicitation expenses associated with the election when voting in conjunction with support of a dissident slate;
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Opting out of business combination provision;
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Proposals that remove restrictions on the right of shareholders to act independently of management;
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Liquidation of the company if the company will file for bankruptcy if the proposal is not approved;
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Shareholder proposals to put option repricings to a shareholder vote;
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General updating of or corrective amendments to charter and by-laws not otherwise specifically addressed herein, unless such amendments would
reasonably be expected to diminish shareholder rights (e.g. extension of directors term limits, amending shareholder vote requirement to amend the charter documents, insufficient information provided as to the reason behind the amendment);
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Change in corporation name;
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Mandates that amendments to bylaws or charters have shareholder approval;
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Management proposals to change the date, time, and/or location of the annual meeting unless the proposed change is unreasonable;
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Repeals, prohibitions or adoption of anti-greenmail provisions;
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Management proposals to implement a reverse stock split when the number of authorized shares will be proportionately reduced and proposals to implement
a reverse stock split to avoid delisting; and
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Exclusive forum provisions.
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SSgA FM generally does not support the following miscellaneous/ routine governance items:
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Proposals asking companies to adopt full tenure holding periods for their executives;
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Reincorporation to a location that we believe has more negative attributes than its current location of incorporation;
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Shareholder proposals to change the date, time, and/or location of the annual meeting unless the current scheduling or location is unreasonable;
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Proposals to approve other business when it appears as voting item;
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Proposals giving the board exclusive authority to amend the bylaws; and
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Proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to
support the proposal.
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ENVIRONMENTAL AND SOCIAL ISSUES
As a fiduciary, we consider the financial and economic implications of environmental and social issues first and foremost. Environmental and social factors not only can have an impact on the reputation of
companies; they may also represent significant operational risks and costs to business.
Well-developed environmental and social management
systems can also generate efficiencies and enhance productivity, both of which impact shareholder value in the long-term.
SSgA FM encourages
companies to be transparent about the environmental and social risks and opportunities they face and adopt robust policies and processes to manage such issues. In our view, companies that manage all risks and consider opportunities related to
environmental and social issues are able to adapt faster to changes and appear to be better placed to achieve sustainable competitive advantage in the long-term. Similarly, Companies with good risk management systems, which include environmental and
social policies, have a stronger position relative to their peers to manage risk and change, which could result anything from regulation and litigation, physical threats (severe weather, climate change), economic trends as well as shifts in consumer
behavior.
In their public reporting, we expect companies to disclose information on relevant management tools, material environmental and
social performance metrics and support efforts by companies to try to demonstrate how sustainability fits into operations and business activities. SSgA FMs team of analysts evaluates these risks on an issuer by issuer basis; understanding that
environmental and social risks can vary widely depending on company industry, its operations, and geographic footprint.
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Common for non-US issuers; request from the issuer to discharge from liability the directors or auditors with respect to actions taken by them during the previous year.
SSgA Global Entities
Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services Licence (AFSL Number 238276). Registered office: Level 17, 420 George Street, Sydney, NSW 2000, Australia Telephone: +612
9240-7600 Facsimile: +612 9240-7611.
Belgium:
State Street Global Advisors Belgium, Office Park Nysdam, 92 Avenue Reine Astrid, B-1310 La Hulpe, Belgium. Telephone: 32 2 663 2036 Facsimile: 32 2 672 2077. Belgium is a branch of
State Street Global Advisors Limited.
Canada:
State Street Global Advisors, Ltd., 770 Sherbrooke Street West Suite 1200, Montreal, Quebec H3A 1G1 Canada and 30 Adelaide Street East, Suite 500, Toronto, Ontario, M5C 3G6 Canada.
Dubai:
State Street Bank and Trust Company (Representative Office), Suite 404 4th Floor, Building 4, Emaar Square, Dubai, United Arab Emirates. Telephone: +971 (0)4-4372800 Facsimile: +971 (0)4-4372818.
France:
State Street Global Advisors
France. Authorised and regulated by the Autorité des Marchés Financiers. Registered with the Register of Commerce and Companies of Nanterre under the number 412 052 680. Registered office: Immeuble Défense Plaza, 23-25 rue
Delarivière-Lefoullon, 92064 Paris La Défense Cedex, France. Telephone: (+33) 1 44 45 40 00 Facsimile: (+33) 1 44 45 41 92.
Germany:
State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich.
Telephone +49 (0)89-55878-400 Facsimile +49 (0)89-55878-440.
Hong Kong:
State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong Telephone: +852 2103-0288
Facsimile: +852 2103-0200.
Japan:
State Street Global Advisors, Japan, 9-7-1 Akasaka, Minato-ku, Tokyo Telephone +813 4530 7380. Financial Instruments Business Operator, Kanto Local Financial Bureau (Kinsho #345). Japan Securities Investment
Advisers Association, Investment Trust Association, Japan Securities Dealers Association.
Ireland:
State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Incorporated and registered in Ireland at Two
Park Place, Upper Hatch Street, Dublin 2. Registered number 145221. Member of the Irish Association of Investment Managers.
Italy:
State Street Global Advisors Ltd., Sede Secondaria di MilanoVia dei Bossi, 4 20121 Milan, Italy.
Telephone: +39 02 32066 100 Facsimile: +39 02 32066 155.
Netherlands:
State Street Global Advisors Netherlands, Adam Smith Building, Thomas Malthusstraat 1-3, 1066 JR Amsterdam, Netherlands. Telephone: 31 20 7085600 Facsimile 31
20 7085601, SSgA Netherlands is a branch of State Street Global Advisors Limited.
Singapore:
State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D), Telephone:
+65 6826-7500 Facsimile: +65 6826-7501.
Switzerland:
State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Telephone +41 (0)44 245 70 00 Facsimile +41 (0)44 245 70 16.
United Kingdom:
State Street Global
Advisors Limited. Authorised and regulated by the Financial Services Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. Telephone: 020 3395
6000 - Facsimile: 020 3395 6350.
United States:
State Street Global Advisors, One Lincoln Street, Boston, MA 02111-2900.
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Web:
www.ssga.com
SSgA generally delegates commodities management for separately managed accounts to SSgA FM, a wholly owned subsidiary of State Street and an affiliate of SSgA. SSgA FM is registered as a commodity trading
advisor (CTA) with the Commodity Futures Trading Commission and National Futures Association.
This communication is not
specifically directed to investors of separately managed accounts (SMA) utilizing futures, options on futures or swaps. SSgA FM CTA clients should contact SSgA Relationship Management for important CTA materials.
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State Street Global Advisors is the investment management business
of State Street Corporation (NYSE: STT), one of the worlds
leading providers of financial
services to institutional investors.
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www.ssga.com
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SSgA FMs European Proxy Voting and Engagement Guidelines cover different corporate governance frameworks and
practices in European markets excluding the United Kingdom and Ireland. This policy complements and should be read in conjunction with SSgA FMs overarching Global Proxy Voting and Engagement Principles which provide a detailed explanation of
SSgA FMs approach to voting and engaging with companies.
SSgA FMs Proxy Voting and Engagement Guidelines in European markets
address areas including board structure, audit related issues, capital structure, remuneration, environmental, social and other governance related issues. Principally, we believe the primary responsibility of the board of directors is to preserve
and enhance shareholder value and protect shareholder interests. In order to carry out their primary responsibilities, directors have to undertake activities that range from oversight of executive management and monitoring the risks that arise from
a companys business, including risks related to sustainability issues. Further, good corporate governance necessitates the existence of effective internal controls and risk management systems, which should be governed by the board.
When voting and engaging with companies in European markets, SSgA FM considers market specific nuances
in the manner that we believe will most likely protect and promote the long term economic value of client investments. SSgA FM expects companies to observe the relevant laws and regulations of their respective markets as well as country specific
best practice guidelines and corporate governance codes. In its analysis and research in to corporate governance issues in European companies, SSgA FM also considers guidance issued by the European Commission. Companies should provide detailed
explanations under diverse comply or explain approaches, especially where they fail to meet requirements and why any such non-compliance would serve shareholders long-term interests.
SSgAS PROXY VOTING AND ENGAGEMENT PHILOSOPHY
In our view, corporate governance and sustainability issues are an integral part of the investment process. The Corporate Governance Team consists of investment professionals with expertise in corporate
governance and company law, remuneration, accounting as well as environmental and social issues. SSgA FM has established robust corporate governance principles and practices that are backed with extensive analytical expertise to understand the
complexities of the corporate governance landscape. SSgA FM engages with companies to provide insight on the principles and practices that drive our voting decisions. We also conduct proactive engagement to address significant shareholder concerns
and ESG issues in a manner consistent with maximizing shareholder value.
The team works alongside members of SSgA FMs active
fundamental and EMEA investment teams; collaborating on issuer engagement and providing input on company specific fundamentals. SSgA FM is also a member of various investor associations that seek to address broader corporate governance related
policy issues in European markets.
SSgA FM is a signatory to the United Nations Principles of Responsible Investment (UNPRI) and is compliant
with the UK Stewardship Code. We are committed to sustainable investing and are working to further integrate environmental, social and governance (ESG) principles into investment and corporate governance practice, where applicable and consistent
with our fiduciary duty.
DIRECTORS AND BOARDS
SSgA FM believes that a well constituted board of directors, with a good balance of skills, expertise and independence, provides the foundations for a well governed company. SSgA FM votes for the
election/reelection of directors on a case-by-case basis after considering various factors including general market practice and availability of information on director skills and expertise. In principle, SSgA FM believes independent directors
are crucial to good corporate governance and help management establish sound corporate governance policies and practices. A sufficiently independent board will most effectively monitor management and perform oversight functions necessary to protect
shareholder interests.
SSgA FMs broad criteria for director independence in European companies include factors such as:
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Participation in relatedparty transactions and other business relations with the company;
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Employment history with company;
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Relations with controlling shareholders;
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family ties with any of the companys advisers, directors or senior employees; and
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Employee and government representatives.
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While, overall board independence requirements and board structures differ from markettomarket, SSgA FM considers voting against directors it deems nonindependent if overall board
independence is below one third. SSgA FM also assesses the division of responsibilities between chairman and CEO on a casebycase basis, giving consideration to factors such as overall level of independence on the board and general
corporate governance standards in the company. SSgA FM may also not support a proposal to discharge the board, if a company fails to meet adequate governance standards or board level independence.
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When considering the election or re-election of a non-executive director, SSgA FM also considers the
number of outside board directorships a non-executive can undertake and attendance at board meetings. In addition, SSgA FM may vote against the election of a director whose biographical disclosures are insufficient to assess his or her role on the
board and/or independence.
Although we generally are in favour of the annual election of directors, we recognise that director terms vary
considerable in different European markets. SSgA FM may vote against article/ bylaw changes that seek to extend director terms. In addition, in certain markets, SSgA FM may vote against directors if their director terms extend beyond four years.
SSgA FM believes companies should have relevant board level committees for audit, remuneration and nomination oversight. The audit committee
is responsible for monitoring the integrity of the financial statements of the company, appointing external auditors, monitoring their qualifications and independence as well their effectiveness and resource levels. Similarly, executive pay is an
important aspect of corporate governance, and it should be determined by the board of directors and SSgA FM expects companies to have in place remuneration committees to provide independent oversight over executive pay. SSgA FM may vote against
nominees who are executive members of audit or remuneration committees.
In its analysis of boards, SSgA FM considers whether board members
have adequate skills to provide effective oversight of corporate strategy, operations and risks, including environmental and social issues. Boards should also have a regular evaluation process is place to assess the effectiveness of the board and
the skills of board members to address issues such as emerging risks, changes to corporate strategy and diversification of operations and geographic footprint.
In certain European markets it is not uncommon for the election of directors to be presented in a single slate. In these cases, where executives serve on the audit or the remuneration committees, SSgA FM
may vote against the entire slate.
SSgA FM may also consider factors such as board performance and directors who appear to be remiss in the
performance of their oversight responsibilities. (e.g. fraud, criminal wrongdoing, breach of fiduciary responsibilities)
Indemnification
and limitations on liability
Generally, SSgA FM supports proposals to limit directors and statutory auditors liability and/or
expand indemnification and liability protection up to the limit provided by law, if he or she has not acted in bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
AUDIT RELATED ISSUES
Companies should
have a robust internal audit and internal control systems designed for effective management of any potential and emerging risks to company operations and strategy. The responsibility of setting out an internal audit function lies with the audit
committee, which should have as members independent non-executive directors.
Appointment of External Auditors
SSgA FM believes that a companys auditor is an essential feature of an effective and transparent system of external supervision and shareholders
should be given the opportunity to vote on their appointment or re-appoint at the annual meeting. When appointing external auditors and approving audit fees, SSgA FM will take into consideration the level of detail in company disclosures and will
generally not support such resolutions if adequate breakdown is not provided and if non-audit fees are more than 50% of audit fees. In addition, SSgA FM may vote against members of the audit committee if we have concerns with audit related issues or
if the level of non-audit fees to audit fees is significant. In certain circumstances, SSgA FM may consider auditor tenure when evaluating the audit process.
Limit Legal Liability of External Auditors
SSgA FM generally opposes limiting the legal
liability of audit firms as we believe this could create a negative impact on the quality of the audit function.
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SHAREHOLDER RIGHTS AND CAPITAL RELATED ISSUES
In some European markets, differential voting rights continue to exist. SSgA FM supports the one share one vote policy and favours a share
structure where all shares have equal voting rights. SSgA FM believes pre-emption rights should be introduced for shareholders in order to provide adequate protection from being overly diluted from the issuance of new shares or convertible
securities to third parties or a small number of select shareholders.
Unequal Voting Rights
SSgA FM generally opposes proposals authorizing the creation of new classes of common stock with superior voting rights and will generally oppose new
classes of preferred stock with unspecified voting, conversion, dividend distribution, and other rights. In addition, SSgA FM will not support capitalization changes that add classes of stock with undefined voting rights or classes that may dilute
the voting interests of existing shareholders. SSgA FM supports proposals to abolish voting caps and capitalization changes that eliminate other classes of stock and/or unequal voting rights.
Increase in Authorized Capital
The ability raise capital is critical for companies to
carry out strategy, grow, and achieve returns above their cost of capital. The approval of capital raising activities is fundamental to shareholders ability to monitor the amounts of proceeds and to ensure capital is deployed efficiently. SSgA
FM supports capital increases that have sound business reasons and are not excessive relative to a companys existing capital base.
Pre-emption rights are a fundamental right for shareholders to protect their investment in a company. Where companies seeks to issue new shares whilst
disapplying preemption rights, SSgA FM may vote against if such authorities are greater than 20% of the issued share capital. SSgA FM may also vote against resolutions seeking authority to issue capital with pre-emption rights if the
aggregate amount allowed seems excessive and is not justified by the board. Generally, we are against capital issuance proposals greater than 100% of the issued share capital when the proceeds are not intended for a specific purpose.
Share Repurchase Programs
SSgA FM
generally supports a proposal to repurchase shares, other than if the issuer does not clearly state the business purpose for the program, a definitive number of shares to be repurchased, and the time frame for the repurchase. SSgA FM may vote
against share re-purchase requests that allow share re-purchases during a takeover period.
Dividends
SSgA FM generally supports dividend payouts that constitute 30% or more of net income. SSgA FM may vote against the dividend payouts if the dividend
payout ratio has been consistently below 30% without adequate explanation; or, the payout is excessive given the companys financial position. Particular attention will be paid where the payment may damage the companys long term financial
health.
Related Party Transactions
Certain companies in European markets have a controlled ownership structure and have complex cross-shareholdings between subsidiaries and parent companies (related companies). Such structures may result
in the prevalence of related-party transactions between the company and its various stakeholders such as directors and management, subsidiaries and shareholders. In markets where shareholders are required to approve such transactions, SSgA FM
expects companies to provide details of the transaction, such as the nature, value and purpose of such a transaction. It also encourages independent directors to ratify such transactions. Further, SSgA FM encourages companies to describe the level
of independent board oversight and the approval process, including details of any independent valuations provided by financial advisors on related-party transactions.
4
Mergers and Acquisitions
Mergers and the reorganization structure of a company often involve proposals relating to reincorporation, restructurings, mergers, liquidations, and other major changes to the corporation. Proposals that
are in the best interests of the shareholders, demonstrated by enhancing share value or improving the effectiveness of the companys operations, will be supported. In general, provisions that are not viewed as economically sound or are thought
to be destructive to shareholders rights are not supported.
SSgA FM will generally support transactions that maximize shareholder
value. Some of the considerations include, but are not limited to the following:
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Board oversight of the process for the recommended transaction, including, director and/or management conflicts of interest;
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Offers made at a premium and where there are no other higher bidders; and
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Offers in which the secondary market price is substantially lower than the net asset value.
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SSgA FM may vote against a transaction considering the following:
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Offers with potentially damaging consequences for minority shareholders because of illiquid stock;
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Offers where we believe there is a reasonable prospect for an enhanced bid or other bidders; and
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At the time of voting, the current market price of the security exceeds the bid price.
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AntiTakeover Measures
European
markets have diverse regulations concerning the use of share issuances as takeover defenses with legal restrictions lacking in some markets. SSgA FM supports a one-share, one-vote policy, for example, given that dual-class capital structures
entrench certain shareholders and management, insulating them from possible takeovers. SSgA FM opposes unlimited share issuance authorizations as they may be used as antitakeover devices, and they have the potential for substantial voting and
earnings dilution. SSgA FM also monitors the duration of authorities to issue shares and whether there are restrictions and caps on multiple issuance authorities during the specified time periods. SSgA FM opposes antitakeover defences such as
authorities for the board, when subject to a hostile takeover, to issue warrants convertible into shares to existing shareholders.
REMUNERATION
Executive Pay
Despite the differences among the types of plans and awards possible, there is a simple underlying philosophy that guides SSgA FMs
analysis of executive paythere should be a direct relationship between remuneration and company performance over the long term.
Shareholders should have the opportunity to assess whether pay structures and levels are aligned with business performance. When assessing remuneration
reports, SSgA FM considers factors such as adequate disclosure of different remuneration elements, absolute and relative pay levels, peer selection and benchmarking, the mix of long term and short term incentives, alignment of pay structures with
shareholder interests as well as with corporate strategy and performance. SSgA FM may oppose remuneration reports where there seems to be a misalignment between shareholders interests. SSgA FM may vote also against the re-election of members
of the remuneration committee if we have serious concerns over remuneration practices and the company has not been responsive to shareholder pressure the amend them.
Equity Incentives Plans
SSgA FM may not support proposals on equity-based incentive plans
where insufficient information is provided on matters such as grant limits, performance metrics, performance and vesting periods and overall dilution. SSgA FM does not generally support options under such plans being issued at a discount to market
price or plans that allow for re-testing of performance metrics.
5
Nonexecutive Director Pay
In European markets, authorities seeking shareholder approval for non-executive directors fees are generally not controversial. SSgA FM generally supports resolutions regarding directors fees
unless disclosure is poor and we are unable to determine whether they are excessive relative to fees paid by other companies in the same country or industry. SSgA FM will evaluate on a company-by-company basis any non-cash or performance related pay
to non-executive directors.
RISK MANAGEMENT
SSgA FM believes that risk management is a key function of the board, which is responsible for setting the overall risk appetite of a company and for providing oversight on the risk management process
established by senior executives at a company. SSgA FM allows boards discretion over how they provide oversight in this area. However, SSgA FM expects companies to disclose how the board provides oversight on its risk management system and to
identify key risks facing the company. Boards should also review existing and emerging risks as they can change with a changing political and economic landscape, or as companies diversify or expand their operations into new areas.
Environmental and Social Issues
As a
fiduciary, SSgA FM considers the financial and economic implications of environmental and social issues first and foremost. In this regard, SSgA FM supports environmental and social related items that we believe would protect or enhance shareholder
value. Environmental and social factors not only can have an impact on the reputation of companies; they may also represent significant operational risks and costs to business. Well-developed environmental and social management systems can also
generate efficiencies and enhance productivity, both of which impact shareholder value in the long-term.
SSgA FM encourages companies to be
transparent about the environmental and social risks and opportunities they face and adopt robust policies and processes to manage such issues. In our view, companies that manage all risks and consider opportunities related to environmental and
social issues are able to adapt faster to changes and appear to be better placed to achieve sustainable competitive advantage in the long-term. Similarly, Companies with good risk management systems, which include environmental and social policies,
have a stronger position relative to their peers to manage risk and change, which could result anything from regulation and litigation, physical threats (severe weather, climate change), economic trends as well as shifts in consumer behavior.
In their public reporting, we expect companies to disclose information on relevant management tools, material environmental and social
performance metrics and support efforts by companies to try to demonstrate how sustainability fits into operations and business activities. SSgA FMs team of analysts evaluates these risks and shareholder proposals relating to them on an issuer
by issuer basis; understanding that environmental and social risks can vary widely depending on company industry, its operations, and geographic footprint. SSgA FM may also take action against the re-election of members of the board if we have
serious concerns over ESG practices and the company has not been responsive to shareholder pressure the amend them.
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SSgA Global Entities
Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services Licence (AFSL Number 238276). Registered office: Level 17, 420
George Street, Sydney, NSW 2000, Australia Telephone: +612 9240-7600 Facsimile: +612 9240-7611.
Belgium:
State Street Global Advisors Belgium, Office Park Nysdam, 92 Avenue Reine Astrid, B-1310 La Hulpe, Belgium. Telephone: 32 2 663
2036 Facsimile: 32 2 672 2077. Belgium is a branch of State Street Global Advisors Limited.
Canada:
State Street Global Advisors, Ltd., 770 Sherbrooke Street West Suite 1200, Montreal, Quebec H3A 1G1 Canada and 30 Adelaide Street East,
Suite 500, Toronto, Ontario, M5C 3G6 Canada.
Dubai:
State Street Bank and Trust Company (Representative Office), Suite 404 4th Floor, Building 4, Emaar Square, Dubai, United Arab Emirates. Telephone: +971 (0)4-4372800 Facsimile: +971
(0)4-4372818.
France:
State Street Global Advisors France. Authorised and regulated by the Autorité des Marchés Financiers. Registered with the Register of Commerce and Companies of Nanterre under the number 412 052 680.
Registered office: Immeuble Défense Plaza, 23-25 rue Delarivière-Lefoullon, 92064 Paris La Défense Cedex, France. Telephone: (+33) 1 44 45 40 00 Facsimile: (+33) 1 44 45 41 92.
Germany:
State Street
Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Telephone +49 (0)89-55878-400 Facsimile +49 (0)89-55878-440.
Hong Kong:
State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street,
Central, Hong Kong Telephone: +852 2103-0288 Facsimile: +852 2103-0200.
Japan:
State Street Global Advisors, Japan, 9-7-1 Akasaka, Minato-ku, Tokyo Telephone +813 4530 7380. Financial Instruments Business Operator, Kanto Local
Financial Bureau (Kinsho #345). Japan Securities Investment Advisers Association, Investment Trust Association, Japan Securities Dealers Association.
Ireland:
State Street Global Advisors Ireland Limited is regulated by the Central Bank
of Ireland. Incorporated and registered in Ireland at Two Park Place, Upper Hatch Street, Dublin 2. Registered number 145221. Member of the Irish Association of Investment Managers.
Italy:
State Street Global Advisors Ltd., Sede Secondaria di
MilanoVia dei Bossi, 4 20121 Milan, Italy. Telephone: +39 02 32066 100 Facsimile: +39 02 32066 155.
Netherlands:
State Street Global Advisors Netherlands, Adam Smith Building, Thomas Malthusstraat 1-3, 1066 JR Amsterdam,
Netherlands. Telephone: 31 20 7085600 Facsimile 31 20 7085601, SSgA Netherlands is a branch of State Street Global Advisors Limited.
Singapore:
State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower,
Singapore 068912 (Company Reg. No: 200002719D), Telephone: +65 6826-7500 Facsimile: +65 6826-7501.
Switzerland:
State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Telephone +41 (0)44 245 70 00 Facsimile +41 (0)44
245 70 16.
United Kingdom:
State Street Global Advisors Limited. Authorised and regulated by the Financial Services Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place,
Canary Wharf, London, E14 5HJ. Telephone: 020 3395 6000 Facsimile: 020 3395 6350.
United States:
State Street Global Advisors, One Lincoln Street, Boston, MA 02111-2900.
Web:
www.ssga.com
SSgA generally delegates commodities management for separately managed
accounts to SSgA FM, a wholly owned subsidiary of State Street and an affiliate of SSgA. SSgA FM is registered as a commodity trading advisor (CTA) with the Commodity Futures Trading Commission and National Futures Association.
This communication is not specifically directed to investors of separately managed accounts (SMA) utilizing futures, options on futures or
swaps. SSgA FM CTA clients should contact SSgA Relationship Management for important CTA materials.
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State Street Global Advisors is the investment management business
of State Street Corporation (NYSE: STT), one of the worlds
leading providers of financial
services to institutional investors.
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www.ssga.com
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©
2013 State Street Corporation. All
Rights Reserved.
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ID2401-INST-3749 0313 Exp. Date: 3/31/2014
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SSgA FMs UK Proxy Voting and Engagement Guidelines outline our expectations of companies listed on stock
exchanges in the United Kingdom and Ireland. This policy complements and should be read in conjunction with SSgA FMs Global Proxy Voting and Engagement Principles which provide a detailed explanation of SSgA FMs approach to voting and
engaging with companies.
SSgA FMs UK Proxy Voting and Engagement Guidelines address areas including board structure, audit related
issues, capital structure, remuneration, environmental, social and other governance related issues. Principally, we believe the primary responsibility of the board of directors is to preserve and enhance shareholder value and protect shareholder
interests. In order to carry out their primary responsibilities, directors have to undertake activities that range from oversight of executive management to monitoring the risks that arise from a companys business, including risks related to
sustainability issues. Further, good corporate governance necessitates the existence of effective internal controls and risk management systems, which should be governed by the board.
When voting and engaging with companies in global markets, SSgA FM considers market specific nuances in
the manner that we believe will most likely protect and promote the long term economic value of client investments. SSgA FM expects companies to observe the relevant laws and regulations of their respective markets as well as country specific best
practice guidelines and corporate governance codes. In its analysis and research in to corporate governance issues in the UK and Ireland, SSgA FM expects all companies, regardless of domicile that obtain a primary listing on the London Stock
Exchange or the Irish Stock Exchange to comply with the UK Corporate Governance Code. Companies should provide detailed explanations under the Codes comply or explain approach, especially where they fail to meet requirements and
why any such non-compliance would serve shareholders long-term interests.
SSgAS PROXY VOTING AND ENGAGEMENT PHILOSOPHY
In our view, corporate governance and sustainability issues are an integral part of the investment process. The Corporate Governance Team
consists of investment professionals with expertise in corporate governance and company law, remuneration, accounting as well as environmental and social issues. SSgA FM has established robust corporate governance principles and practices that are
backed with extensive analytical expertise to understand the complexities of the corporate governance landscape. SSgA FM engages with companies to provide insight on the principles and practices that drive our voting decisions. We also conduct
proactive engagement to address significant shareholder concerns and ESG issues in a manner consistent with maximizing shareholder value.
The
team works alongside members of SSgA FMs active fundamental and EMEA investment teams; collaborating on issuer engagement and providing input on company specific fundamentals. SSgA FM is also a member of various investor associations that seek
to address broader corporate governance related policy issues in the UK and European markets.
SSgA FM is a signatory to the United Nations
Principles of Responsible Investment (UNPRI) and is compliant with the UK Stewardship Code. We are committed to sustainable investing and are working to further integrate environmental, social and governance (ESG) principles into investment and
corporate governance practice, where applicable and consistent with our fiduciary duty.
DIRECTORS AND BOARDS
SSgA FM believes that a well constituted board of directors, with a good balance of skills, expertise and independence, provides the foundations for a
well governed company. SSgA FM votes for the election/re-election of directors on a case-by-case basis after considering various factors including general market practice and availability of information on director skills and expertise. In
principle, SSgA FM believes independent directors are crucial to good corporate governance and help management establish sound corporate governance policies and practices. A sufficiently independent board will most effectively monitor management and
perform oversight functions necessary to protect shareholder interests.
SSgA FMs broad criteria for director independence in UK
companies include factors such as:
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Participation in related-party transactions and other business relations with the company;
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Employment history with company;
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Relations with controlling shareholders; and
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Family ties with any of the companys advisers, directors or senior employees.
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When considering the election or re-election of a director, SSgA FM also considers the number of outside board directorships of a non-executive and an
executive may undertake as well as attendance at board meetings. In addition, SSgA FM monitors other factors that may influence the independence of a non-executive director, such as performance related pay, cross-directorships, significant
shareholdings and tenure. SSgA FM supports the annual election of directors.
2
While SSgA FM is generally supportive of having the roles of chairman and CEO separated in the UK
market, SSgA FM assesses the division of responsibilities between chairman and CEO on a case-by-case basis, giving consideration to factors such as the companys specific circumstances, overall level of independence on the board and general
corporate governance standards in the company. Similarly, SSgA FM will monitor for circumstances where a combined chairman/CEO is appointed or where a former CEO becomes chairman.
SSgA FM may also consider factors such as board performance and directors who appear to be remiss in the performance of their oversight responsibilities. (e.g. fraud, criminal wrongdoing, breach of
fiduciary responsibilities).
SSgA FM believes companies should have committees for audit, remuneration and nomination oversight. The audit
committee is responsible for monitoring the integrity of the financial statements of the company, appointing external auditors, monitoring their qualifications and independence as well their effectiveness and resource levels. Similarly, executive
pay is an important aspect of corporate governance, and it should be determined by the board of directors and SSgA FM expects companies to have in place remuneration committees to provide independent oversight over executive pay. SSgA FM will vote
against nominees who are executive members of audit or remuneration committees.
In its analysis of boards, SSgA FM considers whether board
members have adequate skills to provide effective oversight of corporate strategy, operations and risks, including environmental and social issues. Boards should also have a regular evaluation process is place to assess the effectiveness of the
board and the skills of board members to address issues such as emerging risks, changes to corporate strategy and diversification of operations and geographic footprint. The nomination committee is responsible for evaluating and keeping under review
the balance of skills, knowledge and experience of the board and ensuring that adequate succession plans are in place for directors and the CEO. SSgA FM may vote against the re-election of members of the nomination committee if, over time, the board
has failed to address concerns over board structure or succession.
Indemnification and limitations on liability
Generally, SSgA FM supports proposals to limit directors and statutory auditors liability and/or expand indemnification and liability
protection up to the limit provided by law, if he or she has not acted in bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
AUDIT RELATED ISSUES
Companies should have a robust internal audit and internal control
systems designed for effective management of any potential and emerging risks to company operations and strategy. The responsibility of setting out an internal audit function lies with the audit committee, which should have as members independent
non-executive directors.
Appointment of External Auditors
SSgA FM believes that a companys auditor is an essential feature of an effective and transparent system of external supervision and shareholders should be given the opportunity to vote on their
appointment or re-appoint at the annual meeting. When appointing external auditors and approving audit fees, SSgA FM will take into consideration the level of detail in company disclosures and will generally not support such resolutions if an
adequate breakdown is not provided and if non-audit fees are more than 50% of audit fees. In addition, SSgA FM may vote against members of the audit committee if we have concerns with audit related issues or if the level of non-audit fees to audit
fees is significant. In certain circumstances, SSgA FM may consider auditor tenure when evaluating the audit process.
Limit Legal
Liability of External Auditors
SSgA FM generally opposes limiting the legal liability of audit firms as we believe this could create a
negative impact on the quality of the audit function.
3
SHAREHOLDER RIGHTS AND CAPITAL RELATED ISSUES
Share Issuances
The ability raise
capital is critical for companies to carry out strategy, grow, and achieve returns above their cost of capital. The approval of capital raising activities is fundamental to shareholders ability to monitor the amounts of proceeds and to ensure
capital is deployed efficiently. SSgA FM supports capital increases that have sound business reasons and are note excessive relative to a companys existing capital base.
Pre-emption rights are a fundamental right for shareholders to protect their investment in a company. Where companies seeks to issue new shares whilst dis-applying pre-emption rights, SSgA FM may vote
against if such authorities are greater than 20% of the issued share capital. SSgA FM may also vote against resolutions seeking authority to issue capital with pre-emption rights if the aggregate amount allowed seems excessive and is not justified
by the board. Generally, we are against capital issuance proposals greater than 100% of the issued share capital when the proceeds are not intended for a specific purpose.
Share Repurchase Programs
SSgA FM generally supports a proposal to repurchase shares,
other than if the issuer does not clearly state the business purpose for the program, a definitive number of shares to be repurchased, and the time frame for the repurchase. SSgA FM may vote against share re-purchase requests that allow share
re-purchases during a takeover period.
Dividends
SSgA FM generally supports dividend payouts that constitute 30% or more of net income. SSgA FM may vote against the dividend payouts if the dividend payout ratio has been consistently below 30% without
adequate explanation; or, the payout is excessive given the companys financial position. Particular attention will be paid where the payment may damage the companys long term financial health.
Mergers and Acquisitions
Mergers and
the reorganization structure of a company often involve proposals relating to reincorporation, restructurings, mergers, liquidations, and other major changes to the corporation. Proposals that are in the best interests of the shareholders,
demonstrated by enhancing share value or improving the effectiveness of the companys operations, will be supported. In general, provisions that are not viewed as economically sound or are thought to be destructive to shareholders rights
are not supported.
SSgA FM will generally support transactions that maximize shareholder value. Some of the considerations include, but are
not limited to the following:
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Board oversight of the process for the recommended transaction, including, director and/or management conflicts of interest;
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Offers made at a premium and where there are no other higher bidders; and
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Offers in which the secondary market price is substantially lower than the net asset value.
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SSgA FM may vote against a transaction considering the following:
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Offers with potentially damaging consequences for minority shareholders because of illiquid stock;
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Offers where we believe there is a reasonable prospect for an enhanced bid or other bidders; and
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At the time of voting, the current market price of the security exceeds the bid price.
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Anti-Takeover Measures
SSgA FM opposes
antitakeover defences such as authorities for the board when subject to a hostile takeover to issue warrants convertible into shares to existing shareholders.
4
REMUNERATION
Executive Pay
Despite the differences among the types of plans and awards possible, there
is a simple underlying philosophy that guides SSgA FMs analysis of executive paythere should be a direct relationship between remuneration and company performance over the long term.
Shareholders should have the opportunity to assess whether pay structures and levels are aligned with business performance. When assessing remuneration
reports, SSgA FM considers factors such as adequate disclosure of different remuneration elements, absolute and relative pay levels, peer selection and benchmarking, the mix of long term and short term incentives, alignment of pay structures with
shareholder interests as well as with corporate strategy and performance. SSgA FM may oppose remuneration reports where there seems to be a misalignment between shareholders interests. SSgA FM may vote also against the re-election of members
of the remuneration committee if we have serious concerns over remuneration practices and the company has not been responsive to shareholder pressure the amend them.
Equity Incentives Plans
SSgA FM may not support proposals on equity-based incentive plans
where insufficient information is provided on matters such as grant limits, performance metrics, performance and vesting periods and overall dilution. SSgA FM does not generally support options under such plans being issued at a discount to market
price or plans that allow for re-testing of performance metrics.
Non-executive Director Pay
Authorities seeking shareholder approval for non-executive directors fees are generally not controversial. SSgA generally supports resolutions
regarding directors fees unless disclosure is poor and we are unable to determine whether they are excessive relative to fees paid by other companies in the same country or industry. SSgA FM will evaluate on a company-by-company basis any
non-cash or performance related pay to non-executive directors.
RISK MANAGEMENT
SSgA FM believes that risk management is a key function of the board, which is responsible for setting the overall risk appetite of a company and for
providing oversight on the risk management process established by senior executives at a company. SSgA FM allows boards discretion over how they provide oversight in this area. However, SSgA FM expects companies to disclose how the board provides
oversight on its risk management system and to identify key risks facing the company. Boards should also review existing and emerging risks as they can change with a changing political and economic landscape, or as companies diversify or expand
their operations into new areas.
Environmental and Social Issues
As a fiduciary, SSgA FM considers the financial and economic implications of environmental and social issues first and foremost. In this regard, SSgA FM supports environmental and social related items
that we believe would protect or enhance shareholder value. Environmental and social factors not only can have an impact on the reputation of companies; they may also represent significant operational risks and costs to business. Well-developed
environmental and social management systems can also generate efficiencies and enhance productivity, both of which impact shareholder value in the long-term.
SSgA FM encourages companies to be transparent about the environmental and social risks and opportunities they face and adopt robust policies and processes to manage such issues. In our view, companies
that manage all risks and consider opportunities related to environmental and social issues are able to adapt faster to changes and appear to be better placed to achieve sustainable competitive advantage in the long-term. Similarly, companies with
good risk management systems, which include environmental and social policies, have a stronger position relative to their peers to manage risk and change, which could result anything from regulation and litigation, physical threats (severe weather,
climate change), economic trends as well as shifts in consumer behavior.
In their public reporting, we expect companies to disclose
information on relevant management tools, material environmental and social performance metrics and support efforts by companies to try to demonstrate how sustainability fits into operations and business activities. SSgA FMs team of analysts
evaluates these risks and shareholder proposals relating to them on an issuer by issuer basis; understanding that environmental and social risks can vary widely depending on company industry, its operations, and geographic footprint. SSgA FM may
also take action against the re-election of members of the board if we have serious concerns over ESG practices and the company has not been responsive to shareholder pressure the amend them.
5
SSgA Global Entities
Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services Licence (AFSL Number 238276). Registered office: Level 17, 420
George Street, Sydney, NSW 2000, Australia Telephone: +612 9240-7600 Facsimile: +612 9240-7611.
Belgium:
State Street Global Advisors Belgium, Office Park Nysdam, 92 Avenue Reine Astrid, B-1310 La Hulpe, Belgium. Telephone: 32 2 663
2036 Facsimile: 32 2 672 2077. Belgium is a branch of State Street Global Advisors Limited.
Canada:
State Street Global Advisors, Ltd., 770 Sherbrooke Street West Suite 1200, Montreal, Quebec H3A 1G1 Canada and 30 Adelaide Street East,
Suite 500, Toronto, Ontario, M5C 3G6 Canada.
Dubai:
State Street Bank and Trust Company (Representative Office), Suite 404 4th Floor, Building 4, Emaar Square, Dubai, United Arab Emirates. Telephone: +971 (0)4-4372800 Facsimile: +971
(0)4-4372818.
France:
State Street Global Advisors France. Authorised and regulated by the Autorité des Marchés Financiers. Registered with the Register of Commerce and Companies of Nanterre under the number 412 052 680.
Registered office: Immeuble Défense Plaza, 23-25 rue Delarivière-Lefoullon, 92064 Paris La Défense Cedex, France. Telephone: (+33) 1 44 45 40 00 Facsimile: (+33) 1 44 45 41 92.
Germany:
State Street
Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Telephone +49 (0)89-55878-400 Facsimile +49 (0)89-55878-440.
Hong Kong:
State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street,
Central, Hong Kong Telephone: +852 2103-0288 Facsimile: +852 2103-0200.
Japan:
State Street Global Advisors, Japan, 9-7-1 Akasaka, Minato-ku, Tokyo Telephone +813 4530 7380. Financial Instruments Business Operator, Kanto Local
Financial Bureau (Kinsho #345). Japan Securities Investment Advisers Association, Investment Trust Association, Japan Securities Dealers Association.
Ireland:
State Street Global Advisors Ireland Limited is regulated by the Central Bank
of Ireland. Incorporated and registered in Ireland at Two Park Place, Upper Hatch Street, Dublin 2. Registered number 145221. Member of the Irish Association of Investment Managers.
Italy:
State Street Global Advisors Ltd., Sede Secondaria di
MilanoVia dei Bossi, 4 20121 Milan, Italy. Telephone: +39 02 32066 100 Facsimile: +39 02 32066 155.
Netherlands:
State Street Global Advisors Netherlands, Adam Smith Building, Thomas Malthusstraat 1-3, 1066 JR Amsterdam,
Netherlands. Telephone: 31 20 7085600 Facsimile 31 20 7085601, SSgA Netherlands is a branch of State Street Global Advisors Limited.
Singapore:
State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower,
Singapore 068912 (Company Reg. No: 200002719D), Telephone: +65 6826-7500 Facsimile: +65 6826-7501.
Switzerland:
State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Telephone +41 (0)44 245 70 00 Facsimile +41 (0)44
245 70 16.
United Kingdom:
State Street Global Advisors Limited. Authorised and regulated by the Financial Services Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place,
Canary Wharf, London, E14 5HJ. Telephone: 020 3395 6000 Facsimile: 020 3395 6350.
United States:
State Street Global Advisors, One Lincoln Street, Boston, MA 02111-2900.
Web:
www.ssga.com
SSgA generally delegates commodities management for separately managed
accounts to SSgA FM, a wholly owned subsidiary of State Street and an affiliate of SSgA. SSgA FM is registered as a commodity trading advisor (CTA) with the Commodity Futures Trading Commission and National Futures Association.
This communication is not specifically directed to investors of separately managed accounts (SMA) utilizing futures, options on futures or
swaps. SSgA FM CTA clients should contact SSgA Relationship Management for important CTA materials.
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State Street Global Advisors is the investment management business
of State Street Corporation (NYSE: STT), one of the worlds
leading providers of financial services to institutional investors.
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www.ssga.com
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©
2013 State Street Corporation. All
Rights Reserved.
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ID2401-INST-3751 0313 Exp. Date: 3/31/2014
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SSgA FMs Emerging Market Proxy Voting and Engagement Policy cover different corporate governance frameworks and
practices in emerging markets. This policy complements and should be read in conjunction with SSgA FMs overarching Global Proxy Voting and Engagement Principles which provides a detailed explanation of SSgA FMs approach to voting and
engaging with companies.
At SSgA FM, we recognize that countries in emerging markets are disparate in their corporate governance frameworks
and practices. Concurrent with developing a company specific voting and engagement program, SSgA FM also evaluates the various factors that play into the corporate governance framework of a country. These factors include the macroeconomic conditions
and broader political system in a country, quality of regulatory oversight, enforcement of property and shareholder rights, and the independence of judiciary to name a few. While emerging market countries tend to pose broad common governance issues
across all markets such as concentrated ownership, poor disclosure of financial and related-party transactions, and weak enforcement of rules and regulation, SSgA FMs emerging market proxy voting policy is designed to identify and address
specific governance concerns in each market.
SSgA FMS PROXY VOTING AND ENGAGEMENT PHILOSOPHY IN EMERGING MARKETS
SSgA FMs approach to proxy voting and issuer engagement in emerging markets is designed to increase the value of our investments through the
mitigation of governance risks. Since the overall quality of the corporate governance framework in an emerging market country drives the level of governance risks investors assign to a country, improving the macro governance framework in a country
may help reduce governance risks, in turn, increasing the overall value of SSgA FMs holdings over time. Therefore, in order to improve the overall governance framework and practices in a country, members of our proxy voting and engagement team
endeavor to visit emerging market countries and meet with representatives from regulatory agencies and stock markets to highlight potential concerns with the macro governance framework of a country. SSgA FM is also a member of various investor
associations that seek to address broader corporate governance related policy issues in emerging markets. To help mitigate company specific risk, the team works alongside members of the active fundamental and emerging market teams to engage with
emerging market companies on governance issues and address any specific concerns or to get more information regarding shareholder items that are to be voted on at upcoming shareholder meetings. This integrated approach to engagement drives SSgA
FMs proxy voting and engagement philosophy in emerging markets.
SSgA FMs proxy voting guidelines in Emerging Markets addresses
six broad areas:
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Accounting and Audit Related Issues;
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Shareholder Rights and Capital Related Issues;
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Environmental and Social Issues; and
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General/Routine Issues.
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DIRECTORS AND BOARDS
SSgA FM believes
that a well constituted board of directors, with a good balance of skills, expertise and independence, provides the foundations for a well governed company. However, several factors such as low overall independence-level requirements by market
regulators, poor biographical disclosure of director profiles, prevalence of related-party transactions and the general resistance from controlling shareholders to increase board independence renders the election of directors as one of the most
important fiduciary duties SSgA FM performs in emerging market companies.
SSgA FM votes for the election/ re-election of directors on a
case-by-case basis after considering various factors including general market practice and availability of information on director skills and expertise.
SSgA FMs broad criteria for director independence in emerging market companies include factors such as:
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Participation in related-party transactions;
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Employment history with company;
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Relations with controlling shareholders and other employees; and
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AUDIT RELATED ISSUES
The disclosure and
availability of reliable financial statements in a timely manner is imperative for the investment process. As a result, board oversight of internal controls and the independence of the audit process are essential if investors are to rely on
financial statements. SSgA FM believes that audit committees provide the necessary oversight on the selection and appointment of auditors, a companys internal controls and accounting policies, and the overall audit process. In emerging
markets, SSgA FM encourages boards to appoint an audit committee composed of a majority of independent auditors.
2
Appointment of External Auditors
SSgA FM believes that a companys auditor is an essential feature of an effective and transparent system of external supervision and shareholders should be given the opportunity to vote on their
appointment or re-appoint at the annual meeting. SSgA FM believes that it is imperative for audit committees to select outside auditors who are independent from management.
SHAREHOLDER RIGHTS AND CAPITAL RELATED ISSUES
SSgA FM believes that changes to a
companys capital structuresuch as changes in authorized share capital, share repurchase and debt issuancesare critical decision made by the board. SSgA FM believes the company should have a well explained business rationale that is
consistent with corporate strategy and should not overly dilute its shareholders.
Related Party Transactions
Most companies in emerging markets have a controlled ownership structure that often include complex cross-shareholding between subsidiaries and parent
companies (related companies). As a result, there is a high prevalence of related-party transactions between the company and its various stakeholders such as directors and management. In addition, inter-group loan and loan guarantees provided to
related companies are some of the other related-party transactions that increase the risk profile of companies. In markets where shareholders are required to approve such transactions, SSgA FM expects companies to provide details of the transaction,
such as the nature, value and purpose of such a transaction. It also encourages independent directors to ratify such transactions. Further, SSgA FM encourages companies to describe the level of independent board oversight and the approval process,
including details of any independent valuations provided by financial advisors on related-party transactions.
Share Repurchase Programs
With regard to share repurchase, SSgA FM expects issues to clearly state the business purpose for the program, a definitive number of
shares to be repurchased, and the time frame for the repurchase.
Mergers and Acquisitions
Mergers and the reorganization structure of a company often involve proposals relating to reincorporation, restructurings, mergers, liquidations, and
other major changes to the corporation. Proposals that are in the best interests of the shareholders, demonstrated by enhancing share value or improving the effectiveness of the companys operations, will be supported. In general, provisions
that are not viewed as economically sound or are thought to be destructive to shareholders rights are not supported.
SSgA FM evaluates
mergers and structural reorganizations on a case-by-case basis. SSgA FM will generally support transactions that maximize shareholder value. Some of the considerations include, but are not limited to the following:
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Board oversight of the process for the recommended transaction, including, director and/or management conflicts of interest;
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Offers made at a premium and where there are no other higher bidders; and
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Offers in which the secondary market price is substantially lower than the net asset value.
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SSgA FM may vote against a transaction considering the following:
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Offers with potentially damaging consequences for minority shareholders because of illiquid stock;
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Offers where we believe there is a reasonable prospect for an enhanced bid or other bidders; and
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At the time of voting, the current market price of the security exceeds the bid price.
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3
REMUNERATION
SSgA FM considers it to be the boards responsibility to set appropriate level of executive compensation. Despite the differences among the types of plans and the awards possible, there is a simple
underlying philosophy that guides SSgA FMs analysis of executive compensation; there should be a direct relationship between executive compensation and company performance over the long term. In emerging markets we encourage companies to
disclose information on senior executive remuneration.
With regard to director remuneration, SSgA FM supports director pay provided the
amounts are not excessive relative to other issuers in the market or industry and are not overly dilutive to existing shareholders.
ENVIRONMENTAL AND SOCIAL ISSUES
As a
fiduciary, SSgA FM considers the financial and economic implications of environmental and social issues first and foremost. In this regard, SSgA FM supports environmental and social related items that we believe would protect or enhance shareholder
value. Environmental and social factors can not only have an impact on the reputation of companies; they may also represent significant operational risks and costs to business. Well-developed environmental and social management systems generate
efficiencies and enhance productivity, both of which impact shareholder value in the long-term.
SSgA FM encourages companies to be
transparent about the environmental and social risks and opportunities they face and adopt robust policies and processes to manage such issues. Companies with good risk management systems, which include environmental and social policies, have a
stronger position relative to their peers to manage risk and change.
In their public reporting, we expect companies to disclose information
on relevant management tools, material environmental and social performance metrics and support efforts by companies to try to demonstrate how sustainability fits into operations and business activities. SSgA FMs team of analysts evaluates
these risks on an issuer by issuer basis; understanding that environmental and social risks can vary widely depending on company industry, its operations, and geographic footprint.
In emerging markets, shareholders seldom vote on environmental and social issues. Therefore, SSgA FM addresses a companys approach to identifying and managing environmental and social risks stemming
for various aspects of its operations in its one-on-one engagement with companies.
GENERAL/ROUTINE ISSUES
Some of the other issues that are routinely voted on in emerging markets include approving the allocation of income and accepting financial statements and
statutory reports. For these voting items, SSgA FMs policies consider several factors including historical dividend payouts, pending litigation, governmental investigation, charges of fraud or other indication of significant concerns.
4
SSgA Global Entities
Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services Licence (AFSL Number 238276). Registered office: Level 17, 420
George Street, Sydney, NSW 2000, Australia Telephone: +612 9240-7600 Facsimile: +612 9240-7611.
Belgium:
State Street Global Advisors Belgium, Office Park Nysdam, 92 Avenue Reine Astrid, B-1310 La Hulpe, Belgium. Telephone: 32 2 663
2036 Facsimile: 32 2 672 2077. Belgium is a branch of State Street Global Advisors Limited.
Canada:
State Street Global Advisors, Ltd., 770 Sherbrooke Street West Suite 1200, Montreal, Quebec H3A 1G1 Canada and 30 Adelaide Street East,
Suite 500, Toronto, Ontario, M5C 3G6 Canada.
Dubai:
State Street Bank and Trust Company (Representative Office), Suite 404 4th Floor, Building 4, Emaar Square, Dubai, United Arab Emirates. Telephone: +971 (0)4-4372800 Facsimile: +971
(0)4-4372818.
France:
State Street Global Advisors France. Authorised and regulated by the Autorité des Marchés Financiers. Registered with the Register of Commerce and Companies of Nanterre under the number 412 052 680.
Registered office: Immeuble Défense Plaza, 23-25 rue Delarivière-Lefoullon, 92064 Paris La Défense Cedex, France. Telephone: (+33) 1 44 45 40 00 Facsimile: (+33) 1 44 45 41 92.
Germany:
State Street
Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Telephone +49 (0)89-55878-400 Facsimile +49 (0)89-55878-440.
Hong Kong:
State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street,
Central, Hong Kong Telephone: +852 2103-0288 Facsimile: +852 2103-0200.
Japan:
State Street Global Advisors, Japan, 9-7-1 Akasaka, Minato-ku, Tokyo Telephone +813 4530 7380. Financial Instruments Business Operator, Kanto Local
Financial Bureau (Kinsho #345). Japan Securities Investment Advisers Association, Investment Trust Association, Japan Securities Dealers Association.
Ireland:
State Street Global Advisors Ireland Limited is regulated by the Central Bank
of Ireland. Incorporated and registered in Ireland at Two Park Place, Upper Hatch Street, Dublin 2. Registered number 145221. Member of the Irish Association of Investment Managers.
Italy:
State Street Global Advisors Ltd., Sede Secondaria di
MilanoVia dei Bossi, 4 20121 Milan, Italy. Telephone: +39 02 32066 100 Facsimile: +39 02 32066 155.
Netherlands:
State Street Global Advisors Netherlands, Adam Smith Building, Thomas Malthusstraat 1-3, 1066 JR Amsterdam,
Netherlands. Telephone: 31 20 7085600 Facsimile 31 20 7085601, SSgA Netherlands is a branch of State Street Global Advisors Limited.
Singapore:
State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower,
Singapore 068912 (Company Reg. No: 200002719D), Telephone: +65 6826-7500 Facsimile: +65 6826-7501.
Switzerland:
State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Telephone +41 (0)44 245 70 00 Facsimile +41 (0)44
245 70 16.
United Kingdom:
State Street Global Advisors Limited. Authorised and regulated by the Financial Services Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place,
Canary Wharf, London, E14 5HJ. Telephone: 020 3395 6000 Facsimile: 020 3395 6350.
United States:
State Street Global Advisors, One Lincoln Street, Boston, MA 02111-2900.
Web:
www.ssga.com
SSgA generally delegates commodities management for separately managed
accounts to SSgA FM, a wholly owned subsidiary of State Street and an affiliate of SSgA. SSgA FM is registered as a commodity trading advisor (CTA) with the Commodity Futures Trading Commission and National Futures Association.
This communication is not specifically directed to investors of separately managed accounts (SMA) utilizing futures, options on futures or
swaps. SSgA FM CTA clients should contact SSgA Relationship Management for important CTA materials.
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State Street Global Advisors is the investment management business
of State Street Corporation (NYSE: STT), one of the worlds
leading providers of financial services to institutional investors.
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www.ssga.com
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©
2013 State
Street Corporation. All Rights Reserved.
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5
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ID2401-INST-3748 0313 Exp. Date: 3/31/2014
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SSgA FMs Japan Proxy Voting and Engagement Guidelines complements and should be read in conjunction with SSgA
FMs overarching Global Proxy Voting and Engagement Principles, which provides a detailed explanation of SSgA FMs approach to voting and engaging with companies.
SSgA FMs Proxy Voting and Engagement Guidelines in Japan addresses areas including board structure, audit related issues, capital structure, remuneration, environmental, social and other governance
related issues. Principally, we believe the primary responsibility of the board of directors is to preserve and enhance shareholder value and protect shareholder interests. In order to carry out their primary responsibilities, directors have to
undertake activities that range from oversight of executive management to monitoring the risks that arise from a companys business, including risks related to sustainability issues. Further, good corporate governance necessitates the existence
of effective internal controls and risk management systems, which should be governed by the board.
When voting and engaging with companies in
Japan, SSgA FM takes into consideration the unique aspects of Japanese corporate governance structures. We recognize that under Japanese corporate law, companies may choose between two structures of corporate governance: the statutory auditor system
or the committee structure. Most Japanese boards predominantly consist of executives and non-independent outsiders affiliated through commercial relationships or cross-shareholdings. Nonetheless, when evaluating companies, SSgA FM expects Japanese
companies to address conflicts of interest, risk management and demonstrate an effective process for monitoring management. In its analysis and research into corporate governance issues in Japanese companies, SSgA FM also considers guidance issued
by the Corporate Law Subcommittee of the Legislative Council within the Ministry of Justice as well as private study groups.
SSgA FMS PROXY VOTING AND ENGAGEMENT PHILOSOPHY
In our view, corporate governance and sustainability issues are an integral part of the investment process. The Corporate Governance Team consists of
investment professionals with expertise in corporate governance and company law, remuneration, and environmental and social issues. SSgA FM has established robust corporate governance principles and practices that are backed with extensive
analytical expertise to understand the complexities of the corporate governance landscape. SSgA FM engages with companies to provide insight on the principles and practices that drive our voting decisions. We also conduct proactive engagement to
address significant shareholder concerns and environmental, social and governance (ESG) issues in a manner consistent with maximizing shareholder value.
The team works alongside members of SSgA FMs active investment teams; collaborating on issuer engagement and providing input on company specific fundamentals. SSgA FM is also a member of various
investor associations that seek to address broader corporate governance related policy issues in Japan.
SSgA FM is a signatory to the United
Nations Principles of Responsible Investment (UNPRI) and is compliant with UK Stewardship Code. We are committed to sustainable investing and are working to further integrate ESG principles into investment and corporate governance practice, where
applicable and consistent with our fiduciary duty.
DIRECTORS AND BOARDS
SSgA FM believes that a well constituted board of directors, with a good balance of skills, expertise and independence, provides the foundations for a well governed company. SSgA FM votes for the
election/ re-election of directors on a case-by-case basis after considering various factors including general market practice.
Japanese
companies have the option of having a traditional board of directors with statutory auditors or a board with a committee structure. Most Japanese issuers prefer the traditional statutory auditor structure. Statutory auditors act in a
quasi-compliance role as they are not involved in strategic decision-making nor are they part of the formal management decision process. Statutory auditors attend board meetings but do not have voting rights at the board, however, they have the
right to seek an injunction and conduct broad investigations of unlawful behavior in the companys operations.
SSgA FM will support the
election of statutory auditors, unless the outside statutory auditor nominee is regarded as non-independent based on SSgA FM criteria, or the outside statutory auditor has attended less than 75 percent of meetings of the board of directors or board
of statutory auditors during the year under review or the statutory auditor has been remiss in the performance of their oversight responsibilities (fraud, criminal wrong doing, breach of fiduciary responsibilities).
For companies with a statutory auditor structure there is no legal requirement that boards have outside directors, however, SSgA FM believes there should
be a transparent process of independent and external monitoring of management on behalf of shareholders.
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SSgA FM believes that non-controlled Japanese companies should appoint at least one outside director, otherwise, SSgA FM will oppose the top executive
who is responsible for the director nomination process; and
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For controlled companies with a statutory auditor structure, SSgA FM will oppose the top executive, if the board does not have at least two outside
directors.
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For companies with a committee structure, SSgA FM votes for the election/ re-election of directors on a
case-by-case basis after considering general market practice, as well as the independence of the nominee. SSgA FM also takes into consideration the overall independence level of the committees. In determining director independence, SSgA FM considers
the following factors:
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Participation in related-party transactions and other business relations with the company;
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Past employment with the company;
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Provides professional services to the company; and
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Family ties with the company.
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Regardless of board structure, SSgA FM may oppose the election of a director for the following reasons:
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Failure to attend board meetings; or
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In instances of egregious actions related to a directors service on the board.
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Indemnification and limitations on liability
Generally, SSgA FM supports proposals to limit directors and statutory auditors liability and/or expand indemnification and liability
protection up to the limit provided by law, if he or she has not acted in bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. SSgA FM believes limitations and indemnification are necessary to
attract and retain qualified directors.
AUDIT RELATED ITEMS
SSgA FM believes that a companys auditor is an essential feature of an effective and transparent system of external supervision and shareholders should have the opportunity to vote on their
appointment at the annual meeting.
Ratifying External Auditors
SSgA FM will generally support the appointment of external auditors unless the external auditor is perceived as being non-independent and there are concerns about the accounts presented and the audit
procedures followed.
Limit Legal Liability of External Auditors
SSgA FM generally opposes limiting the legal liability of audit firms as we believe this could create a negative impact on the quality of the audit function.
CAPITAL STRUCTURE, REORGANIZATION AND MERGERS
SSgA FM supports the one share one vote policy and favors a share structure where all shares have equal voting rights. SSgA FM supports proposals to abolish voting caps or multiple voting
rights and will oppose measures to introduce these types of restrictions on shareholder rights.
SSgA FM believes pre-emption rights should be
introduced for shareholders in order to provide adequate protection from being overly diluted from the issuance of new shares or convertible securities to third parties or a small number of select shareholders.
Unequal Voting Rights
SSgA FM generally
opposes proposals authorizing the creation of new classes of common stock with superior voting rights and will generally oppose new classes of preferred stock with unspecified voting, conversion, dividend distribution, and other rights. In addition,
SSgA FM will not support capitalization changes that add classes of stock with undefined voting rights or classes that may dilute the voting interests of existing shareholders.
However, SSgA FM will support capitalization changes that eliminate other classes of stock and/or unequal voting rights.
Increase in Authorized Capital
SSgA FM generally supports increases in authorized capital
where the company provides an adequate explanation for the use of shares. In the absence of an adequate explanation, SSgA FM may oppose the request if the increase in authorized capital exceeds 100 percent of the currently authorized capital or if
it leaves the company will less than 30 percent of the proposed authorized capital outstanding. Where share issuance requests exceed our standard threshold, SSgA FM will consider the nature of the specific need, such as mergers and acquisitions and
stock splits.
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Dividends
SSgA FM generally supports dividend payouts that constitute 30% or more of net income. SSgA FM may vote against the dividend payouts if the dividend payout ratio has been consistently below 30% without
adequate explanation; or, the payout is excessive given the companys financial position. Particular attention will be paid where the payment may damage the companys long term financial health.
Share Repurchase Programs
Companies are
allowed under Japan Corporate Law to amend their articles to authorize the repurchase shares at the boards discretion. SSgA FM will oppose an amendment to articles allowing the repurchase of shares at the boards discretion. SSgA FM
believes the company should seek shareholder approval for a share repurchase program at each years AGM, providing shareholders the right to evaluate the purpose of the repurchase.
SSgA FM generally supports a proposal to repurchase shares, other than if the issuer does not clearly state the business purpose for the program, a definitive number of shares to be repurchased, and the
time frame for the repurchase. SSgA FM may vote against share repurchase requests that allow share repurchases during a takeover period.
Mergers and Acquisitions
Mergers and
the reorganization structure of a company often involve proposals relating to reincorporation, restructurings, mergers, liquidations, and other major changes to the corporation. Proposals that are in the best interests of the shareholders,
demonstrated by enhancing share value or improving the effectiveness of the companys operations, will be supported. In general, provisions that are not viewed as economically sound or are thought to be destructive to shareholders rights
are not supported.
SSgA FM evaluates mergers and structural reorganizations on a case-by-case basis. SSgA FM will generally support
transactions that maximize shareholder value. Some of the considerations include, but are not limited to the following:
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Board oversight of the process for the recommended transaction, including, director and/or management conflicts of interest;
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Offers made at a premium and where there are no other higher bidders; and
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Offers in which the secondary market price is substantially lower than the net asset value.
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SSgA FM may vote against a transaction considering the following:
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Offers with potentially damaging consequences for minority shareholders because of illiquid stock;
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Offers where we believe there is a reasonable prospect for an enhanced bid or other bidders; and
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At the time of voting, the current market price of the security exceeds the bid price.
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Anti-Takeover Measures
In general, SSgA
FM believes that adoption of poison pills that have been structured to protect management and to prevent takeover bids from succeeding is not in shareholders interest. A shareholder rights plan may lead to management entrenchment and
discourage legitimate tender offers and acquisitions. Even if the premium paid to companies with a shareholder rights plan is higher than that offered to unprotected firms, a companys chances of receiving a takeover offer in the first place
may be reduced by the presence of a shareholder rights plan.
Proposals that reduce shareholders rights or have the effect of
entrenching incumbent management will not be supported. Proposals that enhance the right of shareholders to make their own choices as to the desirability of a merger or other proposal are supported.
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Shareholder Rights Plans
In evaluating poison pills, the following conditions must be met before SSgA FM will recommend a vote in favor.
SSgA FM will support the
adoption or renewal of a Japanese issuers
shareholder rights plans (poison pill) if the following conditions are met: (i) minimum trigger, flip-in or
flip-over of 20%, (ii) maximum term of three years, (iii) no dead hand,
slow hand, no hand or
similar feature that limits the ability of a future board to redeem the pill, and (iv) inclusion of a shareholder redemption feature (qualifying offer clause), permitting ten percent of the shares to call a special meeting or seek a written
consent to vote on rescinding the pill if the board refuses to redeem the pill 90 days after a qualifying offer is announced.
SSgA FM will
vote for an
amendment
to a shareholder rights plan (poison pill) where the terms of the new plans are more favorable to shareholders ability to accept unsolicited offers (i.e. if one of the following conditions are met:
(i) minimum trigger, flip-in or flip-over of 20%, (ii) maximum term of three years, (iii) no dead hand, slow hand, no hand or similar feature that limits the ability of a future board to redeem the
pill, and (iv) inclusion of a shareholder redemption feature (qualifying offer clause), permitting ten percent of the shares to call a special meeting or seek a written consent to vote on rescinding the pill if the board refuses to redeem the
pill 90 days after a qualifying offer is announced).
COMPENSATION
In Japan, excessive compensation is rarely an issue. Rather, the problem is the lack of connection between pay and performance. Fixed salaries and cash retirement bonuses tend to comprise a significant
portion of the compensation structure while performance-based pay is generally a small portion of the total pay. SSgA FM, where possible, seeks to encourage the use of performance based compensation in Japan as an incentive for executives and as a
way to align interests with shareholders.
Approve Adjustment to Aggregate Compensation Ceiling for Directors
Remuneration for directors is generally reasonable. Typically, each company sets the director compensation parameters as an aggregate thereby limiting the
total pay to all directors. When requesting a change, a company must disclose the last time the ceiling was adjusted and management provides the rationale for the ceiling increase. SSgA FM will generally support proposed increases to the ceiling if
the company discloses the rationale for the increase. SSgA FM may oppose proposals to increase the ceiling if there has been corporate malfeasance or sustained poor performance.
Approve Annual Bonuses for Directors/Statutory Auditors
In Japan, since there are no legal
requirements that mandate companies to seek shareholder approval before making a bonus, SSgA FM believes that existing shareholder approval for the bonus should be considered best practice. As a result, SSgA FM supports management proposals on
executive compensation where there is a strong relationship between executive pay and performance over a five-year period.
Approve
Retirement Bonuses for Directors/Statutory Auditors
Retirement bonuses make up a sizeable portion of directors and auditors
lifetime compensation and are based on board tenure. While many companies in Japan have abolished this practice, there remain many proposals seeking shareholder approval for the total amounts paid to directors and statutory auditors as a whole. In
general, SSgA FM supports payments unless the recipient is an outsider or in instances where the amount is not disclosed.
Approve Stock
Plan
Most option plans in Japan are conservative, particularly at large companies. Japan corporate law requires companies to disclose the
monetary value of the stock options for directors and/or statutory auditors. Some companies do not disclose the maximum number of options that can be issued per year and shareholders are unable to evaluate the dilution impact. In this case, SSgA FM
cannot calculate the dilution level and therefore, SSgA FM may oppose such plans for poor disclosure. Also, SSgA FM opposes plans that allow for the repricing of the exercise price.
5
Deep Discount Options
As Japanese companies move away from the retirement bonus system, deep discount options plans have become more popular. Typically, the exercise price is set at JPY 1 per share. SSgA FM evaluates deep
discount options using the same criteria used to evaluate stock options as well as considering the vesting period.
ENVIRONMENTAL AND
SOCIAL ISSUES
As a fiduciary, SSgA FM considers the financial and economic implications of environmental and social issues first and
foremost. In this regard, SSgA FM supports environmental and social related items that we believe would protect or enhance shareholder value. Environmental and social factors can not only have an impact on the reputation of companies; they may also
represent significant operational risks and costs to business. Well-developed environmental and social management systems generate efficiencies and enhance productivity, both of which impact shareholder value in the long-term.
SSgA FM encourages companies to be transparent about the environmental and social risks and opportunities they face and adopt robust policies and
processes to manage such issues. Companies with good risk management systems, which include environmental and social policies, have a stronger position relative to their peers to manage risk and change.
In their public reporting, we expect companies to disclose information on relevant management tools, material environmental and social performance
metrics and support efforts by companies to try to demonstrate how sustainability fits into operations and business activities. SSgA FMs team of analysts evaluates these risks on an issuer by issuer basis; understanding that environmental and
social risks can vary widely depending on company industry, its operations, and geographic footprint.
MISCELLANEOUS/ROUTINE ITEMS
Expansion of Business Activities
Japanese companies articles of incorporation strictly define the types of businesses in which a company is permitted to engage. In general, SSgA FM views proposals to expand and diversify the
companys business activities as routine and non-contentious. SSgA FM will monitor instances where there has been an inappropriate acquisition and diversification away from the companys main area of competence, which resulted in a
decrease of shareholder value.
MORE INFORMATION
Any client who wishes to receive information on how its proxies were voted should contact its SSgA relationship manager.
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SSgA Global Entities
Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services Licence (AFSL Number 238276). Registered office: Level 17, 420
George Street, Sydney, NSW 2000, Australia Telephone: +612 9240-7600 Facsimile: +612 9240-7611.
Belgium:
State Street Global Advisors Belgium, Office Park Nysdam, 92 Avenue Reine Astrid, B-1310 La Hulpe, Belgium. Telephone: 32 2 663
2036 Facsimile: 32 2 672 2077. Belgium is a branch of State Street Global Advisors Limited.
Canada:
State Street Global Advisors, Ltd., 770 Sherbrooke Street West Suite 1200, Montreal, Quebec H3A 1G1 Canada and 30 Adelaide Street East,
Suite 500, Toronto, Ontario, M5C 3G6 Canada.
Dubai:
State Street Bank and Trust Company (Representative Office), Suite 404 4th Floor, Building 4, Emaar Square, Dubai, United Arab Emirates. Telephone: +971 (0)4-4372800 Facsimile: +971
(0)4-4372818.
France:
State Street Global Advisors France. Authorised and regulated by the Autorité des Marchés Financiers. Registered with the Register of Commerce and Companies of Nanterre under the number 412 052 680.
Registered office: Immeuble Défense Plaza, 23-25 rue Delarivière-Lefoullon, 92064 Paris La Défense Cedex, France. Telephone: (+33) 1 44 45 40 00 Facsimile: (+33) 1 44 45 41 92.
Germany:
State Street
Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Telephone +49 (0)89-55878-400 Facsimile +49 (0)89-55878-440.
Hong Kong:
State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street,
Central, Hong Kong Telephone: +852 2103-0288 Facsimile: +852 2103-0200.
Japan:
State Street Global Advisors, Japan, 9-7-1 Akasaka, Minato-ku, Tokyo Telephone +813 4530 7380. Financial Instruments Business Operator, Kanto Local
Financial Bureau (Kinsho #345). Japan Securities Investment Advisers Association, Investment Trust Association, Japan Securities Dealers Association.
Ireland:
State Street Global Advisors Ireland Limited is regulated by the Central Bank
of Ireland. Incorporated and registered in Ireland at Two Park Place, Upper Hatch Street, Dublin 2. Registered number 145221. Member of the Irish Association of Investment Managers.
Italy:
State Street Global Advisors Ltd., Sede Secondaria di
MilanoVia dei Bossi, 4 20121 Milan, Italy. Telephone: +39 02 32066 100 Facsimile: +39 02 32066 155.
Netherlands:
State Street Global Advisors Netherlands, Adam Smith Building, Thomas Malthusstraat 1-3, 1066 JR Amsterdam,
Netherlands. Telephone: 31 20 7085600 Facsimile 31 20 7085601, SSgA Netherlands is a branch of State Street Global Advisors Limited.
Singapore:
State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower,
Singapore 068912 (Company Reg. No: 200002719D), Telephone: +65 6826-7500 Facsimile: +65 6826-7501.
Switzerland:
State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Telephone +41 (0)44 245 70 00 Facsimile +41 (0)44
245 70 16.
United Kingdom:
State Street Global Advisors Limited. Authorised and regulated by the Financial Services Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place,
Canary Wharf, London, E14 5HJ. Telephone: 020 3395 6000 Facsimile: 020 3395 6350.
United States:
State Street Global Advisors, One Lincoln Street, Boston, MA 02111-2900.
Web:
www.ssga.com
SSgA generally delegates commodities management for separately managed
accounts to SSgA FM, a wholly owned subsidiary of State Street and an affiliate of SSgA. SSgA FM is registered as a commodity trading advisor (CTA) with the Commodity Futures Trading Commission and National Futures Association.
This communication is not specifically directed to investors of separately managed accounts (SMA) utilizing futures, options on futures or
swaps. SSgA FM CTA clients should contact SSgA Relationship Management for important CTA materials.
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State Street Global Advisors is the investment management business
of State Street Corporation (NYSE: STT), one of the worlds
leading providers of financial services to institutional investors.
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www.ssga.com
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