Fees and Expenses
The following table describes the fees and expenses that you will incur if you own shares of the Fund.
You will also incur usual and customary brokerage commissions when buying or selling shares of the Fund, which are not reflected in the example that
follows:
Annual Fund Operating Expenses
(expenses that you pay each year as a
percentage of the value
of your investment)
|
|
|
|
|
Management Fee
|
|
|
0.30
|
%
|
Other Expenses(1)
|
|
|
0.07
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.37
|
%
|
Fee Waivers and Expense Reimbursement(2)
|
|
|
0.07
|
%
|
Total Annual Operating Expenses After Fee Waivers and Expense Reimbursement
|
|
|
0.30
|
%
|
1
Other expenses are based on estimated amounts for the Funds fiscal year ending May 31, 2014.
(2)
|
Effective as of the date of this Prospectus, the Adviser has contractually agreed through March 25, 2014 to waive fees and/or reimburse the Funds expenses in
order to limit the Funds net annual operating expenses to 0.30% of the Funds average daily net assets, except for interest expense, taxes, brokerage expenses, distribution fees or expenses, litigation expenses and other extraordinary
expenses (the Expense Cap). The impact of the Expense Cap is that, in accordance with and as required thereunder, the Adviser will reimburse the Fund for the cost of compensation paid to the Trusts non-interested trustees (the
Independent Trustees) in respect of the Independent Trustees service to the Fund (Independent Trustee Fees). The Expense Cap will remain in effect until at least March 25, 2014 and may only be terminated with the
consent of the Trusts Board (and may not be terminated by the Adviser) prior to that time.
|
2
Example.
This example is intended to help you compare the cost of investing in the Fund with the
cost of investing in other funds.
This example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
|
|
|
|
|
1 Year
|
|
3 Years
|
|
$ 31
|
|
$
|
111
|
|
Portfolio Turnover.
The Fund pays transaction costs, such as commissions, when it buys and sells securities
(or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund
operating expenses or in the example, affect the Funds performance.
Principal Investment Strategies
The Underlying Index is designed to track the returns of the segment of the U.S. long term tax-exempt bond market, consisting of infrastructure revenue
bonds. The Underlying Index is comprised of tax-exempt municipal securities issued by states, cities, counties, districts, their respective agencies and other tax-exempt issuers. The Underlying Index is intended to track bonds that have been issued
with the intention of funding federal, state and local infrastructure projects such as water and sewer systems, public power systems, toll roads, bridges, tunnels, and many other public use projects. As of March 31, 2013, the Underlying Index
consisted of 517 securities with an average amount outstanding of approximately $125 million and a minimum amount outstanding of approximately $40 million. The Underlying Index is designed to only hold those bonds issued by state and local
municipalities where the interest and principal repayments are generated from dedicated revenue streams or double-barreled entities (whose bonds are backed by both a dedicated revenue stream and a general obligation pledge).
The Underlying Index may include private activity bonds, industrial development bonds, special tax bonds and transportation bonds. Private activity bonds
are issued by municipalities and other public authorities to finance development of industrial facilities for use by a private enterprise. The private enterprise pays the principal and interest on the bond, and the issuer does not pledge its full
faith, credit and taxing power for repayment. Industrial development bonds are a specific type of revenue bond backed by the credit and
security of a private user and therefore have more potential risk. The interest from industrial
development bonds, when distributed by the Fund as exempt-interest dividends to shareholders, may be subject to the alternative minimum tax (AMT). Special tax bonds are payable for and secured by the revenues derived by a
municipality from a particular tax (e.g., tax on the rental of a hotel room, on the purchase of food and beverages, on the rental of automobiles or on the consumption of liquor). Special tax bonds are not secured by the general tax revenues of the
municipality, and they do not represent general obligations of the municipality. Transportation bonds are obligations of issuers that own and operate public transit systems, ports, highways, turnpikes, bridges and other transportation systems.
As of March 31, 2013, the Underlying Index was substantially comprised of issuers in the water revenue and highway revenue tolls
sectors. In addition, as of such date a significant percentage of the Underlying Index was comprised of New York municipal securities.
In
order to be eligible for inclusion in the Underlying Index, the municipal securities must be offered publicly; meet a minimum amount outstanding and deal amount; are investment grade; have a fixed-rate coupon payment; and are not prefunded/escrowed
to maturity. Municipal bonds which are subject to the AMT and state and local taxes are eligible for inclusion in the Underlying Index. The Underlying Index does not attempt to achieve a particular duration (which is a measure of a bonds
sensitivity to interest rates), but the Underlying Index limits eligibility for inclusion to municipal securities which have a stated final maturity of 10 years or longer and are not callable for at least the next 5 years.
The Fund, using a passive or indexing investment approach, attempts to approximate the investment performance of the Underlying Index. The
Adviser and/or Sub-Adviser expect that, over time, the correlation between the Funds performance and that of the Underlying Index before fees and expenses will be 95% or better. A figure of 100% would indicate perfect correlation.
The Adviser and/or Sub-Adviser use a representative sampling indexing strategy in seeking to achieve the Funds investment objective.
Representative sampling is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The securities selected are expected to have,
in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the Underlying
Index. The Fund may or may not hold all of the securities in the Underlying Index.
3
Under normal circumstances, the Fund invests at least 80% of net assets, plus the amount of any
borrowings for investment purposes, in securities issued by municipalities across the United States which are classified as municipal infrastructure revenue bonds based on the Underlying Indexs criteria summarized above, as well as
in other securities whose income is free from regular federal income tax. Because municipal securities that pay interest subject to the AMT may be included in the Underlying Index without limit, the Fund may invest an unlimited amount of its net
assets in municipal securities whose income is subject to the AMT. In addition, the Fund will invest at least 80% of its total assets (but typically far more) in instruments that comprise the Underlying Index.
Industry Concentration Policy.
The Fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or
group of industries to the extent that its Underlying Index is concentrated.
Summary of Principal Risks
As with any investment, you could lose all or part of your investment in the Fund, and the Funds performance could trail that of other investments.
The Fund is subject to the principal risks noted below, any of which may adversely affect the Funds net asset value (NAV), trading price, yield, total return and ability to meet its investment objective, as well as numerous other
risks that are described in greater detail in the section of the Prospectus entitled Further Discussion of Principal Risks and in the Statement of Additional Information (SAI).
Municipal Securities Risk.
Municipal securities are subject to the risk that litigation, legislation or other political events, local business or
economic conditions or the bankruptcy of the issuer could have a significant effect on an issuers ability to make payments of principal and/or interest. Municipal securities can be significantly affected by political changes as well as
uncertainties in the municipal market related to taxation, legislative changes or the rights of municipal security
holders. Because many municipal securities are issued to finance similar projects, especially those
relating to education, health care, transportation and utilities, conditions in those sectors can affect the overall municipal market. In addition, changes in the financial condition of an individual municipal insurer can affect the overall
municipal market. Municipal securities may include revenue bonds, which are generally backed by revenue from a specific project or tax. The issuer of a revenue bond makes interest and principal payments from revenues generated from a particular
source or facility, such as a tax on particular property or revenues generated from a municipal water or sewer utility or an airport. Revenue bonds generally are not backed by the full faith and credit and general taxing power of the issuer. The
market for municipal bonds may be less liquid than for taxable bonds. There may be less information available on the financial condition of issuers of municipal securities than for public corporations.
Private Activity Bonds Risk.
The issuers of private activity bonds in which the Fund may invest may be negatively impacted by conditions affecting
either the general credit of the user of the private activity project or the project itself. The Funds private activity bond holdings also may pay interest subject to the AMT. See Dividends and Distributions for more details.
Industrial Development Bond Risk.
These revenue bonds are issued by or on behalf of public authorities to obtain funds to finance
various public and/or privately operated facilities, including those for business and manufacturing, housing, sports, pollution control, airport, mass transit, port and parking facilities. These bonds are normally secured only by the revenues from
the project and not by state or local government tax payments. Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities financed by the bonds and any guarantor to meet its financial
obligations. These bonds are subject to a wide variety of risks, many of which relate to the nature of the specific project. Generally, the value and credit quality of these bonds are sensitive to the risks related to an economic slowdown.
4
Special Tax Bond Risk.
Special tax bonds are usually backed and payable through a single tax, or
series of special taxes such as incremental property taxes. The failure of the tax levy to generate adequate revenue to pay the debt service on the bonds may cause the value of the bonds to decline.
Transportation Bond Risk.
Transportation debt may be issued to finance the construction of airports, toll roads, highways or other transit
facilities. Airport bonds are dependent on the general stability of the airline industry and on the stability of a specific carrier who uses the airport as a hub. Air traffic generally follows broader economic trends and is also affected by the
price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general economic health of an area. Fuel costs and availability also affect other
transportation related securities, as do the presence of alternate forms of transportation, such as public transportation.
Interest Rate
Risk.
When interest rates rise, prices of debt securities generally decline. The longer the duration of the Funds debt securities, the more sensitive it will be to interest rate changes. (As a general rule, a 1% rise in interest rates
means a 1% fall in value for every year of duration.)
Credit Risk.
The Funds performance could be hurt if an issuer of a
debt security suffers an adverse change in financial condition that results in a payment default, security downgrade or inability to meet a financial obligation. Credit risk is greater for lower-rated securities.
Focus Risk.
To the extent that the Fund focuses on investments from a single state, region or sector of the municipal securities market, its
performance can be more volatile than that of a fund that invests more broadly. As an example, factors affecting a state, region or sector such as severe fiscal difficulties, an economic downturn, court rulings, increased expenditures on domestic
security or reduced monetary support from the federal government could over time impair a states, region or sectors ability to repay its obligations.
Risks Related to Investing in New York.
Because the Underlying Index was substantially
comprised of New York municipal bonds as of March 31, 2013, a substantial portion of the Funds investments are expected to consist of New York municipal bonds as well. Accordingly, the Fund would have greater exposure to negative
political, economic, regulatory or other factors within the State of New York, including the financial condition of its public authorities and political subdivisions, than a fund that invests in a broader base of securities. Unfavorable developments
in any economic sector may have a substantial impact on the overall New York municipal market. Certain issuers of New York municipal bonds have experienced serious financial difficulties in the past and reoccurrence of these difficulties may impair
the ability of certain New York issuers to pay principal or interest on their obligations.
Market Risk.
Deteriorating
market conditions might cause a general weakness in the market that reduces the prices of securities in that market. Developments in a particular class of debt securities or the stock market could also adversely affect the Fund by reducing the
relative attractiveness of debt securities as an investment. Also, to the extent that the Fund emphasizes debt securities from any given state or region, it could be hurt if that state or region does not do well.
Tax Risk.
Income from municipal securities held by the Fund could be declared taxable because of unfavorable changes in tax laws, adverse
interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a securities issuer. In addition, because municipal securities that pay interest subject to the AMT may be included in the Underlying Index without
limit, the Fund may invest an unlimited amount of its net assets in municipal securities whose income is subject to the AMT. Further, a portion of the Funds otherwise exempt-interest distributions may be taxable to those shareholders subject
to the federal AMT.
5
Liquidity Risk.
In certain situations, it may be difficult or impossible to sell an investment in an
orderly fashion at an acceptable price.
Prepayment and Extension Risk.
When interest rates fall, issuers of high interest debt
obligations may pay off the debts earlier than expected (prepayment risk), and the Fund may have to reinvest the proceeds at lower yields. When interest rates rise, issuers of lower interest debt obligations may pay off the debts later than expected
(extension risk), thus keeping the Funds assets tied up in lower interest debt obligations. Ultimately, any unexpected behavior in interest rates could increase the volatility of the Funds share price and yield and could hurt fund
performance. Prepayments could also create capital gains tax liability in some instances.
Pricing Risk.
If market conditions make it
difficult to value some investments, the Fund may value these investments using more subjective methods, such as fair value pricing. In such cases, the value determined for an investment could be different than the value realized upon such
investments sale. As a result, you could pay more than the market value when buying Fund shares or receive less than the market value when selling Fund shares.
Cash Redemption Risk.
The Fund may pay out a portion of its redemption proceeds in cash rather than through the in-kind delivery of portfolio securities. The Fund may be required to sell portfolio
securities in order to obtain the cash needed to distribute redemption proceeds. This may cause the Fund to recognize a capital gain that it might not have incurred if it had made a redemption in-kind. As a result the Fund may pay out higher annual
capital gains distributions than if the in-kind redemption process was used. Only certain institutional investors known as authorized participants who have entered into an agreement with the Funds distributor may redeem shares from the Fund
directly; all other investors buy and sell shares at market prices on an exchange.
Valuation Risk.
The value of the securities in
the Funds portfolio may change on days when shareholders will not be able to purchase or sell the Funds shares.
Non-Diversification Risk.
The Fund is non-diversified and may invest a large percentage of its assets in securities issued by or representing a
small number of issuers. As a result, the Fund may be more exposed to the risks associated with and developments affecting an individual issuer or a smaller number of issuers than a fund that invests more widely. This may increase the Funds
volatility and cause the performance of a relatively smaller number of issuers to have a greater impact on the Funds performance.
Performance Information
As of the date of the Prospectus, the Fund has not yet commenced operations and therefore does not report its performance information. Once available, the Funds performance information will be
accessible on the Funds website at www.dbxus.com and will provide some indication of the risks of investing in the Fund by showing changes in the Funds performance and by showing how the Funds returns compare with those of a broad
measure of market performance.
Management
Investment Adviser.
DBX Advisors LLC.
Sub-Adviser.
Deutsche Investment Management
Americas Inc.
Portfolio Managers.
Philip G. Condon, Ashton P. Goodfield, Blair Ridley and Michael J. Generazo, each a Portfolio
Manager since inception, are primarily responsible for the day-to-day management of the Fund. Each Portfolio Manager functions as a member of a portfolio manager team.
Payment to Broker-Dealers and Other Financial Intermediaries.
If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Adviser or other
related companies may pay the intermediary for marketing activities and presentations, educational training programs, the support of technology platforms and/or reporting systems or other services related to the sale or promotion of the Fund. These
payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more
information.
For important information about the purchase and sale of Fund shares and tax information, please turn to Summary
Information about Purchases and Sales of Fund Shares and Taxes on page 6 of this Prospectus.
6
Summary Information About Purchases and Sales of Fund Shares and Taxes
Purchase and Sale of Fund Shares
Fund shares will be listed and traded at market prices on an exchange. Individual Fund shares may only be purchased and sold on the exchange through a
broker-dealer. The price of Fund shares is based on market price, and because exchange-traded fund shares trade at market prices rather than at NAV, shares may trade at a price greater than NAV (a premium) or less than NAV (a discount). The Fund
will only issue or redeem shares that have been aggregated into blocks of 50,000 shares or multiples thereof (Creation Units) to authorized participants who have entered into agreements with the Funds distributor. Except when
aggregated in Creation Units, the shares are not redeemable securities of the Fund.
Tax Information
The Fund intends to meet certain federal income tax requirements so that distributions of tax-exempt interest income will be treated as
exempt-interest dividends. These dividends are not subject to regular federal income tax. The Fund may invest an unlimited amount of its net assets in municipal securities that generate interest income subject to the AMT for individuals.
All exempt-interest dividends may increase certain corporate shareholders AMT. The Fund expects that its distributions will consist primarily of exempt-interest dividends. The Funds exempt-interest dividends may be subject to state and
local taxes. Any capital gains or income dividends, other than exempt-interest dividends, distributed by the Fund will be taxable to you as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement such as a
401(k) plan or an IRA. For more information regarding the tax consequences that may be associated with investing in the Fund, please refer to the section of the Prospectus entitled Taxes on Distributions.
Additional Information About Funds Investment Strategies and Risks
7
Principal Investment Strategies
Additional Information about the Funds Underlying Index construction is set forth below.
The DBIQ Municipal Infrastructure Revenue Bond Index is maintained by Deutsche Bank Securities Inc. (DBSI or Index Provider) and
is administered and calculated by Structured Solutions AG.
The Underlying Index is designed to track the returns of the segment of the U.S.
long term tax-exempt bond market, consisting of infrastructure revenue bonds. The Underlying Index is comprised of tax-exempt municipal securities issued by states, cities, counties, districts, their respective agencies and other tax-exempt issuers.
The Underlying Index is intended to track bonds that have been issued with the intention of funding federal, state and local infrastructure projects such as water and sewer systems, public power systems, toll roads, bridges, tunnels, and many other
public use projects. As of March 31, 2013, the Underlying Index consisted of 517 securities with an average amount outstanding of approximately $125 million and a minimum amount outstanding of approximately $40 million. The Underlying Index is
designed to only hold those bonds issued by state and local municipalities where the interest and principal repayments are generated from dedicated revenue streams or double-barreled entities (whose bonds are backed by both a dedicated revenue
stream and a general obligation pledge).
The universe of municipal securities eligible for inclusion in the Underlying Index are those
municipal bonds that fulfill the following conditions:
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(a)
|
Subject to a public offering;
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|
(b)
|
Amount outstanding of each bond must be at least $40 million where, subject to the following additional conditions:
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|
1.
|
Bonds with an amount outstanding of less than $100 million may only be included if they are issued after January 1, 2012.
|
|
2.
|
Bonds with an amount outstanding of more than $100 million may be included regardless of issue date.
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|
(c)
|
Deal size of at least $100 million;
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|
(d)
|
Federal tax free (bonds subject to the AMT and state and local taxes) may be included in the Underlying Index without limit;
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|
(e)
|
Investment grade rating by either Standard & Poors Ratings Group or Moodys Investors Service, Inc.;
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|
(f)
|
Fixed-rate coupon payment (zero coupon bonds may not be included in the Underlying Index);
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|
(g)
|
Bonds must not be prerefunded / escrowed to maturity;
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|
(h)
|
Time to maturity must be at least 10 years or longer;
|
|
(i)
|
Callable securities must not be callable within the next 5 years (the next call date must not lie in the next 5 years);
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|
(j)
|
Purpose of the bond proceeds must be for one of the following areas:
|
|
1.
|
Transportation (airports, seaports, bridges, toll roads, tunnels, parking facilities, or similar)
|
|
2.
|
Recreation (convention centers, stadiums, sports complexes, or similar)
|
|
3.
|
Utility (electric public power, water/sewer, sanitation, or similar.)
|
|
4.
|
Industrial Economic Development (solid waste recovery, malls, shopping centers, or similar)
|
|
5.
|
The following industries are excluded: higher education, pollution control, housing, health care and tobacco;
|
|
(k)
|
Proceeds of debt must be used for infrastructure purposes and principal and interest repayment must come from a pledged revenue source (e.g. tolls, sales tax,
registration fees, user fees) or a double-barreled revenue stream (pledged revenue stream and a general obligation pledge);
|
|
(l)
|
Municipal bonds, which are paid back solely using a general obligation pledge or an appropriation, may not be included in the Underlying Index;
|
|
(m)
|
Municipal bonds from Puerto Rico which are classified as Sales Tax may not be included in the Underlying Index; and
|
|
(n)
|
Municipal bonds where the obligor is a corporation may not be included in the Underlying Index.
|
8
All municipal bonds which meet the above requirements are included in the Underlying Index. The
Underlying Index is rebalanced on the last business day of each month. Newly issued municipal bonds which meet the requirements are generally added to the Underlying Index five days prior to the last business day of each month. Additionally, five
days prior to the last business day of each month, any Underlying Index components which no longer meet the above requirements are removed from the Underlying Index.
A Further Discussion of Principal Risks
The Fund is subject to the principal risks noted
below, any of which may adversely affect the Funds NAV, trading price, yield, total return and ability to meet its investment objective. You could lose all or part of your investment in the Fund, and the Fund could underperform other
investments.
Credit Risk.
The Funds performance could be hurt if an issuer of a debt security suffers an adverse change in
financial condition that results in a payment default, security downgrade or inability to meet a financial obligation. Credit risk is greater for lower-rated securities.
Some securities issued by U.S. government agencies or instrumentalities are backed by the full faith and credit of the U.S. government. Other securities that are supported only by the credit of the
issuing agency or instrumentality are subject to greater credit risk than securities backed by the full faith and credit of the U.S. government. This is because the U.S. government might provide financial support, but has no obligation to do so, if
there is a potential or actual loss of principal or failure to make interest payments.
Because of the rising U.S. government debt burden, it
is possible that the U.S. government may not be able to meet its financial obligations or that securities issued by the U.S. government may experience credit downgrades. Such a credit event may also adversely impact the financial markets.
For securities that rely on third-party guarantors to support their credit quality, the same risks may apply if the financial condition
of the guarantor deteriorates or the guarantor ceases insuring municipal bonds. Because guarantors may insure many types of bonds, including subprime mortgage bonds and other high-risk bonds, their financial condition could deteriorate as a result
of events that have little or no connection to securities owned by the Fund.
Liquidity Risk.
In certain situations, it may be
difficult or impossible to sell an investment in an orderly fashion at an acceptable price.
This risk can be ongoing for any security that
does not trade actively or in large volumes, for any security that trades primarily on smaller markets, and for investments that typically trade only among a limited number of large investors (such as certain types of derivatives or restricted
securities). In unusual market conditions, even normally liquid securities may be affected by a degree of liquidity risk. This may affect only certain securities or an overall securities market.
Market Risk.
Deteriorating market conditions might cause a general weakness in the market that reduces the overall level of securities prices in
that market.
9
Prepayment and Extension Risk.
When interest rates fall, issuers of high interest debt obligations
may pay off the debts earlier than expected (prepayment risk), and the Fund may have to reinvest the proceeds at lower yields. When interest rates rise, issuers of lower interest debt obligations may pay off the debts later than expected (extension
risk), thus keeping the Funds assets tied up in lower interest debt obligations. Ultimately, any unexpected behavior in interest rates could increase the volatility of the Funds share price and yield and could hurt fund performance.
Prepayments could also create capital gains tax liability in some instances.
Pricing Risk.
If market conditions make it difficult to
value some investments, the Fund may value these investments using more subjective methods, such as fair value pricing. In such cases, the value determined for an investment could be different than the value realized upon such investments
sale. As a result, you could pay more than the market value when buying fund shares or receive less than the market value when selling fund shares.
Secondary markets may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may prevent the Fund from being able to realize full value and thus sell a
security for its full valuation. This could cause a material decline in the Funds net asset value.
Interest Rate Risk.
When
interest rates rise, prices of debt securities generally decline. The longer the effective duration of the Funds debt securities, the more sensitive it will be to interest rate changes. (As a general rule, a 1% rise in interest rates means a
1% fall in value for every year of duration.)
Cash Redemption Risk.
The Fund may pay out a portion of its redemption proceeds in
cash rather than through the in-kind delivery of portfolio securities. The Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. This may cause the Fund to recognize a capital gain
that it might not have incurred if it had made a redemption in-kind. As a result the Fund may pay out higher annual capital gains distributions than if the in-kind redemption process was used. Only certain institutional investors known as authorized
participants who have entered into an agreement with the Funds distributor may redeem shares from the Fund directly; all other investors buy and sell shares at market prices on an exchange.
Valuation Risk.
Because non-U.S. exchanges may be open on days when the Fund does not price its shares, the value of the securities in the
Funds portfolio may change on days when shareholders will not be able to purchase or sell the Funds shares.
Non-Diversification Risk.
The Fund is non-diversified and may invest a large percentage of its assets in securities issued by or representing a
small number of issuers. As a result, the Fund may be more exposed to the risks associated with and developments affecting an individual issuer or a smaller number of issuers than a fund that invests more widely. This may increase the Funds
volatility and cause the performance of a relatively smaller number of issuers to have a greater impact on the Funds performance.
Municipal Securities Risk.
Municipal securities are subject to the risk that litigation, legislation or other political events, local business or
economic conditions or the bankruptcy of the issuer could have a significant effect on an issuers ability to make payments of principal and/or interest. In addition, there is a risk that, as a result of the current economic crisis, the ability
of any issuer to pay, when due, the principal or interest on its municipal bonds may be materially affected.
Municipal securities can be
significantly affected by political changes as well as uncertainties in the municipal market related to taxation, legislative changes or the rights of municipal security holders. Because many municipal securities are issued to finance similar
projects, especially those relating to education, health care, transportation and utilities, conditions in those sectors can affect the overall municipal market. Municipal securities may include revenue bonds, which are generally backed by revenue
from a specific project or tax. The issuer of a revenue bond makes interest and principal payments from revenues generated from a particular source or facility, such as a tax on particular property or revenues generated from a municipal water or
sewer utility or an airport. Revenue bonds generally are not backed by the full faith and credit and general taxing power of the issuer. Municipal securities backed by current or anticipated revenues from a specific project or specific assets can be
negatively affected by the discontinuance of the taxation supporting the project or assets or the inability to collect revenues for the project or from the assets.
If the Internal Revenue Service (IRS) determines that an issuer of a municipal security has not complied with applicable tax requirements, interest from the security could become taxable and
the security could decline significantly in value.
The market for municipal bonds may be less liquid than for taxable bonds. There may also
be less information available on the financial condition of issuers of municipal securities than for public corporations. This means that it may be harder to buy and sell municipal securities, especially on short notice, and municipal securities may
be more difficult for the Fund to value accurately than securities of
10
public corporations. Since the Fund invests a significant portion of their portfolio in municipal securities, the Funds portfolio may have greater exposure to liquidity risk than a fund
that invests in non-municipal securities. In addition, the value and liquidity of many municipal securities have decreased as a result of the recent financial crisis, which has also adversely affected many municipal securities issuers and may
continue to do so. The markets for many credit instruments, including municipal securities, have experienced periods of illiquidity and extreme volatility since the latter half of 2007. In response to the global economic downturn, governmental cost
burdens may be reallocated among federal, state and local governments. In addition, issuers of municipal securities may seek protection under the bankruptcy laws.
Risks Related to Investing in New York.
Because the Underlying Index was substantially comprised of New York municipal bonds as of March 31, 2013, a substantial portion of the Funds
investments are expected to consist of New York municipal bonds as well. Accordingly, the Fund would have greater exposure to negative political, economic, regulatory or other factors within the State of New York, including the financial condition
of its public authorities and political subdivisions, than a fund that invests in a broader base of securities. Unfavorable developments in any economic sector may have a substantial impact on the overall New York municipal market. Certain issuers
of New York municipal bonds have experienced serious financial difficulties in the past and reoccurrence of these difficulties may impair the ability of certain New York issuers to pay principal or interest on their obligations. The financial health
of New York City affects that of the state, and when New York City experiences financial difficulty, it may have an adverse affect on New York municipal bonds held by the Fund. The growth rate of New York has at times been somewhat slower than the
nation overall. The economic and financial condition of New York also may be affected by various financial, social, economic and political factors, including the outcome of pending litigation including the state or its localities.
Private Activity Bonds Risk.
The issuers of private activity bonds in which the Fund may invest may be negatively impacted by conditions affecting
either the general credit of the user of the private activity project or the project itself. Conditions such as regulatory and environmental restrictions and economic downturns may lower the need for these facilities and the ability of users of the
project to pay for the facilities. This could cause a decline in the Funds value. The Funds private activity bond holdings also may pay interest subject to the AMT. See Dividends and Distributions for more details.
Focus Risk.
To the extent that the Fund focuses on investments from a single state, region or sector of the municipal securities
market, its performance can be more volatile than that of a fund that invests more broadly. As an example, factors affecting a state, region or sector such as severe fiscal difficulties, an economic downturn, court rulings, increased expenditures on
domestic security or reduced monetary support from the federal government could over time impair a states, region or sectors ability to repay its obligations.
Certain other examples of focus risk in the municipal bond market are set forth below:
Electric Utilities Bond Risk.
The electric utilities industry has been experiencing, and will continue to experience, increased competitive pressures. Federal legislation may open transmission
access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other risks include: (a) the availability and cost of fuel; (b) the availability and cost of capital; (c) the effects of
conservation on energy demand; (d) the effects of rapidly changing environmental, safety and licensing requirements, and other federal, state and local regulations; (e) timely and sufficient rate increases; and (f) the effects of
opposition to nuclear power.
Industrial Development Bond Risk.
These revenue bonds are issued by or on behalf of public
authorities to obtain funds to finance various public and/or privately operated facilities, including those for business and manufacturing, housing, sports, pollution control, airport, mass transit, port and parking facilities. These bonds are
normally secured only by the revenues from the project and not by state or local government tax payments. Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities financed by the bonds and any
guarantor to meet its financial obligations. These bonds are subject to a wide variety of risks, many of which relate to the nature of the specific project. Generally, the value and credit quality of these bonds are sensitive to the risks related to
an economic slowdown.
Transportation Bond Risk.
Transportation debt may be issued to finance the construction of
airports, toll roads, highways or other transit facilities. Airport bonds are dependent on the general stability of the airline industry and on the stability of a specific carrier who uses the airport as a hub. Air traffic generally follows broader
economic trends and is also affected by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general economic health of an area.
Fuel costs and availability also affect other transportation related securities, as do the presence of alternate forms of transportation, such as public transportation.
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Water and Sewer Bond Risk.
Water and sewer revenue bonds are often
considered to have relatively secure credit as a result of their issuers importance, monopoly status and generally unimpeded ability to raise rates. Despite this, lack of water supply due to insufficient rain, run off or snow pack is a concern
that has led to past defaults. Further, public resistance to rate increases, costly environmental litigation and federal environmental mandates are challenges faced by issuers of water and sewer bonds.
Resource Recovery Bond Risk.
Resource recovery bonds are a type of revenue bond issued to build facilities such as solid waste
incinerators or waste-to-energy plants. Typically, a private corporation is involved, at least during the construction phase, and the revenue stream is secured by fees or rents paid by municipalities for use of the facilities. The viability of a
resource recovery project, environmental protection regulations, and project operator tax incentives may affect the value and credit quality of resource recovery bonds.
Lease Obligations Risk.
Lease obligations may have risks not normally associated with general obligation or other revenue bonds. Leases and installment purchase or conditional sale contracts (which
may provide for title to the leased asset to pass eventually to the issuer) have developed as a means for governmental issuers to acquire property and equipment without the necessity of complying with the constitutional statutory requirements
generally applicable for the issuance of debt.
Certain lease obligations contain non appropriation clauses that
provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for that purpose by the appropriate legislative body on an annual or other periodic basis. Consequently,
continued lease payments on those lease obligations containing non appropriation clauses are dependent on future legislative actions. If these legislative actions do not occur, the holders of the lease obligation may experience
difficulty in exercising their rights, including disposition of the property.
Special Tax Bond Risk.
Special tax bonds
are usually backed and payable through a single tax, or series of special taxes such as incremental property taxes. The failure of the tax levy to generate adequate revenue to pay the debt service on the bonds may cause the value of the bonds to
decline.
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Tax Risk.
Income from municipal securities held by the Fund could be declared
taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a securities issuer. In addition, because municipal securities that pay interest subject
to the AMT may be included in the Underlying Index without limit, the Fund may invest an unlimited amount of its net assets in municipal securities whose income is subject to the AMT. Further, a portion of the Funds otherwise exempt-interest
distributions may be taxable to those shareholders subject to the federal AMT.
Market Risk.
Developments in a
particular class of debt securities or the stock market could also adversely affect the Fund by reducing the relative attractiveness of debt securities as an investment. Also, to the extent that the Fund emphasizes debt securities from any given
state or region, it could be hurt if that state or region does not do well.
Additional Investment Strategies
Under normal circumstances, the Fund invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in securities issued
by municipalities across the United States which are classified as municipal infrastructure revenue bonds based on the Underlying Indexs criteria, as well as in other securities whose income is free from regular federal income tax.
Because municipal securities that pay interest subject to the AMT may be included in the Underlying Index without limit, the Fund may invest an unlimited amount of its net assets in municipal securities whose income is subject to the AMT. In
addition, the Fund will invest at least 80% of its total assets (but typically far more) in instruments that comprise the Underlying Index.
The policy of investing at least 80% of net assets (plus the amount of any borrowings for investment purposes) in municipal securities and other
securities whose income is free from regular federal income tax cannot be changed without shareholder approval. The Fund will not invest in money market instruments or other short-term investments as part of a temporary defensive strategy to protect
against potential market declines.
Certain fundamental policies of the Fund are set forth in the SAI.
Borrowing Money
The Fund may borrow
money from a bank up to a limit of 10% of the value of its assets, but only for temporary or emergency purposes.
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Additional Risks of Investing in the Fund
Absence of Active Market.
Although shares of the Fund are listed for trading on one or more stock exchanges, there can be no assurance that an active trading market for such shares will develop or
be maintained.
Trading Risks.
Secondary market trading in Fund shares may be halted by a stock exchange because of market conditions
or other reasons. In addition, trading in Fund shares on a stock exchange or in any market may be subject to trading halts caused by extraordinary market volatility pursuant to circuit breaker rules on the exchange or market. There can
be no assurance that the requirements necessary to maintain the listing or trading of Fund shares will continue to be met or will remain unchanged.
Shares of the Fund May Trade at Prices Other Than NAV.
Shares of the Fund may trade at, above or below their NAV. The per share NAV of the Fund will fluctuate with changes in the market value of
such Funds holdings. The trading prices of Shares will fluctuate in accordance with changes in its NAV as well as market supply and demand. However, given that shares can be created and redeemed only in Creation Units at NAV (unlike shares of
many closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their NAVs), the Adviser and Sub-Adviser believe that large discounts or premiums to the NAV of the shares should not be sustained. While the
creation/redemption feature is designed to make it likely that shares normally will trade close to the Funds NAV, disruptions to creations and redemptions may result in trading prices that differ significantly from NAV. Since foreign exchanges
may be open on days when the Fund does not price shares, the value of the securities in the Funds portfolio may change on days when shareholders will not be able to purchase or sell shares.
Costs of Buying or Selling Fund Shares.
Buying or selling Fund shares involves two types of costs that apply to all securities transactions. When
buying or selling shares of the Fund through a broker, you will incur a brokerage commission or other charges imposed by brokers as determined by that broker. In addition, you will also incur the cost of the spread that is, the
difference between what professional investors are willing to pay for Fund shares (the bid price) and the price at which they are willing to sell Fund shares (the ask price). Because of the costs inherent in buying or selling
Fund shares, frequent trading may detract significantly from investment results and an investment in Fund shares may not be advisable for investors who anticipate regularly making small investments.
Derivatives Risk.
Derivatives are financial instruments, such as futures and swaps, whose values are based on the value of one or more indicators,
such as a security, asset, currency, interest rate, or index. Derivatives involve risks different from, and possibly greater than, the risks associated with investing directly in securities and other more traditional investments. For example,
derivatives involve the risk of mispricing or improper valuation and the risk that changes in the value of a derivative may not correlate perfectly with the underlying indicator. Derivative transactions can create investment leverage, may be highly
volatile and the Fund could lose more than the amount it invests. Many derivative transactions are entered into over-the-counter (not on an exchange or contract market); as a result, the value of such a derivative transaction will depend
on the ability and the willingness of the Funds counterparty to perform its obligations under the transaction. If a counterparty were to default on its obligations, the Funds contractual remedies against such counterparty may be subject
to bankruptcy and insolvency laws, which could affect the Funds rights as a creditor (e.g., the Fund may not receive the net amount of payments that it is contractually entitled to receive). A liquid secondary market may not always exist for
the Funds derivative positions at any time.
Portfolio Holdings Information
A description of the Trusts policies and procedures with respect to the disclosure of the Funds portfolio securities is available in the
Funds SAI. The top holdings of the Fund can be found at www.dbxus.com. Fund fact sheets provide information regarding the Funds top holdings and may be requested by calling 1-855-329-3837 (1-855-DBX-ETFS).
Management
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Investment Adviser and Sub-Adviser.
The Adviser has overall responsibility for the general management
and administration of the Trust and oversight of the Sub-Adviser.
Deutsche Investment Management Americas Inc. (DIMA or the
Sub-Adviser), established in 1943, is a registered investment adviser and serves as the investment sub-adviser for the Fund and, subject to the supervision of the Adviser and the oversight of the Trusts Board, is responsible for
the investment management of the Fund.
For its investment advisory services to the Fund, the Adviser is entitled to receive a unitary
management fee from the Fund at an annual rate equal to 0.30% of its average daily net assets.
Pursuant to the Investment Advisory
Agreement between the Adviser and the Trust (entered into on behalf of the Fund), the Adviser is responsible for substantially all expenses of the Fund, including the payments to the Sub-Adviser, the cost of transfer agency, custody, fund
administration, legal, audit and other services except for the fee payments under the Investment Advisory Agreement, interest expense, taxes, brokerage expenses, future distribution fees or expenses, litigation expenses and other extraordinary
expenses. The Fund also bears the cost of the Independent Trustee Fees.
The Adviser also has contractually agreed through March 25, 2014
to waive fees and/or reimburse the Funds expenses in order to limit the Funds net annual operating expenses to 0.30% of the Funds average daily net assets, except for interest expense, taxes, brokerage expenses, distribution fees
or expenses, litigation expenses and other extraordinary expenses (the Expense Caps). In accordance with and as required by the Expense Caps, the Adviser will reimburse the Fund for the Independent Trustee Fees. The Expense Caps will
remain in effect until at least March 25, 2014 and may only be terminated with the consent of the Trusts Board (and may not be terminated by the Adviser) prior to that time.
Pursuant to the Sub-Advisory Agreement with Deutsche Investment Management Americas Inc., the Adviser pays the Sub-Adviser on a monthly basis a portion of the net advisory fees it receives from the Fund
at the annual rate of 0.05% of the Funds average daily net assets.
DBX Advisors LLC is located at 60 Wall Street, New York, New York
10005 and is an, indirect, wholly-owned subsidiary of Deutsche Bank AG, a multi-national financial services company. The Adviser has been a registered investment adviser since August 2010, with assets under management totaling approximately $48.4
million as of February 28, 2013.
Deutsche Investment Management Americas Inc. is located at 345 Park Avenue, New York, NY 10154 and had
approximately $231.9 billion in assets under management as of December 31, 2012.
Under the supervision of the Adviser and oversight of the
Board, the Sub-Adviser makes investment decisions, buys and sells securities for the Fund and conducts research that leads to these purchase and sale decisions. The Sub-Adviser is an indirect, wholly owned subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of financial services, including investment management, mutual funds, retail, private and commercial banking, investment banking and insurance. The Sub-Adviser and its
predecessors have more than 80 years of experience managing mutual funds and provide a full range of global investment advisory services to institutional and retail clients.
The Sub-Adviser may utilize the resources of its global investment platform (collectively, Deutsche Asset Management) to provide investment management services through branch offices located
outside the US. In some cases, the Sub-Adviser may also utilize its branch offices or affiliates located in the US or outside the US to perform certain services, such as trade execution, trade matching and settlement, or various administrative,
back-office or other services. To the extent services are performed outside the US, such activity may be subject to both US and foreign regulation. It is possible that the jurisdiction in which the Sub-Adviser or its affiliate performs such services
may impose restrictions or limitations on portfolio transactions that are different from, and in addition to, those that apply in the US.
A discussion regarding the basis for the Boards approval of the Investment Advisory Agreement and the Sub-Advisory Agreement will be available in
the Funds semi-annual report to shareholders for the six months ending November 30, 2013.
Manager of Managers
Structure.
The Adviser and the Trust may rely on an exemptive order (the Order) from the SEC that permits the Adviser to enter into investment sub-advisory agreements with sub-advisers without obtaining shareholder approval. The
Adviser,
15
subject to the review and approval of the Board, selects sub-advisers for the Fund and supervises, monitors and evaluates the performance of the sub-adviser.
The Order also permits the Adviser, subject to the approval of the Board, to replace sub-advisers and amend investment sub-advisory agreements, including
fees, without shareholder approval whenever the Adviser and the Board believe such action will benefit the Fund and its shareholders. The Adviser thus has the ultimate responsibility (subject to the ultimate oversight of the Board) to recommend the
hiring and replacement of sub-advisers as well as the discretion to terminate any sub-adviser and reallocate the Funds assets for management among any other sub-adviser(s) and itself. This means that the Adviser is able to reduce the
sub-advisory fees and retain a larger portion of the management fee, or increase the sub-advisory fees and retain a smaller portion of the management fee. The Adviser compensates the sub-adviser out of its management fee.
Portfolio Managers.
Philip G. Condon, Ashton P. Goodfield, Blair Ridley and Michael J. Generazo, each a Portfolio Manager, are primarily
responsible for the day-to-day management of the Fund. Each Portfolio Manager functions as a member of a portfolio manager team.
Philip G.
Condon is a Managing Director of Deutsche Asset Management.
Since 2008, he has been Managing Director, Head of the Municipal Bond team, Chief Strategist for U.S. Fixed Income and a Portfolio Manager for DIMA. Mr. Condon joined Deutsche
Asset Management in 1983. He obtained his MBA degree and his undergraduate degree, Bachelor of Arts, from the University of Massachusetts at Amherst.
Ashton P. Goodfield, CFA, is a Managing Director of Deutsche Asset Management.
Since 2008, she has been Managing Director, Head of Municipal Bond Trading and a Portfolio Manager for DIMA.
Ms. Goodfield joined Deutsche Asset Management in 1986. She obtained her undergraduate degree, Bachelor of Arts, from Duke University.
Blair Ridley is a Director of Deutsche Asset Management. From 2006 to 2010, he was Vice President, business manager and product specialist for DIMA.
Since 2010, Mr. Ridley has been a Director and a Portfolio Manager for DIMA. Mr. Ridley joined Deutsche Asset Management in 1999. He obtained his MS in Investment Management from Boston University and his undergraduate degree, Bachelor of Arts,
from the University of California, San Diego.
Michael J. Generazo is a Director of Deutsche Asset Management. Since 2008, he has been a
Director and a Portfolio Manager for DIMA. Mr. Generazo joined Deutsche Asset Management in 1999. He obtained his MBA degree from Suffolk University and his undergraduate degree, Bachelor of Science, from Bryant College.
The Funds SAI provides additional information about the Portfolio Managers compensation, other accounts managed by the Portfolio Managers and
the Portfolio Managers ownership (if any) of shares in the Fund.
Shareholder Information
Additional shareholder information, including how to buy and sell shares of the Fund, is available free of charge by calling toll-free: 1-855-329-3837
(1-800-DBX-ETFS) or visiting our website at www.dbxus.com.
Buying and Selling Shares.
Shares of the Fund will be listed for
trading on a national securities exchange during the trading day. Shares can be bought and sold throughout the trading day at market prices like shares of other publicly-traded companies. The Trust does not impose any minimum investment for shares
of the Fund purchased on an exchange. Buying or selling Fund shares involves two types of costs that may apply to all securities transactions. When buying or selling shares of the Fund through a broker, you will likely incur a brokerage commission
or other charges determined by your broker. In addition, you may incur the cost of the spread that is, any difference between the bid price and the ask price. The commission is frequently a fixed amount and may be a significant
proportional cost for investors seeking to buy or sell small amounts of shares. The spread varies over time for shares of the Fund based on its trading volume and market liquidity, and is generally lower if the Fund has a lot of trading volume and
market liquidity and higher if the Fund has little trading volume and market liquidity. The Funds Shares trade on NYSE Arca under the symbol RVNU.
Shares of the Fund may be acquired or redeemed directly from the Fund only in Creation Units or multiples thereof, as discussed in the section of this Prospectus entitled Creations and
Redemptions. Only an Authorized Participant (as defined herein) may engage in creation or redemption transactions directly with the Fund. Once created, shares of the Fund generally trade in the secondary market in amounts less than a Creation
Unit.
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The Board has evaluated the risks of market timing activities by the Funds shareholders. The Board
noted that the Funds Shares can only be purchased and redeemed directly from the Fund in Creation Units by Authorized Participants and that the vast majority of trading in the Funds Shares occurs on the secondary market.
Because the secondary market trades do not involve the Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including dilution, disruption of portfolio management, increases in the Funds trading
costs and the realization of capital gains. With regard to the purchase or redemption of Creation Units directly with the Fund, to the extent effected in-kind (i.e., for securities), such trades do not cause any of the harmful effects (as previously
noted) that may result from frequent cash trades. To the extent trades are effected in whole or in part in cash, the Board noted that such trades could result in dilution to the Fund and increased transaction costs, which could negatively impact the
Funds ability to achieve its investment objective. However, the Board noted that direct trading by Authorized Participants is critical to ensuring that the Funds Shares trade at or close to NAV. The Fund also employs fair valuation
pricing to minimize potential dilution from market timing. In addition, the Fund imposes both fixed and variable transaction fees on purchases and redemptions of Fund Shares to cover the custodial and other costs incurred by the Fund in effecting
trades. These fees increase if an investor substitutes cash in part or in whole for securities, reflecting the fact that the Funds trading costs increase in those circumstances. Given this structure, the Board determined that with respect to
the Fund it is not necessary to adopt policies and procedures to detect and deter market timing of the Funds Shares.
The national
securities exchange on which the Funds shares are listed is open for trading Monday through Friday and is closed on weekends and the following holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Section 12(d)(1) of the Investment Company Act of 1940,
as amended (the 1940 Act), restricts investments by registered investment companies in the securities of other investment companies. Registered investment companies are permitted to invest in the Fund beyond the limits set forth in
Section 12(d)(1), subject to certain terms and conditions set forth in an SEC exemptive order issued to the Trust, including that such investment companies enter into an agreement with the Trust.
Book Entry.
Shares of the Fund are held in book-entry form, which means that no stock certificates are issued. The Depository Trust Company
(DTC) or its nominee is the record owner of all outstanding shares of the Fund and is recognized as the owner of all shares for all purposes.
Investors owning shares of the Fund are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for shares of the Fund. DTC participants include
securities brokers and dealers, banks, trust companies, clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of shares, you are not entitled to receive physical
delivery of stock certificates or to have shares registered in your name, and you are not considered a registered owner of shares. Therefore, to exercise any right as an owner of shares, you must rely upon the procedures of DTC and its participants.
These procedures are the same as those that apply to any other securities that you hold in book-entry or street name form.
Share Prices.
The trading prices of the Funds shares in the secondary market generally differ from the Funds daily NAV per share and
are affected by market forces such as supply and demand, economic conditions and other factors. Information regarding the intraday value of shares of the Fund, also known as the indicative optimized portfolio value (IOPV), is
disseminated every 15 seconds throughout the trading day by the national securities exchange on which the Funds shares are listed or by market data vendors or other information providers. The IOPV is based on the current market value of the
securities and/or cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect the precise composition of the current portfolio of securities held by the Fund at a particular point in time nor the best
possible valuation of the current portfolio. Therefore, the IOPV should not be viewed as a real-time update of the NAV, which is computed only once a day. The IOPV is generally determined by using both current market quotations and/or
price quotations obtained from broker-dealers that may trade in the portfolio securities held by the Fund. The quotations of certain Fund holdings may not be updated during U.S. trading hours if such holdings do not trade in the U.S. The Fund is not
involved in, or responsible for, the calculation or dissemination of the IOPV and makes no representation or warranty as to its accuracy.
Determination of Net Asset Value.
The NAV of the Fund is generally determined once daily Monday through Friday generally as of the regularly
scheduled close of business of the New York Stock Exchange (NYSE) (normally 4:00 p.m., Eastern time) on each day that the NYSE is open for trading. NAV is calculated by deducting all of the Funds liabilities from the total value of
its assets and dividing the result by the number of shares outstanding, rounding to the nearest cent. All valuations are subject to review by the Trusts Board or its delegate.
In determining NAV, expenses are accrued and applied daily. Debt securities are valued at the mean between the last available bid and ask prices for such securities or, if such prices are not available,
at prices for securities of comparable maturity, quality, and type. Some
17
or all of the Funds debt securities, including the municipal securities in which the Fund invests, may also be valued based on price quotations or other equivalent indications of value
provided by a third-party pricing service. Any such third-party pricing service may use a variety of methodologies to value some or all of the Funds debt securities to determine the market price. For example, the prices of securities with
characteristics similar to those held by the Fund may be used to assist with the pricing process. In addition, the pricing service may use proprietary pricing models. Short-term securities for which market quotations are not readily available are
valued at amortized cost, which approximates market value. Equity investments are valued at market value, which is generally determined using the last reported official closing or last trading price on the exchange or market on which the security is
primarily traded at the time of valuation. The approximate value of shares of the applicable Fund, an amount representing on a per share basis the sum of the current value of the deposit securities based on their then current market price and the
estimated cash component will be disseminated every 15 seconds throughout the trading day through the facilities of the Consolidated Tape Association. As the respective international local markets close, the market value of the deposit securities
will continue to be updated for foreign exchange rates for the remainder of the U.S. trading day at the prescribed 15 second intervals.
If a
securitys market price (or other indicator of market value such as that obtained from a pricing service) is not readily available or does not otherwise accurately reflect the fair value of the security, the security will be valued by another
method that the Adviser believes will better reflect fair value in accordance with the Trusts valuation policies and procedures approved by the Board. The Fund may use fair value pricing in a variety of circumstances, including but not limited
to, situations when the value of a security in the Funds portfolio has been materially affected by events occurring after the close of the market on which the security is principally traded (such as a corporate action or other news that may
materially affect the price of a security) or trading in a security has been suspended or halted. Fair value pricing involves subjective judgments and it is possible that a fair value determination for a security is materially different than the
value that could be realized upon the sale of the security. With respect to securities that are primarily listed on foreign exchanges, the value of the Funds portfolio securities may change on days when you will not be able to purchase or sell
your Shares.
Dividends and Distributions
General Policies.
Dividends from net investment income, if any, are generally declared and paid semi-annually by the Fund. Distributions of net realized capital gains, if any, generally are
declared and paid once a year, but the Trust may make distributions on a more frequent basis for the Fund. The Trust reserves the right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to
preserve its status as a regulated investment company (RIC) or to avoid imposition of income or excise taxes on undistributed income or realized gains.
Dividends and other distributions on shares of the Fund are distributed on a pro rata basis to beneficial owners of such shares. Dividend payments are made through DTC participants and indirect
participants to beneficial owners then of record with proceeds received from the Fund.
Dividend Reinvestment Service.
No dividend
reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by beneficial owners of the Fund for reinvestment of their dividend distributions. Beneficial owners should
contact their broker to determine the availability and costs of the service and the details of participation therein. Brokers may require beneficial owners to adhere to specific procedures and timetables. If this service is available and used,
dividend distributions of both income and realized gains will be automatically reinvested in additional whole shares of the Fund purchased in the secondary market.
Taxes.
As with any investment, you should consider how your investment in shares of the Fund will be taxed. The tax information in this Prospectus is provided as general information. You should
consult your own tax professional about the tax consequences of an investment in shares of the Fund.
Unless your investment in Fund shares is
made through a tax-exempt entity or tax-deferred retirement account, such as an IRA, you need to be aware of the possible tax consequences when the Fund makes distributions or you sell Fund shares.
Taxes on Distributions.
Distributions from the Funds net investment income (other than qualified dividend income), including distributions
of income from securities lending and distributions out of the Funds net short-term capital gains, if any, are taxable to you as ordinary income. Distributions by the Fund of net long-term capital gains in excess of net short-term capital
losses (capital gain dividends) are taxable to you as long-term capital gains, regardless of how long you have held such Funds shares. Distributions by the Fund that qualify as qualified dividend income are taxable to you at long-term capital
gain rates. The maximum individual rate applicable to qualified dividend income and long-term capital gains is
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generally either 15% or 20%, depending on whether the individuals income exceeds certain threshold amounts. It is not anticipated that any distributions by the Fund will qualify for the
dividends received deduction (when received by a corporate shareholder) or for treatment as qualified dividend income (when received by a non-corporate shareholder).
Dividends paid by the Fund that are properly designated as exempt-interest dividends will not be subject to regular U.S. federal income tax. The Fund intends to invest its assets in a manner such that a
significant portion of their dividend distributions to shareholders will generally be exempt from U.S. federal income taxes, including the federal AMT for noncorporate shareholders. The Fund may invest a portion of its assets in certain
private activity bonds, and as a result, a portion of the exempt-interest dividends paid by them will be an item of tax preference to shareholders subject to the AMT. Corporate shareholders should note that income that is generally
exempt from the federal AMT may in certain situations nonetheless be relevant in determining their federal AMT liability, if any. Depending on a shareholders state of residence, exempt-interest dividends from interest earned on municipal
securities of a state or its political subdivisions may be exempt in the hands of such shareholder from income tax in that state. However, income from municipal securities of states other than the shareholders state of residence generally will
not qualify for tax-free treatment for such shareholder.
In general, your distributions are subject to U.S. federal income tax for the
year when they are paid. Certain distributions paid in January, however, may be treated as paid on December 31 of the prior year.
If the
Funds distributions exceed current and accumulated earnings and profits, all or a portion of the distributions made in the taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution generally
will not be taxable but will reduce the shareholders cost basis and result in a higher capital gain or lower capital loss when those shares on which the distribution was received are sold.
If you are neither a resident nor a citizen of the United States or if you are a non-U.S. entity, the Funds ordinary income dividends (which
include distributions of net short- term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies, provided that withholding tax will generally not apply to any gain or income realized by a non-U.S.
shareholder in respect of any distributions of long-term capital gains or that are exempt-interest dividends, or upon the sale or other disposition of shares of the Fund.
19
If you are a resident or a citizen of the United States, by law, back-up withholding (currently, at a
rate of 28%) will apply to your distributions and proceeds if you have not provided a taxpayer identification number or social security number and made other required certifications.
Taxes When Shares are Sold.
Currently, any capital gain or loss realized upon a sale of Fund shares is generally treated as a long-term gain or loss if the shares have been held for more than one
year. Any capital gain or loss realized upon a sale of Fund shares held for one year or less is generally treated as short-term gain or loss, except that any capital loss on the sale of shares held for six months or less is treated as long-term
capital loss to the extent that capital gain dividends were paid with respect to such shares. Additionally, any loss realized upon the sale or exchange of Fund shares with a tax holding period of six months or less will be disallowed to the extent
of any distributions treated as exempt-interest dividends with respect to such shares.
Medicare Tax.
For taxable years beginning after
December 31, 2012, an additional 3.8% Medicare tax will be imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a Fund and net gains from redemptions or other taxable dispositions
of Fund shares) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceed
certain threshold amounts.
The foregoing discussion summarizes some of the consequences under current U.S. federal tax law of
an investment in the Fund. It is not a substitute for personal tax advice. You may also be subject to state and local taxation on Fund distributions and sales of shares. Consult your personal tax adviser about the potential tax consequences of an
investment in shares of the Fund under all applicable tax laws.
Creations and Redemptions.
Prior to trading in the secondary
market, shares of the Fund are created at NAV by market makers, large investors and institutions only in block-size Creation Units of 50,000 shares or multiples thereof. Each creator or Authorized Participant
enters into an authorized participant agreement with the Funds distributor, ALPS Distributors, Inc. (the Distributor). Only an Authorized Participant may create or redeem Creation Units directly with the Fund. Creation Units
generally are issued and redeemed in exchange for a specific basket of securities approximating the holdings of the Fund and a designated amount of cash. Because the Fund invests a portion of its assets in foreign currency forward contracts, the
Fund may pay out a portion of its redemption proceeds in cash rather than through the in-kind delivery of portfolio securities.
Except when aggregated in Creation Units, shares are not redeemable by the Fund.
The prices at which creations and
redemptions occur are based on the next calculation of NAV after an order is received in a form described in the authorized participant agreement.
Creations and redemptions must be made by an Authorized Participant that is either a member of the Continuous Net Settlement System of the National Securities Clearing Corporation or a DTC participant,
and in each case, must have executed an agreement with the Distributor with respect to creations and redemptions of Creation Unit aggregations. Information about the procedures regarding creation and redemption of Creation Units (including the
cut-off times for receipt of creation and redemption orders) is included in the SAI.
The Fund intends to comply with the U.S. federal
securities laws in accepting securities for deposits and satisfying redemptions with redemption securities, including that the securities accepted for deposits and the securities used to satisfy redemption requests will be sold in transactions that
would be exempt from registration under the Securities Act of 1933, as amended (the 1933 Act). Further, an Authorized Participant that is not a qualified institutional buyer, as such term is defined under Rule 144A of the
1933 Act, will not be able to receive Fund Securities that are restricted securities eligible for resale under Rule 144A.
Authorized
Participants and the Continuous Offering of Shares.
Because new shares may be created and issued on an ongoing basis, at any point during the life of the Fund a distribution, as such term is used in the 1933 Act, may be occurring.
Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner that could render them statutory underwriters and subject
to the prospectus delivery and liability provisions of the 1933 Act. Any determination of whether one is an underwriter must take into account all the relevant facts and circumstances of each particular case.
Broker-dealers should also note that dealers who are not underwriters but are participating in a distribution (as contrasted to ordinary
secondary transactions), and thus dealing with shares that are part of an unsold allotment within the meaning of Section 4(3)(C) of the 1933 Act, would be unable to take advantage of the prospectus delivery exemption provided by
Section 4(3) of the
20
1933 Act. For delivery of prospectuses to exchange members, the prospectus delivery mechanism of Rule 153 under the 1933 Act is available only with respect to transactions on a national
securities exchange.
Transaction Fees.
Authorized Participants are charged standard creation and redemption transaction fees to
offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. Purchasers and redeemers of Creation Units for cash are required to pay an additional variable charge (up to the maximum amount shown below)
to compensate for brokerage and market impact expenses. The standard and maximum creation transaction fees of the Fund are $500.
Householding.
Householding is an option available to certain Fund investors. Householding is a method of delivery, based on the preference of the
individual investor, in which a single copy of certain shareholder documents can be delivered to investors who share the same address, even if their accounts are registered under different names. Please contact your broker-dealer if you are
interested in enrolling in householding and receiving a single copy of prospectuses and other shareholder documents, or if you are currently enrolled in householding and wish to change your householding status.
Distribution
The Distributor
distributes Creation Units for the Fund on an agency basis. The Distributor does not maintain a secondary market in shares of the Fund. The Distributor has no role in determining the policies of the Fund or the securities that are purchased or sold
by the Fund. The Distributors principal address is 1290 Broadway, Suite 1100, Denver, Colorado 80203.
The Adviser or its affiliates may
make payments to broker-dealers or other financial intermediaries (together, intermediaries) related to marketing activities and presentations, educational training programs, the support of technology platforms and/or reporting systems
or other services relating to the Fund and certain other funds advised by the Adviser or its affiliates. Such payments, which may be significant to the intermediary, are not made by the Fund. Rather, such payments are made by the Adviser or its
affiliates from their own resources, which come directly or indirectly in part from fees paid by the Fund and certain other funds advised by the Adviser or its affiliates. Payments of this type are sometimes referred to as revenue sharing payments.
A financial intermediary may make decisions about which investment options it recommends or makes available, or the level of services provided, to its customers based on the revenue sharing payments it is eligible to receive. Therefore, such
payments to an intermediary create conflicts of interest between the intermediary and its customers and may cause the intermediary to recommend the Fund or other funds advised by the Adviser or its affiliates. More information regarding these
payments is contained in the Funds SAI.
Fund Service Providers
The Bank of New York Mellon, One Wall Street, New York, New York 10286 (BNY), is the administrator, custodian and fund accounting and transfer agent for the Fund.
Dechert LLP, 1095 Avenue of the Americas, New York, New York 10036, serves as legal counsel to the Fund.
Ernst & Young LLP, 5 Times Square, New York, New York 10036, serves as the Funds independent registered public accounting firm. The
independent registered public accounting firm is responsible for auditing the annual financial statements of the Fund.
Index Provider
DBSI, which is an affiliate of the Adviser, is responsible for the rules-based methodology of the DBIQ Municipal Infrastructure
Revenue Bond Index. See Affiliated Index Provider in the SAI. DBSI is a wholly-owned subsidiary of Deutsche Bank AG. DBSIs index team (known as DBIQ) is responsible for the methodology of the Underlying Index as well as
numerous other Deutsche Bank proprietary indices. DBSI, through DBIQ, is a leading provider of indices representing various major asset classes and regions.
Structured Solutions AG is responsible for the administration and calculation of the Underlying Index.
The Adviser has entered into a license agreement with the Index Provider to use the Underlying Index. The Adviser sublicenses rights in the Underlying Index to the Trust at no charge.
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Disclaimers
The Fund is not sponsored, endorsed, sold or promoted by DBSI or any affiliate of DBSI. Neither DBSI nor any other party makes any representation or warranty, express or implied, to the owners of the Fund
or any member of the public regarding advisability of investing in funds generally or in this Fund particularly or the ability of the Underlying Index to track general stock market performance. DBSI is the licensor of certain trademarks, service
marks and trade names of DBSI and of the Underlying Index which is determined, composed and calculated by DBSI without regard to the Trust, the Adviser or the Fund. DBSI has no obligation to take the needs of the Adviser or the owners of the Fund
into consideration in determining, composing or calculating the Underlying Index. DBSI is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Fund to be issued or in the determination
or calculation of the equation by which the Fund is redeemable for cash. Neither DBSI nor any other party has any obligation or liability to owners of the Fund in connection with the administration, marketing or trading of the Fund.
Although DBSI shall obtain information for inclusion in or for use in the calculation of the Underlying Index from sources which DBSI considers reliable,
neither DBSI nor any other party guarantees the accuracy and/or the completeness of the Underlying Index or any data included therein. Neither DBSI nor any other party makes any warranty, express or implied, as to results to be obtained by licensee,
licensees customers and counterparties, owners of the Fund, or any other person or entity from the use of the Underlying Index or any data included hereunder or for any other use. Neither DBSI nor any other party makes any express or implied
warranties, and DBSI hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the Underlying Index or any data included therein. Without limiting any of the foregoing, in no event shall DBSI or
any other party have any liability for direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
Shares of the Fund are not sponsored, endorsed or promoted by NYSE Arca. NYSE Arca makes no representation or warranty, express or implied, to the owners
of the shares of the Fund or any member of the public regarding the ability of the Fund to track the total return performance of their Underlying Index or the ability of the Underlying Index to track stock market performance. NYSE Arca is not
responsible for, nor has it participated in, the determination of the compilation or the calculation of the Underlying Index, nor in the determination of the timing of, prices of, or quantities of shares of the Fund to be issued, nor in the
determination or calculation of the equation by which the shares are redeemable. NYSE Arca has no obligation or liability to owners of the shares of the Fund in connection with the administration, marketing or trading of the shares of the Fund.
NYSE Arca does not guarantee the accuracy and/or the completeness of the Underlying Index or any data included therein. NYSE Arca makes no
warranty, express or implied, as to results to be obtained by the Trust on behalf of the Fund as licensee, licensees customers and counterparties, owners of the shares of the Fund, or any other person or entity from the use of the subject
Underlying Index or any data included therein in connection with the rights licensed as described herein or for any other use. NYSE Arca makes no express or implied warranties and hereby expressly disclaims all warranties of merchantability or
fitness for a particular purpose with respect to the Underlying Index or any data included therein. Without limiting any of the foregoing, in no event shall NYSE Arca have any liability for any direct, indirect, special, punitive, consequential or
any other damages (including lost profits) even if notified of the possibility of such damages.
The Adviser does not guarantee the accuracy
or the completeness of the Underlying Index or any data included therein and the Adviser shall have no liability for any errors, omissions or interruptions therein.
The Adviser makes no warranty, express or implied, to the owners of shares of the Fund or to any other person or entity, as to results to be obtained by the Fund from the use of the Underlying Index or
any data included therein. The Adviser makes no express or implied warranties and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the Underlying Index or any data included therein.
Without limiting any of the foregoing, in no event shall the Adviser have any liability for any special, punitive, direct, indirect or consequential damages (including lost profits), even if notified of the possibility of such damages.
Premium/Discount Information
Information regarding how often shares of the Fund traded on NYSE Arca at a price above (i.e., at a premium) or below (i.e., at a discount) the NAV of the
Fund during the past calendar year, when available, can be found at www.dbxus.com.
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Financial Highlights
Because the Fund has not commenced operations as of the date of this Prospectus, financial highlights are not provided for the Fund.
23
For more information:
WWW.DBXUS.COM
1-855-329-3837 (1-855-DBX-ETFS)
Copies of the Prospectus, SAI and recent shareholder
reports, when available, can be found on our website at www.dbxus.com. For more information about the Fund, you may request a copy of the SAI. The SAI provides detailed information about the Fund and is incorporated by reference into this
Prospectus. This means that the SAI, for legal purposes, is a part of this Prospectus.
If you have any questions about the Trust or
shares of the Fund or you wish to obtain the SAI or shareholder report free of charge, please:
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Call:
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1-855-329-3837 or 1-855-DBX-ETFS (toll free)
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Monday through Friday, 8:30 a.m. to 6:30 p.m. (Eastern time)
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E-mail:dbxquestions@list.db.com
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Write:
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DBX ETF Trust
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c/o ALPS Distributors, Inc.
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1290 Broadway, Suite 1100
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Denver, Colorado 80203
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Information about the Fund (including the SAI) can be reviewed and copied at the SECs Public Reference Room in
Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the Fund is available on the EDGAR Database on the SECs website at
www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing to the SECs Public Reference Section, Washington, D.C.
20549-1520.
No person is authorized to give any information or to make any representations about the Fund and their shares not contained
in this Prospectus and you should not rely on any other information. Read and keep the Prospectus for future reference.
Investment
Company Act File No.: 811-22487
DBX ETF Trust
Statement of Additional Information
Dated May 21, 2013
This combined Statement of Additional Information
(SAI) is not a prospectus. It should be read in conjunction with the current prospectus (the Prospectus) for the Fund of DBX ETF Trust (the Trust), as such Prospectus may be revised or supplemented from time to
time.
The Prospectus for the Fund is included in this SAI is dated May 21, 2013. Capitalized terms used herein that are not defined have
the same meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained without charge by writing to the Trusts distributor, ALPS Distributors, Inc. (the Distributor), at 1290 Broadway, Suite 1100,
Denver, Colorado 80203, calling 1-855-329-3837 (1-800-DBX-ETFS) or visiting www.dbxus.com.
TABLE OF CONTENTS
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General Description of the Trust and the Fund
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1
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Exchange Listing and Trading
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1
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Investment Strategies and Risks
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2
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General Considerations and Risks
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8
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Proxy Voting
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11
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Portfolio Holdings Information
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11
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Construction and Maintenance of the Underlying Index
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11
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Investment Limitations
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12
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Management
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14
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Investment Advisory, Sub-Advisory, Administrative and Distribution Services
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18
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Brokerage Transactions
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25
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Additional Information Concerning the Trust
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26
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Creation and Redemption of Creation Units
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28
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Taxes
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32
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Miscellaneous Information
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39
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Financial Statements
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39
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i
General Description of the Trust and the Fund
The Trust currently consists of seven investment series or portfolios. The Trust was organized as a Delaware statutory trust on October 7, 2010 and
is authorized to have multiple series or portfolios. The Trust is an open-end management investment company registered with the Securities and Exchange Commission (the SEC) under the Investment Company Act of 1940, as amended (the
1940 Act). The offering of the Funds shares (the Shares) is registered under the Securities Act of 1933, as amended (the 1933 Act).
The investment objective of the Fund is to provide investment results that correspond generally to the performance, before fees and expenses, of a specified benchmark index (an Underlying
Index). The Fund is managed by DBX Advisors LLC (the Adviser) and is sub-advised by Deutsche Investment Management Americas Inc. (the Sub-Adviser or DIMA).
The Fund offers and issues Shares at their net asset value (NAV) per Share only in aggregations of a specified number of Shares
(Creation Units), generally in exchange for a basket of securities and other instruments included in its Underlying Index (the Deposit Securities), together with the deposit of a specified cash payment (the Cash
Component). Shares of the Fund are expected to be listed and trade on NYSE Arca, Inc. (the Exchange). Shares trade in the secondary market at market prices that may be at, above or below NAV. Shares are redeemable only in Creation
Units, and, partially for cash and partially in-kind for securities and other instruments generally included in the Funds Underlying Index. A Creation Unit consists of 50,000 Shares thereof.
The Trust reserves the right to offer a cash option for creations and redemptions of Shares. Shares may be issued in advance of receipt of
Deposit Securities subject to various conditions, including a requirement to maintain with the Trust a cash deposit, equal to at least 115%, which the Adviser may change from time to time, of the market value of the omitted Deposit Securities. See
the Creation and Redemption of Creation Units section of this SAI. Transaction fees for cash creations and redemptions may be higher than the transaction fees associated with in-kind creations and redemptions.
Exchange Listing and Trading
A
discussion of exchange listing and trading matters associated with an investment in the Fund is contained in the Shareholder Information section of the Funds Prospectus. The discussion below supplements, and should be read in conjunction with,
that section of the Prospectus.
Shares of the Fund will be listed for trading and will trade throughout the day on the Exchange. There can be
no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of any Fund will continue to be met. The Exchange may, but is not required to, remove the Shares of the Fund from listing if (i) following the
initial 12-month period beginning upon the commencement of trading of Fund Shares, there are fewer than 50 beneficial owners of Shares of the Fund for 30 or more consecutive trading days, (ii) the value of the Underlying Index on which the Fund
is based is no longer calculated or available, (iii) the indicative optimized portfolio value (IOPV) of the Fund is no longer calculated or available or (iv) any other event shall occur or condition shall exist
that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will also remove Shares of the Fund from listing and trading upon termination of the Fund.
As in the case of other publicly-traded securities, when you buy or sell Shares through a broker you will incur a brokerage commission determined by that
broker.
In order to provide additional information regarding the indicative value of Shares of the Fund, the Exchange or a market data vendor
disseminates every 15 seconds through the facilities of the Consolidated Tape Association or other widely disseminated means an updated IOPV for the Fund as calculated by an information provider or market data vendor. The Trust is not involved in or
responsible for any aspect of the calculation or dissemination of the IOPVs and makes no representation or warranty as to the accuracy of the IOPVs.
An IOPV has a securities component and a cash component. The securities values included in an IOPV are the values of the Deposit Securities for the Fund. While the IOPV reflects the current market value
of the Deposit Securities required to be deposited in connection with the purchase of a Creation Unit, it does not necessarily reflect the precise composition of the current portfolio of securities held by the Fund at a particular point in time
because the current portfolio of the Fund may include securities that are not a part of the current Deposit Securities. Therefore, the Funds IOPV disseminated during the Exchange trading hours should not be viewed as a real-time update of the
Funds NAV, which is calculated only once a day.
1
The cash component included in an IOPV consists of estimated accrued interest, dividends and other income,
less expenses. If applicable, each IOPV also reflects changes in currency exchange rates between the U.S. dollar and the applicable currency.
The Trust reserves the right to adjust the Share prices of Fund in the future to maintain convenient trading ranges for investors. Any adjustments would
be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of the Fund.
Investment
Strategies and Risks
Under normal circumstances, the Fund invests at least 80% of net assets, plus the amount of any borrowings for
investment purposes, in securities issued by municipalities across the United States which are classified as municipal infrastructure revenue bonds based on the Underlying Indexs criteria, as well as in other securities whose
income is free from regular federal income tax. Because municipal securities that pay interest subject to the alternative minimum tax (AMT) may be included in the Underlying Index without limit, the Fund may invest an unlimited amount of
its net assets in municipal securities whose income is subject to the AMT. In addition, the Fund will invest at least 80% of its total assets (but typically far more) in instruments that comprise the Underlying Index. The Fund operates as an index
fund and will not be actively managed. Adverse performance of a security in the Funds portfolio may not result in the elimination of the security from the Funds portfolio.
The Fund engages in representative sampling, which is investing in a sample of securities selected by the Adviser and/or Sub-Adviser to have a collective investment profile similar to that of the
Underlying Index. Securities selected have aggregate investment characteristics (based on market capitalization and industry weightings), fundamental characteristics (such as return variability, earnings valuation and yield) and liquidity measures
similar to those of the Underlying Index. The Fund that uses representative sampling generally do not hold all of the securities that are in the relevant Underlying Index.
Diversification Status.
The Fund is classified as non-diversified. A non-diversified fund is a fund that is not limited by the 1940 Act with regard to the percentage of its assets that
may be invested in the securities of a single issuer. The securities of a particular issuer (or securities of issuers in particular industries) may dominate the underlying index of such a fund and, consequently, the funds investment portfolio.
This may adversely affect the funds performance or subject the funds Shares to greater price volatility than that experienced by more diversified investment companies.
The Fund intends to maintain the required level of diversification and otherwise conduct its operations so as to qualify as a regulated investment company (RIC) for purposes of the U.S.
Internal Revenue Code of 1986, as amended (the Code), and to relieve the Fund of any liability for U.S. federal income tax to the extent that its earnings are distributed to shareholders, provided that the Fund satisfies a minimum
distribution requirement. Compliance with the diversification requirements of the Code may limit the investment flexibility of the Fund and may make it less likely that such Fund will meet their investment objective.
Bonds.
The Fund invests in U.S. registered, dollar-denominated bonds. A bond is an interest-bearing security issued by a company, governmental
unit or, in some cases, a non-U.S. entity. The issuer of a bond has a contractual obligation to pay interest at a stated rate on specific dates and to repay principal (the bonds face value) periodically or on a specified maturity date. An
issuer may have the right to redeem or call a bond before maturity, in which case the investor may have to reinvest the proceeds at lower market rates. Most bonds bear interest income at a coupon rate that is fixed for the
life of the bond. The value of a fixed rate bond usually rises when market interest rates fall, and falls when market interest rates rise. Accordingly, a fixed rate bonds yield (income as a percent of the bonds current value) may differ
from its coupon rate as its value rises or falls. Other types of bonds bear income at an interest rate that is adjusted periodically. Bonds may be senior or subordinated obligations. Senior obligations generally have the first claim on a
corporations earnings and assets and, in the event of liquidation, are paid before subordinated obligations. Bonds may be unsecured (backed only by the issuers general creditworthiness) or secured (also backed by specified collateral).
2
U.S. Government Obligations.
The Fund may invest a portion of its assets in various types of
U.S. Government obligations. U.S. Government obligations are a type of bond. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities. Payment of
principal and interest on U.S. Government obligations (i) may be backed by the full faith and credit of the United States (as with U.S. Treasury obligations and Government National Mortgage Association (i.e., GNMA) certificates) or
(ii) may be backed solely by the issuing or guaranteeing agency or instrumentality itself (as with Federal National Mortgage Association (i.e., FNMA), Federal Home Loan Mortgage Corporation (i.e., FHLMC) and Federal Home Loan Bank (i.e., FHLB)
notes. In the latter case, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the
U.S. Government would provide financial support to its agencies or instrumentalities where it is not obligated to do so. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market interest rates
increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms.
Delayed Delivery Transactions.
The Fund may use delayed delivery transactions as an investment technique. Delayed delivery transactions, also
referred to as forward commitments, involve commitments by the Fund to dealers or issuers to acquire or sell securities at a specified future date beyond the customary settlement for such securities. These commitments may fix the payment price and
interest rate to be received or paid on the investment. The Fund may purchase securities on a delayed delivery basis to the extent that it can anticipate having available cash on the settlement date. Delayed delivery agreements will not be used as a
speculative or leverage technique.
Investment in securities on a delayed delivery basis may increase the Funds exposure to market
fluctuation and may increase the possibility that the Fund will incur short-term gains subject to federal taxation or short-term losses if the Fund must engage in portfolio transactions in order to honor a delayed delivery commitment. Until the
settlement date, the Fund will segregate liquid assets of a dollar value sufficient at all times to make payment for the delayed delivery transactions. Such segregated liquid assets will be marked-to-market daily, and the amount segregated will be
increased if necessary to maintain adequate coverage of the delayed delivery commitments.
3
The delayed delivery securities, which will not begin to accrue interest or dividends until the settlement
date, will be recorded as an asset of the Fund and will be subject to the risk of market fluctuation. The purchase price of the delayed delivery securities is a liability of the Fund until settlement. The Fund may enter into buy/sell back
transactions (a form of delayed delivery agreement). In a buy/sell back transaction, the Fund enters a trade to sell securities at one price and simultaneously enters a trade to buy the same securities at another price for settlement at a future
date.
When-Issued Securities.
The Fund may purchase when-issued securities. Purchasing securities on a when-issued basis
means that the date for delivery of and payment for the securities is not fixed at the date of purchase, but is set after the securities are issued. The payment obligation and, if applicable, the interest rate that will be received on the securities
are fixed at the time the buyer enters into the commitment. The Fund will only make commitments to purchase such securities with the intention of actually acquiring such securities, but the Fund may sell these securities before the settlement date
if it is deemed advisable.
Securities purchased on a when-issued basis and the securities held in the Funds portfolio are subject to
changes in market value based upon the publics perception of the creditworthiness of the issuer and, if applicable, the changes in the level of interest rates. Therefore, if the Fund is to remain substantially fully invested at the same time
that it has purchased securities on a when-issued basis, there will be a possibility that the market value of the Funds assets will fluctuate to a greater degree. Furthermore, when the time comes for the Fund to meet its obligations under
when-issued commitments, the Fund will do so by using then available cash flow, by sale of the segregated liquid assets, by sale of other securities, or although it would not normally expect to do so, by directing the sale of when-issued securities
themselves (which may have a market value greater or less than the Funds payment obligation).
Investment in securities on a when-issued
basis may increase the Funds exposure to market fluctuation and may increase the possibility that the Fund will incur short-term gains subject to federal taxation or short-term losses if the Fund must sell another security in order to honor a
when-issued commitment. The Fund will employ techniques designed to reduce such risks. If the Fund purchases a when-issued security, the Fund will segregate liquid assets in an amount equal to the when-issued commitment. If the market value of such
segregated assets declines, additional liquid assets will be segregated on a daily basis so that the market value of the segregated assets will equal the amount of the Funds when-issued commitments.
Lending Portfolio Securities.
The Fund may lend portfolio securities to approved borrowers. The borrowers provide collateral that is maintained in
an amount at least equal to the current market value of the securities loaned. No securities loan shall be made on behalf of the Fund if, as a result, the aggregate value of all securities loans of the particular Fund exceeds one-third of the value
of such Funds total assets (including the value of the collateral received). The Fund may terminate a loan at any time and obtain the return of the securities loaned. The Fund receives the value of any interest or cash or non-cash
distributions paid on the loaned securities.
With respect to loans that are collateralized by cash, the borrower will be entitled to receive
a fee based on the amount of cash collateral. The Fund is compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral other than cash, the Fund is
compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. Any cash collateral may be reinvested in certain short-term instruments either directly on behalf of each lending Fund or through one or
more joint accounts or money market funds, including those advised by the Adviser and/or Sub-Adviser; such reinvestments are subject to investment risk.
Securities lending involves exposure to certain risks, including operational risk (i.e., the risk of losses resulting from problems in the settlement and accounting process), gap risk (i.e.,
the risk of a mismatch between the return on cash collateral reinvestments and the fees the Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. In the event a borrower does not return the Funds securities as
agreed, the Fund may experience losses if the proceeds received from liquidating the collateral does not at least equal the value of the loaned security at the time the collateral is liquidated plus the transaction costs incurred in purchasing
replacement securities.
The Fund pays a portion of the interest or fees earned from securities lending to a borrower as described above and
to a securities lending agent who administers the lending program in accordance with guidelines approved by the Trusts Board of Trustees (the Board or the Trustees).
Repurchase Agreements.
The Fund may enter into repurchase agreements. A repurchase agreement is an instrument under which the purchaser (i.e., the
Fund) acquires the security and the seller agrees, at the time of the sale, to repurchase the security at a mutually agreed upon time and price, thereby determining the yield during the purchasers holding period. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. If a repurchase agreement is construed to be a collateralized loan, the underlying securities will not be considered to be
owned by the Fund but only to constitute
4
collateral for the sellers obligation to pay the repurchase price, and, in the event of a default by the seller, the Fund may suffer time delays and incur costs or losses in connection with
the disposition of the collateral.
In any repurchase transaction, collateral for a repurchase agreement may include cash items, obligations
issued by the U.S. government or its agencies or instrumentalities, obligations rated in the highest category by at least two nationally recognized statistical rating organizations (NRSRO), or, if unrated, determined to be of comparable
quality by the Adviser and/or Sub-Adviser. Collateral, however, is not limited to the foregoing and may include for example obligations rated below the highest category by NRSROs. Collateral for a repurchase agreement may also include securities
that the Fund could not hold directly without the repurchase obligation. Irrespective of the type of collateral underlying the repurchase agreement, a repurchase obligation with a particular counterparty must satisfy the credit quality standards
applicable to the acquisition of an instrument issued by such counterparty in compliance with Rule 2a-7 under the 1940 Act.
Repurchase
agreements pose certain risks for the Fund that utilizes them. Such risks are not unique to the Fund but are inherent in repurchase agreements. The Fund seeks to minimize such risks but because of the inherent legal uncertainties involved in
repurchase agreements, such risks cannot be eliminated. Lower quality collateral and collateral with longer maturities may be subject to greater price fluctuations than higher quality collateral and collateral with shorter maturities. If the
repurchase agreement counterparty were to default, lower quality collateral may be more difficult to liquidate than higher quality collateral. Should the counterparty default and the amount of collateral not be sufficient to cover the
counterpartys repurchase obligation, the Fund would retain the status of an unsecured creditor of the counterparty (i.e., the position the Fund would normally be in if it were to hold, pursuant to its investment policies, other unsecured debt
securities of the defaulting counterparty) with respect to the amount of the shortfall. As an unsecured creditor, the Fund would be at risk of losing some or all of the principal and income involved in the transaction.
Reverse Repurchase Agreements.
The Fund may enter into reverse repurchase agreements, which involve the sale of securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowing. Generally the effect of such transactions is that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while in many cases the Fund is able to keep some of the interest income associated with those securities. Such transactions are advantageous only if the Fund has an
opportunity to earn a rate of interest on the cash derived from these transactions that is greater than the interest cost of obtaining the same amount of cash. Opportunities to realize earnings from the use of the proceeds equal to or greater than
the interest required to be paid may not always be available and the Fund intends to use the reverse repurchase technique only when the Adviser and/or Sub-Adviser believe it will be advantageous to the Fund. The use of reverse repurchase agreements
may exaggerate any interim increase or decrease in the value of the Funds assets. The Funds exposure to reverse repurchase agreements will be covered by assets having a value equal to or greater than such commitments. The Fund maintains
liquid assets in connection with reverse repurchase agreements. Under the 1940 Act, reverse repurchase agreements are considered borrowings.
Short-Term Instruments and Temporary Investments
. The Fund may invest in short-term instruments, including money market instruments, on an ongoing basis to provide liquidity or for other reasons.
Money market instruments are generally short-term investments that may include but are not limited to: (i) Shares of money market funds (including those advised by the Adviser and/or Sub-Adviser); (ii) obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities (including government-sponsored enterprises); (iii) negotiable certificates of deposit (CDs), bankers acceptances, fixed-time deposits and other obligations of U.S. and
non-U.S. banks (including non-U.S. branches) and similar institutions; (iv) commercial paper rated, at the date of purchase, Prime-1 by Moodys
®
Investors Service, Inc. or A-1 by Standard & Poors
®
Rating Service, a division of The McGraw-Hill Companies, Inc. (S&P
®
), or if unrated, of comparable quality as determined by the Adviser and/or Sub-Adviser; (v) non-convertible corporate debt securities (e.g., bonds and
debentures) with remaining maturities at the date of purchase of not more than 397 days and that satisfy the rating requirements set forth in Rule 2a-7 under the 1940 Act; (vi) repurchase agreements; and (vii) short-term U.S.
dollar-denominated obligations of non-U.S. banks (including U.S. branches) that, in the opinion of the Adviser and/or Sub-Adviser, are of comparable quality to obligations of U.S. banks which may be purchased by the Fund. Any of these instruments
may be purchased on a current or forward-settled basis. Time deposits are non-negotiable deposits maintained in banking institutions for specified periods of time at stated interest rates. Bankers acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international transactions.
Non-U.S. Securities.
The Fund may invest in
fixed income securities issues by entities outside the U.S.
Investing in the securities of non-U.S. issuers involves special risks and
considerations not typically associated with investing in U.S. issuers. These include differences in accounting, auditing and financial reporting standards, the possibility of expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations, political instability which could affect U.S.
5
investments in non-U.S. countries, and potential restrictions on the flow of international capital. Non-U.S. issuers may be subject to less governmental regulation than U.S. issuers. Moreover,
individual non-U.S. economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payment positions.
Restricted Securities/Rule 144A Securities.
The Fund may invest in securities offered pursuant to Rule 144A under the 1933 Act
(Rule 144A securities), which are restricted securities. They may be less liquid and more difficult to value than other investments because such securities may not be readily marketable in broad public markets. The Fund may not be able
to sell a restricted security promptly or at a reasonable price. Although there is a substantial institutional market for Rule 144A securities, it is not possible to predict exactly how the market for Rule 144A securities will develop. A restricted
security that was liquid at the time of purchase may subsequently become illiquid and its value may decline as a result. Restricted securities that are deemed illiquid will count towards the Funds 15% limitation on illiquid securities. In
addition, transaction costs may be higher for restricted securities than for more liquid securities. The Fund may have to bear the expense of registering Rule 144A securities for resale and the risk of substantial delays in effecting the
registration.
Securities of Investment Companies.
The Fund may invest in the securities of other investment companies (including money
market funds) and real estate investment trusts (REITs) to the extent allowed by law. Pursuant to the 1940 Act, the Funds investment in investment companies is limited to, subject to certain exceptions: (i) 3% of the total
outstanding voting stock of any one investment company; (ii) 5% of the Funds total assets with respect to any one investment company and (iii) 10% of the Funds total assets with respect to investment companies in the aggregate.
To the extent allowed by law or regulation, the Fund may invest its assets in the securities of investment companies that are money market funds, including those advised by the Adviser and/or Sub-Adviser or otherwise affiliated with the Adviser
and/or Sub-Adviser, in excess of the limits discussed above. Other investment companies in which the Fund invests can be expected to incur fees and expenses for operations, such as investment advisory and administration fees, that would be in
addition to those incurred by the Fund.
Illiquid Securities.
The Fund may invest up to an aggregate amount of 15% of its net assets in
illiquid securities (calculated at the time of investment). Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets.
Futures and Options.
The Fund may enter into futures contracts and options. These futures contracts and options will be used to simulate
investment in the respective Underlying Index, to facilitate trading or to reduce transaction costs. The Fund will enter into futures contracts and options that are traded on a U.S. or non-U.S. exchange. No Fund will use futures or options for
speculative purposes. The Fund intends to use futures and options in accordance with Rule 4.5 of the Commodity Exchange Act (CEA). The Trust, on behalf of the Fund, has claimed an exclusion from the definition of the term commodity
pool operator in accordance with Rule 4.5 so that the Fund is not subject to registration or regulation as a commodity pool operator under the CEA.
Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific instrument or index at a specified future time and at a specified price. The
Fund may enter into futures contracts to purchase securities indexes when the Adviser and/or Sub-Adviser anticipate purchasing the underlying securities and believe prices will rise before the purchase will be made. To the extent required by law,
liquid assets committed to futures contracts will be maintained.
A call option gives a holder the right to purchase a specific security at a
specified price (exercise price) within a specified period of time. A put option gives a holder the right to sell a specific security at a specified exercise price within a specified period of time. The initial purchaser of a call option
pays the writer a premium, which is paid at the time of purchase and is retained by the writer whether or not such option is exercised. The Fund may purchase put options to hedge its portfolio against the risk of a decline in the market
value of securities held and may purchase call options to hedge against an increase in the price of securities it is committed to purchase. The Fund may write put and call options along with a long position in options to increase its ability to
hedge against a change in the market value of the securities it holds or is committed to purchase. Investments in futures contracts and other investments that contain leverage may require the Fund to maintain liquid assets. Generally, the Fund
maintains an amount of liquid assets equal to its obligations relative to the position involved, adjusted daily on a marked-to-market basis. With respect to futures contracts that are contractually required to cash-settle, the Fund
maintains liquid assets in an amount at least equal to the Funds daily marked-to-market obligation (i.e., the Funds daily net liability, if any), rather than the contracts notional value (i.e., the value of the underlying asset).
By maintaining assets equal to its net obligation under cash-settled futures contracts, the Fund may employ leverage to a greater extent than if the Fund set aside assets equal to the futures contracts full notional value. The Fund bases its
asset maintenance policies on methods permitted by the staff of the SEC and may modify these policies in the future to comply with any changes in the guidance articulated from time to time by the SEC or its staff.
6
Options on Futures Contracts.
An option on a futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, in return for the premium paid, to assume a position in the underlying futures contract at a specified exercise price at any time prior to the expiration date of the option. Upon exercise
of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writers futures margin account that represents the amount by which the
market price of the futures contract exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the futures contract. The potential for loss related to the purchase of an option on a futures contract
is limited to the premium paid for the option plus transaction costs. Because the value of the option is fixed at the point of sale, there are no daily cash payments by the purchaser to reflect changes in the value of the underlying contract;
however, the value of the option changes daily and that change would be reflected in the NAV of the Fund. The potential for loss related to writing call options is unlimited. The potential for loss related to writing put options is limited to the
agreed upon price per Share, also known as the strike price, less the premium received from writing the put.
The Fund may purchase and write
put and call options on futures contracts that are traded on an exchange as a hedge against changes in value of its portfolio securities, or in anticipation of the purchase of securities, and may enter into closing transactions with respect to such
options to terminate existing positions. There is no guarantee that such closing transactions can be effected.
Upon entering into a futures
contract, the Fund will be required to deposit with the broker an amount of cash or cash equivalents known as initial margin, which is in the nature of a performance bond or good faith deposit on the contract and is returned to the Fund
upon termination of the futures contract, assuming all contractual obligations have been satisfied. Subsequent payments, known as variation margin, to and from the broker will be made daily as the price of the index underlying the
futures contract fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as marking-to-market. At any time prior to the expiration of a futures contract, the Fund may elect to close
the position by taking an opposite position, which will operate to terminate the Funds existing position in the contract.
Restrictions on the Use of Futures Contracts and Options on Futures Contracts.
Pursuant to a claim for exemption filed with the Commodity Futures
Trading Commission (CFTC) on behalf of the Fund, neither the Fund nor the Trust is deemed to be a commodity pool and the Adviser is not deemed to be a commodity pool operator (CPO), respectively, under
the Commodity Exchange Act (CEA), and they are not subject to registration or regulation as such under the CEA. The Investment Adviser is not deemed to be a commodity trading advisor with respect to its services as an
investment adviser to the Fund. In February 2012, the CFTC adopted certain regulatory changes that may subject the Investment Adviser to register with the CFTC as a commodity pool operator (CPO) if the Fund is unable to comply with
certain trading and marketing limitations on its investments in futures and certain other instruments. With respect to investments in swap transactions, commodity futures, commodity options or certain other derivatives used for purposes other than
bona fide hedging purposes, the Fund must meet one of the following tests under the amended regulations in order to claim an exemption from being considered a commodity pool or CPO. First, the aggregate initial margin and premiums
required to establish the Funds positions in such investments may not exceed five percent (5%) of the liquidation value of the Funds portfolio (after accounting for unrealized profits and unrealized losses on any such investments).
Alternatively, the aggregate net notional value of such instruments, determined at the time of the most recent position established, may not exceed one hundred percent (100%) of the liquidation value of the Funds portfolio (after
accounting for unrealized profits and unrealized losses on any such positions). In addition to meeting one of the foregoing trading limitations, the Fund may not market itself as a commodity pool or otherwise as a vehicle for trading in the
commodity futures, commodity options or swaps and derivatives markets. In the event that the Investment Adviser is required to register as a CPO with respect to the Fund, the disclosure and operations of the Fund would need to comply with all
applicable CFTC regulations. Compliance with these additional registration and regulatory requirements would increase operational expenses. Other potentially adverse regulatory initiatives could also develop. A related CFTC proposal to harmonize
applicable CFTC and SEC regulations could, if adopted, mitigate certain disclosure and operational burdens if CPO registration were required.
Swap Agreements.
Swap agreements are contracts between parties in which one party agrees to make periodic payments to the other party based on the change in market value or level of a specified
rate, index or asset. In return, the other party agrees to make periodic payments to the first party based on the return of a different specified rate, index or asset. Swap agreements will usually be performed on a net basis, with the Fund receiving
or paying only the net amount of the two payments. The net amount of the excess, if any, of the Funds obligations over its entitlements with respect to each swap is accrued on a daily basis and an amount of liquid assets having an aggregate
value at least equal to the accrued excess will be maintained by the Fund.
The use of interest-rate and index swaps is a highly specialized
activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions. These transactions generally do not involve the delivery of securities or other underlying assets or principal.
7
Tracking Stocks.
A tracking stock is a separate class of common stock whose value is linked to a
specific business unit or operating division within a larger company and which is designed to track the performance of such business unit or division. The tracking stock may pay dividends to Shareholders independent of the parent
company. The parent company, rather than the business unit or division, generally is the issuer of tracking stock. However, holders of the tracking stock may not have the same rights as holders of the companys common stock.
Future Developments.
The Board may, in the future, authorize the Fund to invest in securities and investments other than those listed in this SAI
and in the Funds Prospectus, provided they are consistent with the Funds investment objective and do not violate any investment restrictions or policies.
General Considerations and Risks
A discussion of some of the risks associated with an
investment in the Fund is contained in the applicable Prospectus.
An investment in the Fund should be made with an understanding that the
value of the Funds portfolio securities may fluctuate in accordance with changes in the financial condition of the issuers of the portfolio securities, the value of stocks in general and other factors that affect the market.
Municipal Securities Risk.
The market for municipal bonds may be less liquid than for taxable bonds. There may also be less information available
on the financial condition of issuers of municipal securities than for public corporations. This means that it may be harder to buy and sell municipal securities, especially on short notice, and municipal securities may be more difficult for the
Fund to value accurately than securities of public corporations. Since the Fund invests a significant portion of its portfolio in municipal securities, the Funds portfolio may have greater exposure to liquidity risk than a fund that invests in
non-municipal securities.
Municipal securities may include revenue bonds, which are generally backed by revenue from a specific project or
tax. The issuer of a revenue bond makes interest and principal payments from revenues generated from a particular source or facility, such as a tax on particular property or revenues generated from a municipal water or sewer utility or an airport.
Revenue bonds generally are not backed by the full faith and credit and general taxing power of the issuer.
Some longer-term municipal
securities give the investor the right to put or sell the security at par (face value) within a specified number of days following the investors request usually one to seven days. This demand feature enhances a
securitys liquidity by shortening its effective maturity and enables it to trade at a price equal to or very close to par. If a demand feature terminates prior to being exercised, the Fund would hold the longer-term security, which could
experience substantially more volatility.
Municipal securities are subject to credit and market risk. Generally, prices of higher quality
issues tend to fluctuate more with changes in market interest rates than prices of lower quality issues and prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues.
Prices and yields on municipal securities are dependent on a variety of factors, including general money-market conditions, the financial condition of
the issuer, general conditions of the municipal securities market, the size of a particular offering, the maturity of the obligation and the rating of the issue. A number of these factors, including the ratings of particular issues, are subject to
change from time to time. Available information about the financial condition of an issuer of municipal securities may not be as extensive as that which is made available by corporations whose securities are publicly traded. As a result, municipal
securities may be more difficult to value than securities of public corporations.
Lease Obligations Risk.
Lease obligations may have
risks not normally associated with general obligation or other revenue bonds. Leases and installment purchase or conditional sale contracts (which may provide for title to the leased asset to pass eventually to the issuer) have developed as a means
for governmental issuers to acquire property and equipment without the necessity of complying with the constitutional statutory requirements generally applicable for the issuance of debt. Certain lease obligations contain
non-appropriation clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for that purpose by the appropriate legislative body on an annual or
other periodic basis. Consequently, continued lease payments on those lease obligations containing nonappropriation clauses are dependent on future legislative actions. If these legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including disposition of the property.
8
Electric Utilities Bond Risk
.
The electric utilities industry has been experiencing,
and will continue to experience, increased competitive pressures. Federal legislation in the last two years may open transmission access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other
risks include: (a) the availability and cost of fuel; (b) the availability and cost of capital; (c) the effects of conservation on energy demand; (d) the effects of rapidly changing environmental, safety and licensing
requirements, and other federal, state and local regulations, (e) timely and sufficient rate increases; and (f) the effects of opposition to nuclear power.
Transportation Bond Risk.
Transportation debt may be issued to finance the construction of airports, toll roads, highways or other transit facilities. Airport bonds are dependent on the general
stability of the airline industry and on the stability of a specific carrier who uses the airport as a hub. Air traffic generally follows broader economic trends and is also affected by the price and availability of fuel. Toll road bonds are also
affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general economic health of an area. Fuel costs and availability also affect other transportation-related securities, as do the presence of
alternate forms of transportation, such as public transportation.
Water and Sewer Bond Risk.
Water and sewer revenue bonds are often
considered to have relatively secure credit as a result of their issuers importance, monopoly status and generally unimpeded ability to raise rates. Despite this, lack of water supply due to insufficient rain, run-off or snow pack is a concern
that has led to past defaults. Further, public resistance to rate increases, costly environmental litigation, and federal environmental mandates are challenges faced by issuers of water and sewer bonds.
Industrial Development Bond Risk.
Industrial developments bonds are revenue bonds issued by or on behalf of public authorities to obtain funds to
finance various public and/or privately operated facilities, including those for business and manufacturing, housing, sports, pollution control, airport, mass transit, port and parking facilities. These bonds are normally secured only by the
revenues from the project and not by state or local government tax payments. Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities financed by the bonds and any guarantor to meet its
financial obligations. These bonds are subject to a wide variety of risks, many of which relate to the nature of the specific project. Generally, the value and credit quality of these bonds are sensitive to the risks related to an economic slowdown.
9
Resource Recovery Risk.
Resource recovery bonds are a type of revenue bond issued to build facilities
such as solid waste incinerators or waste-to-energy plants. Typically, a private corporation is involved, at least during the construction phase, and the revenue stream is secured by fees or rents paid by municipalities for use of the facilities.
The viability of a resource recovery project, environmental protection regulations, and project operator tax incentives may affect the value and credit quality of resource recovery bonds.
Special Tax Bond Risk.
Special tax bonds are usually backed and payable through a single tax, or series of special taxes such as incremental property taxes. The failure of the tax levy to generate
adequate revenue to pay the debt service on the bonds may cause the value of the bonds to decline.
Tax Risks.
As with any
investment, you should consider how your investment in Shares of the Fund will be taxed. The tax information in the Prospectus and SAI is provided as general information. You should consult your own tax professional about the tax consequences of an
investment in Shares of the Fund.
There is no guarantee that the Funds income will be exempt from federal or state income taxes.
Events occurring after the date of issuance of a municipal bond or after the Funds acquisition of a municipal bond may result in a determination that interest on that bond is includible in gross income for U.S. federal income tax purposes
retroactively to its date of issuance. Such a determination may cause a portion of prior distributions by the Fund to its shareholders to be taxable to those shareholders in the year of receipt. Federal or state changes in income or AMT rates or in
the tax treatment of municipal bonds may make municipal bonds less attractive as investments and cause them to lose value.
Municipal
Market Disruption Risk.
The value of municipal securities may be affected by uncertainties in the municipal market related to legislation or litigation involving the taxation of municipal securities or the rights of municipal securities holders
in the event of a bankruptcy. Proposals to restrict or eliminate the federal income tax exemption for interest on municipal securities are introduced before Congress from time to time. Proposals also may be introduced before state legislatures that
would affect the state tax treatment of a municipal funds distributions. If such proposals were enacted, the availability of municipal securities and the value of a municipal funds holdings would be affected. Municipal bankruptcies are
relatively rare, and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear and remain untested. Further, the application of state law to municipal issuers could produce varying results among the states or among
municipal securities issuers within a state. These legal uncertainties could affect the municipal securities market generally, certain specific segments of the market, or the relative credit quality of particular securities. There is also the
possibility that as a result of litigation or other conditions, the power or ability of issuers to meet their obligations for the payment of interest and principal on their municipal securities may be materially affected or their obligations may be
found to be invalid or unenforceable. Such litigation or conditions may from time to time have the effect of introducing uncertainties in the market for municipal securities or certain segments thereof, or of materially affecting the credit risk
with respect to particular bonds. Adverse economic, business, legal or political developments might affect all or a substantial portion of the Funds municipal securities in the same manner. Any of these effects could have a significant impact
on the prices of some or all of the municipal securities held by the Fund.
Risks Related to Investing in New York.
Because the
Underlying Index was substantially comprised of New York municipal bonds as of March 31, 2013, a substantial portion of the Funds investments are expected to consist of New York municipal bonds as well. Accordingly, the Fund would have
greater exposure to negative political, economic, regulatory or other factors within the State of New York, including the financial condition of its public authorities and political subdivisions, than a fund that invests in a broader base of
securities. Unfavorable developments in any economic sector may have a substantial impact on the overall New York municipal market. Certain issuers of New York municipal bonds have experienced serious financial difficulties in the past and
reoccurrence of these difficulties may impair the ability of certain New York issuers to pay principal or interest on their obligations. The financial health of New York City affects that of the state, and when New York City experiences financial
difficulty, it may have an adverse affect on New
10
York municipal bonds held by the Fund. The growth rate of New York has at times been somewhat slower than the nation overall. The economic and financial condition of New York also may be affected
by various financial, social, economic and political factors, including the outcome of pending litigation including the state or its localities.
Proxy Voting
The Board has delegated responsibility for decisions regarding proxy voting
for securities held by the Fund to the Sub-Adviser. The Sub-Adviser votes such proxies in accordance with its proxy policies and procedures, which are summarized in Appendix A to this SAI. The Board will periodically review the Funds proxy
voting record.
Information with respect to how the Sub-Adviser voted proxies relating to the Funds portfolio securities during the
12-month period ended June 30 will be available: (i) without charge, upon request, by calling 1-855-329-3837 (1-800-DBX-ETFS) or through the Funds website at www.dbxus.com; and (ii) on the SECs website at www.sec.gov.
Portfolio Holdings Information
The Trust has adopted a policy regarding the disclosure of information about the Trusts portfolio holdings. The Board must approve all material amendments to this policy.
The Funds portfolio holdings are publicly disseminated each day the Fund is open for business through financial reporting and news services,
including publicly accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for Fund Shares, together with estimates and actual cash components, is publicly
disseminated daily prior to the opening of the Exchanges via the National Securities Clearing Corporation (NSCC). The basket represents one Creation Unit of the Fund. The Trust, the Adviser and the Administrator will not disseminate
non-public information concerning the Trust.
Construction and Maintenance of the Underlying Index
Description of the Underlying Index is provided below.
Maintaining the DBIQ Municipal Infrastructure Revenue Bond Index
Number of Components:
approximately 517
Index Description.
The Underlying Index is designed to track the returns of the segment of the U.S. long term
tax-exempt bond market, consisting of infrastructure revenue bonds.
The universe of municipal securities eligible for inclusion in the
Underlying Index are those municipal bonds that fulfill the following conditions:
|
(a)
|
Subject to a public offering;
|
|
(b)
|
Amount outstanding of each bond must be at least $40 million where, subject to the following additional conditions:
|
|
1.
|
Bonds with an amount outstanding of less than $100 million may only be included if they are issued after January 1, 2012.
|
|
2.
|
Bonds with an amount outstanding of more than $100 million may be included regardless of issue date.
|
|
(c)
|
Deal size of at least $100 million;
|
|
(d)
|
Federal tax free (bonds subject to the AMT and state and local taxes) may be included in the Underlying Index without limit;
|
|
(e)
|
Investment grade rating by either Standard & Poors Ratings Group or Moodys Investors Service, Inc.;
|
|
(f)
|
Fixed-rate coupon payment (zero coupon bonds may not be included in the Underlying Index);
|
|
(g)
|
Bonds must not be prerefunded / escrowed to maturity;
|
|
(h)
|
Time to maturity must be at least 10 years or longer;
|
11
|
(i)
|
Callable securities must not be callable within the next 5 years (the next call date must not lie in the next 5 years);
|
|
(j)
|
Purpose of the bond proceeds must be for one of the following areas:
|
|
1.
|
Transportation (airports, seaports, bridges, toll roads, tunnels, parking facilities, or similar)
|
|
2.
|
Recreation (convention centers, stadiums, sports complexes, or similar)
|
|
3.
|
Utility (electric public power, water/sewer, sanitation, or similar.)
|
|
4.
|
Industrial Economic Development (solid waste recovery, malls, shopping centers, or similar)
|
|
5.
|
The following industries are excluded: higher education, pollution control, housing, health care and tobacco;
|
|
(k)
|
Proceeds of debt must be used for infrastructure purposes and principal and interest repayment must come from a pledged revenue source (e.g. tolls, sales tax,
registration fees, user fees) or a double-barreled revenue stream (pledged revenue stream and a general obligation pledge);
|
|
(l)
|
Municipal bonds, which are paid back solely using a general obligation pledge or an appropriation, may not be included in the Underlying Index;
|
|
(m)
|
Municipal bonds from Puerto Rico which are classified as Sales Tax may not be included in the Underlying Index; and
|
|
(n)
|
Municipal bonds where the obligor is a corporation may not be included in the Underlying Index.
|
All municipal bonds which meet the above requirements are included in the Underlying Index. The Underlying Index is rebalanced on the last business day of each month. Newly issued municipal bonds which
meet the requirements are generally added to the Underlying Index five days prior to the last business day of each month. Additionally, five days prior to the last business day of each month, any Underlying Index components which no longer meet the
above requirements are removed from the Underlying Index.
Investment Limitations
The Board has adopted as non-fundamental policies the investment objectives of the Fund discussed in this SAI. The Board has adopted as fundamental
policies for the Fund set forth below investment restrictions numbered 1 through 6 below. The restrictions for such Fund cannot be changed without the approval of the holders of a majority of that Funds outstanding voting securities. A vote of
a majority of the outstanding voting securities is defined in the 1940 Act as the lesser of (a) 67% or more of the voting securities present at a fund meeting, if the holders of more than 50% of the outstanding voting securities are present or
represented by proxy, and (b) more than 50% of outstanding voting securities.
The Fund will not:
1. Concentrate its investments (i.e., invest 25% or more of its total assets in the securities of a particular industry or group of industries), except
that the Fund will concentrate to the extent that its underlying index concentrates in the securities of such particular industry or group of industries. For purposes of this limitation, securities of the U.S. government (including its agencies and
instrumentalities), repurchase agreements collateralized by U.S. government securities, and securities of state or municipal governments and their political subadvisors are not considered to be issued by members of any industry;
2.
Borrow money, except that (i) the Fund may borrow from banks for temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests which might otherwise require the untimely disposition of securities, and (ii) the Fund may, to the extent consistent with its investment policies, enter into repurchase agreements, reverse repurchase agreements, forward
roll transactions and similar investment strategies and techniques; to the extent that it engages in transactions described in (i) and (ii), the Fund will be limited so that no more than 33 1/3% of the value of its total assets (including the
amount borrowed) is derived from such transactions. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law;
3. Issue any senior security, except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time;
12
4. Make loans, except as permitted under the 1940 Act, as interpreted, modified or otherwise permitted
by regulatory authority having jurisdiction, from time to time;
5. Purchase or sell real estate unless acquired as a result of ownership of
securities or other investments (but this restriction shall not prevent the Fund from investing in securities of companies engaged in the real estate business or securities or other instruments backed by real estate or mortgages), or commodities or
commodity contracts (but this restriction shall not prevent the Fund from trading in futures contracts and options on futures contracts, including options on currencies to the extent consistent with the Funds investment objectives and
policies); or
6. Engage in the business of underwriting securities issued by other persons, except to the extent that the Fund may technically
be deemed to be an underwriter under the 1933 Act, the disposing of portfolio securities.
For purposes of the concentration policy in
investment limitation (1), municipal securities with payments of principal or interest backed by the revenue of a specific project are considered to be issued by a member of the industry which includes such specific project.
Senior Securities may include any obligation or instrument issued by an investment company evidencing indebtedness. The 1940 Act generally prohibits a
fund from issuing senior securities, although it provides allowances for certain borrowings and certain other investments, such as short sales, reverse repurchase agreements, and firm commitment agreements, when such investments are
covered or with appropriate earmarking or segregation of assets to cover such obligations.
Under the 1940 Act, an investment
company may only make loans if expressly permitted by its investment policies.
As a matter of fundamental policy, the Fund will:
1. Under normal circumstances, have at least 80% of its net assets (plus the amount of any borrowings for investment purposes)
invested in securities of municipalities across the United States which are classified as municipal infrastructure revenue bonds based on the Underlying Indexs criteria, as well as in other securities whose income is free from
regular federal income tax. The Fund considers any investments in municipal securities that pay interest subject to the AMT as part of the 80% of the Funds net assets that must be invested in municipal securities.
In addition to the investment limitations adopted as fundamental as set forth above, the Fund observes the following restrictions, which may be
changed by the Board without a Shareholder vote. The Fund will not:
1. Sell securities short, unless the Fund owns or has the right to
obtain securities equivalent in-kind and amount to the securities sold short at no added cost, and provided that transactions in options, futures contracts, options on futures contracts or other derivative instruments are not deemed to constitute
selling securities short;
2. Purchase securities on margin, except that the Fund may obtain such short-term credits as are necessary for the
clearance of transactions; and provided that margin deposits in connection with futures contracts, options on futures contracts or other derivative instruments shall not constitute purchasing securities on margin;
3. Purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act, although the Fund may not acquire any
securities of registered open-end investment companies or registered unit investment trusts in reliance on Sections 12(d)(1)(F) or 12(d)(1)(G) of the 1940 Act;
4. Invest in direct interests in oil, gas or other mineral exploration programs or leases; however, the Fund may invest in the securities of issuers that engage in these activities); and
5. Invest in illiquid securities if, as a result of such investment, more than 15% of the Funds net assets would be invested in illiquid securities.
If any percentage restriction described above is complied with at the time of investment, a later increase or decrease in percentage
resulting from any change in value or total or net assets will not constitute in a violation of such restriction, except that certain percentage limitations will be observed continuously in accordance with applicable law.
13
The Fund has adopted a non-fundamental investment policy such that the Fund may invest in shares of
other open-end management investment companies or unit investment trusts subject to the limitations of Section 12(d)(1) of the 1940 Act, including the rules, regulations and exemptive orders obtained thereunder; provided, however, that if the
Fund has knowledge that its Shares are purchased by another investment company investor in reliance on the provisions of subparagraphs (F) or (G) of Section 12(d)(1) of the 1940 Act, the Fund will not acquire any securities of other
open-end management investment companies or unit investment trusts in reliance on the provisions of subparagraphs (F) or (G) of Section 12(d)(1) of the 1940 Act.
The Funds investment objective is non-fundamental and may be changed without the approval of shareholders.
Management
Trustees and Officers.
The Board has responsibility for the overall
management and operations of the Fund, including general supervision of the duties performed by the Adviser, the Sub-Adviser and other service providers. Each Trustee serves until his or her successor is duly elected or appointed and qualified. Each
officer serves until he or she resigns, is removed, dies, retires or becomes disqualified.
The Trust currently has four Trustees. Three
Trustees have no affiliation or business connection with the Adviser or Sub-Adviser or any of their affiliated persons and do not own any stock or other securities issued by the Adviser or Sub-Adviser. These are the non-interested or
independent Trustees (the Independent Trustees). The other Trustee (the Interested Trustee) is affiliated with the Adviser.
The Independent Trustees of the Trust, their term of office and length of time served, their principal business occupations during the past five years, the number of portfolios in the Fund Complex
(defined below) overseen by each Independent Trustee, and other directorships, if any, held by the Trustee are shown below. The Fund Complex includes all open- and closed-end funds (including all of their portfolios) advised by the Adviser and any
funds that have an investment adviser that is an affiliated person of the Adviser. As of the date of this SAI, the Fund Complex consists of the Trusts seven funds and seven exchange-traded funds advised by DBX Strategic Advisors LLC, an
affiliate of the Adviser.
Independent Trustees
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Name, Address,
and Age
|
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Position(s)
Held with
Fund
|
|
Terms of
Office and
Length
of
Time
Served
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of Portfolios
in Fund
Complex Overseen
by Director
|
|
Other Directorships
held by Director
During
Past 5 Years
|
J. David Officer
Age:
64
60 Wall Street New York, New York 10005
|
|
Trustee, Member of the Audit and Nominating Committees
|
|
Since
2011
|
|
Independent Director; Consultant to Pershing LLC (2009-present); Formerly, Consultant, Fidelity (2011), The Dreyfus Corporation (2009-2010); Vice President, The Dreyfus Family of
Funds (2010); Vice Chairman, The Dreyfus Corporation (1998-2009); Chief Operating Officer, The Dreyfus Corporation (2006-2009); President, The Dreyfus Family of Funds, Inc. (2006-2009);
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7
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GLG Investment Series Trust; The Dreyfus Corporation; MBSC Securities Corporation; Dreyfus Services Corporation; MBSC, LLC; Dreyfus
Transfer, Inc.; Dreyfus Service Organization, Inc.; Mellon Residential Funding Corp.; Mellon United National Bank; Laurel Capital Advisors; Mellon United National Bank; Dreyfus Founders Funds, Inc.; Founders Asset Management;
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14
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|
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Chief Executive Officer and Chairman, Laurel Capital Advisors (2005-2009); Executive Vice President, The Bank of New York Mellon (2008-2009); President and Chairman, Dreyfus
Founders Funds, Inc. (2007-2009); President, Chairman and Chief Executive Officer, Founders Asset Management (2007-2009); Vice President BNY Mellon Funds Trust (2007-2009); President, MBSC Securities Corporation (2007-2009); Vice President, Dreyfus
Service Organization, Inc. (2004-2009); Executive Vice President, Mellon Bank, N.A. (1994-2008).
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Old Westbury Funds LLC.
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Independent Trustees
|
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|
|
|
|
|
|
|
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Name, Address,
and Age
|
|
Position(s)
Held with
Fund
|
|
Terms of
Office and
Length of
Time
Served
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of Portfolios
in Fund
Complex Overseen
by
Director
|
|
Other Directorships
held by Director
During Past 5
Years
|
Stephen R. Byers Age: 59
60 Wall Street
New York, New York 10005
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Trustee, Member and Chairman of the Audit and Nominating Committees
|
|
Since
2011
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Retired. Previously, Chief Investment Officer, The Dreyfus Corporation (2000-2006).
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7
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Sierra Income Corporation; College of William and Mary, Graduate School of Business.
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George O. Elston
Age:
48
60 Wall Street
New York, New York 10005
|
|
Trustee, Member of the Audit and Nominating Committees
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|
Since
2011
|
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M&A Advisor, Chief Financial, Operating and Business Officer, Optherion, Inc. (2008-2010); and Vice President, Finance and Government Affairs, Secretary and Treasurer, Elusys
Therapeutics, Inc. (2000-2007).
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7
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Celldex Therapeutics.
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Interested Trustee
|
|
|
|
|
|
|
|
|
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|
Name, Address,
and Age
|
|
Position(s)
Held with
Fund
|
|
Terms of
Office and
Length of
Time
Served
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of Portfolios
in Fund
Complex Overseen
by
Director
|
|
Other Directorships
held by Director
During Past 5
Years
|
Alex Depetris
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Trustee, Chairman of the
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|
Since
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Director in the DBX
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12
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Director, Chairman of
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15
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Age: 32
60 Wall Street New
York, New York 10005
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Board, President, Chief Executive Officer and Secretary
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2010
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Group at Deutsche Bank AG since 2008; Associate, Arnold & Porter, 2006-2008.
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|
the Board of db-X Exchange Traded Funds Inc.
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Officers
|
|
|
|
|
|
|
Name, Address,
and Age
|
|
Position(s)
Held with
Fund
|
|
Terms of
Office and
Length
of
Time
Served
|
|
Principal
Occupation(s)
During Past 5
Years
|
Michael Gilligan
Age: 46
60 Wall Street
New York,
New York
10005
|
|
Treasurer, Chief Financial Officer and Controller
|
|
Since
2010
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Director in the Finance Group at Deutsche Bank AG with CFO responsibility for DBX Strategic Advisors LLC and DB Commodity Services LLC since 2008; Chief Operating Officer, Americas
Credit Trading, Credit Suisse, 2007-2008.
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Martin Kremenstein
Age: 36
60 Wall Street
New York,
New York
10005
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Chief Operating Officer
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|
Since
2010
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Director in the DBX Group at Deutsche Bank AG with responsibility for providing investor solutions to the DB sales force in North America since 2006.
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Frank Gecsedi
Age: 45
60 Wall Street
New York,
New York
10005
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Chief Compliance Officer
|
|
Since
2010
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Vice President in Deutsche Banks Global Markets Legal, Risk and Capital Division since 2010; Vice President and Compliance Manager at Bank of America Merrill Lynch (formerly
Merrill Lynch), (2000 to 2010).
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Board Leadership, Structure and Oversight Responsibilities.
Board Structure.
As noted above, the Board is responsible for oversight of the Fund, including oversight of the duties performed by the Adviser for
the Fund under the investment advisory agreement (the Investment Advisory Agreement). The Board generally meets in regularly scheduled meetings four times a year, and may meet more often as required.
Mr. Depetris, an Interested Trustee, serves as chairman of the Board. The Board is comprised of a super-majority (75 percent) of Independent
Trustees. While the Board does not have a lead Independent Trustee, the chairmen of the Audit Committee and Nominating Committee (each of which consists solely of Independent Trustees) serve as liaisons between the Adviser and other service
providers and the other Independent Trustees. Each such chairman is an Independent Trustee. The Board regularly reviews its Committee structure and membership and believes that its current structure is appropriate based on the fact that the
Independent Trustees constitute a super-majority of the Board, the role of the Committee chairmen (who are Independent Trustees), the assets and number of Fund overseen by the Trustees, as well as the nature of the Funds business.
Risk Oversight.
The Fund is subject to a number of risks, including operational, investment and compliance risks. The Board, directly and
through its Committees, as part of its oversight responsibilities, oversees the services provided by the Adviser and the Trusts other service providers in connection with the management and operations of the Fund, as well as their associated
risks. Under the oversight of the Board, the Trust, the Adviser and other service providers have adopted policies, procedures and controls to address these risks. The Board, directly and through its Committees, receives and reviews information from
the Adviser, other service providers, the Trusts independent registered public accounting firm and Trust counsel to assist it in its oversight responsibilities. This information includes, but is not limited to, reports regarding the
Funds investments, including Fund performance and investment practices, valuation of Fund portfolio securities, and compliance. The Board also reviews, and must approve any proposed changes to, the Funds investment objective, policies
and restrictions, and reviews any areas of non-compliance with the Funds investment policies and restrictions. The Audit Committee monitors the Trusts accounting policies, financial reporting and internal control system and reviews any
internal audit reports impacting the Trust. As part of its compliance oversight, the Board reviews the annual compliance report issued by the Trusts
16
Chief Compliance Officer on the policies and procedures of the Trust and its service providers, proposed changes to the policies and procedures and quarterly reports on any material compliance
issues that arose during the period.
Experience, Qualifications and Attributes.
The Board has concluded, based on each Trustees
experience, qualifications and attributes, that each Board member should serve as a Trustee. Following is a brief summary of the information that led to this conclusion.
Mr. Stephen Byers. Mr. Byers gained extensive experience with a variety of financial, accounting, management, regulatory and operational issues facing funds through his more than 30 years of
experience on the boards and/or in senior management of such companies as The Dreyfus Corporation, Gruntal & Co., LLC, Painewebber, Citibank/Citicorp and American Airlines. Mr. Byers possesses a strong understanding of the regulatory
framework under which investment companies must operate and can provide management input and investment guidance to the Board.
Mr. George Elston. Through his prior positions on the boards and in senior management of such companies as Celldex Therapeutics, Optherion, Inc. and
Elusys Therapeutics, Mr. Elston has experience with a variety of financial, management, regulatory and operational issues as well as experience with marketing and distribution. Mr. Elston also has experience as a general partner of Chatham
Partners LLC.
Mr. David Officer. Mr. Officer has over 30 years of experience in the financial services industry and related fields,
including his positions on the boards and/or in senior management of such companies as The Bank of New York Mellon, The Dreyfus Corporation, Laurel Capital Advisors and Bank of New England. In addition to his experience with financial, investment
and regulatory matters, Mr. Officer has extensive accounting knowledge through his education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor at his previous positions.
Mr. Alex Depetris. In addition to his tenure as Vice President in the DBX Group at Deutsche Bank AG, Mr. Depetris has experience as
an attorney at the law firms of Arnold & Porter and Sullivan & Worcester. Therefore, Mr. Depetris has extensive knowledge of the regulatory framework under which investment companies operate, including with respect to
exchange-traded funds.
Committees of the Board of Trustees.
The Board has two standing committees, the Audit Committee and the
Nominating Committee, and has delegated certain responsibilities to those Committees.
Messrs. Byers, Elston and Officer currently serve
as members of the Audit Committee. The Audit Committee has the responsibility, among other things, to: (i) approve and recommend to the Board the selection of the Trusts independent registered public accounting firm, (ii) review the
scope of the independent registered public accounting firms audit activity, (iii) review the audited financial statements and (iv) review with such independent registered public accounting firm the adequacy and the effectiveness of
the Trusts internal controls. The Audit Committee met twice during the fiscal year ended May 31, 2012.
Messrs. Byers, Elston
and Officer currently serve as members of the Nominating Committee. The Nominating Committee has the responsibility, among other things, to identify and recommend individuals for Board membership, and evaluate candidates for Board membership. The
Board will consider recommendations for trustees from Shareholders. Nominations from Shareholders should be in writing and sent to the Secretary of the Trust to the attention of the Chairman of the Nominating Committee, as described below under the
caption Shareholder Communications to the Board. During the fiscal year ended May 31, 2012, the Nominating Committee did not meet.
Shareholder Communications to the Board.
Shareholders may send communications to the Trusts Board by addressing the communications directly to the Board (or individual Board members) and/or
otherwise clearly indicating in the salutation that the communication is for the Board (or individual Board members). The shareholder may send the communication to either the Trusts office or directly to such Board members at the address
specified for each Trustee. Other shareholder communications received by the Trust not directly addressed and sent to the Board will be reviewed and generally responded to by management. Such communications will be forwarded to the Board at
managements discretion based on the matters contained therein.
Remuneration of` Trustees.
The Trust pays each Independent
Trustee (i) an annual retainer of $25,000; (ii) $2,500 for each Board meeting attended in person and $1,500 for each Board meeting attended telephonically; (iii) $1,500 to members of the Boards Audit Committee for each meeting
of the Audit Committee attended; and (iv) a retainer of $2,000 to the chairperson of the Audit Committee. The Trust also reimburses each Trustee for travel and other out-of-pocket expenses incurred by him/her in connection with attending such
meetings.
17
The table below sets forth the compensation paid to each Trustee for the fiscal year ended May 31, 2012:
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|
|
|
|
|
|
|
Name of Trustee
|
|
Aggregate
Compensation
from
the Trust
|
|
|
Pension or
Retirement
Benefits Accrued As
Part of Trust
Expenses
|
|
|
Estimated Annual
Benefits Upon
Retirement
|
|
|
Total
Compensation
From the Fund and
Fund Complex
|
|
J. David Officer
|
|
$
|
47,000
|
|
|
|
Not Applicable
|
|
|
|
Not Applicable
|
|
|
$
|
47,000
|
|
Stephen R. Byers
|
|
$
|
50,000
|
|
|
|
Not Applicable
|
|
|
|
Not Applicable
|
|
|
$
|
50,000
|
|
George O. Elston
|
|
$
|
47,000
|
|
|
|
Not Applicable
|
|
|
|
Not Applicable
|
|
|
$
|
47,000
|
|
Control Persons and Principal Holders of Securities.
As of May 1, 2013, the officers and Trustees, as a group owned beneficially less than 1% of the shares of the Fund.
As of the date of this SAI, no person owned of record 5% or more of the Funds outstanding shares.
Potential Conflicts of Interest
The
Adviser is owned by Deutsche Bank AG, a multi-national financial services company. Therefore, the Adviser is affiliated with a variety of entities that provide, and/or engage in commercial banking, insurance, brokerage, investment banking, financial
advisory, broker-dealer activities (including sales and trading), hedge funds, real estate and private equity investing, in addition to the provision of investment management services to institutional and individual investors. Since Deutsche Bank
AG, its affiliates, directors, officers and employees (the Firm) are engaged in businesses and have interests in addition to managing asset management accounts, such wide ranging activities involve real, potential or apparent conflicts
of interest. These interests and activities include potential advisory, transactional and financial activities and other interests in securities and companies that may be directly or indirectly purchased or sold by the Firm for its clients
advisory accounts.
The Adviser may take investment positions in securities in which other clients or related persons within the Firm have
different investment positions. There may be instances in which the Adviser is purchasing or selling for its client accounts, or pursuing an outcome in the context of a workout or restructuring with respect to, securities in which the Firm is
undertaking the same or differing strategy in other businesses or other client accounts. These are considerations of which advisory clients should be aware and which may cause conflicts that could be to the disadvantage of the Advisers
advisory clients, including the Fund. The Adviser has instituted business and compliance policies, procedures and disclosures that are designed to identify, monitor and mitigate conflicts of interest and, as appropriate, to report them to the
Funds Board.
Investment Advisory, Sub-Advisory, Administrative and Distribution Services
Investment Adviser and Sub-Adviser.
DBX Advisors LLC serves as investment adviser to the Fund pursuant to an Investment Advisory Agreement between
the Trust and the Adviser. The Adviser is a Delaware limited liability company and was registered as an investment adviser under the Investment Advisers Act of 1940, as amended, in August 2010. DBX Advisors LLC was formed in June 2010 and is an
indirect, wholly-owned subsidiary of Deutsche Bank AG. Deutsche Investment Management Americas Inc. serves as the investment sub-adviser to the Fund pursuant to a Sub-Advisory Agreement.
Under the Investment Advisory Agreement, the Adviser, subject to the supervision of the Board and in conformity with the stated investment policies of the Fund, manages and administers the Trust and
manages the Sub-Adviser and manages or delegates to the
18
Sub-Adviser the duties of the investment and reinvestment of the Funds assets. The Sub-Adviser manages the investment and reinvestment of the Funds assets on an ongoing basis under
the supervision of the Adviser.
For its investment advisory services to the Fund, the Adviser is entitled to receive a unitary management
fee from the Fund based on the Funds average daily net assets at an annual rate of 0.30%.
Under the Investment Advisory Agreement,
the Adviser is responsible for substantially all expenses of the Fund (including the payments to the Sub-Adviser, the cost of transfer agency, custody, fund administration, legal, audit and other services) except for the fee payments under the
Investment Advisory Agreement, interest expense, taxes, brokerage expenses, future distribution fees or expenses, litigation expenses and other extraordinary expenses. The Fund also bears the cost of compensation paid to the Independent Trustees in
respect of the Independent Trustees service to the Fund (Independent Trustee Fees).
The Investment Advisory Agreement with
respect to the Fund continues in effect for two years from its effective date, and thereafter is subject to annual approval by (i) the Board or (ii) the vote of a majority of the outstanding voting securities (as defined in the 1940 Act)
of the applicable Fund, provided that in either event such continuance also is approved by a majority of the Board who are not interested persons (as defined in the 1940 Act) of the applicable Fund, by a vote cast in person at a meeting called for
the purpose of voting on such approval.
The Investment Advisory Agreement with respect to the Fund is terminable without penalty, on 60
days notice, by the Board or by a vote of the holders of a majority of the applicable Funds outstanding voting securities (as defined in the 1940 Act). The Investment Advisory Agreement is also terminable upon 60 days notice by the
Adviser and will terminate automatically in the event of its assignment (as defined in the 1940 Act).
The Adviser has contractually
agreed through March 25, 2014 to waive fees and/or reimburse the Funds expenses in order to limit the Funds net annual operating expenses to 0.30% of the Funds average daily net assets, except for interest expense, taxes, brokerage
expenses, distribution fees or expenses, litigation expenses and other extraordinary expenses (the Expense Caps). In accordance with and as required by the Expense Caps, the Adviser will reimburse the Fund for the Independent Trustee
Fees. The Expense Caps will remain in effect until at least March 25, 2014 and may only be terminated with the consent of the Trusts Board (and may not be terminated by the Adviser) prior to that time.
Under the Sub-Advisory Agreement, the Sub-Adviser will not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Sub-Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Sub-Adviser in the performance of its duties or from reckless disregard of its duties
and obligations thereunder. The Sub-Advisory Agreement continues in effect until two years from its initial effective date, and thereafter only if approved annually by the Board, including a majority of the Independent Trustees.
The Sub-Advisory Agreement terminates automatically upon assignment and is terminable at any time without penalty as to the Fund by the Board, including
a majority of the Independent Trustees, or by vote of the holders of a majority of that Funds outstanding voting securities on 60 days written notice to the Sub-Adviser, by the Adviser on 60 days written notice to the Sub-Adviser
or by a Sub-Adviser on 60 days written notice to the Adviser and the Trust.
Pursuant to the Sub-Advisory Agreement, the Adviser
pays the Sub-Adviser on a monthly basis a portion of the net advisory fees it receives from the Fund at the annual rate of 0.05% of the Funds average daily net assets.
The Sub-Adviser is located at 345 Park Avenue, New York, NY 10154.
Manager of Managers
Structure.
The Adviser and the Trust may rely on an exemptive order (the Order) from the SEC that permits the Adviser to enter into investment sub-advisory agreements with sub-advisers without obtaining shareholder approval. The
Adviser, subject to the review and approval of the Board, selects sub-advisers for the Fund and supervises, monitors and evaluates the performance of the sub-adviser.
The Order also permits the Adviser, subject to the approval of the Board, to replace sub-advisers and amend investment sub-advisory agreements, including fees, without shareholder approval whenever the
Adviser and the Board believe such action will benefit the Fund and its shareholders. The Adviser thus has the ultimate responsibility (subject to the ultimate oversight of the Board) to recommend the hiring and replacement of sub-advisers as well
as the discretion to terminate any sub-adviser and reallocate the Funds assets for
19
management among any other sub-adviser(s) and itself. This means that the Adviser is able to reduce the sub-advisory fees and retain a larger portion of the management fee, or increase the
sub-advisory fees and retain a smaller portion of the management fee. The Adviser compensates the sub-adviser out of its management fee.
Affiliated Index Provider.
Deutsche
Bank Securities Inc. (DBSI or Index Provider), which is a wholly-owned subsidiary of the Adviser, is responsible for amendments to the rules-based methodology of the DBIQ Municipal Infrastructure Revenue Bond Index. In order
to minimize any potential for conflicts caused by the fact that the Adviser or its affiliates act as the Index Provider to the Fund, the Adviser has retained an unaffiliated third party to calculate the Index, Structured Solutions AG (the
Calculation Agent). The Calculation Agent, using the Index Providers rules-based methodology, will calculate, maintain and disseminate the DBIQ Municipal Infrastructure Revenue Bond Index on a daily basis. The Adviser will monitor
the results produced by the Calculation Agent to help ensure that the DBIQ Municipal Infrastructure Revenue Bond Index is being calculated in accordance with the rules-based methodology. In addition, the Adviser and the Index Provider have
established policies and procedures designed to prevent non-public information about pending changes to the DBIQ Municipal Infrastructure Revenue Bond Index from being used or disseminated in an improper manner. Furthermore, the Adviser and the
Index Provider have established policies and procedures designed to prevent improper use and dissemination of non-public information about the Funds portfolio strategies and to prevent the Funds portfolio managers from having any
influence on the construction of the DBIQ Municipal Infrastructure Revenue Bond Index methodology.
Portfolio Managers.
Set forth below is additional information regarding the individuals identified in the Prospectus as primarily responsible for the
day-to-day management of the Fund (Portfolio Managers).
DIMA supervises and manages the investment portfolio of the Fund and
directs the purchase and sale of the Funds investment securities. DIMA utilizes teams of investment professionals acting together to manage the assets of the Fund. The DIMA Portfolio Managers that have direct oversight responsibility and are
primarily responsible for the day-to-day management of the Fund are:
Philip G. Condon, Ashton P. Goodfield, Blair Ridley and Michael J.
Generazo, each a Portfolio Manager, are primarily responsible for the day-to-day management of the Fund. Each Portfolio Manager functions as a member of a portfolio manager team.
Philip G. Condon is a Managing Director of Deutsche Asset Management. Since 2008, he has been Managing Director, Head of the Municipal Bond team, Chief Strategist for U.S. Fixed Income and a Portfolio
Manager for DIMA. Mr. Condon joined Deutsche Asset Management in 1983. He obtained his MBA degree and his undergraduate degree, Bachelor of Arts, from the University of Massachusetts at Amherst.
Ashton P. Goodfield, CFA, is a Managing Director of Deutsche Asset Management. Since 2008, she has been Managing Director, Head of Municipal Bond Trading
and a Portfolio Manager for DIMA. Ms. Goodfield joined Deutsche Asset Management in 1986. She obtained her undergraduate degree, Bachelor of Arts, from Duke University.
Blair Ridley is a Director of Deutsche Asset Management. From 2006 to 2010, he was Vice President, business manager and product specialist for DIMA. Since 2010, Mr. Ridley has been a Director and a
Portfolio Manager for DIMA. Mr. Ridley joined Deutsche Asset Management in 1999. He obtained his MS in Investment Management from Boston University and his undergraduate degree, Bachelor of Arts, from the University of California, San Diego.
Michael J. Generazo is a Director of Deutsche Asset Management. Since 2008, he has been a Director and a Portfolio Manager for DIMA.
Mr. Generazo joined Deutsche Asset Management in 1999. He obtained his MBA degree from Suffolk University and his undergraduate degree, Bachelor of Science, from Bryant College.
Other Accounts Managed
The Portfolio Managers were also primarily responsible for
the day-to-day management of other accounts, as set forth in the tables below.
20
As of March 31, 2013, Mr. Condon was responsible for the day-to-day portfolio management of 12
registered investment companies, no other pooled investment companies and no other accounts managed by Deutsche Asset Management.
As of March
31, 2013, Ms. Goodfield was responsible for the day-to-day portfolio management of 4 registered investment companies, no other pooled investment companies and no other accounts managed by Deutsche Asset Management.
As of March 31, 2013, Mr. Ridley was responsible for the day-to-day portfolio management of no registered investment companies, no other pooled
investment companies and no other accounts managed by Deutsche Asset Management.
As of March 31, 2013, Mr. Generazo was responsible for
the day-to-day portfolio management of 3 registered investment companies, no other pooled investment companies and 7 other accounts managed by Deutsche Asset Management.
The table below shows the number of other accounts managed by each Portfolio Manager and the total assets in the accounts, as of March 31, 2013, except as otherwise noted, in each of the following
categories: registered investment companies, other pooled investment vehicles and other accounts. For each category, the table also shows the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on
account performance.
The following table provides information relating to other accounts managed by Philip G. Condon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
12
|
|
|
|
0
|
|
|
|
0
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
14,329
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The following table provides information relating to other accounts managed by Ashton P. Goodfield:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
8,730
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The following table provides information relating to other accounts managed by Blair Ridley:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
21
The following table provides information relating to other accounts managed by Michael J. Generazo:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Companies
|
|
|
Other
Accounts
|
|
Number of Accounts Managed
|
|
|
3
|
|
|
|
0
|
|
|
|
7
|
|
Number of Accounts Managed with Performance-Based Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Assets Managed (assets in millions)
|
|
$
|
7,293
|
|
|
$
|
0
|
|
|
$
|
276
|
|
Assets Managed with Performance-Based Fees
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Portfolio Manager Compensation
DIMA has the following major components in its compensation program for the Portfolio Managers:
|
|
Short Term Variable Pay
|
Variable pay can be
delivered via a short-term and/or long-term vehicle, namely cash, restricted equity awards, and/or restricted incentive awards. Variable pay comprises a greater proportion of total compensation as a portfolio managers seniority and total
compensation level increase. The proportion of variable pay delivered via a long-term incentive award, which is subject to clawback, will increase significantly as the amount of variable pay increases. All variable pay delivered via long-term
incentive award is subject to clawback.
To evaluate its investment professionals, Deutsche Asset Management reviews investment performance
for all accounts managed in relation to both account peer group and benchmark related data (i.e., appropriate Morningstar peer group universes and/or benchmark index(es) with respect to each account). The ultimate goal of this process is to evaluate
the degree to which investment professionals deliver investment performance that meets or exceeds their clients risk and return objectives. When determining Total Compensation, Deutsche Asset Management considers a number of quantitative and
qualitative factors:
|
Quantitative measures (e.g. one-, three- and five-year pre-tax returns versus the benchmark and appropriate peer group, taking risk targets into account) are utilized
to measure performance.
|
|
Qualitative measures (e.g. adherence to, as well as contributions to, the enhancement of the investment process) are included in the performance review.
|
|
Other factors (e.g. teamwork, adherence to compliance rules, risk management and living the values of Deutsche Asset Management) are included as part of a
discretionary component of the review process, giving management the ability to consider additional markers of performance on a subjective basis.
|
Portfolio Manager Ownership of Fund Shares
As of March 31, 2013, none of the
Portfolio Managers beneficially owned any Shares of the Fund.
Potential Conflicts of Interest
Because the Portfolio Managers manage multiple portfolios for multiple clients, the potential for conflicts of interest exists. The Portfolio Managers may
manage other portfolios that have a similar investment style as the Fund. However, the portfolios managed by a Portfolio Manager may not have portfolio compositions identical to those of the Fund managed by the Portfolio Manager due, for example, to
specific investment limitations or guidelines present in some portfolios or accounts, but not others. The Portfolio Managers
22
may purchase securities for one portfolio and not another portfolio, and the performance of securities purchased for one portfolio may vary from the performance of securities purchased for other
portfolios. A Portfolio Manager may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on behalf of the Fund, or make investment decisions that are similar to those made for the Fund,
both of which have the potential to adversely impact the Fund depending on market conditions. For example, a Portfolio Manager may purchase a security in one portfolio while appropriately selling that same security in another portfolio. In addition,
some of these portfolios have fee structures that are or have the potential to be higher than the advisory fees paid by the Fund, which can cause potential conflicts in the allocation of investment opportunities between the Fund and the other
accounts. However, the compensation structure for Portfolio Managers does not generally provide incentive to favor one account over another because that part of a managers bonus based on performance is not based on the performance of one
account to the exclusion of others. There are many other factors considered in determining the Portfolio Managers bonus and there is no formula that is applied to weight the factors listed (see Compensation of Portfolio Managers and
Other Accounts Managed). In addition, current trading practices do not allow DIMA to intentionally favor one portfolio over another as trades are executed as trade orders are received. Portfolios rebalancing dates also generally vary
between fund families. Program trades created from the portfolio rebalance are executed at market on close. For additional information regarding potential conflicts of interest faced by the Adviser, see Potential Conflicts of Interest.
Codes of Ethics.
The Trust, the Adviser, the Sub-Adviser and the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1
of the 1940 Act. The Codes of Ethics permit personnel subject to the Codes of Ethics to invest in securities, subject to certain limitations, including securities that may be purchased or held by the Fund. The Codes of Ethics are on public file
with, and are available from, the SEC.
Anti-Money Laundering Requirements.
The Fund is subject to the USA PATRIOT Act (the
Patriot Act). The Patriot Act is intended to prevent the use of the U.S. financial system in furtherance of money laundering, terrorism or other illicit activities. Pursuant to requirements under the Patriot Act, the Fund may request
information from Authorized Participants to enable it to form a reasonable belief that it knows the true identity of its Authorized Participants. This information will be used to verify the identity of Authorized Participants or, in some cases, the
status of financial professionals; it will be used only for compliance with the requirements of the Patriot Act. The Fund reserves the right to reject purchase orders from persons who have not submitted information sufficient to allow the Fund to
verify their identity. The Fund also reserves the right to redeem any amounts in the Fund from persons whose identity it is unable to verify on a timely basis. It is the Funds policy to cooperate fully with appropriate regulators in any
investigations conducted with respect to potential money laundering, terrorism or other illicit activities.
Administrator, Custodian and
Transfer Agent.
The Bank of New York Mellon (BNY) serves as administrator, custodian and transfer agent for the Fund. BNYs principal address is One Wall Street, New York, New York 10286. Pursuant to the Fund Administration and
Accounting Agreement with the Trust, BNY provides necessary administrative, legal, tax and accounting and financial reporting services for the maintenance and operations of the Trust and the Fund. In addition, BNY makes available the office space,
equipment, personnel and facilities required to provide such services. Pursuant to a Custody Agreement with the Trust, BNY maintains in separate accounts cash, securities and other assets of the Trust and the Fund, keeps all necessary accounts and
records and provides other services. BNY is required, upon the order of the Trust, to deliver securities held by BNY and to make payments for securities purchased by the Trust for the Fund. Also, pursuant to the Custody Agreement, BNY is authorized
to appoint certain foreign custodians or foreign custody managers for Fund investments outside the United States. Pursuant to a Transfer Agency and Service Agreement with the Trust, BNY acts as a transfer agent for the Funds authorized and
issued Shares of beneficial interest, and as dividend disbursing agent of the Trust. As compensation for these services, BNY receives certain out-of-pocket costs, transaction fees and asset-based fees which are accrued daily and paid monthly the
Adviser from its management fee.
Distributor.
The Distributors principal address is 1290 Broadway, Suite 1100, Denver, Colorado
80203. The Distributor has entered into a Distribution Agreement with the Trust pursuant to which it distributes Shares of the Fund. The Distribution Agreement continues for two years from its effective date and is renewable annually. Shares are
continuously offered for sale by the Fund through the Distributor only in Creation Units, as described in the applicable Prospectus and below in the Creation and Redemption of Creation Units section of this SAI. Shares in less than Creation Units
are not distributed by the Distributor. The Distributor will deliver the applicable Prospectus and, upon request, the SAI to persons purchasing Creation Units and will maintain records of both orders placed with it and confirmations of acceptance
furnished by it. The Distributor is a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the 1934 Act), and a member of the Financial Industry Regulatory Authority (FINRA).
The Distribution Agreement for the Fund provides that it may be terminated at any time, without the payment of any penalty, on at least 60 days
prior written notice to the other party following (i) the vote of a majority of the Independent Trustees, or (ii) the vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the relevant Fund. The
Distribution Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act).
23
The Distributor may also enter into agreements with securities dealers (Soliciting Dealers) who
will solicit purchases of Creation Units of Fund Shares. Such Soliciting Dealers may also be Authorized Participants (as defined below), DTC participants and/or investor services organizations.
The Adviser may, from time to time and from its own resources, pay, defray or absorb costs relating to distribution, including payments out of its own
resources to the Distributor, or to otherwise promote the sale of Shares. The Adviser currently pays the Distributor, from the Advisers own resources, an amount of approximately $20,000 per year for such purposes.
The Adviser and/or its subsidiaries or affiliates (db-X Entities) may pay certain broker-dealers and other financial intermediaries
(Intermediaries) for certain marketing activities related to the Fund or other funds advised by the Adviser or its affiliates (db-X Funds) (with such payments being Payments). Any Payments made by db-X Entities
will be made from their own assets and not from the assets of the Fund. Although a portion of db-X Entities revenue comes directly or indirectly in part from fees paid by the Fund and other db-X Funds, Payments do not increase the price paid
by investors for the purchase of shares of, or the cost of owning, the Fund or other db-X Funds. db-X Entities may make Payments for Intermediaries participating in activities that are designed to make registered representatives, other
professionals and individual investors more knowledgeable about the Fund or for other activities, such as participation in marketing activities and presentations, educational training programs, the support of technology platforms and/or reporting
systems (Education Costs). db-X Entities may also make Payments to Intermediaries for certain printing, publishing and mailing costs associated with the Fund or materials relating to other db-X Funds or exchange-traded funds in general
(Publishing Costs). In addition, db-X Entities may make Payments to Intermediaries that make shares of the Fund and certain other db-X Funds available to their clients or for otherwise promoting the Fund and other db-X Funds. Payments of
this type are sometimes referred to as revenue-sharing payments. Payments to an Intermediary may be significant to the Intermediary, and amounts that Intermediaries pay to your salesperson or other investment professional may also be significant for
your salesperson or other investment professional. Because an Intermediary may make decisions about which investment options it will recommend or make available to its clients or what services to provide for various products based on payments it
receives or is eligible to receive, Payments create conflicts of interest between the Intermediary and its clients and these financial incentives may cause the Intermediary to recommend the Fund and other db-X Funds over other investments. The same
conflict of interest exists with respect to your salesperson or other investment professional if he or she receives similar payments from his or her Intermediary firm.
As of March 31, 2013, db-X Entities had arrangements to make Payments to E*Trade Financial Corporation (E*Trade). Pursuant to the db-X Entities arrangement with E*Trade, E*Trade has
agreed to promote the Fund to E*Trades customers and not to charge certain of its customers any commissions when those customers purchase or sell shares of certain Fund online (the Co-Branded Marketing Program). db-X Entities have
agreed to facilitate the Co-Branded Marketing Program by making Payments to E*Trade during the term of the agreement based on a certain percentage of the assets of the Fund held in the accounts of E*Trades customers.
db-X Entities may determine to make Payments based on any number of metrics. For example, db-X Entities may make Payments at year end or other intervals
in a fixed amount, based upon an Intermediarys services at defined levels or an amount based on the Intermediarys net sales of one or more db-X Funds in a year or other period, any of which arrangements may include an agreed upon minimum
or maximum payment, or any combination of the foregoing. Any payments made by the db-X Entities to an Intermediary may create the incentive for an Intermediary to encourage customers to buy shares of the Fund or other db-X Funds.
24
Brokerage Transactions
The Adviser and/or Sub-Adviser is generally responsible for placing orders for the purchase and sale of portfolio securities, including the allocation of brokerage. Except as otherwise specified,
references in this section to the Adviser should be read to include the Sub-Adviser, except as noted below.
The policy of
the Adviser in placing orders for the purchase and sale of securities for a fund is to seek best execution, taking into account such factors, among others, as price; commission (where applicable); the broker-dealers ability to ensure that
securities will be delivered on settlement date; the willingness of the broker-dealer to commit its capital and purchase a thinly traded security for its own inventory; whether the broker-dealer specializes in block orders or large program trades;
the broker-dealers knowledge of the market and the security; the broker-dealers ability to maintain confidentiality; the broker-dealers ability to provide access to new issues; the broker-dealers ability to provide support
when placing a difficult trade; the financial condition of the broker-dealer; and whether the broker-dealer has the infrastructure and operational capabilities to execute and settle the trade. The Adviser seeks to evaluate the overall reasonableness
of brokerage commissions with commissions charged on comparable transactions and compares the brokerage commissions (if any) paid by the funds to reported commissions paid by others. The Adviser routinely reviews commission rates, execution and
settlement services performed and makes internal and external comparisons.
Purchases and sales of fixed-income securities and certain
over-the-counter securities are effected on a net basis, without the payment of brokerage commissions. Transactions in fixed income and certain over-the-counter securities are generally placed by the Adviser with the principal market makers for
these securities unless the Adviser reasonably believes more favorable results are available elsewhere. Transactions with dealers serving as market makers reflect the spread between the bid and asked prices. Purchases of underwritten issues will
include an underwriting fee paid to the underwriter. Money market instruments are normally purchased in principal transactions directly from the issuer or from an underwriter or market maker.
It is likely that the broker-dealers selected based on the considerations described in this section will include firms that also sell shares of the funds to their customers. However, the Adviser does not
consider sales of shares of the funds as a factor in the selection of broker-dealers to execute portfolio transactions for the funds and, accordingly, has implemented policies and procedures reasonably designed to prevent its traders from
considering sales of shares of the funds as a factor in the selection of broker-dealers to execute portfolio transactions for the funds.
The
Adviser is permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended (1934 Act), when placing portfolio transactions for a fund, to cause a fund to pay brokerage commissions in excess of that which another broker-dealer
might charge for executing the same transaction in order to obtain research and brokerage services if the Adviser determines that such commissions are reasonable in relation to the overall services provided. The Adviser may from time to time, in
reliance on Section 28(e) of the 1934 Act, execute portfolio transactions with broker-dealers that provide research and brokerage services to the Adviser. Consistent with the Advisers policy regarding best execution, where more than one
broker is believed to be capable of providing best execution for a particular trade, the Adviser may take into consideration the receipt of research and brokerage services in selecting the broker-dealer to execute the trade. Although certain
research and brokerage services from broker-dealers may be useful to a fund and to the Adviser, it is the opinion of the Adviser that such information only supplements its own research effort since the information must still be analyzed, weighed and
reviewed by the Advisers staff. To the extent that research and brokerage services of value are received by the Adviser, the Adviser may avoid expenses that it might otherwise incur. Research and brokerage services received from a
broker-dealer may be useful to the Adviser and its affiliates in providing investment management services to all or some of its clients, which includes a fund. Services received from broker-dealers that executed securities transactions for a fund
will not necessarily be used by the Adviser specifically to service that fund.
Research and brokerage services provided by broker-dealers may
include, but are not limited to, information on the economy, industries, groups of securities, individual companies, statistical information, accounting and tax law interpretations, political developments, legal developments affecting portfolio
securities, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance analysis and measurement and analysis of corporate responsibility issues. Research and brokerage services are typically
received in the form of written or electronic reports, access to specialized financial publications, telephone contacts and personal meetings with security analysts, but may also be provided in the form of access to various computer software and
meetings arranged with corporate and industry representatives.
The Adviser may also select broker-dealers and obtain from them research and
brokerage services that are used in connection with executing trades provided that such services are consistent with interpretations under Section 28(e) of the 1934 Act. Typically, these
25
services take the form of computer software and/or electronic communication services used by the Adviser to facilitate trading activity with those broker-dealers.
Research and brokerage services may include products obtained from third parties if the Adviser determines that such product or service constitutes
brokerage and research as defined in Section 28(e) and interpretations thereunder. Provided a Sub-Adviser is acting in accordance with any instructions and directions of the Adviser or the Board, the Sub-Adviser is authorized to pay to a broker
or dealer who provides third party brokerage and research services a commission for executing a portfolio transaction for a fund in excess of what another broker or dealer may charge, if the Sub-Adviser determines in good faith that such commission
was reasonable in relation to the value of the third party brokerage and research services provided by such broker or dealer.
The Adviser may
use brokerage commissions to obtain certain brokerage products or services that have a mixed use (i.e., it also serves a function that does not relate to the investment decision-making process). In those circumstances, the Adviser will make a good
faith judgment to evaluate the various benefits and uses to which it intends to put the mixed use product or service and will pay for that portion of the mixed use product or service that it reasonably believes does not constitute research and
brokerage services with its own resources.
The Adviser will monitor regulatory developments and market practice in the use of client
commissions to obtain research and brokerage services and may adjust its portfolio transactions policies in response thereto.
Investment
decisions for a fund and for other investment accounts managed by the Adviser are made independently of each other in light of differing conditions. However, the same investment decision may be made for two or more of such accounts. In such cases,
simultaneous transactions are inevitable. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for a fund with those to be sold or purchased for other accounts in executing transactions. Purchases or sales
are then averaged as to price and commission and allocated as to amount in a manner deemed equitable to each account. While in some cases this practice could have a detrimental effect on the price paid or received by, or on the size of the position
obtained or disposed of for, a fund, in other cases it is believed that the ability to engage in volume transactions will be beneficial to a fund.
The Adviser and its affiliates and the funds management team manage other mutual funds and separate accounts, some of which use short sales of securities as a part of its investment strategy. The
simultaneous management of long and short portfolios creates potential conflicts of interest including the risk that short sale activity could adversely affect the market value of the long positions (and vice versa), the risk arising from sequential
orders in long and short positions, and the risks associated with receiving opposing orders at the same time. The Adviser has adopted procedures that it believes are reasonably designed to mitigate these potential conflicts of interest. Incorporated
in the procedures are specific guidelines developed to ensure fair and equitable treatment for all clients. The Adviser and the investment team have established monitoring procedures and a protocol for supervisory reviews, as well as compliance
oversight to ensure that potential conflicts of interest relating to this type of activity are properly addressed.
Deutsche Bank AG or
one of its affiliates (including the Sub-Adviser or one of its affiliates) may act as a broker for the funds and receive brokerage commissions or other transaction-related compensation from the funds in the purchase and sale of securities, when, in
the judgment of the Adviser, and in accordance with procedures approved by the Board, the affiliated broker will be able to obtain a price and execution at least as favorable as those obtained from other qualified brokers and if, in the transaction,
the affiliated broker charges the funds a rate consistent with that charged to comparable unaffiliated customers in similar transactions.
Additional Information Concerning the Trust
Shares.
The Trust currently is comprised of seven separate investment series or portfolios called funds. Each series issues Shares of common stock, no par value. The Trust issues Shares of
beneficial interests in the fund with no par value. The Board may designate additional funds.
Each Share issued by the fund has a pro
rata interest in the assets of that fund. Shares have no preemptive, exchange, subscription or conversion rights and are freely transferable. Each Share is entitled to participate equally in dividends and distributions declared by the Board with
respect to the relevant fund, and in the net distributable assets of such fund on liquidation. Each Share has one vote with respect to matters upon which the Shareholder is entitled to vote. In any matter submitted to Shareholders for a vote, the
fund shall hold a separate vote, provided that Shareholders of all effected funds will vote together when: (1) required by the 1940 Act or (2) the Trustees determine that the matter affects the interests of more than one fund. Under
Delaware law, the Trust is not required to hold an annual meeting of Shareholders unless required to do so under the 1940 Act. The policy of the Trust is not to hold an annual meeting of
26
Shareholders unless required to do so under the 1940 Act. All Shares (regardless of the fund) have
noncumulative voting rights in the election of members of the Board. Under Delaware law, Trustees of the Trust may be removed by vote of the Shareholders.
Following the creation of the initial Creation Unit(s) of Shares of the Fund and immediately prior to the commencement of trading in the Funds Shares, a holder of Shares may be a control
person of the Fund, as defined in the 1940 Act. The Fund cannot predict the length of time for which one or more Shareholders may remain a control person of the Fund.
Shareholders may make inquiries by writing to DBX ETF Trust, c/o the Distributor, ALPS Distributors, Inc., 1290 Broadway, Suite 1100, Denver, Colorado 80203, by email by writing to
dbxquestions@list.db.com or by telephone by calling 1-855-329-3837 or 1-855-DBX-ETFS (toll free).
Termination of the Trust or the Fund.
The Trust or the Fund may be terminated by a majority vote of the Board or the affirmative vote of a supermajority of the holders of the Trust or such Fund entitled to vote on termination. Although the Shares are not automatically redeemable
upon the occurrence of any specific event, the Trusts organizational documents provide that the Board will have the unrestricted power to alter the number of Shares in a Creation Unit. In the event of a termination of the Trust or the Fund,
the Board, in its sole discretion, could determine to permit the Shares to be redeemable in aggregations smaller than Creation Units or to be individually redeemable. In such circumstance, the Trust may make redemptions in kind, for cash or for a
combination of cash or securities.
DTC as Securities Depository for Shares of the Fund.
Shares of the Fund are represented by
securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was
created to hold securities of its participants (DTC Participants) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts
of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations,
some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the NYSE Amex Equities and the FINRA. Access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (Indirect Participants).
Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in
Shares (owners of such beneficial interests are referred to herein as Beneficial Owners) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records
of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws
of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.
Conveyance of all notices, statements and other communications to Beneficial Owners is effected as follows. Pursuant to the Depositary Agreement between
the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the Shares of the Fund held by each DTC Participant. The Trust shall inquire of each such DTC Participant as to the
number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place
as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC
Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the registered holder of all Shares of the Trust. DTC or its nominee, upon receipt of any such distributions, shall credit
immediately DTC Participants accounts with payments in amounts proportionate to their respective beneficial interests in Shares of the Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants
and Beneficial Owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a
street name, and will be the responsibility of such DTC Participants.
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The Trust has no responsibility or liability for any aspect of the records relating to or notices to
Beneficial Owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship
between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants. DTC may decide to discontinue providing its service with respect to
Shares of the Trust at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action to find a replacement for DTC to perform
its functions at a comparable cost.
Creation and Redemption of Creation Units
General.
The Trust issues and sells Shares of the Fund only in Creation Units on a continuous basis through the Distributor, without a sales load, at the Funds NAV next determined after
receipt, on any Business Day (as defined herein), of an order in proper form. The following table sets forth the number of Shares of the Fund that constitute a Creation Unit for such Fund:
The Board reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund of the Trust, and to make a corresponding change in the number of Shares constituting a
Creation Unit, in the event that the per Share price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board.
A Business Day with respect to the Fund is any day on which the Exchange on which the Fund is listed for trading is open for business. As of the date of this SAI, each Exchange observes the
following holidays, as observed: New Years Day, Dr. Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Fund Deposit.
The consideration for purchase of Creation Units of the Fund generally consists of the in-kind deposit of a designated portfolio of
securities (i.e., the Deposit Securities), which constitutes an optimized representation of the securities of the relevant Funds Underlying Index, and the Cash Component computed as described below. Together, the Deposit Securities and the
Cash Component constitute the Fund Deposit, which represents the minimum initial and subsequent investment amount for a Creation Unit of any Fund.
The Cash Component is an amount equal to the difference between the NAV of the Shares (per Creation Unit) and the Deposit Amount, which is an amount equal to the market value of the Deposit
Securities, and serves to compensate for any difference between the NAV per Creation Unit and the Deposit Amount. Payment of any stamp duty or other similar fees and expenses payable upon transfer of beneficial ownership of the Deposit Securities
shall be the sole responsibility of the Authorized Participant purchasing a Creation Unit.
The Adviser and/or Sub-Adviser makes available
through the NSCC on each Business Day, prior to the opening of business on the Exchange, the list of names and the required number of Shares of each Deposit Security to be included in the current Fund Deposit (based on information at the end of the
previous Business Day) for the Fund. Such Fund Deposit is applicable, subject to any adjustments as described below, in order to effect purchases of Creation Units of Shares of a given Fund until such time as the next-announced Fund Deposit is made
available.
The identity and number of Shares of the Deposit Securities pursuant to changes in composition of the Funds portfolio and
changes as rebalancing adjustments and corporate action events are reflected from time to time by the Adviser and/or Sub-Adviser with a view to the investment objective of the Fund. The composition of the Deposit Securities may also change in
response to adjustments to the weighting or composition of the component securities constituting the relevant Underlying Index.
The Trust
reserves the right to permit or require the substitution of a cash in lieu amount to be added to the Cash Component to replace any Deposit Security that may not be available in sufficient quantity for delivery or that may not be eligible
for transfer through the systems of DTC of the Clearing Process (discussed below). The Trust also reserves the right to permit or require a cash in lieu amount where the delivery of the Deposit Security by the Authorized Participant (as
described below) would be restricted under applicable securities laws or where the delivery of the Deposit Security to the Authorized Participant would result in the disposition of the Deposit Security by the Authorized Participant becoming
restricted under applicable securities laws, or in certain other situations. The adjustments described above will reflect changes, known to the Adviser and/or Sub-Adviser on the date of announcement to be in effect by the time of delivery of the
Fund Deposit, in the composition of the subject index being tracked by the relevant Fund, or resulting from stock splits and other corporate actions.
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Role of the Authorized Participant.
Creation Units may be purchased only by or through a DTC
Participant that has entered into an Authorized Participant Agreement with the Distributor (an Authorized Participant). Such Authorized Participant will agree, pursuant to the terms of such Authorized Participant Agreement and on behalf
of itself or any investor on whose behalf it will act, to certain conditions, including that such Authorized Participant will make available in advance of each purchase of Shares an amount of cash sufficient to pay the Cash Component, once the NAV
of a Creation Unit is next determined after receipt of the purchase order in proper form, together with the transaction fee described below. The Authorized Participant may require the investor to enter into an agreement with such Authorized
Participant with respect to certain matters, including payment of the Cash Component. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should be aware that their particular
broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement and that orders to purchase Creation Units may have to be placed by the investors broker through an Authorized Participant. As a result, purchase
orders placed through an Authorized Participant may result in additional charges to such investor. The Trust does not expect to enter into an Authorized Participant Agreement with more than a small number of DTC Participants. A list of current
Authorized Participants may be obtained from the Distributor.
Purchase Order.
To initiate an order for a Creation Unit, an Authorized
Participant must submit to the Distributor an irrevocable order to purchase Shares of the Fund. The Distributor will notify the Adviser and/or Sub-Adviser and the Custodian of such order. The Custodian will then provide such information to the
appropriate subcustodian. For the Fund, the Custodian shall cause the subcustodian to maintain an account into which the Authorized Participant shall deliver, on behalf of itself or the party on whose behalf it is acting, the securities included in
the designated Fund Deposit (or the cash value of all or a part of such securities, in the case of a permitted or required cash purchase or cash in lieu amount), with any appropriate adjustments as advised by the Trust. Deposit
Securities must be delivered to an account maintained at the applicable local subcustodian. Those placing orders to purchase Creation Units through an Authorized Participant should allow sufficient time to permit proper submission of the purchase
order to the Distributor by the cut-off time on such Business Day.
The Authorized Participant must also make available on or before the
contractual settlement date, by means satisfactory to the Trust, immediately available or same day funds estimated by the Trust to be sufficient to pay the Cash Component next determined after acceptance of the purchase order, together with the
applicable purchase transaction fee. Any excess funds will be returned following settlement of the issue of the Creation Unit. Those placing orders should ascertain the applicable deadline for cash transfers by contacting the operations department
of the broker or depositary institution effectuating the transfer of the Cash Component. This deadline is likely to be significantly earlier than the closing time of the regular trading session on the Exchange.
Investors should be aware that an Authorized Participant may require orders for purchases of Shares placed with it to be in the particular form required
by the individual Authorized Participant.
Timing of Submission of Purchase Orders.
An Authorized Participant must submit an
irrevocable purchase order before 4:00 p.m., Eastern time on any Business Day in order to receive that days NAV. In the case of custom orders, the order must be received by the Distributor no later than 3:00 p.m., Eastern time on the trade
date. With respect to in-kind creations, a custom order may be placed by an Authorized Participant where cash replaces any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for trading by
such Authorized Participant or the investor for which it is acting or other relevant reason. Orders to create Shares of the Fund that are submitted on the Business Day immediately preceding a holiday or day (other than a weekend) when the equity
markets in the relevant foreign market are closed may not be accepted. The Distributor in its discretion may permit the submission of such orders and requests by or through an Authorized Participant at any time (including on days on which the
Exchange is not open for business) via communication through the facilities of the Distributors proprietary website maintained for this purpose. Purchase orders and redemption requests, if accepted by the Trust, will be processed based on the
NAV next determined after such acceptance in accordance with the Trusts standard cut-off times as provided in the Authorized Participant Agreement and disclosed in this SAI.
Acceptance of Order for Creation Unit.
Subject to the conditions that (i) an irrevocable purchase order has been submitted by the Authorized Participant (either on its own or another
investors behalf) and (ii) arrangements satisfactory to the Trust are in place for payment of the Cash Component and any other cash amounts which may be due, the Trust will accept the order, subject to its right (and the right of the
Distributor and the Adviser and/or Sub-Adviser) to reject any order until acceptance.
Once the Trust has accepted an order, upon next
determination of the NAV of the Shares, the Trust will confirm the issuance of a Creation Unit, against receipt of payment, at such NAV. The Distributor will then transmit a confirmation of acceptance to the Authorized Participant that placed the
order.
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The Trust reserves the absolute right to reject or revoke a creation order transmitted to it by the
Distributor in respect of the Fund if (i) the order is not in proper form; (ii) the investor(s) upon obtaining the Shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (iii) the Deposit Securities
delivered do not conform to the identity and number of Shares specified by the Adviser and/or Sub-Adviser, as described above; (iv) acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund;
(v) acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit would, in the discretion of the Trust or the Adviser and/or Sub-Adviser, have an adverse effect on the Trust or the
rights of beneficial owners; or (vii) circumstances outside the control of the Trust, the Distributor and the Adviser and/or Sub-Adviser make it impracticable to process purchase orders. The Trust shall notify a prospective purchaser of a
Creation Unit and/or the Authorized Participant acting on behalf of such purchaser of its rejection of such order. The Trust, the Custodian, the subcustodian and the Distributor are under no duty, however, to give notification of any defects or
irregularities in the delivery of Portfolio Deposits nor shall any of them incur any liability for failure to give such notification.
Issuance of a Creation Unit.
Except as provided herein, a Creation Unit will not be issued until the transfer of good title to the Trust of the
Deposit Securities and the payment of the Cash Component have been completed. When the subcustodian has confirmed to the Custodian that the securities included in the Fund Deposit (or the cash value thereof) have been delivered to the account of the
relevant subcustodian or subcustodians, the Distributor and the Adviser shall be notified of such delivery and the Trust will issue and cause the delivery of the Creation Unit. Creation Units typically are issued on a T+3 basis (i.e.,
three Business Days after trade date).
To the extent contemplated by an Authorized Participants agreement with the Distributor, the
Trust will issue Creation Units to such Authorized Participant notwithstanding the fact that the corresponding Portfolio Deposits have not been received in part or in whole, in reliance on the undertaking of the Authorized Participant to deliver the
missing Deposit Securities as soon as possible, which undertaking shall be secured by such Authorized Participants delivery and maintenance of collateral having a value at least equal to 115%, which the Adviser and/or Sub-Adviser may change
from time to time, of the value of the missing Deposit Securities in accordance with the Trusts then-effective procedures. The only collateral that is acceptable to the Trust is cash in U.S. dollars or an irrevocable letter of credit in form,
and drawn on a bank, that is satisfactory to the Trust. The cash collateral posted by the Authorized Participant may be invested at the risk of the Authorized Participant, and income, if any, on invested cash collateral will be paid to that
Authorized Participant. Information concerning the Trusts current procedures for collateralization of missing Deposit Securities is available from the Distributor. The Authorized Participant Agreement will permit the Trust to buy the missing
Deposit Securities at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such securities and the cash collateral or the amount that may be drawn under any letter of credit.
In certain cases, Authorized Participants may create and redeem Creation Units on the same trade date and in these instances, the Trust
reserves the right to settle these transactions on a net basis or require a representation from the Authorized Participants that the creation and redemption transactions are for separate beneficial owners. All questions as to the number of Shares of
each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust and the Trusts determination shall be final and binding.
Cash Purchase Method.
In the case of a cash purchase, the investor must pay the cash equivalent of the Deposit Securities it would otherwise be
required to provide through an in-kind purchase, plus the same Cash Component required to be paid by an in-kind purchaser. In addition, to offset the Trusts brokerage and other transaction costs associated with using the cash to purchase the
requisite Deposit Securities, the investor will be required to pay a fixed purchase transaction fee, plus an additional variable charge for cash purchases, which is expressed as a percentage of the value of the Deposit Securities.
Creation Transaction Fee.
A standard creation transaction fee is imposed to offset the transfer and other transaction costs associated with the
issuance of Creation Units. The standard creation transaction fee will be the same regardless of the number of Creation Units purchased by a purchaser on the same day. Purchasers of Creation Units for cash are required to pay an additional variable
charge to compensate the relevant Fund for brokerage and market impact expenses. When the Trust permits an in-kind purchaser to substitute cash in lieu of depositing a portion of the Deposit Securities, the purchaser will be assessed the additional
variable charge for cash purchases on the cash in lieu portion of its investment up to a maximum additional variable charge. Investors will also bear the costs of transferring the Deposit Securities to the Trust. Investors who use the services of a
broker or other such intermediary may be charged a fee for such services.
The Funds standard maximum creation transaction fee is $500
and its maximum additional variable charge, as a percentage of the amount invested, is 2%.
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Redemption of Creation Units.
Shares of the Fund may be redeemed only in Creation Units at their NAV
next determined after receipt of a redemption request in proper form by the Distributor and only on a Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in the secondary market
but must accumulate enough Shares to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit
assembly of a Creation Unit. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Redemptions are effected partially for cash and partially in-kind. In the case of in-kind redemptions, the Adviser and/or Sub-Adviser makes available through the NSCC, prior to the opening of business on
the Exchange on each Business Day, the identity and number of Shares that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day (Fund Securities).
Fund Securities received on redemption may not be identical to Deposit Securities that are applicable to creations of Creation Units.
Unless
cash redemptions are available or specified for the Fund, the redemption proceeds for a Creation Unit generally consist of Fund Securities plus cash in an amount equal to the difference between the NAV of the Shares being redeemed, as next
determined after a receipt of a request in proper form, and the value of the Fund Securities, less the redemption transaction fee described below.
Redemption Transaction Fee.
A standard redemption transaction fee is imposed to offset transfer and other transaction costs that may be incurred by the relevant Fund. The standard and maximum
redemption transaction fee will be the same regardless of the number of Creation Units redeemed by an investor on the same day. The redeeming investor may be assessed an additional variable charge on the cash in lieu portion of its redemption
proceeds. The standard redemption transaction fees are set forth below. Investors will also bear the costs of transferring the Fund Securities from the Trust to their account or on their order. Investors who use the services of a broker or other
such intermediary may be charged a fee for such services.
The Funds standard redemption transaction fee is $500 and the maximum
redemption fee, as a percentage of the amount redeemed, is 2%.
Redemption requests for Creation Units of any Fund must be submitted to
the Distributor by or through an Authorized Participant. An Authorized Participant must submit an irrevocable redemption request before 4:00 p.m., Eastern time on any Business Day in order to receive that days NAV. In the case of custom
redemptions, the order must be received by the Distributor no later than 3:00 p.m., Eastern time. Investors other than through Authorized Participants are responsible for making arrangements for a redemption request to be made through an Authorized
Participant. The Distributor will provide a list of current Authorized Participants upon request.
The Authorized Participant must transmit
the request for redemption in the form required by the Trust to the Distributor in accordance with procedures set forth in the Authorized Participant Agreement. Investors should be aware that their particular broker may not have executed an
Authorized Participant Agreement and that, therefore, requests to redeem Creation Units may have to be placed by the investors broker through an Authorized Participant who has executed an Authorized Participant Agreement in effect. At any
time, there may be only a limited number of broker-dealers that have an Authorized Participant Agreement. Investors making a redemption request should be aware that such request must be in the form specified by such Authorized Participant. Investors
making a request to redeem Creation Units should allow sufficient time to permit proper submission of the request by an Authorized Participant and transfer of the Shares to the Trusts Transfer Agent; such investors should allow for the
additional time that may be required to effect redemptions through their banks, brokers or other financial intermediaries if such intermediaries are not Authorized Participants.
A redemption request is considered to be in proper form if (i) an Authorized Participant has transferred or caused to be transferred to the Trusts Transfer Agent the Creation Unit
being redeemed through the book-entry system of DTC so as to be effective by the Exchange closing time on any Business Day, (ii) a request in form satisfactory to the Trust is received by the Distributor from the Authorized Participant on
behalf of itself or another redeeming investor within the time periods specified above and (iii) all other procedures set forth in the Participant Agreement are properly followed. If the Transfer Agent does not receive the investors
Shares through DTCs facilities by 10:00 a.m., Eastern time, on the Business Day next following the day that the redemption request is received, the redemption request shall be rejected. Investors should be aware that the deadline for such
transfers of Shares through the DTC system may be significantly earlier than the close of business on the Exchange. Those making redemption requests should ascertain the deadline applicable to transfers of Shares through the DTC system by contacting
the operations department of the broker or depositary institution effecting the transfer of the Shares.
Upon receiving a redemption request,
the Distributor shall notify the Trust and the Trusts Transfer Agent of such redemption request. The tender of an investors Shares for redemption and the distribution of the cash redemption payment in respect of Creation Units
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redeemed will be made through DTC and the relevant Authorized Participant to the beneficial owner thereof as recorded on the book-entry system of DTC or the DTC Participant through which such
investor holds, as the case may be, or by such other means specified by the Authorized Participant submitting the redemption request.
Redemptions of Shares for Fund Securities will be subject to compliance with applicable U.S. federal and state securities laws and the Fund (whether or
not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Fund could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund
Securities under such laws.
In the case of cash redemptions, proceeds will be paid to the Authorized Participant redeeming Shares on behalf
of the redeeming investor as soon as practicable after the date of redemption (within seven calendar days thereafter).
The right of
redemption may be suspended or the date of payment postponed with respect to any Fund (i) for any period during which the NYSE is closed (other than customary weekend and holiday closings), (ii) for any period during which trading on the
NYSE is suspended or restricted, (iii) for any period during which an emergency exists as a result of which disposal of the Shares of the Funds portfolio securities or determination of its NAV is not reasonably practicable or (iv) in
such other circumstance as is permitted by the SEC.
An Authorized Participant submitting a redemption request is deemed to represent to the
Trust that it (or its client) (i) owns outright or has full legal authority and legal beneficial right to tender for redemption the requisite number of Fund shares to be redeemed and can receive the entire proceeds of the redemption, and
(ii) the Fund shares to be redeemed have not been loaned or pledged to another party nor are they the subject of a repurchase agreement, securities lending agreement or such other arrangement that would preclude the delivery of such fund shares
to the Trust. The Trust reserves the right to verify these representations at its discretion, but will typically require verification with respect to a redemption request from the Fund in connection with higher levels of redemption activity and/or
short interest in the Fund. If the Authorized Participant, upon receipt of a verification request, does not provide sufficient verification of its representations as determined by the Trust, the redemption request will not be considered to have been
received in proper form and may be rejected by the Trust.
Taxation on Creation and Redemptions of Creation Units.
An Authorized
Participant generally will recognize either gain or loss upon the exchange of Deposit Securities for Creation Units. This gain or loss is calculated by taking the market value of the Creation Units purchased over the Authorized Participants
aggregate basis in the Deposit Securities exchanged therefor. However, the Internal Revenue Service (the IRS) may apply the wash sales rules to determine that any loss realized upon the exchange of Deposit Securities for Creation Units
is not currently deductible. Authorized Participants should consult their own tax advisors.
Current federal tax laws dictate that capital
gain or loss realized from the redemption of Creation Units will generally create long-term capital gain or loss if the Authorized Participant holds the Creation Units for more than one year, or short-term capital gain or loss if the Creation Units
were held for one year or less.
Taxes
Regulated Investment Company Qualifications.
The Fund intends to qualify for treatment as a separate RIC under Subchapter M of the Code. To qualify for treatment as a RIC, the Fund must annually
distribute at least 90% of its investment company taxable income (which includes dividends, interest and net short-term capital gains) and meet several other requirements. Among such other requirements are the following: (i) at least 90% of the
Funds annual gross income must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or non-U.S. currencies, other income (including, but not limited to,
gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies, and net income derived from interests in qualified publicly-traded partnerships (i.e., partnerships that are
traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends, capital gains and other traditionally permitted mutual fund income); and (ii) at the
close of each quarter of the Funds taxable year, (a) at least 50% of the market value of the Funds total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities,
with such other securities limited for purposes of this calculation in respect of any one issuer to an amount not greater than 5% of the value of the Funds assets and not greater than 10% of the outstanding voting securities of such issuer,
and (b) not more than 25% of the value of the Funds total assets may be invested in the securities (other than U.S. government securities or the securities of other RICs) of any one issuer, of two or more issuers of which 20% or more of
the voting stock is held by the Fund and that are engaged in the same or similar trades or businesses or related trades or businesses or the securities of one or more qualified publicly-traded partnerships.
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Although in general the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC
with respect to items attributable to an interest in a qualified publicly-traded partnership. The Funds investments in partnerships, including in qualified publicly-traded partnerships, may result in the Fund being subject to state, local, or
non-U.S. income, franchise or withholding tax liabilities.
Taxation of RICs.
As a RIC, the Fund will not be subject to U.S. federal
income tax on the portion of its taxable investment income and capital gains that it distributes to its Shareholders, provided that it satisfies a minimum distribution requirement. To satisfy the minimum distribution requirement, the Fund must
distribute to its Shareholders at least the sum of (i) 90% of its investment company taxable income (i.e., income other than its net realized long-term capital gain over its net realized short-term capital loss), plus or minus
certain adjustments, and (ii) 90% of its net tax-exempt income for the taxable year. The Fund will be subject to income tax at regular corporation rates on any taxable income or gains that it does not distribute to its Shareholders. If the Fund
fails to qualify for any taxable year as a RIC or fails to meet the distribution requirement, all of its taxable income will be subject to tax at regular corporate income tax rates without any deduction for distributions to Shareholders, and such
distributions generally will be taxable to Shareholders as ordinary dividends to the extent of the Funds current and accumulated earnings and profits. In such event, distributions to individuals should be eligible to be treated as qualified
dividend income and distributions to corporate Shareholders generally should be eligible for the dividends received deduction. Although the Fund intends to distribute substantially all of its net investment income and its capital gains for each
taxable year, the Fund will be subject to U.S. federal income taxation to the extent any such income or gains are not distributed. If the Fund fails to qualify as a RIC in any year, it must pay out its earnings and profits accumulated in that year
in order to qualify again as a RIC. If the Fund fails to qualify as a RIC for a period greater than two taxable years, the Fund may be required to recognize any net built-in gains with respect to certain of its assets (i.e., the excess of the
aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Fund had been liquidated) if it qualifies as a RIC in a subsequent year.
Excise Tax.
The Fund will be subject to a 4% excise tax on certain undistributed income if it does not distribute to its Shareholders in each
calendar year at least 98% of its ordinary income for the calendar year plus 98.2% of its capital gain net income for the 12 months ended October 31 of such year. For this purpose, however, any ordinary income or capital gain net income
retained by the Fund that is subject to corporate income tax in the taxable year ending within the relevant calendar year will be considered to have been distributed. In addition, the minimum amounts that must be distributed in any year to avoid the
excise tax will be increased or decreased to reflect any underdistribution or overdistribution, as the case may be, from the previous year. The Fund intends to declare and distribute dividends and distributions in the amounts and at the times
necessary to avoid the application of this 4% excise tax.
Net Capital Loss Carryforwards.
Net capital loss carryforwards may be
applied against any net realized capital gains in each succeeding year.
Taxation of U.S. Shareholders.
Dividends and other
distributions by the Fund are generally treated under the Code as received by the Shareholders at the time the dividend or distribution is made. However, any dividend or distribution declared by the Fund in October, November or December of any
calendar year and payable to Shareholders of record on a specified date in such a month shall be deemed to have been received by each Shareholder on December 31 of such calendar year and to have been paid by the Fund not later than such
December 31, provided such dividend is actually paid by the Fund during January of the following calendar year.
The Fund intends to
distribute annually to its Shareholders substantially all of its investment company taxable income and any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). However, if
the Fund retains for investment an amount equal to all or a portion of its net long-term capital gains in excess of its net short-term capital losses (including any capital loss carryovers), it will be subject to a corporate tax (currently at a
maximum rate of 35%) on the amount retained. In that event, the Fund may designate such retained amounts as undistributed capital gains in a notice to its Shareholders who (a) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gains, their proportionate Shares of the undistributed amount, (b) will be entitled to credit their proportionate Shares of the 35% tax paid by the Fund on the undistributed amount against their U.S. federal
income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their Shares by an amount equal to
65% of the amount of undistributed capital gains included in the Shareholders income. Organizations or persons not subject to U.S. federal income tax on such capital gains will be entitled to a refund of their pro rata Share of such taxes paid
by the Fund upon filing appropriate returns or claims for refund with the IRS.
Distributions of net realized long-term capital gains, if any,
that the Fund reports as capital gains dividends are taxable as long-term capital gains, whether paid in cash or in Shares and regardless of how long a Shareholder has held Shares of the Fund. All other dividends of the Fund (including dividends
from short-term capital gains) from its current and accumulated earnings and profits (regular dividends) are generally subject to tax as ordinary income, subject to the discussion of qualified dividend income below.
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If an individual receives a regular dividend qualifying for the long-term capital gains rates and such
dividend constitutes an extraordinary dividend, and the individual subsequently recognizes a loss on the sale or exchange of stock in respect of which the extraordinary dividend was paid, then the loss will be long-term capital loss to
the extent of such extraordinary dividend. An extraordinary dividend on common stock for this purpose is generally a dividend (i) in an amount greater than or equal to 10% of the taxpayers tax basis (or trading value) in a
Share of stock, aggregating dividends with ex-dividend dates within an 85-day period or (ii) in an amount greater than 20% of the taxpayers tax basis (or trading value) in a Share of stock, aggregating dividends with ex-dividend dates
within a 365-day period.
Distributions in excess of the Funds current and accumulated earnings and profits will, as to each
Shareholder, be treated as a tax-free return of capital to the extent of a Shareholders basis in Shares of the Fund, and as a capital gain thereafter (if the Shareholder holds Shares of the Fund as capital assets). Shareholders receiving
dividends or distributions in the form of additional Shares should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the Shareholders receiving cash dividends or distributions
will receive and should have a cost basis in the Shares received equal to such amount.
Investors considering buying Shares just prior to a
dividend or capital gain distribution should be aware that, although the price of Shares purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them. If the Fund is
the holder of record of any security on the record date for any dividends payable with respect to such security, such dividends will be included in the Funds gross income not as of the date received but as of the later of (a) the date
such security became ex-dividend with respect to such dividends (i.e., the date on which a buyer of the security would not be entitled to receive the declared, but unpaid, dividends); or (b) the date the Fund acquired such security.
Accordingly, in order to satisfy its income distribution requirements, the Fund may be required to pay dividends based on anticipated earnings, and Shareholders may receive dividends in an earlier year than would otherwise be the case.
In certain situations, the Fund may, for a taxable year, defer all or a portion of its capital losses and currency losses realized after October until
the next taxable year in computing its investment company taxable income and net capital gain, which will defer the recognition of such realized losses. Such deferrals and other rules regarding gains and losses realized after October may affect the
tax character of Shareholder distributions.
For taxable years beginning after December 31, 2012, an additional 3.8% Medicare tax
will be imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund Shares) of U.S. individuals, estates and trusts
to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceeds certain threshold amounts.
Sales of Shares.
Upon the sale or exchange of Shares of the Fund, a Shareholder will realize a taxable gain or loss equal to the difference
between the amount realized and the Shareholders basis in Shares of the Fund. A redemption of Shares by the Fund will be treated as a sale for this purpose. Such gain or loss will be treated as capital gain or loss if the Shares are capital
assets in the Shareholders hands and will be long-term capital gain or loss if the Shares are held for more than one year and short-term capital gain or loss if the Shares are held for one year or less. Any loss realized on a sale or exchange
will be disallowed to the extent the Shares disposed of are replaced, including replacement through the reinvesting of dividends and capital gains distributions in the Fund, within a 61-day period beginning 30 days before and ending 30 days after
the disposition of the Shares. In such a case, the basis of the Shares acquired will be increased to reflect the disallowed loss. Any loss realized by a Shareholder on the sale of the Fund Share held by the Shareholder for six months or less will be
treated for U.S. federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of long-term capital gains received by the Shareholder with respect to such Share. Additionally, any loss realized
upon the sale or exchange of Fund shares with a tax holding period of six months or less will be disallowed to the extent of any distributions treated as exempt-interest dividends with respect to such shares.
If a Shareholder incurs a sales charge in acquiring Shares of the Fund, disposes of those Shares within 90 days and then acquires, prior to
February 1 of the following calendar year, Shares in a mutual fund for which the otherwise applicable sales charge is reduced by reason of a reinvestment right (e.g., an exchange privilege), the original sales charge will not be taken into
account in computing gain/loss on the original Shares to the extent the subsequent sales charge is reduced. Instead, the disregarded portion of the original sales charge will be added to the tax basis of the newly acquired Shares. Furthermore, the
same rule also applies to a disposition of the newly acquired Shares made within 90 days of the second acquisition. This provision prevents Shareholders from immediately deducting the sales charge by shifting their investments within a family of
mutual funds.
34
Back-Up Withholding.
In certain cases, the Fund will be required to withhold at the applicable
withholding rate (currently 28%), and remit to the U.S. Treasury such amounts withheld from any distributions paid to a Shareholder who: (i) has failed to provide a correct taxpayer identification number; (ii) is subject to back-up
withholding by the IRS; (iii) has failed to certify to the Fund that such Shareholder is not subject to back-up withholding; or (iv) has not certified that such Shareholder is a U.S. person (including a U.S. resident alien). Back-up
withholding is not an additional tax and any amount withheld may be credited against a Shareholders U.S. federal income tax liability.
Sections 351 and 362.
The Trust, on behalf of the Fund, has the right to reject an order for a purchase of Shares of the Fund if the purchaser (or group of purchasers) would, upon obtaining the
Shares so ordered, own 80% or more of the outstanding Shares of a given Fund and if, pursuant to Sections 351 and 362 of the Code, that Fund would have a basis in the securities different from the market value of such securities on the date of
deposit. If the Funds basis in such securities on the date of deposit was less than market value on such date, the Fund, upon disposition of the securities, would recognize more taxable gain or less taxable loss than if its basis in the
securities had been equal to market value. It is not anticipated that the Trust will exercise the right of rejection except in a case where the Trust determines that accepting the order could result in material adverse tax consequences to the Fund
or its Shareholders. The Trust also has the right to require information necessary to determine beneficial Share ownership for purposes of the 80% determination.
Taxation of Certain Derivatives.
The Funds transactions in zero coupon securities, non-U.S. currencies, forward contracts, options and futures contracts (including options and futures
contracts on non-U.S. currencies), to the extent permitted, will be subject to special provisions of the Code (including provisions relating to hedging transactions and straddles) that, among other things, may affect the
character of gains and losses realized by the Fund (i.e., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Fund and defer Fund losses. These rules could therefore affect the character, amount and
timing of distributions to Shareholders. These provisions also (a) will require the Fund to mark-to-market certain types of the positions in its portfolio (i.e., treat them as if they were closed out at the end of each year) and (b) may
cause the Fund to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. The Fund will monitor its transactions,
will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any zero coupon security, non-U.S. currency, forward contract, option, futures contract or hedged investment in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a RIC.
The Funds investment in so-called Section 1256
contracts, such as regulated futures contracts, most non-U.S. currency forward contracts traded in the interbank market and options on most security indexes, are subject to special tax rules. All Section 1256 contracts held by the Fund at
the end of its taxable year are required to be marked to their market value, and any unrealized gain or loss on those positions will be included in the Funds income as if each position had been sold for its fair market value at the end of the
taxable year. The resulting gain or loss will be combined with any gain or loss realized by the Fund from positions in Section 1256 contracts closed during the taxable year. Provided such positions were held as capital assets and were not part
of a hedging transaction nor part of a straddle, 60% of the resulting net gain or loss will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or loss,
regardless of the period of time the positions were actually held by the Fund.
As a result of entering into swap contracts, the Fund may make
or receive periodic net payments. The Fund may also make or receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will generally constitute ordinary income
or deductions, while termination of a swap will generally result in capital gain or loss (which will be a long-term capital gain or loss if the Fund has been a party to the swap for more than one year). With respect to certain types of swaps, the
Fund may be required to currently recognize income or loss with respect to future payments on such swaps or may elect under certain circumstances to mark such swaps to market annually for tax purposes as ordinary income or loss. The tax treatment of
many types of credit default swaps is uncertain.
Qualified Dividend Income.
Distributions by the Fund of investment company
taxable income (including any short-term capital gains), whether received in cash or Shares, will be taxable either as ordinary income or as qualified dividend income, eligible for the reduced maximum rate to individuals of either 15% or 20%
(depending on whether the individuals income exceeds certain threshold amounts to the extent the Fund receives qualified dividend income on the securities it holds and the Fund designates the distribution as qualified dividend income.
Distributions by the Fund of its net short-term capital gains will be taxable as ordinary income. Capital gain distributions consisting of the Funds net capital gains will be taxable as long-term capital gains. Qualified dividend income is, in
general, dividend income from taxable U.S. corporations (but generally not from U.S. REITs) and certain non-U.S. corporations (e.g., non-U.S. corporations that are not passive foreign investment companies and which are incorporated in a
possession of the U.S. or in certain countries with a comprehensive tax treaty with the U.S., or the stock of which is readily tradable on an established securities market in the U.S.). Under current IRS guidance, the United States
35
has appropriate comprehensive income tax treaties with the following countries: Australia, Austria, Bangladesh, Barbados, Belgium, Bulgaria, Canada, China (but not with Hong Kong, which is
treated as a separate jurisdiction for U.S. tax purposes), Cyprus, the Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Latvia,
Lithuania, Luxembourg, Malta, Mexico, Morocco, the Netherlands, New Zealand, Norway, Pakistan, the Philippines, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Thailand,
Trinidad and Tobago, Tunisia, Turkey, Ukraine, the United Kingdom, and Venezuela.
A dividend from the Fund will not be treated as
qualified dividend income to the extent that (i) the Shareholder has not held the Shares on which the dividend was paid for 61 days during the 121-day period that begins on the date that is 60 days before the date on which the Shares become
ex-dividend with respect to such dividend or the Fund fails to satisfy those holding period requirements with respect to the securities it holds that paid the dividends distributed to the Shareholder (or, in the case of certain preferred stocks, the
holding requirement of 91 days during the 181-day period beginning on the date that is 90 days before the date on which the stock becomes ex-dividend with respect to such dividend); (ii) the Fund or the Shareholder is under an obligation
(whether pursuant to a short sale or otherwise) to make related payments with respect to substantially similar or related property; or (iii) the Shareholder elects to treat such dividend as investment income under Section 163(d)(4)(B) of
the Code. Dividends received by the Fund from a REIT or another RIC may be treated as qualified dividend income only to the extent the dividend distributions are attributable to qualified dividend income received by such REIT or other RIC. It is
expected that dividends received by the Fund from a REIT and distributed to a Shareholder generally will be taxable to the Shareholder as ordinary income.
If you lend your Fund Shares pursuant to securities lending arrangements you may lose the ability to use non-U.S. tax credits passed through by the Fund or to treat Fund dividends (paid while the Shares
are held by the borrower) as qualified dividends. Consult your financial intermediary or tax advisor. If you enter into a short sale with respect to Shares of the Fund, substitute payments made to the lender of such Shares may not be deductible.
Consult your financial intermediary or tax advisor.
Corporate Dividends Received Deduction.
The Fund does not expect dividends that
are paid to its corporate Shareholders to be eligible, in the hands of such Shareholders, for the corporate dividends received deduction.
Excess Inclusion Income.
Under current law, the Fund serves to block unrelated business taxable income from being realized by their tax-exempt
Shareholders. Notwithstanding the foregoing, a tax-exempt Shareholder could realize unrelated business taxable income by virtue of its investment in the Fund if Shares in the Fund constitute debt-financed property in the hands of the tax-exempt
Shareholder within the meaning of Code Section 514(b). Certain types of income received by the Fund from REITs, real estate mortgage investment conduits, taxable mortgage pools or other investments may cause the Fund to designate some or all of
its distributions as excess inclusion income. To Fund Shareholders, such excess inclusion income may (i) constitute taxable income, as unrelated business taxable income for those Shareholders who would otherwise be
tax-exempt such as individual retirement accounts, 401(k) accounts, Keogh plans, pension plans and certain charitable entities; (ii) not be offset by otherwise allowable deductions for tax purposes; (iii) not be eligible for reduced U.S.
withholding for non-U.S. Shareholders even from tax treaty countries; and (iv) cause the Fund to be subject to tax if certain disqualified organizations as defined by the Code are Fund Shareholders. If a charitable remainder annuity
trust or a charitable remainder unitrust (each as defined in Code Section 664) has UBTI for a taxable year, a 100% excise tax on the UBTI is imposed on the trust.
Non-U.S. Investments.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time the Fund accrues income or receivables or expenses or other
liabilities denominated in a non-U.S. currency and the time the Fund actually collects such income or pays such liabilities are generally treated as ordinary income or ordinary loss. In general, gains (and losses) realized on debt instruments will
be treated as Section 988 gain (or loss) to the extent attributable to changes in exchange rates between the U.S. dollar and the currencies in which the instruments are denominated. Similarly, gain or losses on non-U.S. currency, non-U.S.
currency forward contracts and certain non-U.S. currency options or futures contracts denominated in non-U.S currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as
ordinary income or loss unless the Fund were to elect otherwise.
The Fund may be subject to non-U.S. income taxes withheld at the source.
The Fund, if more than 50% of the value of its total assets at the close of its taxable year consists of securities of foreign corporations, may elect to pass through to its investors the amount of non-U.S. income taxes paid by the Fund
provided that the Fund held the security on the dividend settlement date and for at least 15 additional days immediately before and/or thereafter, with the result that each investor with respect to Shares of the Fund held for a minimum 16-day
holding period at the time of deemed distribution will (i) include in gross income, even though not actually received, the investors pro rata Share of the Funds non-U.S. income taxes, and (ii) either deduct (in calculating U.S.
taxable income) or credit (in calculating U.S. federal income tax) the investors pro rata Share of the Funds non-U.S. income taxes. A non-U.S. person
36
invested in the Fund in a year that the Fund elects to pass through its non-U.S. taxes may be treated as receiving additional dividend income subject to U.S. withholding tax. A
non-U.S. tax credit may not exceed the investors U.S. federal income tax otherwise payable with respect to the investors non-U.S. source income. For this purpose, Shareholders must treat as non-U.S. source gross income (i) their
proportionate Shares of non-U.S. taxes paid by the Fund and (ii) the portion of any dividend paid by the Fund that represents income derived from non-U.S. sources; the Funds gain from the sale of securities will generally be treated as
U.S.-source income. Certain limitations will be imposed to the extent to which the non-U.S. tax credit may be claimed.
Reporting.
If a
Shareholder recognizes a loss with respect to the Funds Shares of $2 million or more for an individual Shareholder or $10 million or more for a corporate Shareholder, the Shareholder must file with the IRS a disclosure statement on Form 8886.
Direct Shareholders of portfolio securities are in many cases exempted from this reporting requirement, but under current guidance, Shareholders of a RIC are not exempted. The fact that a loss is reportable under these regulations does not affect
the legal determination of whether the taxpayers treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
Other Taxes.
Dividends, distributions and redemption proceeds may also be subject to additional state, local and non-U.S. taxes depending on each
Shareholders particular situation.
Taxation of Non-U.S. Shareholders.
Dividends paid by the Fund to non-U.S. Shareholders are
generally subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income and short-term capital gains. In order to obtain a reduced rate of withholding, a non-U.S.
Shareholder will be required to provide an IRS Form W-8BEN certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. Shareholder who provides a Form W-8ECI, certifying that the
dividends are effectively connected with the non-U.S. Shareholders conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. Shareholder
were a U.S. Shareholder. A non-U.S. corporation receiving effectively connected dividends may also be subject to additional branch profits tax imposed at a rate of 30% (or lower treaty rate). A non-U.S. Shareholder who fails to provide
an IRS Form W-8BEN or other applicable form may be subject to back-up withholding at the appropriate rate.
In general, U.S. federal
withholding tax will not apply to any gain or income realized by a non-U.S. Shareholder in respect of any distributions of net long-term capital gains over net short-term capital losses, exempt-interest dividends, or upon the sale or other
disposition of Shares of the Fund.
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) makes a non-U.S. person
subject to U.S. tax on disposition of a U.S. real property interest as if such person were a U.S. person. Such gain is sometimes referred to as FIRPTA gain. The Code provides a look-through rule for distributions of FIRPTA
gain by a RIC if all of the following requirements are met: (i) the RIC is classified as a qualified investment entity (which includes a RIC if, in general, more than 50% of the RICs assets consists of interests in REITs
and U.S. real property holding corporations); and (ii) you are a non-U.S. shareholder that owns more than 5% of the Funds shares at any time during the one-year period ending on the date of the distribution. If these conditions are met,
Fund distributions to you to the extent derived from gain from the disposition of a U.S. real property interest (USRPI), may also be treated as USRPI gain and therefore subject to U.S. federal income tax, and requiring that you file a
nonresident U.S. income tax return. Also, such gain may be subject to a 30% branch profits tax in the hands of a non-U.S. shareholder that is a corporation. Even if a non-U.S. Shareholder does not own more than 5% of the Funds shares, Fund
distributions that are attributable to gain from the sale or disposition of a USRPI will be taxable as ordinary dividends subject to withholding at a 30% or lower treaty rate.
These rules apply to dividends paid by the Fund before January 1, 2014 (unless such sunset date is extended or made permanent). After such sunset date, Fund distributions from a U.S. REIT
attributable to FIRPTA gain will continue to be subject to the withholding rules described above provided the fund would otherwise be classified as a qualified investment entity.
Further, if the Fund is a U.S. real property holding corporation, any gain realized on the sale or exchange of Fund shares by a foreign
shareholder that owns more than 5% of a class of Fund shares would generally be taxed in the same manner as for a U.S. shareholder. The Fund will be a U.S. real property holding corporation if, in general, 50% or more of the fair market
value of its assets consists of U.S. real property interests, including stock of certain U.S. REITs.
For taxable years beginning before
January 1, 2014 (unless further extended by Congress), properly designated dividends received by a nonresident alien or foreign entity are generally exempt from U.S. federal withholding tax when they (a) are paid in respect of the
Funds qualified net interest income (generally, the Funds U.S. source interest income, reduced by expenses that are allocable to such
37
income), or (b) are paid in connection with the Funds qualified short-term capital gains (generally, the excess of the Funds net short-term capital gain over the
Funds long-term capital loss for such taxable year). However, depending on the circumstances, the Fund may designate all, some or none of the Funds potentially eligible dividends as such qualified net interest income or as qualified
short-term capital gains, and a portion of the Funds distributions (e.g. interest from non U.S. sources or any foreign currency gains) would be ineligible for this potential exemption from withholding. There can be no assurance as to whether
or not legislation will be enacted to extend this exemption.
Shares of the Fund held by a non-U.S. Shareholder at death will be
considered situated within the United States and will generally be subject to the U.S. estate tax.
Effective January 1, 2014, the Fund
will be required to withhold U.S. tax (at a 30% rate) on payments of taxable dividends and (effective January 1, 2017) redemption proceeds made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new
reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the Fund to enable the Fund to determine
whether withholding is required.
The foregoing discussion is a summary of certain material U.S. federal income tax considerations only
and is not intended as a substitute for careful tax planning. Purchasers of Shares should consult their own tax advisers as to the tax consequences of investing in such Shares, including under state, local and non-U.S tax laws. Finally, the
foregoing discussion is based on applicable provisions of the Code, regulations, judicial authority and administrative interpretations in effect on the date of this SAI. Changes in applicable authority could materially affect the conclusions
discussed above, and such changes often occur.
Standby Commitments.
The Fund may purchase municipal securities together with the right
to resell the securities to the seller at an agreed upon price or yield within a specified period prior to the maturity date of the securities. Such a right to resell is commonly known as a put and is also referred to as a standby
commitment. The Fund may pay for a standby commitment either in cash or in the form of a higher price for the securities which are acquired subject to the standby commitment, thus increasing the cost of securities and reducing the yield
otherwise available. Additionally, the Fund may purchase beneficial interests in municipal securities held by trusts, custodial arrangements or partnerships and/or combined with third-party puts or other types of features such as interest rate
swaps; those investments may require the Fund to pay tender fees or other fees for the various features provided. The IRS has issued a revenue ruling to the effect that, under specified circumstances, a regulated investment company will
be the owner of tax-exempt municipal obligations acquired subject to a put option. The IRS has also issued private letter rulings to certain taxpayers (which do not serve as precedent for other taxpayers) to the effect that tax-exempt interest
received by a regulated investment company with respect to such obligations will be tax-exempt in the hands of the company and may be distributed to its shareholders as exempt-interest dividends. The IRS has subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of property in cases involving the sale of securities or participation interests therein if the purchaser has the right to cause the security, or the participation interest
therein, to be purchased by either the seller or a third party. The Fund, where relevant, intends to take the position that it is the owner of any municipal obligations acquired subject to a standby commitment or other third party put and that
tax-exempt interest earned with respect to such municipal obligations will be tax-exempt in its hands. There is no assurance that the IRS will agree with such position in any particular case. If the Fund is not viewed as the owner of such municipal
obligations, it will not be permitted to treat the exempt interest paid on such obligations as belonging to it. This may affect the Funds eligibility to pay exempt-interest dividends to its shareholders. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment of tender fees paid by the Fund, in relation to various regulated investment company tax provisions is unclear. However, the Advisor intends to manage the Funds
portfolio in a manner designed to minimize any adverse impact from the tax rules applicable to these investments.
As described herein, in
certain circumstances the Fund may be required to recognize taxable income or gain even though no corresponding amounts of cash are received concurrently. The Fund may therefore be required to obtain cash to satisfy its distribution requirements by
selling securities at times when it might not otherwise be desirable to do so or by borrowing the necessary cash, thereby incurring interest expense. In certain situations, the Fund will, for a taxable year, defer all or a portion of its capital
losses and currency losses realized after October 31 until the next taxable year in computing its investment company taxable income and net capital gain, which will defer the recognition of such realized losses. Such deferrals and other rules
regarding gains and losses realized after October 31 may affect the federal income tax character of shareholder distributions.
Exempt-interest dividends.
Any dividends paid by the Fund that are reported by the Fund as exempt-interest dividends will not be subject to
regular federal income tax. The Fund will be qualified to pay exempt-interest dividends to its shareholders if, at the end of each quarter of the Funds taxable year, at least 50% of the total value of the Funds assets consists of
obligations of a state or political
38
subdivision thereof the interest on which is exempt from federal income tax under Code section 103(a). Distributions that the Fund reports as exempt-interest dividends are treated as interest
excludable from shareholders gross income for federal income tax purposes but may result in liability for federal AMT purposes and for state and local tax purposes, both for individual and corporate shareholders. For example, if the Fund
invests in private activity bonds, certain shareholders may be subject to AMT on the part of the Funds distributions derived from interest on such bonds.
Interest on indebtedness incurred directly or indirectly to purchase or carry shares of the Fund will not be deductible to the extent it is deemed related to exempt-interest dividends paid by the Fund.
The portion of interest that is not deductible is equal to the total interest paid or accrued on the indebtedness, multiplied by the percentage of the Funds total distributions (not including Capital Gain Dividends) paid to the shareholder
that are exempt-interest dividends. Under rules used by the IRS to determine when borrowed funds are considered incurred for the purpose of purchasing or carrying particular assets, the purchase of shares may be considered to have been made with
borrowed funds even though such funds are not directly traceable to the purchase of shares. In addition, the Code may require a shareholder that receives exempt-interest dividends to treat as taxable income a portion of certain otherwise non-taxable
social security and railroad retirement benefit payments. A portion of any exempt-interest dividend paid by the Fund that represents income derived from certain revenue or private activity bonds held by the Fund may not retain its tax-exempt status
in the hands of a shareholder who is a substantial user of a facility financed by such bonds, or a related person thereof. Moreover, some or all of the exempt-interest dividends distributed by the Fund may be a specific
preference item, or a component of an adjustment item, for purposes of the federal individual and corporate AMT. The receipt of dividends and distributions from the Fund may affect a foreign corporate shareholders federal branch
profits tax liability and the federal excess net passive income tax liability of a shareholder that is a Subchapter S corporation. Shareholders should consult their own tax advisors as to whether they are (i) substantial
users with respect to a facility or related to such users within the meaning of the Code or (ii) subject to a federal AMT, the federal branch profits tax or the federal excess net passive income tax.
Shareholders that are required to file tax returns are required to report tax-exempt interest income, including exempt-interest dividends, on
their federal income tax returns. The Fund will inform shareholders of the federal income tax status of its distributions after the end of each calendar year, including the amounts, if any, that qualify as exempt-interest dividends and any portions
of such amounts that constitute tax preference items under the federal AMT. Shareholders who have not held shares of the Fund for a full taxable year may have designated as tax-exempt or as a tax preference item a percentage of their distributions
which is different from the percentage of the Funds income that was tax-exempt or comprising tax preference items during the period of their investment in the Fund. Shareholders should consult their tax advisors for more information.
Miscellaneous Information
Counsel.
Dechert LLP, located at 1095 Avenue of the Americas, New York, New York 10036, is counsel to the Trust.
Independent Registered Public Accounting Firm.
Ernst & Young LLP, located at 5 Times Square, New York, New York 10036, serves as the Trusts independent registered public accounting
firm, audits the Funds financial statements, and may perform other services.
Financial Statements
Because the Fund had not commenced operations as of the date of this SAI, financial statements are not provided for the Fund.
39
APPENDIX A
SUMMARY OF PROXY VOTING POLICIES AND PROCEDURES
I. INTRODUCTION
Deutsche Asset Management (AM) has adopted and implemented the following policies and procedures, which it believes are reasonably designed to
ensure that proxies are voted in the best economic interest of clients, in accordance with its fiduciary duties and local regulation. These Proxy Voting Policies, Procedures and Guidelines shall apply to all accounts managed by US domiciled advisers
and to all US client accounts managed by non US regional offices. Non US regional offices are required to maintain procedures and to vote proxies as may be required by law on behalf of their non US clients. In addition, AMs proxy policies
reflect the fiduciary standards and responsibilities for ERISA accounts.
The attached guidelines represent a set of global recommendations
that were determined by the Global Proxy Voting Sub-Committee (the GPVSC). These guidelines were developed to provide AM with a comprehensive list of recommendations that represent how AM will generally vote proxies for its clients. The
recommendations derived from the application of these guidelines are not intended to influence the various AM legal entities either directly or indirectly by parent or affiliated companies. In addition, the organizational structures and documents of
the various AM legal entities allows, where necessary or appropriate, the execution by individual AM subsidiaries of the proxy voting rights independently of any DB parent or affiliated company. This applies in particular to non U.S. fund management
companies. The individuals that make proxy voting decisions are also free to act independently, subject to the normal and customary supervision by the management/boards of these AM legal entities.
II. AMS PROXY VOTING RESPONSIBILITIES
Proxy votes are the property of AMs advisory clients.
1
As such, AMs authority and responsibility to vote such proxies depend upon its contractual relationships with its clients. AM has delegated responsibility for effecting its advisory clients
proxy votes to Institutional Shareholder Services (ISS), an independent third-party proxy voting specialist. ISS votes AMs advisory clients proxies in accordance with AMs proxy guidelines or AMs specific
instructions. Where a client has given specific instructions as to how a proxy should be voted, AM will notify ISS to carry out those instructions. Where no specific instruction exists, AM will follow the procedures in voting the proxies set forth
in this document. Certain Taft-Hartley clients may direct AM to have ISS vote their proxies in accordance with Taft Hartley voting Guidelines
Clients may in certain instances contract with their custodial agent and notify AM that they wish to engage in securities lending transactions. In such
cases, it is the responsibility of the custodian to deduct the number of shares that are on loan so that they do not get voted twice.
III.
POLICIES
1. Proxy voting activities are conducted in the best economic interest of clients
AM has adopted the following policies and procedures to ensure that proxies are voted in accordance with the best economic interest of its clients, as
determined by AM in good faith after appropriate review.
2. The Global Proxy Voting Sub-Committee
The Global Proxy Voting Sub-Committee (the GPVSC) is an internal working group established by the applicable AMs Investment Risk
Oversight Committee pursuant to a written charter. The GPVSC is responsible for overseeing AMs proxy voting activities, including:
(i)
adopting, monitoring and updating guidelines, attached as Exhibit A (the Guidelines), that provide how AM will generally vote proxies pertaining to a comprehensive list of common proxy voting matters;
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For purposes of these Policies and Procedures, clients refers to persons or entities: for which AM serves as investment adviser or
sub-adviser; for which AM votes proxies; and that have an economic or beneficial ownership interest in the portfolio securities of issuers soliciting such proxies.
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(ii) voting proxies where (A) the issues are not covered by specific client instruction or the
Guidelines; (B) the Guidelines specify that the issues are to be determined on a case-by-case basis; or (C) where an exception to the Guidelines may be in the best economic interest of AMs clients; and
(iii) monitoring the Proxy Vendor Oversights proxy voting activities (see below).
AMs Proxy Vendor Oversight, a function of AMs Operations Group, is responsible for coordinating with ISS to administer AMs proxy voting process and for voting proxies in accordance with
any specific client instructions or, if there are none, the Guidelines, and overseeing ISS proxy responsibilities in this regard.
3.
Availability of Proxy Voting Policies and Procedures and proxy voting record
Copies of these Policies and Procedures, as they may be
updated from time to time, are made available to clients as required by law and otherwise at AMs discretion. Clients may also obtain information on how their proxies were voted by AM as required by law and otherwise at AMs discretion;
however, AM must not selectively disclose its investment company clients proxy voting records. The Proxy Vendor Oversight will make proxy voting reports available to advisory clients upon request. The investment companies proxy voting
records will be disclosed to shareholders by means of publicly-available annual filings of each companys proxy voting record for 12-month periods ended June 30 (see Recordkeeping below), if so required by relevant law.
IV. PROCEDURES
The key
aspects of AMs proxy voting process are as follows:
1. The GPVSCs Proxy Voting Guidelines
The Guidelines set forth the GPVSCs standard voting positions on a comprehensive list of common proxy voting matters. The GPVSC has developed, and
continues to update the Guidelines based on consideration of current corporate governance principles, industry standards, client feedback, and the impact of the matter on issuers and the value of the investments.
The GPVSC will review the Guidelines as necessary to support the best economic interests of AMs clients and, in any event, at least annually. The
GPVSC will make changes to the Guidelines, whether as a result of the annual review or otherwise, taking solely into account the best economic interests of clients. Before changing the Guidelines, the GPVSC will thoroughly review and evaluate the
proposed change and the reasons therefore, and the GPVSC Chair will ask GPVSC members whether anyone outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as a AM advisory client has
requested or attempted to influence the proposed change and whether any member has a conflict of interest with respect to the proposed change. If any such matter is reported to the GPVSC Chair, the Chair will promptly notify the Conflicts of
Interest Management Sub-Committee (see below) and will defer the approval, if possible. Lastly, the GPVSC will fully document its rationale for approving any change to the Guidelines.
The Guidelines may reflect a voting position that differs from the actual practices of the public company(ies) within the Deutsche Bank organization or of the investment companies for which AM or an
affiliate serves as investment adviser or sponsor. Investment companies, particularly closed-end investment companies, are different from traditional operating companies. These differences may call for differences in voting positions on the same
matter. Further, the manner in which AM votes investment company proxies may differ from proposals for which a AM-advised or sponsored investment company solicits proxies from its shareholders. As reflected in the Guidelines, proxies solicited by
closed-end (and open-end) investment companies are generally voted in accordance with the pre-determined guidelines of ISS. See Section IV.3.B.
Funds (Underlying Funds) in which Topiary Fund Management Fund of Funds (each, a Fund) invest, may from time to time seek to
revise their investment terms (i.e. liquidity, fees, etc.) or investment structure. In such event, the Underlying Funds may require approval/consent from its investors to effect the relevant changes. Topiary Fund Management has adopted Proxy Voting
Procedures which outline the process for these approvals.
2. Specific proxy voting decisions made by the GPVSC
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The Proxy Vendor Oversight will refer to the GPVSC all proxy proposals (i) that are not covered by
specific client instructions or the Guidelines; or (ii) that, according to the Guidelines, should be evaluated and voted on a case-by-case basis.
Additionally, if, the Proxy Vendor Oversight, the GPVSC Chair or any member of the GPVSC, a portfolio manager, a research analyst or a sub-adviser believes that voting a particular proxy in accordance
with the Guidelines may not be in the best economic interests of clients, that individual may bring the matter to the attention of the GPVSC Chair and/or the Proxy Vendor Oversight.
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If the
Proxy Vendor Oversight refers a proxy proposal to the GPVSC or the GPVSC determines that voting a particular proxy in accordance with the Guidelines is not in the best economic interests of clients, the GPVSC will evaluate and vote the proxy,
subject to the procedures below regarding conflicts.
The GPVSC endeavors to hold meetings to decide how to vote particular proxies
sufficiently before the voting deadline so that the procedures below regarding conflicts can be completed before the GPVSCs voting determination.
3. Certain proxy votes may not be cast
In some cases, the GPVSC may determine that it is
in the best economic interests of its clients not to vote certain proxies. If the conditions below are met with regard to a proxy proposal, AM will abstain from voting:
Neither the Guidelines nor specific client instructions cover an issue;
ISS does
not make a recommendation on the issue;
The GPVSC cannot convene on the proxy proposal at issue to make a determination as to what
would be in the clients best interest. (This could happen, for example, if the Conflicts of Interest Management Sub-committee found that there was a material conflict or if despite all best efforts being made, the GPVSC quorum requirement
could not be met).
In addition, it is AMs policy not to vote proxies of issuers subject to laws of those jurisdictions that impose
restrictions upon selling shares after proxies are voted, in order to preserve liquidity. In other cases, it may not be possible to vote certain proxies, despite good faith efforts to do so. For example, some jurisdictions do not provide adequate
notice to shareholders so that proxies may be voted on a timely basis. Voting rights on securities that have been loaned to third-parties transfer to those third-parties, with loan termination often being the only way to attempt to vote proxies on
the loaned securities. Lastly, the GPVSC may determine that the costs to the client(s) associated with voting a particular proxy or group of proxies outweighs the economic benefits expected from voting the proxy or group of proxies.
The Proxy Vendor Oversight will coordinate with the GPVSC Chair regarding any specific proxies and any categories of proxies that will not or cannot be
voted. The reasons for not voting any proxy shall be documented.
4. Conflict of Interest Procedures
A. Procedures to Address Conflicts of Interest and Improper Influence
Overriding Principle
. In the limited circumstances where the GPVSC votes proxies,
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the GPVSC will vote those proxies in accordance with what it, in good faith, determines to be the best economic
interests of AMs clients.
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The Proxy Vendor Oversight generally monitors upcoming proxy solicitations for heightened attention from the press or the industry and for novel or
unusual proposals or circumstances, which may prompt the Proxy Vendor Oversight to bring the solicitation to the attention of the GPVSC Chair. AM portfolio managers, AM research analysts and sub-advisers also may bring a particular proxy vote to the
attention of the GPVSC Chair, as a result of their ongoing monitoring of portfolio securities held by advisory clients and/or their review of the periodic proxy voting record reports that the GPVSC Chair distributes to AM portfolio managers and AM
research analysts.
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As mentioned above, the GPVSC votes proxies (i) where neither a specific client instruction nor a Guideline directs how the proxy should be voted,
(ii) where the Guidelines specify that an issue is to be determined on a case by case basis or (iii) where voting in accordance with the Guidelines may not be in the best economic interests of clients.
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Independence of the GPVSC
. As a matter of Compliance policy, the GPVSC and the Proxy Vendor Oversight
are structured to be independent from other parts of Deutsche Bank. Members of the GPVSC and the employee responsible for Proxy Vendor Oversight are employees of AM. As such, they may not be subject to the supervision or control of any employees of
Deutsche Bank Corporate and Investment Banking division (CIB). Their compensation cannot be based upon their contribution to any business activity outside of AM without prior approval of Legal and Compliance. They can have no contact
with employees of Deutsche Bank outside of the Private Client and Asset Management division (PCAM) regarding specific clients, business matters or initiatives without the prior approval of Legal and Compliance. They furthermore may not
discuss proxy votes with any person outside of AM (and within AM only on a need to know basis).
Conflict Review Procedures
. There will
be a committee (the Conflicts of Interest Management Sub-Committee) established within AM that will monitor for potential material conflicts of interest in connection with proxy proposals that are to be evaluated by the GPVSC. Promptly
upon a determination that a vote shall be presented to the GPVSC, the GPVSC Chair shall notify the Conflicts of Interest Management Sub-Committee. The Conflicts of Interest Management Sub-Committee shall promptly collect and review any information
deemed reasonably appropriate to evaluate, in its reasonable judgment, if AM or any person participating in the proxy voting process has, or has the appearance of, a material conflict of interest. For the purposes of this policy, a conflict of
interest shall be considered material to the extent that a reasonable person could expect the conflict to influence, or appear to influence, the GPVSCs decision on the particular vote at issue. GPVSC should provide the Conflicts of
Interest Management Sub-Committee a reasonable amount of time (no less than 24 hours) to perform all necessary and appropriate reviews. To the extent that a conflicts review cannot be sufficiently completed by the Conflicts of Interest Management
Sub-Committee the proxies will be voted in accordance with the standard guidelines.
The information considered by the Conflicts of Interest
Management Sub-Committee may include without limitation information regarding (i) AM client relationships; (ii) any relevant personal conflict known by the Conflicts of Interest Management Sub-Committee or brought to the attention of that
sub-committee; (iii) and any communications with members of the GPVSC (or anyone participating or providing information to the GPVSC) and any person outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that
identifies itself as a AM advisory client regarding the vote at issue. In the context of any determination, the Conflicts of Interest Management Sub-Committee may consult with, and shall be entitled to rely upon, all applicable outside experts,
including legal counsel.
Upon completion of the investigation, the Conflicts of Interest Management Sub-Committee will document its findings
and conclusions. If the Conflicts of Interest Management Sub-Committee determines that (i)AM has a material conflict of interest that would prevent it from deciding how to vote the proxies concerned without further client consent or
(ii) certain individuals should be recused from participating in the proxy vote at issue, the Conflicts of Interest Management Sub-Committee will so inform the GPVSC chair.
If notified that AM has a material conflict of interest as described above, the GPVSC chair will obtain instructions as to how the proxies should be voted either from (i) if time permits, the
effected clients, or (ii) in accordance with the standard guidelines. If notified that certain individuals should be recused from the proxy vote at issue, the GPVSC Chair shall do so in accordance with the procedures set forth below.
Note: Any AM employee who becomes aware of a potential, material conflict of interest in respect of any proxy vote to be made on behalf of
clients shall notify Compliance. Compliance shall call a meeting of the conflict review committee to evaluate such conflict and determine a recommended course of action.
Conflict Review Procedures
. There will be a committee (the Conflicts of Interest Management Sub-Committee) established within AM that will monitor for potential material conflicts of
interest in connection with proxy proposals that are to be evaluated by the GPVSC. Promptly upon a determination that a vote shall be presented to the GPVSC, the GPVSC Chair shall notify the Conflicts of Interest Management Sub-Committee. The
Conflicts of Interest Management Sub-Committee shall promptly collect and review any information deemed reasonably appropriate to evaluate, in its reasonable judgment, if AM or any person participating in the proxy voting process has, or has the
appearance of, a material conflict of interest. For the purposes of this policy, a conflict of interest shall be considered material to the extent that a reasonable person could expect the conflict to influence, or appear to influence,
the GPVSCs decision on the particular vote at issue. GPVSC should provide the Conflicts of Interest Management Sub-Committee a reasonable
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The Proxy Vendor Oversight, who serves as the non-voting secretary of the GPVSC, may receive routine calls from proxy solicitors and other parties
interested in a particular proxy vote. Any contact that attempts to exert improper pressure or influence shall be reported to the Conflicts of Interest Management Sub-Committee.
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amount of time (no less than 24 hours) to perform all necessary and appropriate reviews. To the extent that a conflicts review cannot be sufficiently completed by the Conflicts of Interest
Management Sub-Committee the proxies will be voted in accordance with the standard guidelines.
The information considered by the Conflicts of
Interest Management Sub-Committee may include without limitation information regarding (i) AM client relationships; (ii) any relevant personal conflict known by the Conflicts of Interest Management Sub-Committee or brought to the attention
of that sub-committee; (iii) and any communications with members of the GPVSC (or anyone participating or providing information to the GPVSC) and any person outside of the AM organization (but within Deutsche Bank and its affiliates) or any
entity that identifies itself as a AM advisory client regarding the vote at issue. In the context of any determination, the Conflicts of Interest Management Sub-Committee may consult with, and shall be entitled to rely upon, all applicable outside
experts, including legal counsel.
Upon completion of the investigation, the Conflicts of Interest Management Sub-Committee will document its
findings and conclusions. If the Conflicts of Interest Management Sub-Committee determines that (i)AM has a material conflict of interest that would prevent it from deciding how to vote the proxies concerned without further client consent or
(ii) certain individuals should be recused from participating in the proxy vote at issue, the Conflicts of Interest Management Sub-Committee will so inform the GPVSC chair.
If notified that AM has a material conflict of interest as described above, the GPVSC chair will obtain instructions as to how the proxies should be voted either from (i) if time permits, the
effected clients, or (ii) in accordance with the standard guidelines. If notified that certain individuals should be recused from the proxy vote at issue, the GPVSC Chair shall do so in accordance with the procedures set forth below.
Note: Any AM employee who becomes aware of a potential, material conflict of interest in respect of any proxy vote to be made on behalf of
clients shall notify Compliance. Compliance shall call a meeting of the conflict review committee to evaluate such conflict and determine a recommended course of action.
Procedures to be followed by the GPVSC. At the beginning of any discussion regarding how to vote any proxy, the GPVSC Chair (or his or her delegate) will inquire as to whether any GPVSC member (whether
voting or ex officio) or any person participating in the proxy voting process has a personal conflict of interest or has actual knowledge of an actual or apparent conflict that has not been reported to the Conflicts of Interest Management
Sub-Committee.
The GPVSC Chair also will inquire of these same parties whether they have actual knowledge regarding whether any director,
officer or employee outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as a AM advisory client, has: (i) requested that AM, the Proxy Vendor Oversight (or any member thereof) or a
GPVSC member vote a particular proxy in a certain manner; (ii) attempted to influence AM, the Proxy Vendor Oversight (or any member thereof), a GPVSC member or any other person in connection with proxy voting activities; or (iii) otherwise
communicated with a GPVSC member or any other person participating or providing information to the GPVSC regarding the particular proxy vote at issue, and which incident has not yet been reported to the Conflicts of Interest Management
Sub-Committee.
If any such incidents are reported to the GPVSC Chair, the Chair will promptly notify the Conflicts of Interest Management
Sub-Committee and, if possible, will delay the vote until the Conflicts of Interest Management Sub-Committee can complete the conflicts report. If a delay is not possible, the Conflicts of Interest Management Sub-Committee will instruct the GPVSC
whether anyone should be recused from the proxy voting process, or whether AM should vote the proxy in accordance with the standard guidelines, seek instructions as to how to vote the proxy at issue from ISS or, if time permits, the effected
clients. These inquiries and discussions will be properly reflected in the GPVSCs minutes.
Duty to Report
. Any AM employee,
including any GPVSC member (whether voting or ex officio), that is aware of any actual or apparent conflict of interest relevant to, or any attempt by any person outside of the AM organization (but within Deutsche Bank and its affiliates) or any
entity that identifies itself as a AM advisory client to influence, how AM votes its proxies has a duty to disclose the existence of the situation to the GPVSC Chair (or his or her designee) and the details of the matter to the Conflicts of Interest
Management Sub-Committee. In the case of any person participating in the deliberations on a specific vote, such disclosure should be made before engaging in any activities or participating in any discussion pertaining to that vote.
Recusal of Members
. The GPVSC will recuse from participating in a specific proxy vote any GPVSC members (whether voting or ex officio) and/or any
other person who (i) are personally involved in a material conflict of interest; or (ii) who, as determined by the
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Conflicts of Interest Management Sub-Committee, have actual knowledge of a circumstance or fact that could effect their independent judgment, in respect of such vote. The GPVSC will also exclude
from consideration the views of any person (whether requested or volunteered) if the GPVSC or any member thereof knows, or if the Conflicts of Interest Management Sub-Committee has determined, that such other person has a material conflict of
interest with respect to the particular proxy, or has attempted to influence the vote in any manner prohibited by these policies.
If, after
excluding all relevant GPVSC voting members pursuant to the paragraph above, there are three or more GPVSC voting members remaining, those remaining GPVSC members will determine how to vote the proxy in accordance with these Policies and Procedures.
If there are fewer than three GPVSC voting members remaining, the GPVSC Chair will vote the proxy in accordance with the standard guidelines, will obtain instructions as to how to have the proxy voted from, if time permits, the effected clients and
otherwise from ISS.
B. Investment Companies and Affiliated Public Companies
Investment Companies
. As reflected in the Guidelines, all proxies solicited by open-end and closed-end investment companies are voted in accordance with the pre-determined guidelines of ISS, unless
the investment company client directs AM to vote differently on a specific proxy or specific categories of proxies. However, regarding investment companies for which AM or an affiliate serves as investment adviser or principal underwriter, such
proxies are voted in the same proportion as the vote of all other shareholders (i.e., mirror or echo voting). Master fund proxies solicited from feeder funds are voted in accordance with applicable provisions of
Section 12 of the Investment Company Act of 1940.
Subject to participation agreements with certain Exchange Traded Funds
(ETF) issuers that have received exemptive orders from the U.S. Securities and Exchange Commission allowing investing DWS funds to exceed the limits set forth in Section 12(d)(1)(A) and (B) of the Investment Company Act of
1940, DeAM will echo vote proxies for ETFs in which Deutsche Bank holds more than 25% of outstanding voting shares globally when required to do so by participation agreements and SEC orders.
Affiliated Public Companies
. For proxies solicited by non-investment company issuers of or within the Deutsche Bank organization, e.g., Deutsche bank itself, these proxies will be voted in the same
proportion as the vote of other shareholders (i.e., mirror or echo voting).
Note: With respect to the Central Cash
Management Fund (registered under the Investment Company Act of 1940), the Fund is not required to engage in echo voting and the investment adviser will use these Guidelines, and may determine, with respect to the Central Cash Management Fund, to
vote contrary to the positions in the Guidelines, consistent with the Funds best interest.
C. Other Procedures That Limit Conflicts
of Interest
AM and other entities in the Deutsche Bank organization have adopted a number of policies, procedures and internal controls
that are designed to avoid various conflicts of interest, including those that may arise in connection with proxy voting, including:
Deutsche Bank Americas Restricted Activities Policy
. This policy provides for, among other things, independence of AM employees from CIB, and information barriers between AM and other affiliates. Specifically, no AM employee may be subject to
the supervision or control of any employee of CIB. No AM employee shall have his or her compensation based upon his or her contribution to any business activity within the Bank outside of the business of AM, without the prior approval of Legal or
Compliance. Further, no employee of CIB shall have any input into the compensation of a AM employee without the prior approval of Legal or Compliance. Under the information barriers section of this policy, as a general rule, AM employees who are
associated with the investment process should have no contact with employees of Deutsche Bank or its affiliates, outside of PCAM, regarding specific clients, business matters, or initiatives. Further, under no circumstances should proxy votes be
discussed with any Deutsche Bank employee outside of AM (and should only be discussed on a need-to-know basis within AM).
Other relevant
internal policies include the Deutsche Bank Americas Code of Professional Conduct, the Deutsche Asset Management Information Sharing Procedures, the Deutsche Asset Management Code of Ethics, the Sarbanes-Oxley Senior Officer Code of Ethics, and the
Deutsche Bank Group Code of Conduct. The GPVSC expects that these policies, procedures and internal controls will greatly reduce the chance that the GPVSC (or, its members) would be involved in, aware of or influenced by, an actual or apparent
conflict of interest.
V. RECORDKEEPING
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At a minimum, the following types of records must be properly maintained and readily accessible in order to
evidence compliance with this policy.
AM will maintain a record of each vote cast by AM that includes among other things, company name,
meeting date, proposals presented, vote cast and shares voted.
The Proxy Vendor Oversight maintains records for each of the proxy
ballots it votes. Specifically, the records include, but are not limited to:
The proxy statement (and any additional solicitation
materials) and relevant portions of annual statements.
Any additional information considered in the voting process that may be obtained
from an issuing company, its agents or proxy research firms.
Analyst worksheets created for stock option plan and share increase
analyses.
Proxy Edge print-screen of actual vote election.
AM will retain these Policies and Procedures and the Guidelines; will maintain records of client requests for proxy voting information; and will retain any documents the Proxy Vendor Oversight or the
GPVSC prepared that were material to making a voting decision or that memorialized the basis for a proxy voting decision.
The GPVSC also will
create and maintain appropriate records documenting its compliance with these Policies and Procedures, including records of its deliberations and decisions regarding conflicts of interest and their resolution.
With respect to AMs investment company clients, ISS will create and maintain records of each companys proxy voting record for 12-month
periods ended June 30. AM will compile the following information for each matter relating to a portfolio security considered at any shareholder meeting held during the period covered by the report and with respect to which the company was
entitled to vote:
The name of the issuer of the portfolio security;
The exchange ticker symbol of the portfolio security (if symbol is available through reasonably practicable means);
The Council on Uniform Securities Identification Procedures number for the portfolio security (if the number is available through reasonably practicable means);
The shareholder meeting date;
A
brief identification of the matter voted on;
Whether the matter was proposed by the issuer or by a security holder;
Whether the company cast its vote on the matter;
How the company cast its vote (e.g., for or against proposal, or abstain; for or withhold regarding election of directors); and
Whether the company cast its vote for or against management.
Note: This list is intended
to provide guidance only in terms of the records that must be maintained in accordance with this policy. In addition, please note that records must be maintained in accordance with the applicable AM Records Management Policy.
With respect to electronically stored records, properly maintained is defined as complete, authentic (unalterable) usable and backed-up. At a
minimum, records should be retained for a period of not less than six years (or longer, if necessary to comply with applicable regulatory requirements), the first three years in an appropriate AM office.
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VI. THE GPVSCS OVERSIGHT ROLE
In addition to adopting the Guidelines and making proxy voting decisions on matters referred to it as set forth above, the GPVSC will monitor the proxy voting process by reviewing summary proxy
information presented by ISS. The GPVSC will use this review process to determine, among other things, whether any changes should be made to the Guidelines. This review will take place at least quarterly and will be documented in the GPVSCs
minutes.
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Attachment A Global Proxy Voting Guidelines
Deutsche Asset Management
Global Proxy Voting Guidelines
As Amended October 2010
[GRAPHIC OMITTED]
9
Table of contents
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I
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Board Of Directors And Executives
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12
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A
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Election Of Directors
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12
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B
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Classified Boards Of Directors
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12
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C
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Board And Committee Independence
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12
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D
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Liability And Indemnification Of Directors
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13
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E
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Qualifications Of Directors
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13
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F
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Removal Of Directors And Filling Of Vacancies
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13
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G
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Proposals To Fix The Size Of The Board
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13
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H
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Proposals to Restrict Chief Executive Officers Service on Multiple Boards
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13
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I
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Proposals to Restrict Supervisory Board Members Service on Multiple Boards
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13
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J
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Proposals to Establish Audit Committees
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14
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II
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Capital Structure
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14
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A
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Authorization Of Additional Shares
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14
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B
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Authorization Of Blank Check Preferred Stock
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14
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C
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Stock Splits/Reverse Stock Splits
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14
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D
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Dual Class/Supervoting Stock
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15
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E
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Large Block Issuance
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15
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F
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Recapitalization Into A Single Class Of Stock
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15
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G
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Share Repurchases
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15
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H
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Reductions In Par Value
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15
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III
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Corporate Governance Issues
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15
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A
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Confidential Voting
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15
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B
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Cumulative Voting
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15
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C
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Supermajority Voting Requirements
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16
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D
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Shareholder Right To Vote
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16
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IV
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Compensation
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16
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A
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Establishment of a Remuneration Committee
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16
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B
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Executive And Director Stock Option Plans
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17
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C
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Employee Stock Option/Purchase Plans
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17
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D
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Golden Parachutes
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17
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E
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Proposals To Limit Benefits Or Executive Compensation
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17
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F
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Option Expensing
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18
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G
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Management board election and motion
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18
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H
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Remuneration (variable pay)
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18
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I
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Long-term incentive plans
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19
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J
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Shareholder Proposals Concerning Pay For Superior Performance
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19
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K
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Executive Compensation Advisory
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19
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V
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Anti-Takeover Related Issues
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19
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A
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Shareholder Rights Plans (Poison Pills)
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19
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B
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Reincorporation
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19
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C
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Fair-Price Proposals
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20
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D
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Exemption From State Takeover Laws
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20
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E
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Non-Financial Effects Of Takeover Bids
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20
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VI
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Mergers & Acquisitions
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20
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10
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VII
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Social & Political Issues
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20
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A
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Labor & Human Rights
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20
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B
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Diversity & Equality
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20
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C
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Health & Safety
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21
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D
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Government/Military
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21
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E
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Tobacco
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21
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F
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Principles for Responsible Investment (PRI) Environmental Issues
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22
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VIII
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Miscellaneous Items
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22
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A
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Ratification Of Auditors
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22
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B
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Limitation Of Non-Audit Services Provided By Independent Auditor
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22
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C
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Audit Firm Rotation
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22
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D
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Transaction Of Other Business
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22
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E
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Motions To Adjourn The Meeting
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F
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Bundled Proposals
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23
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G
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Change Of Company Name
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23
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H
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Proposals Related To The Annual Meeting
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23
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I
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Reimbursement Of Expenses Incurred From Candidate Nomination
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Investment Company Proxies
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International Proxy Voting
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These Guidelines may reflect a voting position that differs from the actual practices of the public
company(ies) within the Deutsche Bank organization or of the investment companies for which AM or an affiliate serves as investment adviser or sponsor.
NOTE: Because of the unique structure and regulatory scheme applicable to closed-end investment companies, the voting guidelines (particularly those related to governance issues) generally will be
inapplicable to holdings of closed-end investment companies. As a result, determinations on the appropriate voting recommendation for closed-end investment company shares will be made on a case-by-case basis.
I. Board of Directors and Executives
A. Election of Directors
Routine: AM
Policy is to vote for the uncontested election of directors. Votes for a director in an uncontested election will be withheld in cases where a director has shown an inability to perform his/her duties in the best interests of the
shareholders.
Proxy contest: In a proxy contest involving election of directors, a case-by-case voting decision will be made based upon
analysis of the issues involved and the merits of the incumbent and dissident slates of directors. AM will incorporate the decisions of a third party proxy research vendor, currently, Institutional Shareholder Services (ISS) subject to
review by the Proxy Voting Sub-Committee (GPVSC) as set forth in the AMs Proxy Voting Policies and Procedures.
Rationale: The large
majority of corporate directors fulfill their fiduciary obligation and in most cases support for managements nominees is warranted. As the issues relevant to a contested election differ in each instance, those cases must be addressed as they
arise.
B. Classified Boards of Directors
AM policy is to vote against proposals to classify the board and for proposals to repeal classified boards and elect directors annually.
Rationale: Directors should be held accountable on an annual basis. By entrenching the incumbent board, a classified board may be used as an anti-takeover device to the detriment of the shareholders in a
hostile take-over situation.
C. Board and Committee Independence
AM policy is to vote:
1. For proposals that require that a certain percentage
(majority up to 66 2/3%) of members of a board of directors be comprised of independent or unaffiliated directors.
2 For
proposals that require all members of a companys compensation, audit, nominating, or other similar committees be comprised of independent or unaffiliated directors.
3 Against shareholder proposals to require the addition of special interest, or constituency, representatives to boards of directors.
4. For separation of the Chairman and CEO positions.
5. Against
proposals that require a company to appoint a Chairman who is an independent director.
Rationale: Board independence is a cornerstone of
effective governance and accountability. A board that is sufficiently independent from management assures that shareholders interests are adequately represented. However, the Chairman of the board must have sufficient involvement in and
experience with the operations of the company to perform the functions required of that position and lead the company.
No director qualifies
as independent unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a
relationship with the company).
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Whether a director is in fact not independent will depend on the laws and regulations of the
primary market for the security and the exchanges, if any, on which the security trades.
D. Liability and Indemnification of Directors
AM policy is to vote for management proposals to limit directors liability and to broaden the indemnification of
directors, unless broader indemnification or limitations on directors liability would effect shareholders interests in pending litigation.
Rationale: While shareholders want directors and officers to be responsible for their actions, it is not in the best interests of the shareholders for them to be to risk averse. If the risk of personal
liability is too great, companies may not be able to find capable directors willing to serve. We support expanding coverage only for actions taken in good faith and not for serious violations of fiduciary obligation or negligence.
E. Qualifications of Directors
AM
policy is to follow managements recommended vote on either management or shareholder proposals that set retirement ages for directors or require specific levels of stock ownership by directors.
Rationale: As a general rule, the board of directors, and not the shareholders, is most qualified to establish qualification policies.
F. Removal of Directors and Filling of Vacancies
AM policy is to vote against proposals that include provisions that directors may be removed only for cause or proposals that include provisions that only continuing directors may fill board
vacancies.
Rationale: Differing state statutes permit removal of directors with or without cause. Removal of directors for cause usually
requires proof of self-dealing, fraud or misappropriation of corporate assets, limiting shareholders ability to remove directors except under extreme circumstances. Removal without cause requires no such showing.
Allowing only incumbent directors to fill vacancies can serve as an anti-takeover device, precluding shareholders from filling the board until the next
regular election.
G. Proposals to Fix the Size of the Board
AM policy is to vote:
1. For proposals to fix the size of the board unless:
(a) no specific reason for the proposed change is given; or (b) the proposal is part of a package of takeover defenses.
2.
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Against proposals allowing management to fix the size of the board without shareholder approval.
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Rationale: Absent danger of anti-takeover use, companies should be granted a reasonable amount of flexibility in fixing the size of its board.
H. Proposals to Restrict Chief Executive Officers Service on Multiple Boards
AM policy is to vote For proposals to restrict a Chief Executive Officer from serving on more than three outside boards of directors.
Rationale: Chief Executive Officer must have sufficient time to ensure that shareholders interests are represented adequately.
Note: A directors service on multiple closed-end fund boards within a fund complex are treated as service on a single Board for the
purpose of the proxy voting guidelines.
I. Proposals to Restrict Supervisory Board Members Service on Multiple Boards (For FFT Securities)
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AM policy is to vote for proposals to restrict a Supervisory Board Member from serving on more
than five supervisory boards.
Rationale: We consider a strong, independent and knowledgeable supervisory board as important counter-balance
to executive management to ensure that the interests of shareholders are fully reflected by the company.
Full information should be disclosed
in the annual reports and accounts to allow all shareholders to judge the success of the supervisory board controlling their company.
Supervisory Board Member must have sufficient time to ensure that shareholders interests are represented adequately.
Note: A directors service on multiple closed-end fund boards within a fund complex are treated as service on a single Board for the purpose of the
proxy voting guidelines.
J. Proposals to Establish Audit Committees (For FFT and U.S. Securities)
AM policy is to vote for proposals that require the establishment of audit committees.
Rationale: The audit committee should deal with accounting and risk management related questions, verifies the independence of the auditor with due regard
to possible conflicts of interest. It also should determine the procedure of the audit process
II. Capital Structure
A. Authorization of Additional Shares (For U.S. Securities)
AM policy is to vote for proposals to increase the authorization of existing classes of stock that do not exceed a 3:1 ratio of shares authorized to shares outstanding for a large cap company,
and do not exceed a 4:1 ratio of shares authorized to shares outstanding for a small-midcap company (companies having a market capitalization under one billion U.S. dollars.).
Rationale: While companies need an adequate number of shares in order to carry on business, increases requested for general financial flexibility must be limited to protect shareholders from their
potential use as an anti-takeover device. Requested increases for specifically designated, reasonable business purposes (stock split, merger, etc.) will be considered in light of those purposes and the number of shares required.
B. Authorization of Blank Check Preferred Stock (For U.S. Securities)
AM policy is to vote:
1. Against proposals to create blank check preferred stock or
to increase the number of authorized shares of blank check preferred stock unless the company expressly states that the stock will not be used for anti-takeover purposes and will not be issued without shareholder approval.
2. For proposals mandating shareholder approval of blank check stock placement.
Rationale: Shareholders should be permitted to monitor the issuance of classes of preferred stock in which the board of directors is given unfettered discretion to set voting, dividend, conversion and
other rights for the shares issued.
C. Stock Splits/Reverse Stock Splits
AM policy is to vote for stock splits if a legitimate business purpose is set forth and the split is in the shareholders best interests. A vote is cast for a reverse stock
split only if the number of shares authorized is reduced in the same proportion as the reverse split or if the effective increase in authorized shares (relative to outstanding shares) complies with the proxy guidelines for common stock increases
(see, Section II.A, above).
Rationale: Generally, stock splits do not detrimentally effect shareholders. Reverse stock splits, however, may
have the same result as an increase in authorized shares and should be analyzed accordingly.
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D. Dual Class/Supervoting Stock
AM policy is to vote against proposals to create or authorize additional shares of super-voting stock or stock with unequal voting rights.
Rationale: The one share, one vote principal ensures that no shareholder maintains a voting interest exceeding their equity interest in the
company.
E. Large Block Issuance (For U.S. Securities)
AM policy is to address large block issuances of stock on a case-by-case basis, incorporating the recommendation of an independent third party proxy research firm (currently ISS) subject to review by the
GPVSC as set forth in AMs Proxy Policies and Procedures.
Additionally, AM supports proposals requiring shareholder approval of large
block issuances.
Rationale: Stock issuances must be reviewed in light of the business circumstances leading to the request and the potential
impact on shareholder value.
F. Recapitalization into a Single Class of Stock
AM policy is to vote for recapitalization plans to provide for a single class of common stock, provided the terms are fair, with no class of stock being unduly disadvantaged.
Rationale: Consolidation of multiple classes of stock is a business decision that may be left to the board and/management if there is no adverse effect
on shareholders.
G. Share Repurchases
AM policy is to vote for share repurchase plans provided all shareholders are able to participate on equal terms.
Rationale: Buybacks are generally considered beneficial to shareholders because they tend to increase returns to the remaining shareholders.
H. Reductions in Par Value
AM policy is to vote for proposals to reduce par
value, provided a legitimate business purpose is stated (e.g., the reduction of corporate tax responsibility).
Rationale: Usually,
adjustments to par value are a routine financial decision with no substantial impact on shareholders.
III. Corporate Governance Issues
A. Confidential Voting
AM policy is to vote for proposals to provide for confidential voting and independent tabulation of voting results and to vote
against proposals to repeal such provisions.
Rationale: Confidential voting protects the privacy rights of all shareholders. This
is particularly important for employee-shareholders or shareholders with business or other affiliations with the company, who may be vulnerable to coercion or retaliation when opposing management. Confidential voting does not interfere with the
ability of corporations to communicate with all shareholders, nor does it prohibit shareholders from making their views known directly to management.
B. Cumulative Voting (For U.S. Securities)
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AM policy is to vote against shareholder proposals requesting cumulative voting and
for management proposals to eliminate it. The protections afforded shareholders by cumulative voting are not necessary when a company has a history of good performance and does not have a concentrated ownership interest. Accordingly, a
vote is cast against cumulative voting and for proposals to eliminate it if:
a)
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The company has a five year return on investment greater than the relevant industry index,
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b)
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All directors and executive officers as a group beneficially own less than 10% of the outstanding stock, and
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c)
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No shareholder (or voting block) beneficially owns 15% or more of the company.
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Thus, failure of any one of the three criteria results in a vote for cumulative voting in accordance with the general policy.
Rationale: Cumulative voting is a tool that should be used to ensure that holders of a significant number of shares may have board representation; however, the presence of other safeguards may make their
use unnecessary.
C. Supermajority Voting Requirements
AM policy is to vote against management proposals to require a supermajority vote to amend the charter or bylaws and to vote for shareholder proposals to modify or rescind existing
supermajority requirements.
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Exception made when company holds a controlling position and seeks to lower threshold to maintain control and/or make changes to corporate by-laws.
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Rationale: Supermajority voting provisions violate the democratic principle that a simple majority should carry the vote.
Setting supermajority requirements may make it difficult or impossible for shareholders to remove egregious by-law or charter provisions. Occasionally, a company with a significant insider held position might attempt to lower a supermajority
threshold to make it easier for management to approve provisions that may be detrimental to shareholders. In that case, it may not be in the shareholders interests to lower the supermajority provision.
D. Shareholder Right to Vote
AM policy
is to vote against proposals that restrict the right of shareholders to call special meetings, amend the bylaws, or act by written consent. Policy is to vote for proposals that remove such restrictions.
Rationale: Any reasonable means whereby shareholders can make their views known to management or effect the governance process should be supported.
IV. Compensation
Annual
Incentive Plans or Bonus Plans are often submitted to shareholders for approval. These plans typically award cash to executives based on company performance. Deutsche Bank believes that the responsibility for executive compensation decisions rest
with the board of directors and/or the compensation committee, and its policy is not to second-guess the boards award of cash compensation amounts to executives unless a particular award or series of awards is deemed excessive. If stock
options are awarded as part of these bonus or incentive plans, the provisions must meet Deutsche Banks criteria regarding stock option plans, or similar stock-based incentive compensation schemes, as set forth below.
A. Establishment of a Remuneration Committee (For FFT Securities)
AM policy is to vote for proposals that require the establishment of a remuneration committee.
Rationale: Corporations should disclose in each annual report or proxy statement their policies on remuneration. Essential details regarding executive remuneration including share options, long-term
incentive plans and bonuses, should be disclosed in the annual report, so that investors can judge whether corporate pay policies and practices meet the standard.
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The remuneration committee shall not comprise any board members and should be sensitive to the wider scene
on executive pay. It should ensure that performance-based elements of executive pay are designed to align the interests of shareholders.
B. Executive and Director Stock Option Plans
AM policy is to vote for stock option plans that meet the following criteria:
(1) The
resulting dilution of existing shares is less than (a) 15 percent of outstanding shares for large capital corporations or (b) 20 percent of outstanding shares for small-mid capital companies (companies having a market capitalization under
one billion U.S. dollars).
(2) The transfer of equity resulting from granting options at less than FMV is no greater than 3% of the over-all
market capitalization of large capital corporations, or 5% of market cap for small-mid capital companies.
(3) The plan does not contain
express repricing provisions and, in the absence of an express statement that options will not be repriced; the company does not have a history of repricing options.
(4)
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The plan does not grant options on super-voting stock.
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AM will support performance-based option proposals as long as a) they do not mandate that all options granted by the company must be performance based, and b) only certain high-level executives are
subject to receive the performance based options.
AM will support proposals to eliminate the payment of outside director pensions.
Rationale: Determining the cost to the company and to shareholders of stock-based incentive plans raises significant issues not encountered
with cash-based compensation plans. These include the potential dilution of existing shareholders voting power, the transfer of equity out of the company resulting from the grant and execution of options at less than FMV and the authority to
reprice or replace underwater options. Our stock option plan analysis model seeks to allow reasonable levels of flexibility for a company yet still protect shareholders from the negative impact of excessive stock compensation. Acknowledging that
small mid-capital corporations often rely more heavily on stock option plans as their main source of executive compensation and may not be able to compete with their large capital competitors with cash compensation, we provide slightly more
flexibility for those companies.
C. Employee Stock Option/Purchase Plans
AM policy is to vote for employee stock purchase plans (ESPPs) when the plan complies with Internal Revenue Code 423, allowing non-management employees to purchase stock at 85% of FMV.
AM policy is to vote for employee stock option plans (ESOPs) provided they meet the standards for stock option plans in general. However,
when computing dilution and transfer of equity, ESOPs are considered independently from executive and director option plans.
Rationale: ESOPs
and ESPPs encourage rank-and-file employees to acquire an ownership stake in the companies they work for and have been shown to promote employee loyalty and improve productivity.
D. Golden Parachutes
AM policy is to vote for proposals to require shareholder
approval of golden parachutes and for proposals that would limit golden parachutes to no more than three times base compensation. Policy is to vote against more restrictive shareholder proposals to limit golden parachutes.
Rationale: In setting a reasonable limitation, AM considers that an effective parachute should be less attractive than continued employment and that the
IRS has opined that amounts greater than three times annual salary, are excessive.
E. Proposals to Limit Benefits or Executive
Compensation
AM policy is to vote against
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1. Proposals to limit benefits, pensions or compensation and
2. Proposals that request or require disclosure of executive compensation greater than the disclosure required by Securities and Exchange Commission
(SEC) regulations.
Rationale: Levels of compensation and benefits are generally considered to be day-to-day operations of the company, and
are best left unrestricted by arbitrary limitations proposed by shareholders.
F. Option Expensing
AM policy is to support proposals requesting companies to expense stock options.
Rationale: Although companies can choose to expense options voluntarily, the Financial Accounting Standards Board (FASB) does not yet require it, instead allowing companies to disclose the theoretical
value of options as a footnote. Because the expensing of stock options lowers earnings, most companies elect not to do so. Given the fact that options have become an integral component of compensation and their exercise results in a transfer of
shareholder value, AM agrees that their value should not be ignored and treated as no cost compensation. The expensing of stock options would promote more modest and appropriate use of stock options in executive compensation plans and
present a more accurate picture of company operational earnings.
G. Management board election and motion (For FFT Securities)
AM policy is to vote against:
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the election of board members with positions on either remuneration or audit committees;
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the election of supervisory board members with too many supervisory board mandates;
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automatic election of former board members into the supervisory board.
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Rationale: Management as an entity, and each of its members, are responsible for all actions of the company, and aresubject to applicable laws and regulationsaccountable to the shareholders as
a whole for their actions.
Sufficient information should be disclosed in the annual company report and account to allow shareholders to judge
the success of the company.
H. Remuneration (variable pay): (For FFT Securities)
Executive remuneration for Management Board
AM policy is to vote for remuneration for Management Board that is transparent and linked to results.
Rationale: Executive compensation should motivate management and align the interests of management with the shareholders. The focus should be on criteria that prevent excessive remuneration; but enable
the company to hire and retain first-class professionals.
Shareholder interests are normally best served when management is remunerated to
optimize long-term returns. Criteria should include suitable measurements like return on capital employed or economic value added.
Interests
should generally also be correctly aligned when management own shares in the company even more so if these shares represent a substantial portion of their own wealth.
Its disclosure shall differentiate between fixed pay, variable (performance related) pay and long-term incentives, including stock option plans with valuation ranges as well as pension and any other
significant arrangements.
Executive remuneration for Supervisory Board
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AM policy is to vote for remuneration for Supervisory Board that is at least 50% in fixed form.
Rationale: It would normally be preferable if performance linked compensation were not based on dividend payments, but linked to suitable
result based parameters. Consulting and procurement services should also be published in the company report.
I. Long-term incentive plans
(For FFT Securities)
AM policy is to vote for long-term incentive plans for members of a management board that reward for
above average company performance.
Rationale: Incentive plans will normally be supported if they:
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directly align the interests of members of management boards with those of shareholders;
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establish challenging performance criteria to reward only above average performance;
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measure performance by total shareholder return in relation to the market or a range of comparable companies;
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are long-term in nature and encourage long-term ownership of the shares once exercised through minimum holding periods;
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do not allow a repricing of the exercise price in stock option plans.
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J. Shareholder Proposals Concerning Pay for Superior Performance
AM policy is
to address pay for superior performance proposals on a case-by-case basis, incorporating the recommendation of an independent third party proxy research firm (currently ISS) subject to review by the GPVSC as set forth in AMs Proxy Policies and
Procedures.
Rationale: While AM agrees that compensation issues are better left to the discretion of management, they appreciate the need to
monitor for excessive compensation practices on a case by case basis. If, after a review of the ISS metrics, AM is comfortable with ISSs applying this calculation and will vote according to their recommendation.
K. Executive Compensation Advisory
AM
policy is to follow managements recommended vote on shareholder proposals to propose an advisory resolution seeking to ratify the compensation of the companys named executive officers (NEOs) on an annual basis.
Rationale: AM believes that controls exist within senior management and corporate compensation committees, ensuring fair compensation to executives. This
might allow shareholders to require approval for all levels of managements compensation.
V. Anti-Takeover Related Issues
A. Shareholder Rights Plans (Poison Pills)
AM policy is to vote for proposals to require shareholder ratification of poison pills or that request boards to redeem poison pills, and to vote against the adoption of poison
pills if they are submitted for shareholder ratification. Rationale: Poison pills are the most prevalent form of corporate takeover defenses and can be (and usually are) adopted without shareholder review or consent. The potential cost of poison
pills to shareholders during an attempted takeover outweighs the benefits.
B. Reincorporation
AM policy is to examine reincorporation proposals on a case-by-case basis. The voting decision is based on: (1) differences in state law between the
existing state of incorporation and the proposed state of incorporation; and (2) differences between the existing and the proposed charter/bylaws/articles of incorporation and their effect on shareholder rights. If changes resulting from the
proposed
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reincorporation violate the corporate governance principles set forth in these guidelines, the reincorporation will be deemed contrary to shareholders interests and a vote cast
against.
Rationale: Reincorporations can be properly analyzed only by looking at the advantages and disadvantages to their
shareholders. Care must be taken that anti-takeover protection is not the sole or primary result of a proposed change.
C. Fair-Price
Proposals
AM policy is to vote for management fair-price proposals, provided that: (1) the proposal applies only to
two-tier offers; (2) the proposal sets an objective fair-price test based on the highest price that the acquirer has paid for a companys shares; (3) the supermajority requirement for bids that fail the fair-price test is no higher
than two-thirds of the outstanding shares; (4) the proposal contains no other anti-takeover provisions or provisions that restrict shareholders rights.
A vote is cast for shareholder proposals that would modify or repeal existing fair-price requirements that do not meet these standards.
Rationale: While fair price provisions may be used as anti-takeover devices, if adequate provisions are included, they provide some protection to shareholders who have some say in their application and
the ability to reject those protections if desired.
D. Exemption from state takeover laws
AM policy is to vote for shareholder proposals to opt out of state takeover laws and to vote against management proposals
requesting to opt out of state takeover laws.
Rationale: Control share statutes, enacted at the state level, may harm long-term share value
by entrenching management. They also unfairly deny certain shares their inherent voting rights.
E. Non-financial Effects of Takeover Bids
Policy is to vote against shareholder proposals to require consideration of non-financial effects of merger or acquisition
proposals.
Rationale: Non-financial effects may often be subjective and are secondary to AMs stated purpose of acting in its
clients best economic interest.
VI. Mergers & Acquisitions
Evaluation of mergers, acquisitions and other special corporate transactions (i.e., takeovers, spin-offs, sales of assets, reorganizations, restructurings and recapitalizations) are performed on a
case-by-case basis incorporating information from an independent proxy research source (currently ISS.) Additional resources including portfolio management and research analysts may be considered as set forth in AMs Policies and Procedures.
VII. Social, Environmental & Political Issues
Social and environmental issues are becoming increasingly important to corporate success. We incorporate social and environmental considerations into both our investment decisions and our proxy voting
decisions particularly if the financial performance of the company could be impacted. In addition, AM has incorporated the Principles for Responsible Investment (PRI) in these Proxy Voting Guidelines.
A. Labor & Human Rights
AM
policy is to vote against adopting global codes of conduct or workplace standards exceeding those mandated by law.
Rationale:
Additional requirements beyond those mandated by law are deemed unnecessary and potentially burdensome to companies
B.
Diversity & Equality
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1. AM policy is to vote against shareholder proposals to force equal employment opportunity,
affirmative action or board diversity.
Rationale: Compliance with State and Federal legislation along with information made available through
filings with the EEOC provides sufficient assurance that companies act responsibly and make information public.
2. AM policy is also to vote
against proposals to adopt the Mac Bride Principles. The Mac Bride Principles promote fair employment, specifically regarding religious discrimination.
Rationale: Compliance with the Fair Employment Act of 1989 makes adoption of the Mac Bride Principles redundant. Their adoption could potentially lead to charges of reverse discrimination.
C. Health & Safety
1.
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AM policy is to vote against adopting a pharmaceutical price restraint policy or reporting pricing policy changes.
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Rationale: Pricing is an integral part of business for pharmaceutical companies and should not be dictated by shareholders (particularly pursuant to an
arbitrary formula). Disclosing pricing policies may also jeopardize a companys competitive position in the marketplace.
2. AM policy is
to vote against shareholder proposals to control the use or labeling of and reporting on genetically engineered products.
Rationale: Additional requirements beyond those mandated by law are deemed unnecessary and potentially burdensome to companies.
D. Government/Military
1. AM policy is
to vote against shareholder proposals regarding the production or sale of military arms or nuclear or space-based weapons, including proposals seeking to dictate a companys interaction with a particular foreign country or agency.
Rationale: Generally, management is in a better position to determine what products or industries a company can and should participate in. Regulation of
the production or distribution of military supplies is, or should be, a matter of government policy.
2. AM policy is to vote
against shareholder proposals regarding political contributions and donations.
Rationale: The Board of Directors and Management,
not shareholders, should evaluate and determine the recipients of any contributions made by the company.
3. AM policy is to vote
against shareholder proposals regarding charitable contributions and donations.
Rationale: The Board of Directors and Management,
not shareholders, should evaluate and determine the recipients of any contributions made by the company.
E. Tobacco
1. AM policy is to vote against shareholder proposals requesting additional standards or reporting requirements for tobacco companies as well
as against requesting companies to report on the intentional manipulation of nicotine content.
Rationale: Where a tobacco
companys actions meet the requirements of legal and industry standards, imposing additional burdens may detrimentally effect a companys ability to compete. The disclosure of nicotine content information could affect the companys
rights in any pending or future litigation.
2. Shareholder requests to spin-off or restructure tobacco businesses will be opposed.
Rationale: These decisions are more appropriately left to the Board and management, and not to shareholder mandate.
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F. Principles for Responsible Investment
AM policy is to engage actively with companies on ESG issues and participate in collaborative engagement initiatives. In this context, AM is willing to participate in the development of policy, regulation
and standard setting (such as promoting and protecting shareholder rights). AM could support shareholder initiatives and also file shareholder resolutions with long term ESG considerations and improved ESG disclosure, when applicable. In addition,
AM could ask for standardized ESG reporting and issues to be integrated within annual financial reports.
G. Environmental Issues
AM policy is to vote for increased disclosure on CERES Principles, ESG issues or other similar environmental mandates (e.g.,
those relating to Greenhouse gas emissions or the use of nuclear power) and to follow managements recommended vote on all other matters related to the above issues.
Rationale: Environmental issues are extensively regulated by outside agencies and compliance with additional requirements often involves significant cost to companies.
VIII. Miscellaneous Items
A.
Ratification of Auditors
AM policy is to vote for a) the management recommended selection of auditors and b) proposals to
require shareholder approval of auditors.
Rationale: Absent evidence that auditors have not performed their duties adequately, support for
managements nomination is warranted.
B. Limitation of non-audit services provided by independent auditor
AM policy is to support proposals limiting non-audit fees to 50% of the aggregate annual fees earned by the firm retained as a companys independent
auditor.
Rationale: In the wake of financial reporting problems and alleged audit failures at a number of companies, AM supports the general
principle that companies should retain separate firms for audit and consulting services to avoid potential conflicts of interest. However, given the protections afforded by the recently enacted Sarbanes-Oxley Act of 2002 (which requires Audit
Committee pre-approval for non-audit services and prohibits auditors from providing specific types of services), and the fact that some non-audit services are legitimate audit-related services, complete separation of audit and consulting fees may
not be warranted. A reasonable limitation is appropriate to help ensure auditor independence and it is reasonable to expect that audit fees exceed non-audit fees.
C. Audit firm rotation
AM policy is to support proposals seeking audit firm rotation
unless the rotation period sought is less than five years.
Rationale: While the Sarbanes-Oxley Act mandates that the lead audit partner be
switched every five years, AM believes that rotation of the actual audit firm would provide an even stronger system of checks and balances on the audit function.
D. Transaction of Other Business
AM policy is to vote against transaction of other
business proposals.
Rationale: This is a routine item to allow shareholders to raise other issues and discuss them at the meeting. As
the nature of these issues may not be disclosed prior to the meeting, we recommend a vote against these proposals. This protects shareholders voting by proxy (and not physically present at a meeting) from having action taken at the meeting that they
did not receive proper notification of or sufficient opportunity to consider.
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E. Motions to Adjourn the Meeting
AM Policy is to vote against proposals to adjourn the meeting.
Rationale: Management may seek
authority to adjourn the meeting if a favorable outcome is not secured. Shareholders should already have had enough information to make a decision. Once votes have been cast, there is no justification for management to continue spending time and
money to press shareholders for support.
F. Bundled Proposals
AM policy is to vote against bundled proposals if any bundled issue would require a vote against it if proposed individually.
Rationale: Shareholders should not be forced to take the good with the bad in cases where the proposals could reasonably have been submitted separately.
G. Change of Company Name
AM policy is
to support management on proposals to change the company name. Rationale: This is generally considered a business decision for a company.
H. Proposals Related to the Annual Meeting
AM Policy is to vote in favor of management for proposals related to the conduct of the annual meeting (meeting time, place, etc.)
Rationale: These are considered routine administrative proposals.
I. Reimbursement of
Expenses Incurred from Candidate Nomination
AM policy is to follow managements recommended vote on shareholder proposals related to
the amending of company bylaws to provide for the reimbursement of reasonable expenses incurred in connection with nominating one or more candidates in a contested election of directors to the corporations board of directors.
Rationale: Corporations should not be liable for costs associated with shareholder proposals for directors.
J. Investment Company Proxies
Proxies
solicited by investment companies are voted in accordance with the recommendations of an independent third party, currently ISS. However, regarding investment companies for which AM or an affiliate serves as investment adviser or principal
underwriter, such proxies are voted in the same proportion as the vote of all other shareholders. Proxies solicited by master funds from feeder funds will be voted in accordance with applicable provisions of Section 12 of the Investment Company
Act of 1940.
Investment companies, particularly closed-end investment companies, are different from traditional operating companies. These
differences may call for differences in voting positions on the same matter. For example, AM could vote for staggered boards of closed-end investment companies, although AM generally votes against staggered boards for
operating companies. Further, the manner in which AM votes investment company proxies may differ from proposals for which a AM-advised investment company solicits proxies from its shareholders. As reflected in the Guidelines, proxies solicited by
closed-end (and open-end) investment companies are voted in accordance with the pre-determined guidelines of an independent third-party.
Subject to participation agreements with certain Exchange Traded Funds (ETF) issuers that have received exemptive orders from the U.S.
Securities and Exchange Commission allowing investing DWS funds to exceed the limits set forth in Section 12(d)(1)(A) and (B) of the Investment Company Act of 1940, DeAM will echo vote proxies for ETFs in which Deutsche Bank holds more
than 25% of outstanding voting shares globally when required to do so by participation agreements and SEC orders.
23
Note: With respect to the Central Cash Management Fund (registered under the Investment Company Act of
1940), the Fund is not required to engage in echo voting and the investment adviser will use these Guidelines, and may determine, with respect to the Central Cash Management Fund, to vote contrary to the positions in the Guidelines, consistent with
the Funds best interest.
K. International Proxy Voting
The above guidelines pertain to issuers organized in the United States, Canada and Germany. Proxies solicited by other issuers are voted in accordance with international guidelines or the recommendation
of ISS and in accordance with applicable law and regulation.
IMPORTANT: The information contained herein is the property of Deutsche Bank
Group and may not be copied, used or disclosed in whole or in part, stored in a retrieval system or transmitted in any form or by any means (electronic, mechanical, reprographic, recording or otherwise) without the prior written permission of
Deutsche Bank Group.
24
DBX ETF TRUST (THE REGISTRANT)
PART C OTHER INFORMATION
Item 28. Exhibits.
(a)(1) Certificate of Trust of the Registrant dated October 7, 2010, incorporated by reference to the Trusts Registration Statement, filed on
October 25, 2010.
(a)(2) Agreement and Declaration of Trust, incorporated by reference to Pre-Effective Amendment No. 1 to the
Trusts Registration Statement, filed on October 25, 2010.
(b) Bylaws of the Trust, incorporated by reference to Pre-Effective
Amendment No. 1 to the Trusts Registration Statement, filed on October 25, 2010.
(c) Not applicable.
(d)(1) Investment Advisory Agreement between the Trust and DBX Advisors LLC, incorporated by reference to Pre-Effective Amendment No. 2, filed on
May 11, 2011.
(d)(2) Investment Sub-Advisory Agreement between DBX Advisors LLC and TDAM USA Inc., incorporated by reference to
Pre-Effective Amendment No. 2, filed on May 11, 2011.
(d)(3) Investment Sub-Advisory Agreement between DBX Advisors LLC and
RREEF Americas L.L.C., incorporated by reference to Post-Effective Amendment No. 11, filed on May 21, 2013.
(d)(4) Investment Sub-Advisory
Agreement between DBX Advisors LLC and Deutsche Investment Management Americas Inc., filed herewith.
(e) Distribution Agreement between the
Registrant and ALPS Distributors, Inc. dated as of October 11, 2011, incorporated by reference to Post-Effective Amendment No. 2, filed on September 28, 2012.
(f) Not applicable.
(g)(1) Custody Agreement between the Registrant and The Bank of New York
Mellon, incorporated by reference to Pre-Effective Amendment No. 2, filed on May 11, 2011.
(g)(2) Foreign Custody Manager Agreement
between the Registrant and The Bank of New York Mellon, incorporated by reference to Pre-Effective Amendment No. 2, filed on May 11, 2011.
(h)(1) Fund Administration and Accounting Agreement between the Registrant and The Bank of New York Mellon, incorporated by reference to Pre-Effective Amendment No. 2, filed on May 11, 2011.
(h)(2) Transfer Agency and Service Agreement between the Registrant and The Bank of New York Mellon, incorporated by reference to
Pre-Effective Amendment No. 2, filed on May 11, 2011.
(h)(3) Form of Participation Agreement, incorporated by reference to
Pre-Effective Amendment No. 2, filed on May 11, 2011.
(h)(4) Form of Sublicense Agreement between the Registrant and DBX Advisors
LLC, incorporated by reference to Pre-Effective Amendment No. 2, filed on May 11, 2011.
(h)(5) Expense Limitation Agreement,
incorporated by reference to Post-Effective Amendment No. 2, filed on September 28, 2012.
(i)(1) Opinion of Dechert LLP,
incorporated by reference to Pre-Effective Amendment No. 2, filed on May 11, 2011.
(i)(2) Consent of Counsel, Dechert LLP, filed
herewith.
(j) Not applicable.
1
(l) Initial Share Purchase
Agreement between Registrant and DBX Advisors LLC, incorporated by reference to Pre-Effective Amendment No. 2, filed on May 11, 2011.
(p)(1) Code of Ethics of the
Registrant, incorporated by reference to Pre-Effective Amendment No. 2, filed on May 11, 2011.
(p)(2) Code of Ethics of DBX Advisors
LLC, incorporated by reference to Post-Effective Amendment No. 2, filed on September 28, 2012.
(p)(3) TDAM USA Inc.s Code of
Ethics, incorporated by reference to Post-Effective Amendment No. 2, filed on September 28, 2012.
(p)(4) Deutsche Investment
Management Americas Inc.s and RREEF America L.L.C.s Code of Ethics, incorporated by reference to Post-Effective Amendment No. 11, filed on May 21, 2013.
(q) Powers of Attorney of Trustees of the Registrant incorporated by reference to Post-Effective Amendment No. 2, filed on September 28, 2012.
Item 29. Persons controlled by or Under Common Control with the Fund.
Not applicable.
Item 30. Indemnification.
(a) Pursuant to Article IX of the Registrants Agreement and Declaration of Trust, the Trust has agreed that no person who is or has been a Trustee, officer, or employee of the Trust shall be subject
to any personal liability whatsoever to any person, other than the Trust or its Shareholders, in connection with the affairs of the Trust; and all persons shall look solely to the Trust property or property of a Series for satisfaction of claims of
any nature arising in connection with the affairs of the Trust or such Series.
Every note, bond, contract, instrument,
certificate, Share or undertaking and every other act or thing whatsoever executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been executed or done only in or
with respect to their or his capacity as Trustees or Trustee and neither such Trustees or Trustee nor the Shareholders shall be personally liable thereon.
All Persons extending credit to, contracting with or having any claim against the Trust or a Series shall look only to the assets of the Trust property or the Trust property of such Series for payment
under such credit, contract or claim; and neither the Trustees, nor any of the Trusts officers, employees or agents, whether past, present or future, shall be personally liable therefor.
No person who is or has been a Trustee, officer or employee of the Trust shall be liable to the Trust or to any Shareholder for any
action or failure to act except for his or her own bad faith, willful misfeasance, gross negligence or reckless disregard of his or her duties involved in the conduct of the individuals office, and for nothing else, and shall not be liable for
errors of judgment or mistakes of fact or law.
Without limiting the foregoing limitations of liability, a Trustee shall not
be responsible for or liable in any event for any neglect or wrongdoing of any officer, employee, investment adviser, sub-adviser, principal underwriter, custodian or other agent of the Trust, nor shall any Trustee be responsible or liable for the
act or omission of any other Trustee (or for the failure to compel in any way any former or acting Trustee to redress any breach of trust), except in the case of such Trustees own willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
2
Item 31. Business and Other Connections of Investment Manager.
With respect to each of DBX Advisors LLC and Deutsche Investment Management Americas Inc. (collectively, the Advisers), the
response to this Item will be incorporated by reference to the Advisers Uniform Applications for Investment Adviser Registration (Form ADV) on file with the SEC. Each Advisers Form ADV may be obtained, free of charge, at the
SECs website at www.adviserinfo.sec.gov.
Item 32. Principal Underwriters.
(a) ALPS Distributors, Inc. acts as the distributor for the Registrant and the following investment companies: ALPS ETF Trust, Ameristock
Mutual Fund, Inc., Arbitrage Funds, AQR Funds, BBH Trust, BLDRS Index Funds Trust, BPV Family of Funds, Brown Management Funds, Caldwell & Orkin Funds, Inc., Campbell Multi-Strategy Trust, Century Capital Management Trust, Columbia ETF
Trust, CornerCap Group of Funds, The Cortina Funds, Inc., CRM Mutual Fund Trust, Cullen Funds, Drexel Hamilton Investment Partners LLC, EGA Global Shares Trust, Financial Investors Variable Insurance Trust, Firsthand Funds, GLG Investment Series
Trust, Heartland Group, Inc., Henssler Funds, Inc., Holland Balanced Fund, IndexIQ Trust, Index IQ ETF Trust, James Advantage Funds, Laudus Trust, Laudus Institutional Trust, Mairs & Power Funds Trust, Oak Associates Funds, Pax World Series
Trust I, Pax World Funds Trust II, PowerShares QQQ 100 Trust Series 1, RiverNorth Funds, Russell Exchange Traded Funds Trust, SPDR Dow Jones Industrial Average ETF Trust, SPDR S&P 500 ETF Trust, SPDR S&P MidCap 400 ETF Trust, Select Sector
SPDR Trust, Stonebridge Funds Trust, Stone Harbor Investment Funds, Tilson Investment Trust, Transparent Value Trust, db-X Exchange-Traded Funds Inc., Trust for Professional Managers, Wakefield Alternative Series Trust, Wasatch Funds, WesMark Funds,
Westcore Trust, Whitebox Mutual Funds, Williams Capital Liquid Assets Fund, Wilmington Funds and WisdomTree Trust.
(b) To the
best of Registrants knowledge, the directors and executive officers of ALPS Distributors, Inc., are as follows:
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Name*
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Position with Underwriter
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Positions with Fund
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Edmund J. Burke
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Director
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None
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Thomas A. Carter
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President, Director
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None
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Jeremy O. May
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Executive Vice President, Director
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None
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Kevin J. Ireland
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Senior Vice President, Director of Institutional Sales
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None
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Mark R. Kiniry
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Senior Vice President, National Sales Director Investments
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None
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Bradley J. Swenson
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Senior Vice President, Chief Compliance Officer
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None
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Robert J. Szydlowski
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Senior Vice President, Chief Technology Officer
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None
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Tané T. Tyler
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Senior Vice President, Assistant Secretary, General Counsel
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None
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Kenneth V. Hager
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Vice President, Treasurer and Assistant Secretary
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None
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Eric Parsons
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Vice President, Controller and Assistant Treasurer
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None
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Steven Price
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Vice President, Deputy Chief Compliance Officer
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None
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James Stegall
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Vice President, Institutional Sales Manager
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None
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Jeff Brainard
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Vice President, Regional Sales Manager
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None
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Paul F. Leone
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Vice President, Assistant General
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None
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3
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Counsel
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Erin E. Douglas
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Vice President, Senior Associate Counsel
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None
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JoEllen Legg
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Vice President, Senior Associate Counsel
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None
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David T. Buhler
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Vice President, Associate Counsel
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None
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Rhonda A. Mills
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Vice President, Associate Counsel
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None
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Randall D. Young
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Secretary
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None
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Gregg Wm. Givens
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Assistant Treasurer
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None
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*
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The principal business address for each of the above directors and executive officers is 1290 Broadway, Suite 1100, Denver, Colorado 80203.
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(c) Not applicable.
Item 33. Location of Accounts and Records.
(a) The Registrant maintains accounts, books and other documents required by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules thereunder (collectively,
Records) at its offices at 60 Wall Street, New York, New York 10005.
(b) DBX Advisors LLC maintains all Records
relating to its services as investment adviser to the Registrant at 60 Wall Street, New York, New York 10005.
(c) Deutsche
Investment Management Americas Inc. maintains all Records relating to its services as a sub-adviser to the Registrant at 345 Park Avenue, New York, NY 10154.
(d) ALPS Distributors, Inc. maintains all Records relating to its services as Distributor of the Registrant at 1290 Broadway, Suite 1100, Denver, Colorado 80203.
(e) The Bank of New York Mellon maintains all Records relating to its services as administrator, transfer agent and custodian of the
Registrant at One Wall Street, New York, New York 10286.
Item 34. Management Services.
There are no management related service contracts not discussed in Part A or Part B.
Item 35. Undertakings.
None.
4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant
certifies that it meets all of the requirements for effectiveness of this Registration Statement under Rule 485(b) under the Securities Act and has duly caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of New York and state of New York on the 21
st
day of May, 2013.
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DBX ETF Trust
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By:
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/s/ Alex Depetris
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Alex Depetris
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President and Chief Executive Officer
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Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities stated and on the dates indicated.
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SIGNATURE
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CAPACITY
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DATE
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/s/ Alex Depetris
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Alex Depetris
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Trustee and Chairman, President,
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May 21, 2013
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Chief Executive Officer and Secretary
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/s/ Michael Gilligan
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Michael Gilligan
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Treasurer, Chief Financial Officer and Controller
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May 21, 2013
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/s/ J. David Officer*
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J. David Officer
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Trustee
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May 21, 2013
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/s/ Stephen R. Byers*
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Stephen R. Byers
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Trustee
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May 21, 2013
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/s/ George O. Elston*
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George O. Elston
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Trustee
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*By:
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/s/ Alex Depetris
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May 21, 2013
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Alex Depetris (attorney-in-fact)
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EXHIBIT INDEX
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Exhibit
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Caption
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(d)(4)
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Investment Sub-Advisory Agreement between DBX Advisors LLC and Deutsche Investment Management Americas Inc. dated as of March 25, 2013
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(i)(2)
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Consent of Counsel, Dechert LLP
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