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February 2015
MSELN-147-C
Registration Statement No. 333-189888
Dated January 30, 2015
Filed Pursuant to Rule 433
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STRUCTURED INVESTMENTS
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Opportunities in International Equities
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
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Performance Leveraged Upside SecuritiesSM
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Principal at Risk Securities
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The PLUS are senior unsecured obligations of Royal Bank of Canada, do not pay interest, do not guarantee any return of principal at maturity and have the terms described in the accompanying prospectus supplement and prospectus, as supplemented or modified by this document. At maturity, if the value of the basket has increased, investors will receive the stated principal amount of their investment plus a return reflecting the leveraged upside performance of the basket, subject to the maximum payment at maturity. However, if the value of the basket has decreased, investors will lose 1% for every 1% decline. The PLUS are for investors who seek a return linked to an equally-weighted basket of five exchange-traded funds and who are willing to risk their principal and forgo current income and upside above the maximum payment at maturity in exchange for the leverage feature, which applies to a limited range of positive performance of the basket. Investors may lose their entire initial investment in the PLUS. The PLUS are senior notes issued as part of Royal Bank of Canada’s Global Medium-Term Notes, Series F program. All payments on the PLUS are subject to the credit risk of Royal Bank of Canada.
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SUMMARY TERMS
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Issuer:
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Royal Bank of Canada
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The basket is composed of five exchange-traded funds (each, a “basket component”) weighted as set forth in the table below.
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Basket components
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Bloomberg
symbols
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Component
weightings
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Initial component
values*
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WisdomTree® India Earnings Fund (“EPI”)
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EPI
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20%
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iShares® MSCI Malaysia ETF (“EWM”)
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EWM
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20%
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Basket:
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iShares® MSCI Taiwan ETF (“EWT”)
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EWT
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20%
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iShares® MSCI South Korea Capped ETF (“EWY”)
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EWY
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20%
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iShares® China Large-Cap ETF (“FXI”)
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FXI
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20%
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* The initial component value for each basket component will be determined on the pricing date, and will be the official closing value of the relevant basket component on the pricing date.
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Aggregate principal amount:
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$
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Stated principal amount:
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$10 per PLUS
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Issue price:
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$10 per PLUS (see “Commissions and issue price” below)
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Pricing date:
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February , 2015 (expected to be February 27, 2015)
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Original issue date:
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March , 2015 (three business days after the pricing date)
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Maturity date:
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June , 2016
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Payment at maturity:
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If the final basket value is greater than the initial basket value,
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$10 + $10 × leverage factor × basket return
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In no event will the payment at maturity exceed the maximum payment at maturity.
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If the final basket value is less than or equal to the initial basket value,
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$10 + $10 × basket return
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This amount will be less than or equal to the stated principal amount of $10. You will lose some or all of the principal amount if the final basket value is less than the initial basket value.
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Maximum payment at maturity:
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$11.65 per PLUS (116.50% of the stated principal amount)
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Leverage factor:
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300%
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Basket return:
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(final basket value – initial basket value) / initial basket value
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Initial basket value:
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Set equal to 100 on the pricing date
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Final basket value:
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100 × [1 + (sum of the basket component return multiplied by the respective component weighting for each basket component)]
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Basket component return:
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With respect to each basket component, (final component value – initial component value) / initial component value
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Final component value:
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The official closing value of the relevant basket component on the valuation date
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Valuation date:
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May , 2016, subject to adjustment for non-trading days and certain market disruption events
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Official closing value:
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The closing price of one share of each basket component times the adjustment factor
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Adjustment factor:
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1.0, subject to adjustment in the event of certain events. See “Additional Terms of the PLUS - Adjustment factor” on page 10 of this document.
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CUSIP/ISIN:
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780082384 / US7800823848
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Listing:
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The PLUS will not be listed on any securities exchange.
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Agent:
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RBC Capital Markets, LLC (“RBCCM”). See “Supplemental Information Regarding Plan of Distribution; Conflicts of Interest.”
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Commissions and issue price:
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Price to public
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Agent’s commissions
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Proceeds to issuer
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Per PLUS
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$10.000
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$0.175(1)
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$0.050(2)
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$9.775
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Total
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$
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$
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$
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(1)
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RBCCM, acting as agent for Royal Bank of Canada, will receive a fee of up to $0.225 per $10 stated principal amount and will pay to Morgan Stanley Wealth Management (“MSWM”) a fixed sales commission of up to $0.175 for each PLUS that MSWM sells. See “Supplemental Information Regarding Plan of Distribution; Conflicts of Interest.”
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(2)
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Of the amount per $10 stated principal amount received by RBCCM, acting as agent for Royal Bank of Canada, RBCCM will pay MSWM a structuring fee of $0.05 for each PLUS.
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The initial estimated value of the PLUS as of the date of this document is $9.6686 per $10.00 PLUS, which is less than the price to public. The final pricing supplement relating to the PLUS will set forth our estimate of the initial value of the PLUS as of the pricing date, which will not be less than $9.4686 per $10.00 PLUS. The market value of the PLUS at any time will reflect many factors, cannot be predicted with accuracy, and may be less than this amount.
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Investment in the PLUS involve certain risks. See “Risk Factors” beginning on page 5 of this document, and “Risk Factors” beginning on page S-1 of the accompanying prospectus supplement and page 1 of the prospectus.
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You should read this document together with the related prospectus supplement and prospectus,
each of which can be accessed via the hyperlinks below, before you decide to invest.
Please also see “Additional Terms of the PLUS” in this document.
None of the Securities and Exchange Commission, any state securities commission or any other regulatory body has approved or disapproved of the PLUS or passed upon the adequacy or accuracy of this document. Any representation to the contrary is a criminal offense. The PLUS will not constitute deposits insured by the Canada Deposit Insurance Corporation, the U.S. Federal Deposit Insurance Corporation (the “FDIC”) or any other Canadian or U.S. government agency or instrumentality.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Investment Summary
Performance Leveraged Upside Securities
Principal at Risk Securities
The PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016 (the “PLUS”) can be used:
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As an alternative to direct exposure to the basket that enhances returns for a certain range of positive performance of the basket.
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To enhance returns and potentially outperform the basket in a moderately bullish scenario.
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To achieve similar levels of upside exposure to the basket as a direct investment, subject to the maximum payment at maturity, while using fewer dollars by taking advantage of the leverage factor.
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The PLUS are exposed on a 1:1 basis to the negative performance of the basket.
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Maturity:
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Approximately 15 months
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Leverage factor:
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300%
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Maximum payment at maturity:
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$11.65 per PLUS (116.50% of the stated principal amount)
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Minimum payment at maturity:
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None. Investors may lose their entire initial investment in the PLUS.
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Coupon:
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None
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Basket Weighting:
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20% for each basket component
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Key Investment Rationale
These PLUS offer leveraged exposure to the performance of the basket. In exchange for enhanced performance of 300% of the appreciation of the basket, investors forgo performance above the maximum payment at maturity of $11.65 per PLUS. At maturity, if the value of the basket has increased, investors will receive the stated principal amount of their investment plus a return reflecting the leveraged upside performance of the basket, subject to the maximum payment at maturity. However, if the value of the basket has decreased, investors will lose 1% for every 1% decline. Investors may lose their entire initial investment in the PLUS.
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Leveraged
Performance
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The PLUS offer investors an opportunity to capture enhanced returns relative to a direct investment in the basket within a certain range of positive performance.
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Upside Scenario
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The value of the basket increases and, at maturity, we will pay the stated principal amount of $10 plus 300% of the basket return, subject to the maximum payment at maturity of $11.65 per PLUS (116.50% of the stated principal amount).
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Downside Scenario
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The value of the basket declines and, at maturity, we will pay less than the stated principal amount by an amount that is proportionate to the percentage decrease in the value of the basket from the initial basket value.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Additional Information
You should read this document together with the prospectus dated July 23, 2013, as supplemented by the prospectus supplement dated July 23, 2013, relating to our Senior Global Medium-Term Notes, Series F, of which the PLUS are a part. This document, together with these documents, contains the terms of the PLUS and supersedes all other prior or contemporaneous oral statements as well as any other written materials, including preliminary or indicative pricing terms, correspondence, trade ideas, structures for implementation, sample structures, brochures or other educational materials of ours.
You should rely only on the information provided or incorporated by reference in this document, the prospectus and the prospectus supplement. We have not authorized anyone else to provide you with different information, and we take no responsibility for any other information that others may give you. We and MSWM are offering to sell the PLUS and seeking offers to buy the PLUS only in jurisdictions where it is lawful to do so. The information contained in this document and the accompanying prospectus supplement and prospectus is current only as of their respective dates.
If the information in this document differs from the information contained in the prospectus supplement or the prospectus, you should rely on the information in this document.
You should carefully consider, among other things, the matters set forth in “Risk Factors” in this document and the accompanying prospectus supplement, as the PLUS involve risks not associated with conventional debt securities. We urge you to consult your investment, legal, tax, accounting and other advisers before you invest in the PLUS.
You may access these documents on the SEC website at www.sec.gov as follows (or if such address has changed, by reviewing our filings for the relevant date on the SEC website):
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·
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Prospectus dated July 23, 2013:
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Prospectus Supplement dated July 23, 2013:
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Our Central Index Key, or CIK, on the SEC website is 1000275.
Please see the section “Documents Incorporated by Reference” on page i of the above prospectus for a description of our filings with the SEC that are incorporated by reference therein.
The issuer has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at.www.sec.gov. Alternatively, the issuer, any underwriter or any dealer participating in this offering will arrange to send you the prospectus if you request it by calling toll-free 1-800-584-6837.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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How the PLUS Work
Payoff Diagram
The payoff diagram below illustrates the payment at maturity on the PLUS for a range of hypothetical percentage changes in the value of the basket. The graph is based on the following terms:
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Stated principal amount:
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$10 per PLUS
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Leverage factor:
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300%
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Maximum payment at maturity:
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$11.65 per PLUS (116.50% of the stated principal amount)
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PLUS Payoff Diagram
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How it works
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Upside Scenario. If the final basket value is greater than the initial basket value, then investors would receive the $10 stated principal amount plus a return reflecting 300% of the appreciation of the basket over the term of the PLUS, subject to the maximum payment at maturity. Under the terms of the PLUS, an investor would realize the maximum payment at maturity at a final basket value of 105.50% of the initial basket value.
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If the basket appreciates 3%, the investor would receive a 9% return, or $10.90 per PLUS, or 109.00% of the stated principal amount.
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If the basket appreciates 20%, the investor would receive only the maximum payment at maturity of $11.65 per PLUS, or 116.50% of the stated principal amount.
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Downside Scenario. If the final basket value is less than or equal to the initial basket value, the investor would receive an amount less than or equal to the $10 stated principal amount, based on a 1% loss of principal for each 1% decline in the basket.
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If the basket depreciates 30%, the investor would lose 30% of the investor’s principal and receive only $7.00 per PLUS at maturity, or 70% of the stated principal amount.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Risk Factors
An investment in the PLUS is subject to the risks described below, as well as the risks described under “Risk Factors” in the accompanying prospectus supplement and prospectus. Investors in the PLUS are also exposed to further risks related to the issuer of the PLUS, Royal Bank of Canada, which are described in Royal Bank of Canada’s annual report on Form 40-F for its most recently completed fiscal year, filed with the SEC and incorporated by reference herein. See the categories of risks, identified and disclosed in the management’s discussion and analysis of financial condition and results of operations included in the annual report on Form 40-F. This section (and the management’s discussion and analysis section of the annual report on Form 40-F) describes the most significant risks relating to the PLUS. You should carefully consider whether the PLUS are suited to your particular circumstances.
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PLUS do not pay interest or guarantee return of principal. The terms of the PLUS differ from those of ordinary debt securities in that the PLUS do not pay interest or guarantee payment of the principal amount at maturity. If the final basket value is less than the initial basket value, the payout at maturity will be an amount in cash that is less than the $10 stated principal amount of each PLUS by an amount proportionate to the decrease in the value of the basket, and may be zero.
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The appreciation potential of the PLUS is limited by the maximum payment at maturity. The appreciation potential of the PLUS is limited by the maximum payment at maturity of $11.65 per PLUS, or 116.50% of the stated principal amount. Although the leverage factor provides 300% exposure to any increase in the value of the basket as of the valuation date above the initial basket value, because the payment at maturity will be limited to 116.50% of the stated principal amount, any increase in the final basket value over the initial basket value by more than 5.50% will not further increase the return on the PLUS.
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The market price of the PLUS will be influenced by many unpredictable factors. Many factors will influence the value of the PLUS in the secondary market and the price at which RBCCM may be willing to purchase or sell the PLUS in the secondary market, including:
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the value, volatility and dividend yield, as applicable, of the basket components and the securities represented or held by the basket components;
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interest and yield rates;
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exchange rates between the U.S. dollar and the relevant non-U.S. currencies in which the securities held by the basket components are traded;
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time remaining to maturity;
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geopolitical conditions and economic, financial, political and regulatory or judicial events that affect the applicable international equities markets generally; and
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any actual or anticipated changes in our credit ratings or credit spreads.
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The values of the basket components may be, and have recently been, volatile, and we can give you no assurance that the volatility will lessen. You may receive less, and possibly significantly less, than the stated principal amount if you sell your PLUS prior to maturity.
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The PLUS are subject to the credit risk of Royal Bank of Canada, and any actual or anticipated changes to its credit ratings or credit spreads may adversely affect the market value of the PLUS. You are dependent on Royal Bank of Canada’s ability to pay all amounts due on the PLUS at maturity and therefore you are subject to the credit risk of Royal Bank of Canada. If Royal Bank of Canada defaults on its obligations under the PLUS, your investment would be at risk and you could lose some or all of your investment. As a result, the market value of the PLUS prior to maturity will be affected by changes in the market’s view of Royal Bank of Canada’s creditworthiness. Any actual or anticipated decline in Royal Bank of Canada’s credit ratings or increase in the credit spreads charged by the market for taking Royal Bank of Canada credit risk is likely to adversely affect the market value of the PLUS.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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The amount payable on the PLUS is not linked to the value of the basket at any time other than the valuation date. The final basket value will be based on the official closing values of the basket components on the valuation date, subject to adjustment for non-trading days and certain market disruption events. Even if the value of the basket appreciates prior to the valuation date but then decreases by the valuation date, the payment at maturity will be less, and may be significantly less, than it would have been had the payment at maturity been linked to the value of the basket prior to that decrease. Although the actual value of the basket on the maturity date or at other times during the term of the PLUS may be higher than the final basket value, the payment at maturity will be based solely on the closing value of the basket on the valuation date.
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Changes in the values of the basket components may offset each other. Movements in the values of the basket components may not correlate with each other. At a time when the value of one or more of the basket components increases, the values of one or more of the other basket components may not increase as much or may even decline. Therefore, in calculating the final basket value and the payment at maturity, increases in the value of one or more of the basket components may be moderated, or more than offset, by lesser increases or declines in the values of the other basket components.
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The initial estimated value of the PLUS will be less than the price to the public. The initial estimated value that is set forth on the cover page of this document, and that will be set forth in the final pricing supplement for the PLUS, does not represent a minimum price at which we, RBCCM or any of our affiliates would be willing to purchase the PLUS in any secondary market (if any exists) at any time. If you attempt to sell the PLUS prior to maturity, their market value may be lower than the price you paid for them and the initial estimated value. This is due to, among other things, changes in the value of the basket, the borrowing rate we pay to issue securities of this kind, and the inclusion in the price to the public of the agent’s commissions and the estimated costs relating to our hedging of the PLUS. These factors, together with various credit, market and economic factors over the term of the PLUS, are expected to reduce the price at which you may be able to sell the PLUS in any secondary market and will affect the value of the PLUS in complex and unpredictable ways. Assuming no change in market conditions or any other relevant factors, the price, if any, at which you may be able to sell your PLUS prior to maturity may be less than your original purchase price, as any such sale price would not be expected to include the agent’s commissions and the hedging costs relating to the PLUS. In addition to bid-ask spreads, the value of the PLUS determined for any secondary market price is expected to be based on the secondary rate rather than the internal funding rate used to price the PLUS and determine the initial estimated value. As a result, the secondary price will be less than if the internal funding rate was used. The PLUS are not designed to be short-term trading instruments. Accordingly, you should be able and willing to hold your PLUS to maturity.
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Our initial estimated value of the PLUS is an estimate only, calculated as of the time the terms of the PLUS are set. The initial estimated value of the PLUS is based on the value of our obligation to make the payments on the PLUS, together with the mid-market value of the derivative embedded in the terms of the PLUS. See “Structuring the PLUS” below. Our estimate is based on a variety of assumptions, including our credit spreads, expectations as to dividends, interest rates and volatility, and the expected term of the PLUS. These assumptions are based on certain forecasts about future events, which may prove to be incorrect. Other entities may value the PLUS or similar securities at a price that is significantly different than we do.
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The value of the PLUS at any time after the pricing date will vary based on many factors, including changes in market conditions, and cannot be predicted with accuracy. As a result, the actual value you would receive if you sold the PLUS in any secondary market, if any, should be expected to differ materially from the initial estimated value of your PLUS.
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Adjustments to the basket components could adversely affect the value of the PLUS. The investment advisors of the basket components may add, delete or substitute the stocks represented or held by the applicable basket components, or make other methodological changes. Further, the investment advisors may discontinue or suspend maintenance of the basket components. Any of these actions could affect the value of and the return on the PLUS.
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We have no affiliation with the investment advisors and the relevant index sponsors and will not be responsible for any actions taken by them. We have no affiliation with the investment advisors or the sponsors of the indices that underlie the basket components. These entities will not be involved in the offering of the PLUS. Consequently, we have no control over their actions, including any actions of the type that could affect the basket components, and therefore, the value of the basket components. The investment advisors and these sponsors have no obligation of any sort with respect to the PLUS. Thus, they have no obligation to take your interests into consideration for any reason, including in taking any actions that might affect the value of the PLUS.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Investing in the PLUS is not equivalent to investing in the basket components or the securities which they hold. Investing in the PLUS is not equivalent to investing in the securities represented by any basket component. Investors in the PLUS will not have voting rights or rights to receive dividends or other distributions or any other rights with respect to the securities represented or held by any basket component.
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Each basket component and its underlying index are different. The performance of each basket component may not exactly replicate the performance of its underlying index, because each basket component will reflect transaction costs and fees that are not included in the calculation of its underlying index. It is also possible that the performance of a basket component may not fully replicate or may in certain circumstances diverge significantly from the performance of its underlying index due to the temporary unavailability of certain securities in the secondary market, the performance of any derivative instruments contained in that basket component or due to other circumstances.
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An investment in the PLUS is subject to management risk. Each basket component is not managed according to traditional methods of ‘‘active’’ investment management, which involve the buying and selling of securities based on economic, financial and market analysis and investment judgment. Instead, each basket component, utilizing a ‘‘passive’’ or indexing investment approach, attempts to approximate the investment performance of its underlying index by investing in a portfolio of securities that generally replicates its underlying index. Therefore, unless a specific security is removed from its underlying index, the applicable basket component generally would not sell a security because the security’s issuer was in financial trouble. In addition, each basket component is subject to the risk that the investment strategy of its investment advisor may not produce the intended results.
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There are risks associated with investments in securities linked to the value of foreign (and especially emerging market) equity securities. The securities held by the basket components have been issued by non-U.S. companies. An investment in securities linked to the value of non-U.S. equity securities involves particular risks. Non-U.S. securities markets may be more volatile than U.S. securities markets, and market developments may affect non-U.S. securities markets differently from the U.S. securities markets. Direct or indirect government intervention to stabilize these non-U.S. securities markets, as well as cross shareholdings among non-U.S. companies, may affect trading prices and volumes in those markets. Also, there is generally less publicly available information in the U.S. about non-U.S. companies than about those companies that are subject to the reporting requirements of the SEC, and non-U.S. companies are subject to accounting, disclosure, auditing and financial reporting standards and requirements that differ from those applicable to U.S. reporting companies.
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In addition, the stocks that are generally tracked by the basket components have been issued by companies in various emerging markets countries, which pose further risks in addition to the risks associated with investing in foreign equity markets generally. Countries with emerging markets may have relatively unstable governments, may present the risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets, and may have less protection of property rights than more developed countries. The economies of countries with emerging markets may be based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
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Securities prices in non-U.S. countries are subject to political, economic, financial and social factors that may be unique to the particular country. These factors, which could negatively affect the non-U.S. securities markets, include the possibility of recent or future changes in the economic and fiscal policies of non-U.S. governments, the possible imposition of, or changes in, currency exchange laws or other non-U.S. laws or restrictions applicable to non-U.S. companies or investments in non-U.S. equity securities, the possibility of fluctuations in the rate of exchange between currencies, the possibility of outbreaks of hostility and political instability and the possibility of natural disaster or adverse public health developments in the region. Moreover, the economies of certain foreign countries may differ favorably or unfavorably from the U.S. economy in important respects, such as growth of gross national product, rate of inflation, trade surpluses or deficits, capital reinvestment, resources and self-sufficiency.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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The PLUS are subject to exchange rate risk. Because the securities held by the basket components are traded in currencies other than U.S. dollars, and the PLUS are denominated in U.S. dollars, the amount payable on the PLUS at maturity may be exposed to fluctuations in the exchange rate between the U.S. dollar and each of the currencies in which those securities are denominated. These changes in exchange rates may reflect changes in various non-U.S. economies that in turn may affect the payment on the PLUS at maturity. An investor’s net exposure will depend on the extent to which the currencies in which the relevant securities are denominated either strengthen or weaken against the U.S. dollar and the relative weight of each security. If, taking into account such weighting, the U.S. dollar strengthens against the currencies in which the relevant securities are denominated, the value of those securities may be adversely affected and the prices of the basket components may be adversely affected as well. In turn, the payment at maturity may be adversely affected.
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The PLUS will not be listed on any securities exchange and secondary trading may be limited. The PLUS will not be listed on any securities exchange. Therefore, there may be little or no secondary market for the PLUS. RBCCM may, but is not obligated to, make a market in the PLUS, and, if it chooses to do so at any time, it may cease doing so. When it does make a market, it will generally do so for transactions of routine secondary market size at prices based on its estimate of the current value of the PLUS, taking into account its bid/offer spread, our credit spreads, market volatility, the notional size of the proposed sale, the cost of unwinding any relating hedging positions, the time remaining to maturity and the likelihood that it will be able to resell the PLUS. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the PLUS easily. Since other broker-dealers may not participate significantly in the secondary market for the PLUS, the price at which you may be able to trade your PLUS is likely to depend on the price, if any, at which RBCCM is willing to transact. If, at any time, RBCCM were to cease making a market in the PLUS, it is likely that there would be no secondary market for the PLUS. Accordingly, you should be willing to hold your PLUS to maturity.
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Historical values of the basket components should not be taken as an indication of their respective future values during the term of the PLUS. The trading prices of the equity securities comprising the basket components will determine the value of the relevant basket component at any given time. As a result, it is impossible to predict whether the value of any basket component will rise or fall. Trading prices of the equity securities comprising the basket components will be influenced by complex and interrelated political, economic, financial and other factors.
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Hedging and trading activity by us and our subsidiaries could potentially adversely affect the value of the PLUS. One or more of our subsidiaries and/or third-party dealers expect to carry out hedging activities related to the PLUS (and possibly to other instruments linked to the basket, the basket components, or the securities which they represent or hold), including trading in those securities as well as in other related instruments. Some of our subsidiaries also trade those securities and other financial instruments related to the basket components on a regular basis as part of their general broker-dealer and other businesses. Any of these hedging or trading activities on or prior to the pricing date could potentially affect the initial component values and, therefore, could increase the value at which the basket components must close on the valuation date so that investors do not suffer a loss on their initial investment in the PLUS. Additionally, such hedging or trading activities during the term of the PLUS, including on the valuation date, could adversely affect the value of the basket on the valuation date and, accordingly, the amount of cash an investor will receive at maturity, if any.
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Our business activities may create conflicts of interest. We and our affiliates may engage in trading activities related to the basket components, the securities represented or held by the basket components that are not for the account of holders of the PLUS or on their behalf. These trading activities may present a conflict between the holders’ interest in the PLUS and the interests we and our affiliates will have in proprietary accounts, in facilitating transactions, including options and other derivatives transactions, for our customers and in accounts under our management. These trading activities could be adverse to the interests of the holders of the PLUS.
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We and our affiliates may presently or from time to time engage in business with one or more of the issuers of the securities represented or held by the basket components. This business may include extending loans to, or making equity investments in, such companies or providing advisory services to such companies, including merger and acquisition advisory services. In the course of business, we and our affiliates may acquire non-public information relating to these companies and, in addition, one or more of our affiliates may publish research reports about these companies. Neither we nor the agent have made any independent investigation regarding any matters whatsoever relating to the issuers of the securities represented or held by the basket components.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Moreover, we and our affiliates may have published, and in the future expect to publish, research reports with respect to the basket components or the securities represented or held by the basket components. This research is modified from time to time without notice and may express opinions or provide recommendations that are inconsistent with purchasing or holding the PLUS. Any of these activities by us or one or more of our affiliates may affect the value of the basket components and, therefore, the market value of the PLUS.
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The calculation agent, which is a subsidiary of the issuer, will make determinations with respect to the PLUS, which may create a conflict of interest. Our wholly owned subsidiary, RBCCM, will serve as the calculation agent. As calculation agent, RBCCM will determine the initial component value, the final component value, and basket component return of each basket component, the final basket value, the basket return, and calculate the amount of cash, if any, you will receive at maturity. Moreover, certain determinations made by RBCCM, in its capacity as calculation agent, may require it to exercise discretion and make subjective judgments, such as with respect to the occurrence or non-occurrence of market disruption events and the selection of a successor fund or the calculation of the final component value in the event of a market disruption event or discontinuance of a basket component, may adversely affect the payout to you at maturity.
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The antidilution adjustments that the calculation agent is required to make do not cover every event that could affect a basket component. RBCCM, as calculation agent, will adjust the amount payable at maturity for certain events affecting a basket component. However, the calculation agent will not make an adjustment for every event that could affect a basket component. If an event occurs that does not require the calculation agent to adjust the amount payable at maturity, the market price of the PLUS may be materially and adversely affected.
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Significant aspects of the tax treatment of the PLUS are uncertain. The tax treatment of an investment in the PLUS is uncertain. We do not plan to request a ruling from the Internal Revenue Service or from the Canada Revenue Agency regarding the tax treatment of an investment in the PLUS, and the Internal Revenue Service, the Canada Revenue Agency or a court may not agree with the tax treatment described in this document.
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The Internal Revenue Service has issued a notice indicating that it and the U.S. Treasury Department are actively considering whether, among other issues, a holder should be required to accrue interest over the term of an instrument such as the PLUS even though that holder will not receive any payments with respect to the PLUS until maturity and whether all or part of the gain a holder may recognize upon sale, exchange or maturity of an instrument such as the PLUS should be treated as ordinary income. The outcome of this process is uncertain and could apply on a retroactive basis.
Please read carefully the sections entitled “Canadian Federal Income Tax Consequences” and “Supplemental Discussion of U.S. Federal Income Tax Consequences” in this document, the section entitled “Tax Consequences” in the accompanying prospectus and the section entitled “Certain Income Tax Consequences” in the accompanying prospectus supplement. You should consult your tax advisor about your own tax situation.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Additional Terms of the PLUS
Please read this information in conjunction with the summary terms on the front cover of this document.
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Additional Provisions
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Adjustment factor:
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With respect to each basket component, 1.0, subject to adjustment. If a basket component is subject to a stock split or reverse stock split, then once such split has become effective, the adjustment factor will be adjusted to equal the product of the prior adjustment factor and the number of shares issued in such stock split or reverse stock split with respect to one share of that basket component. No such adjustment to the adjustment factor will be required unless such adjustment would require a change of at least 0.1% in the amount being adjusted as then in effect. Any number so adjusted will be rounded to the nearest one hundred-thousandth with five one-millionths being rounded upward.
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Closing price of a basket
component:
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The closing price for one share of a basket component (or one unit of any other security for which a closing price must be determined with respect to this basket component) on any trading day means:
· if the shares of that basket component (or any such other security) are listed or admitted to trading on a national securities exchange, the last reported sale price, regular way, of the principal trading session on such day on the principal U.S. securities exchange registered under the Exchange Act on which the shares of that basket component (or any such other security) are listed or admitted to trading, or
· if the shares of that basket component (or any such other security) are not listed or admitted to trading on any national securities exchange but are included in the OTC Bulletin Board Service (the OTC Bulletin Board) operated by the Financial Industry Regulatory Authority (FINRA), the last reported sale price of the principal trading session on the OTC Bulletin Board on such day.
If the shares of a basket component (or any such other security) are listed or admitted to trading on any national securities exchange but the last reported sale price, as applicable, is not available pursuant to the preceding sentence, then the closing price for one share of that basket component (or one unit of any such other security) on any trading day will mean the last reported sale price of the principal trading session on the over-the-counter market or the OTC Bulletin Board on such day.
If the last reported sale price for a basket component (or any such other security) is not available pursuant to either of the two preceding sentences, then the closing price for any trading day will be the mean, as determined by the calculation agent, of the firm bid prices for that basket component (or any such other security) obtained from as many recognized dealers in such security, but not exceeding three, as will make such bid prices available to the calculation agent. Bids of the Issuer or any of its affiliates may be included in the calculation of such mean, but only to the extent that any such bid is the highest of the bids obtained. The term “OTC Bulletin Board” will include any successor service thereto, or, if applicable, the OTC Reporting Facility operated by FINRA.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Postponement of the
valuation date:
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If, for any basket component (an “affected basket component”), (i) a market disruption event occurs on the valuation date or (ii) that day is determined by the calculation agent not to be a trading day by reason of an extraordinary event, occurrence, declaration, or otherwise, the calculation agent will determine the official closing value of the basket component for the valuation date, and as a result, the final basket value, as follows:
· The official closing value of each basket component that is not an affected basket component will be its official closing value on the valuation date.
· The official closing value of each basket component that is an affected basket component for the valuation date will be deemed to be the official closing value of the basket component on the immediately succeeding trading day during which no market disruption event shall have occurred or is continuing to occur; provided that the final basket value will be determined (or, if not determinable, estimated) by the calculation agent in a manner which the calculation agent considers commercially reasonable under the circumstances on a date no later than the fifth scheduled trading day after the scheduled valuation date, regardless of the occurrence of a market disruption event on that day.
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Market disruption events:
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With respect to any basket component, a market disruption event, as determined by the calculation agent in its sole discretion, means the occurrence or existence of any of the following events:
· a suspension, absence or material limitation of trading in the shares of that basket component on its primary market for more than two hours of trading or during the one-half hour before the close of trading in that market;
· a suspension, absence or material limitation of trading in option or futures contracts relating to that basket component, if available, in the primary market for those contracts for more than two hours of trading or during the one-half hour before the close of trading in that market; or
· the shares of that basket component do not trade on the NYSE Arca, the NASDAQ Global Market or what was the primary market for the shares of that basket component, as determined by the calculation agent in its sole discretion;
· any other event, if the calculation agent determines that the event materially interferes with our ability or the ability of any of our affiliates or hedge counterparties to unwind all or a material portion of a hedge with respect to the PLUS that such party or its respective hedge counterparties have effected or may effect as described below under “Use of Proceeds and Hedging.”
The following events will not be market disruption events:
· a limitation on the hours or number of days of trading in the shares of that basket component on its primary market, but only if the limitation results from an announced change in the regular business hours of the relevant market; and
· a decision to permanently discontinue trading in the option or futures contracts relating to the shares of that basket component.
For this purpose, a “suspension, absence or material limitation of trading” in the primary securities market on which option or futures contracts relating to the shares of a basket component, if available, are traded will not include any time when that market is itself closed for trading under ordinary circumstances. In contrast, a suspension or limitation of trading in option or futures contracts relating to the shares of a basket component, if available, in the primary market for those contracts, by reason of any of:
· a price change exceeding limits set by that market;
· an imbalance of orders relating to those contracts; or
· a disparity in bid and asked quotes relating to those contacts;
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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will constitute a suspension or material limitation of trading in option or futures contracts, as the case may be, relating to the shares of that basket component in the primary market for those contracts.
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Discontinuation
of/adjustments to the basket
components:
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If a basket component is discontinued and the sponsor or another entity establishes or designates a successor or substitute fund that the calculation agent determines, in its sole discretion, to be comparable to that basket component (the successor fund), then the calculation agent will substitute the successor fund for that basket component and determine the closing price of that basket component on the valuation date as described above under “—Closing price of a basket component.”
If a basket component is discontinued and:
· the calculation agent does not select a successor fund, or
· the successor fund is no longer traded or listed on any of the relevant trading days,
the calculation agent will compute a substitute price for that basket component in accordance with the procedures last used to calculate the price of that basket component before any discontinuation but using only those securities that were held by that basket component prior to such discontinuation. If a successor fund is selected or the calculation agent calculates a price as a substitute for that basket component as described below, the successor fund or price will be used as a substitute for that basket component for all purposes going forward, including for purposes of determining whether a market disruption event exists, even if that basket component is re-established, unless the calculation agent in its sole discretion decides to use the re-established basket component.
If a basket component is discontinued before the valuation date and the calculation agent determines that no successor fund is available at that time, then on each trading day until the earlier to occur of:
· the determination of the final component value, or
· a determination by the calculation agent that a successor fund is available,
the calculation agent will determine the price that would be used in computing the closing price of that basket component as described in the preceding paragraph as if that day were a trading day. The calculation agent will cause notice of each price to be published not less often than once each month in The Wall Street Journal, another newspaper of general circulation or a website or webpage available to holders of the PLUS, and arrange for information with respect to these prices to be made available by telephone.
Notwithstanding these alternative arrangements, discontinuation of the operation of a basket component would be expected to adversely affect the value of, liquidity of and trading in the PLUS.
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Business day:
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A business day means a Monday, Tuesday, Wednesday, Thursday or Friday that is not a day on which banking institutions in The City of New York generally are authorized or obligated by law, regulation or executive order to close.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Trading day:
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As to each basket component, a trading day means any day on which the exchange and each related exchange are scheduled to be open for their respective regular trading sessions.
The exchange means the primary organized exchange or quotation system for trading a basket component, any successor to such exchange or quotation system or any substitute exchange or quotation system to which trading in such shares has temporarily relocated (provided that the calculation agent has determined that there is comparable liquidity relative to such shares on such temporary substitute exchange or quotation system as on the original exchange).
A related exchange means each exchange or quotation system on which futures or options contracts relating to a basket component are traded, any successor to such exchange or quotation system or any substitute exchange or quotation system to which trading in the futures or options contracts relating to that basket component has temporarily relocated (provided that the calculation agent has determined that there is comparable liquidity relative to the futures or options contracts relating to that basket component on that temporary substitute exchange or quotation system as on the original related exchange).
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Default interest:
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In the event we fail to make a payment on the maturity date, any overdue payment in respect of such payment on the PLUS will bear interest until the date upon which all sums due are received by or on behalf of the relevant holder, at a rate per annum which is the rate for deposits in U.S. dollars for a period of six months which appears on the Reuters Screen LIBOR page as of 11:00 a.m. (London time) on the first business day following such failure to pay. Such rate shall be determined by the calculation agent. If interest is required to be calculated for a period of less than one year, it will be calculated on the basis of a 360-day year consisting of the actual number of days in the period.
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Events of default and
acceleration:
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If the maturity of the PLUS is accelerated upon an event of default under the Indenture, the amount payable upon acceleration will be determined by the calculation agent. Such amount will be calculated as if the date of declaration of acceleration were the valuation date.
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Minimum ticketing size:
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$1,000 / 100 PLUS
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Additional amounts:
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We will pay any amounts to be paid by us on the PLUS without deduction or withholding for, or on account of, any and all present or future income, stamp and other taxes, levies, imposts, duties, charges, fees, deductions or withholdings (“taxes”) now or hereafter imposed, levied, collected, withheld or assessed by or on behalf of Canada or any Canadian political subdivision or authority that has the power to tax, unless the deduction or withholding is required by law or by the interpretation or administration thereof by the relevant governmental authority. At any time a Canadian taxing jurisdiction requires us to deduct or withhold for or on account of taxes from any payment made under or in respect of the PLUS, we will pay such additional amounts (“Additional Amounts”) as may be necessary so that the net amounts received by each holder (including Additional Amounts), after such deduction or withholding, shall not be less than the amount the holder would have received had no such deduction or withholding been required.
However, no Additional Amounts will be payable with respect to a payment made to a holder of a PLUS or of a right to receive payments in respect thereto (a “Payment Recipient”), which we refer to as an “Excluded Holder,” in respect of any taxes imposed because the beneficial owner or Payment Recipient:
(i) is someone with whom we do not deal at arm’s length (within the meaning of the Income Tax Act (Canada)) at the time of making such payment;
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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(ii) is subject to such taxes by reason of its being connected presently or formerly with Canada or any province or territory thereof otherwise than by reason of the holder’s activity in connection with purchasing the PLUS, the holding of PLUS or the receipt of payments thereunder;
(iii) is, or does not deal at arm’s length with a person who is, a “specified shareholder” (within the meaning of subsection 18(5) of the Income Tax Act (Canada)) of Royal Bank of Canada (generally a person will be a “specified shareholder” for this purpose if that person, either alone or together with persons with whom the person does not deal at arm’s length, owns 25% or more of (a) our voting shares, or (b) the fair market value of all of our issued and outstanding shares);
(iv) presents such security for payment (where presentation is required) more than 30 days after the relevant date (except to the extent that the holder thereof would have been entitled to such Additional Amounts on presenting a security for payment on the last day of such 30 day period); for this purpose, the “relevant date” in relation to any payments on any security means:
a. the due date for payment thereof, or
b. if the full amount of the monies payable on such date has not been received by the trustee on or prior to such due date, the date on which the full amount of such monies has been received and notice to that effect is given to holders of the PLUS in accordance with the Indenture;
(v) could lawfully avoid (but has not so avoided) such withholding or deduction by complying, or requiring that any agent comply with, any statutory requirements necessary to establish qualification for an exemption from withholding or by making, or requiring that any agent make, a declaration of non-residence or other similar claim for exemption to any relevant tax authority; or
(vi) is subject to deduction or withholding on account of any tax, assessment, or other governmental charge that is imposed or withheld by reason of the application of Section 1471 through 1474 of the United States Internal Revenue Code of 1986, as amended (the “Code”) (or any successor provisions), any regulation, pronouncement, or agreement thereunder, official interpretations thereof, or any law implementing an intergovernmental approach thereto, whether currently in effect or as published and amended from time to time.
For the avoidance of doubt, we will not have any obligation to pay any holders Additional Amounts on any tax which is payable otherwise than by deduction or withholding from payments made under or in respect of the PLUS at maturity.
We will also make such withholding or deduction and remit the full amount deducted or withheld to the relevant authority in accordance with applicable law. We will furnish to the trustee, within 30 days after the date the payment of any taxes is due pursuant to applicable law, certified copies of tax receipts evidencing that such payment has been made or other evidence of such payment satisfactory to the trustee. We will indemnify and hold harmless each holder of the PLUS (other than an Excluded Holder) and upon written request reimburse each such holder for the amount of (x) any taxes so levied or imposed and paid by such holder as a result of payments made under or with respect to the PLUS, and (y) any taxes levied or imposed and paid by such holder with respect to any reimbursement under (x) above, but excluding any such taxes on such holder’s net income or capital.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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For additional information, see the section entitled “Tax Consequences—Canadian Taxation” in the accompanying prospectus.
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Form of securities:
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Book-entry
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Trustee:
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The Bank of New York Mellon
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Calculation agent:
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RBCCM. The calculation agent will make all determinations regarding the PLUS. Absent manifest error, all determinations of the calculation agent will be final and binding on you and us, without any liability on the part of the calculation agent. You will not be entitled to any compensation from us for any loss suffered as a result of any of the above determinations or confirmations by the calculation agent.
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Contact:
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Morgan Stanley Wealth Management clients may contact their local Morgan Stanley Wealth Management branch office or our principal executive offices at 1585 Broadway, New York, New York 10036 (telephone number 1-(866)-477-4776). All other clients may contact their local brokerage representative. Third-party distributors may contact Morgan Stanley Structured Investment Sales at 1-(800)-233-1087.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Information About the Basket Components
All disclosures contained in this document regarding the basket components, including, without limitation, their make-up, method of calculation, and changes in their components, have been derived from publicly available sources. The information reflects the policies of, and is subject to change by, the applicable investment advisor. Each of these entities has no obligation to continue to sponsor, and may discontinue, the applicable basket component. The consequences of an investment advisor discontinuing publication or making other changes to a basket component are discussed above in the section entitled “Discontinuation of/adjustments to the basket components” or “adjustment factor,” as applicable. Neither we nor RBCCM accepts any responsibility for the calculation, maintenance or publication of any basket component or successor to any basket component.
Information provided to or filed with the SEC by the applicable investment advisor under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, can be located through the SEC’s website at http://www.sec.gov. In addition, information may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents. We have not participated in the preparation of, or verified, such publicly available information. None of the forgoing documents or filings are incorporated by reference in, and should not be considered part of, this free writing prospectus.
The selection of the basket components is not a recommendation to invest in any basket component. Neither we nor any of our affiliates make any representation to you as to the future performance of any basket component.
The WisdomTree® India Earnings Fund
The WisdomTree® India Earnings Fund is an investment portfolio maintained and managed by WisdomTree Trust (“WTT”). Wisdom Tree Asset Management, Inc. (“WTAM”) is currently the investment adviser to the WisdomTree® India Earnings Fund, and Mellon Capital Management Corporation is the sub-adviser to the WisdomTree® India Earnings Fund. The WisdomTree® India Earnings Fund is an exchange traded fund that trades on the NYSE Arca, Inc. under the ticker symbol “EPI.”
WTT is a registered investment company that consists of numerous separate investment portfolios, including the WisdomTree® India Earnings Fund.
Investment Objective and Strategy
The WisdomTree® India Earnings Fund is an exchange-traded fund that seeks to track the price and yield performance, before fees and expenses, of the WisdomTree India Earnings Index. The WisdomTree India Earnings Index is a weighted index that measures the performance of companies incorporated and traded in India that are profitable and that are eligible to be purchased by foreign investors as of the annual index rebalance. The inception date of the WisdomTree India Earnings Index was December 3, 2007. The level of the WisdomTree India Earnings Index is reported by Bloomberg L.P. under the ticker symbol “WTIND.”
The WisdomTree® India Earnings Fund pursues a “passive” or indexing approach in attempting to track the performance of the WisdomTree India Earnings Index. The WisdomTree® India Earnings Fund attempts to invest all, or substantially all, of its assets in the common stocks that make up the WisdomTree India Earnings Index. The WisdomTree® India Earnings Fund generally uses a “representative sampling” strategy to achieve its investment objective, meaning that it generally will invest in a sample of the securities whose risk, return and other characteristics closely resemble the risk, return and other characteristics of the WisdomTree India Earnings Index as a whole.
Under normal circumstances, at least 95% of the WisdomTree® India Earnings Fund’s total assets (exclusive of collateral held from securities lending) will be invested in the component securities of the WisdomTree India Earnings Index. To the extent that the WisdomTree India Earnings Index concentrates (i.e., holds 25% or more of its total assets) in the securities of a particular industry or group of industries, the WisdomTree® India Earnings Fund will concentrate its investments to approximately the same extent as the WisdomTree India Earnings Index.
The WisdomTree India Earnings Index
The WisdomTree India Earnings Index is a weighted index that measures the performance of companies incorporated and traded in India that are profitable and that are eligible to be purchased by foreign investors as of the annual index rebalance.
The WisdomTree India Earnings Index consists only of companies that:
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are incorporated in India;
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are listed on a major stock exchange in India;
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have generated at least $5 million in earnings in their fiscal year prior to the annual index rebalance;
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have a market capitalization of at least $200 million on the annual index rebalance;
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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have an average daily dollar trading volume of at least $200,000 for each of the six months prior to the annual index rebalance;
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have traded at least 250,000 shares per month for each of the six months prior to the annual index rebalance; and
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have a price to earnings ratio (“P/E ratio”) of at least 2 as of the annual index rebalance.
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Companies are weighted in the WisdomTree India Earnings Index based on reported net income in their fiscal year prior to the annual index rebalance. The reported net income number is then multiplied by a second factor developed by Standard & Poor’s called the “Investability Weighting Factor” (“IWF”). The IWF is used to scale the earnings generated by each company by restrictions on shares available to be purchased. The product of the reported net income and IWF is known at the “Earnings Factor.” Companies are weighted by the proportion of each individual earnings factor relative to the sum of all earnings factors within the WisdomTree India Earnings Index.
Notwithstanding the criteria used to determine and calculate the WisdomTree India Earnings Index, no assurances can be given that the WisdomTree India Earnings Index will have a positive return during the term of the PLUS.
The maximum weight of any one sector in the WisdomTree India Earnings Index, at the time of the WisdomTree India Earnings Index’s annual rebalance, is capped at 25%. In response to market conditions, sector weights may fluctuate above 25% between annual index rebalance dates.
WisdomTree Investments, Inc. (“WTI”), as index provider, currently uses Standard & Poor’s Global Industry Classification Standards to define companies in each sector of the WisdomTree India Earnings Index. The following sectors are included in the WisdomTree India Earnings Index: consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, telecommunication services, and utilities. A sector is comprised of multiple industry groups. For example, the energy sector is comprised of companies in, among others, the natural gas, oil and petroleum industries.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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The iShares Basket Components
iShares® consists of numerous separate investment portfolios (the “iShares Funds”), including the iShares® MSCI Malaysia ETF, the iShares® MSCI Taiwan ETF, the iShares® MSCI South Korea Capped ETF and the iShares® China Large-Cap ETF (the “iShares basket components”). Each iShares basket component seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of their respective underlying indices (the MSCI Malaysia Index, the MSCI Taiwan Index, the MSCI Korea 25/50 Index and the FTSE China 25 Index). Each iShares basket component typically earns income dividends from securities included in the applicable underlying index. These amounts, net of expenses and taxes (if applicable), are passed along to the iShares basket component’s shareholders as “ordinary income.” In addition, the iShares basket component realizes capital gains or losses whenever it sells securities. Net long-term capital gains are distributed to shareholders as “capital gain distributions.” However, because the PLUS are linked only to the share price of the iShares basket components, you will not be entitled to receive income, dividend, or capital gain distributions from the iShares basket component or any equivalent payments.
“iShares®” and “BlackRock®” are registered trademarks of BlackRock. The PLUS are not sponsored, endorsed, sold, or promoted by BlackRock, or by any of the iShares Funds. Neither BlackRock nor the iShares Funds make any representations or warranties to the owners of the PLUS or any member of the public regarding the advisability of investing in the PLUS. Neither BlackRock nor the iShares Funds shall have any obligation or liability in connection with the registration, operation, marketing, trading, or sale of the PLUS or in connection with our use of information about these basket components or any of the iShares Funds.
The iShares® MSCI Malaysia ETF
The iShares® MSCI Malaysia ETF is intended to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of its underlying index, the MSCI Malaysia Index. This basket component trades on NYSE Arca under the ticker symbol “EWM.”
The MSCI Malaysia Index is a free float-adjusted market capitalization index of securities listed on the Bursa Malaysia. The MSCI Malaysia Index is calculated daily in the local currencies and published in real time every 15 seconds during market trading hours. The MSCI Malaysia Index is reported by Bloomberg L.P. under the ticker symbol “MXMY.”
The MSCI Malaysia Index is part of the MSCI Equity Indices series and is an MSCI Global Investable Market Index, which is an index family within the MSCI International Equity Indices. The index is classified as “EM,” as defined below.
The iShares® MSCI Taiwan ETF
The iShares® MSCI Taiwan ETF is intended to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of its underlying index, the MSCI Taiwan Index. This basket component trades on NYSE Arca under the ticker symbol “EWT.”
The MSCI Taiwan Index is a free float-adjusted market capitalization index of publicly traded securities in the Taiwanese market as listed on the Singapore Exchange and Taiwan Futures Exchange. The MSCI Taiwan Index is reported by Bloomberg L.P. under the ticker symbol “TAMSCI.” The MSCI Taiwan Index is published in real time every 60 seconds during market trading hours. The index has a base date of December 31, 1987, an initial value of 100, and is calculated in Taiwan dollars.
The MSCI Taiwan Index is part of the MSCI Equity Indices series and is an MSCI Global Investable Market Index, which is an index family within the MSCI International Equity Indices. The index is classified as “EM,” as defined below.
The iShares® MSCI South Korea Capped ETF
The iShares® MSCI South Korea Capped ETF is intended to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of its underlying index, the MSCI Korea 25/50 Index. This basket component trades on NYSE Arca under the ticker symbol “EWY.”
The MSCI Korea 25/50 Index consists of stocks traded primarily on the Stock Market Division of the Korean Exchange. The MSCI Korea 25/50 Index is a free-float adjusted market capitalization weighted index with a capping methodology applied to issuer weights so that no issuer of a component exceeds 25% of the Index weight and all issuers with weight above 5% do not exceed 50% of the Index weight, as described below under “Objectives and Guiding Principles Underlying the MSCI 25/50 Indices.”
The MSCI Korea 25/50 Index is part of the MSCI Equity Indices series and is an MSCI Global Investable Market Index, which is an index family within the MSCI International Equity Indices. The index is classified as “EM,” as defined below.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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General - MSCI Indices
MSCI provides global equity indices intended to measure equity performance in international markets and the MSCI International Equity Indices are designed to serve as global equity performance benchmarks. In constructing these indices, MSCI applies its index construction and maintenance methodology across developed, emerging, and frontier markets.
MSCI enhanced the methodology used in its MSCI International Equity Indices. The MSCI Standard and MSCI Small Cap Indices, along with the other MSCI equity indices based on them, transitioned to the global investable market indices methodology described below. The transition was completed at the end of May 2008. The Enhanced MSCI Standard Indices are composed of the MSCI Large Cap and Mid Cap Indices. The MSCI Global Small Cap Index transitioned to the MSCI Small Cap Index resulting from the Global Investable Market Indices methodology and contains no overlap with constituents of the transitioned MSCI Standard Indices. Together, the relevant MSCI Large Cap, Mid Cap, and Small Cap Indices will make up the MSCI investable market index for each country, composite, sector, and style index that MSCI offers.
Constructing the MSCI Global Investable Market Indices. MSCI undertakes an index construction process, which involves:
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defining the equity universe;
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determining the market investable equity universe for each market;
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determining market capitalization size segments for each market;
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applying index continuity rules for the MSCI Standard Index;
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creating style segments within each size segment within each market; and
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classifying securities under the Global Industry Classification Standard (the “GICS”).
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Defining the Equity Universe. The equity universe is defined by:
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Identifying Eligible Equity Securities: the equity universe initially looks at securities listed in any of the countries in the MSCI Global Index Series, which will be classified as either Developed Markets (“DM”) or Emerging Markets (“EM”). All listed equity securities, or listed securities that exhibit characteristics of equity securities, except mutual funds, ETFs, equity derivatives, limited partnerships, and most investment trusts, are eligible for inclusion in the equity universe. Real Estate Investment Trusts (“REITs”) in some countries are also eligible for inclusion.
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Classifying Eligible Securities into the Appropriate Country: each company and its securities (i.e., share classes) are classified in only one country.
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Determining the Market Investable Equity Universes. A market investable equity universe for a market is derived by applying investability screens to individual companies and securities in the equity universe that are classified in that market. A market is equivalent to a single country, except in DM Europe.
The investability screens used to determine the investable equity universe in each market are as follows:
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Equity Universe Minimum Size Requirement: this investability screen is applied at the company level. In order to be included in a market investable equity universe, a company must have the required minimum full market capitalization.
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Equity Universe Minimum Free Float-Adjusted Market Capitalization Requirement: this investability screen is applied at the individual security level. To be eligible for inclusion in a market investable equity universe, a security must have a free float-adjusted market capitalization equal to or higher than 50% of the equity universe minimum size requirement.
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EM Minimum Liquidity Requirement: this investability screen is applied at the individual security level. To be eligible for inclusion in a market investable equity universe, a security must have adequate liquidity. The twelve-month and three-month Annual Traded Value Ratio (“ATVR”), a measure that screens out extreme daily trading volumes and takes into account the free float-adjusted market capitalization size of securities, together with the three-month frequency of trading are used to measure liquidity. In the calculation of the ATVR, the trading volumes in depository receipts associated with that security, such as ADRs or GDRs, are also considered. A minimum liquidity level of 15% of three- and twelve-month ATVR and 80% of three-month frequency of trading over the last four consecutive quarters are required for inclusion of a security in a market investable equity universe of an EM.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Global Minimum Foreign Inclusion Factor Requirement: this investability screen is applied at the individual security level. To be eligible for inclusion in a market investable equity universe, a security’s Foreign Inclusion Factor (“FIF”) must reach a certain threshold. The FIF of a security is defined as the proportion of shares outstanding that is available for purchase in the public equity markets by international investors. This proportion accounts for the available free float of and/or the foreign ownership limits applicable to a specific security (or company). In general, a security must have an FIF equal to or larger than 0.15 to be eligible for inclusion in a market investable equity universe.
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Minimum Length of Trading Requirement: this investability screen is applied at the individual security level. For an initial public offering (“IPO”) to be eligible for inclusion in a market investable equity universe, the new issue must have started trading at least four months before the implementation of the initial construction of the index or at least three months before the implementation of a semi-annual index review (as described below). This requirement is applicable to small new issues in all markets. Large IPOs are not subject to the minimum length of trading requirement and may be included in a market investable equity universe and the Standard Index outside of a Quarterly or Semi-Annual Index Review.
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Defining Market Capitalization Size Segments for Each Market. Once a market investable equity universe is defined, it is segmented into the following size−based indices:
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Investable Market Index (Large + Mid + Small);
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Standard Index (Large + Mid);
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Creating the size segment indices in each market involves the following steps:
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defining the market coverage target range for each size segment;
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determining the global minimum size range for each size segment;
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determining the market size-segment cutoffs and associated segment number of companies;
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assigning companies to the size segments; and
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applying final size-segment investability requirements.
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Index Continuity Rules for the Standard Indices. In order to achieve index continuity, as well as to provide some basic level of diversification within a market index, and notwithstanding the effect of other index construction rules described in this section, a minimum number of three constituents will be maintained for an EM Standard Index.
Creating Style Indices within Each Size Segment. All securities in the investable equity universe are classified into value or growth segments using the MSCI Global Value and Growth methodology.
Classifying Securities under the Global Industry Classification Standard. All securities in the global investable equity universe are assigned to the industry that best describes their business activities. To this end, MSCI has designed, in conjunction with Standard & Poor’s, the GICS. Under the GICS, each company is assigned to one sub−industry according to its principal business activity. Therefore, a company can belong to only one industry grouping at each of the four levels of the GICS.
Index Maintenance
The MSCI global investable market indices are maintained with the objective of reflecting the evolution of the underlying equity markets and segments on a timely basis, while seeking to achieve index continuity, continuous investability of constituents and replicability of the indices, and index stability, and low index turnover. In particular, index maintenance involves:
(i) Semi−Annual Index Reviews (“SAIRs”) in May and November of the Size Segment and Global Value and Growth Indices which include:
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updating the indices on the basis of a fully refreshed equity universe;
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taking buffer rules into consideration for migration of securities across size and style segments; and
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updating FIFs and Number of Shares (“NOS”).
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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(ii) Quarterly Index Reviews (“QIRs”) in February and August of the Size Segment Indices aimed at:
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including significant new eligible securities (such as IPOs that were not eligible for earlier inclusion) in the index;
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allowing for significant moves of companies within the Size Segment Indices, using wider buffers than in the SAIR; and
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reflecting the impact of significant market events on FIFs and updating NOS.
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(iii) Ongoing Event−Related Changes: changes of this type are generally implemented in the indices as they occur. Significantly large IPOs are included in the indices after the close of the company’s tenth day of trading.
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Objectives and Guiding Principles Underlying the MSCI 25/50 Indices
Under current regulations, a fund needs to satisfy certain tests, such as those relating to asset diversification and sources of income, for qualification as a “regulated investment company” or “RIC.” More specifically, one requirement of a RIC is that, at the end of each quarter of a RIC’s tax year, no more than 25% of the value of the RIC’s assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund’s total assets. The MSCI 25/50 Indices take into account these investments limits, offering a benchmarking alternative for RIC compliant funds.
The following principles have guided MSCI in designing a methodology for constructing the MSCI 25/50 Indices from underlying non constrained indices.
Reflecting the 25% and 50% concentration constraints. Ensuring timely and on-going reflection of the constraints requires an MSCI 25/50 Index to be rebalanced periodically. The MSCI 25/50 Indices are rebalanced in February, May, August and November.
Minimizing tracking error to the Parent Index. MSCI seeks to achieve this by rebalancing an MSCI 25/50 Index using an optimization process that aims to minimize the constituent weight differences between that MSCI 25/50 Index and the relevant parent index (the MSCI Mexico Investable Market Index). The active risk or the tracking error of an MSCI 25/50 Index versus the relevant parent index is measured as the distance between the constituent weights of that MSCI 25/50 Index and the relevant parent index.
Index Construction and Maintenance Methodology
Constructing and Rebalancing the MSCI 25/50 Indices
The MSCI 25/50 Index methodology follows a portfolio optimization framework. The Barra Optimizer is utilized to perform the optimization function, which is aimed at minimizing index turnover, tracking error and extreme deviation from the relevant parent index. The Barra Optimizer is an algorithm designed to facilitate the portfolio construction process.
Minimizing transaction cost. A transaction cost is applied as a proxy for index turnover on rebalancing from each MSCI 25/50 Index.
Minimum weight of constituents. The minimum weight of any MSCI 25/50 Index constituent is equal to the weight of the smallest constituent in the relevant parent index.
Buffer Rules. A buffer of 10% of the value of each constraint is used in order to reduce the risk of non-compliance due to short term market movements between two quarterly rebalancing. As a result, at the point of constructing or rebalancing the MSCI 25/50 Indices, the weight of any single issuer cannot exceed 22.5% of the index weight and all issuers with weight above 4.5% cannot exceed 45% of the index weight.
Maintenance Rules
Quarterly Index Reviews. The MSCI 25/50 Indices are rebalanced quarterly and the changes resulting from the rebalancing are made as of the close of the last business day of each February, May, August and November, to coincide with the quarterly index reviews of their parent indices. The MSCI 25/50 Indices are in general rebalanced five business days before the effective date. The changes resulting from the rebalancing are announced on the same day. In case a pro forma MSCI 25/50 Index violates the 25/50 constraints between the announcement date and the effective date, the previously announced results will be discarded and a newly rebalanced MSCI 25/50 Index will be announced.
At each rebalancing, a constraint factor is calculated for each constituent of each MSCI 25/50 Index. The constraint factor is defined as the weight in the applicable MSCI 25/50 Index at the time of the rebalancing divided by the weight in the relevant parent index. The constraint factor as well as the constituents of each MSCI 25/50 Index remains constant between index reviews except in case of corporate events.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Ongoing Event Related Changes. A security added to a parent index following a corporate event is added to the relevant MSCI 25/50 Index with an estimated capped weight, without rebalancing of the MSCI 25/50 index.
In the event of a merger or an acquisition where an index constituent acquires another index constituent or merges with another index constituent, the remaining company is maintained in the relevant MSCI 25/50 Index with a constraint factor calculated as the weighted average of the constraint factors before the corporate event.
If a spun-off security of an index constituent is added to a parent index, it will be added to the relevant MSCI 25/50 Index with the same constraint factor as the parent security.
The deletion of a constituent from a parent index following a corporate event triggers its deletion from the relevant MSCI 25/50 Index without rebalancing of that MSCI 25/50 Index.
The addition of a newly eligible security in a parent index — for example, an early inclusion of a large initial public offering, or a security migrating to that parent index from another size segment — will result in the inclusion of that security in the relevant MSCI 25/50 Index and consequently trigger the full rebalancing of that MSCI 25/50 Index.
Issuer Concentration Issues. A minimum of 15 issuers in the relevant parent index is required at any point in time for an MSCI 25/50 Index to be rebalanced as described above. In the event the number of issuers drops below 15 but remains above 11 following a corporate event or a regular index review, MSCI will apply certain adjustments.
An MSCI 25/50 Index will need to be discontinued if the number of issuers decreases to less than 12, as mathematically no solution can satisfy the 25% and 50% constraints. MSCI will however temporarily maintain the MSCI 25/50 Index for a minimum of two months before discontinuation by adding the necessary number of securities to that MSCI 25/50 Index. The index discontinuation will coincide with one of the subsequent regular index reviews.
In the event that no securities are eligible for temporary addition to the relevant MSCI 25/50 Index, MSCI will provide an index, as close as possible to the 25/50 constraints, for a minimum of two months before discontinuation.
The iShares® China Large-Cap ETF
The iShares® China Large-Cap ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities of the largest companies in the China equity market available to international investors, as represented by the FTSE China 25 Index. The fund’s investment objective and the FTSE China 25 Index may be changed at any time.
The following information has been obtained from the iShares website without independent verification. The shares of the iShares® China Large-Cap ETF trade on the NYSE Arca under the symbol “FXI”.
FTSE China 25 Index
The FTSE China 25 Index (formerly the FTSE/Xinhua China 25 Index) is a stock index calculated, published and disseminated by the index sponsor, the FTSE, and is designed to represent the performance of the mainland Chinese market that is available to international investors. The FTSE China 25 Index, like other indices of FTSE, is governed by an independent advisory committee, the FTSE Asia Pacific Advisory Committee, that ensures that the FTSE China 25 Index is operated in accordance with ground rules published and maintained by the FTSE Policy Group. The FTSE China 25 Index is calculated and published in Hong Kong dollars (“HKD”) and non-HKD denominated constituent prices are converted to HKD in order to calculate the index. The constituents of the FTSE China 25 Index are selected based on full market capitalization and with a view to providing stability in the index. As a result, the FTSE China 25 Index is not necessarily comprised of the 25 stocks with the highest full market capitalization. To be eligible for inclusion in the FTSE China 25 Index, a stock must be a constituent of the FTSE All-World Index, must be listed and trading on the Stock Exchange of Hong Kong Ltd. (“HKSE”), and must be an “H” share or a “Red Chip” share. “H” shares are securities of companies incorporated in the People’s Republic of China and nominated by the Central Government for listing and trading on the HKSE. “Red Chip” shares are securities of companies that are incorporated outside of the People’s Republic of China, are more than 35% owned (including strategic holdings), directly or indirectly, in aggregate by Chinese entities (such as Chinese Government entities, states, provinces or municipalities and derive more than 55% of their revenue or operating assets from mainland China). Both “H” shares and “Red Chip” shares are quoted and traded in Hong Kong dollars and are available only to international investors who are not citizens of the People’s Republic of China.
The composition of the FTSE China 25 Index is reviewed quarterly in March, June, September and December as described below.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Index Calculation
The index is calculated during each trading day of the HKSE (except for Hong Kong Public Holidays) on a real-time and end-of-day closing level (at 16:15 local Hong Kong time) basis. Total return calculations of the index are published at the end of each working day and include cash dividends based on the security’s ex-dividend date. The price portion of the index is calculated using the following formula:
SUM [(pn * en) * sn * fn * cn] / d
n=1, 2, 3……n
where p is the latest trade price of the component security n, e is the exchange rate required to convert the security’s home currency into Hong Kong dollars, if applicable, s is the number of shares of the security in issue as used by the FTSE index ground rules, f is the portion of free floating shares, adjusted in accordance with the policies of the FTSE/Xinhua Index Limited, c is the factor applied to each security to cap its weight within the index, expressed as a number between 0 and 1 (1 representing 100% or no cap) and published by FTSE that coincides with the most recent quarterly review of the index, and d is the divisor, a figure that represents the total issued share capital of the index at the base date, which may be adjusted to allow for changes in the issued share capital of individual securities without distorting the index.
The index uses actual trade prices for securities with local stock exchange quotations and Reuters real-time spot currency rates to convert those prices into Hong Kong dollars for its calculations. The foreign exchange rates received from Reuters at the index closing time (16:15 local Hong Kong time) are used to calculate the closing level of the index.
Under its calculation methodology, FTSE uses available published information to exclude from free floating shares, regardless of size of holdings, all of the following: any corporate investments by companies that are in a related industry (including suppliers) in an index constituent company, including by a publicly listed, or strategic holding company, private or non-listed subsidiary of a listed company, or a private company; long-term holdings by company directors, their families, companies majority owned by a director, or promoters; holdings of employee share schemes or shares held by employee unions; holdings by government authorities, government controlled corporations, government owned corporations, and government investment companies (although sovereign wealth funds may be considered free float in some circumstances); shares subject to lock-in clauses (for the duration of the clause); and convertible stock or loan stock that is not yet converted.
The initial weighting of an index constituent stock is applied in bands, as follows: free float less than or equal to 15% — ineligible for inclusion in the index, unless free float is also greater than 5% and the full market capitalization is greater than USD $2.5 billion (or local currency equivalent), in which case actual free float rounded up to the next whole percentage is used; free float greater than 15% but less than or equal to 20% – 20%; free float greater than 20% but less than or equal to 30% – 30%; free float greater than 30% but less than or equal to 40% – 40%; free float greater than 40% but less than or equal to 50% – 50%; free float greater than 50% but less than or equal to 75% – 75%; and free float greater than 75% – 100%. Foreign ownership limits, if any, will be applied after calculating the actual free float restriction, but before applying the bands described above. If the foreign ownership limit is more restrictive than the free float restriction, the precise foreign ownership limit is applied. If the foreign ownership limit is less restrictive or equal to the free float restriction, the free float restriction is applied.
A capping methodology is applied at quarterly reviews to the constituents of the index to ensure that no constituent’s weight exceeds 10%. The weights of all lower ranking constituents are then increased by a corresponding amount. The adjusted weights of these lower ranking constituents are then checked against the 10% cap. The process is repeated until no constituent’s weight exceeds 10%. Following this process, if the total index weight of those constituents whose individual weights exceed 5% is greater than 40% in the aggregate, a similar procedure is then applied to ensure that no more than one constituent is capped at 10% by reducing, for example, the second largest stock to 9% and increasing the other constituents’ individual weights commensurately. The process continues until the total index weight of the constituents whose individual weights exceed 5% is less than 40% in the aggregate.
Maintenance
The quarterly review of the index constituents takes place in March, June, September and December. The meeting to review the constituents will be held on the Tuesday after the first Friday of the review month using data from the close of business on the next trading day following the third Friday in February, May, August and November. Any constituent changes will be implemented on the next trading day following the third Friday of the same month. The index is capped as at the close of business the day before the third Friday in March, June, September and December. The index is capped using prices adjusted for corporate events as at the close of business the day before the third Friday based on the constituents, shares in issue and free float on the next trading day following the third Friday of the review month. Index changes resulting from index reviews are published as soon as practical following the conclusion of each respective FTSE Asia Pacific Advisory Committee meeting.
The insertion and deletion of companies in the index at the quarterly review are designed to provide stability in the selection of constituents of the index while ensuring that the index continues to be representative of the market by including or excluding those companies which have risen or fallen significantly. All securities eligible to be constituents of the index will be ranked by their full market capitalization. In determining the full market capitalization of a company, all share classes are included, while only the eligible share classes are included in the index weighting. A company will be inserted into the index at the periodic review if it rises to 15th position or above when the eligible companies are ranked by full market capitalization (before the application of any investability weightings). A company in the index will be deleted at the periodic review if it falls to 36th position or below when the eligible companies are ranked by full market capitalization (before the application of any investability weightings). A reserve list of potential index constituents will be maintained following each quarterly review in the event of removals prior to the next quarterly review as described below.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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A constant number of constituents will be maintained for the index. Where a greater number of companies qualify to be inserted in the index than those qualifying to be deleted, the lowest ranking constituents presently included in the index will be deleted to ensure that an equal number of companies are inserted and deleted at the periodic review. Likewise, where a greater number of companies qualify to be deleted than those qualifying to be inserted, the securities of the highest ranking companies which are presently not included in the index will be inserted to match the number of companies being deleted at the periodic review.
An index constituent’s free float is also reviewed in connection with the quarterly index reviews. Implementation of any changes takes place after the close of the index calculation on the third Friday of the review month. A constituent’s free float will be reviewed and adjusted if necessary by identifying information which necessitates a change in free float weighting, following a corporate event, or the expiration of a lock-in clause.
If a corporate event includes a corporate action which affects the index, any change in free float will be implemented at the same time as the corporate action. If there is no corporate action or lock-in clause expiration, the change in free float will be applied as soon as practicable.
Following the application of an initial free float restriction, a constituent’s free float will only be changed if its actual free float moves to more than 5 percentage points above the minimum or 5 percentage points below the maximum of an adjacent new band. This 5 percentage points threshold does not apply if the change is greater than one band i.e. a movement of 10 percentage points for the bands between 20% and 50% and 25 percentage points for the bands between 50% and 100% will not be subject to the 5 percentage point threshold.
Each constituent is tested for liquidity on an annual basis in March by calculation of its median daily trading per month as part of the FTSE All-World Index review. The median trade is calculated by ranking each daily trade total and selecting the middle ranking day. Daily totals with zero trades are included in the ranking; therefore a security that fails to trade for more than half of the days in a month will have a zero median trade. Securities which do not turnover at least 0.05% of their free float adjusted shares based on their median daily trade per month in ten of the twelve months prior to an annual review, are not eligible for inclusion in the index. Constituents failing to trade at least 0.04% of their free float adjusted shares based on its median daily trade per month for more than four of the twelve months prior to the annual review are removed from the index. New issues which do not have a twelve month trading record must have a minimum three month trading record when reviewed. They must turnover at least 0.05% of their free float adjusted shares based on their median daily trade per month in each month since their listing. This rule will not apply to new issues added under the Fast Entry Rule described below. At the sole discretion of the FTSE Asia Pacific Advisory Committee, the above percentage figures may be adjusted by up to 0.01% at the March review so that, in the Committee’s opinion, the index better reflects the liquid investable market of the region. This discretion may only be exercised across the whole market and may not be applied to individual securities.
Corporate Events, New Issues and Extraordinary Removals
In the event of a merger or takeover in which one constituent is absorbed by another, the resulting company will remain a constituent. In the event of a merger or takeover resulting in a vacancy (either a constituent mergers into another constituent or a constituent merges into a non-constituent), the vacancy will be filled by the highest ranking security by full market capitalization from a reserve list maintained by the FTSE Asia Pacific Advisory Committee. In the event of corporate splits and spin-offs in which a constituent company forms two or more companies, the resulting companies may be eligible for inclusion as index constituents provided they meet applicable requirements. Index constituent changes resulting from a split will be determined following the effectiveness of the split based on market values at the close on the first day of trading and applied using market values at the close of the second day of trading. During this period, the index may have more than 25 constituents.
If, in the view of the FTSE Asia Pacific Advisory Committee, a new issue is so large that the effectiveness of the index as the market indicator would be significantly and adversely affected by its omission, the FTSE Asia Pacific Advisory Committee may decide to include the new issue as a constituent of the index. To qualify, the company must be a “fast entry” into the FTSE All-World Index and have a full market capitalization which would ensure the company joins the index in 5th position or higher, before the application of individual constituent investability weightings. In such a case, the FTSE Asia Pacific Advisory Committee will normally include the company after the close of business on the fifth day of official trading and advance notification will be given accordingly. The security which is the lowest ranking constituent by full market capitalization of the index will be selected for removal.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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If a constituent is delisted, or ceases to have a firm quotation, or is subject to a takeover or has, in the opinion of the Chairman and Deputy Chairman of the FTSE Asia Pacific Advisory Committee (or their nominated deputies), ceased to be a viable constituent as defined by FTSE’s methodology, it will be removed from the list of constituents and replaced by the highest ranking company by full market capitalization eligible on the reserve list as at the close of the index calculation two days prior to the deletion. The removal and replacement are effected simultaneously, before the start of the index calculation on the day following the day on which the event justifying removal was announced.
Information regarding the index may be obtained from the FTSE website. We are not incorporating by reference that website, the sources listed above or any material they include in this document.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Historical Information
While actual historical information on the basket will not exist before the pricing date, the first graph below sets forth the hypothetical historical daily performance of the basket from January 30, 2010 through January 29, 2015. The graph is based upon actual daily official closing values of the basket components, hypothetical component weightings as described in “Summary Terms—Basket” on the cover page, and a hypothetical basket value of 100 as of January 30, 2010.
The other graphs below set forth the daily official closing values of the basket components for the period from January 1, 2010 through January 28, 2015. The tables below each graph set forth the published high and low official closing values, as well as the end-of-quarter official closing values, of the basket components for each quarter in the period from January 1, 2010 through January 28, 2015.
We obtained the information below from Bloomberg Financial Markets, without independent verification.
You should not take the historical values of the basket or the basket components as an indication of future performance, and no assurance can be given as to the value of any of the basket or the basket components on the valuation date.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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The WisdomTree® India Earnings Fund
Information as of market close on January 28, 2015:
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Bloomberg Symbol:
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EPI
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52 Week High (on 1/22/2015):
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$24.29
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Current Price:
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$24.04
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52 Week Low (on 2/3/2014):
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$15.74
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52 Weeks Ago:
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$16.17
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High
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Low
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Period End
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2010
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First Quarter
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$23.44
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$20.23
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$23.33
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Second Quarter
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$24.29
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$20.45
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$22.75
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Third Quarter
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$26.57
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$22.66
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$26.37
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Fourth Quarter
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$28.69
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$24.60
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$26.39
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2011
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First Quarter
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$26.68
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$21.94
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$24.80
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Second Quarter
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$25.51
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$22.24
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$23.94
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Third Quarter
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$24.38
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$18.15
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$18.15
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Fourth Quarter
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$20.58
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$15.46
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$15.60
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2012
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First Quarter
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$21.56
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$16.23
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$19.28
|
|
Second Quarter
|
$19.57
|
$15.62
|
$17.23
|
|
Third Quarter
|
$18.94
|
$16.36
|
$18.94
|
|
Fourth Quarter
|
$19.84
|
$17.72
|
$19.37
|
|
2013
|
|
|
|
|
First Quarter
|
$20.50
|
$17.75
|
$17.97
|
|
Second Quarter
|
$19.18
|
$15.38
|
$16.20
|
|
Third Quarter
|
$16.84
|
$13.31
|
$15.32
|
|
Fourth Quarter
|
$17.64
|
$15.54
|
$17.44
|
|
2014
|
|
|
|
|
First Quarter
|
$18.96
|
$15.74
|
$18.96
|
|
Second Quarter
|
$23.45
|
$18.93
|
$22.47
|
|
Third Quarter
|
$23.54
|
$21.66
|
$21.91
|
|
Fourth Quarter
|
$23.55
|
$20.78
|
$22.05
|
|
2015
|
|
|
|
|
First Quarter (through January 28, 2015)
|
$24.29
|
$21.40
|
$24.04
|
|
PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
|
The iShares® MSCI Malaysia ETF
Information as of market close on January 28, 2015:
|
Bloomberg Symbol:
|
EWM
|
52 Week High (on 8/27/2014):
|
$16.31
|
| |
|
|
|
|
Current Price:
|
$13.23
|
52 Week Low (on 1/6/2014):
|
$12.74
|
| |
|
|
|
|
52 Weeks Ago:
|
$14.58
|
|
|
| |
High
|
Low
|
Period End
|
|
2010
|
|
|
|
|
First Quarter
|
$11.68
|
$10.22
|
$11.68
|
|
Second Quarter
|
$12.12
|
$10.70
|
$11.44
|
|
Third Quarter
|
$13.80
|
$11.50
|
$13.74
|
|
Fourth Quarter
|
$14.40
|
$13.62
|
$14.38
|
|
2011
|
|
|
|
|
First Quarter
|
$14.91
|
$13.86
|
$14.79
|
|
Second Quarter
|
$15.28
|
$14.53
|
$15.28
|
|
Third Quarter
|
$15.46
|
$12.07
|
$12.19
|
|
Fourth Quarter
|
$14.12
|
$12.02
|
$13.40
|
|
2012
|
|
|
|
|
First Quarter
|
$14.80
|
$13.52
|
$14.60
|
|
Second Quarter
|
$14.83
|
$13.59
|
$14.27
|
|
Third Quarter
|
$15.03
|
$14.05
|
$14.58
|
|
Fourth Quarter
|
$15.20
|
$14.48
|
$15.13
|
|
2013
|
|
|
|
|
First Quarter
|
$15.38
|
$14.18
|
$14.97
|
|
Second Quarter
|
$16.80
|
$14.81
|
$15.55
|
|
Third Quarter
|
$15.94
|
$13.89
|
$15.04
|
|
Fourth Quarter
|
$16.31
|
$15.35
|
$15.82
|
|
2014
|
|
|
|
|
First Quarter
|
$15.71
|
$14.43
|
$15.65
|
|
Second Quarter
|
$16.29
|
$15.54
|
$15.88
|
|
Third Quarter
|
$16.31
|
$15.36
|
$15.40
|
|
Fourth Quarter
|
$15.47
|
$13.07
|
$13.48
|
|
2015
|
|
|
|
|
First Quarter (through January 28, 2015)
|
$13.52
|
$12.74
|
$13.23
|
|
PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
|
The iShares® MSCI Taiwan ETF
Information as of market close on January 28, 2015:
|
Bloomberg Symbol:
|
EWT
|
52 Week High (on 8/27/2014):
|
$16.58
|
| |
|
|
|
|
Current Price:
|
$15.71
|
52 Week Low (on 2/3/2014):
|
$13.28
|
| |
|
|
|
|
52 Weeks Ago:
|
$13.72
|
|
|
| |
High
|
Low
|
Period End
|
|
2010
|
|
|
|
|
First Quarter
|
$13.37
|
$11.45
|
$12.55
|
|
Second Quarter
|
$13.14
|
$10.88
|
$11.20
|
|
Third Quarter
|
$13.55
|
$11.18
|
$13.55
|
|
Fourth Quarter
|
$15.62
|
$13.05
|
$15.62
|
|
2011
|
|
|
|
|
First Quarter
|
$16.06
|
$13.86
|
$14.86
|
|
Second Quarter
|
$16.02
|
$14.60
|
$15.18
|
|
Third Quarter
|
$15.43
|
$11.81
|
$11.81
|
|
Fourth Quarter
|
$13.52
|
$11.22
|
$11.71
|
|
2012
|
|
|
|
|
First Quarter
|
$13.83
|
$11.79
|
$13.42
|
|
Second Quarter
|
$13.35
|
$11.53
|
$12.23
|
|
Third Quarter
|
$13.60
|
$11.60
|
$13.38
|
|
Fourth Quarter
|
$13.82
|
$12.58
|
$13.62
|
|
2013
|
|
|
|
|
First Quarter
|
$13.82
|
$13.10
|
$13.34
|
|
Second Quarter
|
$14.40
|
$12.59
|
$13.30
|
|
Third Quarter
|
$14.44
|
$12.99
|
$13.92
|
|
Fourth Quarter
|
$14.68
|
$13.82
|
$14.42
|
|
2014
|
|
|
|
|
First Quarter
|
$14.39
|
$13.28
|
$14.39
|
|
Second Quarter
|
$15.80
|
$14.41
|
$15.80
|
|
Third Quarter
|
$16.58
|
$15.22
|
$15.27
|
|
Fourth Quarter
|
$15.92
|
$14.71
|
$15.11
|
|
2015
|
|
|
|
|
First Quarter (through January 28, 2015)
|
$15.84
|
$14.45
|
$15.71
|
|
PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
|
The iShares® MSCI South Korea Capped ETF
Information as of market close on January 28, 2015:
|
Bloomberg Symbol:
|
EWY
|
52 Week High (on 7/30/2014):
|
$67.36
|
| |
|
|
|
|
Current Price:
|
$57.05
|
52 Week Low (on 1/6/2015):
|
$53.83
|
| |
|
|
|
|
52 Weeks Ago:
|
$58.72
|
|
|
| |
High
|
Low
|
Period End
|
|
2010
|
|
|
|
|
First Quarter
|
$50.42
|
$43.90
|
$50.00
|
|
Second Quarter
|
$52.90
|
$42.09
|
$44.71
|
|
Third Quarter
|
$53.49
|
$44.25
|
$53.49
|
|
Fourth Quarter
|
$61.19
|
$52.79
|
$61.19
|
|
2011
|
|
|
|
|
First Quarter
|
$64.35
|
$56.61
|
$64.35
|
|
Second Quarter
|
$69.64
|
$61.55
|
$65.00
|
|
Third Quarter
|
$67.94
|
$45.67
|
$46.57
|
|
Fourth Quarter
|
$58.02
|
$45.27
|
$52.26
|
|
2012
|
|
|
|
|
First Quarter
|
$60.79
|
$52.07
|
$59.54
|
|
Second Quarter
|
$61.07
|
$51.35
|
$54.81
|
|
Third Quarter
|
$60.55
|
$51.53
|
$59.13
|
|
Fourth Quarter
|
$63.35
|
$56.61
|
$63.35
|
|
2013
|
|
|
|
|
First Quarter
|
$64.97
|
$57.18
|
$59.43
|
|
Second Quarter
|
$58.81
|
$50.15
|
$53.20
|
|
Third Quarter
|
$64.28
|
$51.71
|
$61.50
|
|
Fourth Quarter
|
$65.68
|
$61.73
|
$64.67
|
|
2014
|
|
|
|
|
First Quarter
|
$61.64
|
$57.47
|
$61.51
|
|
Second Quarter
|
$65.66
|
$62.23
|
$65.02
|
|
Third Quarter
|
$67.36
|
$60.51
|
$60.51
|
|
Fourth Quarter
|
$59.37
|
$54.88
|
$55.29
|
|
2015
|
|
|
|
|
First Quarter (through January 28, 2015)
|
$57.48
|
$53.83
|
$57.05
|
|
PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
|
The iShares® China Large-Cap ETF
Information as of market close on January 28, 2015:
|
Bloomberg Symbol:
|
FXI
|
52 Week High (on 1/22/2015):
|
$43.86
|
| |
|
|
|
|
Current Price:
|
$42.11
|
52 Week Low (on 3/13/2014):
|
$32.98
|
| |
|
|
|
|
52 Weeks Ago:
|
$34.55
|
|
|
| |
High
|
Low
|
Period End
|
|
2010
|
|
|
|
|
First Quarter
|
$44.56
|
$37.17
|
$42.10
|
|
Second Quarter
|
$44.59
|
$37.02
|
$39.13
|
|
Third Quarter
|
$42.85
|
$38.74
|
$42.82
|
|
Fourth Quarter
|
$47.93
|
$42.19
|
$43.09
|
|
2011
|
|
|
|
|
First Quarter
|
$44.91
|
$41.16
|
$44.91
|
|
Second Quarter
|
$46.37
|
$41.11
|
$42.95
|
|
Third Quarter
|
$43.30
|
$30.83
|
$30.83
|
|
Fourth Quarter
|
$38.95
|
$29.75
|
$34.87
|
|
2012
|
|
|
|
|
First Quarter
|
$40.49
|
$35.17
|
$36.67
|
|
Second Quarter
|
$38.35
|
$31.83
|
$33.67
|
|
Third Quarter
|
$35.29
|
$32.09
|
$34.60
|
|
Fourth Quarter
|
$40.45
|
$34.91
|
$40.45
|
|
2013
|
|
|
|
|
First Quarter
|
$41.85
|
$36.34
|
$36.93
|
|
Second Quarter
|
$38.62
|
$31.70
|
$32.52
|
|
Third Quarter
|
$39.16
|
$31.73
|
$37.08
|
|
Fourth Quarter
|
$40.19
|
$36.43
|
$38.37
|
|
2014
|
|
|
|
|
First Quarter
|
$37.12
|
$32.98
|
$35.78
|
|
Second Quarter
|
$38.28
|
$34.58
|
$37.04
|
|
Third Quarter
|
$42.52
|
$37.32
|
$38.28
|
|
Fourth Quarter
|
$41.98
|
$37.46
|
$41.62
|
|
2015
|
|
|
|
|
First Quarter (through January 28, 2015)
|
$43,86
|
$41.02
|
$42.11
|
|
PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
|
Canadian Federal Income Tax Consequences
An investor should read carefully the description of material Canadian federal income tax considerations relevant to a Non-resident Holder owning debt securities under “Tax Consequences—Canadian Taxation” in the accompanying prospectus.
Supplemental Discussion of U.S. Federal Income Tax Consequences
The following, together with the discussion of U.S. federal income taxation in the accompanying prospectus and prospectus supplement, is a general description of the material U.S. tax considerations relating to the PLUS. It does not purport to be a complete analysis of all tax considerations relating to the PLUS. Prospective purchasers of the PLUS should consult their tax advisors as to the consequences under the tax laws of the country of which they are resident for tax purposes and the tax laws of Canada and the U.S. of acquiring, holding and disposing of the PLUS and receiving payments under the PLUS. This summary is based upon the law as in effect on the date of this document and is subject to any change in law that may take effect after such date.
Supplemental U.S. Tax Considerations
The following section supplements the discussion of U.S. federal income taxation in the accompanying prospectus and prospectus supplement with respect to U.S. holders (as defined in the accompanying prospectus). Except as otherwise noted under “Non-U.S. Holders” and “Foreign Account Tax Compliance Act,” it applies only to those U.S. holders who are not excluded from the discussion of U.S. federal income taxation in the accompanying prospectus.
NO STATUTORY, JUDICIAL OR ADMINISTRATIVE AUTHORITY DIRECTLY DISCUSSES HOW THE PLUS SHOULD BE TREATED FOR U.S. FEDERAL INCOME TAX PURPOSES. AS A RESULT, THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PLUS ARE UNCERTAIN. BECAUSE OF THE UNCERTAINTY, YOU SHOULD CONSULT YOUR TAX ADVISOR IN DETERMINING THE U.S. FEDERAL INCOME TAX AND OTHER TAX CONSEQUENCES OF YOUR INVESTMENT IN THE PLUS, INCLUDING THE APPLICATION OF STATE, LOCAL OR OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
We will not attempt to ascertain whether the basket components or any of the entities whose stock is included in the basket components would be treated as a “passive foreign investment company” within the meaning of Section 1297 of the Code or a “U.S. real property holding corporation” within the meaning of Section 897 of the Code. If the basket components or any of the entities whose stock is included in the basket components were so treated, certain adverse U.S. federal income tax consequences could possibly apply to U.S. and non-U.S. holders, respectively. You should refer to any available information filed with the SEC and other authorities by the basket components or the entities whose stock is included in the basket components and consult your tax advisor regarding the possible consequences to you in this regard.
In the opinion of our counsel, Morrison & Foerster LLP, it would generally be reasonable to treat a PLUS as a pre-paid cash-settled derivative contract in respect of the basket for U.S. federal income tax purposes, and the terms of the PLUS require a holder and us (in the absence of a change in law or an administrative or judicial ruling to the contrary) to treat the PLUS for all tax purposes in accordance with such characterization. If the PLUS are so treated, subject to the discussion below regarding the potential application of the “constructive ownership” rules under Section 1260 of the Code, a U.S. holder should generally recognize capital gain or loss upon the sale, exchange or maturity of the PLUS in an amount equal to the difference between the amount a holder receives at such time and the holder’s tax basis in the PLUS. In general, a U.S. holder’s tax basis in the PLUS will be equal to the price the holder paid for the PLUS. Capital gain recognized by an individual U.S. holder is generally taxed at ordinary income rates where the property is held for one year or less. The deductibility of capital losses is subject to limitations.
While the matter is not entirely clear, there exists a substantial risk that an investment in the PLUS is a “constructive ownership transaction” to which Section 1260 of the Code applies. If Section 1260 of the Code applies, all or a portion of any long-term capital gain recognized by a U.S. holder in respect of the PLUS could be recharacterized as ordinary income (the “Excess Gain”). In addition, an interest charge will also apply to any deemed underpayment of tax in respect of any Excess Gain to the extent such gain would have resulted in gross income inclusion for the U.S. holder in taxable years prior to the taxable year of the sale, exchange or maturity (assuming such income accrued at a constant rate equal to the applicable federal rate as of the date of sale, exchange or maturity). To the extent any gain is treated as long-term capital gain after application of the recharacterization rules of Section 1260 of the Code, such gain would be subject to U.S. federal income tax at the rates that would have been applicable to the net underlying long-term capital gain. U.S. holders should consult their tax advisors regarding the potential application of Section 1260 of the Code to an investment in the PLUS.
|
PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
|
Alternative Treatments. Alternative tax treatments of the PLUS are also possible and the Internal Revenue Service might assert that a treatment other than that described above is more appropriate. For example, it would also be possible to treat the PLUS, and the Internal Revenue Service might assert that a PLUS should be treated, as a single debt instrument. Because the PLUS have a term that exceeds one year, such a debt instrument would be subject to the special tax rules governing contingent payment debt instruments. If the PLUS are so treated, a holder would generally be required to accrue interest income over the term of the PLUS based upon the yield at which we would issue a non-contingent fixed-rate debt instrument with other terms and conditions similar to the PLUS. In addition, any gain a holder might recognize upon the sale, exchange or maturity of the PLUS would generally be ordinary income and any loss recognized by a holder at such time would be ordinary loss to the extent of interest that same holder included in income in the current or previous taxable years in respect of the PLUS, and thereafter, would be capital loss.
Because of the absence of authority regarding the appropriate tax characterization of the PLUS, it is also possible that the Internal Revenue Service could seek to characterize the PLUS in a manner that results in tax consequences that are different from those described above. For example, the Internal Revenue Service could possibly assert that any gain or loss that a holder may recognize upon the sale, exchange or maturity of the PLUS should be treated as ordinary gain or loss.
The Internal Revenue Service has released a notice that may affect the taxation of holders of the PLUS. According to the notice, the Internal Revenue Service and the U.S. Treasury Department are actively considering whether the holder of an instrument such as the PLUS should be required to accrue ordinary income on a current basis. It is not possible to determine what guidance they will ultimately issue, if any. It is possible, however, that under such guidance, holders of the PLUS will ultimately be required to accrue income currently and this could be applied on a retroactive basis. The Internal Revenue Service and the U.S. Treasury Department are also considering other relevant issues, including whether additional gain or loss from such instruments should be treated as ordinary or capital and whether the special “constructive ownership rules” of Section 1260 of the Code (as discussed above) might be applied to such instruments. Holders are urged to consult their tax advisors concerning the significance and potential impact of the above considerations. We intend to treat the PLUS for U.S. federal income tax purposes in accordance with the treatment described in this document unless and until such time as the U.S. Treasury Department and Internal Revenue Service determine that some other treatment is more appropriate.
Backup Withholding and Information Reporting. Payments made with respect to the PLUS and proceeds from the sale or exchange of the PLUS may be subject to a backup withholding tax unless, in general, the holder complies with certain procedures or is an exempt recipient. Any amounts so withheld generally will be refunded by the Internal Revenue Service or allowed as a credit against the holder's U.S. federal income tax liability, provided the holder makes a timely filing of an appropriate tax return or refund claim to the Internal Revenue Service. Reports will be made to the Internal Revenue Service and to holders that are not excepted from the reporting requirements.
Non-U.S. Holders. The following discussion applies to non-U.S. holders of the PLUS. A non-U.S. holder is a beneficial owner of a PLUS that, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign corporation, or a foreign estate or trust.
Subject to the discussion of “dividend equivalent” payments below, a non-U.S. holder will generally not be subject to U.S. federal income or withholding tax for amounts paid in respect of the PLUS, provided that (i) the holder complies with any applicable certification requirements, (ii) the payment is not effectively connected with the conduct by the holder of a U.S. trade or business, and (iii) if the holder is a non-resident alien individual, such holder is not present in the U.S. for 183 days or more during the taxable year of the sale, exchange or maturity of the PLUS. In the case of (ii) above, the holder generally would be subject to U.S. federal income tax with respect to any income or gain in the same manner as if the holder were a U.S. holder and, in the case of a holder that is a corporation, the holder may also be subject to a branch profits tax equal to 30% (or such lower rate provided by an applicable U.S. income tax treaty) of a portion of its earnings and profits for the taxable year that are effectively connected with its conduct of a U.S. trade or business, subject to certain adjustments. Payments made to a non-U.S. holder may be subject to information reporting and to backup withholding unless the holder complies with applicable certification and identification requirements as to its foreign status.
A “dividend equivalent” payment is treated as a dividend from sources within the U.S. and such payments generally would be subject to a 30% U.S. withholding tax if paid to a non-U.S. holder. Under proposed Treasury Department regulations, certain payments (including deemed payments) that are contingent upon or determined by reference to actual or estimated U.S. source dividends, with respect to certain equity-linked instruments, whether explicitly stated or implicitly taken into account in computing one or more of the terms of such instruments, including the PLUS, may be treated as dividend equivalents. If enacted in their current form, the regulations will impose a withholding tax on payments or deemed payments made on the PLUS on or after January 1, 2016 that are treated as dividend equivalents. However, the U.S. Treasury Department and Internal Revenue Service have announced that they intend to limit this withholding to equity-linked instruments issued on or after the date that is 90 days after the date of publication in the U.S. Federal Register of final regulations addressing dividend equivalent withholding. If any payments are treated as dividend equivalents subject to withholding, we (or the applicable paying agent) would be entitled to withhold taxes without being required to pay any additional amounts with respect to amounts so withheld.
|
PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
|
As discussed above, alternative characterizations of the PLUS for U.S. federal income tax purposes are possible. Should an alternative characterization, by reason of change or clarification of the law, by regulation or otherwise, cause payments as to the PLUS to become subject to withholding tax, we will withhold tax at the applicable statutory rate. The Internal Revenue Service has also indicated that it is considering whether income in respect of instruments such as the PLUS should be subject to withholding tax. Prospective investors should consult their own tax advisors in this regard.
Foreign Account Tax Compliance Act. The Foreign Account Tax Compliance Act (“FATCA”), enacted on March 18, 2010, imposes a 30% U.S. withholding tax on certain U.S. source payments of interest (and OID), dividends, or other fixed or determinable annual or periodical gain, profits, and income, and on the gross proceeds from a disposition of property (including payments at maturity, or upon a redemption or sale) of a type which can produce U.S. source interest or dividends (“withholdable payments”), if paid to a foreign financial institution (including amounts paid to a foreign financial institution on your behalf) unless such institution enters into an agreement with the Treasury Department to collect and provide to the Treasury Department certain information regarding U.S. account holders, including certain account holders that are foreign entities with U.S. owners, with such institution or otherwise complies with FATCA. In addition, the PLUS may constitute a “financial account” for these purposes and thus, be subject to information reporting requirements pursuant to FATCA. The legislation also generally imposes a withholding tax of 30% on withholdable payments made to a non-financial foreign entity, unless that entity provides the withholding agent with a certification that it does not have any substantial U.S. owners or a certification identifying the direct and indirect substantial U.S. owners of the entity.
These withholding and reporting requirements generally apply to U.S. source periodic payments made after June 30, 2014 and to payments of gross proceeds from a sale or redemption made after December 31, 2016. We will not pay additional amounts with respect to any FATCA withholding. Therefore, if such withholding applies, any payments on the PLUS will be significantly less than what you would have otherwise received. Depending on your circumstances, these amounts withheld may be creditable or refundable to you. Foreign financial institutions and non-financial foreign entities located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules. You are urged to consult with your own tax advisor regarding the possible implications of FATCA on your investment in the PLUS.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Employee Retirement Income Security Act
This section is only relevant to you if you are an insurance company or the fiduciary of a pension plan or an employee benefit plan (including a governmental plan, an IRA or a Keogh Plan) proposing to invest in the PLUS.
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), imposes certain requirements on “employee benefit plans” (as defined in Section 3(3) of ERISA) subject to ERISA, including entities such as collective investment funds and separate accounts whose underlying assets include the assets of such plans (collectively, “ERISA Plans”) and on those persons who are fiduciaries with respect to ERISA Plans. Each fiduciary of an ERISA Plan should consider the fiduciary standards of ERISA in the context of the ERISA Plan’s particular circumstances before authorizing an investment in the covered bonds. Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the ERISA Plan.
In addition, Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit certain transactions involving the assets of an ERISA Plan, as well as those plans that are not subject to ERISA but which are subject to Section 4975 of the Internal Revenue Code, such as individual retirement accounts, including entities whose underlying assets include the assets of such plans (together with ERISA Plans, “Plans”) and certain persons (referred to as “parties in interest” or “disqualified persons”) having certain relationships to such Plans, unless a statutory or administrative exemption is applicable to the transaction. Governmental plans may be subject to similar prohibitions. Therefore, a plan fiduciary considering purchasing PLUS should consider whether the purchase or holding of such instruments might constitute a “prohibited transaction.”
Royal Bank of Canada and certain of its affiliates each may be considered a “party in interest” or a “disqualified person” with respect to many employee benefit plans by reason of, for example, Royal Bank of Canada (or its affiliate) providing services to such plans. Prohibited transactions within the meaning of ERISA or the Internal Revenue Code may arise, for example, if PLUS are acquired by or with the assets of a Plan, and with respect to which Royal Bank of Canada or any of its affiliates is a ‘‘party in interest” or a “disqualified person,” unless those PLUS are acquired under an exemption for transactions effected on behalf of that Plan by a “qualified professional asset manager” or an “in-house asset manager,” for transactions involving insurance company general accounts, for transactions involving insurance company pooled separate accounts, for transactions involving bank collective investment funds, or under another available exemption. Section 408(b) (17) provides an additional exemption for the purchase and sale of securities and related lending transactions where neither the issuer of the securities nor any of its affiliates have or exercise any discretionary authority or control or render any investment advice with respect to the assets of any Plan involved in the transaction and the Plan pays no more than “adequate consideration” in connection with the transaction. The person making the decision on behalf of a Plan or a governmental plan shall be deemed, on behalf of itself and any such plan, by purchasing and holding the PLUS, or exercising any rights related thereto, to represent that (a) such purchase, holding and exercise of the PLUS will not result in a non-exempt prohibited transaction under ERISA or the Internal Revenue Code (or, with respect to a governmental plan, under any similar applicable law or regulation) and (b) neither Royal Bank of Canada nor any of its affiliates is a “fiduciary” (within the meaning of Section 3(21) of ERISA) with respect to the purchaser or holder in connection with such person’s acquisition, disposition or holding of the PLUS, or any exercise related thereto or as a result of any exercise by Royal Bank of Canada or any of its affiliates of any rights in connection with the PLUS, and no advice provided by Royal Bank of Canada or any of its affiliates has formed a primary basis for any investment decision by or on behalf of such purchaser or holder in connection with the PLUS and the transactions contemplated with respect to the PLUS.
If you are an insurance company or the fiduciary of a pension plan or an employee benefit plan, and propose to invest in PLUS, you should consult your legal counsel.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Use of Proceeds and Hedging
The net proceeds from the sale of the PLUS will be used as described under “Use of Proceeds” in the accompanying prospectus supplement and prospectus and to hedge market risks of Royal Bank of Canada associated with its obligation to make the payment at maturity on the PLUS. The initial public offering price of the PLUS includes the underwriting discount and commission and the estimated cost of hedging our obligations under the PLUS.
Supplemental Information Regarding Plan of Distribution;
Conflicts of Interest
Pursuant to the terms of a distribution agreement, RBCCM, an affiliate of Royal Bank of Canada, will purchase the PLUS from Royal Bank of Canada for distribution to MSWM. RBCCM will act as agent for the PLUS and will receive a fee of up to $0.225 per $10 stated principal amount and will pay to MSWM a fixed sales commission of up to $0.175 for each of the PLUS they sell. Of the amount per $10 stated principal amount received by RBCCM, RBCCM will pay MSWM a structuring fee of $0.05 for each PLUS.
MSWM may reclaim selling concessions allowed to individual brokers within MSWM in connection with the offering if, within 30 days of the offering, Royal Bank of Canada repurchases the PLUS distributed by such brokers.
We expect that delivery of the PLUS will be made against payment for the PLUS on or about March , 2015, which is the third business day following the pricing date (this settlement cycle being referred to as “T+3”).
In addition, RBCCM or another of its affiliates or agents may use this document in market-making transactions after the initial sale of the PLUS, but is under no obligation to do so and may discontinue any market-making activities at any time without notice.
The value of the PLUS shown on your account statement may be based on RBCCM’s estimate of the value of the PLUS if RBCCM or another of our affiliates were to make a market in the PLUS (which it is not obligated to do). That estimate will be based on the price that RBCCM may pay for the PLUS in light of then prevailing market conditions, our creditworthiness and transaction costs. For an initial period of approximately six months, the value of the PLUS that may be shown on your account statement is expected to be higher than RBCCM’s estimated value of the PLUS at that time. This is because the estimated value of the PLUS will not include the agent’s commission and our hedging costs and profits; however, the value of the PLUS shown on your account statement during that period is initially expected to be a higher amount, reflecting the addition of the agent’s commission and our estimated costs and profits from hedging the PLUS. This excess is expected to decrease over time until the end of this period, and we reserve the right to shorten this period. After this period, if RBCCM repurchases your PLUS, it expects to do so at prices that reflect its estimated value.
For additional information as to the relationship between us and RBCCM, please see the section “Plan of Distribution—Conflicts of Interest” in the accompanying prospectus.
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PLUS Based on a Basket of Five Exchange-Traded Funds due June , 2016
Performance Leveraged Upside SecuritiesSM
Principal at Risk Securities
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Structuring the PLUS
The PLUS are our debt securities, the return on which is linked to the performance of the basket. As is the case for all of our debt securities, including our structured notes, the economic terms of the PLUS reflect our actual or perceived creditworthiness at the time of pricing. In addition, because structured notes result in increased operational, funding and liability management costs to us, we typically borrow the funds under these securities at a rate that is more favorable to us than the rate that we might pay for a conventional fixed or floating rate debt security of comparable maturity. Using this relatively lower implied borrowing rate, rather than the secondary market rate, along with the fees and expenses associated with structured notes, typically reduces the initial estimated value of the securities at the time their terms are set. Unlike the estimated value included in this document, any value of the PLUS determined for purposes of a secondary market transaction may be based on a different funding rate, which may result in a lower value for the securities than if our initial internal funding rate were used.
In order to satisfy our payment obligations under the PLUS, we may choose to enter into certain hedging arrangements (which may include call options, put options or other derivatives) on the issue date with RBCCM or one of our other subsidiaries. The terms of these hedging arrangements take into account a number of factors, including our creditworthiness, interest rate movements, the volatility of each basket component, and the tenor of the securities. The economic terms of the PLUS and their initial estimated value depend in part on the terms of these hedging arrangements.
The lower implied borrowing rate, the underwriting commission and the hedging-related costs relating to the PLUS reduce the economic terms of the PLUS to you and result in the initial estimated value for the PLUS on the pricing date being less than their public offering price. See “Risk Factors—The initial estimated value of the PLUS will be less than the price to the public” above.
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