Form 485BPOS HSBC FUNDS

Registration Nos. 033-07647
811-04782

 

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 2026

 

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933	☒
Pre-Effective Amendment No.	☐
Post-Effective Amendment No. 298	☒
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940	☒
Amendment No. 314	☒
(Check appropriate box or boxes)

 

HSBC FUNDS
(Exact name of registrant as specified in charter)
66 Hudson Boulevard E., 29^th Floor

New York, New York 10001
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (800) 782-8183

 

Stefano Michelagnoli, President

66 Hudson Boulevard E., 29^th Floor

New York, New York 10001
(Name and address of agent for service)
Please send copies of all communications to:

 

Brenden P. Carroll, Esq.
Dechert LLP
1900 K Street, N.W.
Washington, D.C. 20006-2401

 

It is proposed that this filing will become effective:
	☐	immediately upon filing pursuant to paragraph (b) of Rule 485
	☒	on February 28, 2026 pursuant to paragraph (b) of Rule 485
	☐	60 days after filing pursuant to paragraph (a)(1) of Rule 485
	☐	on [date] pursuant to paragraph (a)(1) of Rule 485
	☐	75 days after filing pursuant to paragraph (a)(2) of Rule 485
	☐	on [date] pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
	☐	this post-effective amendment designates a new effective date for a previously filed post-effective amendment.

 

HSBC Funds				Table of Contents
				Summary Section
This section summarizes each				3		HSBC U.S. Government Money Market Fund
Fund’s investment objectives,				9		HSBC U.S. Treasury Money Market Fund
strategies, fees, risks and past
performance, and provides other
information about your account.
				Additional Information About the Funds’ Investment Strategies and Risks
This section provides				15		More About Risks and Investment Strategies
additional details about				15		Investment Risks of the Funds
each Fund’s investment				20		Other Information
strategies and risks.				20		Who May Want to Invest?
				20		More Information About Fund Investments
				20		Portfolio Holdings
				Fund Management
Review this section for				21		The Investment Adviser
details on the organizations				23		The Distributor, Administrator and Sub-Administrator
that provide services to
the Funds.
				Shareholder Information
Review this section for				24		Pricing of Fund Shares
details on how				25		Purchasing and Adding to Your Shares
shares are valued, and				31		Selling Your Shares
how to purchase,				35		Distribution Arrangements
sell and exchange shares. This section also describes				36		Distribution and Shareholder Servicing Arrangements— Revenue Sharing
related charges and				36		Exchanging Your Shares
payments of dividends				37		Delivery of Shareholder Documents
and distributions.				37		Other Information
				38		Dividends, Distributions and Taxes
				Financial Highlights
Review this section				41		HSBC U.S. Government Money Market Fund
for details on selected				43		HSBC U.S. Treasury Money Market Fund
financial statements
of the Funds.

HSBC U.S. Government Money Market Fund
Summary Section

Investment Objective

The investment objective of the HSBC U.S. Government Money Market Fund (the “Fund”) is to provide shareholders of the Fund with liquidity and as high a level of current income as is consistent with the preservation of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Fund. You may pay other fees, such a brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and Example below.

Annual Fund Operating Expenses (expenses that you pay as a percentage of the value of your investment)	Class A	Class I	Intermediary Class	Intermediary Service Class	Class P	Class Y
Management Fee	0.10%	0.10%	0.10%	0.10%	0.10%	0.10%
Distribution (12b-1) Fee	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
Other Expenses:
Shareholder Servicing Fee	0.25%	0.00%	0.05%	0.10%	0.05%	0.00%
Other Operating Expenses(1)	0.14%	0.04%	0.14%	0.14%	0.14%	0.14%
Total Other Expenses	0.39%	0.04%	0.19%	0.24%	0.19%	0.14%
Total Annual Fund Operating Expenses(1)	0.49%	0.14%	0.29%	0.34%	0.29%	0.24%
Fee Waiver and/or Expense Reimbursement(2)	-	-	0.10%	0.13%	0.10%	-
Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement(1)	0.49%	0.14%	0.19%	0.21%	0.19%	0.24%

(1)

The Total Annual Fund Operating Expenses may not equal the expense ratio stated in the Fund’s most recent annual report and financial highlights. The expense ratio in the financial highlights reflects the operating expenses of the Fund and does not include indirect expenses associated with the Fund’s investments in other money market funds (acquired fund fees and expenses). Without acquired fund fees and expenses, Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement would have been 0.48%, 0.13%, 0.18%, 0.20%, 0.18% and 0.23% for Class A Shares, Class I Shares, Intermediary Shares, Intermediary Service Shares, Class P Shares and Class Y Shares, respectively.

(2)

HSBC Global Asset Management (USA) Inc., the Fund’s investment adviser (the “Adviser”), has entered into a contractual expense limitation agreement with the Fund (“Expense Limitation Agreement”) under which it will limit total expenses of the Fund (excluding interest, taxes, brokerage commissions, extraordinary expenses and acquired fund fees and expenses) to an annual rate of 0.14%, 0.18%, 0.20% and 0.18% for Class I Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares, respectively. Any amounts contractually waived or reimbursed by the Adviser will be subject to repayment by the Fund to the Adviser within three years, calculated monthly from when the waiver or reimbursement was recorded, to the extent that the repayment will not cause the Fund’s operating expenses to exceed the contractual expense limit that was in effect at the time of such waiver or reimbursement. The expense limitation shall be in effect until February 28, 2027. The Expense Limitation Agreement shall terminate upon the termination of the Investment Advisory Contract between the Fund and the Adviser, or it may be terminated upon written notice to the Adviser by the Trust’s Board of Trustees.

3

Table of Contents 

HSBC U.S. Government Money Market Fund
Summary Section

Example

This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem 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 Fund’s operating expenses remain the same. The Example takes the Fund’s Expense Limitation Agreement into account for the first year only. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

		1 Year	3 Years	5 Years	10 Years
Class A Shares		$ 50	$ 157	$ 274	$ 616
Class I Shares		$ 14	$   45	$   79	$ 179
Intermediary Shares		$ 19	$   83	$ 153	$ 358
Intermediary Service Shares		$ 22	$   96	$ 178	$ 418
Class P Shares		$ 19	$   83	$ 153	$ 358
Class Y Shares		$ 25	$   77	$ 135	$ 306

Principal Investment Strategies

The Fund is a government money market fund and seeks to maintain a stable price of $1.00 per share. The Fund seeks to achieve its investment objective by investing at least 99.5% of its total assets in cash, securities issued or guaranteed by the United States or certain U.S. government agencies or instrumentalities (“U.S. Government Securities”) and/or repurchase agreements that are collateralized fully by these types of obligations. In addition, the Fund must invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in U.S. Government Securities and repurchase agreements collateralized fully by these types of obligations. The Fund will invest in securities with maturities of (or deemed maturities of) 397 days or less and will maintain a dollar-weighted average portfolio maturity of 60 days or less and a dollar-weighted average portfolio life of 120 days or less.

The Fund invests in issues of the U.S. Treasury, such as bills, notes and bonds, and issues of U.S. government agencies and instrumentalities established under the authority of an Act of Congress. This includes securities of various U.S. government agencies which, while chartered or sponsored by Acts of Congress, are neither issued nor guaranteed by the U.S. Treasury. The Fund may invest in, among other things, obligations that are supported by the “full faith and credit” of the United States (e.g., obligations guaranteed by the Government National Mortgage Association); supported by the right of the issuer to borrow from the U.S. Treasury (e.g., obligations of the Federal National Mortgage Association); or supported only by the credit of the agency or instrumentality (e.g., obligations of the Federal Farm Credit Bank). The Fund may also invest in repurchase agreements that are collateralized by U.S. Government Securities, as well as securities of other money market funds that primarily invest in U.S. Government Securities and repurchase agreements collateralized by U.S. Government Securities.

In purchasing and selling securities for the Fund, portfolio managers consider the credit analysis performed by HSBC Global Asset Management (USA) Inc., the Fund’s investment adviser (the “Adviser”). Portfolio managers select investments from an approved credit list compiled by the Adviser’s global credit analysts, who have conducted an independent qualitative and quantitative review of each issuer on the list. Safety is prioritized, with additional emphasis placed on liquidity and yield.

HSBC U.S. Government Money Market Fund
Summary Section

Principal Investment Risks

 

The Fund has the following principal investment risks. The risks are presented in an order intended to facilitate readability, and their order does not imply that the realization of one risk is likely to occur more frequently than another risk, nor does it imply that the realization of one risk is likely to have a greater adverse impact than another risk.

•

Debt Instruments Risk: The risks of investing in debt instruments include:

•

Credit Risk: The Fund could lose money if an issuer or guarantor of a debt instrument is unable or unwilling to make or perceived to be unable or unwilling to make timely payments of interest or principal, defaults on its other obligations or enters bankruptcy. The issuer or guarantor could also suffer a rapid decrease in credit quality rating, which would adversely affect the value and liquidity of the investment.

•

Interest Rate Risk: Fluctuations in interest rates may affect the yield, volatility, liquidity and value of investments in income producing or debt instruments. Generally, if interest rates rise, the value of such investments will fall. A low interest rate environment poses additional risks to the Fund, because low yields on the Fund’s portfolio holdings may have an adverse impact on the Fund’s ability to provide a positive yield to shareholders, pay expenses out of current income, or, at times, maintain a stable $1.00 share price and/or achieve its investment objective. The risks associated with changing interest rates may have unpredictable effects on the markets and the Fund’s investments.

•

Inventory Risk: The market-making capacity in debt markets has declined as a result of reduced broker-dealer inventories relative to fund assets, reduced broker-dealer proprietary trading activity and increased regulatory capital requirements for financial institutions such as banks. Because market makers provide stability to a market through their intermediary services, a significant reduction in dealer market-making capacity has the potential to decrease liquidity and increase volatility in the debt markets. A decrease in liquidity may affect the ability of the Fund to pay redemption proceeds within the allowable time period.

•

Market Risk: The value of the Fund’s investments may decline due to changing economic, political, social, regulatory or market conditions. Market risk may affect a single issuer, industry or section of the economy or it may affect the economy as a whole. Events such as war, acts of terrorism, social or political unrest or instability, natural disasters, rapid changes in interest rates, tariffs and other restrictions on trade, the spread of infectious illness or other public health threats could also significantly impact the Fund and its investments.

•

Repurchase Agreements: If the seller in a repurchase agreement defaults on its obligation to repurchase the underlying securities at a time when the value of these securities has declined, the Fund may incur a loss upon disposition of the securities. There is also a risk that the seller of the agreement may become insolvent and subject to liquidation.

•

Stable NAV Risk: The Fund may not be able to maintain an NAV per share of $1.00 (a “Stable NAV”) at all times. The failure of other money market funds to maintain a Stable NAV (or the perceived threat of such a failure) could adversely affect the Fund’s NAV. Shareholders of the Fund should not rely on or expect the Adviser or an affiliate to help the Fund maintain a Stable NAV.

•

U.S. Government Securities Risk: There are different types of U.S. Government Securities with different levels of credit risk. U.S. Government Securities issued or guaranteed by the U.S. Treasury and/or supported by the full faith and credit of the United States have the lowest credit risk, although they are not risk free and may default. A U.S. government-sponsored entity, although chartered or sponsored by an Act of Congress, may issue securities that are neither insured nor guaranteed by the U.S. Treasury and are riskier than those that are.

Risk is inherent in all investing. You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a bank account or a deposit of HSBC Bank USA, N.A. and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the Fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress.

HSBC U.S. Government Money Market Fund
Summary Section

Performance Bar Chart and Table

The bar chart and table below provide an indication of the risks of an investment in the Fund by showing changes in the Fund’s year to year performance. Past performance does not indicate how the Fund will perform in the future.

The bar chart below shows the Fund’s annual returns for Class I Shares and how performance has varied from year to year. The returns for the Fund’s other share classes will differ from the returns of the Class I Shares shown in the bar chart because the expenses of the classes differ.

Annual Total Returns as of 12/31 for Class I Shares
Bar chart assumes reinvestment of dividends and distributions

Year	Returns
2016	0.26%
2017	0.81%
2018	1.75%
2019	2.13%
2020	0.39%
2021	0.03%
2022	1.62%
2023	5.05%
2024	5.20%
2025	4.25%

Best Quarter:	12/31/2023	1.34%
Worst Quarter:	12/31/2021	0.01%

The table below lists the average annual total returns for each class of shares for various time periods. As of December 31, 2025, the 7-day yields of the Fund’s Class A, Class I, Intermediary, Intermediary Service, Class P and Class Y Shares were 3.34%, 3.69%, 3.66%, 3.64%, 3.64% and 3.59%, respectively. The 7-day yield information reflects any contractual and voluntary fee waivers/expense reimbursements. Without these fee waivers/expense reimbursements, the yields would have been lower. For current yield information on the Fund, call 1-800-782-8183.

Past performance is not an indication of how the Fund will perform in the future.

6

Table of Contents 

HSBC U.S. Government Money Market Fund
Summary Section

Performance Bar Chart and Table — (continued)

Average Annual Total Returns^ (for the periods ended December 31, 2025)

	Inception Date	1 Year	5 Years	10 Years	Since Inception
Class A Shares	Apr. 1, 1999	3.89%	2.93%	1.85%	1.77%
Class I Shares	Dec. 24, 2003	4.25%	3.21%	2.13%	1.46%
Intermediary Shares	July 12, 2016	4.22%	3.18%	-	2.21%
Intermediary Service Shares	July 12, 2016	4.20%	3.17%	-	2.19%
Class P Shares	May 11, 2023	4.20%	-	-	4.82%
Class Y Shares	July 1, 1996	4.15%	3.12%	2.04%	2.22%

^

During the year ended December 31, 2007, the Fund received a one-time reimbursement from the Adviser related to past marketing arrangements. During the year ended December 31, 2010, the Fund also received a one-time payment in respect of a class action settlement. As a result, the Fund’s total returns for the years ended December 31, 2007 and 2010 were higher than they would have been had the Fund not received these payments.

7

Table of Contents 

HSBC U.S. Government Money Market Fund
Summary Section

Investment Adviser

HSBC Global Asset Management (USA) Inc. is the Fund’s investment adviser.

Purchasing and Selling Your Shares

Generally, you may purchase or redeem Fund shares on any business day by mail (HSBC Funds, P.O. Box 219691, Kansas City, MO 64121-9691), wire transfer, or telephone at 1-800-782-8183. Purchases and redemptions of Class I Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares may only be made via wire transfer. Investors who wish to purchase, exchange or redeem Fund shares through a broker-dealer should contact the broker-dealer directly.

		Minimum Initial Investment				Minimum Subsequent Investment
Class A Shares
Regular (non-retirement)		$	1,000			$	100
Retirement (IRA)		$	250			$	100
Automatic Investment Plan		$	250			$	25
Class I Shares		$	50,000,000			$	5,000,000
Intermediary Shares		$	10,000,000			$	0
Intermediary Service Shares		$	10,000,000			$	0
Class P Shares		$	10,000,000			$	0
Class Y Shares		$	1,000,000			$	0

Tax Information

The Fund intends to declare dividends from net investment income daily and pay such dividends monthly. Net long-term capital gains, if any, will be distributed on an annual basis. The Fund’s distributions are taxable, and will be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.

Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase shares of the Fund through a financial intermediary, such as a broker-dealer or investment adviser, the Fund, the Adviser, the distributor and/or their affiliates may pay the intermediary for the sale of Fund shares and related services. These payments create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your financial intermediary or visit your financial intermediary’s website for more information.

HSBC U.S. Treasury Money Market Fund
Summary Section

Investment Objective

The investment objective of the HSBC U.S. Treasury Money Market Fund (the “Fund”) is to provide as high a level of current income as is consistent with the preservation of capital and liquidity.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and Example below.

Annual Fund Operating Expenses (expenses that you pay as a percentage of the value of your investment)	Class A	Class I	Intermediary Class	Intermediary Service Class	Class P	Class Y
Management Fee	0.10%	0.10%	0.10%	0.10%	0.10%	0.10%
Distribution (12b-1) Fee	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
Other Expenses:
Shareholder Servicing Fee	0.25%	0.00%	0.05%	0.10%	0.05%	0.00%
Other Operating Expenses	0.15%	0.05%	0.15%	0.15%	0.15%	0.15%
Total Other Expenses	0.40%	0.05%	0.20%	0.25%	0.20%	0.15%
Total Annual Fund Operating Expenses	0.50%	0.15%	0.30%	0.35%	0.30%	0.25%
Fee Waiver and/or Expense Reimbursement(1)	-	0.01%	0.12%	0.15%	0.12%	-
Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement	0.50%	0.14%	0.18%	0.20%	0.18%	0.25%

(1)

HSBC Global Asset Management (USA) Inc., the Fund’s investment adviser (the “Adviser”), has entered into a contractual expense limitation agreement with the Fund (“Expense Limitation Agreement”) under which it will limit total expenses of the Fund (excluding interest, taxes, brokerage commissions, extraordinary expenses and estimated indirect expenses attributable to the Fund’s investments in investment companies) to an annual rate of 0.14%, 0.18%, 0.20% and 0.18% for Class I Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares, respectively. Any amounts contractually waived or reimbursed by the Adviser will be subject to repayment by the Fund to the Adviser within three years, calculated monthly from when the waiver or reimbursement was recorded, to the extent that the repayment will not cause the Fund’s operating expenses to exceed the contractual expense limit that was in effect at the time of such waiver or reimbursement. The expense limitation shall be in effect until February 28, 2027. The Expense Limitation Agreement shall terminate upon the termination of the Investment Advisory Contract between the Fund and the Adviser, or it may be terminated upon written notice to the Adviser by the Trust’s Board of Trustees.

9

Table of Contents 

HSBC U.S. Treasury Money Market Fund
Summary Section

Example

This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem 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 Fund’s operating expenses remain the same. The Example takes the Fund’s Expense Limitation Agreement into account for the first year only. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

			1 Year				3 Years				5 Years				10 Years
Class A Shares			$	51			$	160			$	280			$	628
Class I Shares			$	14			$	47			$	84			$	191
Intermediary Shares			$	18			$	84			$	157			$	369
Intermediary Service Shares			$	20			$	97			$	181			$	428
Class P Shares			$	18			$	84			$	157			$	369
Class Y Shares			$	26			$	80			$	141			$	318

Principal Investment Strategies

The Fund is a government money market fund and seeks to maintain a stable price of $1.00 per share. The Fund seeks to achieve its investment objective by investing, under normal market conditions, exclusively in direct obligations of the U.S. Treasury. The Fund will invest in securities with maturities of (or deemed maturities of) 397 days or less and will maintain a dollar-weighted average portfolio maturity of 60 days or less and a dollar-weighted average portfolio life of 120 days or less.

The U.S. Treasury issues various types of marketable securities consisting of bills, notes, bonds and other debt securities. The Fund will not invest in securities issued or guaranteed by agencies or instrumentalities of the U.S. government, will not enter into loans of its portfolio securities and will not, under normal conditions, invest in repurchase agreements.

Under adverse market conditions, the Fund may temporarily invest in repurchase agreements collateralized by U.S. Treasury obligations. These securities may entail more risk than the types of securities in which the Fund typically invests. Additionally, as an alternative to investing in negatively yielding securities, the Fund may also elect to hold uninvested cash with the Fund’s custodian.

HSBC U.S. Treasury Money Market Fund
Summary Section

Principal Investment Risks

The Fund has the following principal investment risks. The risks are presented in an order intended to facilitate readability, and their order does not imply that the realization of one risk is likely to occur more frequently than another risk, nor does it imply that the realization of one risk is likely to have a greater adverse impact than another risk.

•

Debt Instruments Risk: The risks of investing in debt instruments include:

•

Credit Risk: The Fund could lose money if an issuer or guarantor of a debt instrument is unable or unwilling to make or perceived to be unable or unwilling to make timely payments of interest or principal, defaults on its other obligations or enters bankruptcy. The issuer or guarantor could also suffer a rapid decrease in credit quality rating, which would adversely affect the value and liquidity of the investment.

•

Interest Rate Risk: Fluctuations in interest rates may affect the yield, volatility, liquidity and value of investments in income producing or debt instruments. Generally, if interest rates rise, the value of such investments will fall. A low interest rate environment poses additional risks to the Fund, because low yields on the Fund’s portfolio holdings may have an adverse impact on the Fund’s ability to provide a positive yield to shareholders, pay expenses out of current income, or, at times, maintain a stable $1.00 share price and/or achieve its investment objective. The risks associated with changing interest rates may have unpredictable effects on the markets and the Fund’s investments.

•

Inventory Risk: The market-making capacity in debt markets has declined as a result of reduced broker-dealer inventories relative to fund assets, reduced broker-dealer proprietary trading activity and increased regulatory capital requirements for financial institutions such as banks. Because market makers provide stability to a market through their intermediary services, a significant reduction in dealer market-making capacity has the potential to decrease liquidity and increase volatility in the debt markets. A decrease in liquidity may affect the ability of the Fund to pay redemption proceeds within the allowable time period.

•

Market Risk: The value of the Fund’s investments may decline due to changing economic, political, social, regulatory or market conditions. Market risk may affect a section of the economy or it may affect the economy as a whole. Events such as war, acts of terrorism, social or political unrest or instability, natural disasters, rapid changes in interest rates, tariffs and other restrictions on trade, the spread of infectious illness or other public health threats could also significantly impact the Fund and its investments.

•

Stable NAV Risk: The Fund may not be able to maintain an NAV per share of $1.00 (a “Stable NAV”) at all times. The failure of other money market funds to maintain a Stable NAV (or the perceived threat of such a failure) could adversely affect the Fund’s NAV. Shareholders of the Fund should not rely on or expect the Adviser or an affiliate to help the Fund maintain a Stable NAV.

Risk is inherent in all investing. You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a bank account or a deposit of HSBC Bank USA, N.A. and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the Fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress.

HSBC U.S. Treasury Money Market Fund
Summary Section

Performance Bar Chart and Table

The bar chart and table below provide an indication of the risks of an investment in the Fund by showing changes in the Fund’s year to year performance. Past performance does not indicate how the Fund will perform in the future.

The bar chart below shows the Fund’s annual returns for Class Y Shares and how performance has varied from year to year. The returns for the Fund’s other share classes will differ from the returns of the Class Y Shares shown in the bar chart because the expenses of the classes differ.

Annual Total Returns as of 12/31 for Class Y Shares
Bar chart assumes reinvestment of dividends and distributions

 

Year	Returns
2016	0.07%
2017	0.65%
2018	1.61%
2019	1.95%
2020	0.32%
2021	0.01%
2022	1.49%
2023	4.90%
2024	5.06%
2025	4.09%

 

Best Quarter:	12/31/2023	1.31%
Worst Quarter:	12/31/2021	0.00%

12

Table of Contents 

HSBC U.S. Treasury Money Market Fund
Summary Section

Performance Bar Chart and Table — (continued)

The table below lists the average annual total returns for each class of shares for various time periods. As of December 31, 2025, the 7-day yields of the Fund’s Class A, Class I, Intermediary, Intermediary Service, Class P and Class Y Shares were 3.31%, 3.68%, 3.66%, 3.64%, 3.64% and 3.56%, respectively. The 7-day yield information reflects any contractual and voluntary fee waivers/expense reimbursements. Without these fee waivers/expense reimbursements, the yields would have been lower. For current yield information on the Fund, call 1-800-782-8183.

Past performance is not an indication of how the Fund will perform in the future.

Average Annual Total Returns^ (for the periods ended December 31, 2025)

	Inception Date	1 Year	5 Years	10 Years	Since Inception
Class A Shares	May 14, 2001	3.83%	2.90%	1.81%	1.35%
Class I Shares	Dec. 30, 2003	4.21%	3.18%	2.09%	1.54%
Intermediary Shares	July 12, 2016	4.19%	3.16%	-	2.17%
Intermediary Service Shares	July 12, 2016	4.17%	3.15%	-	2.17%
Class P Shares	May 11, 2023	4.17%	-	-	4.80%
Class Y Shares	May 11, 2001	4.09%	3.09%	2.00%	1.51%

^

During the year ended December 31, 2007, the Fund received a one-time reimbursement from the Adviser related to past marketing arrangements. During the year ended December 31, 2010, the Fund also received a one-time payment in respect of a class action settlement. As a result, the Fund’s total returns for the years ended December 31, 2007 and 2010 were higher than they would have been had the Fund not received these payments.

13

Table of Contents 

HSBC U.S. Treasury Money Market Fund
Summary Section

Investment Adviser

HSBC Global Asset Management (USA) Inc. is the Fund’s investment adviser.

Purchasing and Selling Your Shares

Generally, you may purchase or redeem Fund shares on any business day by mail (HSBC Funds, P.O. Box 219691, Kansas City, MO 64121-9691), wire transfer, or telephone at 1-800-782-8183. Purchases and redemptions of Class I Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares may only be made via wire transfer. Investors who wish to purchase, exchange or redeem Fund shares through a broker-dealer should contact the broker-dealer directly.

		Minimum Initial Investment			Minimum Subsequent Investment
Class A Shares
Regular (non-retirement)		$	1,000		$	100
Retirement (IRA)		$	250		$	100
Automatic Investment Plan		$	250		$	25
Class I Shares		$	50,000,000		$	5,000,000
Intermediary Shares		$	10,000,000		$	0
Intermediary Service Shares		$	10,000,000		$	0
Class P Shares		$	10,000,000		$	0
Class Y Shares		$	1,000,000		$	0

Tax Information

The Fund intends to declare dividends from net investment income daily and pay such dividends monthly. Net long-term capital gains, if any, will be distributed on an annual basis. The Fund’s distributions are taxable, and will be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.

Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase shares of the Fund through a financial intermediary, such as a broker-dealer or investment adviser, the Fund, the Adviser, the distributor and/or their affiliates may pay the intermediary for the sale of Fund shares and related services. These payments create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your financial intermediary or visit your financial intermediary’s website for more information.

Additional Information About the Funds’
Investment Strategies and Risks

More About Risks and Investment Strategies

Each Fund is a series of the HSBC Funds (the “Trust”). The investment objective and strategies of each Fund are non-fundamental and may be changed without shareholder approval. Shareholders will be given advance notice of material changes to a Fund’s investment objective or other non-fundamental investment policies. If there is a change in the investment objective or strategies of a Fund, shareholders should consider whether the Fund remains an appropriate investment in light of their current financial position and needs. There can be no assurance that the investment objective of a Fund will be achieved.

Each of the U.S. Government Money Market Fund and U.S. Treasury Money Market Fund intends to be a “government money market fund” under Rule 2a-7 under the Investment Company Act of 1940, as amended (“1940 Act”). “Government money market funds” are money market funds that invest at least 99.5% of their total assets in cash, securities issued or guaranteed by the United States or certain U.S. government agencies or instrumentalities (“U.S. Government Securities”), and/or repurchase agreements that are collateralized fully by these types of obligations. “Government money market funds” are exempt from provisions under Rule 2a-7 that: (1) require a four digit floating net asset value (“NAV”) per share and (2) permit and/or require the imposition of a “liquidity fee” under certain circumstances. In addition, the U.S. Government Money Market Fund must invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in U.S. Government Securities and repurchase agreements collateralized fully by these types of obligations. The U.S. Treasury Money Market Fund must invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in direct obligations of the U.S. Treasury. However, under normal market conditions, the U.S. Treasury Money Market Fund intends to invest exclusively in direct obligations of the U.S. Treasury. The investment policies to invest at least 80% of net assets, plus any borrowings for investment purposes, in the particular type of securities suggested by a Fund’s name exclude cash. Moreover, these investment policies are not fundamental and may be changed by the Board of Trustees of the Trust upon 60 days’ notice to Fund shareholders.

Investment Risks of the Funds

Investments in the Funds are subject to investment risks, including the possible loss of the principal amount invested. This section provides more detailed information about the Funds’ principal investments and risks. This prospectus does not disclose all the types of securities or investment strategies that the Funds may use. The Funds’ Statement of Additional Information (“SAI”) provides more detailed information about the securities, investment policies and risks described in this prospectus.

The Funds intend to use the amortized cost method of valuation to seek to maintain an NAV of $1.00 per share (a “Stable NAV”), but there is no assurance that the Funds will be able to do so on a continuous basis. The Funds’ performance per share will change daily based on many factors, including the quality of the instruments in each Fund’s investment portfolio, national and international economic conditions and general market conditions.

An investment in the Funds is neither insured nor guaranteed by the U.S. government. Shares of a Fund are not deposits or obligations of, or guaranteed or endorsed by, HSBC Bank USA, N.A. or any other bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. The Funds’ sponsor is not required to reimburse a Fund for losses, and you should not expect that the sponsor will provide financial support to a Fund at any time, including during periods of market stress.

As a money market fund, each Fund must meet the requirements of Rule 2a-7 under the 1940 Act. In addition, the Funds are subject to additional requirements under Rule 2a-7 as “government money market funds.” This Rule imposes strict requirements on the investment quality, liquidity, maturity and diversification of each Fund’s investments. Under Rule 2a-7, each Fund’s investments must have

Additional Information About the Funds’
Investment Strategies and Risks

Investment Risks of the Funds — (continued)

a remaining maturity of (or a deemed remaining maturity of) no more than 397 days and each Fund must maintain a dollar-weighted average maturity that does not exceed 60 days and a dollar-weighted average portfolio life of 120 days or less.

Institutional or other large investors are encouraged to invest in the Funds. As a result, the Funds may have large inflows or outflows of cash from time to time. This could have adverse effects on a Fund’s performance if the Fund were required to sell securities or invest cash (or leave cash uninvested) at times when it otherwise would not do so. This activity could also accelerate the realization of taxable income and/or gains for a Fund, increase a Fund’s transaction costs, and impact liquidity.

There can be no assurance that the investment objectives of each Fund will be achieved. In addition, each Fund’s investment policies, as well as the relatively short maturity of obligations purchased by the Funds, may result in frequent changes in each Fund’s portfolio, which may give rise to taxable gains or losses and reduce investment returns.

During adverse market conditions or when the Adviser believes there is an insufficient supply of appropriate money market instruments in which to invest, a Fund may temporarily hold uninvested cash with the Fund’s custodian in lieu of such investments. During periods when such temporary or defensive positions are held, a Fund may be unable to pursue its investment objective. Such positions may also subject a Fund to additional risks, such as increased credit exposure to the Fund’s custodian bank, as well as fees and other costs. Each of the Funds is subject to one or more of the following investment risks. The risks are presented in an order intended to facilitate readability, and their order does not imply that the realization of one risk is likely to occur more frequently than another risk, nor does it imply that the realization of one risk is likely to have a greater adverse impact than another risk.

● Principal Risk * Additional Risk	U.S. Government Money Market Fund	U.S. Treasury Money Market Fund
Risk
Debt Instruments Risk	●	●
Investments In Other Investment Companies	*
Large Shareholder Transactions Risk	*	*
Market Risk	●	●
Regulatory Risk	*	*
Repurchase Agreements	●	*
Stable NAV Risk	●	●
U.S. Government Securities Risk	●

•

Debt Instruments Risk: The risks of investing in debt instruments include:

•

Credit Risk: A Fund could lose money if an issuer or guarantor of a debt instrument is unable or unwilling to make timely payments of interest or principal, defaults on its other obligations or enters bankruptcy. Furthermore, the value of a debt instrument may decline if the market believes that the issuer or guarantor is unable or unwilling to make such payments on time. Changes in economic conditions could cause issuers or guarantors of these instruments to be unable or unwilling to meet their financial obligations. Although securities issued or guaranteed by the U.S. Treasury and/or supported by the full faith and credit of the United States have the lowest credit risk, they are not risk free and are subject to default.

Additional Information About the Funds’
Investment Strategies and Risks

Investment Risks of the Funds — (continued)

•

Interest Rate Risk: Fluctuations in interest rates may affect the yield, volatility, liquidity and value of investments in income-producing or debt instruments. Generally, if interest rates rise, the value of such investments will fall. In addition, rising interest rates could lead to heightened investment volatility and decreased liquidity. During periods of falling interest rates, borrowers may pay off their debt sooner than expected, forcing the reinvestment of principal proceeds at lower interest rates, resulting in less interest income. Conversely, during periods of rising interest rates, borrowers may pay off their debt later than expected, thereby preventing reinvestment of principal proceeds at higher interest rates, increasing a Fund’s sensitivity to changes in interest rates and resulting in less income to the Fund than potentially available. The Funds may face a heightened level of interest rate risk due to certain changes in monetary policy, such as certain interest rate changes by the U.S. Federal Reserve. A low interest rate environment poses additional risks to the Funds. Low yields on a Fund’s portfolio holdings may have an adverse impact on the Fund’s ability to provide a positive yield to shareholders, pay expenses out of current income, or, at times, maintain a stable $1.00 share price and/or achieve its investment objective. Interest rate changes can be sudden and unpredictable, and a Fund may lose money if these changes are not anticipated by the Adviser. A wide variety of factors can cause interest rates or yields to rise or fall (e.g., central bank monetary policies, inflationary or deflationary pressures, changing inflation or real growth rates, general market and economic conditions, etc.). The risks associated with changing interest rates may have unpredictable effects on the markets and a Fund’s investments.

•

Inventory Risk: The market-making capacity in debt markets has declined as a result of reduced broker-dealer inventories relative to fund assets, reduced broker-dealer proprietary trading activity and increased regulatory capital requirements for financial institutions such as banks. Because market makers provide stability to a market through their intermediary services, a significant reduction in dealer market-making capacity has the potential to decrease liquidity and increase volatility in the debt markets. A decrease in liquidity may negatively affect the ability of a Fund to pay redemption proceeds within the allowable time period.

•

Investments in Other Investment Companies: Subject to certain restrictions, the U.S. Government Money Market Fund may invest in securities issued by other money market funds that primarily invest in U.S. Government Securities and repurchase agreements collateralized by U.S. Government Securities. Such securities will be acquired by the Fund within the limits prescribed by the 1940 Act and the rules thereunder. Investors should recognize that the purchase of securities of other investment companies results in duplication of expenses such that investors indirectly bear a proportionate share of the operating expenses of such companies, including investment advisory and administrative services fees.

•

Large Shareholder Transactions: A Fund may be adversely impacted when certain large shareholders, including institutional investors, purchase or redeem large amounts of shares of the Fund, which may occur rapidly or unexpectedly. As a result, the Funds may experience redemptions resulting in large outflows of cash from time to time. This could have adverse effects on a Fund’s performance and/or portfolio construction if the Fund were required to sell securities at times when it otherwise would not do so. This activity could also accelerate the realization of taxable income and/or gains for the Fund, which may increase taxable distributions to shareholders, and increase a Fund’s transaction costs or decrease the liquidity of a Fund’s portfolio. The effects of taxable income and/or gains resulting from large shareholder transactions would particularly impact non-redeeming shareholders who do not hold their Fund shares in IRAs, 401(k) plans or other tax-advantaged investment plans. To the extent that such transactions result in short-term capital gains, such gains will generally be taxed at the ordinary income tax rate for shareholders who hold Fund shares in a taxable account. Similarly, large purchases of Fund shares may adversely affect a Fund’s performance to the extent that the Fund is delayed

Additional Information About the Funds’
Investment Strategies and Risks

Investment Risks of the Funds — (continued)

in investing new cash or otherwise maintains a larger cash position than it ordinarily would. Large redemptions of Fund shares could also result in a Fund’s current expenses being allocated over a smaller asset base, leading to an increase in the Fund’s expense ratio. Certain circumstances that may cause a Fund to experience large redemptions include, but are not limited to, the occurrence of significant events affecting investor demand for securities or asset classes in which a Fund invests; changes in the eligibility criteria for a Fund or share class of a Fund; personnel changes relating to the management of a Fund; announced liquidations or reorganizations of a Fund; or other announcements relating to a Fund, including changes in investment objectives, strategies, policies or risks. Although large shareholder transactions may be more frequent under certain circumstances, a Fund is generally subject to the risk that a large shareholder can purchase or redeem a significant percentage of Fund shares at any time. Moreover, a Fund is subject to the risk that other shareholders may make investment decisions based on the choices of a large shareholder, which could exacerbate any potential negative effects experienced by a Fund.

•

Market Risk: The value of a Fund’s investments may decline due to changing economic, political, social, regulatory or market conditions. Issuer, political, economic, regulatory, social or market developments can affect a single issuer, issuers within an industry or economic sector, or the market as a whole. In the short term, a Fund’s investments can fluctuate dramatically in response to these developments. Different parts of the market and different types of securities can react differently to these developments. Moreover, the conditions in one country or geographic region could adversely affect a Fund’s investments in a different country or geographic region due to increasingly interconnected global economies and financial markets. In addition, market risk includes the risk that geopolitical and other events will disrupt the economy on a regional, national or global level. Events such as war, acts of terrorism, regional conflicts, market manipulation, government defaults, government shutdowns, natural/environmental disasters, inflation, rapid interest rate changes, supply chain disruptions, international sanctions, tariffs and other restrictions on trade, global recessions, social or political unrest or instability, the spread of infectious illness or other public health threats could also significantly impact a Fund and its investments, including in ways that cannot be foreseen. A Fund could be negatively impacted if the values of its investments were harmed by such events. Any market disruptions could also prevent a Fund from executing investment decisions in a timely manner.

•

Repurchase Agreements: The use of repurchase agreements, in which a party buys a security from another party (“seller”) and the seller agrees to repurchase the security at an agreed-upon date and price (which reflects a market rate of interest), involves certain risks. If the seller in a repurchase agreement defaults on its obligation to repurchase the underlying securities at a time when the value of these securities has declined, a Fund may incur a loss upon disposition of the securities. The Funds may also suffer time delays and incur expenses in connection with the disposition of the securities. These risks are increased to the extent that a repurchase agreement is secured by collateral other than cash and U.S. Government securities. In addition, the value of collateral other than cash and U.S. Government Securities may be more volatile, or the collateral may be less liquid or subject to greater risk of loss, thereby increasing the risk that the Fund will be unable to recover fully in the event of a counterparty’s default. There is also a risk that the seller of the agreement may become insolvent and subject to liquidation.

•

Stable NAV Risk: The Funds expect to use the amortized cost method of valuation to seek to maintain a Stable NAV. However, the Funds may not be able to maintain a Stable NAV. If any money market fund fails to maintain a Stable NAV (or if there is a perceived threat of such a failure), other money market funds, including the Funds, could be subject to increased redemption activity, which could adversely affect the Funds’ NAV. Shareholders of the Funds should not rely on or expect the Adviser or an affiliate to purchase distressed assets from the Funds, make capital infusions into the Funds, enter into capital support agreements with the Funds or take other actions to help the Funds maintain a Stable NAV.

Additional Information About the Funds’
Investment Strategies and Risks

Investment Risks of the Funds — (continued)

•

U.S. Government Securities Risk: There are different types of U.S. Government Securities with different levels of credit risk. Some U.S. Government Securities are issued or guaranteed by the U.S. Treasury and are supported by the full faith and credit of the United States. Other types of U.S. Government Securities are supported by the full faith and credit of the United States (but not issued by the U.S. Treasury). These securities have the lowest credit risk, although they are not risk free and may default. Still other types of U.S. Government Securities are: (1) supported by the ability of the issuer to borrow from the U.S. Treasury; (2) supported only by the credit of the issuing agency, instrumentality or government-sponsored corporation; (3) supported by pools of assets (e.g., mortgage-backed securities); or (4) supported by the United States in some other way. Certain U.S. Government Securities are riskier than others. The relative level of risk depends on the nature of the particular security and government support. A U.S. government-sponsored entity, although chartered or sponsored by an Act of Congress, may issue securities that are neither insured nor guaranteed by the U.S. Treasury and are riskier than those that are. Regarding certain federal agency securities or government sponsored entity securities (such as debt securities or mortgage-backed securities issued by Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal Farm Credit Banks, Federal Home Loan Banks, and other government sponsored agencies), investors should be aware that although the issuer may be chartered or sponsored by an Act of Congress, the issuer is not funded by congressional appropriations, and its securities are neither guaranteed nor insured by the U.S. Treasury. Fannie Mae and Freddie Mac have been operating under conservatorship, with the Federal Housing Finance Agency acting as their conservator, since September 2008. This risk does not apply to the HSBC U.S. Treasury Money Market Fund, which normally invests only in obligations of the U.S. Treasury and does not invest in obligations issued or guaranteed by agencies or instrumentalities of the U.S. government.

Additional Information About the Funds’
Investment Strategies and Risks

Other Information

To the extent authorized by law, each Fund reserves the right to discontinue offering shares at any time, merge, reorganize itself or any class of shares or cease operations and liquidate.

Who May Want To Invest?

Consider investing in the Funds if you are:

•

Seeking preservation of capital

•

Investing for short-term needs

•

Have a very low risk tolerance

•

Willing to accept lower potential returns in exchange for a higher degree of safety

The Funds will not be appropriate for anyone:

•

Seeking high total returns

•

Pursuing a long-term goal or investing for retirement

More Information About Fund Investments

This prospectus describes the Funds’ principal strategies, and the Funds will normally invest in the types of securities described in this prospectus. However, in addition to the investments and strategies described in this prospectus, each Fund also may invest in other securities and engage in other investment practices. These securities and investment practices, as well as those described in this prospectus, are described in detail in the Statement of Additional Information (“SAI”). Of course, a Fund cannot guarantee that it will achieve its investment goal.

Portfolio Holdings

A description of the Funds’ policies and procedures with respect to the disclosure of the Funds’ portfolio securities is available in the SAI and on the Funds’ website at https://www.assetmanagement.us.hsbc.com/en/ institutional-investor. To request a copy of the SAI, please refer to the back cover of this prospectus.

Fund Management

The Investment Adviser

HSBC Global Asset Management (USA) Inc., 66 Hudson Boulevard, E. 29th Floor, New York, NY 10001, is the investment adviser for the Funds, pursuant to an investment advisory contract (the “Investment Advisory Agreement”) with the Trust. The Adviser is a wholly-owned subsidiary of HSBC USA, Inc., a registered bank holding company (“HSBC”). The Adviser and its affiliates provide investment advisory services for a range of clients, including individuals, trusts, estates, corporations and other institutions, insurance companies and pooled investment vehicles. As of September 30, 2025, the Adviser had approximately $152.3 billion in assets under management.

Through its portfolio management team, the Adviser makes the day-to-day investment decisions and continuously reviews, supervises and administers the Funds’ investment programs pursuant to the Investment Advisory Agreement. The Adviser also provides certain operational support services to the Funds at the annual rate of 0.10% of a Fund’s average daily net assets of Class A, Intermediary Class, Intermediary Service Class, Class P and Class Y Shares, pursuant to an Operational Support Services Agreement, but these fees are not charged to Class I Shares.

The Adviser intends to support organizations that are focused on addressing issues at the intersection of gender, racial and ethnic inequality by making an annual donation out of its own resources in an amount equal to or greater than 20% of the annual fees (advisory, operational support and administrative) it receives with respect to the assets invested in the Class P Shares of each Fund. Donations will be determined after any fee waivers, expense reimbursements, yield support payments, revenue sharing payments and similar amounts have been subtracted from the annual fees the Adviser receives with respect to Class P Shares. Donations will be made at least annually and will continue throughout the life of Class P Shares. Donations will be made to partner organizations, including charities and community groups, that have been selected by the HSBC Group Corporate Sustainability team.

The Trust and the Adviser have each received an exemptive order from the SEC that allows the Adviser to enter into new investment sub-advisory contracts and to make material changes to existing sub-advisory contracts with certain unaffiliated subadvisers with the approval of the Board of Trustees of the Trust, but without shareholder approval. None of the Funds currently use the services of a subadviser. However, the conditions under the exemptive order could be applied to the use of one or more unaffiliated subadvisers at a future time. In the future, the Trust and the Adviser may, on behalf of the U.S. Government Money Market Fund, receive an additional exemptive order that would allow the Adviser to implement new investment sub-advisory contracts and to make material changes to sub-advisory contracts that may be in effect at the time with subadvisers that are affiliated with the Adviser with the approval of the Board of Trustees, but without shareholder approval. As with the current order, the new order would be subject to certain conditions, including that the U.S. Government Money Market Fund would notify shareholders and provide them with certain information upon the hiring of a subadviser.

For advisory and operational support services (as applicable), during the last fiscal year the Funds paid fees (net of fee waivers) as follows:

	Percentage of average net assets for Fiscal Year Ended 10/31/25
U.S. Government Money Market Fund	0.10%
U.S. Treasury Money Market Fund	0.08%

The Adviser may voluntarily waive fees and/or reimburse Fund expenses from time to time. For example, the Adviser may voluntarily undertake to waive fees and/or reimburse Fund expenses in the event that a Fund’s yield drops below a designated level. Once started, there is no guarantee that the Adviser will continue to

Fund Management

voluntarily waive a portion of its fees and/or reimburse Fund expenses following commencement of such a waiver and/or reimbursement. Such waivers and/or reimbursements will impact a Fund’s performance. The Adviser has entered into an Expense Limitation Agreement with each Fund with respect to the Class I Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares under which it will limit the total expenses of each respective Fund (excluding interest, taxes, brokerage commissions, extraordinary expenses and indirect expenses associated with the Fund’s investments in other money market funds (acquired fund fees and expenses)) to the annual rates shown in the table below:

	Class I Shares	Intermediary Shares	Intermediary Service Shares	Class P Shares
U.S. Government Money Market Fund	0.14%	0.18%	0.20%	0.18%
U.S. Treasury Money Market Fund	0.14%	0.18%	0.20%	0.18%

Any amounts contractually waived or reimbursed by the Adviser will be subject to repayment by a Fund to the Adviser within three years, calculated monthly from when the waiver or reimbursement was recorded, to the extent that the repayment will not cause a Fund’s operating expenses to exceed the contractual expense limit that was in effect at the time of such waiver or reimbursement. The expense limitations shall be in effect until February 28, 2027. The Expense Limitation Agreement shall terminate upon the termination of the Investment Advisory Agreement between the Trust and the Adviser, or it may be terminated upon written notice to the Adviser by the Trust’s Board of Trustees.

A discussion regarding the basis for the Board of Trustees’ approval of the Investment Advisory Agreement for the Funds is available in the Funds’ Form N-CSR covering the six-month period ended April 30, 2025 and will be available in the Funds’ report on Form N-CSR covering the six-month period ended April 30, 2026.

Fund Management

The Distributor, Administrator and Sub-Administrator

The Adviser also serves as the Trust’s administrator (the “Administrator”), and in that role oversees and coordinates the activities of other service providers, and monitors certain aspects of the Trust’s operations. State Street Bank and Trust Company, whose address is One Congress Street, Boston, MA 02114, serves as sub-administrator, and provides fund accounting, custody and other services, to the Funds (the “Sub-Administrator”).

Foreside Distribution Services, L.P. (the “Distributor”), a member of the Financial Industry Regulatory Authority (“FINRA”), is the Trust’s principal underwriter and acts as the Trust’s distributor in connection with the offering of Fund shares. The Distributor may enter into agreements with banks, broker-dealers or other financial intermediaries through which investors may purchase or redeem shares.

The SAI has more detailed information about the Adviser, Distributor, Administrator and Sub-Administrator, and other service providers. You can obtain a copy of the SAI on the Funds’ website at https://www.assetmanagement.us.hsbc.com/en/institutional-investor.

Shareholder Information

Pricing of Fund Shares

 

Shareholder Information

Purchasing and Adding to Your Shares

Purchasing Shares You may purchase, redeem or exchange shares of the Funds through the Funds’ Transfer Agent or through banks, brokers and other investment representatives, which may charge additional fees and may require higher minimum investments or impose other limitations on buying and selling shares. If you purchase, redeem or exchange shares through a bank, broker or other investment representative, that party is responsible for transmitting orders to the Funds’ Transfer Agent and may have an earlier cut-off time for purchase, redemption and exchange orders. Purchase, redemption and exchange orders will be executed at the NAV next calculated after the Funds’ Transfer Agent has received and accepted the order in good order. In addition, certain banks, brokers and other investment representatives are authorized to accept, on behalf of the Funds, purchase, redemption and exchange orders placed by or on behalf of their customers. If a bank, broker or other investment representative is authorized to accept, on behalf of the Trust, purchase, redemption and exchange orders (and provided such authorized agent complies with its agreement with the Trust or the Distributor), a Fund or the Funds’ Transfer Agent will be deemed to have received an order for the purchase, redemption or exchange of Fund shares when the order is received and accepted in good order by such authorized agent, and the order will be executed at the NAV next calculated. Each authorized agent’s agreement with the Trust or the Distributor allows orders to be executed at the NAV next calculated, after the order is received and accepted in good order by such authorized agent, although the order may not be transmitted to the Trust or the Funds’ Transfer Agent until after the time at which a Fund next calculates its NAV. In general, “good order” means that payment for your purchase and all the information needed to complete your order must be received by a Fund, the Funds’ Transfer Agent or their authorized agents before your order is processed. Purchase proceeds must be received by 6:00 p.m. Eastern time. You should contact the bank, broker or other investment representative through whom you purchase, redeem or exchange shares of the Funds to learn whether it is authorized to accept orders on behalf of the Trust. You should also consult such bank, broker or other investment representative for specific information about the purchase, redemption and/or exchange of Fund shares.

The Funds offer the six classes of shares described below.

CLASS A SHARES are offered to clients of the Adviser’s affiliates, certain retirement plans, certain institutional clients and some third party providers.

CLASS I SHARES are offered primarily for direct investment by institutional investors, such as corporations, foundations, municipalities and other governmental entities, banks and trust companies, as well as to other investors who meet the investment minimums on the following page. Class I Shares are also available for investment by other investment companies and products advised by the Adviser or its affiliates, employees of the Adviser, and members of the Trust’s Board of Trustees. Purchases and redemptions of Class I Shares may only be made via wire transfer.

INTERMEDIARY SHARES are offered primarily through intermediaries and bank sweep programs. Purchases and redemptions of Intermediary Shares may only be made via wire transfer.

INTERMEDIARY SERVICE SHARES are offered primarily through intermediaries and bank sweep programs. Purchases and redemptions of Intermediary Service Shares may only be made via wire transfer.

Shareholder Information

Purchasing and Adding to Your Shares
continued

 

 

Avoid 24% Tax Withholding The Funds are required to withhold 24% of taxable dividends, capital gains distributions and redemptions paid to shareholders who have not provided the Funds with their certified taxpayer identification number in compliance with Internal Revenue Service (“IRS”) rules, or who have been notified by the IRS that they are subject to backup withholding. Backup withholding is not an additional tax; rather, it is a way in which the IRS ensures that it will collect taxes otherwise due. Any amounts withheld may be credited against your U.S. federal income tax liability. To avoid tax withholding, make sure you provide your correct tax identification number (social security number for most investors) on your Account Application and required certifications.

Shareholder Information

Purchasing and Adding to Your Shares
continued

Instructions for Opening or Adding to an Account

By Regular Mail or By Overnight Service

Initial Investment:

If purchasing through your financial advisor or brokerage account, simply tell your advisor or broker that you wish to purchase shares of the Funds and he or she will take care of the necessary documentation. For all other purchases, follow the instructions below.

1.

Carefully read, complete, and sign the Account Application. Establishing your account privileges now saves you the inconvenience of having to add them later. A copy of the application can be obtained on the Funds’ website at https://www.assetmanagement.us.hsbc.com/en/institutional-investor.

2.

Make your check payable to “HSBC Funds” and include the name of the appropriate Fund(s) on the check.

 

 

3. Mail to: HSBC Funds, P.O. Box 219691, Kansas City, MO 64121-9691.

Shareholder Information

Purchasing and Adding to Your Shares
continued

Electronic Purchases

Your bank must participate in the ACH and must be a U.S. bank. Your bank or broker may charge for this service.

Select the electronic purchase option on your Account Application or call 1-800-782-8183. Your account can generally be set up for electronic purchases within 15 days.

Call 1-800-782-8183 to arrange a transfer from your bank account.

By Wire Transfer

For information on how to request a wire transfer, call 1-800-782-8183.

Customer Identification Information

To help the U.S. Government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person that opens a new account, and to determine whether such person’s name appears on U.S. Government lists of known or suspected terrorists and terrorist organizations.

As a result, the Funds must obtain the following information for each person that opens a new account:

•

Name;

•

Date of birth (for individuals);

•

Residential or business street address (although post office boxes are still permitted for mailing); and

•

Social security number, taxpayer identification number or other identifying number.

Shareholder Information

Purchasing and Adding to Your Shares
continued

You may also be asked for a copy of your driver’s license, passport or other identifying document in order to verify your identity. In addition, it may be necessary to verify your identity by cross-referencing your identification information with a consumer report or other electronic database. Additional information may be required to open accounts for corporations and other entities.

Federal law prohibits the Funds and other financial institutions from opening a new account unless they receive from an investor the minimum identifying information listed above. After an account is opened, the Funds may restrict your ability to purchase additional shares until your identity is verified. The Funds may close your account or take other appropriate action if they are unable to verify your identity within a reasonable time.

If your account is closed for this reason, your shares will be redeemed at the NAV next calculated after the account is closed.

Shareholder Information

Purchasing and Adding to Your Shares
continued

Restrictions on Offers and Sales to Canadian Residents

The shares described in this prospectus may only be distributed in Canada through approved parties, and this prospectus may not be used to solicit, and will not constitute a solicitation of, an offer to buy shares in Canada unless such solicitation is made by approved parties. A distribution or solicitation may be deemed to occur in Canada where a distribution or solicitation is made to a person (including an individual, corporation, trust, partnership or other entity, or other legal person) resident or otherwise located in Canada at the applicable time. For these purposes, the following persons will generally be considered to be a Canadian resident:

1.

An individual, if

•

the individual’s primary principal residence is located in Canada; or

•

the individual is physically located in Canada at the time of the offer, sale or other relevant activity.

2.

A corporation, if

•

the corporation’s head office or principal office is located in Canada; or

•

securities of the corporation that entitle the holder to elect a majority of the directors are held by Canadian Resident individuals (as described above) or by legal persons resident or otherwise located in Canada; or

•

the individuals that make investment decisions or provide instructions on behalf of the corporation are Canadian Resident individuals (as described above).

3.

A trust, if

•

the principal office of the trust (if any) is located in Canada; or

•

the trustee (or in the case of multiple trustees, the majority of trustees) are Canadian Resident individuals (as described above) or are legal persons resident or otherwise located in Canada; or

•

the individuals that make investment decisions or provide instructions on behalf of the trust are Canadian Resident individuals (as described above).

4.

A partnership, if

•

the partnership’s head office or principal office (if any) is located in Canada; or

•

the holders of the majority of the interests of or in the partnership are held by Canadian Residents (as described above); or

•

the general partner (if any) is a Canadian Resident (as described above); or

•

the individuals that make investment decisions or provide instructions on behalf of the partnership are Canadian Resident individuals (as described above).

Shareholder Information

Selling Your Shares

Withdrawing Money from Your Fund Investment As a mutual fund shareholder, you are technically selling shares when you request a withdrawal in cash. This is also known as redeeming shares or a redemption of shares.

Generally, you may sell your Fund shares at any time. Your sales price will generally be the next NAV calculated after your sell order is received and accepted in good order by a Fund, its transfer agent or your investment representative, as described under “Purchasing Shares” above. You may receive proceeds of your sale in a check, ACH or federal wire transfer.

Instructions for Selling Shares

If selling your Fund shares through your financial adviser or broker, ask him or her for redemption procedures. Your adviser and/or broker may have transaction minimums and/or transaction times that will affect your redemption. For all other sales transactions, follow the instructions below.

By Telephone

(unless you have declined telephone sales privileges)

1.

Call 1-800-782-8183 with instructions as to how you wish to receive your funds (mail, wire, electronic transfer). (See “Selling Your Shares—Verifying Telephone Redemptions”)

By Mail or Overnight Service

(See “Selling Your Shares—Redemptions in Writing Required and Non-Financial Transactions”)

1.

Call 1-800-782-8183 to request redemption forms or write a letter of instruction indicating:

•

your Fund and account number

•

amount you wish to redeem

•

address where your check should be sent

•

account owner’s signature

2.

Mail to: HSBC Funds, P.O. Box 219691, Kansas City, MO 64121-9691.

Wire Transfer

You must select this option on your Account Application. Call 1-800-782-8183 to request a wire transfer. If you call by the cut-off time for redemptions (at 5:00 p.m. Eastern Time for the U.S. Government Money Market Fund and 2:00 p.m. Eastern Time for the U.S. Treasury Money Market Fund), your payment will normally be wired to your bank on the same business day. Otherwise, it normally will be wired on the following business day. A Fund may, in its sole discretion and subject to the needs of the Fund’s Portfolio Management team, seek to satisfy wire transfer requests on an intraday basis.

The Fund may charge a wire transfer fee.

NOTE: Your financial institution may also charge a separate fee.

Shareholder Information

Selling Your Shares
continued

Electronic Redemptions

Call 1-800-782-8183 to request an electronic redemption.

Your bank must participate in the ACH and must be a U.S. bank. Your bank may charge for this service.

Systematic Withdrawal Plan

You can receive automatic payments from your account on a monthly, quarterly, semi-annual or annual basis. The minimum withdrawal is $50. To activate this feature:

•

Make sure you have checked the appropriate box on the Account Application, or call 1-800-782-8183.

•

Include a voided personal check.

•

Your account must have a value of $10,000 or more to start withdrawals.

If the value of your account falls below $1,000, you may be asked to add sufficient funds to bring the account back to $1,000, or the Fund may close your account and mail the proceeds to you.

Redemptions In Writing Required and Non-Financial Transactions

You must request redemptions in writing for certain types of redemptions, including from Individual Retirement Accounts (“IRAs”) and in the following situations:

•

You want to redeem shares with a value of $50,000 or more and you want to receive the proceeds in the form of a check;

•

You want your payment sent to an address, bank account or payee other than the one currently designated on your account;

•

You want the redemption proceeds to be transferred to another Fund account with a different registration; or

•

Other unusual situations as determined by the Funds’ transfer agent.

In the above situations, except for redemptions from IRAs, you must obtain a medallion signature guarantee for all registered owners or their legal representative (unless you request and receive a waiver).

For non-financial transactions, there is no requirement to provide a signature guarantee from a notary public to request any of the following changes:

•

A change of name;

•

Add or change banking instructions (the bank account must have at least one common owner with the owner of the Fund account);

•

Add or change beneficiaries;

•

Add or change authorized account traders;

•

Add a Power of Attorney;

•

Add or change a Trustee; or

•

A UTMA/UGMA custodian change.

The Funds reserve the right to waive medallion and other signature guarantee requirements, require a medallion or other signature guarantee under other circumstances or reject or delay a redemption or other instruction if the signature guarantee is not in good form. The Funds may also request a letter from a surviving joint owner before fulfilling a redemption request.

Shareholder Information

Selling Your Shares
continued

You may request a waiver of the requirement to obtain a medallion or other signature guarantee. In these circumstances, for your protection, you will be asked to provide information to verify your identity. The Funds use reasonable procedures to verify that written instructions without a medallion or other signature guarantee are genuine and only made by authorized individuals. These procedures include asking for information to verify your identity and authorization. If these procedures are followed, the Funds and its agents will not be responsible for any loss, liability, cost or expense of acting upon unauthorized or fraudulent instructions; you bear the risk of loss. The Funds may modify or cancel this waiver policy at any time without notice.

Verifying Telephone Redemptions

Unless you have specifically indicated on your Account Application otherwise, you may request redemptions by telephone. The Funds attempt to ensure that telephone redemptions are only made by authorized individuals. All telephone calls are recorded for your protection and you will be asked to provide information to verify your identity. Proceeds of telephone redemption requests will be sent to your address of record or authorized account designated in the current records of the transfer agent (unless you provide written instructions and a medallion signature guarantee indicating another address or account). For the 15-day period following a change of account address, telephone redemptions will only be filled by a wire transfer to the authorized account designated in the current records of the transfer agent. In order to receive the redemption by check during this time period, the redemption request must be in the form of a written letter (a medallion signature guarantee may be required). The Funds use reasonable procedures to verify that instructions given by telephone are genuine and only made by authorized individuals. These procedures include recording telephone instructions and asking for information to verify your identity. If these procedures are followed, the Funds and its agents will not be responsible for any loss, liability, cost or expense of acting upon unauthorized or fraudulent instructions; you bear the risk of loss. The telephone redemption feature may not be available at all times, particularly in times of unusual market conditions and shareholder activity. The Funds may modify or cancel the telephone redemption feature at any time without notice.

Redemptions Within 10 Days of Shares Purchased by Check

When you have made an investment by check and subsequently request a redemption you will not receive the redemption proceeds until the Funds’ transfer agent is satisfied that the check has cleared (which may require up to 10 business days).

Redemption Proceeds

The Funds typically expect that they will hold cash or cash equivalents to meet redemption requests. The Funds may also use the proceeds from the sale of portfolio securities to meet redemption requests. In addition, under stressed market conditions, as well as for temporary or emergency purposes, the Funds may distribute redemption proceeds in kind, access a line of credit or overdraft facility, or borrow through other sources to meet redemptions. Redemption proceeds are generally paid in cash, but the Funds reserve the right to pay, above certain limits, all or part of any redemption proceeds in kind, that is, in securities with a market value equal to the redemption price. If the Funds make a payment in kind, the securities will be valued in the same manner as NAV is calculated. The Funds may provide these securities in lieu of cash without prior notice. You would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains you may realize from the sale, or from the sale of securities you receive. Additional information is available in the Funds’ SAI.

Shareholder Information

Selling Your Shares
continued

Delay or Suspension in Payment of Redemption Proceeds

Upon receipt of a proper redemption request submitted in a timely manner and otherwise in accordance with the redemption procedures set forth in this prospectus, each Fund will redeem the requested shares and make a payment to you in satisfaction thereof no later than the business day following the redemption request. A Fund may postpone and/or suspend redemption and payment beyond one business day only as follows:

•

For any period during which there is a non-routine closure of the Fedwire or applicable Federal Reserve Banks;

•

For any period (1) during which the New York Stock Exchange is closed other than customary week-end and holiday closings or (2) during which trading on the New York Stock Exchange is restricted;

•

For any period during which an emergency exists as a result of which (1) disposal of securities owned by a Fund is not reasonably practicable or (2) it is not reasonably practicable for a Fund to fairly determine the net asset value of its shares;

•

For any period during which the SEC has, by rule or regulation, deemed that (1) trading shall be restricted or (2) an emergency exists;

•

For any period that the SEC may by order permit for your protection; or

•

For any period during which a Fund, as part of a necessary liquidation of the Fund, has properly postponed and/or suspended redemption of shares and payment in accordance with federal securities laws.

In addition, a temporary hold may be placed on the disbursement of redemption proceeds from an account if there is a reasonable belief that financial exploitation of a Specified Adult (as defined below) has occurred, is occurring, has been attempted, or will be attempted. Notice of such a delay will be provided in accordance with regulatory requirements. This temporary hold will be for an initial period of no more than 15 business days while an internal review of the facts and circumstances of the suspected financial exploitation is conducted, but the temporary hold may be extended for up to 10 additional business days if the internal review supports the belief that financial exploitation has occurred, is occurring, has been attempted, or will be attempted. Both the initial and additional hold on the disbursement may be terminated or extended by a state regulator or an agency or court of competent jurisdiction. For purposes of this paragraph, the term “Specified Adult” refers to an individual who is (1) a natural person age 65 and older; or (2) a natural person age 18 and older who is reasonably believed to have a mental or physical impairment that renders the individual unable to protect his or her own interests.

Closing of Small Accounts

If your account falls below $50 due to redemptions, a Fund may ask you to increase your balance. If it is still below $50 after 30 days, a Fund may close your account and send you the proceeds at the current NAV.

Undeliverable or Uncashed Checks

Any check tendered in payment of a redemption transaction that cannot be delivered by the post office or which remains uncashed for more than six months may be reinvested in the shareholder’s account at the then-current NAV. No interest will accrue on amounts represented by uncashed redemption checks. Any check tendered in payment of dividends or other distributions that cannot be delivered by the post office or which remains uncashed for more than six months may be reinvested in the shareholder’s account at the then-current NAV, and if a Fund cannot locate the shareholder, the dividend option may be changed from cash to reinvest. Distributions are reinvested on the pay date at the NAV determined at the close of business on that date.

Unclaimed Accounts

Per state requirements, property may be transferred to the appropriate state if no activity occurs in the account within the time period specified by state law. Escheatment of an IRA account will be subject to 10% federal withholding tax and treated as a taxable distribution to you.

Shareholder Information

Distribution Arrangements

This section describes the fees you will pay as an investor in different share classes offered by the Funds.

	Class A Shares	Class I Shares	Intermediary Class and Class P Shares	Intermediary Service Class Shares	Class Y Shares
Distribution	Subject to annual shareholder servicing fees of up to 0.25% of the Fund’s average daily net assets attributable to Class A Shares.	No distribution or servicing fees.	Subject to annual shareholder servicing fees of up to 0.05% of the Fund’s average daily net assets attributable to Intermediary and Class P Shares, respectively.	Subject to annual shareholder servicing fees of up to 0.10% of the Fund’s average daily net assets attributable to Intermediary Service Shares.	No distribution or servicing fees.
(12b-1) and
Servicing Fees
Fund Expenses	Higher annual expenses than Class I, Intermediary, Intermediary Service, P or Y Shares.	Lower annual expenses than Class A, Intermediary, Intermediary Service, P or Y Shares.	Lower annual expenses than Class A, Intermediary Service or Y Shares.	Lower annual expenses than Class A or Y Shares.	Lower annual expenses than Class A Shares.

Distribution (12b-1) and Shareholder Servicing Fees

The Funds have adopted a Distribution (“12b-1”) Plan for Class A Shares. 12b-1 fees compensate the Distributor and other dealers and investment representatives for services and expenses relating to the sale and distribution of the Funds’ shares and/or for providing shareholder services. 12b-1 fees are paid from Fund assets on an ongoing basis, and will decrease the return on your investment and may cost you more than paying other types of sales charges. The Funds have also adopted a Shareholder Services Plan for Class A Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares. The Shareholder Services Plan provides that certain financial institutions and securities brokers (“Shareholder Servicing Agents”) provide certain services to the shareholders of the Funds, including performing certain shareholder account, administrative and service functions.

•

The 12b-1 and shareholder servicing fees vary by share class as follows:

•

Class A Shares may pay a 12b-1 fee of up to 0.25% of the average daily net assets of Class A Shares of a Fund. Class A Shares have a non-compensatory 12b-1 Plan. No payments have been made under this plan and there is no current intention to do so.

•

Class I, Intermediary, Intermediary Service, Class P and Class Y Shares do not pay a 12b-1 fee.

•

In addition to the 12b-1 fees, Class A Shares are subject to a shareholder servicing fee of up to 0.25%, Intermediary Shares and Class P Shares are subject to a shareholder servicing fee of up to 0.05%, and Intermediary Service Shares are subject to a shareholder servicing fee of up to 0.10%.

•

The aggregate of the 12b-1 fees and shareholder servicing fees will not exceed 0.25% for Class A Shares.

Shareholder Information

Distribution Arrangements

continued

Distribution and Shareholder Servicing Arrangements—Revenue Sharing

The Adviser and/or its affiliates may, out of their own resources, and without cost to any Fund, assist in the sale, distribution and/or servicing of a Fund’s shares. Without limiting the foregoing, the Adviser and/or its affiliates may, out of their own resources, and without cost to any Fund, provide compensation to selected financial intermediaries for marketing and/or shareholder recordkeeping, processing, accounting and/or other administrative services in connection with the sale, distribution and/or servicing of shares and shareholders of the Fund. These payments, which may be significant, are not paid by the Funds, and therefore, do not increase Fund expenses. Accordingly, these payments are not included in the fee and expense tables in this Prospectus. In addition, these payments do not change the price paid by shareholders for the purchase of Fund shares, the amount the Funds receive as proceeds from such sales or the fees and expenses paid by the Funds. Historically, these payments have generally been structured as a percentage of average net assets attributable to the financial intermediary, but may also be structured as a fixed dollar amount, or a combination of the two, or may be calculated on another appropriate basis. These payments are in addition to commissions and 12b-1 fees, shareholder servicing fees and sales charges borne by shareholders. The making of these payments creates a conflict of interest for a financial intermediary receiving such payments to recommend the Funds over another investment. Shareholders should ask their financial intermediaries about how they will be compensated for investments made in the Funds. For additional information about these arrangements and payments, please see the “Payments to Financial Intermediaries” section of the SAI.

Exchanging Your Shares

If exchanging your shares through your financial adviser or broker, ask him or her for exchange procedures. Your adviser and/or broker may have transaction minimums and/or transaction times that will affect your exchange. For all other redemption transactions, follow the instructions below.

You can exchange your shares of a Fund for shares of the same class of another HSBC Fund (see “Notes on Exchanges”). Transaction fees are generally not charged for exchanges.

You must meet the minimum investment requirements for the HSBC Fund into which you are exchanging. Exchanges from one HSBC Fund to another are taxable.

Instructions for Exchanging Shares

Exchanges may be made by sending a written request to HSBC Funds, P.O. Box 219691, Kansas City, MO 64121-9691 or by calling 1-800-782-8183. Please provide the following information:

•

Your name and telephone number

•

The exact name on your account and account number

•

Taxpayer identification number (usually your social security number)

•

Dollar value or number of shares to be exchanged

•

The name of the Fund from which the exchange is to be made

•

The name of the Fund into which the exchange is being made

Shareholder Information

Exchanging Your Shares

continued

See “Selling Your Shares” for important information about telephone transactions.

To prevent disruption in the management of the Funds due to market timing strategies, exchange activity may be limited.

Notes on Exchanges

The registration and tax identification numbers of the two accounts must be identical.

The Exchange Privilege (including automatic exchanges) may be changed or eliminated at any time upon a 60-day notice to shareholders.

See “Taxes” for important information about the tax consequences to you if you dispose of your shares in a Fund, including through exchange. Please also be sure to read carefully the prospectus of any HSBC Fund into which you wish to exchange shares.

Delivery of Shareholder Documents

In an effort to reduce the cost associated with the printing and mailing of prospectuses, annual reports and semi-annual reports as well as reduce the likelihood of our shareholders receiving duplicative mailings, the Funds intend to mail only one prospectus and shareholder report to shareholders having the same last name and residing at a common address. If you wish to receive separate copies of the prospectuses and shareholder reports, please contact your financial adviser or registered representative at the institution where you have your account.

If you are a client of HSBC Securities (USA) Inc., please send your request to the address below:

HSBC Securities (USA) Inc.
P.O. Box 4217
Buffalo, NY 14240-8929

If you have any questions about the delivery of shareholder documents, please call 1-800-662-3343.

If your account is held directly with a Fund, please mail your request to the address below:

HSBC Funds
P.O. Box 219691
Kansas City, MO 64121-9691

If you have any questions regarding the delivery of shareholder documents, please call 1-800-782-8183 for Retail Investors and 1-877-244-2424 for Institutional Investors.

The Funds will begin sending you individual copies of prospectuses and shareholder reports thirty days after receiving your request.

Other Information

The prospectus and SAI, related regulatory filings and any other Fund communications or disclosure documents do not purport to create any contractual obligations between a Fund and shareholders. Each Fund may amend any of these documents or enter into (or amend) a contract on behalf of the Fund without shareholder approval except where shareholder approval is specifically required. Furthermore, shareholders are not intended to be third-party beneficiaries of any contracts entered into by (or on behalf of) a Fund, including contracts with the Adviser or other parties who provide services to the Fund.

Shareholder Information

Dividends, Distributions and Taxes

Dividends and Distributions

All dividends and distributions will be automatically reinvested unless you request otherwise. There are no sales charges for reinvested distributions. Net capital gains, if any, are distributed at least annually.

Net long-term capital gains distributions, if any, are made on a per share basis regardless of how long you’ve owned your shares. Therefore, if you invest shortly before the distribution date, some of your investment will be returned to you in the form of a distribution, which will generally be taxable. To the extent permitted by law, a Fund retains the right to temporarily suspend paying dividends if it is believed to be in the best interest of the Fund.

From time to time, a portion of a Fund’s distributions may constitute a return of capital for tax purposes, and/or may include amounts in excess of a Fund’s net investment income for the period calculated in accordance with generally accepted accounting principles.

Taxes

The following information related to tax matters is meant as a general summary for U.S. taxpayers. Please see the Funds’ SAI for more information. Because everyone’s tax situation is unique, you should rely on your own tax advisor for advice about the particular federal, state and local tax consequences to you of investing in a Fund.

•

A Fund generally will not have to pay income tax on amounts it distributes to shareholders, although shareholders will be taxed on distributions they receive.

•

Any income a Fund receives and any capital gain that a Fund realizes, less expenses, is paid out to its shareholders.

•

A Fund will generally pay dividends from net investment income on a monthly basis and any net long-term capital gains will generally be distributed at least on an annual basis. Unless a shareholder elects to receive dividends and distributions in cash, dividends and distributions will be automatically invested in additional shares of the Fund. Dividends and distributions are treated in the same manner for federal and state income tax purposes whether you receive them in cash or in additional shares.

•

Dividends from the Funds are generally not eligible for the reduced rate of tax that may apply to certain qualifying dividends on corporate stock.

•

An additional 3.8% Medicare tax is 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 person’s “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.

•

Dividends attributable to interest income are generally taxable as ordinary income.

•

If a Fund reports a dividend as a capital gain distribution (e.g., when the Fund has a gain from the sale of an asset the Fund held for more than one year), you will pay tax on that distribution at the long-term capital gains tax rate, no matter how long you have held your Fund shares.

•

Distributions of short-term capital gain (e.g., when the Fund has a gain from the sale of an asset it held for one year or less) are taxable at ordinary income tax rates.

Shareholder Information

Dividends, Distributions and Taxes
continued

•

Dividends are taxable in the year in which they are paid or deemed paid, even if they appear on your account statement the following year. If a Fund declares a dividend in October, November or December of a year and distributes the dividend in January of the next year, you may be taxed as if you received it in the year declared rather than the year received.

•

There may be tax consequences to you if you dispose of your shares in a Fund, for example, through redemption, exchange or sale. The amount of any gain or loss and the rate of tax will depend mainly upon how much you paid for the shares, how much you sell them for, and how long you held them.

•

Because the Funds intend to maintain a stable NAV per share of $1.00, shareholders will typically not recognize gain or loss when they sell or exchange their shares because the amount realized will be the same as their tax basis in the shares.

•

Information regarding the federal tax status of distributions made by the Funds will be mailed by February 15th of each year. The notice will tell you which dividends and redemptions must be treated as taxable ordinary income and which (if any) are short-term or long-term capital gain. Depending on your residence for tax purposes, distributions also may be subject to state and local taxes, including withholding taxes.

•

Distributions in excess of a Fund’s current and accumulated earnings and profits are treated as a tax-free return of your investment to the extent of your basis in the shares, and generally as capital gain thereafter. A return of capital, which for tax purposes is treated as a return of your investment, reduces your basis in shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition of shares. A distribution will reduce a Fund’s NAV per share and may be taxable to you as ordinary income or capital gain even though, from an economic standpoint, the distribution may constitute a return of capital.

•

As with all mutual funds, the Funds may be required to withhold U.S. federal income tax at the rate of 24% of all taxable distributions payable to you if you fail to provide the Funds with your correct taxpayer identification number or to make required certifications, or if you have been notified by the IRS that you are subject to backup withholding. Backup withholding, which is applicable to all U.S. citizens, is not an additional tax, but is a method in which the IRS ensures that it will collect taxes otherwise due. Any amounts withheld may be credited against your U.S. federal income tax liability.

•

Foreign shareholders are generally subject to special withholding requirements. If a Fund elects to report distributions of U.S. source interest and short-term capital gains, such distributions may be paid to foreign shareholders free of withholding. A Fund has the option of not accepting purchase orders from non-U.S. investors.

•

If you invest through a tax-deferred retirement account, such as an IRA, you generally will not have to pay tax on dividends or capital gains until they are distributed from the account. These accounts are subject to complex tax rules, and you should consult your tax adviser about investment through a tax-deferred account.

•

There is a penalty on certain pre-retirement distributions from retirement accounts.

•

The Funds are required to withhold U.S. tax (at a 30% rate) on payments of taxable dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the Funds to enable the Funds to determine whether withholding is required.

•

Because each Fund’s distributions (or a portion thereof) relate to U.S. Treasury interest, the Fund’s distributions may be exempt from state or local income tax in certain jurisdictions. Please consult your tax advisor.

Financial Highlights

The financial highlights tables are intended to help you understand each Fund’s financial performance for the past five years, or, if shorter, the period of the Fund’s operations. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been derived from information audited by PricewaterhouseCoopers LLP, whose reports, along with each of the Fund’s financial statements, is available on the Funds’ website and included in the Funds’ Form N-CSR for the fiscal year ended October 31, 2025, which is available upon request.

Financial Highlights

HSBC U.S. Government Money Market Fund

Selected data for a share outstanding throughout the periods indicated.

		Investment Activities				Distributions					Ratios/Supplementary Data
	Net Asset Value, Beginning of Period	Net Investment Income/ (Loss)	Net Realized and Unrealized Gains/ (Losses) from Investments	Total from Investment Activities		Net Investment Income	Net Realized Gains from Investment Transactions	Total Distributions	Net Asset Value, End of Period	Total Return	Net Assets at Value, End of Period (000’s)	Ratio of Net Expense to Average Net Assets	Ratio of Net Investment Income to Average Net Assets	Ratio of Expenses to Average Net Assets (Excluding Fee Reductions)
Class a Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.01%	$1,852,942	0.48%	3.93%	0.48%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.96%	1,876,058	0.48%	4.85%	0.48%
Year Ended October 31, 2023(1)	1.00	0.04(c)	—	0.04		(0.04)	—	(0.04)	1.00	4.42%	1,465,532	0.48%	4.37%	0.48%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.76%	1,234,039	0.30%	0.68%	0.49%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.01%	1,680,757	0.08%	0.01%	0.49%
Class I Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.37%	$31,289,619	0.13%	4.27%	0.13%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.33%	28,522,912	0.13%	5.21%	0.13%
Year Ended October 31, 2023	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.79%	31,281,874	0.13%	4.61%	0.13%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.98%	49,455,073	0.10%	1.20%	0.14%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.03%	29,897,234	0.06%	0.03%	0.14%
Intermediary Class Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.34%	$2,891,717	0.16%	4.24%	0.28%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.30%	2,453,799	0.16%	5.18%	0.28%
Year Ended October 31, 2023	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.76%	3,338,524	0.16%	4.56%	0.28%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.95%	4,006,166	0.13%	1.50%	0.29%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.02%	1,237,168	0.07%	0.01%	0.29%

Financial Highlights

HSBC U.S. Government Money Market Fund continued

		Investment Activities				Distributions					Ratios/Supplementary Data
	Net Asset Value, Beginning of Period	Net Investment Income/ (Loss)	Net Realized and Unrealized Gains/ (Losses) from Investments	Total from Investment Activities		Net Investment Income	Net Realized Gains from Investment Transactions	Total Distributions	Net Asset Value, End of Period	Total Return	Net Assets at Value, End of Period (000’s)	Ratio of Net Expense to Average Net Assets	Ratio of Net Investment Income to Average Net Assets	Ratio of Expenses to Average Net Assets (Excluding Fee Reductions)
Intermediary Service Class Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.32%	$3,712,798	0.18%	4.21%	0.33%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.28%	2,293,243	0.18%	5.14%	0.33%
Year Ended October 31, 2023	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.74%	1,468,865	0.18%	4.73%	0.33%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.94%	1,056,440	0.14%	0.93%	0.34%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.02%	1,026,492	0.07%	0.01%	0.34%
Class P Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.32%	$429,049	0.18%	4.19%	0.28%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.27%	134,104	0.18%	5.16%	0.28%
Period Ended October 31, 2023(2)	1.00	0.02(c)	—	0.02		(0.02)	—	(0.02)	1.00	2.45%(a)	34,268	0.18%(b)	5.22%(b)	0.28%(b)
Class Y Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.27%	$2,728,788	0.23%	4.17%	0.23%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.22%	1,698,999	0.23%	5.09%	0.23%
Year Ended October 31, 2023	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.68%	1,277,813	0.23%	4.49%	0.23%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.90%	1,742,544	0.17%	0.91%	0.24%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.01%	1,386,114	0.08%	0.01%	0.24%

(1)

Includes the conversion of Class A Shares to Class D Shares and the redesignation of Class D Shares as Class A Shares at the close of business on October 29, 2023.

(2)

Commencement of operations May 11, 2023.

(a)

Not annualized for periods less than one year. Total return calculations do not include any sales or redemption charges.

(b)

Annualized for periods less than one year.

(c)

Calculated based on average shares outstanding.

Amounts designated as “—” are $0.00 or have been rounded to $0.00.

Financial Highlights

HSBC U.S. Treasury Money Market Fund

Selected data for a share outstanding throughout the periods indicated.

		Investment Activities				Distributions					Ratios/Supplementary Data
	Net Asset Value, Beginning of Period	Net Investment Income/ (Loss)	Net Realized and Unrealized Gains/ (Losses) from Investments	Total from Investment Activities		Net Investment Income	Net Realized Gains from Investment Transactions	Total Distributions	Net Asset Value, End of Period	Total Return	Net Assets at Value, End of Period (000’s)	Ratio of Net Expense to Average Net Assets	Ratio of Net Investment Income to Average Net Assets	Ratio of Expenses to Average Net Assets (Excluding Fee Reductions)
Class A Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	3.95%	$108,451	0.50%	3.86%	0.50%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.93%	85,758	0.50%	4.82%	0.50%
Year Ended October 31, 2023(1)	1.00	0.04(c)	—	0.04		(0.04)	—	(0.04)	1.00	4.38%	63,928	0.51%	4.18%	0.51%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.73%	93,677	0.31%	0.63%	0.53%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.02%	120,467	0.06%	0.02%	0.51%
Class I Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.33%	$3,636,907	0.14%	4.23%	0.15%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.31%	2,752,423	0.14%	5.20%	0.15%
Year Ended October 31, 2023	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.76%	3,321,282	0.14%	4.64%	0.16%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.94%	2,993,947	0.12%	1.13%	0.18%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.01%	1,318,598	0.06%	0.02%	0.16%
Intermediary Class Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.31%	$405,133	0.16%	4.25%	0.30%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.29%	554,093	0.16%	5.19%	0.30%
Year Ended October 31, 2023	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.74%	972,875	0.16%	4.58%	0.31%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.93%	1,122,315	0.14%	1.36%	0.33%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.01%	350,940	0.06%	0.01%	0.31%

Financial Highlights

HSBC U.S. Treasury Money Market Fund continued

		Investment Activities				Distributions					Ratios/Supplementary Data
	Net Asset Value, Beginning of Period	Net Investment Income/ (Loss)	Net Realized and Unrealized Gains/ (Losses) from Investments	Total from Investment Activities		Net Investment Income	Net Realized Gains from Investment Transactions	Total Distributions	Net Asset Value, End of Period	Total Return	Net Assets at Value, End of Period (000’s)	Ratio of Net Expense to Average Net Assets	Ratio of Net Investment Income to Average Net Assets	Ratio of Expenses to Average Net Assets (Excluding Fee Reductions)
Intermediary Service Class Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.29%	$1,160,670	0.18%	4.18%	0.35%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.27%	876,083	0.18%	5.14%	0.35%
Year Ended October 31, 2023	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.72%	605,495	0.18%	4.43%	0.36%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.92%	793,981	0.15%	0.98%	0.38%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.01%	794,437	0.06%	0.00%	0.36%
Class P Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.29%	$232,100	0.18%	4.20%	0.30%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.26%	272,413	0.18%	5.11%	0.30%
Period Ended October 31, 2023(2)	1.00	0.02(c)	—	0.02		(0.02)	—	(0.02)	1.00	2.45%(a)	228	0.18%(b)	5.20%(b)	0.31%(b)
Class Y Shares
Year Ended October 31, 2025	$1.00	$0.04(c)	$—	$0.04		$(0.04)	$—	$(0.04)	$1.00	4.21%	$602,778	0.25%	4.10%	0.25%
Year Ended October 31, 2024	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	5.19%	357,452	0.25%	5.08%	0.25%
Year Ended October 31, 2023	1.00	0.05(c)	—	0.05		(0.05)	—	(0.05)	1.00	4.64%	322,897	0.26%	4.49%	0.26%
Year Ended October 31, 2022	1.00	0.01(c)	—	0.01		(0.01)	—	(0.01)	1.00	0.87%	339,059	0.19%	0.75%	0.28%
Year Ended October 31, 2021	1.00	—	—	—		—	—	—	1.00	0.01%	440,144	0.06%	0.02%	0.26%

(1) Includes the conversion of Class A Shares to Class D Shares and the redesignation of Class D Shares as Class A Shares at the close of business on October 29, 2023.

(2) Commencement of operations May 11, 2023.

(a) Not annualized for periods less than one year. Total return calculations do not include any sales or redemption charges.

(b) Annualized for periods less than one year.

(c) Calculated based on average shares outstanding.

Amounts designated as “—” are $0.00 or have been rounded to $0.00.

(This Page Intentionally Left Blank)

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PRIVACY POLICY FOR
HSBC FUNDS

This privacy policy notice summarizes the collection and disclosure of nonpublic personal information (“Information’’) of customers (“you’’) of the HSBC Family of Funds (“we’’ or “us’’). If you are an individual shareholder of record of any series of the Funds, we consider you to be a customer of the HSBC Family of Funds. Shareholders purchasing or owning shares of any of the HSBC Family of Funds through their bank, broker, or other financial institution should consult that financial institution’s privacy policies.

We collect the following categories of Information about you

We may collect various categories of Information from and about you, including the following: name; social security number; account balance; bank account information; and purchase and redemption history.

We collect Information about you from the following sources: information we receive from you on applications or other forms; information about your transactions with us, our affiliates, our service providers, or others; and information we receive from a consumer reporting agency.

How we share your Information

We do not disclose any Information about you or any former customer to anyone, except as permitted by law.

We disclose Information about you to the following types of third parties

We may disclose Information about you and any former customer to our affiliates, which we consider to include HSBC Bank USA, N.A. and HSBC Global Asset Management (USA) Inc. and their affiliates, as permitted by law. We may disclose Information about you and any former customer to nonaffiliated third parties, as permitted by law, including: government entities, in response to subpoenas or to comply with laws or regulations; or companies that perform necessary services for us, including our third party service providers.

We may disclose all of the Information we collect to companies that perform marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements.

Protecting the security and confidentiality of your Information

We restrict access to Information about you to those employees who need to know that information to provide products or services to you. We maintain physical, electronic, and procedural safeguards that comply with federal standards to guard your Information.

Should you have any questions regarding the HSBC Family of Funds privacy policies and practices, please contact:

INVESTOR SERVICES

Retail: 1-800-782-8183
Institutional: 1-877-244-2424

BY MAIL

HSBC Funds
PO Box 219691
Kansas City, MO 64121-9691

Updates to the Privacy Policy

From time to time, we may update or revise this policy.

Last updated: March 2019

This is not part of the prospectus

For more information about the Funds, the following documents are available free upon request:

Annual/Semi-annual Reports:

Additional information about the Funds’ investments is available in the Funds’ annual and semi-annual reports to shareholders and in Form N-CSR. In the Funds’ annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds’ performance during the last fiscal year. In Form N-CSR, you will find the Funds’ annual and semi-annual financial statements.

Statement of Additional Information (SAI):

The SAI provides more detailed information about the Funds, including their operations and investment policies. It is incorporated by reference and legally considered a part of this prospectus.

You can get free copies of the Funds’ annual and semi-annual reports, SAI and other information such as the Fund’s financial statements and prospectuses of other funds in the HSBC Family of Funds from the Funds’ website at https://www.assetmanagement.us.hsbc.com/en/institutional-investor. You can also obtain these items or request other information, and discuss your questions about the Funds, by contacting a broker or bank through which shares of the Funds may be purchased or sold, or contact the Funds at:

HSBC Funds P.O. Box 219691 Kansas City, MO 64121-9691 Telephone: 1-800-782-8183 for Retail Investors 1-877-244-2424 for Institutional Investors

You can review and copy the Funds’ annual and semi-annual reports, SAI and other information such as the Fund’s financial statements for free from the SEC’s website at www.sec.gov or you can obtain copies of this information, after paying a duplicating fee, by electronic request at the following email address: [email protected].

Investment Company Act File No. 811-04782

00323099

 

 

STATEMENT OF ADDITIONAL INFORMATION

 

HSBC FUNDS

 

	Class A	Class I	Intermediary Class	Intermediary Service Class	Class P	Class Y
HSBC U.S. Government Money Market Fund	HGDXX	HGIXX	HGGXX	HGFXX	HGPXX	RGYXX
HSBC U.S. Treasury Money Market Fund	HTDXX	HBIXX	HTGXX	HTFXX	HTPXX	HTYXX

 

P.O. Box 219691

Kansas City, MO 64121-9691

 

General and Account Information - (800) 782-8183 (Toll Free)

 

HSBC Global Asset Management (USA) Inc.

Investment Adviser and Administrator of the Funds (“Adviser” or “Administrator”)

 

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY THE PROSPECTUS FOR THE FUNDS DATED FEBRUARY 28, 2026 (the “Prospectus”). This Statement of Additional Information (“SAI”) contains additional and more detailed information than that set forth in the Prospectus and should be read in conjunction with the Prospectus. The Prospectus and SAI may be obtained without charge by writing or calling the HSBC Funds (the “Trust”) at the address and telephone number printed above.

 

References in this SAI to the “Prospectus” are to the Prospectus dated February 28, 2026 of the Trust by which shares of the funds listed above (each a “Fund” and, collectively, the “Funds”) are being offered. Unless the context otherwise requires, terms defined in the Prospectus have the same meaning in this SAI as in the Prospectus.

 

The U.S. Government Money Market Fund’s and the U.S. Treasury Money Market Fund’s current audited financial statements dated October 31, 2025, are included in the Trust’s Form N-CSR for such period, as filed with the Securities and Exchange Commission (the “SEC”). The financial statements from the Trust’s Form N-CSR are incorporated herein by reference.

 

Copies of each Fund’s annual report dated October 31, 2025 and/or the financial statements may be obtained without charge by writing or calling the Trust at the address and telephone number printed above.

 

February 28, 2026

 

 

TABLE OF CONTENTS

 

GENERAL INFORMATION	1
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS	1
U.S. Government Money Market Fund	1
U.S. Treasury Money Market Fund	2
Qualifying as a Regulated Investment Company	2
INVESTMENT TECHNIQUES AND RISKS	2
Cyber Security Risk	3
Fixed Income Instruments	3
Global Financial Markets	4
Investments in Other Investment Companies	5
Liquidity	5
Mortgage-Related Securities	6
Operational Risk	11
Repurchase Agreements	12
Risks of Qualified Financial Contracts	13
Selection of Money Market Investments	13
U.S. Government Securities	14
Portfolio Transactions	14
DISCLOSURE OF PORTFOLIO HOLDINGS	16
INVESTMENT RESTRICTIONS	18
Non-Fundamental Restrictions	18
Fundamental Restrictions	18
Diversification and Other Measures	20
Percentage and Rating Restrictions	20
MANAGEMENT OF THE TRUST	21
Board of Trustees	21
Committees	24
Fund Ownership	25
Trustee and Officer Compensation	26
Investment Adviser	26
Distribution Plan	28
The Distributor	29
Payments to Financial Intermediaries	30
Administrator and Sub-Administrator	31
Transfer Agent	32
Custodian and Fund Accounting Agent	32

 

 

Shareholder Services Plan and Shareholder Servicing Agents	33
Federal Banking Law	34
Expenses	34
Proxy Voting	34
DETERMINATION OF NET ASSET VALUE	35
Purchase of Shares	36
Exchange Privilege	36
In-Kind Purchases	37
Automatic Investment Plan	37
Purchases through a Shareholder Servicing Agent or a Securities Broker	38
Redemption of Shares	38
Systematic Withdrawal Plan	39
Redemption of Shares Purchased Directly Through the Funds	39
Check Redemption Service	39
Retirement Plans	40
Individual Retirement Account Plans (“IRAs”)	40
Defined Contribution Plans	40
Section 457 Plan, 401(k) Plan, 403(b) Plan	40
DIVIDENDS AND DISTRIBUTIONS	40
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES	41
OWNERSHIP OF THE FUNDS	43
TAXATION	46
Federal Income Tax	46
Distributions in General	47
Sale, Exchange or Redemption of Shares	48
Original Issue Discount/Market Discount	49
Backup Withholding	49
Other Taxation	50
Foreign Shareholders	50
OTHER INFORMATION	50
Capitalization	50
Independent Registered Public Accounting Firm	51
Counsel	51
Code of Ethics	51
Registration Statement	51
Financial Statements	51
Shareholder Inquiries	52

 

 

APPENDIX A – DESCRIPTION OF SECURITY RATINGS	A-1
APPENDIX B – ISS PROXY VOTING GUIDELINES	B-1

 

 

GENERAL INFORMATION

 

The HSBC U.S. Government Money Market Fund (“U.S. Government Money Market Fund”) and HSBC U.S. Treasury Money Market Fund (“U.S. Treasury Money Market Fund”) are separate series of the Trust, an open-end management investment company. Each Fund is a money market fund that must comply with the requirements of the SEC’s Rule 2a-7 under the Investment Company Act of 1940, as amended (the “1940 Act”) and, by virtue of compliance with the diversification requirements of Rule 2a-7, is deemed to have satisfied the diversification requirements of the 1940 Act. Each Fund has its own distinct investment objective and policies. Each Fund is described in this SAI.

 

Shares of the U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund are divided into six separate classes: Class A (the “Class A Shares”), Class I (the “Class I Shares”), Intermediary Class (the “Intermediary Shares”), Intermediary Service Class (the “Intermediary Service Shares”), Class P (the “Class P Shares”) and Class Y (the “Class Y Shares”). See the Prospectus and “Purchase of Shares” for information about the various classes and eligibility to invest therein.

 

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS

 

The following information supplements the discussion of the investment objective, policies and risks of each Fund in the Funds’ Prospectus.

 

The U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund are money market funds that follow investment and valuation policies designed to maintain a stable net asset value (“NAV”) of $1.00 per share. There is no assurance that U.S. Government Money Market Fund or the U.S. Treasury Money Market Fund will be able to maintain a stable NAV of $1.00 per share. There can be no assurance that the investment objective of a Fund will be achieved.

 

Except as otherwise indicated, the investment objective and related policies and strategies of a Fund are not fundamental and may be changed by the Board of Trustees of the Trust (the “Board”) without the approval of Fund shareholders. Shareholders will be given advance notice of material changes to a Fund’s investment objective or other non-fundamental investment policies. If there is a change, shareholders should consider whether a Fund remains an appropriate investment in light of their then-current financial position and needs.

 

U.S. Government Money Market Fund

 

The Fund is a government money market fund and seeks to maintain a stable price of $1.00 per share. The Fund seeks to achieve its investment objective by investing at least 99.5% of its total assets in cash, securities issued or guaranteed by the United States or certain U.S. government agencies or instrumentalities (“U.S. Government Securities”) and/or repurchase agreements that are collateralized fully by these types of obligations. In addition, the Fund must invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in U.S. Government Securities and repurchase agreements collateralized fully by these types of obligations. This policy is not fundamental and may be changed by the Board upon 60 days’ notice to Fund shareholders. If there is a change, shareholders should consider whether the Fund remains an appropriate investment in light of their then-current financial position and needs. All investments on behalf of the Fund (i.e., 100% of the Fund’s investments) mature or are deemed to mature within 397 days from the date of acquisition, as calculated in accordance with Rule 2a-7. The Fund also must have a dollar-weighted average portfolio maturity of 60 days or less and a dollar-weighted average portfolio life of 120 days or less, each as calculated in accordance with Rule 2a-7.

  

The Fund invests in obligations of, or obligations guaranteed by, the U.S. Government, its agencies or instrumentalities. These include issues of the U.S. Treasury, such as bills, notes and bonds, and issues of agencies and instrumentalities established under the authority of an Act of Congress. Some of the latter category of obligations are supported by the “full faith and credit” of the United States, others are supported by the right of the issuer to borrow from the U.S. Treasury, and still others are supported only by the credit of the agency or instrumentality. Examples of each of the three types of obligations described in the

 

 

preceding sentence are (i) obligations guaranteed by the Government National Mortgage Association (“GNMA”), (ii) obligations of the Federal National Mortgage Association (“FNMA”), and (iii) obligations of the Federal Farm Credit Bank, respectively. The Fund may also invest in securities of other money market funds that primarily invest in U.S. Government Securities and repurchase agreements collateralized by U.S. Government Securities.

 

U.S. Treasury Money Market Fund

 

The Fund is a government money market fund and seeks to maintain a stable price of $1.00 per share. The Fund seeks to achieve its investment objective by investing, under normal market conditions, exclusively in direct obligations of the U.S. Treasury. In addition, the Fund must invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in direct obligations of the U.S. Treasury. This policy is not fundamental and may be changed by the Board upon 60 days’ notice to Fund shareholders. If there is a change, shareholders should consider whether the Fund remains an appropriate investment in light of their then-current financial position and needs. All investments on behalf of the Fund (i.e., 100% of the Fund’s investments) mature or are deemed to mature within 397 days from the date of acquisition, as calculated in accordance with Rule 2a-7. The Fund also must have a dollar-weighted average portfolio maturity of 60 days or less and a dollar-weighted average portfolio life of 120 days or less, as calculated in accordance with Rule 2a-7.

 

The Fund may not enter into loans of its portfolio securities, invest in obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government, or invest in repurchase agreements under normal conditions. However, the Fund may temporarily invest in repurchase agreements collateralized by U.S. Treasury obligations.

 

The U.S. Treasury issues various types of marketable securities consisting of bills, notes, bonds and other debt securities. They are direct obligations of the U.S. Government and differ primarily in the length of their maturity. Treasury bills, the most frequently issued marketable U.S. Government security, have a maturity of up to one year and are issued on a discount basis.

 

Qualifying as a Regulated Investment Company

 

The Trust intends for each Fund to maintain its qualification as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). In order to maintain such qualification, among other things, at the close of each quarter of each Fund’s taxable year, at least 50% of the Fund’s total assets must be represented by cash, U.S. Government Securities, investment company securities and other securities limited in respect of any one issuer to not more than 5% in value of the total assets of the Fund and not more than 10% of the outstanding voting securities of such issuer. In addition, at the close of each quarter of its taxable year, not more than 25% of a Fund’s total assets may be invested in securities of one issuer (or two or more issuers which are controlled by the Fund and which are determined to be engaged in the same or similar trades or businesses or related businesses) other than U.S. Government securities or the securities of other regulated investment companies or in the securities of one or more “qualified publicly traded partnerships”.

 

INVESTMENT TECHNIQUES AND RISKS

 

Each Fund invests in a variety of securities in accordance with its investment objectives and policies (as described in the Prospectus and above in this SAI) and employs a number of investment techniques. Each type of security and technique involves certain risks. The following is an alphabetical list of the investment techniques used by the Funds as indicated in the table, and the main risks associated with those techniques. The risks are presented in an order intended to facilitate readability, and their order does not imply that the realization of one risk is likely to occur more frequently than another risk, nor does it imply that the realization of one risk is likely to have a greater adverse impact than another risk.

 

 

The table below indicates the types of investments and techniques that are material to the investment strategies employed by each Fund. In some cases, the omission of a Fund is not intended to imply that the Fund is precluded from investing in the types of investments or employing the techniques indicated below. Generally, if a particular type of investment or technique is not indicated as being applicable to a particular Fund, the particular type of investment or technique will not be material to the investment strategies employed by the Fund, although any risk factors that are stated more generally with respect to any broader category of investment or technique may still apply.

 

Type of Investment Technique or Risk	U.S. Government Money Market Fund	U.S. Treasury Money Market Fund
Cyber Security Risk	X	X
Fixed Income Securities	X	X
Global Financial Markets	X	X
Investments in Other Investment Companies	X
Liquidity	X	X
Mortgage-Related Securities	X
Operational Risk	X	X
Repurchase Agreements	X	X*
Risks of Qualified Financial Contracts	X	X
Selection of Money Market Investments	X	X
U.S. Government Securities	X

 

* The U.S. Treasury Money Market Fund, under adverse market conditions, temporarily may invest in repurchase agreements collateralized by U.S. Treasury obligations.

 

Cyber Security Risk

 

The Funds face greater risks of cyber security breaches because of the broad use of technology, such as computer and cloud-based systems and the internet, that has developed in the course of business. In general, cyber-attacks result from deliberate attacks but other events may have effects similar to those caused by cyber-attacks. Cyber-attacks include, among others, stealing, destroying or corrupting data that is maintained online or digitally (or in cloud-based systems), denial-of-service attacks on websites, and the unauthorized release of confidential information. Cyber-attacks affecting a Fund or its investment adviser, subadviser, custodian, transfer agent, intermediary or other third-party service provider may adversely impact the Funds. These cyber-attacks have the ability to cause disruptions and impact trading and other business operations, to result in financial losses, to prevent a Fund from buying and selling securities (potentially at advantageous times), to prevent shareholders from transacting business, and to lead to violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs. Similar to operational risk in general, the Funds and their investment adviser have instituted risk management systems designed to minimize the risks associated with cyber security. However, these systems may not succeed in detecting, preventing or remediating cyber-attacks. The Funds do not directly control the cyber security systems of the service providers to the Funds, their trading counterparties, or the issuers in which a Fund may invest. Moreover, cyber-attacks are becoming increasingly sophisticated and may involve state-sponsored actors. Losses caused by cyber-attacks may not be recoverable.

 

Fixed Income Instruments

 

The Funds invest in fixed income securities. The value of a Fund’s investment in fixed income instruments may change as prevailing interest rates fluctuate. When interest rates decline, the value of fixed income securities can be expected to rise. However, a low interest rate environment poses additional risks to the Funds, which are heightened in a very low interest rate environment. Low yields on the Funds’ portfolio holdings may have an adverse impact on a Fund’s ability to generate a positive yield or pay expenses out of current income. Without maintaining a positive yield, it is difficult for the U.S. Government Money Market

 

 

Fund and U.S. Treasury Money Market Fund to maintain a stable $1.00 NAV. In addition, in a low interest rate environment, it is difficult for a Fund to achieve its investment objective.

 

When interest rates rise, the value of fixed income securities can be expected to decline. The Funds’ investments in fixed income securities with longer terms to maturity or greater duration are subject to greater volatility than shorter-term obligations. Fluctuations in interest rates may affect the yield, volatility, liquidity and value of investments in income-producing or fixed income securities. A wide variety of factors can cause interest rates to rise (e.g., central bank monetary policies, inflationary or deflationary pressures, changing inflation or real growth rates, general market and economic conditions, etc.). The risks associated with changing interest rates may have unpredictable effects on the markets and a Fund’s investments. The Fund may face a heightened level of interest rate risk due to certain changes in monetary policy, such as certain interest rate changes by the United States Federal Reserve.

 

Outflows in the fixed income market could impose difficulties on dealers because the recent increase of assets in bond mutual funds and exchange traded funds has not been matched with a proportionate increase in dealer capacity. As such, dealer inventories appear to be at an all-time low, relative to the market size. This reduction in market-making capacity by dealers has the potential to decrease liquidity and increase volatility in fixed income markets.

 

After purchase by a Fund, a fixed income security may cease to be rated or its rating may be reduced below the minimum required for purchase. A fixed income security which has had its rating downgraded or revoked may be subject to greater risk to principal and income, and often involve greater volatility of price, than instruments in the higher rating categories. Such instruments are also subject to greater credit risks (including, without limitation, the possibility of default by or bankruptcy of its issuers of such securities) than securities in higher rating categories.

  

Global Financial Markets

 

Global economies and financial markets are becoming increasingly interconnected. Social, political and economic conditions (including instability and volatility) and events (including, but not limited to, armed conflicts, natural/environmental disasters, rapid inflation, supply chain disruptions, international sanctions, global recessions, pandemics, epidemics, social or political unrest, economic sanctions, cyber-attacks, and government shutdowns and defaults) in one country, region or financial market, including a country, region or market in which a Fund has not invested, may adversely impact issuers in a different country, region or financial market, including a country, region or market in which a Fund has invested. As a result, a Fund could be negatively impacted if the values of its investments were harmed by these political or economic conditions or events. Such conditions and/or events may not have the same impact on all types of securities and may expose a Fund to greater market or liquidity risk or cause difficulty in valuing portfolio instruments held by the Fund. This could cause a Fund to underperform other types of investments. Moreover, such negative political and economic conditions and events could disrupt the processes necessary for a Fund’s operations. For additional information, please see the discussion herein on “Operational Risk.”

 

For example, the outbreak of an infectious respiratory illness caused by a novel strain of coronavirus (known as COVID-19) caused volatility, severe market dislocations and liquidity constraints in markets around the world. The transmission of COVID-19 and efforts to contain its spread led to severe macroeconomic disruptions, exchange closures, travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, quarantines, event and service cancellations or interruptions, disruptions to business operations (including staff furloughs and reductions) and supply chains, and a reduction in consumer and business spending, as well as general concern and uncertainty that has negatively affected the economy. Certain of these consequences remain ongoing. Such events, or other disruptions caused by social, political or economic conditions or other events, could adversely impact issuers, markets and economies (and, accordingly, a Fund) over the short- and long-term, including in ways that cannot be foreseen.

 

The severity or duration of such conditions and/or events may be affected by policy changes made by governments or quasi-governmental organizations. Historically, instability in the financial markets has led

 

 

governments across the globe to take a number of actions designed to support the financial markets. There can be no guarantee that these actions will be sufficient or will have their intended effect, or will not result in unintended adverse economic consequences, such as increased inflationary pressure. Future government regulation and/or intervention may also change the way in which a Fund is regulated and could limit or preclude the Fund’s ability to achieve its investment objective. Moreover, governments or their agencies may acquire distressed assets from financial institutions, may acquire ownership interests in those institutions, or may impose conditions on issuers receiving financial assistance (including by restricting or limiting their ability to pay dividends), all of which may affect a Fund’s investments in ways that are unforeseeable.

 

Political institutions may not be able to effectively respond to these political and economic conditions and events, and these political institutions may erode over time. For example, one or more countries that have adopted the euro may abandon that currency and/or withdraw from the European Union, which could disrupt global markets and affect the liquidity and value of a Fund’s investments, regardless of whether the Fund has significant exposure to European markets.

 

In addition, in the United States, total public debt as a percentage of gross domestic product has grown rapidly since 2008. High levels of national debt may raise concerns that the U.S. government will be unable to pay investors at maturity, may cause declines in currency valuations and may prevent the U.S. government from implementing effective fiscal policy.

 

Investments in Other Investment Companies

 

Subject to certain restrictions, the U.S. Government Money Market Fund may invest in securities issued by other money market funds that primarily invest in U.S. Government Securities and repurchase agreements collateralized by U.S. Government Securities. Such securities will be acquired by the Fund within the limits prescribed by the 1940 Act and the rules thereunder. Investors should recognize that the purchase of securities of other investment companies results in duplication of expenses such that investors indirectly bear a proportionate share of the operating expenses of such companies, including investment advisory and administrative services fees. In addition, the Fund will be affected by the investment policies, practices, and performance of such money market fund in direct proportion to the amount of assets the Fund invests therein.

 

The Trust may, in the future, seek to achieve a Fund’s investment objective (subject to applicable investment restrictions) by investing all of the Fund’s assets in an open-end management investment company having substantially the same investment objective, policies and restrictions as those applicable to the Fund. In such event, the investment advisory contract for the Fund would be terminated and the administrative services fees paid by the Fund would be reduced. Such investment would be made only if the Trustees of the Trust believe that the aggregate per share expenses of the Fund and such other investment company will be less than or approximately equal to the expenses which the Fund would incur if the Trust were to continue to retain the services of an investment adviser for the Fund and the assets of the Fund were to continue to be invested directly in portfolio securities.

 

In cases where (i) a Fund has an investment policy to invest under normal circumstances at least 80% of its net assets in a particular type or category of securities, and (ii) a Fund invests in another investment company that has a similar investment policy requiring it to invest under normal circumstances at least 80% of its net assets in that type or category of securities, the Fund will treat its investment in the other investment company as meeting the requirements of the Fund’s policy concerning the investment of at least 80% of the Fund’s net assets.

 

Liquidity

 

The Funds will comply with the liquidity requirements under Rule 2a-7, including the weekly and daily liquidity requirements. In addition, each Fund will not acquire an illiquid security (as defined below) if, immediately after the acquisition, the Fund would have invested more than 5% of its total assets in illiquid securities. An illiquid security is a security that cannot be sold or disposed of within seven calendar days in the ordinary course of business at approximately the amount at which a Fund has valued the security.

 

 

The policy with respect to the purchase of illiquid securities does not limit the acquisition of securities eligible for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “1933 Act”) or commercial paper issued pursuant to Section 4(a)(2) under the 1933 Act that are determined to be liquid in accordance with guidelines established by the Board. There may be delays in selling these securities, and sales may be made at less favorable prices.

 

The Adviser may determine that a particular Rule 144A or Section 4(a)(2) security is liquid and thus not subject to the limitation on investments in illiquid securities, pursuant to guidelines adopted by the Board. Factors that the Adviser must consider in determining whether a particular Rule 144A security is liquid include the frequency of trades and quotes for the security, the number, diversity, and quality of dealers willing to purchase or sell the security and the number of other potential purchasers, dealer undertakings to make a market in the security, and the nature of the security and the nature of the market for the security (i.e., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). Investing in Rule 144A securities could have the effect of increasing the level of a Fund’s illiquidity to the extent that qualified institutions might become, for a time, uninterested in purchasing these securities.

 

Mortgage-Related Securities

 

The U.S. Government Money Market Fund may invest in mortgage-backed certificates and other securities representing ownership interests in mortgage pools, including collateralized mortgage obligations (“CMOs”). Interest and principal payments on the mortgages underlying mortgage-backed securities are passed through to the holders of the mortgage-backed securities. Mortgage-backed securities currently offer yields higher than those available from many other types of fixed-income securities, but because of their prepayment aspects, their price volatility and yield characteristics will change based on changes in prepayment rates.

 

There are two methods of trading mortgage-backed securities. A specific pool transaction is a trade in which the pool number of the security to be delivered on the settlement date is known at the time the trade is made. This is in contrast with the typical mortgage transaction, called a TBA (to be announced) transaction, in which the type of mortgage securities to be delivered is specified at the time of trade but the actual pool numbers of the securities that will be delivered are not known at the time of the trade. For example, in a TBA transaction an investor could purchase $1 million of 30-year FNMA 9% mortgages and receive up to three pools on the settlement date. The pool numbers of the pools to be delivered at settlement will be announced shortly before settlement takes place. The terms of the TBA trade may be made more specific if desired. For example, an investor may request pools with particular characteristics, such as those that were issued prior to January 1, 1990. The most detailed specification of the trade is to request that the pool number be known prior to purchase. In this case, the investor has entered into a specific pool transaction. Generally, agency pass-through mortgage-backed securities are traded on a TBA basis. The specific pool numbers of the securities purchased do not have to be determined at the time of the trade.

 

Mortgage-backed securities have yield and maturity characteristics that are dependent on the mortgages underlying them. Thus, unlike traditional debt securities, which may pay a fixed rate of interest until maturity when the entire principal amount comes due, payments on these securities include both interest and a partial payment of principal. In addition to scheduled loan amortization, payments of principal may result from the voluntary prepayment, refinancing or foreclosure of the underlying mortgage loans. Such prepayments may significantly shorten the effective durations of mortgage-backed securities, especially during periods of declining interest rates. Similarly, during periods of rising interest rates, a reduction in the rate of prepayments may significantly lengthen the effective durations of such securities.

 

Investment in mortgage-backed securities poses several risks, including interest rate, prepayment, market and credit risk. Interest rate risk reflects the risk that, as interest rates rise, the value of mortgage-backed securities generally can be expected to fall. Prepayment risk reflects the risk that borrowers may prepay their mortgages faster than expected, thereby affecting the investment’s average life and perhaps its yield. Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally

 

 

prepaying mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by home value appreciation, ease of the refinancing process and local economic conditions.

 

Market risk reflects the risk that the price of the security may fluctuate over time. The price of mortgage-backed securities may be particularly sensitive to prevailing interest rates, the length of time the security is expected to be outstanding, and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, and a Fund invested in such securities wishing to sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold.

 

Credit risk reflects the risk that a Fund may not receive all or part of its principal because the issuer or credit enhancer has defaulted on its obligations. Obligations issued by U.S. Government-related agencies or instrumentalities may not be backed by the full faith and credit of the U.S. Government. The performance of private label mortgage-backed securities, issued by private institutions, is based on the financial health of those institutions.

 

The financial crisis in 2007—particularly the increase in delinquencies and defaults on residential mortgages, falling home prices, and unemployment—had adversely affected the market for mortgage-related securities. In addition, various market and governmental actions may impair the ability to foreclose on or exercise other remedies against underlying mortgage holders, or may reduce the amount received upon foreclosure. These factors may cause mortgage-related securities to experience lower valuations and reduced liquidity. There is also no assurance that the U.S. Government will take action to support the mortgage-related securities industry, as it has in the past, should the economy experience another downturn. Further, future legislative and other government actions may significantly alter the manner in which the mortgage-related securities market functions. Each of these factors could ultimately increase the risk that a Fund could realize losses on mortgage-related securities.

 

Mortgage Pass-Through Securities. Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment that consists of both interest and principal payments. In effect, these payments are a “pass-through” of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs that may be incurred. Some mortgage-related securities (such as securities issued by the GNMA) are described as “modified pass-through.” These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.

 

The principal governmental guarantor of mortgage-related securities is GNMA. GNMA is a wholly owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of Federal Housing Administration (“FHA”) insured or Department of Veterans Affairs (“VA”) guaranteed mortgages. Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include the FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC”). FNMA is a government-sponsored corporation. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the U.S. Government.

 

FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation formerly owned by the Federal Home

 

 

Loan Banks. FHLMC issues participation certificates (“PCs”) which represent interests in conventional mortgages from FHLMC’s national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the U.S. Government.

 

In September 2008, the Federal Housing Finance Agency (“FHFA”) placed FNMA and FHMLC into conservatorship. As the conservator, FHFA succeeded to all rights, titles, powers and privileges of FNMA and FHLMC and of any stockholder, officer or director of FNMA and FHLMC with respect to FNMA and FHLMC and the assets of FNMA and FHLMC. FHFA selected a new chief executive officer and chairman of the board of directors for each of FNMA and FHLMC. The FHFA has indicated that the conservatorship of each enterprise will end when the director of FHFA determines that FHFA’s plan to restore the enterprise to a safe and solvent condition has been completed. FNMA and FHLMC are continuing to operate as going concerns while in conservatorship and each remain liable for all of its obligations, including its guaranty obligations, associated with its mortgage-backed securities. The steps taken in connection with the conservatorship are both intended to enhance each of FNMA’s and FHLMC’s ability to meet its obligations.

 

Under the Federal Housing Finance Regulatory Reform Act of 2008 (the “Reform Act”), which was included as part of the Housing and Economic Recovery Act of 2008, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by FNMA or FHLMC prior to FHFA’s appointment as conservator or receiver, as applicable, if FHFA determines, in its sole discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration of FNMA’s or FHLMC’s affairs. The Reform Act requires FHFA to exercise its right to repudiate any contract within a reasonable period of time after its appointment as conservator or receiver.

 

FHFA, in its capacity as conservator, has indicated that it has no intention to repudiate the guaranty obligations of FNMA or FHLMC because FHFA views repudiation as incompatible with the goals of the conservatorship. However, in the event that FHFA, as conservator or if it is later appointed as receiver for FNMA or FHLMC, were to repudiate any such guaranty obligation, the conservatorship or receivership estate, as applicable, would be liable for actual direct compensatory damages in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of FNMA’s or FHLMC’s assets available therefor.

 

In the event of repudiation, the payments of interest to holders of FNMA or FHLMC mortgage-backed securities would be reduced if payments on the mortgage loans represented in the mortgage loan groups related to such mortgage-backed securities are not made by the borrowers or advanced by the servicer. Any actual direct compensatory damages for repudiating these guaranty obligations may not be sufficient to offset any shortfalls experienced by such mortgage-backed security holders.

 

Further, in its capacity as conservator or receiver, FHFA has the right to transfer or sell any asset or liability of FNMA or FHLMC without any approval, assignment or consent. Although FHFA has stated that it has no present intention to do so, if FHFA, as conservator or receiver, were to transfer any such guaranty obligation to another party, holders of FNMA or FHLMC mortgage-backed securities would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party.

 

In addition, certain rights provided to holders of mortgage-backed securities issued by FNMA and FHLMC under the operative documents related to such securities may not be enforced against FHFA, or enforcement of such rights may be delayed, during the conservatorship or any future receivership. The operative documents for FNMA and FHLMC mortgage-backed securities may provide (or with respect to securities issued prior to the date of the appointment of the conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in its capacity as guarantor, which includes the appointment of a conservator or receiver, holders of such mortgage-backed securities have the right to replace FNMA or FHLMC as trustee if the requisite percentage of mortgage-backed securities holders consent. The Reform Act prevents mortgage-backed security holders from enforcing such rights if the event of default arises solely because a conservator or receiver has been appointed. The Reform Act also provides that no person may exercise any right or power to terminate, accelerate or declare an event of default under certain contracts to which FNMA or FHLMC is a party, or obtain possession of or exercise control over any property of FNMA or FHLMC, or affect any contractual rights of FNMA or FHLMC, without

 

 

the approval of FHFA, as conservator or receiver, for a period of 45 or 90 days following the appointment of FHFA as conservator or receiver, respectively.

 

FHFA and the White House have made public statements regarding plans to consider ending the conservatorships of FNMA and FHLMC. In the event that FNMA and FHLMC are taken out of conservatorship, it is unclear how the capital structure of FNMA and FHLMC would be constructed and what effects, if any, there may be on FNMA’s and FHLMC’s creditworthiness and guarantees of certain mortgage-backed securities. It is also unclear whether the U.S. Treasury would continue to enforce its rights or perform its obligations related to senior preferred stock. Should FNMA’s and FHLMC’s conservatorship end, there could be an adverse impact on the value of their securities, which could cause losses to the Fund.

 

The conditions attached to the financial contribution made by the Treasury to FHLMC and FNMA and the issuance of senior preferred stock place significant restrictions on the activities of FHLMC and FNMA. FHLMC and FNMA must obtain the consent of the Treasury to, among other things, (i) make any payment to purchase or redeem its capital stock or pay any dividend other than in respect of the senior preferred stock, (ii) issue capital stock of any kind, (iii) terminate the conservatorship of the FHFA except in connection with a receivership, or (iv) increase its debt beyond certain specified levels. In addition, significant restrictions are placed on the maximum size of each of FHLMC’s and FNMA’s respective portfolios of mortgages and mortgage- backed securities, and the purchase agreements entered into by FHLMC and FNMA provide that the maximum size of their portfolios of these assets must decrease by a specified percentage each year. The future status and role of FHLMC and FNMA could be impacted by (among other things) the actions taken and restrictions placed on FHLMC and FNMA by the FHFA in its role as conservator, the restrictions placed on FHLMC’s and FNMA’s operations and activities as a result of the senior preferred stock investment made by the U.S. Treasury, market responses to developments at FHLMC and FNMA, and future legislative and regulatory action that alters the operations, ownership, structure and/or mission of these institutions, each of which may, in turn, impact the value of, and cash flows on, any mortgage-backed securities guaranteed by FHLMC and FNMA, including any such mortgage-backed securities held by a Fund.

 

Under the direction of the FHFA, FNMA and FHLMC have entered into a joint initiative to develop a common securitization platform for the issuance of a uniform mortgage-backed security (the “Single Security Initiative”) that aligns the characteristics of FNMA and FHLMC certificates. The Single Security Initiative seeks to support the overall liquidity of the TBA market. FNMA and FHLMC began issuing uniform mortgage-backed security in June 2019, and the effects it may have on the market for mortgage-backed securities are uncertain. While the initial effects of the issuance of uniform mortgage-backed securities on the market for mortgage-related securities have been relatively minimal, the long-term effects are still uncertain.

 

Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets the Fund’s investment quality standards. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. The Funds are subject to the liquidity requirements described above.

 

 

The assets underlying mortgage-related securities may be represented by a portfolio of first lien residential mortgages (including both whole mortgage loans and mortgage participation interests) or portfolios of mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn be insured or guaranteed by the FHA or the VA. In the case of private issue mortgage-related securities whose underlying assets are neither U.S. Government securities nor U.S. Government-insured mortgages, to the extent that real properties securing such assets may be located in the same geographical region, the security may be subject to a greater risk of default than other comparable securities in the event of adverse economic, political or business developments that may affect such region and, ultimately, the ability of residential homeowners to make payments of principal and interest on the underlying mortgages.

 

Collateralized Mortgage Obligations (“CMOs”). A CMO is a hybrid between a mortgage-backed bond and a mortgage pass-through security. Similar to a bond, interest and prepaid principal is paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA, and their income streams.

 

CMOs are structured into multiple classes, each bearing a different stated maturity. Actual maturity and average life will depend upon the prepayment experience of the collateral. CMOs provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal only after the first class has been retired. An investor is partially guarded against a sooner than desired return of principal because of the sequential payments. In a typical CMO transaction, a corporation (“issuer”) issues multiple series (e.g., A, B, C, Z) of CMO bonds (“Bonds”). Proceeds of the Bond offering are used to purchase mortgages or mortgage pass-through certificates (“Collateral”). The Collateral is pledged to a third party trustee as security for the Bonds. Principal and interest payments from the Collateral are used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B and C Bonds all bear current interest. Interest on the Series Z Bond is accrued and added to principal and a like amount is paid as principal on the Series A, B or C Bond currently being paid off. When the Series A, B and C Bonds are paid in full, interest and principal on the Series Z Bond begins to be paid currently. With some CMOs, the issuer serves as a conduit to allow loan originators (primarily builders or savings and loan associations) to borrow against their loan portfolios.

 

FHLMC CMOs. FHLMC CMOs are debt obligations of FHLMC issued in multiple classes having different maturity dates that are secured by the pledge of a pool of conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made semiannually, as opposed to monthly. The amount of principal payable on each semiannual payment date is determined in accordance with FHLMC’s mandatory sinking fund schedule, which, in turn, is equal to approximately 100% of FHA prepayment experience applied to the mortgage collateral pool. All sinking fund payments in the CMOs are allocated to the retirement of the individual classes of bonds in the order of their stated maturities. Payment of principal on the mortgage loans in the collateral pool in excess of the amount of FHLMC’s minimum sinking fund obligation for any payment date are paid to the holders of the CMOs as additional sinking fund payments. Because of the “pass-through” nature of all principal payments received on the collateral pool in excess of FHLMC’s minimum sinking fund requirement, the rate at which principal of the CMOs is actually repaid is likely to be such that each class of bonds will be retired in advance of its scheduled maturity date.

 

If collection of principal (including prepayments) on the mortgage loans during any semiannual payment period is not sufficient to meet FHLMC’s minimum sinking fund obligation on the next sinking fund payment date, FHLMC agrees to make up the deficiency from its general funds. Criteria for the mortgage loans in the pool backing the FHLMC CMOs are identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in the event of delinquencies and/or defaults.

 

Stripped Mortgage-Backed Securities (“SMBS”). SMBS are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government or by private originators of,

 

 

or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.

 

SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or IO class), while the other class will receive all of the principal (the principal-only or PO class). The cash flow and yields on IO and PO classes can be extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a Fund’s yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to fully recoup its initial investment in these securities even if the security is in one of the highest rating categories.

 

Although SMBS are typically purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, these securities were only recently developed. As a result, established trading markets have not yet developed and, accordingly, these securities may be deemed “illiquid” and subject to a Fund’s limitations on investments in illiquid securities.

 

Mortgage-Backed Securities and Asset-Backed Securities - Types of Credit Support. Mortgage-backed securities and asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failure by obligors on underlying assets to make payments, such securities may contain elements of credit support. Such credit support falls into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the pass-through of payments due on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default enhances the likelihood of ultimate payment of the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a combination of such approaches. However, the Fund is subject to the credit risk of a person or entities providing the credit enhancements.

 

The ratings of mortgage-backed securities and asset-backed securities for which third-party credit enhancement provides liquidity protection or protection against losses from default are generally dependent upon the continued creditworthiness of the provider of the credit enhancement. The ratings of such securities could be subject to reduction in the event of deterioration in the creditworthiness of the credit enhancement provider even in cases where the delinquency and loss experience on the underlying pool of assets is better than expected.

 

Examples of credit support arising out of the structure of the transaction include “senior-subordinated securities” (multiple class securities with one or more classes subordinate to other classes as to the payment of principal thereof and interest thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class), creation of “reserve funds” (where cash or investments, sometimes funded from a portion of the payments on the underlying assets, are held in reserve against future losses) and “overcollateralization” (where the scheduled payments on, or the principal amount of, the underlying assets exceed those required to make payment of the securities and pay any servicing or other fees). The degree of credit support provided for each issue is generally based on historical information with respect to the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that which is anticipated could adversely affect the return on an investment in such a security.

 

Operational Risk

 

The Funds’ investments or their service providers rely on the security and reliability of information and communications technologies, systems and networks and may be negatively impacted if these technologies,

 

 

systems and networks become compromised or unreliable. These operational risks arise from a variety of factors and could negatively impact the Funds and their shareholders. These factors include processing and human errors, inadequate or failed internal or external processes, failures in systems and networks, cyber-attacks, changes in personnel, and errors caused by third-party service providers or trading counterparties. The use of certain investment strategies that involve manual or additional processing increases these risks. Although the Funds attempt to minimize such failures through controls and oversight, it is not possible to identify all of the operational risks that may affect a Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. In addition, other disruptive events, including, but not limited to, natural disasters and public health crises (such as the COVID-19 pandemic) can adversely affect the Funds, in particular if the Funds’ officers are unable or unwilling to perform their responsibilities as a result of any such event. Any disruption in these services could negatively impact the Funds and their shareholders.

 

In addition, the Funds rely on various sources to calculate their NAV. Therefore, each Fund is subject to certain operational risks associated with reliance on third party service providers and data sources. NAV calculation may be impacted by operational risks arising from factors such as failures in systems and technology. Such failures may result in delays in the calculation of a Fund’s NAV and/or the inability to calculate NAV over extended time periods. Each Fund may be unable to recover any losses associated with such failures.

 

Repurchase Agreements

 

The Funds may invest in repurchase agreements. The U.S. Treasury Money Market Fund may invest in repurchase agreements only in respect of direct obligations of the U.S. Treasury. A repurchase agreement arises when a buyer purchases an obligation and simultaneously agrees with the vendor to resell the obligation to the vendor at an agreed-upon price and time, which is usually not more than seven days from the date of purchase. The resale price of a repurchase agreement is greater than the purchase price, reflecting an agreed-upon market rate which is effective for the period of time the buyer’s funds are invested in the obligation and which is not related to the coupon rate on the purchased obligation. Obligations serving as collateral for each repurchase agreement are delivered to a Fund’s custodian bank either physically or in book entry form and the collateral is marked to market daily to ensure that each repurchase agreement is fully collateralized at all times. A buyer of a repurchase agreement runs a risk of loss if, at the time of default by the issuer, the value of the collateral securing the agreement is less than the price paid for the repurchase agreement. A Fund may enter into repurchase agreements only with a vendor which is a member bank of the Federal Reserve System or which is a “primary dealer” (as designated by the Federal Reserve Bank of New York) in U.S. Government obligations. A Fund may also enter into a repurchase agreement with the Federal Reserve Bank of New York, the Fixed Income Clearing Corporation, or certain counterparties approved by the Adviser. The restrictions and procedures that govern the investment of a Fund’s assets in repurchase obligations are designed to minimize the Fund’s risk of losses from those investments. Repurchase agreements are considered collateralized loans under the 1940 Act.

 

The repurchase agreement provides that, in the event the seller fails to pay the price agreed upon on the agreed upon delivery date or upon demand, as the case may be, the Fund will have the right to liquidate the securities. If, at the time a Fund is contractually entitled to exercise its right to liquidate the securities, the seller is subject to a proceeding under the bankruptcy laws or its assets are otherwise subject to a stay order, the Fund’s exercise of its right to liquidate the securities may be delayed and result in certain losses and costs to the Fund. The Funds have each adopted and follow procedures which are intended to minimize the risks of repurchase agreements. For example, each Fund only enters into repurchase agreements after the Adviser has determined that the seller is creditworthy, and the Adviser monitors that seller’s creditworthiness on an ongoing basis. Moreover, under such agreements, the value of the securities (which are marked to market every business day) is required to be greater than the repurchase price, and the Funds have the right to make margin calls at any time if the value of the securities falls below the agreed upon margin.

 

All repurchase agreements entered into by the Funds are fully collateralized at all times during the period of the agreement in that the value of the collateral is at least equal to the amount of the loan, reduced by

 

 

the transaction costs (including the loss of interest) that the Fund reasonably could expect to incur in the event that the Fund must liquidate the collateral, and the Fund or its custodian bank has possession of the collateral, which the Board believes gives the Fund a valid, perfected security interest in the collateral. The Board believes that the collateral underlying repurchase agreements may be more susceptible to claims of the seller’s creditors than would be the case with securities owned by a Fund. Repurchase agreements give rise to income which does not qualify as tax-exempt income when distributed to Fund shareholders.

 

Repurchase agreements involving obligations other than U.S. Government Securities (such as commercial paper, corporate bonds, mortgage loans and equities) may be subject to special risks and may not have the benefit of certain protections in the event of the counterparty’s insolvency. Moreover, repurchase agreements secured by obligations that are not eligible for direct investment under Rule 2a-7 under the 1940 Act or a Fund’s investment strategies and limitations, may require the Fund to promptly dispose of such collateral if the seller or guarantor becomes insolvent. If the seller or guarantor becomes insolvent, a Fund may suffer delays, costs and possible losses in connection with the disposition of collateral.

 

Risks of Qualified Financial Contracts

 

Regulations adopted by federal banking regulators under the Dodd-Frank Act require that certain qualified financial contracts (“QFCs”) with counterparties that are part of U.S. or foreign global systemically important banking organizations be amended to include contractual restrictions on close-out and cross-default rights. QFCs include, but are not limited to, repurchase agreements. If a covered counterparty of a Fund or certain of the covered counterparty’s affiliates were to become subject to certain insolvency proceedings, the Fund may be temporarily unable to exercise certain default rights, and the QFC may be transferred to another entity. These requirements may impact a Fund’s credit and counterparty risks.

 

Selection of Money Market Investments

 

The Funds invest in fixed income securities. The value of the fixed income securities in a Fund’s portfolio can be expected to vary inversely with changes in prevailing interest rates. Although each Fund’s investment policies are designed to minimize these changes and to maintain an NAV of $1.00 per share for the U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund, there is no assurance that these policies will be successful. Withdrawals by shareholders could require the sale of portfolio investments at a time when such a sale might not otherwise be desirable.

 

Securities issued or guaranteed as to principal and interest by the U.S. Government include a variety of Treasury securities, which differ in their interest rates, maturities and dates of issue. Securities issued or guaranteed by agencies or instrumentalities of the U.S. Government may or may not be supported by the full faith and credit of the United States or by the right of the issuer to borrow from the Treasury.

 

Considerations of portfolio quality, maturity, diversification and liquidity, as well as preservation of capital, mean that a Fund may not necessarily invest in money market instruments paying the highest available yield at a particular time. Consistent with its investment objectives, the Funds will each attempt to maximize yields by portfolio trading and by buying and selling portfolio investments in anticipation of, or in response to, changing economic and money market conditions and trends. The Funds will each also invest to take advantage of what the Adviser believes to be temporary disparities in yields of different segments of the high-grade money market or among particular instruments within the same segment of the market. In purchasing and selling securities for the Funds, portfolio managers consider the Adviser’s credit analysis. With respect to the U.S. Government Money Market Fund, portfolio managers select investments from an approved credit list compiled by the Adviser’s global credit analysts, who have conducted an independent qualitative and quantitative review of each issuer on the list. Safety is prioritized, with additional emphasis placed on liquidity and yield. These policies, as well as the relatively short maturity of obligations purchased by a Fund, may result in frequent changes in the Fund’s portfolio. Portfolio turnover may give rise to taxable gains. The Funds do not usually pay brokerage commissions in connection with the purchase or sale of portfolio securities.

 

 

U.S. Government Securities

 

The Funds may each invest in U.S. Government Securities. U.S. Government Securities include bills, notes and bonds issued by the U.S. Treasury and securities issued or guaranteed by agencies or instrumentalities of the U.S. Government. The U.S. Treasury Money Market Fund invests only in obligations of the U.S. Treasury and therefore may not invest in obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government.

 

Some U.S. Government securities are supported by the direct full faith and credit pledge of the U.S. Government; others are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as securities issued by the FNMA, are supported by the discretionary authority of the U.S. Government to purchase the agencies’ obligations; and others are supported only by the credit of the issuing or guaranteeing instrumentality. There is no assurance that the U.S. Government will be able or willing to repay any principal or interest when due, or will provide financial support to a U.S. Government agency, authority, instrumentality or sponsored enterprise when it is not obligated by law to do so.

 

Regarding certain federal agency securities or government sponsored entity securities (such as debt securities or mortgage-backed securities issued by FNMA, FHLMC, Federal Home Loan Banks, Federal Farm Credit Bank and other government sponsored agencies), you should be aware that although the issuer may be chartered or sponsored by an Act of Congress, the issuer is not funded by congressional appropriations, and its securities are neither guaranteed nor insured by the U.S. Treasury. This risk does not apply to the Treasury Money Market Fund, which invests only in obligations of the U.S. Treasury and does not invest in obligations issued or guaranteed by agencies or instrumentalities of the U.S. government.

 

Portfolio Transactions

 

Portfolio securities normally will be purchased or sold from or to issuers directly or from or to dealers serving as market makers for the securities at a net price. Generally, money market securities are traded on a principal basis and do not involve brokerage commissions. The cost of executing portfolio securities transactions for each Fund primarily consists of dealer spreads and underwriting commissions. The Adviser is primarily responsible for portfolio decisions and the placing of portfolio transactions. The Trust has no obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities for each Fund. Allocation of transactions, including their frequency, to various dealers is determined by the Adviser in its best judgment and in a manner deemed to be in the best interest of each Fund’s shareholders rather than by any formula. In placing orders for each Fund, the primary consideration is prompt execution of orders in an effective manner at the most favorable price, although the Fund does not necessarily pay the lowest spread or commission available. Other factors taken into consideration are the dealer’s general execution and operational facilities, the type of transaction involved and other factors, such as the dealer’s risk in positioning the securities. To the extent consistent with applicable legal requirements, the Adviser may place orders for the purchase and sale of Fund investments for a Fund with a broker-dealer affiliate of the Adviser.

 

The Adviser may, in circumstances in which two or more dealers are in a position to offer comparable results and subject to certain conditions, give preference to a dealer that has provided statistical or other research services to the Adviser. By allocating transactions in this manner, the Adviser is able to supplement its research and analysis with the views and information of securities firms. These services, which in some cases may also be purchased for cash, include such matters as general economic and security market reviews, industry and company reviews, evaluations of securities and recommendations as to the purchase and sale of securities. Some of these services are of value to the Adviser in advising several of its clients (including the Funds), although not all of these services are necessarily useful and of value in managing each Fund. The management fee paid from each Fund is not reduced because the Adviser and its affiliates receive such services.

 

Under the 1940 Act, persons affiliated with HSBC USA, Inc. (“HSBC USA”), the Adviser, the Trust or Foreside Distribution Services, L.P. (“Foreside” or “Distributor”) are generally prohibited from dealing with a Fund as a principal in the purchase and sale of securities. A Fund may purchase securities from

 

 

underwriting syndicates of which the Distributor or other affiliate is a member under certain conditions in accordance with the provisions of a rule adopted under the 1940 Act. Under the 1940 Act, persons affiliated with the Adviser, a Fund or Foreside may act as a broker for the Fund. In order for such persons to effect any portfolio transactions for a Fund, the commissions, fees or other remuneration received by such persons must be reasonable and fair compared to the commissions, fees or other remunerations paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliate to receive no more than the remuneration that would be expected to be received by an unaffiliated broker in a commensurate arms-length transaction. The Trustees of the Trust regularly review any commissions paid by the Funds to affiliated brokers. The Funds will not do business with nor pay commissions to affiliates of the Adviser in any portfolio transactions where they act as principal.

 

As permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended (“1934 Act”), the Adviser may cause each Fund to pay a broker-dealer which provides “brokerage and research services” (as defined in the 1934 Act) to the Adviser an amount of commission for effecting a securities transaction for the Fund in excess of the commission which another broker-dealer would have charged for effecting that transaction, provided that the Adviser determines in good faith that the greater commission is reasonable in relation to the value of the brokerage and research services provided by the executing broker-dealer viewed in terms of either a particular transaction or its respective overall responsibilities to the Fund or to its other clients. Not all of such services are useful or of value in advising each Fund.

 

The term “brokerage and research services” includes advice as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or of purchasers or sellers of securities; furnishing analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; and effecting securities transactions and performing functions incidental thereto, such as clearance and settlement. Although commissions paid on every transaction will, in the judgment of the Adviser, be reasonable in relation to the value of the brokerage services provided, commissions exceeding those which another broker might charge may be paid to broker-dealers who were selected to execute transactions on behalf of the Funds and the Adviser’s other clients in part for providing advice as to the availability of securities or of purchasers or sellers of securities and services in effecting securities transactions and performing functions incidental thereto, such as clearance and settlement. The SEC has published interpretative guidance that tightened previously existing standards concerning the types of expenses that qualify for the Section 28(e) safe harbor and set forth certain steps that investment advisers would need to take in order to ensure such qualification.

 

Investment decisions for each Fund and for the other investment advisory clients of the Adviser are made with a view to achieving their respective investment objectives. Investment decisions are the product of many factors in addition to basic suitability for the particular client involved. Thus, a particular security may be bought for certain clients even though it could have been sold for other clients at the same time, and a particular security may be sold for certain clients even though it could have been bought for other clients at the same time. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling that same security. In some instances, one client may sell a particular security to another client. Two or more clients may simultaneously purchase or sell the same security, in which event each day’s transactions in that security are, insofar as practicable, averaged as to price and allocated between such clients in a manner which in the Adviser’s opinion is equitable to each and in accordance with the amount being purchased or sold by each. In addition, when purchases or sales of the same security for a Fund and for other clients of the Adviser occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantage available to large denomination purchases or sales. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients in terms of the price paid or received or of the size of the position obtainable. It is recognized that, in some cases, this system could have a detrimental effect on the price or volume of the security as far as a Fund is concerned. In other cases, however, the Adviser believes that the Funds’ ability to participate in volume transactions will produce better executions for the Funds.

 

The Board has adopted a policy to ensure compliance with Rule 12b-1(h) under the 1940 Act in the selection of broker-dealers to execute portfolio transactions for the Funds. Generally, Rule 12b-1(h) prohibits the

 

 

Funds from compensating a broker-dealer for promotion or sale of Fund shares by directing to the broker-dealer securities transactions or remuneration received or to be received from such portfolio securities transactions.

 

Since the Funds invest primarily in fixed-income securities, it is anticipated that most purchases and sales will be with the issuer or with underwriters of or dealers in those securities, acting as principal. Accordingly, the Funds would not ordinarily pay significant brokerage commissions with respect to their securities transactions.

 

In the United States and in some other countries debt securities are traded principally in the over-the-counter market on a net basis through dealers acting for their own account and not as brokers. In other countries, both debt and equity securities are traded on exchanges at fixed commission rates. The cost of securities purchased from underwriters includes an underwriter’s commission or concession, and the prices at which securities are purchased and sold from and to dealers include a dealer’s mark-up or mark-down. The Adviser normally seeks to deal directly with the primary market makers or on major exchanges unless, in its opinion, better prices are available elsewhere. Subject to the requirement of seeking best execution, securities may, as authorized by each investment advisory contract, be bought from or sold to dealers who have furnished statistical, research and other information or services to the Adviser. At present, no arrangements for the recapture of commission payments are in effect.

 

During the fiscal year ended October 31, 2025, the Funds acquired securities issued by their regular brokers or dealers, or their parent companies, as reflected in the table below. The following shows the aggregate holdings of the securities of each such issuer as of October 31, 2025. (For these purposes a regular broker or dealer includes any of the (a) ten brokers or dealers that received the greatest dollar amount of brokerage commissions by virtue of direct or indirect participation in the Trust’s portfolio transactions during the most recent fiscal year, (b) ten brokers or dealers that engaged as principal in the largest dollar amount of portfolio transactions of the Trust during its most recent fiscal year, or (c) ten brokers or dealers that sold the largest dollar amount of securities of the Funds during the Trust’s most recent fiscal year.)

 

U.S. Government Money Market Fund
	Banco Paribas Fortis SA	$     500,000,000
	Banco Santander SA	$     500,000,000
	Bank of NY Mellon	$  4,950,000,000
	Citigroup Global Markets	$  1,000,000,000
	Credit Agricole	$  1,300,000,000
	Northern Trust Corp.	$  4,250,000,000
	Standard Chartered Bank	$     500,000,000
	State Street Bank and Trust Co.	$     515,000,000
	Wells Fargo Co.	$     750,000,000

 

During the fiscal year ended October 31, 2025, the U.S. Treasury Money Market Fund did not acquire securities issued by its regular brokers or dealers, or their parent companies.

 

DISCLOSURE OF PORTFOLIO HOLDINGS

 

The Board has adopted policies and procedures relating to the disclosure of the Trust’s portfolio securities (the “Policy”). The Policy is designed to ensure that the disclosure of holdings information is necessary to the Trust’s operation or useful to the Trust’s shareholders without compromising the integrity or performance of the Trust. Disclosure of information regarding the portfolio holdings of the Funds occurs only upon the determination, by the Trust’s Chief Compliance Officer (“CCO”), that such disclosure is in the best interests of the Funds’ shareholders and that it does not present a conflict of interest between the shareholders and the Adviser, principal underwriter, or any affiliated person of the Fund, the Adviser, or its principal underwriter.

 

 

The Trust discloses a complete schedule of investments in each Form N-CSR. Each Form N-CSR is available, free of charge, on the EDGAR database on the SEC’s website at www.sec.gov and on the Trust’s website at https://www.assetmanagement.us.hsbc.com/en/institutional-investor/funds.

 

The Funds will also disclose on the Adviser’s website: (i) within five business days after the end of each month, a complete schedule of portfolio holdings and certain other information, including the dollar-weighted average portfolio maturity and dollar-weighted average portfolio life of each Fund; (ii) each business day, (a) the percentage of each Fund’s total assets that are invested daily and weekly liquid assets, (b) each Fund’s daily net inflows or outflows, and (c) each Fund’s marked-to-market NAV per share. In addition, each Fund will file with the SEC on Form N-MFP, within five business days after the end of each month, more detailed portfolio holdings information of the Fund. The Funds’ Form N-MFP filings will be available on the SEC’s website, and the Adviser’s website will contain a link to such filings.

 

The Funds will also publicly disclose the complete schedule of each Fund’s portfolio holdings on a weekly or monthly basis. This information, which will include portfolio holdings, sector holdings and other characteristics, will generally be available on the Adviser’s Web site subject to a delay of five (5) business days. The disclosure of weekly portfolio holdings information, however, may not occur when monthly portfolio holdings information will be available shortly before or after the date on which the weekly portfolio holdings information would otherwise be available. Portfolio holdings information will be available until it is updated as of the following period. The information on the Adviser’s website is publicly available to all categories of persons.

 

The Trust or the Adviser may share non-public holdings information of the Trust on a more frequent basis with the Adviser and other service providers to the Trust (including the Trust’s custodian; the Sub-Administrator; and pricing services such as FT Interactive). In addition, the Trust may share non-public holdings information with mutual fund ranking and rating services, including Standard & Poor’s Corporation, Morningstar, Lipper Analytical Services, FactSet, Fitch Ratings, Inc. Fundipedia and Bloomberg L.P. These service providers and other entities owe contractual, fiduciary, or other legal duties of confidentiality to the Trust or the Adviser that foster reasonable expectations that holdings information will not be misused. The Trust’s officers may authorize disclosure of the Trust’s holdings portfolio information to service providers where such service provider needs information to fulfill its duties.

 

The Trust may also disclose information about portfolio holdings to mutual fund evaluation services that agree not to disclose the information to third parties and that enter into a Confidentiality Agreement. Such Confidentiality Agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that such information will be used solely for the purpose of analysis and evaluation of the portfolio. Disclosures may be made to other third parties under a Confidentiality Agreement satisfactory to Fund counsel and the Trust’s CCO. The Confidentiality Agreement prohibits anyone in possession of non-public holdings information from purchasing or selling securities based on such information, or from disclosing such information to other persons, except for those who are actually engaged in, and need to know, such information to perform services for the portfolio.

 

Currently, the Trust has arrangements to provide additional disclosure of holdings information to the following evaluation services: Lipper Analytical Services (10 days after the end of each month), Morningstar (5 business days after the end of each month), Bloomberg L.P. (60 days after the end of each quarter), FactSet (daily), Fitch Ratings, Inc. (two times per month), Fundipedia (5 business days after the end of each month) and Standard & Poor’s Corporation (between 3-5 days after the end of each week).

 

No compensation or other consideration is paid to or received by any party in connection with the disclosure of holdings information, including the Trust, the Adviser and its affiliates.

 

Pursuant to the Policy, the CCO may authorize exceptions and allow disclosures under other circumstances he or she deems appropriate. In addition, a Fund may disclose its holdings, as appropriate, in conformity with the foregoing principles. Compliance with the Policy (including the use of the portfolio holdings information) will be monitored by the CCO or his or her designee on a regular basis, and any violations

 

 

constituting a “Material Compliance Matter” as defined under Rule 38a-1 under the 1940 Act will be reported by the CCO to the Board.

 

INVESTMENT RESTRICTIONS

 

Each Fund has adopted certain fundamental and non-fundamental investment restrictions. Fundamental investment restrictions may not be changed without approval by holders of a “majority of the outstanding shares” of the Fund, which, as used in this SAI, means the vote of the lesser of (i) 67% or more of the outstanding “voting securities” of the Fund present at a meeting, if the holders of more than 50% of the outstanding “voting securities” of the Fund are present or represented by proxy, or (ii) more than 50% of the outstanding “voting securities” of the Fund. The term “voting securities” as used in this paragraph has the same meaning as in the 1940 Act.

 

Notwithstanding anything contained herein to the contrary, the Funds will seek to comply with the maturity, quality, liquidity and diversification requirements of Rule 2a-7 under the 1940 Act, including the prohibition from acquiring an illiquid security if, immediately after the acquisition, a Fund would have more than 5% of its total assets invested in illiquid securities.

  

Non-Fundamental Restrictions

 

Each of the Funds is subject to the following non-fundamental restriction, in addition to the fundamental restrictions set forth below under the headings for each Fund:

 

1.       

The Fund may not directly purchase securities or other instruments issued by companies that manufacture cluster munitions or anti-personnel mines. The Adviser uses the definitions within the 1997 Mine Ban Treaty and the 2008 Convention on Cluster Bombs for guidance and implementation. The Fund may purchase securities of registered investment companies, ETNs or other pooled vehicles that invest in companies that manufacture cluster munitions or anti-personnel mines.

 

Fundamental Restrictions

 

U.S. Government Money Market Fund. As a matter of fundamental policy, the Trust, on behalf of the Fund:

 

1.       

may not borrow money, except that, as a temporary measure for extraordinary or emergency purposes, the Fund may borrow from banks in an amount not to exceed 1/3 of the value of the net assets of the Fund including the amount borrowed (moreover, the Trust (on behalf of the Fund) may not purchase any securities at any time at which borrowings exceed 5% of the total assets of the Fund) taken in each case at market value;

 

2.       

may not purchase any security or evidence of interest therein on margin, except that the Trust may obtain such short-term credit for the Fund as may be necessary for the clearance of purchases and sales of securities;

 

3.       

may not act as an underwriter of securities issued by others, except to the extent it could be considered an underwriter in the acquisition and disposition of restricted securities;

 

4.       

may make loans to the extent permitted under the 1940 Act and the rules and regulations thereunder;

 

5.       

may not purchase or sell real estate (including limited partnership interests, but excluding securities secured by real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts in the ordinary course of business (the Trust reserves the freedom of action to hold and to sell for the Fund real estate acquired as a result of its ownership of securities);

 

 

6.       

may not “concentrate” its investments in any one industry (excluding the U.S. Government, its agencies or instrumentalities and repurchase agreements collateralized by such investments), except to the extent permitted under the 1940 Act and the rules and regulations thereunder; provided, however, that the Fund may invest without limitation in U.S. dollar-denominated obligations of U.S. banks, foreign branches of U.S. banks and U.S. branches of foreign banks;

 

7.       

may issue senior securities to the extent permitted under the 1940 Act and the rules and regulations thereunder;

 

8.       

may not pledge, mortgage or hypothecate for any purpose in excess of 10% of the net assets of the Fund (taken at market value);

 

9.       

may not sell any security which it does not own, unless, by virtue of its ownership of other securities, it has at the time of sale a right to obtain securities, without payment of further consideration, equivalent in kind and amount to the securities sold; and provided, that, if such right is conditional, the sale is made upon the same conditions;

 

10.     

may not invest for the purpose of exercising control or management;

 

11.     

may not, taken together with any investments described in Investment Restriction (14) below, invest more than 10% of the net assets of the Fund in securities that are not readily marketable, including debt securities for which there is no established market and fixed time deposits and repurchase agreements maturing in more than seven days;

 

12.     

may not purchase or retain any securities issued by an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Trust, or is an officer or director of the Adviser, if after the purchase of the securities of such issuer by the Trust, on behalf of the Fund, one or more of such persons owns beneficially more than 1/2 of 1% of the shares or securities, or both, all taken at market value, of such issuer, and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, all taken at market value;

 

13.     

may not write, purchase or sell any put or call option or any combination thereof;

 

14.     

may not, taken together with any investments described in Investment Restriction (11) above, invest in securities which are subject to legal or contractual restrictions on resale (other than fixed time deposits and repurchase agreements maturing in not more than seven days) if, as a result thereof, more than 10% of the net assets of the Fund, (taken at market value) would be so invested (including fixed time deposits and repurchase agreements maturing in more than seven days);

 

15.     

may not purchase securities of any issuer if such purchase at the time thereof would cause more than 10% of the voting securities of such issuer to be held for the Fund; or

 

16.     

may not make short sales of securities or maintain a short position, unless, at all times when a short position is open, the Fund owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short, and unless not more than 10% of the net assets of the Fund (taken at market value) is held as collateral for such sales at any one time.

 

For the purposes of interpreting the fundamental policies, securities deemed to be liquid in accordance with the procedures adopted by the Board are not included in the limitation set forth in Items 11 and 14.

 

 

U.S. Treasury Money Market Fund. As a matter of fundamental policy, the Trust, on behalf of the Fund:

 

1.       

may not purchase securities on margin (except for short-term credits necessary for the clearance of transactions) or make short sales of securities (the deposit or payment by the Fund of initial or maintenance margin in connection with futures contracts or related options transactions is not considered the purchase of a security on margin);

 

2.       

may not underwrite securities of other issuers, to the extent that the purchase of municipal obligations, or other permitted investments, directly from the issuer thereof or from an underwriter for an issuer and the later disposition of such securities in accordance with the Fund’s investment program may be deemed to be an underwriting;

 

3.       

may not invest an amount equal to 10% or more of the value of its net assets in investments which are illiquid (including repurchase agreements and fixed time deposits not subject to withdrawal penalties having maturities of more than seven calendar days);

 

4.       

may not issue senior securities, borrow money or pledge or mortgage its assets, except the Fund may borrow from banks up to 33 1/3% of the current value of the total assets of the Fund and pledge up to 33 1/3% of its assets to secure such borrowings;

 

5.       

may not make loans or lend its portfolio securities;

 

6.       

may not purchase securities other than direct obligations of the U.S. Treasury or repurchase agreements pertaining thereto (there being no limit on the amount of the assets of the U.S. Treasury Fund which may be invested in the securities of any one issuer of such obligations); and

 

7.       

may not purchase or sell real estate (including limited partnership interests but excluding securities secured by real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts in the ordinary course of business (the Trust reserves the freedom of action to hold and to sell for the Fund real estate acquired as a result of its ownership of securities).

 

For the purposes of interpreting the fundamental policies, securities deemed to be liquid in accordance with the procedures adopted by the Board are not included in the limitations set forth in Item 3.

 

Diversification and Other Measures

 

Each Fund’s diversification tests are measured at the time of initial purchase and calculated as specified in Rule 2a-7 under the 1940 Act, which may allow a Fund to exceed the limits specified in the Prospectus for certain securities subject to guarantees or demand features. A Fund will be deemed to satisfy the maturity requirements described in the Prospectus to the extent that the Fund satisfies the applicable maturity requirements in Rule 2a-7 under the 1940 Act. The definition of issuer for purposes of these investment restrictions is the same as that described under “Investment Objective, Policies and Restrictions” in this SAI for the purpose of diversification under the 1940 Act.

 

It is the intention of each Fund, unless otherwise indicated, that with respect to the Fund’s policies that are the result of the application of law, the Fund will take advantage of the flexibility provided by rules or interpretations of the SEC currently in existence or promulgated in the future or changes to such laws.

 

Percentage and Rating Restrictions

 

If a percentage restriction or a rating restriction on investment or utilization of assets set forth above or referred to in a Fund’s Prospectus is adhered to at the time an investment is made or assets are so utilized, a later change in percentage resulting from changes in the value of the securities held by a Fund or a later change in the rating of a security held by a Fund is not considered a violation of policy. However, the Adviser

 

 

will consider such change in its determination of whether to continue to hold the security and provided further, that the Adviser will take appropriate steps, which may include the disposition of portfolio securities, as may be necessary to satisfy the applicable requirements of the 1940 Act and/or the rules thereunder with respect to the Fund’s investments in illiquid securities or any borrowings by the Fund.

 

MANAGEMENT OF THE TRUST

 

Board of Trustees

 

Overall responsibility for management of HSBC Funds (the “Trust”) rests with the Board. The Trustees elect the officers of the Trust and appoint service providers to manage the Trust’s day-to-day operations. The Trustees meet regularly to discuss and consider matters concerning the Trust and to oversee the Trust’s activities, including the investment performance of the Fund and the operation of the Trust’s compliance program, and to evaluate and address potential conflicts and risks associated with the Trust’s activities.

 

Board Composition And Leadership Structure. The Trust has a Board of Trustees. The Board consists of four Trustees, all of whom are not “interested persons” (as that term is defined by Section 2(a)(19) of the 1940 Act) of the Trust (the “Independent Trustees”). The Board is responsible for the overall management of the Trust, including general supervision and review of the Trust’s investment activities. The Board elects the officers of the Trust who are responsible for administering the Trust’s day-to-day operations. The Trust enters into agreements with various entities to manage the day-to-day operations of the Trust, including with the Adviser, a subadviser (as applicable), the administrator, the fund accountant, the transfer agent, the distributor and the custodian. The Board is responsible for selecting these service providers (based on the recommendation of the Adviser), approving the terms of their contracts with the Trust and exercising general oversight of these service providers on an ongoing basis.

 

The Chair of the Board, Mr. Hurley, is an Independent Trustee, and, among other duties and responsibilities, serves as a point person for communications between the Trustees and the Trust’s management. The Trustees interact directly with the Chair, Chairs of the Trust’s standing Committees, each other, the Trust’s officers, and senior management of the Adviser and other service providers of the Trust at scheduled meetings and between meetings, as appropriate.

 

The Board has established the following standing committees: the Audit Committee and the Nominating and Corporate Governance Committee (the “Committees”) to facilitate the Trustees’ effective oversight of the management of those aspects of the Trust’s operations. Each Committee has a Chair, who is an Independent Trustee. Each Committee’s responsibilities are discussed in greater detail below. By assigning areas of responsibility to committees of Trustees, and to the full Board, the Board’s leadership structure enables it to exercise informed and independent judgment over the matters within its purview.

 

Board’s Role in Risk Oversight of The Trust. The Board, as a whole, considers risk management issues as part of its general oversight responsibilities throughout the year at regular Board meetings, as does each Committee of the Trust. The Board and its Committees consider risk management through, among other things, regular reports that have been developed by management, in consultation with the Board, its Committees, and counsel. These reports address investment, valuation, liquidity, operations and compliance matters. The Board may also receive special written reports or presentations on cybersecurity and a variety of other risk issues, either upon request or upon the Adviser’s initiative. In addition, the Board meets regularly with the Adviser’s internal risk department and Fund Pricing Group to review reports on their examinations of liquidity risks, and when applicable, their fair value determinations on the Funds’ investment portfolios.

 

With respect to investment risk, the Board receives regular written reports describing and analyzing the investment performance of the Funds, which may include the comparison of the Funds’ performance to their respective benchmarks and/or peer groups when applicable. In addition, investment personnel for the Funds meet regularly with the Board to discuss Fund performance, including investment risk, liquidity and market updates. Also, to the extent that a Fund changes a particular investment strategy or invests in a

 

 

new type of security that could have a material effect on the Fund’s risk profile, the Board generally is consulted.

 

With respect to valuation, pursuant to Rule 2a-5 under the 1940 Act, the Board has designated the Adviser as the “Valuation Designee.” As Valuation Designee, the Adviser performs fair value determinations relating to a particular Fund’s investments and is responsible for, among other things, establishing, implementing and testing fair value methodologies. The Board receives regular and other periodic written reports on valuation matters and will review, no less frequently than annually, a written report prepared by the Adviser (as Valuation Designee) that assesses the adequacy and effectiveness of its process for determining fair value.

 

With respect to compliance risks, the Board selects the person to serve as the Trust’s CCO pursuant to Rule 38a-1 under the 1940 Act. In addition, the Board receives regular compliance reports and meets regularly with the CCO to discuss compliance issues, including compliance risks. In accordance with SEC rules, the Independent Trustees meet regularly in executive session with the CCO, and the CCO prepares and presents an annual written compliance report to the Board. The Board also meets regularly with the Chief Compliance Officer of the Adviser. The Board adopts compliance policies and procedures for the Trust and approves such procedures of certain of the Trust’s service providers, such as the Adviser and the subadvisers (as applicable). The compliance policies and procedures are specifically designed to detect and prevent violations of the federal securities laws. In addition, the Board oversees compliance by third-party service providers with the Trust’s compliance program and assess recommendations made by the CCO concerning changes and additions to the Trust’s compliance program.

 

Qualifications of The Trustees. The names of the Trustees, their addresses, ages, positions held with the Trust, principal occupation(s) during the past five years, number of portfolios in the fund complex overseen, and other directorships held by each Trustee are set forth below.

 

TRUSTEES

 

Name, Address(1) and Age	Position(s) Held With Trust	Length of Time Served	Principal Occupation(s) During Past 5 Years	Portfolios in Fund Complex Overseen by Trustee(2)	Other Directorships Held By Trustee During the Past 5 Years(3)
Independent Trustees
Hugh T. Hurley III Age: 61	Trustee and Chair	Indefinite; 2020 to present	Private Investor (2017 – present)	2	Harris Associates Investment Trust (8 portfolios) (2018 – present) Harris Oakmark ETF Trust (3 portfolios) (2024 – present)
Marcia L. Beck Age: 70	Trustee	Indefinite; 2008 to present	Private Investor (1999 – present)	2	None
Susan C. Gause Age: 73	Trustee	Indefinite; 2013 to present	Private Investor (2003 – present)	2	Brighthouse Funds Trust II (29 portfolios) (2012 – present); Brighthouse Funds Trust I (43 portfolios) (2008 – present)

 

 

Name, Address(1) and Age	Position(s) Held With Trust	Length of Time Served	Principal Occupation(s) During Past 5 Years	Portfolios in Fund Complex Overseen by Trustee(2)	Other Directorships Held By Trustee During the Past 5 Years(3)
Susan S. Huang Age: 71	Trustee	Indefinite; 2008 to present	Private Investor (2000 – present)	2	None

 

⁽¹⁾ Each Independent Trustee may be contacted by writing to the Trustee, c/o SS&C Global Investor and Distribution Solutions, Inc., P.O. Box 219691, Kansas City, MO 64121-9691, Attn: Stefano Michelagnoli.

⁽²⁾ The “Fund Complex” is comprised of the 2 portfolios of HSBC Funds.

⁽³⁾ This column includes only directorships of companies required to report to the SEC under the Securities Exchange Act of 1934 (i.e., “public companies”) or other investment companies registered under the 1940 Act.

 

OFFICERS

 

Name, Address and Age	Position(s) Held With Trust	Term of Office and Length of Time Served	Principal Occupation(s) During Past 5 Years
Stefano R. Michelagnoli 66 Hudson Boulevard E. 29th Floor New York, New York 10001 Age: 55	President	One year; 2020 to present	Global Head of Client Operations, HSBC Global Asset Management (USA) Inc. (June 2020 – present); Regional Head of Product (Americas)
James D. Levy 66 Hudson Boulevard E. 29th Floor New York, New York 10001 Age: 62	Vice President	One year; 2014 to present	Vice President, Product Management, HSBC Global Asset Management (USA) Inc. (2014 – present)
Maria Clem Sell (1) 190 Middle Street, Suite 301 Portland, ME 04101 Age: 48	Treasurer	One year; November 2022 to present	Director and Fund Treasurer, ACA Global (f/k/a Foreside Financial Group, LLC) (2021 - present); Director, Franklin Templeton Investments (2014 – 2021)
Charles L. Booth 190 Middle Street, Suite 301 Portland, ME 04101 Age: 65	Chief Compliance Officer and Secretary	One year; February 20, 2025 to present	Independent Compliance Consultant (2023 – present); Director and Compliance Officer, Citi Fund Services (1988 – 2023)
James M. Curtis 66 Hudson Boulevard E. 29th Floor New York, New York 10001 Age: 57	Chief Legal Officer	One year; 2018 to present	Managing Associate General Counsel, HSBC Wealth and Personal Banking (2018-present)

 

⁽¹⁾ Ms. Sell is also an officer of certain other investment companies.

 

Trustee Experience, Qualifications, Attributes or Skills. The following provides an overview of the considerations that led the Board to conclude that each individual serving as a Trustee of the Trust should so serve. The current members of the Board joined at different points in time since 2008. Generally, no one factor was decisive in the original selection of an individual to join the Board. Among the factors the Board considered when concluding that an individual should serve on the Board were the following: (i) the individual’s business and professional experience and accomplishments, including prior experience in the financial services and investment management fields or on other boards; (ii) the individual’s ability to work effectively with other members of the Board; and (iii) how the individual’s skills, experiences and attributes would contribute to an appropriate mix of relevant skills and experience on the Board.

 

 

In addition to personal qualities, such as integrity, the role of an effective Trustee inherently requires the ability to comprehend, discuss and critically analyze materials and issues presented in exercising judgments and reaching informed conclusions relevant to his or her duties and obligations. The Board believes that the specific background of each Board member (including as set forth above) evidences such ability and is appropriate to his or her serving on the Board. The Chair of the Board, Mr. Hurley, has significant experience in the investment management and capital markets industries, having served in several senior executive management roles, including as Managing Director and Global Head of Product Strategy at BlackRock, Inc., a global asset management company. Mr. Hurley is also a National Association of Corporate Directors (“NACD”) Governance Fellow and is NACD Directorship Certified^TM. He has a B.S. in Finance and has held roles as finance chair, treasurer, and endowment chair in his previous positions, requiring him to work closely with audit and accounting professionals. In addition, Mr. Hurley serves as an independent director for another mutual fund complex and is a member of that complex’s audit committee. Ms. Beck has asset management operating and leadership experience, having served as President and Trustee of the Goldman Sachs Mutual Funds, an unaffiliated mutual fund complex. Ms. Huang has asset management operating and leadership experience, having served as Senior Vice President of Schroder Investment Management, a global asset management company. Mses. Beck and Huang each has experience managing risk as well as portfolios of money market and fixed income instruments, respectively. Ms. Gause has significant experience in the financial services industry, having served as, among other things, Chief Executive Officer of Dresdner RCM Global Investors and Allianz Dresdner Asset Management, a global asset management company. In that position, Ms. Gause was responsible for the day-to-day activities of the investment adviser of various registered open-end funds. In addition, Ms. Gause has served as an independent director for another mutual fund complex since 2008.

 

Committees

 

The Board currently has two standing committees: Audit Committee and Nominating and Corporate Governance Committee.

 

Audit Committee. The Audit Committee is comprised of all of the Independent Trustees of the Trust. The Audit Committee is currently chaired by Ms. Beck. Ms. Beck, Mr. Hurley and Ms. Gause are audit committee financial experts of the Trust. The primary purpose of the Audit Committee is to oversee the accounting and financial reporting policies, practices and internal controls of the Trust. The Audit Committee, among other things: (i) recommends to the Board the selection, retention and termination of an independent public accounting firm; (ii) annually reviews the scope of the proposed audit and, generally, the audit procedures to be utilized and the proposed audit fees; (iii) reviews the results of the annual audit with the independent auditors and any reports from the independent auditors concerning an audit, as presented to the Audit Committee; (iv) reviews the annual financial statements of the Funds with management and the independent auditors; (v) approves the fees to be paid by the Trust to the independent auditors for its services; and (vi) reviews the adequacy and effectiveness of internal controls and procedures with management and the independent auditors. The Audit Committee of the Trust met four times during the most recently completed fiscal year.

  

Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is comprised of all of the Independent Trustees of the Trust. The Committee is currently chaired by Ms. Gause. This Committee, among other things: (i) makes nominations for trustee membership on the Board or a Committee; (ii) evaluates on a periodic basis the operations and effectiveness of the Board as a whole; (iii) periodically reviews the composition of the Board to determine whether it may be appropriate to add individuals with different backgrounds or skills from those already on the Board; (iv) periodically reviews industry best practices and Board governance procedures and recommends appropriate changes to the full Board; (v) periodically reviews Trustee compensation and Committee responsibilities and recommends any appropriate changes to the full Board; (vi) reviews the retention of professional liability insurance (D&O/E&O Insurance) and investment company fidelity bonds; and (vii) reviews the independence and performance of the Independent Trustee counsel. The Nominating and Corporate Governance Committee also considers nominees recommended by shareholders. Such recommendations should be forwarded to the President of the Trust. The Nominating and Corporate Governance Committee met four times during the most recently completed fiscal year.

 

 

When evaluating a person as a potential nominee to serve as an Independent Trustee, the Nominating and Corporate Governance Committee may consider, among other factors: (i) whether or not the person is “independent” and whether the person is otherwise qualified under applicable laws and regulations to serve as a Trustee; (ii) whether or not the person is willing to serve, and willing and able to commit the time necessary for the performance of the duties of an Independent Trustee; (iii) the contribution that the person can make to the Board, with consideration being given to the person’s business experience, education and such other factors as the Committee may consider relevant; (iv) the character and integrity of the person; (v) the desirable personality traits, including independence, leadership and the ability to work with the other members of the Board; and (vi) consistency with the 1940 Act.

 

The process of identifying nominees involves the consideration of candidates recommended by one or more of the following: current Independent Trustees, officers and other sources that the Committee deems appropriate.

 

Fund Ownership

 

Listed below for each Trustee is a dollar range of securities beneficially owned in the Funds together with the aggregate dollar range of equity securities in all registered investment companies overseen by each Trustee in the HSBC Family of Funds, as of December 31, 2025 (unless stated otherwise).

 

Trustees	Dollar Range of Equity Securities in the Fund	Aggregate Dollar Range(1) of Securities in All Registered Investment Companies Overseen By Trustee in HSBC Family of Funds
Independent Trustees
Marcia L. Beck		$50,001-$100,000
HSBC U.S. Government Money Market Fund	$50,001-$100,000
HSBC U.S. Treasury Money Market Fund	None
Susan C. Gause		None
HSBC U.S. Government Money Market Fund	None
HSBC U.S. Treasury Money Market Fund	None
Susan S. Huang		$10,001-$50,000
HSBC U.S. Government Money Market Fund	$10,001-$50,000
HSBC U.S. Treasury Money Market Fund	None
Hugh T. Hurley, III		None
HSBC U.S. Government Money Market Fund	None
HSBC U.S. Treasury Money Market Fund	None

 

⁽¹⁾ Ownership disclosure is made using the following ranges: None; $1 - $10,000; $10,001 - $50,000; $50,001 - $100,000 and over $100,000.

 

As of February 1, 2026, the Trustees and officers of the Trust as a group beneficially owned less than 1% of the outstanding shares of the Funds.

 

 

Trustee and Officer Compensation

 

For the fiscal year ended October 31, 2025, the following compensation was paid to the Trustees. 

 

Compensation From the Funds	Independent Trustees
	Marcia L. Beck	Susan C. Gause	Susan S. Huang	Hugh T. Hurley III
U.S. Government Money Market Fund	$ 115,002	$ 95,833	$ 89,351	$ 97,883
U.S. Treasury Money Market Fund	$ 115,002	$ 95,833	$ 89,351	$ 97,833
Pension Or Retirement Benefits Accrued As Part Of The Funds’ Expenses (1)	N/A	N/A	N/A	N/A
Estimated Annual Benefits Upon Retirement	N/A	N/A	N/A	N/A
Total Compensation From Fund Complex(2) Paid To Trustees	$ 230,004	$ 191,666	$ 178,702	$ 195,766

 

⁽¹⁾ The Trust does not accrue pension or retirement benefits as part of Fund expenses, and Trustees are not entitled to retirement benefits upon retirement from the Board.

⁽²⁾ The Fund Complex consisted of 5 portfolios until March 28, 2025. As of October 31, 2025, the Fund Complex consisted of 2 portfolios.

 

None of the officers receive compensation directly from the Funds.

 

Pursuant to a Fund principal financial officer (“PFO”)/Treasurer, CCO, Secretary and AMLO Agreement between the Trust and Foreside Fund Officer Services, LLC (“Foreside”) (“Fund Officer Agreement”), Foreside makes individuals available to serve as the Trust’s CCO, the Anti-Money Laundering Officer, Secretary and the Principal Financial Officer and Treasurer (“PFO”). Under the Fund Officer Agreement, Foreside provides a Secretary to, as applicable, sign documents requiring Secretary’s signature, attend Board and Board Committee meetings; and assist in review of any minutes of Board and Board Committee meetings. The CCO also provides infrastructure and support in implementing the written policies and procedures comprising the Funds’ Compliance Program. This includes providing support services to the CCO, developing standards for reports to the Board by Foreside and other service providers, and assisting in preparing or providing documentation for the Board to make findings and conduct reviews pertaining to the Funds’ Compliance Program and related policies and procedures of Fund service providers. The PFO will perform the Fund PFO services including, but not limited to, (i) assisting with the planning and coordination of the Funds’ annual financial statement audit; (ii) reviewing and commenting on each Fund’s financial statements and shareholder reports; and (iii) reviewing and overseeing daily Fund expense payment authorizations, periodic budget/accrual review and authorization; and (iv) performing high level review of periodic fund distributions, fund tax returns and other tax reporting. For the services provided under that Fund Officer Agreement, the Trust paid Foreside $420,196 for the fiscal year ended October 31, 2025, including reimbursement of certain out-of-pocket expenses. Foreside pays the salary and other compensation earned by any such individuals as employees of Foreside.

 

Investment Adviser

 

HSBC Global Asset Management (USA) Inc. is the investment adviser to the Funds pursuant to an investment advisory contract (the “Advisory Contract”) with the Trust. For investment advisory services, the Adviser is entitled to a fee from each Fund, which is accrued daily and paid monthly, and which is based on the Fund’s daily net assets, at an annual rate of 0.10%.

 

The Adviser has entered into a contractual expense limitation agreement (“Agreement”) with the Funds with respect to the Class I Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares under which it will limit total expenses of a Fund (excluding interest, taxes, brokerage commissions, extraordinary expenses and estimated indirect expenses attributable to a Fund’s investments in investment companies.) The expense limitations shall be in effect until February 28, 2027. The Agreement shall terminate upon the termination of the Advisory Contract between the Trust and the Adviser, or may be terminated upon written notice to the Adviser by the Board.

 

 

In addition to the contractual expense limitation agreement with the Funds discussed above, the Adviser may voluntarily waive fees and/or reimburse expenses from time to time. For example, the Advisor may voluntarily undertake to waive fees and/or reimburse expenses in the event that fund yields drop below a certain level. Once implemented, the Adviser may terminate these temporary waiver and expense limitation efforts at any time and shareholders should not expect these temporary waiver and expense limitation efforts to continue indefinitely.

 

For the fiscal years ended October 31, 2025, 2024 and 2023, the aggregate amount of advisory fees incurred by each Fund was:

 

Fund	2025^	2024^	2023^
U.S. Government Money Market Fund	$ 40,181,915	$ 35,964,273	$ 35,564,170
U.S. Treasury Money Market Fund	$   5,664,418	$   5,052,548	$   4,618,806

 

^ Expense does not include deductions for waivers.

 

For the fiscal years ended October 31, 2025, 2024 and 2023, the aggregate amount of advisory fees, including deductions for waivers, incurred by each Fund was:

 

Fund	2025	2024	2023
U.S. Government Money Market Fund	$ 32,774,393	$ 30,090,412	$ 29,924,268
U.S. Treasury Money Market Fund	$   2,488,259	$   2,230,814	$   2,106,460

 

The Advisory Contract for the U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund will continue in effect through December 31, 2026. Thereafter, the Advisory Contract will continue in effect with respect to each Fund for successive periods not to exceed one (1) year provided such continuance is approved at least annually by (i) the holders of a majority of the outstanding voting securities of the Funds or by the Board, and (ii) a majority of the Trustees of the Trust who are not parties to the Advisory Contract or “interested persons” (as defined in Section 2(a)(19) of the 1940 Act) of any such party. Notwithstanding the foregoing, the Advisory Contract may be terminated with respect to a Fund without penalty by either party on 60 days’ written notice and will terminate automatically in the event of its assignment within the meaning of the 1940 Act.

 

The Adviser, located at 66 Hudson Boulevard E., 29^th Floor, New York, New York 10001, is a wholly-owned subsidiary of HSBC USA, Inc., a registered bank holding company. No securities or instruments issued by HSBC USA Inc. will be purchased for a Fund.

 

The Advisory Contract for the Funds provides that the Adviser will manage the portfolio of each Fund and will furnish to each of the Funds investment guidance and policy direction in connection therewith. The Adviser has agreed to provide the Trust with, among other things, information relating to composition, credit conditions and average maturity of the portfolio of each Fund. Pursuant to the Advisory Contract, the Adviser also furnishes to the Board periodic reports on the investment performance of each Fund.

 

The Adviser and the Trust have also entered into an Operational Support Services Agreement, under which the Adviser provides certain support services in connection with the operation of certain Classes of shares of the Funds. For its services, the Adviser is entitled to a fee from each Fund, computed daily and paid monthly, equal on an annual basis to 0.10% of the Fund’s average daily net assets, with the exception of assets attributable to Class I Shares.

 

For the fiscal years ended October 31, 2025, 2024 and 2023, the aggregate amount of operational support services fees incurred by each Fund (other than Class I Shares) was:

 

 

Fund	2025^	2024^	2023^
U.S. Government Money Market Fund	$ 9,690,877	$ 7,697,533	$ 6,261,276
U.S. Treasury Money Market Fund	$ 2,293,253	$ 2,033,194	$ 1,665,653

 

^ Expense does not include deductions for waivers.

 

If the Adviser were prohibited from performing any of its services for the Trust under the Advisory Contract or the Operational Support Services Agreement, it is expected that the Board would recommend to the Funds’ shareholders that they approve new agreements with another entity or entities qualified to perform such services and selected by the Board.

 

The investment advisory services of the Adviser provided to the Funds are not exclusive under the terms of the Advisory Contract. The Adviser is free to and does render investment advisory services to others.

 

The Trust and the Adviser have each received an exemptive order from the SEC that allows the Adviser to enter into new investment sub-advisory contracts and to make material changes to existing sub-advisory contracts with certain unaffiliated subadvisers with the approval of the Board, but without shareholder approval. This authority is subject to certain conditions, including the requirement that the Trustees (including a majority of Independent Trustees) of the Trust must approve any new or amended agreements with subadvisers. In accordance with the exemptive order received from the SEC, an information statement providing details about the appointment of the new subadviser will be mailed to shareholders within 90 days of the change in subadviser. Shareholders will also receive an information statement describing material changes to a sub-advisory contract between the Adviser and a subadviser within 90 days of the material change. The Adviser remains responsible for the performance of each Fund, oversees subadvisers to ensure compliance with each Fund’s investment policies and guidelines, and monitors each subadviser’s adherence to its investment style and performance results in order to recommend any changes in a subadviser to the Board.

 

In the future, the Trust and the Adviser may, on behalf of the U.S. Government Money Market Fund, receive an additional exemptive order that would allow the Adviser to implement new investment sub-advisory contracts and to make material changes to existing sub-advisory contracts with subadvisers that are affiliated with the Adviser with the approval of the Board of Trustees, but without shareholder approval. As with the current order, the new order would be subject to certain conditions, including that the Government Money Market Fund, as appropriate, would notify shareholders and provide them with certain information upon the hiring of a subadviser.

 

None of the Funds covered by this SAI currently uses the services of a subadviser.

  

Distribution Plan

 

The Trust has adopted a Distribution Plan with respect to the Class A Shares (the “Plan”) of the Funds. The Plan provides that it may not be amended to increase materially the costs which the Class A Shares may bear pursuant to the Plan without approval by shareholders of the Class A Shares, and that any material amendments of the Plan must be approved by the Board, and by the Independent Trustees of the Trust that have no direct or indirect financial interest in the operation of the Plan or in any related agreement (“Qualified Trustees”), by vote cast at a meeting called for the purpose of considering such amendments. The selection and nomination of the Qualified Trustees has been committed to the discretion of the Independent Trustees. The Plan has been approved, and is subject to annual approval, by the Board and by the Qualified Trustees, by vote cast at a meeting called for the purpose of voting on the Plan. The Board approved the Plan to stimulate sales of shares of the Funds in the face of competition from a variety of other investment companies and financial products. In approving the Plan, the Board considered the potential advantages to shareholders of the Funds of continued growth of the asset bases of the Funds (including greater liquidity, more investment flexibility and possible achievement of greater economies of scale). In adopting the Plan, the Trustees considered alternative methods to distribute the Class A Shares and to reduce the class’s expense ratio. The Trustees concluded that there was a reasonable likelihood that the Plan will benefit Class A Shares and the class’s shareholders. The Plan is terminable with respect

 

 

to Class A Shares at any time by a vote of a majority of the Qualified Trustees or by vote of the holders of a majority of the class.

 

For the fiscal years ended October 31, 2025, 2024 and 2023, the aggregate amount of distribution fees incurred by each Fund for Class A Shares was:

 

Fund	2025^	2024^	2023^
U.S. Government Money Market Fund	$0	$0	$0
U.S. Treasury Money Market Fund	$0	$0	$0

 

^ Expense does not include deductions for waivers.

 

The Distributor

 

The Distributor, a wholly-owned subsidiary of Foreside Financial Group, LLC, doing business as ACA Group, is a member of FINRA. The Distributor’s address is 190 Middle Street, Suite 301, Portland, ME 04101. Foreside serves as distributor to the Funds under a Distribution Agreement with the Trust (the “Distribution Agreement”). Unless otherwise terminated, the Distribution Agreement will continue in effect for successive annual periods if, as to each Fund, such continuance is approved at least annually by (i) the vote of a majority of those members of the Board who are not parties to the Distribution Agreement or interested persons (as defined in the 1940 Act) of any such party, cast at a meeting for the purpose of voting on such approval and (ii) by the vote of the Board or the vote of a majority of the outstanding voting securities of such Fund. Under the terms of the Distribution Agreement, Foreside acts as the agent of the Trust in connection with the continuous offering of shares of the Funds. The Distributor continually distributes shares of the Funds on a best efforts basis. The Distributor is not affiliated with the Adviser or any of its affiliates. The Distributor has no obligation to sell any specific quantity of Fund shares. The Distributor and its officers have no role in determining the investment policies or which securities are to be purchased or sold by the Trust.

 

Foreside has entered into a Distribution Services Agreement with the Adviser in connection with Foreside’s services as distributor of the Funds pursuant to which the Adviser undertakes to pay Foreside amounts owed to Foreside under the terms of the Distribution Agreement to the extent that the Funds are not otherwise authorized to make such payments. The payments made by the Adviser to the Distributor do not represent an additional expense to a Fund or its shareholders.

 

Pursuant to the Plan adopted by the Trust, the Distributor is reimbursed by the U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund monthly for costs and expenses incurred by the Distributor in connection with the distribution of Class A Shares of the U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund and for the provision of certain shareholder services with respect to these Shares. Payments to the Distributor are for various types of activities, including: (1) payments to broker-dealers which advise shareholders regarding the purchase, sale or retention of Class A Shares of the Funds and which provide shareholders with personal services and account maintenance services (“service fees”), (2) payments to employees of the Distributor, and (3) printing and advertising expenses. Pursuant to the Plan, the amount of the Distributor’s reimbursement from a Fund may not exceed, on an annual basis, 0.25% of the average daily net assets of the Fund represented by Class A Shares, outstanding during the period for which payment is being made. The aggregate fees paid to the Distributor pursuant to the Plan, and to shareholder servicing agents (“Shareholder Servicing Agents”) pursuant to the Shareholder Services Plan (as discussed below), will not exceed, on an annual basis, 0.25%, 0.05%, 0.10% and 0.05%, of a Fund’s average daily net assets represented by Class A Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares, respectively, outstanding during the period for which payment is being made. Salary expenses of Foreside personnel who are responsible for marketing shares of the various series of the Trust may be allocated to such series on the basis of average net assets; travel expenses are allocated to, or divided among, the particular series for which they are incurred. The distribution fees collected from the U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund by Foreside are used to pay commissions for the sale of Fund shares.

 

 

The Funds are not liable for distribution and shareholder servicing expenditures made by the Distributor in any given year in excess of the maximum amount payable under the Plan in that year.

 

Payments to Financial Intermediaries

 

The Adviser and/or its affiliates may, out of their own resources, and without cost to any Fund, provide compensation, which may be significant, to selected financial intermediaries to promote the sale, distribution and/or servicing of shares of the Funds (“Payments”). These arrangements are sometimes referred to as “revenue sharing” arrangements. Since these Payments are made out of the resources of the Adviser and/or its affiliates, they do not represent an additional charge to the Funds or their shareholders. Accordingly, these Payments are not reflected in the fee and expense tables in the Prospectus. In addition, these Payments do not change the price paid by investors for the purchase of a Fund’s shares or the amount a Fund receives as proceeds from such purchases. These Payments are in addition to commissions and 12b-1 fees, shareholder servicing fees and sales charges borne by applicable shareholders.

 

The Adviser and/or its affiliates make these Payments primarily to compensate financial intermediaries for, among other things: marketing shares of the Funds, which may consist of Payments relating to the inclusion of the Funds on a financial intermediary’s platform or portal or in certain advisory programs from time to time sponsored by the financial intermediaries; educational programs; scheduled interactions with the financial intermediaries’ registered representatives or salespersons, including at conferences or seminars; provision of training and educational programs; marketing support fees for providing assistance in promoting the sale of Fund shares; and/or other specified and relevant services intended to assist in the sale, distribution, and/or servicing of Fund shares. With respect to certain financial intermediaries and related fund “supermarket” platform arrangements, the Funds and/or the Adviser, rather than the Distributor, typically enter into such agreements. These financial intermediaries may charge a fee for their services. These financial intermediaries may otherwise act as processing agents and are responsible for promptly transmitting purchase, redemption and other requests to the Funds.

 

In addition, the Adviser and/or its affiliates may, out of their own resources, and without cost to any Fund, make Payments (including through sub-transfer agency and networking arrangements) for sub-accounting, administrative and/or shareholder processing services that are in addition to the transfer agent, shareholder administration, servicing and processing fees paid by the Funds. These Payments may exceed amounts earned on these assets by the Adviser and/or its affiliates for the performance of these or similar services.

 

Generally, the Adviser and/or its affiliates negotiate the amount of Payments on an individual basis with each financial intermediary. In determining the amount of Payments to be made, the Adviser and/or its affiliates may consider a number of factors, including, without limitation, asset mix and length of relationship with the financial intermediary; the size of the customer/shareholder base of the financial intermediary; the manner in which customers of the financial intermediary make investments in the Funds; the nature and scope of services provided by the financial intermediary; and the costs incurred by the financial intermediary in connection with maintaining the infrastructure necessary or desirable to support investments in the Funds along with any other relevant factor that the Funds deem appropriate. Historically, these Payments have generally been structured as a percentage of average net assets attributable to the financial intermediary, but may also be structured as a fixed dollar amount, or a combination of the two, or may be calculated on another appropriate basis. Typically, the annual Payments to a financial intermediary are not expected to exceed 0.25% of a Fund’s average net assets. The Adviser and/or its affiliates expect to periodically determine the advisability of continuing these Payments.

 

For the year ended December 31, 2025, the Adviser and/or its affiliates made Payments, related to 2025, out of their own assets to approximately 24 unaffiliated financial intermediaries (in addition to affiliated financial intermediaries), totaling approximately $24 million to affiliated and unaffiliated financial intermediaries (excluding Payments made through sub-transfer agency and networking arrangements and certain other types of Payments described below), with respect to all funds of the Trust (including the Fund in this SAI). During this time, the Adviser has also made similar payments to its affiliates.

 

 

Periodically, and where appropriate, the Adviser and/or its affiliates may enter into similar arrangements with other financial intermediaries. Thus, the number of financial intermediaries that receive Payments is subject to change at any time without notice.

 

From time to time, and subject to applicable regulations, the Adviser and/or its affiliates may also be involved in cash and non-cash compensation arrangements with financial intermediaries to promote the sale of Fund shares in the form of, for example: occasional gifts; occasional meals, tickets or other entertainment; and/or sponsorship support of regional or national events. Subject to applicable FINRA regulations and other legal requirements, the Adviser and/or its affiliates may pay costs and expenses associated with these efforts (e.g., travel, lodging, entertainment and meals). Other compensation may also be offered from time to time to the extent not prohibited by applicable federal or state laws or FINRA regulations. This compensation is not included in, and is made in addition to, the Payments described above.

 

The Adviser and/or its affiliates may be incentivized to make Payments since they promote the sale and retention of Fund shares to clients of the financial intermediaries. When financial intermediaries sell or retain more shares of the Funds, the Adviser and/or its affiliates benefit from the incremental management and other fees paid by the Funds with respect to those assets.

 

The compensation or reimbursement received by financial intermediaries through commissions, sales charges, fees payable from the Funds, and/or revenue sharing arrangements may be more or less than the overall compensation or reimbursement on similar or other products and may influence your financial intermediary to introduce and recommend the Funds over other similar investment options. In addition, depending on the arrangements in place at any particular time, this compensation or reimbursement creates a conflict of interest for financial intermediaries as they may have a financial incentive for recommending a Fund (or a particular share class of a Fund) over another investment.

 

Although a Fund may use financial intermediaries that sell Fund shares to effect transactions for the Fund’s portfolio, the Fund and the Adviser will not consider the sale of Fund shares as a factor when choosing financial intermediaries to effect those transactions.

 

Shareholders may obtain more information about these arrangements, including the conflicts of interests that such arrangements create, from their financial intermediaries and should so inquire if they would like additional information. Shareholders are encouraged to ask their financial intermediary how their respective financial intermediary will be compensated for investments made in the Funds.

 

Investors who purchase shares through financial intermediaries will be subject to the procedures of those intermediaries through which they purchase shares, which may include charges, investment minimums, cutoff times and other restrictions in addition to, or different from, those listed herein. Information concerning any charges or services will be provided to customers by the financial intermediary through which they purchase shares. Investors purchasing shares of the Funds through financial intermediaries should acquaint themselves with their financial intermediary’s procedures and should read the Prospectus in conjunction with any materials and information provided by their financial intermediary. The financial intermediary, and not its customers, will be the shareholder of record, although costumers may have the right to vote shares depending upon their arrangement with the financial intermediary. The Distributor does not receive compensation from the Funds for its distribution services except the distribution/service fees with respect to the shares of those classes and Funds for which a Rule 12b-1 Plan is effective. However, the Adviser pays the Distributor a fee for certain distribution-related services.

 

Administrator and Sub-Administrator

 

Pursuant to an Amended and Restated Administration Services Agreement, the Adviser serves as the Trust’s administrator (the “Administrator”), and in that role oversees and coordinates the activities of other service providers and monitors certain aspects of the Trust’s operations. The Amended and Restated Administration Services Agreement was renewed for the one (1) year period ending December 31, 2026 and may be terminated upon not more than 60 days written notice by either party. The administration fee,

 

 

computed daily and paid monthly (or at such times as the Administrator shall request), is equal on an annual basis to two basis points (0.02%) of average daily net assets.

 

The fee rate is determined on the basis of the aggregate average daily net assets of the HSBC Family of Funds. The total administration fee to be paid to the Administrator is allocated to each of the funds in the HSBC Family of Funds based upon its proportionate share of the aggregate net assets of the HSBC Family of Funds, and then allocated to each class of shares on a class basis.

 

For the fiscal years ended October 31, 2025, 2024 and 2023, the aggregate amount of administration fees incurred by each Fund was:

 

Fund	2025^	2024^	2023^
U.S. Government Money Market Fund	$ 8,036,383	$ 7,192,855	$ 7,112,820
U.S. Treasury Money Market Fund	$ 1,132,884	$ 1,010,510	$    923,760

 

^ Expense does not include deductions for waivers.

 

State Street Bank and Trust Company (“State Street”), One Congress Street, Boston, MA 02114 serves as the sub-administrator of the Trust. State Street provides fund administration, regulatory administration, custody and fund accounting services and certain other services pursuant to a Master Services Agreement with the Trust. For its services, State Street is entitled to a fee, payable by the Funds, based primarily on a Fund’s net assets, subject to per Fund fees, miscellaneous fees and reimbursements of certain expenses.

 

Transfer Agent

 

State Street serves as the transfer agent of the Trust. State Street has delegated its responsibilities to SS&C Global Investor and Distribution Solutions (“SS&C”) to provide transfer agency services to the Trust. SS&C maintains an account for each shareholder of record, performs other transfer agency functions and acts as dividend disbursing agent for the Trust. The principal business address of SS&C is 2000 Crown Colony Drive, Quincy, Massachusetts 02169-0953.

 

Custodian and Fund Accounting Agent

 

State Street serves as the custodian and fund accounting agent of the Trust . State Street provides custodial services and act as fund accounting agent pursuant to a Master Services Agreement with the Trust. State Street’s responsibilities as custodian include safeguarding and controlling each Fund’s cash and securities, handling the receipt and delivery of securities, determining income and collecting interest on each Fund’s investments, maintaining books of original entry for portfolio and fund accounting and other required books and accounts in order to calculate the daily NAV of Shares of each Fund. Securities held for each Fund may be deposited into the Federal Reserve-Treasury Department Book Entry System or the Depository Trust Company. State Street does not determine the investment policies of the Funds or decide which securities will be purchased or sold for the Funds. For its services, State Street is entitled to a fee, payable by the Funds, based primarily on a Fund’s net assets, subject to per Fund fees, miscellaneous fees and reimbursements of certain expenses.

 

For the fiscal years ended October 31, 2025, 2024 and 2023, the aggregate amount of fund accounting fees incurred by the Funds was:

 

Fund	2025	2024	2023
U.S. Government Money Market Fund	$ 543,322	$ 461,593	$ 472,218
U.S. Treasury Money Market Fund	$ 109,346	$ 100,733	$  89,668

 

 

Shareholder Services Plan and Shareholder Servicing Agents

 

The Trust has adopted a Shareholder Services Plan with respect to the Class A Shares ,Intermediary Shares, Intermediary Service Shares and Class P Shares which provides that the Trust may obtain the services of certain financial institutions and securities brokers, as Shareholder Servicing Agents that shall, as agents for their customers who purchase the Funds’ Class A Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares, perform certain shareholder account, administrative and service functions for such customers, and may enter into agreements providing for the payment of fees for such services. The Shareholder Services Plan continues in effect indefinitely if such continuance is specifically approved at least annually by a vote of both a majority of the Trustees and a majority of the Trustees who are not “interested persons” of the Trust and who have no direct or indirect financial interest in the operation of the Shareholder Services Plan or in any agreement related to such Plan (“Qualified Trustees”). The Shareholder Services Plan may be terminated at any time by a vote of a majority of the Qualified Trustees or with respect to a particular Class of Shares by a majority vote of the outstanding voting securities of that class. The Shareholder Services Plan may not be amended to increase materially the amount of permitted expenses thereunder with respect to the Class A Shares, Intermediary Shares, Intermediary Service Shares or Class P Shares without the approval of a majority of shareholders of the particular class, and may not be materially amended in any case without a vote of the majority of both the Trustees and the Qualified Trustees.

 

The Trust has entered into a shareholder servicing agreement (a “Shareholder Servicing Agreement”) with certain Shareholder Servicing Agents, including HSBC, pursuant to which the Shareholder Servicing Agent, as agent for its customers, among other things: answers customer inquiries regarding account status and history, the manner in which purchases, exchanges and redemptions of Class A Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares of the Funds may be effected and certain other matters pertaining to the Funds; assists shareholders in designating and changing dividend options, account designations and addresses; provides necessary personnel and facilities to establish and maintain shareholder accounts and records; assists in processing purchase and redemption transactions; arranges for the wiring of funds; transmits and receives funds in connection with customer orders to purchase or redeem Shares; verifies and guarantees shareholder signatures in connection with redemption orders and transfers and changes in shareholder-designated accounts; furnishes (either separately or on an integrated basis with other reports sent to a shareholder by a Shareholder Servicing Agent) monthly and year-end statements and confirmations of purchases and redemptions; transmits, on behalf of the Trust, proxy statements, annual reports, updated prospectuses and other communications from the Trust to the Funds’ shareholders; receives, tabulates and transmits to the Trust proxies executed by shareholders with respect to meetings of shareholders of the Funds or the Trust; and provides such other related services as the Trust or a shareholder may request. With respect to Class A Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares, each Shareholder Servicing Agent receives a fee from the Funds for these services, which may be paid periodically, determined by a formula based upon the number of accounts serviced by such Shareholder Servicing Agent during the period for which payment is being made, the level of activity in accounts serviced by such Shareholder Servicing Agent during such period, and the expenses incurred by such Shareholder Servicing Agent.

 

The Trust understands that some Shareholder Servicing Agents also may impose certain conditions on their customers, subject to the terms of the Prospectus, in addition to or different from those imposed by the Trust, such as requiring a different minimum initial or subsequent investment, account fees (a fixed amount per transaction processed), compensating balance requirements (a minimum dollar amount a customer must maintain in order to obtain the services offered), or account maintenance fees (a periodic charge based on a percentage of the assets in the account or of the dividends paid on those assets). Each Shareholder Servicing Agent has agreed to transmit to its customers who are holders of Shares appropriate prior written disclosure of any fees that it may charge them directly and to provide written notice at least 30 days prior to the imposition of any transaction fees. Conversely, the Trust understands that certain Shareholder Servicing Agents may credit to the accounts of their customers from whom they are already receiving other fees amounts not exceeding such other fees or the fees received by the Shareholder Servicing Agent from the Fund with respect to those accounts.

 

 

For the fiscal year ended October 31, 2025, 2024 and 2023, the aggregate amount of shareholder servicing expenses incurred by each Fund (other than Class I and Class Y shares) was:

 

Fund	2025^	2024^	2023^
U.S. Government Money Market Fund	$ 9,050,362	$ 7,443,375	$ 5,882,578
U.S. Treasury Money Market Fund	$ 1,557,000	$ 1,361,927	$ 1,047,453

 

^  Expense does not include deductions for waivers.

 

Federal Banking Law

 

The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the Glass-Steagall Act that had previously restricted the ability of banks and their affiliates to engage in certain mutual fund activities. Nevertheless, HSBC USA’s and the Adviser’s activities remain subject to, and may be limited by, applicable federal banking law and regulations. HSBC USA and the Adviser believe that they possess the legal authority to perform the services for the Funds contemplated by the Prospectus, this SAI, and the Advisory Contract without violation of applicable statutes and regulations. If future changes in these laws and regulations were to limit the ability of HSBC USA and the Adviser to perform these services, the Board would review the Trust’s relationship with HSBC USA and the Adviser and consider taking all actions necessary in the circumstances, which could include recommending to shareholders the selection of another qualified adviser or, if that course of action appeared impractical, that the Funds be liquidated.

 

Entities that are part of banking organizations, such as the Adviser and its affiliates, are subject to extensive government regulation. Government regulation may change frequently and may have significant effects, including limiting the ability of the Adviser and its affiliates from engaging in certain trading activities, which may adversely impact a Fund. For example, the so-called “Volcker Rule” prohibits the Adviser and its affiliates from engaging in certain trading activities. A Fund may be adversely impacted by this rule if the Adviser or its affiliates own 25% or more of a Fund’s shares outside of any seeding period permitted by the rule. These restrictions may prevent a Fund from maintaining sufficient seed capital and may cause the Fund to liquidate at the end of the period if the Fund is not able to achieve sufficient scale. Other restrictions, including restrictions on trading and transactions with affiliates, can also apply. Funds that are not managed by entities that are part of banking organizations are not subject to these limitations.

 

Expenses

 

Except for the expenses paid by the Adviser and the Distributor, the Funds bear all costs of their operations. Expenses attributable to a class (“Class Expenses”) shall be allocated to that class only. Class Expenses with respect to the Class A Shares, Intermediary Shares, Intermediary Service Shares and Class P Shares must include payments made pursuant to their respective Distribution Plan or Shareholder Services Plan. In the event a particular expense is not reasonably allocable by class or to a particular class, it shall be treated as a Fund expense or a Trust expense. Trust expenses directly related to a Fund are charged to the Fund; other expenses are allocated among the applicable series of the Trust in relation to the net assets of each Fund equally or another appropriate basis.

 

Proxy Voting

 

The Trust has adopted Proxy Voting Policies that delegate the responsibility of voting proxies to the Adviser. In an effort to avoid conflicts of interest, the Adviser has, in turn, engaged Institutional Shareholder Services Inc. (“ISS”) to provide proxy voting and related services and has delegated responsibility for voting proxies on behalf of the Funds to ISS. A summary of ISS’ proxy voting guidelines is attached as an appendix to this SAI.

 

Information regarding how the Funds voted proxies relating to portfolio securities during the 12-month period ending June 30, 2025 is available on the Trust’s website at https://www.assetmanagement.us.hsbc.com/en/institutional-investor/funds, or will be available as soon as

 

 

reasonably practicable after the latest filing on Form N-PX on the SEC’s website at http://www.sec.gov. This information is also available without charge, upon request, by calling 1-800-782-8183.

 

DETERMINATION OF NET ASSET VALUE

 

The net asset value per share (NAV) of the U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund is determined every hour starting at 8:00 a.m. Eastern time on each day on which U.S. bond markets are open for trading (a “Money Market Business Day”). The final NAV is determined at 5:00 p.m. Eastern time for the U.S. Government Money Market Fund and at 2:00 p.m. Eastern time for the U.S. Treasury Money Market Fund. The Funds reserve the right to amend the times at which they determine NAV, or to determine NAV more or less frequently. The Funds reserve the right to close early based on recommendations by the Securities Industry and Financial Markets Association. If such closing time is prior to the time at which the Funds currently determines their NAV, the earlier closing time will be treated as the last time by which orders on that Money Market Fund Business Day must be received and NAV is calculated.

 

An order for shares of any Fund received in good order on a Money Market Business Day prior to the last determination of the NAV for that Fund will receive the dividend declared for the Fund on that Money Market Business Day. An order for shares of a Fund received in good order on a Money Market Business Day after the last NAV determination for that Fund will be effected at the first NAV determined on the next Money Market Business Day, and will start earning dividends on that Money Market Business Day. Orders for shares accepted on a Money Market Business Day after the last NAV determination will not earn dividends or receive any other compensation until those orders settle the following Money Market Business Day.

 

In the event the Board deems it necessary to establish NAVs for one or more Funds by utilizing available market quotations instead of the amortized cost method, the Board may discontinue the hourly calculation of NAVs for one or more Funds, in favor of a once-daily NAV calculation. In such circumstances, the NAV for the Funds would be determined daily at 5:00 p.m. Eastern Time for the U.S. Government Money Market Fund and at 2:00 p.m. Eastern Time for the U.S. Treasury Money Market Fund, until such time as the Board determines to reinstate the hourly NAV calculations. It is anticipated that the NAV of each class of shares will remain constant at $1.00, although no assurance can be given that the net asset value will remain constant on a continuing basis.

 

The Trust uses the amortized cost method to determine the value of each Fund’s portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The amortized cost method involves valuing an obligation at its cost and amortizing any discount or premium over the period until maturity, regardless of the impact of fluctuating interest rates on the market value of the security. During these periods, the yield to a shareholder may differ somewhat from that which could be obtained from a similar fund which utilizes a method of valuation based upon market prices. Thus, during periods of declining interest rates, if the use of the amortized cost method resulted in a lower value of a Fund’s portfolio on a particular day, a prospective investor in the Fund would be able to obtain a somewhat higher yield than would result from an investment in a fund utilizing solely market values, and existing Fund shareholders would receive correspondingly less income. The converse would apply during periods of rising interest rates.

 

Rule 2a-7 provides that, in order to value its portfolio using the amortized cost method, a Fund must maintain a dollar-weighted average portfolio maturity of 60 days or less and a dollar-weighted average portfolio life of 120 days or less (as calculated in accordance with Rule 2a-7) and only purchase securities having remaining maturities of (or deemed maturities of) 397 days or less, which are determined by the Trust’s Board to be of high quality with minimal credit risks. Pursuant to Rule 2a-7, the Board has established procedures designed to stabilize, to the extent reasonably possible, the price per share of the Fund, as computed for the purpose of sales and redemptions, at $1.00. Such procedures include review of a Fund’s portfolio holdings by the Board to determine whether the NAV of the Fund calculated by using available market quotations deviates from the $1.00 per share valuation based on amortized cost. The extent of any deviation is examined by the Board. If such deviation exceeds $0.050, the Board will promptly consider what action, if any, will be initiated. In the event the Board determines that a deviation exists which may result in material dilution or other unfair results to investors or existing shareholders, the Board will take such corrective action as it regards as necessary and appropriate, which may include suspending

 

 

redemptions in order to liquidate a Fund in an orderly manner, selling portfolio instruments prior to maturity to realize capital gains or losses or to shorten average portfolio maturity, withholding part or all of dividends or establishing a NAV per share by using available market quotations.

 

Subject to the Trust’s compliance with applicable regulations, the Trust on behalf of each Fund has reserved the right to pay the redemption or repurchase price of shares, either totally or partially, by a distribution in kind of portfolio securities (instead of cash), as applicable. The securities so distributed would be valued at the same amount as that assigned to them in calculating the NAV for the shares being sold. If a shareholder received a distribution in-kind, the shareholder could incur brokerage or other charges in converting the securities to cash.

 

Purchase of Shares

 

Shares may be purchased through the Funds, Shareholder Servicing Agents or Securities Brokers (as defined below). Class Y Shares of the U.S. Government Money Market and U.S. Treasury Money Market Funds are continuously offered for sale at NAV (normally $1.00 per share) with no front-end sales charge to the public, and to customers of securities brokers that have entered into a dealer agreement with the Distributor (“Securities Brokers”) or a financial institution, including a federal or state-chartered bank, trust company or savings and loan association, that has entered into a Shareholder Servicing Agreement with the Trust or the Distributor (together with Securities Brokers, “Servicing Agents”). Each Class of shares of each Fund are subject to certain minimum investment requirements. The U.S. Treasury Money Market Fund is offered primarily for investments through portal providers, intermediaries (anyone facilitating the purchase of the Funds by their clients) and institutional direct clients, if they meet the minimum investment. Class I Shares of each Fund are offered primarily for direct investment by institutional investors. In addition, investment companies and products advised by the Adviser or its affiliates, employees of the Adviser, and members of the Board are eligible to invest in Class I Shares. Class A Shares of each Fund are offered to clients of the Adviser and its affiliates and are subject to lower operating expenses. Intermediary Shares, Intermediary Service Shares and Class P Shares of each Fund are offered primarily through intermediaries (anyone facilitating the purchase of the Fund by their clients) and bank sweep programs.

 

An order to purchase shares of the Funds that is received in good order prior to the close of business on a Money Market Business Day is effected on that day at the next determined NAV per share. In general, “good order” means that payment for your purchase and all the information needed to complete your order must be received by the Fund or the Fund’s Transfer Agent before your order is processed. Shares purchased earn dividends from and including the day the purchase is effected. The Trust intends the Funds to be as fully invested at all times as is reasonably practicable in order to enhance the yield on its assets. Each Shareholder Servicing Agent or Securities Broker is responsible for and required to promptly forward orders for Shares to the Fund’s transfer agent.

 

While there is no sales load on purchases of shares, the Distributor may receive fees from the Funds. See “Management of the Trust” and “The Distributor” above. Other funds which have investment objectives similar to those of the Funds but which do not pay some or all of such fees from their assets may offer a higher yield.

 

All purchase payments are invested in full and fractional Shares. The Trust reserves the right to cease offering shares for sale at any time or to reject any order for the purchase of Shares.

 

Exchange Privilege

 

By contacting the Transfer Agent or his Shareholder Servicing Agent or his Securities Broker, a shareholder of the Funds may exchange some or all of his Shares for shares of a corresponding class of another fund within the HSBC Family of Funds. By contacting the Transfer Agent or his Shareholder Servicing Agent or his Securities Broker, a shareholder of a Fund may exchange some or all of his Shares at NAV without a sales charge for Shares of the same class offered with the same or lower sales charge by another fund

 

 

within the HSBC Family of Funds. Exchanges for Shares with a higher sales charge may be made upon payment of the sales charge differential.

 

Class A Shares may be exchanged for Class A Shares of other Money Market Funds. Intermediary Shares, Intermediary Service Shares, Class I Shares, Class P Shares and Class Y Shares may be exchanged for a corresponding class of the Money Market Funds or exchanged for Class I Shares of non-money market funds within the HSBC Family of Funds at NAV without a front-end sales charge provided that the amount to be exchanged meets the applicable minimum investment requirements. In each case, the exchange is conditioned upon being made in states where it is legally authorized. An exchange may result in a change in the number of Shares held, but not in the value of such Shares immediately after the exchange. Each exchange involves the redemption of the Shares to be exchanged and the purchase of the shares of the other funds within the HSBC Family of Funds, which may produce a gain or loss for tax purposes.

 

The exchange privilege (or any aspect of it) may be changed or discontinued upon 60 days written notice to shareholders and is available only to shareholders in states in which such exchanges may be legally made. A shareholder considering an exchange should obtain and read the prospectus of the other funds within the HSBC Family of Funds into which the exchange will be made and consider the differences in investment objectives and policies before making any exchange.

 

An exchange is considered a sale of shares and may result in a capital gain or loss for federal income tax purposes. A shareholder wishing to exchange his or her Shares may do so by contacting the Trust at 800-782-8183, by contacting his or her broker-dealer or by providing written instruction to the Trust.

 

In-Kind Purchases

 

The Trust, in its discretion, may permit purchases of Fund shares by means of in-kind contributions of portfolio securities under certain circumstances. An in-kind contribution must be made in the form of securities that are permissible investments for the Funds as described in the Prospectus. In connection with an in-kind securities purchase, the Funds will require, among other things, that the securities be valued in the same manner as they would be valued for purposes of computing a Fund’s NAV; that the Funds receive satisfactory assurances that they will have good and marketable title to the securities received by them; and that the securities be in proper form for transfer to the Funds. In addition, the Funds generally will not accept securities of any issuer unless they are liquid, have a readily ascertainable market value, and are not subject to restrictions on resale.

 

The Funds will not be liable for any brokerage commission or fee (except for customary transfer fees) in connection with an in-kind purchase of Fund shares. Your broker may impose a fee in connection with processing your in-kind purchase of Fund shares. An investor contemplating an in-kind purchase of Fund shares should consult his or her tax adviser to determine the tax consequences under Federal and state law of making such a purchase.

 

Automatic Investment Plan

 

The Trust offers a plan for regularly investing specified dollar amounts ($25.00 minimum in monthly, quarterly, semi-annual or annual intervals) in the Funds. If an Automatic Investment Plan is selected, subsequent investments will be automatic and will continue until such time as the Trust and the investor’s bank are notified in writing to discontinue further investments. Due to the varying procedures to prepare, process and to forward bank withdrawal information to the Trust, there may be a delay between the time of bank withdrawal and the time the money reaches the Funds. The investment in the Funds will be made at the NAV per share determined on the day that both the check and the bank withdrawal data are received in required form by the Fund’s transfer agent. Further information about the Automatic Investment Plan may be obtained from Citi at the telephone number listed under “Shareholder Inquiries.”

 

For further information on how to purchase Shares, an investor should contact the Funds directly at HSBC Funds, PO Box 219691, Kansas City, MO 64121-9691 or by calling 1-800-782-8183.

 

 

Purchases through a Shareholder Servicing Agent or a Securities Broker

 

Shareholder Servicing Agents and Securities Brokers, if applicable, may offer services to their customers, including specialized procedures for the purchase and redemption of Shares, such as pre-authorized or automatic purchase and redemption programs and “sweep” checking programs. Each Shareholder Servicing Agent and Securities Broker may establish its own terms, conditions and charges, including limitations on the amounts of transactions, with respect to such services. Charges for these services may include fixed annual fees, account maintenance fees and minimum account balance requirements. The effect of any such fees will be to reduce the net return on the investment of customers of that Shareholder Servicing Agent or Securities Broker. Conversely, certain Shareholder Servicing Agents may (although they are not required by the Trust to do so) credit to the accounts of their customers from whom they are already receiving other fees amounts not exceeding such other fees or the fees received by the Servicing Agent from the Funds, which will have the effect of increasing the net return on the investment of such customers of those Servicing Agents.

 

Shareholder Servicing Agents and Securities Brokers may transmit purchase payments on behalf of their customers by wire directly to the Funds’ custodian bank by following the procedures described above.

  

For further information on how to direct a Securities Broker, if applicable, or a Shareholder Servicing Agent to purchase Shares, an investor should contact his Securities Broker or his Shareholder Servicing Agent.

 

Redemption of Shares

 

A shareholder may redeem all or any portion of the Shares in his account at any time at the NAV per share next calculated after a redemption request is received in good order by the Transfer Agent, with respect to Shares purchased directly through the Funds, or by his Securities Broker or his Shareholder Servicing Agent, if the Securities Broker or Shareholder Servicing Agent is authorized to receive orders for Fund shares on behalf of the Funds. Class A Shares, Class I Shares, Intermediary Shares, Intermediary Service Shares, Class P Shares and Class Y Shares may be redeemed without charge. See “Determination of Net Asset Value” above.

 

Except as otherwise set forth in the Prospectus, the proceeds of a redemption are normally paid from the Funds in U.S. dollars within one business day following the date on which the redemption is effected. The Funds may suspend the right of redemption and postpone for more than one day the date of payment upon redemption: (i) during periods in which there is a non-routine closure of the Fedwire or applicable Federal Reserve Banks, (ii) during periods when the New York Stock Exchange is closed other than for weekends and certain holidays or when trading on such Exchange is restricted, (iii) during periods in which, as a result of emergency, disposal, or evaluation of the NAV of the portfolio securities is not reasonably practicable, (iv) during periods in which the SEC has, by rule or regulation, deemed that trading shall be restricted or an emergency exists, (v) in certain circumstances when there has been a determination to liquidate a Fund, or (vi) for such other periods as the SEC may permit for your protection. To be in a position to eliminate excessive expenses, the Trust reserves the right to redeem upon not less than 30 days’ notice all Shares in an account which has a value below $50.00, provided that such involuntary redemptions will not result from fluctuations in the value of Fund Shares. A shareholder will be allowed to make additional investments prior to the date fixed for redemption to avoid liquidation of the account.

 

Unless Shares have been purchased directly from the Funds, a shareholder may redeem Shares only by authorizing his Securities Broker, if applicable, or his Shareholder Servicing Agent to redeem such Shares on his behalf (since the account and records of such a shareholder are established and maintained by his Securities Broker or his Shareholder Servicing Agent). For further information as to how to direct a Securities Broker or a Shareholder Servicing Agent to redeem Shares, a shareholder should contact his Securities Broker or his Shareholder Servicing Agent.

 

The Board has adopted procedures that provide that redemptions by shareholders may be satisfied by the distribution of portfolio securities in-kind, reflecting the shareholder’s proportionate interest in the relevant Fund, subject to certain adjustments.

 

 

Redemption proceeds are generally paid in cash, but the Funds reserve the right to pay all or part of any redemption proceeds in-kind. However, the Funds have made an election pursuant to Rule 18f-1 under the 1940 Act to redeem shares of each Fund solely in cash up to the lesser of $250,000 or 1.00% of the NAV of the Fund during any 90-day period for any one shareholder. The Funds reserve the right to pay all or part of other redemptions by a distribution of portfolio securities in kind from the applicable Fund’s portfolio. The securities distributed in kind would be valued at the same value as that assigned to them in calculating the NAV of the shares being redeemed. In the event a shareholder receives an in-kind distribution of portfolio securities, it would be the responsibility of the shareholder to dispose of the securities. The shareholder would be subject to any risk that the value of the securities would decline prior to their sale, that it would be difficult to sell the securities, and that brokerage fees could be incurred.

 

Systematic Withdrawal Plan

 

Any shareholder who owns Shares with an aggregate value of $10,000 or more may establish a Systematic Withdrawal Plan under which he redeems at NAV the number of full and fractional shares that will produce the monthly, quarterly, semi-annual or annual payments specified (minimum $50.00 per payment). Depending on the amounts withdrawn, systematic withdrawals may deplete the investor’s principal. Investors contemplating participation in this Systematic Withdrawal Plan should consult their tax advisers. No additional charge to the shareholder is made for this service.

 

Redemption of Shares Purchased Directly Through the Funds

 

Redemption by Letter. Redemptions may be made by letter to the Transfer Agent specifying the dollar amount or number of shares to be redeemed, account number and the Fund. The letter must be signed in exactly the same way the account is registered (if there is more than one owner of the Shares, all must sign). In connection with a written redemption request, all signatures of all registered owners or authorized parties must be guaranteed by an Eligible Guarantor Institution, which includes a domestic bank, broker, dealer, credit union, national securities exchange, registered securities association, clearing agency or savings association. The Transfer Agent, however, may reject redemption instructions if the guarantor is neither a member nor a participant in a signature guarantee program (currently known as “STAMP,” “SEMP,” or “NYSE MSP”). Corporations, partnerships, trusts or other legal entities may be required to submit additional documentation.

 

Redemption by Wire or Telephone. An investor may redeem shares of the Funds by wire or by telephone if he has checked the appropriate box on the Purchase Application or has filed a Telephone Authorization Form with the Trust. These redemptions may be paid from the Funds by wire or by check. The Trust reserves the right to refuse telephone wire redemptions and may limit the amount involved or the number of telephone redemptions. The telephone redemption procedure may be modified or discontinued at any time by the Trust. Instructions for wire redemptions are set forth in the Purchase Application. The Trust employs reasonable procedures to confirm that instructions communicated by telephone are genuine. For instance, the following information must be verified by the shareholder or Securities Broker at the time a request for a telephone redemption is effected: (1) shareholder’s account number; (2) shareholder’s social security number; and (3) name and account number of shareholder’s designated Securities Broker or bank.

 

If the Trust fails to follow these or other established procedures, it may be liable for any losses due to unauthorized or fraudulent instructions.

 

Check Redemption Service

 

Shareholders may redeem Class A Shares of the Funds by means of a Check Redemption Service. If Class A Shares are held in book credit form and the Check Redemption Service has been elected on the Purchase Application on file with the Trust, redemptions of shares may be made by using redemption checks provided by the Trust. There is no charge for this service. Checks must be written for amounts of $250 or more, may be payable to anyone and negotiated in the normal way. If more than one shareholder owns the Class A

 

 

Shares, all must sign the check unless an election has been made to require only one signature on checks and that election has been filed with the Trust.

 

Class A Shares represented by a redemption check continue to earn daily dividends until the check clears the banking system. When honoring a redemption check, the Trust causes the redemption of exactly enough full and fractional Class A Shares of the Funds from an account to cover the amount of the check. The Check Redemption Services may be terminated at any time by the Trust.

 

If the Check Redemption Service is requested for an account in the name of a corporation or other institution, additional documents must be submitted with the application, i.e., corporations (Certification of Corporate Resolution), partnerships (Certification of Partnership) and trusts (Certification of Trustees). In addition, since the share balance of the Fund account is changing on a daily basis, the total value of the Fund account cannot be determined in advance and the Fund account cannot be closed or entirely redeemed by check.

 

Retirement Plans

 

Class A Shares of the Funds are offered in connection with tax-deferred retirement plans. Application forms and further information about these plans, including applicable fees, are available from the Trust or the Distributor upon request. The tax law governing tax-deferred retirement plans is complex and changes frequently. Before investing in the Funds through one or more of these plans, an investor should consult his or her tax adviser.

 

Individual Retirement Account Plans (“IRAs”)

 

Shares of the Funds may be used as a funding medium for an IRA. An Internal Revenue Service-approved IRA plan may be available from an investor’s Shareholder Servicing Agent. The minimum initial investment for an IRA is $250; the minimum subsequent investment is $100. In general, IRAs are available to individuals who receive compensation or earned income and their spouses whether or not they are active participants in a tax-qualified or Government-approved retirement plan. In general, an IRA contribution by an individual who participates, or whose spouse participates, in a tax-qualified or Government-approved retirement plan may not be deductible, in whole or in part, depending upon the individual’s income. Individuals also may establish an IRA to receive a “rollover” contribution of distributions from another IRA or a qualified plan. Tax advice should be obtained before planning a rollover or determining contribution limits.

 

Defined Contribution Plans

 

Investors who are self-employed may purchase shares of the Funds for retirement plans for self-employed persons that are known as defined contribution plans (formerly Keogh or H.R. 10 Plans). HSBC offers a prototype plan for money purchase and profit sharing defined contribution plans. The rules governing these plans are complex, and a tax adviser should be consulted.

 

Section 457 Plan, 401(k) Plan, 403(b) Plan

 

The Funds may be used as investment vehicles for certain deferred compensation plans provided for by Section 457 of the Code with respect to service for state governments, local governments, rural electric cooperatives and political subdivisions, agencies, instrumentalities, tax-exempt organizations and certain affiliates of such entities. The Funds may also be used as investment vehicles for both 401(k) plans and 403(b) plans.

 

DIVIDENDS AND DISTRIBUTIONS

 

The Trust declares all of each Fund’s net investment income daily as a dividend to Fund shareholders. Dividends substantially equal to each Fund’s net investment income earned during the month are distributed in that month to the Fund’s shareholders of record. Generally, a Fund’s net investment income consists of the interest and dividend income it earns, less expenses. In computing interest income,

 

 

premiums are not amortized nor are discounts accrued on long-term debt securities in the Funds, except as required for federal income tax purposes.

 

Shares begin accruing dividends on the day they are purchased. Dividends are distributed monthly. Unless a shareholder elects to receive dividends in cash (subject to the policies of the shareholder’s Shareholder Servicing Agent or Securities Broker), dividends are distributed in the form of additional shares of the Funds at the rate of one share (and fraction thereof) of the Fund for each one dollar (and fraction thereof) of dividend income.

 

Each Fund’s net realized capital gains, if any, are distributed to shareholders annually. Additional distributions are also made to each Fund’s shareholders to the extent necessary to avoid application of the 4% non-deductible federal excise tax on certain undistributed income and net capital gains of regulated investment companies. Unless a shareholder elects to receive dividends in cash, dividends are distributed in the form of additional shares of the Funds (purchased at their NAV without a sales charge).

 

For this purpose, the net income of the Funds (from the time of the immediately preceding determination thereof) consists of (i) all income accrued, less the amortization of any premium, on the assets of the Funds, less (ii) all actual and accrued expenses determined in accordance with generally accepted accounting principles. Interest income includes discount earned (including both original issue and market discount) on discount paper accrued ratably to the date of maturity and any net realized gains or losses on the assets of the Funds. Obligations held in a Fund’s portfolio are valued at amortized cost, which the Trustees of the Trust have determined in good faith constitutes fair value for the purposes of complying with the 1940 Act. This method provides certainty in valuation, but may result in periods during which the stated value of an obligation held for a Fund is higher or lower than the price the Fund would receive if the obligation were sold. This valuation method will continue to be used until such time as the Trustees of the Trust determine that it does not constitute fair value for such purposes.

 

Since the net income of the Funds is declared as a dividend each time the net income of the Funds is determined, the NAV per share of the Funds is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder’s investment in the Funds, representing the reinvestment of dividend income, is reflected by an increase in the number of Shares in his account.

 

It is expected that the Funds will have a positive net income at the time of each determination thereof. If, for any reason, the net income of the Funds determined at any time is a negative amount, which could occur, for instance, upon default by an issuer of an obligation held in a Fund’s portfolio, the negative amount with respect to each shareholder account would first be offset from the dividends declared during the month with respect to each such account. If and to the extent that such negative amount exceeds such declared dividends at the end of the month, the number of outstanding Fund shares would be reduced by treating each shareholder as having contributed to the capital of the Fund that number of full and fractional shares in the account of such shareholder which represents his proportion of the amount of such excess. Each shareholder will be deemed to have agreed to such contribution in these circumstances by his investment in the Funds.

 

DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES

 

The Trust’s Amended and Restated Agreement and Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (par value $0.001 per share) and to divide or combine the shares into a greater or lesser number of shares without thereby materially changing the proportionate beneficial interests in the Trust. Currently, the Trust has 2 operational series of shares, each of which constitutes a separately managed “Fund.” The Trust reserves the right to create additional series of shares. Currently, the Funds issue separate classes of shares as described under “General Information.”

 

Subject to the distinctions permitted among classes of the Trust or any series as established by the Trustees consistent with the requirements of the 1940 Act, each share of the Trust or any series shall represent an

 

 

equal beneficial interest in the net assets of the Trust or such series, and each shareholder of the Trust or any series shall be entitled to receive such shareholder’s pro rata share of distributions of income and capital gains, if any, made with respect to the Trust or such series. Upon redemption of the shares of any series, the applicable shareholder shall be paid solely out of the funds and property of such series of the Trust. Except as otherwise provided by the Trustees, shareholders shall have no preemptive or other right to subscribe to any additional shares or other securities issued by the Trust.

 

The Trustees may require shareholders to redeem shares for any reason under terms set by the Trustees. When issued, shares are fully paid and non-assessable. The Trustees may, however, cause shareholders, or shareholders of a particular series or class, to pay certain transfer agency, servicing or similar agent charges by setting off such charges due from such shareholder from declared but unpaid dividends owed such shareholder and/or by reducing the number of shares in the account of such shareholder by that number of full and/or fractional shares which represents the outstanding amount of such charges due from such shareholder.

 

Shareholders are entitled to one vote for each share held on matters on which they are entitled to vote (and a proportionate fractional vote for each fraction of a share). The Trust is not required and has no current intention to hold annual meetings of shareholders, although the Trust will hold special meetings of Fund shareholders when in the judgment of the Trustees of the Trust it is necessary or desirable to submit matters for a shareholder vote or as otherwise required by the 1940 Act or other applicable federal law. It is not anticipated that the Trust will hold shareholders’ meetings unless required by law or its Amended and Restated Agreement and Declaration of Trust or By-Laws. On any matters submitted to a vote of the shareholders, all shares of the Trust then entitled to vote shall be voted in aggregate, except: (i) when required by the 1940 Act, shares shall be voted by individual series or class; (ii) when the matter involves any action that the Trustees have determined will affect only the interests of one or more series, then only shareholders of such series shall be entitled to vote thereon; and (iii) when the matter involves any action that the Trustees have determined will affect only the interests of one or more classes, then only the shareholders of such class or classes shall be entitled to vote thereon. Accordingly, shareholders of each series generally vote separately, for example, to approve investment advisory contracts or changes in fundamental investment policies or restrictions, but shareholders of all series may vote together to the extent required under the 1940 Act, such as in the election or selection of Trustees, principal underwriters and accountants for the Trust. Under certain circumstances, the shareholders of one or more series could control the outcome of these votes.

 

Shares of each class of a series represent an equal pro rata interest in such series and, generally, have identical voting, dividend, liquidation, and other rights, preferences, powers, terms and conditions, except that: (i) each class shall have a different designation; (ii) each class of shares shall bear any class expenses; and (iii) each class shall have separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class. Upon liquidation or dissolution of a Fund, shareholders of the Fund would generally be entitled to share pro rata in the net assets of the Fund’s available for distribution to shareholders.

 

The shareholders of the Funds have the power to vote only: (i) for the election or removal of Trustees as and to the extent provided in the Trust’s Amended and Restated Agreement and Declaration of Trust; (ii) with respect to such additional matters relating to the Trust as may be required by federal law including the 1940 Act, or any registration of the Trust with the SEC (or any successor agency) or any state; and (iii) as the Trustees may otherwise consider necessary or desirable in their sole discretion.

 

The Trust is an entity of the type commonly known as a “Delaware statutory trust.” Under Delaware law and the Trust’s Amended and Restated Agreement and Declaration of Trust, shareholders are entitled to the same limitation of personal liability extended to shareholders of corporations organized under Delaware law. Therefore, shareholders generally will not be subject to personal liability for Fund obligations. The risk that a shareholder will incur personal liability for Fund obligations is limited to the circumstances in which a state court may not apply Delaware law or the terms of the Trust’s Amended and Restated Agreement and Declaration of Trust.

 

 

OWNERSHIP OF THE FUNDS

 

As of February 1, 2026, the following persons owned of record 5% or more of a Fund or class of shares:

 

Fund/Class	Name and Address	Percent of the Class Total Assets Held by the Shareholder
HSBC U.S. Government Money Market Fund Class A	Pershing LLC* For the Exclusive Benefit of its Customers Attn Cash Management Services 1 Pershing Plaza Jersey City, NJ 07399-0001	89.99%
HSBC U.S. Government Money Market Fund Class A	SEI Private Trust Company c/o HSBC Bank One Freedom Valley Drive Oaks, PA 19456-9989	5.33%
HSBC U.S. Government Money Market Fund Class I	Goldman Sachs & Co LLC 71 S. Wacker Drive, STE 500 Chicago, IL 60606-4673	9.88%
HSBC U.S. Government Money Market Fund Class I	Deloitte LLP Attn Bank Reconciliation 695 E Main St Ste 2 Stamford, CT 06901-2150	7.12%
HSBC U.S. Government Money Market Fund Class I	BofA Securities Inc. For the Sole Benefit of its Customers Money Fund Operations 100 N Tryon St 34th Fl Charlotte, NC 28202-4000	6.83%
HSBC U.S. Government Money Market Fund Class I	Hare & Co 2* Attn STIF Operations PO BOX 223910 Pittsburgh, PA 15251-2910	6.27%
HSBC U.S. Government Money Market Fund Intermediary Class	Special Custody Account Exclusive Benefit of Customers of Wells Fargo Bank NA* Attn Money Funds 1525 W W T Harris Blvd 28262-8522	43.72%
HSBC U.S. Government Money Market Fund Intermediary Class	Hare & Co 2* Attn STIF Operations PO BOX 223910 Pittsburgh, PA 15251-2910	33.02%
HSBC U.S. Government Money Market Fund Intermediary Service Share Class	HSBC Bank USA National Association* as Agent Corporate Trust and Loan Agency Control Unit 452 Fifth Avenue 8E6 New York, NY 10018	13.28%
HSBC U.S. Government Money Market Fund Intermediary Service Share Class	Band & Co c/o US Bank NA PO Box 1787 Milwaukee, WI 53201-1787	12.75%
HSBC U.S. Government Money Market Fund Intermediary Service Share Class	Band & Co c/o US Bank NA 1555 N River Center Dr STE 302 Milwaukee, WI 53212-3958	9.83%
HSBC U.S. Government Money Market Fund Intermediary Service Share Class	HSBC FBO Baseten Labs Inc 28 2nd Street STE 300 San Francisco, CA 94105-3455	9.38%

 

 

Fund/Class	Name and Address	Percent of the Class Total Assets Held by the Shareholder
HSBC U.S. Government Money Market Fund Intermediary Service Share Class	PolarKeep Inc. 41 Downey Drive Tenafly, NJ 07670-3003	7.41%
HSBC U.S. Government Money Market Fund Class P	Acumatica Inc. 3075 112th Avenue Northeast Bellevue, WA 98004-8003	9.03%
HSBC U.S. Government Money Market Fund Class P	Frank & Eileen LLC 843 S Los Angeles St STE 500 Los Angeles, CA 90014-3343	7.39%
HSBC U.S. Government Money Market Fund Class P	HSBC FBO NextThink Inc 501 Boylston Street Boston, MA 02116-3769	5.82%
HSBC U.S. Government Money Market Fund Class Y	HSBC Bank USA Attn David Marrero 452 5th Ave., 2nd Floor New York, NY 10018-2736	14.78%
HSBC U.S. Government Money Market Fund Class Y	HSBC FBO De Shaw & Co LP #3 1166 Avenue of the Americas Fl 9 New York, NY 10036-2750	19.18%
HSBC U.S. Government Money Market Fund Class Y	HSBC FBO De Shaw & Co LLC 1166 Avenue of the Americas Fl 9 New York, NY 10036-2750	7.36%
HSBC U.S. Government Money Market Fund Class Y	HSBC FBO De Shaw Research LLC 1166 Avenue of the Americas Fl 9 New York, NY 10036-2750	6.68%
HSBC U.S. Government Money Market Fund Class Y	HSBC FBO LITF Holdings LLC 1166 Avenue of the Americas Fl 9 New York, NY 10036-2750	5.97%
HSBC U.S. Treasury Money Market Fund Class A	Pershing LLC* For the Exclusive Benefit of its Customers Attn Cash Management Services 1 Pershing Plaza Jersey City, NJ 07399-0001	34.51%
HSBC U.S. Treasury Money Market Fund Class A	HSBC Bank USA* Attn David Marrero 452 5th Ave., 2nd Floor New York, NY 10018-2736	30.35%
HSBC U.S. Treasury Money Market Fund Class A	SEI Private Trust Company* c/o HSBC Bank One Freedom Valley Drive Oaks, PA 19456-9989	27.68%
HSBC U.S. Treasury Money Market Fund Class I	HSBC Bank USA* Attn David Marrero 452 5th Ave., 2nd Floor New York, NY 10018-2736	35.10%
HSBC U.S. Treasury Money Market Fund Class I	BofA Securities Inc. For the Sole Benefit of its Customers 200 N College St. Charlotte, NC 28202-2191	10.29%
HSBC U.S. Treasury Money Market Fund Class I	Diamond Foreign Asset Company PO Box 1564 Grand Cayman KY1-11110	5.96%

 

 

Fund/Class	Name and Address	Percent of the Class Total Assets Held by the Shareholder
HSBC U.S. Treasury Money Market Fund Class I	Coupang Inc 720 Olive Way Seattle, WA 98101-1859	5.38%
HSBC U.S. Treasury Money Market Fund Intermediary Class	Special Custody Account for the Exclusive Benefit of Wells Fargo Bank NA* Attn Money Funds 1525 W W T Harris Blvd. Charlotte, NC 28262-8522	36.75%
HSBC U.S. Treasury Money Market Fund Intermediary Class	Hare & Co 2B* Attn STIF Operations PO BOX 223910 Pittsburgh, PA 15251-2910	30.02%
HSBC U.S. Treasury Money Market Fund Intermediary Class	BoA Securities Inc For the Sole Benefit of its Customers Money Fund Operations 100 N Tryon St 34th FL Charlotte, NC 28202-4000	9.26%
HSBC U.S. Treasury Money Market Fund Intermediary Class	HSBC Bank USA 452 5th Ave 2nd FL New York, NY 10018-2706	5.64%
HSBC U.S. Treasury Money Market Fund Intermediary Service Share Class	HSBC Bank* USA National Association as Agent Corporate Trust and Loan Agency Control Unit 452 Fifth Ave, 8E6 New York, NY 10018	27.27%
HSBC U.S. Treasury Money Market Fund Intermediary Service Share Class	HSBC FBO WIZ Inc 2345 Yale Street Palo Alto, CA 94306-1448	22.05%
HSBC U.S. Treasury Money Market Fund Intermediary Service Share Class	Softserve Inc. 12800 University Dr. #410 Fort Meyers, FL 33907-5336	14.33%
HSBC U.S. Treasury Money Market Fund Intermediary Service Share Class	HSBC FBO Beacon BioSignals Inc 22 Boston Wharf Rd FL 7 Unit 41 Boston, MA 02210-3032	5.78%
HSBC U.S. Treasury Money Market Fund Class P	Improbable Worlds Limited* 10 Bishops Square London, England E1 6EG	22.69%
HSBC U.S. Treasury Money Market Fund Class P	NAPCO Security Technologies Inc 333 Bayview Ave. Amityville, NY 11701-2800	17.76%
HSBC U.S. Treasury Money Market Fund Class P	HSBC FBO Click Therapeutics Inc. 80 White St FL 3 New York, NY 10013-3527	11.30%
HSBC U.S. Treasury Money Market Fund Class P	Gain Security Inc 1209 N Orange St Wilmington, DE 19801-1120	13.73%
HSBC U.S. Treasury Money Market Fund Class P	HSBC FBO International Decision Systems Inc. 800 Washington Ave N STE 901 Minneapolis, MN 55401-2765	5.25%
HSBC U.S. Treasury Money Market Fund Class P	Frank & Eileen LLC 843 S Los Angeles St STE 500 Los Angeles, CA 90014-3343	10.09%

 

 

Fund/Class	Name and Address	Percent of the Class Total Assets Held by the Shareholder
HSBC U.S. Treasury Money Market Fund Class Y	HSBC Bank USA* Attn David Marrerro 452 5th Ave., 2nd Floor New York, NY 10018-2736	75.03%

 

*Entity owned more than 25% of the outstanding shares of the Fund. A shareholder owning of record or beneficially more than 25% of a Fund’s outstanding shares may be considered a control person and could have a more significant effect on matters presented at a shareholders’ meeting than votes of other shareholders.

 

TAXATION

 

Federal Income Tax

 

The following is a summary of certain U.S. federal income tax issues concerning the Funds and their shareholders. The Funds may also be subject to state, local, foreign or other taxes not discussed below. This discussion does not purport to be complete or to address all tax issues relevant to each shareholder. Prospective investors should consult their own tax advisors with regard to the federal, state, foreign and other tax consequences to them of the purchase, ownership or disposition of Fund shares. This discussion is based upon present provisions of the Code, the regulations promulgated thereunder, and judicial and administrative authorities, all of which are subject to change, which change may be retroactive. Future changes in tax laws may adversely impact the Funds and their shareholders.

 

The Funds each intend to be taxed as a regulated investment company under Subchapter M of the Code. Accordingly, each Fund must, among other things: (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities, foreign currencies, net income derived from an interest in a qualified publicly traded partnership or other income derived with respect to its business of investing in such stock, securities or currencies; and (b) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the value of the Fund’s total assets is represented by cash and cash items, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Fund’s total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities and the securities of other regulated investment companies), in two or more issuers that the Fund controls and which are engaged in the same or similar trades or businesses, or of one or more qualified publicly traded partnerships.

 

As a regulated investment company, each Fund generally is not subject to U.S. federal income tax on income and gains that it distributes to shareholders, if at least 90% of the Fund’s investment company taxable income (which includes, among other items, dividends, interest and the excess of any net short-term capital gains over net long-term capital losses) for the taxable year is distributed (i.e., the 90% distribution requirement). The Funds intend to distribute all or substantially all of such income.

 

Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To prevent imposition of the excise tax, each Fund must generally distribute for each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) at least 98.2% of the excess of its capital gains over capital losses for the 12-month period ending October 31 of the calendar year, and (3) all such ordinary income and capital gains for previous years that were not distributed during such years.

 

A distribution will be treated as paid on December 31 of the calendar year if it is declared by a Fund in October, November or December of that year with a record date in such month and paid by the Fund during

 

 

January of the following year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received.

 

For federal income tax purposes, the Funds are generally permitted to carry forward a net capital loss in any year to offset its own capital gains, if any, during subsequent taxable years. Any such carryforward losses will retain their character as short-term or long-term.

 

As of the tax year ended October 31, 2025, the Funds had net capital loss carryforwards (“CLCFs”) not subject to expiration as summarized in the table below. The Board does not intend to authorize a distribution of any realized gain for the Funds until any applicable CLCF has been offset.

 

	Short Term Amount ($)	Long Term Amount ($)	Total ($)
U.S. Government Money Market Fund	1,113,781	-	1,113,781
U.S. Treasury Money Market Fund	41,245	3,128	44,373

 

The amount of capital losses that can be carried forward and used in any single year is subject to an annual limitation if there is a more than 50% “change in ownership” of a Fund. An ownership change generally results when shareholders owning 5% or more of a Fund increase their aggregate holdings by more than 50% over a three-year look-back period. An ownership change could result in capital loss carryovers being used at a slower rate, thereby reducing a Fund’s ability to offset capital gains with those losses. An increase in the amount of taxable gains distributed to a Fund’s shareholders could result from an ownership change. No Fund undertakes any obligation to avoid or prevent an ownership change, which can occur in the normal course of shareholder purchases and redemptions or as a result of engaging in a tax-free reorganization with another fund. Moreover, because of circumstances beyond a Fund’s control, there can be no assurance that a Fund will not experience, or has not already experienced, an ownership change. Additionally, if a Fund engages in a tax-free reorganization with another fund, the effect of these and other rules not discussed herein may be to disallow or postpone the use by the Fund of its capital loss carryovers (including any current year losses and built-in losses when realized) to offset its own gains or those of the other fund, or vice versa, thereby reducing the tax benefits Fund shareholders would otherwise have enjoyed from the use of such capital loss carryovers.

 

Distributions in General

 

Distributions of investment company taxable income generally are taxable to shareholders as ordinary income. It is not expected that such distributions will be eligible for the dividends-received deduction for corporations or for treatment as “qualified dividend income” for individuals.

 

If for any taxable year a Fund does not qualify for federal tax treatment as a regulated investment company, all of the Fund’s net taxable investment income would (unless certain cure provisions apply) be subject to federal and, potentially, state income tax at regular corporate rates without any deduction for distributions to its shareholders. In such event, dividend distributions (including amounts derived from interest on municipal securities) would be taxable to a Fund’s shareholders to the extent of the Fund’s current and accumulated earnings and profits.

 

The excess of long-term capital gains over net short-term capital losses realized, if any, distributed and properly reported by the Funds, whether received in cash or reinvested in Fund Shares, will generally be taxable to shareholders as long-term capital gain, regardless of how long a shareholder has held Fund shares. Long-term capital gain distributions, if any, made to individuals are generally subject to a maximum federal income tax rate of 15% or 20%, depending on whether the individual’s income exceeds certain threshold amounts. Distributions of any net short-term capital gains from assets held for one year or less will be taxed as ordinary income. Distributions will be subject to these capital gains rates regardless of how long a shareholder has held Fund shares.

 

Shareholders receiving distributions in the form of additional shares will be taxed on the amount of such distribution and will have a cost basis for federal income tax purposes in each share received equal to the

 

 

amount of the cash the shareholder could have received. Shareholders will be notified annually as to the federal tax status of distributions.

 

An additional 3.8% Medicare tax is 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 person’s “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.

 

Distributions in excess of a Fund’s current and accumulated earnings and profits are treated as a tax-free return of a shareholder’s investment to the extent of the shareholder’s basis in the shares, and generally as capital gain thereafter. A return of capital, which for tax purposes is treated as a return of a shareholder’s investment, reduces the shareholder’s basis in shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition of shares. A distribution will reduce a Fund’s NAV per share and may be taxable to a shareholder as ordinary income or capital gain even though, from an economic standpoint, the distribution may constitute a return of capital.

 

Certain distributions reported by a Fund as Section 163(j) interest dividends may be treated as interest income by shareholders for purposes of the tax rules applicable to interest expense limitations under Code Section 163(j). Such treatment by the shareholder is generally subject to holding period requirements and other potential limitations, although the holding period requirements are generally not applicable to dividends declared by money market funds and certain other funds that declare dividends daily and pay such dividends on a monthly or more frequent basis. The amount that a Fund is eligible to report as a Section 163(j) dividend for a tax year is generally limited to the excess of such Fund’s business interest income over the sum of the Fund’s (i) business interest expense and (ii) other deductions properly allocable to the Fund’s business interest income.

 

Sale, Exchange or Redemption of Shares

 

Upon disposition (by redemption, repurchase, sale or exchange) of Fund shares, a shareholder may realize a taxable gain or loss depending upon his basis in his shares. Realization of such a gain or loss is considered unlikely with respect to the U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund because of each Fund’s policy to attempt to maintain a $1.00 per share NAV. The amount of any gain or loss and the rate of tax will depend mainly upon how much you paid for the shares, how much you sell them for, and how long you held them. When you sell or exchange your shares, you will generally recognize a capital gain or loss in an amount equal to the difference between your adjusted tax basis in the shares and the amount received. Capital losses in any year are deductible only to the extent of capital gains, plus, in the case of a non-corporate taxpayer, generally $3,000 of income.

 

With respect to any gain or loss recognized on the sale or exchange of shares of a Fund, unless a shareholder chooses to adopt a simplified “NAV method” of accounting (described below), any gain or loss generally will be treated as short-term capital gain or loss if the shareholder held its shares as capital assets for one year or less, and long-term capital gain or loss if the shareholder held its shares as capital assets for more than one year. The maximum individual tax rate applicable to long-term capital gains is generally 15% or 20%, depending on whether the individual’s income exceeds certain threshold amounts.

 

Any loss recognized on shares held for six months or less will be treated as long-term capital loss to the extent of any long-term capital gain distributions that were received with respect to the shares. Additionally, any loss realized on a sale or exchange of Fund shares will be disallowed under “wash sale rules” to the extent that the shares disposed of are replaced (including replacement through reinvesting of dividends and capital gain distributions in the Fund) within a period of 61 days 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 adjusted to reflect the disallowed loss. The Internal Revenue Service has determined not to apply the wash sale rules to redemptions of shares in money market funds.

 

 

If a shareholder elects to adopt the simplified “NAV method” of accounting, rather than compute gain or loss on every taxable sale or other disposition of shares of a Fund as described above, the shareholder would determine gain or loss based on the change in the aggregate value of its Fund shares during a computation period (such as the shareholder’s taxable year), reduced by the shareholder’s net investment (i.e., purchases minus sales) in those Fund shares during the computation period. Under the simplified “NAV method,” any resulting capital gain or loss would be reportable on a net basis and would generally be treated as a short-term capital gain or loss. If a shareholder uses the simplified “NAV method”, the wash sale rules will generally not apply to disallow a loss incurred for a computation period.

 

Original Issue Discount/Market Discount

 

Market Discount. If a Fund purchases a debt security in the secondary market at a price lower than the stated redemption price at maturity of such debt security, the excess of the stated redemption price over the purchase price is “market discount.” If the amount of market discount is more than a de minimis amount, a portion of such market discount must be included as ordinary income (not capital gain) by a Fund in respect of each taxable year in which the Fund owns an interest in such debt security and receives a principal payment on it. In particular, a Fund will be required to allocate that principal payment first to the portion of the market discount on the debt security that has accrued but has not previously been includable in income. In general, the amount of market discount that must be included for each period is equal to the lesser of (i) the amount of market discount accruing during such period (plus any accrued market discount for prior periods not previously taken into account) or (ii) the amount of the principal payment with respect to such period. Generally, market discount accrues on a daily basis for each day the debt security is held by a Fund, at a constant rate over the time remaining to the debt security’s maturity or, at the election of the Fund, at a constant yield to maturity, which takes into account the semi-annual compounding of interest. Gain realized on the disposition of a market discount obligation must be recognized as ordinary interest income (not capital gain) to the extent of the “accrued market discount” not previously taken into account.

 

Original Issue Discount. Certain debt securities acquired by a Fund may be treated as debt securities that were originally issued at a discount. Very generally, original issue discount is defined as the difference between the price at which a security was issued and its stated redemption price at maturity. Although a Fund receives no actual cash income from such a discount, original issue discount that accrues on debt securities in a given year generally are treated for federal income tax purposes as interest and, therefore, such income would be subject to the distribution requirements applicable to regulated investment companies. Some debt securities may be purchased by a Fund at a discount that exceeds the original issue discount on such debt securities, if any. This additional discount generally represents market discount for federal income tax purposes (see above).

 

Backup Withholding

 

The Trust will be required to report to the Internal Revenue Service (the “IRS”) all distributions by the Funds except in the case of certain exempt shareholders. All such distributions generally will be subject to withholding of federal income tax at a current rate of 24% (“backup withholding”) in the case of nonexempt shareholders if (1) the shareholder fails to furnish the Funds with and to certify the shareholder’s correct taxpayer identification number or social security number, (2) the IRS notifies the shareholder or the Funds that the shareholder has failed to report properly certain interest and dividend income to the IRS and to respond to notices to that effect, or (3) when required to do so, the shareholder fails to certify that he is not subject to backup withholding. If the withholding provisions are applicable, any such distributions whether reinvested in additional shares or taken in cash, will be reduced by the amounts required to be withheld.

 

Any amounts withheld may be credited against the shareholder’s federal income tax liability. Investors may wish to consult their tax advisors about the applicability of the backup withholding provisions.

 

 

Other Taxation

 

Distributions may be subject to additional state and local taxes, depending on each shareholder’s particular situation. Because the Funds distributions related to U.S. Treasury interest, the Funds’ distributions may be exempt from state or local income taxation in certain jurisdictions. Investors may wish to consult their tax advisers about the applicability of the exemption from state and local income tax relating to the distribution of U.S. Treasury interest.

 

Foreign Shareholders

 

Taxation of a shareholder who, as to the United States, is a non-resident alien individual, foreign trust or estate, or foreign corporation or foreign partnership (“foreign shareholder”), depends on whether the income from a Fund is “effectively connected” with a U.S. trade or business carried on by such shareholder. If the income from a Fund is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, ordinary income dividends (including distributions of any net short-term capital gains) will generally be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate) upon the gross amount of the dividend. Note that the preferential rate of tax applicable to qualified dividend income (discussed above) does not apply to dividends paid to foreign shareholders. Such a foreign shareholder would generally be exempt from U.S. federal income tax on gains realized on the sale of shares of a Fund, and distributions of net long-term capital gains that are reported as capital gain dividends. If the income from a Fund is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then ordinary income dividends, capital gain dividends and any gains realized upon the sale of shares of a Fund will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations. If the Fund elects to report distributions derived from certain U.S. source interest and short-term capital gains, such distributions may be paid to foreign shareholders free of withholding. However, depending on the circumstances, the Fund may report all, some or none of the Fund’s potentially eligible dividends as eligible for this exemption, and a portion of the Fund’s distributions (e.g. interest from non-U.S. sources or any foreign currency gains) would be ineligible for this potential exemption from withholding. In addition, in the case of Fund Shares held through a financial intermediary, the intermediary may have withheld amounts even if a Fund reported all or a portion of a dividend payment as exempt from U.S. federal withholding tax. Affected shareholders should contact their financial intermediaries regarding the application of these rules to their accounts.

 

The tax consequences to a foreign shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Foreign shareholders are urged to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Funds, including the applicability of the U.S. estate tax and foreign taxes.

 

The Funds are required to withhold U.S. tax (at a 30% rate) on payments of taxable dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the Funds to enable the Funds to determine whether withholding is required.

 

OTHER INFORMATION

 

Capitalization

 

The Trust is an open-end, management investment company formed as a statutory trust under the laws of the State of Delaware on March 2, 2016. The U.S. Government Money Market Fund and the U.S. Treasury Money Market Fund were previously series of HSBC Funds, a different legal entity organized as a Massachusetts business trust (the “Predecessor Trust”). In 2016, at a special meeting of shareholders, the shareholders of each series of the Predecessor Trust (the “Predecessor Funds”) approved the reorganization of the Predecessor Funds with and into corresponding “shell” series of the Trust. The shell series of the Trust succeeded to the accounting and performance histories of the Predecessor Funds. Any

 

 

historical information provided for a Fund that relates to periods prior to June 24, 2016 is that of the corresponding Predecessor Fund.

 

The Predecessor Trust was a Massachusetts business trust established under a Declaration of Trust dated April 22, 1987, as a successor to two previously-existing Massachusetts business trusts, Fund Trust Tax-Free Trust (organized on July 30, 1986) and Fund Vest (organized on July 17, 1984, and since renamed Fund Source). Prior to October 3, 1994, the name of the Predecessor Trust was “Fund Trust.” Prior to April 12, 2001, the name of the Predecessor Trust was “Republic Funds.” Prior to February 28, 2012, the name of the Predecessor Trust was “HSBC Investor Funds.”

 

The capitalization of the Trust consists solely of an unlimited number of shares of beneficial interest with a par value of $0.001 each. The Board may establish additional series (with different investment objectives and fundamental policies) and classes of shares within each series at any time in the future. Establishment and offering of additional classes or series will not alter the rights of the Funds’ shareholders.

 

Independent Registered Public Accounting Firm

 

The Board has appointed PricewaterhouseCoopers LLP (“PwC”) as the independent registered public accounting firm of the Trust. PwC audits the Trust’s annual financial statements and prepares the Trust’s income tax returns. PwC’s address is 300 Madison Ave, New York, NY 10017.

 

Counsel

 

Dechert LLP, 1900 K Street, N.W., Washington, D.C. 20006, advises on certain legal matters in connection with the shares of the Funds offered by the Trust, and also acts as counsel to the Trust. Stradley Ronon Stevens & Young, LLP, 2000 K Street, N.W. Suite 700, Washington, D.C. 20006, acts as counsel to the Independent Trustees of the Trust.

 

Code of Ethics

 

The Trust, the Adviser and Foreside each has adopted a code of ethics, as required by applicable law, including Rule 17j-1 under the 1940 Act, which is designed to prevent affiliated persons of the Trust, the Adviser and Foreside from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Funds (which may also be held by persons subject to a code). Each Code sets forth restrictions with respect to certain transactions and contains preclearance and reporting obligations.

 

Registration Statement

 

This SAI and the Prospectus do not contain all the information included in the Trust’s registration statement filed with the SEC under the 1933 Act with respect to shares of the Funds; certain portions of which have been omitted pursuant to the rules and regulations of the SEC. The registration statement, including the exhibits filed therewith, may be obtained on the SEC’s website at http://www.sec.gov or copies of this information may be obtained after paying a duplicating fee, by electronic request, at the following email address: [email protected].

 

Statements contained herein and in the Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document that was filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference.

 

Financial Statements

 

The U.S. Government Money Market and U.S. Treasury Money Market Funds’ current audited financial statements dated October 31, 2025 have been audited by PwC, an independent registered public accounting firm, as indicated in its report with respect thereto, and are included in the Trust’s Form N-CSR

 

 

for such period, as filed with the SEC. The financial statements from the Trust’s Form N-CSR are incorporated herein by reference. Copies of the financial statements will be provided without charge to each person receiving this SAI.

 

Shareholder Inquiries

 

All shareholder inquiries should be directed to the Trust, P.O. Box 219691, Kansas City, MO 64121-9691.

 

General and Account Information: (800) 782-8183 (TOLL FREE)

 

 

APPENDIX A – DESCRIPTION OF SECURITY RATINGS

 

S&P Global Ratings

 

Long-Term Issue Credit Ratings

 

Issue credit ratings are based, in varying degrees, on S&P Global Ratings’ analysis of the following considerations:

 

	·	Likelihood of payment – capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
	·	Nature of and provisions of the obligation;
	·	Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.

Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)

 

AAA An obligation rated ‘AAA’ has the highest rating assigned by S&P Global Ratings. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

 

AA  An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

 

A  An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

 

BBB An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

 

BB, B, CCC, CC, and C Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant speculative characteristics. ‘BB’ indicates the least degree of speculation and ‘C’ the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

 

BB An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

 

B An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

 

CCC  An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

 

 

CC An obligation rated ‘CC’ is currently highly vulnerable to nonpayment.

 

C A ‘C’ rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

 

D An obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless S&P Global Ratings’ believes that such payments will be made during such grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligation’s rating is lowered to ‘D’ upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

 

Plus (+) or The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to Minus (-) show relative standing within the major rating categories.

 

NR  This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P Global Ratings does not rate a particular obligation as a matter of policy.

 

Municipal Short-Term Note Ratings

 

A S&P Global Ratings’ U.S. municipal note rating reflects S&P Global Ratings’ opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P Global Ratings analysis will review the following considerations:

 

	·	Amortization schedule – the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
	·	Source of payment – the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.

 

Note rating symbols are as follows:

 

SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.

 

SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.

 

SP-3  Speculative capacity to pay principal and interest.

 

Short-Term Issue Credit Ratings

 

A-1 A  short-term obligation rated ‘A-1’ is rated in the highest category by S&P Global Ratings. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.

 

 

A-2 A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

 

A-3 A short-term obligation rated ‘A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

 

Variable Rate Demand Obligations:

 

S&P Global Ratings’ assigns “dual” ratings to all debt issues that have a put option or demand feature as part of their structure. The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the demand feature. The long-term rating symbols are used for bonds to denote the long-term maturity and the short-term rating symbols for the put option (for example, ‘AAA/A-1+’). With U.S. municipal short-term demand debt, note rating symbols are used with the short-term issue credit rating symbols (for example, ’SP-1+/A-1+’).

 

MOODY’S INVESTORS SERVICE (“Moody’s”)

 

Long-Term Obligation Ratings

 

Moody’s long-term ratings are opinions of the relative credit risk of financial obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings use Moody’s Global Scale and reflect both the likelihood of default and any financial loss suffered in the event of default.

 

Aaa  Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.

 

Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.

 

A Obligations rated A are considered upper-medium grade and are subject to low credit risk.

 

Baa  Obligations rated Baa are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.

 

Ba Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.

 

B Obligations rated B are considered speculative and are subject to high credit risk.

 

Caa Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.

  

Ca Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

 

C Obligations rated C are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest.

 

Note Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

 

 

U.S. Municipal Short Term Obligation Ratings

 

MIG 1 This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.

 

MIG 2 This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.

 

MIG 3 This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.

 

SG This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.

 

Demand Obligation Ratings

 

In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned; a long or short-term debt rating and a demand obligation rating. The first element represents Moody’s evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moody’s evaluation of the degree of risk associated with the ability to receive purchase price upon demand (“demand feature”), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating.

 

When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.

 

VMIG rating expirations are a function of each issue’s specific structural or credit features.

 

VMIG 1 This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

 

VMIG 2 This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

 

VMIG 3 This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

 

SG This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.

 

Short-Term Obligation Ratings

 

Moody’s short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.

 

Moody’s employs the following designations to indicate the relative repayment ability of rated issuers:

 

P-1  Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.

 

 

P-2 Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.

 

P-3 Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short term obligations.

 

NP Issuers (or supporting institutions) rated “Not Prime” do not fall within any of the Prime rating categories.

 

Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or support-provider.

 

FITCH, INC. (“Fitch Ratings”)

 

Corporate Finance Obligations – Long-Term Rating Scales

 

Ratings of individual securities or financial obligations of a corporate issuer address relative vulnerability to default on an ordinal scale. In addition, for financial obligations in corporate finance, a measure of recovery given default on that liability is also included in the rating assessment. This notably applies to covered bonds ratings, which incorporate both an indication of the probability of default and of the recovery given a default of this debt instrument.

 

The relationship between issuer scale and obligation scale assumes an historical average recovery of between 30%–50% on the senior, unsecured obligations of an issuer. As a result, individual obligations of entities, such as corporations, are assigned ratings higher, lower, or the same as that entity’s issuer rating or Issuer Default Rating (“IDR”).

 

AAA Highest credit quality. ‘AAA’ denotes the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

 

AA Very high credit quality. ‘AA’ ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

  

A High credit quality. ‘A’ ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

 

BBB Good credit quality. ‘BBB’ ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

 

BB Speculative. ‘BB’ ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be available to allow financial commitments to be met.

 

B Highly speculative. ‘B’ ratings indicate that material credit risk is present.

 

CCC Substantial credit risk. ‘CCC’ ratings indicate that substantial credit risk is present.

 

CC Very high levels of credit risk. ‘CC’ ratings indicate very high levels of credit risk.

 

C Exceptionally high levels of credit risk. ‘C’ indicates exceptionally high levels of credit risk.

 

Defaulted obligations typically are not assigned ‘D’ ratings, but are instead rated in the ‘B’ to ‘C’ rating categories, depending upon their recovery prospects and other relevant characteristics. This approach

 

 

better aligns obligations that have comparable overall expected loss but varying vulnerability to default and loss.

 

Notes: The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the ‘AAA’ obligation rating category, or to corporate finance obligation ratings in the categories below ‘B’.

 

The subscript ‘emr’ is appended to a rating to denote embedded market risk which is beyond the scope of the rating. The designation is intended to make clear that the rating solely addresses the counterparty risk of the issuing bank. It is not meant to indicate any limitation in the analysis of the counterparty risk, which in all other respects follows published Fitch criteria for analyzing the issuing financial institution. Fitch does not rate these instruments where the principal is to any degree subject to market risk.

 

Short-Term Ratings Assigned to Obligations in Corporate, Public and Structured Finance

 

A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as “short term” based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations, and up to 36 months for obligations in U.S. public finance markets.

 

F-1 Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

 

F-2 Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.

 

F-3 Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.

 

B Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.

 

C High short-term default risk. Default is a real possibility.

 

RD Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Applicable to entity ratings only.

 

D Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.

 

 

APPENDIX B – ISS PROXY VOTING GUIDELINES

 

 

TABLE OF CONTENTS

Coverage	8
1.   Board of Directors	9
Voting on Director Nominees in Uncontested Elections	9
Independence	9
ISS Classification of Directors – U.S.	10
Composition	12
Attendance	12
Overboarded Directors	12
Gender Diversity	12
Racial and/or Ethnic Diversity	13
Responsiveness	13
Accountability	14
Poison Pills	14
Unequal Voting Rights	14
Classified Board Structure	15
Removal of Shareholder Discretion on Classified Boards	15
Problematic Governance Structure	15
Unilateral Bylaw/Charter Amendments	15
Restricting Binding Shareholder Proposals	16
Director Performance Evaluation	16
Management Proposals to Ratify Existing Charter or Bylaw Provisions	16
Problematic Audit-Related Practices	16
Problematic Compensation Practices	17
Problematic Pledging of Company Stock	17
Climate Accountability	17
Governance Failures	18
Voting on Director Nominees in Contested Elections	18
Vote-No Campaigns	18
Proxy Contests/Proxy Access	18
Other Board-Related Proposals	19
Adopt Anti-Hedging/Pledging/Speculative Investments Policy	19
Board Refreshment	19
Term/Tenure Limits	19
Age Limits	19
Board Size	20
Classification/Declassification of the Board	20
CEO Succession Planning	20
Cumulative Voting	20
Director and Officer Indemnification, Liability Protection, and Exculpation	21
Establish/Amend Nominee Qualifications	21
Establish Other Board Committee Proposals	22
Filling Vacancies/Removal of Directors	22
Independent Board Chair	22
Majority of Independent Directors/Establishment of Independent Committees	23
Majority Vote Standard for the Election of Directors	23

 

 

Proxy Access	23
Require More Nominees than Open Seats	23
Shareholder Engagement Policy (Shareholder Advisory Committee)	24
2.   Audit-Related	25
Auditor Indemnification and Limitation of Liability	25
Auditor Ratification	25
Shareholder Proposals Limiting Non-Audit Services	25
Shareholder Proposals on Audit Firm Rotation	26
3.   Shareholder Rights & Defenses	27
Advance Notice Requirements for Shareholder Proposals/Nominations	27
Amend Bylaws without Shareholder Consent	27
Control Share Acquisition Provisions	27
Control Share Cash-Out Provisions	28
Disgorgement Provisions	28
Fair Price Provisions	28
Freeze-Out Provisions	28
Greenmail	28
Shareholder Litigation Rights	29
Federal Forum Selection Provisions	29
Exclusive Forum Provisions for State Law Matters	29
Fee shifting	29
Net Operating Loss (NOL) Protective Amendments	30
Poison Pills (Shareholder Rights Plans)	30
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy	30
Management Proposals to Ratify a Poison Pill	31
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)	31
Proxy Voting Disclosure, Confidentiality, and Tabulation	31
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions	32
Reimbursing Proxy Solicitation Expenses	32
Reincorporation Proposals	33
Shareholder Ability to Act by Written Consent	33
Shareholder Ability to Call Special Meetings	33
Stakeholder Provisions	34
State Antitakeover Statutes	34
Supermajority Vote Requirements	34
Virtual Shareholder Meetings	34
4.   Capital/Restructuring	35
Capital	35
Adjustments to Par Value of Common Stock	35
Common Stock Authorization	35
General Authorization Requests	35
Specific Authorization Requests	36
Dual Class Structure	36
Issue Stock for Use with Rights Plan	36

 

 

Preemptive Rights	36
Preferred Stock Authorization	37
General Authorization Requests	37
Recapitalization Plans	38
Reverse Stock Splits	38
Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S.	38
Share Repurchase Programs	39
Share Repurchase Programs Shareholder Proposals	39
Stock Distributions: Splits and Dividends	39
Tracking Stock	40
Restructuring	40
Appraisal Rights	40
Asset Purchases	40
Asset Sales	40
Bundled Proposals	41
Conversion of Securities	41
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans	41
Formation of Holding Company	41
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)	42
Joint Ventures	42
Liquidations	43
Mergers and Acquisitions	43
Private Placements/Warrants/Convertible Debentures	43
Reorganization/Restructuring Plan (Bankruptcy)	45
Special Purpose Acquisition Corporations (SPACs)	45
Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions	45
Spin-offs	46
Value Maximization Shareholder Proposals	46
5.   Compensation	47
Executive Pay Evaluation	47
Advisory Votes on Executive Compensation—Management Proposals (Say-on-Pay)	47
Pay-for-Performance Evaluation	48
Problematic Pay Practices	49
Compensation Committee Communications and Responsiveness	50
Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)	50
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale	50
Equity-Based and Other Incentive Plans	51
Shareholder Value Transfer (SVT)	52
Three-Year Value-Adjusted Burn Rate	52
Egregious Factors	53
Liberal Change in Control Definition	53
Repricing Provisions	53
Problematic Pay Practices or Significant Pay-for-Performance Disconnect	53
Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))	54

 

 

Specific Treatment of Certain Award Types in Equity Plan Evaluations	54
Dividend Equivalent Rights	54
Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)	55
Other Compensation Plans	55
401(k) Employee Benefit Plans	55
Employee Stock Ownership Plans (ESOPs)	55
Employee Stock Purchase Plans—Qualified Plans	55
Employee Stock Purchase Plans—Non-Qualified Plans	55
Option Exchange Programs/Repricing Options	56
Stock Plans in Lieu of Cash	56
Transfer Stock Option (TSO) Programs	57
Director Compensation	57
Shareholder Ratification of Director Pay Programs	57
Equity Plans for Non-Employee Directors	58
Non-Employee Director Retirement Plans	58
Shareholder Proposals on Compensation	58
Bonus Banking/Bonus Banking “Plus”	58
Compensation Consultants—Disclosure of Board or Company’s Utilization	59
Disclosure/Setting Levels or Types of Compensation for Executives and Directors	59
Golden Coffins/Executive Death Benefits	59
Hold Equity Past Retirement or for a Significant Period of Time	59
Pay Disparity	60
Pay for Performance/Performance-Based Awards	60
Pay for Superior Performance	61
Pre-Arranged Trading Plans (10b5-1 Plans)	61
Prohibit Outside CEOs from Serving on Compensation Committees	61
Recoupment of Incentive or Stock Compensation in Specified Circumstances	62
Severance and Golden Parachute Agreements	62
Share Buyback Impact on Incentive Program Metrics	62
Supplemental Executive Retirement Plans (SERPs)	63
Tax Gross-Up Proposals	63
Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity	63
6.   Routine/Miscellaneous	64
Adjourn Meeting	64
Amend Quorum Requirements	64
Amend Minor Bylaws	64
Change Company Name	64
Change Date, Time, or Location of Annual Meeting	65
Other Business	65
7.   Social and Environmental Issues	66
Global Approach – E&S Shareholder Proposals	66
Endorsement of Principles	66
Animal Welfare	66

 

 

Animal Welfare Policies	66
Animal Testing	67
Animal Slaughter	67
Consumer Issues	67
Genetically Modified Ingredients	67
Reports on Potentially Controversial Business/Financial Practices	68
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation	68
Product Safety and Toxic/Hazardous Materials	68
Tobacco-Related Proposals	69
Climate Change	70
Say on Climate (SoC) Management Proposals	70
Say on Climate (SoC) Shareholder Proposals	70
Climate Change/Greenhouse Gas (GHG) Emissions	70
Energy Efficiency	71
Renewable Energy	71
Diversity	72
Board Diversity	72
Equality of Opportunity	72
Gender Identity, Sexual Orientation, and Domestic Partner Benefits	72
Gender, Race/Ethnicity Pay Gap	73
Racial Equity and/or Civil Rights Audit Guidelines	73
Environment and Sustainability	73
Facility and Workplace Safety	73
Natural Capital- Related and/or Community Impact Assessment Proposals	74
Hydraulic Fracturing	74
Operations in Protected Areas	74
Recycling	75
Sustainability Reporting	75
Water Issues	75
General Corporate Issues	75
Charitable Contributions	75
Data Security, Privacy, and Internet Issues	76
ESG Compensation-Related Proposals	76
Human Rights, Human Capital Management, and International Operations	76
Human Rights Proposals	76
Mandatory Arbitration	77
Operations in High-Risk Markets	77
Outsourcing/Offshoring	77
Sexual Harassment	78
Weapons and Military Sales	78
Political Activities	78
Lobbying	78
Political Contributions	79

 

Political Expenditures and Lobbying Congruency	79
Political Ties	79
8.   Mutual Fund Proxies	81
Election of Directors	81
Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes	81
Converting Closed-end Fund to Open-end Fund	81
Proxy Contests	81
Investment Advisory Agreements	82
Approving New Classes or Series of Shares	82
Preferred Stock Proposals	82
1940 Act Policies	82
Changing a Fundamental Restriction to a Nonfundamental Restriction	82
Change Fundamental Investment Objective to Nonfundamental	83
Name Change Proposals	83
Change in Fund’s Subclassification	83
Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value	83
Disposition of Assets/Termination/Liquidation	84
Changes to the Charter Document	84
Changing the Domicile of a Fund	84
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval	84
Distribution Agreements	85
Master-Feeder Structure	85
Mergers	85
Shareholder Proposals for Mutual Funds	85
Establish Director Ownership Requirement	85
Reimburse Shareholder for Expenses Incurred	85
Terminate the Investment Advisor	86

 

Coverage

The U.S. research team provides proxy analyses and voting recommendations for the common shareholder meetings of U.S. - incorporated companies that are publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are held in our institutional investor clients’ portfolios. Coverage generally includes corporate actions for common equity holders, such as written consents and bankruptcies. ISS’ U.S. coverage includes investment companies (including open-end funds, closed-end funds, exchange-traded funds, and unit investment trusts), limited partnerships (“LPs”), master limited partnerships (“MLPs”), limited liability companies (“LLCs”), and business development companies. ISS reviews its universe of coverage on an annual basis, and the coverage is subject to change based on client need and industry trends.

 

Foreign-incorporated companies

 

In addition to U.S.- incorporated, U.S.- listed companies, ISS’ U.S. policies are applied to certain foreign-incorporated company analyses. Like the SEC, ISS distinguishes two types of companies that list but are not incorporated in the U.S.:

 

§

U.S. Domestic Issuers – which have a majority of outstanding shares held in the U.S. and meet other criteria, as determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies (e.g. they are required to file DEF14A proxy statements) – are generally covered under standard U.S. policy guidelines.

§

Foreign Private Issuers (FPIs) – which are allowed to take exemptions from most disclosure requirements (e.g., they are allowed to file 6-K for their proxy materials) and U.S. listing standards – are generally covered under a combination of policy guidelines:

§

FPI Guidelines (see the Americas Regional Proxy Voting Guidelines), may apply to companies incorporated in governance havens, and apply certain minimum independence and disclosure standards in the evaluation of key proxy ballot items, such as the election of directors; and/or

§

Guidelines for the market that is responsible for, or most relevant to, the item on the ballot.

 

U.S. incorporated companies listed only on non-U.S. exchanges are generally covered under the ISS guidelines for the market on which they are traded.

 

An FPI is generally covered under ISS’ approach to FPIs outlined above, even if such FPI voluntarily files a proxy statement and/or other filing normally required of a U.S. Domestic Issuer, so long as the company retains its FPI status.

 

In all cases – including with respect to other companies with cross-market features that may lead to ballot items related to multiple markets – items that are on the ballot solely due to the requirements of another market (listing, incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” primary market coverage.

 

 

1.

Board of Directors

 

Voting on Director Nominees in Uncontested Elections

 

Four fundamental principles apply when determining votes on director nominees:

 

Independence: Boards should be sufficiently independent from management (and significant shareholders) to ensure that they are able and motivated to effectively supervise management’s performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of directors.

 

Composition: Companies should ensure that directors add value to the board through their specific skills and expertise and by having sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence, while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.

 

Responsiveness: Directors should respond to investor input, such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority of shares are tendered.

 

Accountability: Boards should be sufficiently accountable to shareholders, including through transparency of the company’s governance practices and regular board elections, by the provision of sufficient information for shareholders to be able to assess directors and board composition, and through the ability of shareholders to remove directors.

 

General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees¹ considered on case-by-case basis):

 

Independence

 

Vote against² or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per ISS’ Classification of Directors) when:

 

§

Independent directors comprise 50 percent or less of the board;

§

The non-independent director serves on the audit, compensation, or nominating committee;

§

The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or

 

¹ A “new nominee” is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question.

 

² In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.

 

 

§

The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee.

 

ISS Classification of Directors – U.S.

 

 

 

 

 

 

Composition

 

Attendance at Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who served only part of the fiscal year³) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:

 

§

Medical issues/illness;

§

Family emergencies; and

§

Missing only one meeting (when the total of all meetings is three or fewer).

In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote against or withhold from appropriate members of the nominating/governance committees or the full board.

 

If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.

 

Overboarded Directors: Generally vote against or withhold from individual directors who:

 

§

Sit on more than five public company boards; or

§

Are CEOs of public companies who sit on the boards of more than two public companies besides their own—withhold only at their outside boards4.

 

NOTE: For shareholder meeting reports published on or after February 25th, 2025, Institutional Shareholder Services (ISS) has indefinitely halted the consideration of the gender diversity of a company’s board when making vote recommendations with respect to the election or re-election of directors at U.S. companies covered by these guidelines under its proprietary ISS U.S. Benchmark policy.

 

Gender Diversity: Generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the company’s board. An exception will be made if there was at least one woman on the board at the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.

 

³ Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.

⁴ Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.

 

 

NOTE: For shareholder meeting reports published on or after February 25th, 2025, Institutional Shareholder Services (ISS) has indefinitely halted the consideration of the racial and/or ethnic diversity of a company’s board when making vote recommendations with respect to the election or re-election of directors at U.S. companies covered under these guidelines under its proprietary ISS U.S. Benchmark policy.

 

Racial and/or Ethnic Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members⁵. An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.

 

Responsiveness

 

Vote case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:

 

§

The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are:

§

Disclosed outreach efforts by the board to shareholders in the wake of the vote;

§

Rationale provided in the proxy statement for the level of implementation;

§

The subject matter of the proposal;

§

The level of support for and opposition to the resolution in past meetings;

§

Actions taken by the board in response to the majority vote and its engagement with shareholders;

§

The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and

§

Other factors as appropriate.

§

The board failed to act on takeover offers where the majority of shares are tendered; or

§

At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote.

 

Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:

 

§

The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be considered are:

§

The company’s response, including:

§

Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated);

§

Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; and

§

Disclosure of specific and meaningful actions taken to address shareholders’ concerns;

§

Other recent compensation actions taken by the company;

§

Whether the issues raised are recurring or isolated;

§

The company’s ownership structure; and

§

Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.

 

⁵ Aggregate diversity statistics provided by the board will only be considered if specific to racial and/or ethnic diversity.

 

 

§

The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the plurality of votes cast.

 

Accountability

 

Problematic Takeover Defenses, Capital Structure, and Governance Structure

 

Poison Pills: Generally vote against or withhold from all nominees (except new nominees¹, who should be considered case-by-case) if:

 

§

The company has a poison pill with a deadhand or slowhand feature6;

§

The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or lowering the trigger, without shareholder approval; or

§

The company has a long-term poison pill (with a term of over one year) that was not approved by the public shareholders7.

 

Vote case-by-case on nominees if the board adopts an initial short-term pill⁶ (with a term of one year or less) without shareholder approval, taking into consideration:

 

§

The trigger threshold and other terms of the pill;

§

The disclosed rationale for the adoption;

§

The context in which the pill was adopted, (e.g., factors such as the company’s size and stage of development, sudden changes in its market capitalization, and extraordinary industry-wide or macroeconomic events);

§

A commitment to put any renewal to a shareholder vote;

§

The company’s overall track record on corporate governance and responsiveness to shareholders; and

§

Other factors as relevant.

 

Unequal Voting Rights: Generally vote withhold or against directors individually, committee members, or the entire board (except new nominees¹, who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights⁸.

 

Exceptions to this policy will generally be limited to:

 

§

Newly-public companies9 with a sunset provision of no more than seven years from the date of going public;

§

Limited Partnerships and the Operating Partnership (OP) unit structure of REITs;

§

Situations where the super-voting shares represent less than 5% of total voting power and therefore considered to be de minimis; or

 

⁶ If a short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder vote, ISS will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption.

 

⁷ Approval prior to, or in connection, with a company’s becoming publicly-traded, or in connection with a de-SPAC transaction, is insufficient.

 

⁸ This generally includes classes of common stock that have additional votes per share than other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”).

 

⁹ Includes companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct listings, and those who complete a traditional initial public offering.

 

 

§

The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular binding vote on whether the capital structure should be maintained.

 

Classified Board Structure: The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.

 

Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.

 

Problematic Governance Structure: For companies that hold or held their first annual meeting⁹ of public shareholders after Feb. 1, 2015, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees¹, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:

 

§

Supermajority vote requirements to amend the bylaws or charter;

§

A classified board structure; or

§

Other egregious provisions.

 

A provision which specifies that the problematic structure(s) will be sunset within seven years of the date of going public will be considered a mitigating factor.

 

Unless the adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.

 

Unilateral Bylaw/Charter Amendments: Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees¹, who should be considered case-by-case) if the board amends the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors:

 

§

The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification;

§

Disclosure by the company of any significant engagement with shareholders regarding the amendment;

§

The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the bylaws/charter;

§

The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;

§

The company’s ownership structure;

§

The company’s existing governance provisions;

§

The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and

§

Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.

 

Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees¹, who should be considered case-by-case) if the directors:

 

§

Classified the board;

§

Adopted supermajority vote requirements to amend the bylaws or charter;

§

Eliminated shareholders’ ability to amend bylaws;

§

Adopted a fee-shifting provision; or

§

Adopted another provision deemed egregious.

 

 

Restricting Binding Shareholder Proposals: Generally vote against or withhold from the members of the governance committee if:

 

§

The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include but are not limited to: outright prohibition on the submission of binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis.

 

Submission of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Generally continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.

 

Director Performance Evaluation: The board lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not limited to:

 

§

A classified board structure;

§

A supermajority vote requirement;

§

Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;

§

The inability of shareholders to call special meetings;

§

The inability of shareholders to act by written consent;

§

A multi-class capital structure; and/or

§

A non-shareholder-approved poison pill.

 

Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:

 

§

The presence of a shareholder proposal addressing the same issue on the same ballot;

§

The board’s rationale for seeking ratification;

§

Disclosure of actions to be taken by the board should the ratification proposal fail;

§

Disclosure of shareholder engagement regarding the board’s ratification request;

§

The level of impairment to shareholders’ rights caused by the existing provision;

§

The history of management and shareholder proposals on the provision at the company’s past meetings;

§

Whether the current provision was adopted in response to the shareholder proposal;

§

The company’s ownership structure; and

§

Previous use of ratification proposals to exclude shareholder proposals.

 

Problematic Audit-Related Practices

 

Generally vote against or withhold from the members of the Audit Committee if:

 

§

The non-audit fees paid to the auditor are excessive;

§

The company receives an adverse opinion on the company’s financial statements from its auditor; or

§

There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.

 

Vote case-by-case on members of the Audit Committee and potentially the full board if:

 

 

§

Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted.

 

Problematic Compensation Practices

 

In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:

 

§

There is an unmitigated misalignment between CEO pay and company performance (pay for performance);

§

The company maintains significant problematic pay practices; or

§

The board exhibits a significant level of poor communication and responsiveness to shareholders.

 

Generally vote against or withhold from the Compensation Committee chair, other committee members, or potentially the full board if:

 

§

The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared frequency of say on pay; or

§

The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.

 

Generally vote against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.

 

Problematic Pledging of Company Stock: Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of pledged company stock by executives or directors raises concerns. The following factors will be considered:

 

§

The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;

§

The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume;

§

Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;

§

Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and

§

Any other relevant factors.

 

Climate Accountability

 

For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain¹⁰, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.

 

Minimum steps to understand and mitigate those risks are considered to be the following. Both minimum criteria will be required to be in alignment with the policy :

 

§

Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), including:

 

 

¹⁰ Companies defined as “significant GHG emitters” will be those on the current Climate Action 100+ Focus Group list.

 

 

§

Board governance measures;

 

§

Corporate strategy;

 

§

Risk management analyses; and

 

§

Metrics and targets.

 

§

Appropriate GHG emissions reduction targets.

 

At this time, “appropriate GHG emissions reductions targets” will be medium-term GHG reduction targets or Net Zero-by-2050 GHG reduction targets for a company’s operations (Scope 1) and electricity use (Scope 2). Targets should cover the vast majority of the company’s direct emissions.

 

Governance Failures

 

Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:

 

§

Material failures of governance, stewardship, risk oversight11, or fiduciary responsibilities at the company;

 

§

Failure to replace management as appropriate; or

 

§

Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.

 

Voting on Director Nominees in Contested Elections

 

Vote-No Campaigns

 

General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information.

 

Proxy Contests/Proxy Access

 

General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:

 

§

Long-term financial performance of the company relative to its industry;

 

§

Management’s track record;

 

§

Background to the contested election;

 

§

Nominee qualifications and any compensatory arrangements;

 

§

Strategic plan of dissident slate and quality of the critique against management;

 

§

Likelihood that the proposed goals and objectives can be achieved (both slates); and

 

§

Stock ownership positions.

 

 

¹¹ Examples of failure of risk oversight include but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant adverse legal judgments or settlement; or hedging of company stock.

 

 

In the case of candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).

 

Other Board-Related Proposals

 

Adopt Anti-Hedging/Pledging/Speculative Investments Policy

 

General Recommendation: Generally vote for proposals seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding responsible use of company stock will be considered.

 

Board Refreshment

 

Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed.

 

Term/Tenure Limits

 

General Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits, considering:

 

§

The rationale provided for adoption of the term/tenure limit;

 

§

The robustness of the company’s board evaluation process;

 

§

Whether the limit is of sufficient length to allow for a broad range of director tenures;

 

§

Whether the limit would disadvantage independent directors compared to non-independent directors; and

 

§

Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner.

 

Vote case-by-case on shareholder proposals asking for the company to adopt director term/tenure limits, considering:

 

§

The scope of the shareholder proposal; and

 

§

Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.

 

Age Limits

 

General Recommendation: Generally vote against management and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits.

 

 

Board Size

 

General Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size.

 

Vote against proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.

 

Classification/Declassification of the Board

 

General Recommendation: Vote against proposals to classify (stagger) the board.

Vote for proposals to repeal classified boards and to elect all directors annually.

 

CEO Succession Planning

 

General Recommendation: Generally vote for proposals seeking disclosure on a CEO succession planning policy, considering, at a minimum, the following factors:

 

§

The reasonableness/scope of the request; and

 

§

The company’s existing disclosure on its current CEO succession planning process.

 

Cumulative Voting

 

General Recommendation: Generally vote against management proposals to eliminate cumulate voting, and for shareholder proposals to restore or provide for cumulative voting, unless:

 

§

The company has proxy access12, thereby allowing shareholders to nominate directors to the company’s ballot; and

 

§

The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections.

 

Vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).

 

 

¹² A proxy access right that meets the recommended guidelines.

 

 

Director and Officer Indemnification, Liability Protection, and Exculpation

 

General Recommendation: Vote case-by-case on proposals on director and officer indemnification, liability protection, and exculpation¹³.

 

Consider the stated rationale for the proposed change. Also consider, among other factors, the extent to which the proposal would:

 

§

Eliminate directors’ and officers’ liability for monetary damages for violating the duty of care;

 

§

Eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalt;

 

§

Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than mere carelessness; and

 

§

Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify.

 

Vote for those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if both of the following apply:

 

§

If the individual was found to have acted in good faith and in a manner that the individual reasonably believed was in the best interests of the company; and

 

§

If only the individual’s legal expenses would be covered.

 

Establish/Amend Nominee Qualifications

 

General Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the criteria and the degree to which they may preclude dissident nominees from joining the board.

 

Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:

 

§

The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative to that of its peers;

 

§

The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is sought;

 

§

The company’s disclosure and performance relating to the issue for which board oversight is sought and any significant related controversies; and

 

§

The scope and structure of the proposal.

 

¹³ Indemnification: the condition of being secured against loss or damage.

 

Limited liability: a person’s financial liability is limited to a fixed sum, or personal financial assets are not at risk if the individual loses a lawsuit that results in financial award/damages to the plaintiff.

 

Exculpation: to eliminate or limit the personal liability of a director or officer to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director or officer.

 

 

Establish Other Board Committee Proposals

 

General Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:

 

§

Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is sought;

 

§

Level of disclosure regarding the issue for which board oversight is sought;

 

§

Company performance related to the issue for which board oversight is sought;

 

§

Board committee structure compared to that of other companies in its industry sector; and

 

§

The scope and structure of the proposal.

 

Filling Vacancies/Removal of Directors

 

General Recommendation: Vote against proposals that provide that directors may be removed only for cause. Vote for proposals to restore shareholders’ ability to remove directors with or without cause.

 

Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.

 

Vote for proposals that permit shareholders to elect directors to fill board vacancies.

 

Independent Board Chair

 

General Recommendation: Generally vote for shareholder proposals requiring that the board chair position be filled by an independent director, taking into consideration the following:

 

§

The scope and rationale of the proposal;

 

§

The company’s current board leadership structure;

 

§

The company’s governance structure and practices;

 

§

Company performance; and

 

§

Any other relevant factors that may be applicable.

 

The following factors will increase the likelihood of a “for” recommendation:

 

§

A majority non-independent board and/or the presence of non-independent directors on key board committees;

 

§

A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;

 

§

The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair;

 

§

Evidence that the board has failed to oversee and address material risks facing the company;

 

§

A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or

 

§

Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests.

 

 

Majority of Independent Directors/Establishment of Independent Committees

 

General Recommendation: Vote for shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS’ definition of Independent Director (See ISS’ Classification of Directors.)

 

Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors unless they currently meet that standard.

 

Majority Vote Standard for the Election of Directors

 

General Recommendation: Generally vote for management proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included.

 

Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.

 

Companies are strongly encouraged to also adopt a post-election policy (also known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.

 

Proxy Access

 

General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:

 

§

Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;

 

§

Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;

 

§

Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; and

 

§

Cap: cap on nominees of generally twenty-five percent (25%) of the board.

 

Review for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are more restrictive than these guidelines.

 

Require More Nominees than Open Seats

 

General Recommendation: Vote against shareholder proposals that would require a company to nominate more candidates than the number of open board seats.

 

 

Shareholder Engagement Policy (Shareholder Advisory Committee)

 

General Recommendation: Generally vote for shareholder proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:

 

§

Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board;

 

§

Effectively disclosed information with respect to this structure to its shareholders;

 

§

Company has not ignored majority-supported shareholder proposals, or a majority withhold vote on a director nominee; and

 

§

The company has an independent chair or a lead director, according to ISS’ definition. This individual must be made available for periodic consultation and direct communication with major shareholders.

 

 

2.

Audit-Related

 

Auditor Indemnification and Limitation of Liability

 

General Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to:

 

§

The terms of the auditor agreement—the degree to which these agreements impact shareholders’ rights;

 

§

The motivation and rationale for establishing the agreements;

 

§

The quality of the company’s disclosure; and

 

§

The company’s historical practices in the audit area.

 

Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.

 

Auditor Ratification

 

General Recommendation: Vote for proposals to ratify auditors unless any of the following apply:

 

§

An auditor has a financial interest in or association with the company, and is therefore not independent;

 

§

There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company’s financial position;

 

§

Poor accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP; or

 

§

Fees for non-audit services (“Other” fees) are excessive.

 

Non-audit fees are excessive if:

 

§

Non-audit (“other”) fees > audit fees + audit-related fees + tax compliance/preparation fees

 

Tax compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other” fees.

 

In circumstances where “Other” fees include fees related to significant one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.

 

Shareholder Proposals Limiting Non-Audit Services

 

General Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.

 

 

Shareholder Proposals on Audit Firm Rotation

 

General Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account:

 

§

The tenure of the audit firm;

 

§

The length of rotation specified in the proposal;

 

§

Any significant audit-related issues at the company;

 

§

The number of Audit Committee meetings held each year;

 

§

The number of financial experts serving on the committee; and

 

§

Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price.

 

 

3.

Shareholder Rights & Defenses

 

Advance Notice Requirements for Shareholder Proposals/Nominations

 

General Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.

 

To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a 90-120-day window). The submittal window is the period under which shareholders must file their proposals/nominations prior to the deadline.

 

In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.

 

Amend Bylaws without Shareholder Consent

 

General Recommendation: Vote against proposals giving the board exclusive authority to amend the bylaws.

 

Vote case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into account the following:

 

§

Any impediments to shareholders’ ability to amend the bylaws (i.e. supermajority voting requirements);

 

§

The company’s ownership structure and historical voting turnout;

 

§

Whether the board could amend bylaws adopted by shareholders; and

 

§

Whether shareholders would retain the ability to ratify any board-initiated amendments.

 

Control Share Acquisition Provisions

 

General Recommendation: Vote for proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders.

 

Vote against proposals to amend the charter to include control share acquisition provisions.

 

Vote for proposals to restore voting rights to the control shares.

 

Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.

 

 

Control Share Cash-Out Provisions

 

General Recommendation: Vote for proposals to opt out of control share cash-out statutes.

 

Control share cash-out statutes give dissident shareholders the right to “cash-out” of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.

 

Disgorgement Provisions

 

General Recommendation: Vote for proposals to opt out of state disgorgement provisions.

 

Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company’s stock to disgorge, or pay back, to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.

 

Fair Price Provisions

 

General Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.

 

Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.

 

Freeze-Out Provisions

 

General Recommendation: Vote for proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company.

 

Greenmail

 

General Recommendation: Vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments.

 

Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.

 

 

Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.

 

Shareholder Litigation Rights

 

Federal Forum Selection Provisions

 

Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal securities law.

 

General Recommendation: Generally vote for federal forum selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.

 

Vote against provisions that restrict the forum to a particular federal district court; unilateral adoption (without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.

 

Exclusive Forum Provisions for State Law Matters

 

Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).

 

General Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the state of Delaware as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.

 

For states other than Delaware, vote case-by-case on exclusive forum provisions, taking into consideration:

 

§

The company’s stated rationale for adopting such a provision;

 

§

Disclosure of past harm from duplicative shareholder lawsuits in more than one forum;

 

§

The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and the definition of key terms; and

 

§

Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections.

 

Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that specify a particular local court within the state; unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.

 

Fee shifting

 

Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.

 

 

General Recommendation: Generally vote against provisions that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful).

 

Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments policy.

 

Net Operating Loss (NOL) Protective Amendments

 

General Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of protecting a company’s net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of three years and the exhaustion of the NOL.

 

Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the NOL:

 

§

The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder);

 

§

The value of the NOLs;

 

§

Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon exhaustion or expiration of the NOL);

 

§

The company’s existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and

 

§

Any other factors that may be applicable.

 

Poison Pills (Shareholder Rights Plans)

 

Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy

 

General Recommendation: Vote for shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if either:

 

§

Shareholders have approved the adoption of the plan; or

 

§

The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate.

 

If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add the caveat that a vote within 12 months would be considered sufficient implementation.

 

 

Management Proposals to Ratify a Poison Pill

 

General Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes:

 

§

No lower than a 20 percent trigger, flip-in or flip-over;

 

§

A term of no more than three years;

 

§

No deadhand, slowhand, no-hand, or similar feature that limits the ability of a future board to redeem the pill; and

 

§

Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill.

 

In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.

 

Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)

 

General Recommendation: Vote against proposals to adopt a poison pill for the stated purpose of protecting a company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.

 

Vote case-by-case on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:

 

§

The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent);

 

§

The value of the NOLs;

 

§

Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs);

 

§

The company’s existing governance structure, including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and

 

§

Any other factors that may be applicable.

 

Proxy Voting Disclosure, Confidentiality, and Tabulation

 

General Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company’s vote-counting methodology.

 

While a variety of factors may be considered in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:

 

§

The scope and structure of the proposal;

 

 

§

The company’s stated confidential voting policy (or other relevant policies) and whether it ensures a “level playing field” by providing shareholder proponents with equal access to vote information prior to the annual meeting;

 

§

The company’s vote standard for management and shareholder proposals and whether it ensures consistency and fairness in the proxy voting process and maintains the integrity of vote results;

 

§

Whether the company’s disclosure regarding its vote counting method and other relevant voting policies with respect to management and shareholder proposals are consistent and clear;

 

§

Any recent controversies or concerns related to the company’s proxy voting mechanics;

 

§

Any unintended consequences resulting from implementation of the proposal; and

 

§

Any other factors that may be relevant.

 

Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions

 

General Recommendation: Generally vote against management proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best practice.

 

In addition, voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:

 

§

The presence of a shareholder proposal addressing the same issue on the same ballot;

 

§

The board’s rationale for seeking ratification;

 

§

Disclosure of actions to be taken by the board should the ratification proposal fail;

 

§

Disclosure of shareholder engagement regarding the board’s ratification request;

 

§

The level of impairment to shareholders’ rights caused by the existing provision;

 

§

The history of management and shareholder proposals on the provision at the company’s past meetings;

 

§

Whether the current provision was adopted in response to the shareholder proposal;

 

§

The company’s ownership structure; and

 

§

Previous use of ratification proposals to exclude shareholder proposals.

 

Reimbursing Proxy Solicitation Expenses

 

General Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses.

 

When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with the election.

 

Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one or more candidates in a contested election where the following apply:

 

§

The election of fewer than 50 percent of the directors to be elected is contested in the election;

 

§

One or more of the dissident’s candidates is elected;

 

§

Shareholders are not permitted to cumulate their votes for directors; and

 

§

The election occurred, and the expenses were incurred, after the adoption of this bylaw.

 

 

Reincorporation Proposals

 

General Recommendation: Management or shareholder proposals to change a company’s state of incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance concerns including the following:

 

§

Reasons for reincorporation;

 

§

Comparison of company’s governance practices and provisions prior to and following the reincorporation; and

 

§

Comparison of corporation laws of original state and destination state.

 

Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.

 

Shareholder Ability to Act by Written Consent

 

General Recommendation: Generally vote against management and shareholder proposals to restrict or prohibit shareholders’ ability to act by written consent.

 

Generally vote for management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:

 

§

Shareholders’ current right to act by written consent;

 

§

The consent threshold;

 

§

The inclusion of exclusionary or prohibitive language;

 

§

Investor ownership structure; and

 

§

Shareholder support of, and management’s response to, previous shareholder proposals.

 

Vote case-by-case on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:

 

§

An unfettered14 right for shareholders to call special meetings at a 10 percent threshold;

 

§

A majority vote standard in uncontested director elections;

 

§

No non-shareholder-approved pill; and

 

§

An annually elected board.

 

Shareholder Ability to Call Special Meetings

 

General Recommendation: Vote against management or shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings.

 

Generally vote for management or shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:

 

§

Shareholders’ current right to call special meetings;

 

 

¹⁴ “Unfettered” means no restrictions on agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting.

 

 

§

Minimum ownership threshold necessary to call special meetings (10 percent preferred);

 

§

The inclusion of exclusionary or prohibitive language;

 

§

Investor ownership structure; and

 

§

Shareholder support of, and management’s response to, previous shareholder proposals.

 

Stakeholder Provisions

 

General Recommendation: Vote against proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.

 

State Antitakeover Statutes

 

General Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and anti-greenmail provisions).

 

Supermajority Vote Requirements

 

General Recommendation: Vote against proposals to require a supermajority shareholder vote.

 

Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for companies with shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:

 

§

Ownership structure;

 

§

Quorum requirements; and

 

§

Vote requirements.

 

Virtual Shareholder Meetings

 

General Recommendation: Generally vote for management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only¹⁵ meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting.

 

Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:

 

§

Scope and rationale of the proposal; and

 

§

Concerns identified with the company’s prior meeting practices.

 

¹⁵ Virtual-only shareholder meeting” refers to a meeting of shareholders that is held exclusively using technology without a corresponding in-person meeting.

 

 

4.

Capital/Restructuring

 

Capital

 

Adjustments to Par Value of Common Stock

 

General Recommendation: Vote for management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action.

 

Vote for management proposals to eliminate par value.

 

Common Stock Authorization

 

General Authorization Requests

 

General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes:

 

§

If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized share;

 

§

If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares;

 

§

If share usage is greater than current authorized shares, vote for an increase of up to the current share usage; or

 

§

In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization.

 

Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:

 

§

The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights to other share classes;

 

§

On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization;

 

§

The company has a non-shareholder approved poison pill (including an NOL pill); or

 

§

The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval.

 

However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:

 

§

In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern;

 

§

The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or

 

§

A government body has in the past year required the company to increase its capital ratios.

 

 

For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.

 

Specific Authorization Requests

 

General Recommendation: Generally vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:

 

§

twice the amount needed to support the transactions on the ballot, and

 

§

the allowable increase as calculated for general issuances above.

 

Dual Class Structure

 

General Recommendation: Generally vote against proposals to create a new class of common stock unless:

 

§

The company discloses a compelling rationale for the dual-class capital structure, such as:

 

§

The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as a going concern; or

 

§

The new class of shares will be transitory;

 

§

The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term and long term; and

 

§

The new class is not designed to preserve or increase the voting power of an insider or significant shareholder.

 

Issue Stock for Use with Rights Plan

 

General Recommendation: Vote against proposals that increase authorized common stock for the explicit purpose of implementing a non-shareholder-approved shareholder rights plan (poison pill).

 

Preemptive Rights

 

General Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into consideration:

 

§

The size of the company;

 

§

The shareholder base; and

 

§

The liquidity of the stock.

 

 

Preferred Stock Authorization

 

General Authorization Requests

 

General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes:

 

§

If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares;

 

§

If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares;

 

§

If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.

 

§

In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization; or

 

§

If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a specific use for the shares.

 

Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:

 

§

If the shares requested are blank check preferred shares that can be used for antitakeover purposes;16

 

§

The company seeks to increase a class of non-convertible preferred shares entitled to more than one vote per share on matters that do not solely affect the rights of preferred stockholders “supervoting shares”);

 

§

The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number of common shares into which they are convertible (“supervoting shares”) on matters that do not solely affect the rights of preferred stockholders;

 

§

The stated intent of the increase in the general authorization is to allow the company to increase an existing designated class of supervoting preferred shares;

 

§

On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization;

 

§

The company has a non-shareholder approved poison pill (including an NOL pill); and

 

§

The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval.

 

However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:

 

§

In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern;

 

§

The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or

 

§

A government body has in the past year required the company to increase its capital ratios.

 

For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.

 

¹⁶ To be acceptable, appropriate disclosure would be needed that the shares are “declawed”: i.e., representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights plan.

 

 

Specific Authorization Requests

 

General Recommendation: Generally vote for proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:

 

§

twice the amount needed to support the transactions on the ballot, and

 

§

the allowable increase as calculated for general issuances above.

 

Recapitalization Plans

 

General Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into account the following:

 

§

More simplified capital structure;

 

§

Enhanced liquidity;

 

§

Fairness of conversion terms;

 

§

Impact on voting power and dividends;

 

§

Reasons for the reclassification;

 

§

Conflicts of interest; and

 

§

Other alternatives considered.

 

Reverse Stock Splits

 

General Recommendation: Vote for management proposals to implement a reverse stock split if:

 

§

The number of authorized shares will be proportionately reduced; or

 

§

The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.

 

Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:

 

§

Stock exchange notification to the company of a potential delisting;

 

§

Disclosure of substantial doubt about the company’s ability to continue as a going concern without additional financing;

 

§

The company’s rationale; or

 

§

Other factors as applicable.

 

Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S.

 

General Recommendation: For U.S. domestic issuers incorporated outside the U.S. and listed solely on a U.S. exchange, generally vote for resolutions to authorize the issuance of common shares up to 20 percent of currently issued common share capital, where not tied to a specific transaction or financing proposal.

 

 

For pre-revenue or other early-stage companies that are heavily reliant on periodic equity financing, generally vote for resolutions to authorize the issuance of common shares up to 50 percent of currently issued common share capital. The burden of proof will be on the company to establish that it has a need for the higher limit.

 

Renewal of such mandates should be sought at each year’s annual meeting.

 

Vote case-by-case on share issuances for a specific transaction or financing proposal.

 

Share Repurchase Programs

 

General Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding:

 

§

Greenmail;

 

§

The use of buybacks to inappropriately manipulate incentive compensation metrics;

 

§

Threats to the company’s long-term viability; or

 

§

Other company-specific factors as warranted.

 

Vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.

 

Share Repurchase Programs Shareholder Proposals

 

General Recommendation: Generally vote against shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks.

 

Stock Distributions: Splits and Dividends

 

General Recommendation: Generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.

 

 

Tracking Stock

 

General Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:

 

§

Adverse governance changes;

 

§

Excessive increases in authorized capital stock;

 

§

Unfair method of distribution;

 

§

Diminution of voting rights;

 

§

Adverse conversion features;

 

§

Negative impact on stock option plans; and

 

§

Alternatives such as spin-off.

 

Restructuring

 

Appraisal Rights

 

General Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal.

 

Asset Purchases

 

General Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors:

 

§

Purchase price;

 

§

Fairness opinion;

 

§

Financial and strategic benefits;

 

§

How the deal was negotiated;

 

§

Conflicts of interest;

 

§

Other alternatives for the business; and

 

§

Non-completion risk.

 

Asset Sales

 

General Recommendation: Vote case-by-case on asset sales, considering the following factors:

 

§

Impact on the balance sheet/working capital;

 

§

Potential elimination of diseconomies;

 

§

Anticipated financial and operating benefits;

 

§

Anticipated use of funds;

 

§

Value received for the asset;

 

§

Fairness opinion;

 

§

How the deal was negotiated; and

 

§

Conflicts of interest.

 

 

Bundled Proposals

 

General Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals.

 

Conversion of Securities

 

General Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.

 

Vote for the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.

 

Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans

 

General Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating:

 

§

Dilution to existing shareholders’ positions;

 

§

Terms of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties; exit strategy;

 

§

Financial issues - company’s financial situation; degree of need for capital; use of proceeds; effect of the financing on the company’s cost of capital;

 

§

Management’s efforts to pursue other alternatives;

 

§

Control issues - change in management; change in control, guaranteed board and committee seats; standstill provisions; voting agreements; veto power over certain corporate actions; and

 

§

Conflict of interest - arm’s length transaction, managerial incentives.

 

Vote for the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.

 

Formation of Holding Company

 

General Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into consideration the following:

 

§

The reasons for the change;

 

§

Any financial or tax benefits;

 

§

Regulatory benefits;

 

§

Increases in capital structure; and

 

 

§

Changes to the articles of incorporation or bylaws of the company.

 

Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include either of the following:

 

§

Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or

 

§

Adverse changes in shareholder rights.

 

Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)

 

General Recommendation: Vote case-by-case on going private transactions, taking into account the following:

 

§

Offer price/premium;

 

§

Fairness opinion;

 

§

How the deal was negotiated;

 

§

Conflicts of interest;

 

§

Other alternatives/offers considered; and

 

§

Non-completion risk.

 

Vote case-by-case on going dark transactions, determining whether the transaction enhances shareholder value by taking into consideration:

 

§

Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock); and

 

§

Balanced interests of continuing vs. cashed-out shareholders, taking into account the following:

 

§

Are all shareholders able to participate in the transaction?

 

§

Will there be a liquid market for remaining shareholders following the transaction?

 

§

Does the company have strong corporate governance?

 

§

Will insiders reap the gains of control following the proposed transaction? and

 

§

Does the state of incorporation have laws requiring continued reporting that may benefit shareholders?

 

Joint Ventures

 

General Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following:

 

§

Percentage of assets/business contributed;

 

§

Percentage ownership;

 

§

Financial and strategic benefits;

 

§

Governance structure;

 

§

Conflicts of interest;

 

§

Other alternatives; and

 

§

Non-completion risk.

 

 

Liquidations

 

General Recommendation: Vote case-by-case on liquidations, taking into account the following:

 

§

Management’s efforts to pursue other alternatives;

 

§

Appraisal value of assets; and

 

§

The compensation plan for executives managing the liquidation.

 

Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.

 

Mergers and Acquisitions

 

General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:

 

§

Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale.

 

§

Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.

 

§

Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions.

 

§

Negotiations and process - Were the terms of the transaction negotiated at arm’s-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation “wins” can also signify the deal makers’ competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value.

 

§

Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the “ISS Transaction Summary” section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.

 

§

Governance - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.

 

Private Placements/Warrants/Convertible Debentures

 

General Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration:

 

§

Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price

 

 

appreciation is often the necessary event to trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to trigger the dilutive event.

 

§

Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features, termination penalties, exit strategy):

 

§

The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement.

 

§

When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry, and anticipation of future performance.

 

§

Financial issues:

 

§

The company’s financial condition;

 

§

Degree of need for capital;

 

§

Use of proceeds;

 

§

Effect of the financing on the company’s cost of capital;

 

§

Current and proposed cash burn rate; and

 

§

Going concern viability and the state of the capital and credit markets.

 

§

Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger, or sale of part or all of the company.

 

§

Control issues:

 

§

Change in management;

 

§

Change in control;

 

§

Guaranteed board and committee seats;

 

§

Standstill provisions;

 

§

Voting agreements;

 

§

Veto power over certain corporate actions; and

 

§

Minority versus majority ownership and corresponding minority discount or majority control premium.

 

§

Conflicts of interest:

 

§

Conflicts of interest should be viewed from the perspective of the company and the investor; and

 

§

Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder interests?

 

§

Market reaction:

 

§

The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price.

 

Vote for the private placement, or for the issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.

 

 

Reorganization/Restructuring Plan (Bankruptcy)

 

General Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to:

 

§

Estimated value and financial prospects of the reorganized company;

§

Percentage ownership of current shareholders in the reorganized company;

§

Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an Official Equity Committee);

§

The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);

§

Existence of a superior alternative to the plan of reorganization; and

§

Governance of the reorganized company.

 

Special Purpose Acquisition Corporations (SPACs)

 

General Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following:

 

§

Valuation - Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target if it is a private entity.

§

Market reaction - How has the market responded to the proposed deal? A negative market reaction may be a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price.

§

Deal timing - A main driver for most transactions is that the SPAC charter typically requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date.

§

Negotiations and process - What was the process undertaken to identify potential target companies within specified industry or location specified in charter? Consider the background of the sponsors.

§

Conflicts of interest - How are sponsors benefiting from the transaction compared to IPO shareholders? Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter requires that the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within the 18-24-month timeframe.

§

Voting agreements - Are the sponsors entering into enter into any voting agreements/tender offers with shareholders who are likely to vote against the proposed merger or exercise conversion rights?

§

Governance - What is the impact of having the SPAC CEO or founder on key committees following the proposed merger?

 

Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions

 

The main purpose of SPACs is to identify and acquire a viable target within a specified timeframe, and failure to achieve this objective within the allotted time calls into question management’s ability to execute its primary objective. The end of that timeframe is generally referred to as the termination date.

 

General Recommendation: Generally support requests to extend the termination date by up to one year from the SPAC’s original termination date (inclusive of any built-in extension options, and accounting for prior extension requests).

 

Other factors that may be considered include: any added incentives, business combination status, other amendment terms, and, if applicable, use of money in the trust fund to pay excise taxes on redeemed shares.

 

Spin-offs

 

General Recommendation: Vote case-by-case on spin-offs, considering:

 

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Tax and regulatory advantages;

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Planned use of the sale proceeds;

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Valuation of spinoff;

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Fairness opinion;

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Benefits to the parent company;

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Conflicts of interest;

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Managerial incentives;

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Corporate governance changes; and

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Changes in the capital structure.

 

Value Maximization Shareholder Proposals

 

General Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by:

 

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Hiring a financial advisor to explore strategic alternatives;

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Selling the company; or

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Liquidating the company and distributing the proceeds to shareholders.

 

These proposals should be evaluated based on the following factors:

 

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Prolonged poor performance with no turnaround in sight;

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Signs of entrenched board and management (such as the adoption of takeover defenses);

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Strategic plan in place for improving value;

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Likelihood of receiving reasonable value in a sale or dissolution; and

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The company actively exploring its strategic options, including retaining a financial advisor.

 

5.

Compensation

 

Executive Pay Evaluation

 

Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:

 

1.

Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs;

2.

Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;

3.

Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed);

4.

Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; and

5.

Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.

 

Advisory Votes on Executive Compensation—Management Proposals (Say-on-Pay)

 

General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.

 

Vote against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”) if:

 

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There is an unmitigated misalignment between CEO pay and company performance (pay for performance);

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The company maintains significant problematic pay practices; or

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The board exhibits a significant level of poor communication and responsiveness to shareholders.

 

Vote against or withhold from the members of the Compensation Committee and potentially the full board if:

 

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There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;

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The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast;

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The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or

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The situation is egregious.

 

Primary Evaluation Factors for Executive Pay

 

Pay-for-Performance Evaluation

 

ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the S&P1500, Russell 3000, or Russell 3000E Indices¹⁷, this analysis considers the following:

 

1.

Peer Group18 Alignment:

 

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The degree of alignment between the company’s annualized TSR rank and the CEO’s annualized total pay rank within a peer group, each measured over a three-year period.

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The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year period.

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The multiple of the CEO’s total pay relative to the peer group median in the most recent fiscal year.

 

2.

Absolute Alignment19 – the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.

 

If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our analysis may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:

 

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The ratio of performance- to time-based incentive awards;

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The overall ratio of performance-based compensation to fixed or discretionary pay;

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The rigor of performance goals;

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The complexity and risks around pay program design;

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The transparency and clarity of disclosure;

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The company’s peer group benchmarking practices;

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Financial/operational results, both absolute and relative to peers;

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Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards);

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Realizable pay20 compared to grant pay; and

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Any other factors deemed relevant.

 

¹⁷ The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.

¹⁸ The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company’s selected peers’ GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of the company’s market cap. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.

¹⁹ Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.

²⁰ ISS research reports include realizable pay for S&P1500 companies.

 

Problematic Pay Practices

 

Problematic pay elements are generally evaluated case-by-case considering the context of a company’s overall pay program and demonstrated pay-for-performance philosophy. The focus is on executive compensation practices that contravene the global pay principles, including:

 

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Problematic practices related to non-performance-based compensation elements;

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Incentives that may motivate excessive risk-taking or present a windfall risk; and

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Pay decisions that circumvent pay-for-performance, such as options backdating or waiving performance requirements.

 

The list of examples below highlights certain problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:

 

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Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);

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Extraordinary perquisites or tax gross-ups;

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New or materially amended agreements that provide for:

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Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent bonus);

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CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or “modified single” triggers) or in connection with a problematic Good Reason definition;

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CIC excise tax gross-up entitlements (including “modified” gross-ups); and/or

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Multi-year guaranteed awards that are not at risk due to rigorous performance conditions;

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Liberal CIC definition combined with any single-trigger CIC benefits;

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Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI’s executives is not possible;

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Severance payments made when the termination is not clearly disclosed as involuntary (for example, a termination without cause or resignation for good reason); and/or

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Any other provision or practice deemed to be egregious and present a significant risk to investors.

 

The above examples are not an exhaustive list. Please refer to ISS’ U.S. Compensation Policies FAQ document for additional detail on specific pay practices that have been identified as problematic and may lead to negative vote recommendations.

 

Options Backdating

 

The following factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan

administration versus deliberate action or fraud:

 

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Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;

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Duration of options backdating;

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Size of restatement due to options backdating;

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Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and

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Adoption of a grant policy that prohibits backdating and creates a fixed grant schedule or window period for equity grants in the future.

 

Compensation Committee Communications and Responsiveness

 

Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s

responsiveness to investor input and engagement on compensation issues:

 

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Failure to respond to majority-supported shareholder proposals on executive pay topics; or

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Failure to adequately respond to the company’s previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account:

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Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated);

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Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;

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Disclosure of specific and meaningful actions taken to address shareholders’ concerns;

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Other recent compensation actions taken by the company;

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Whether the issues raised are recurring or isolated;

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The company’s ownership structure; and

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Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.

 

Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)

 

General Recommendation: Vote for annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.

 

Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale

 

General Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of existing change-in-control arrangements maintained with named executive officers but also considering new or extended arrangements.

 

Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude, and/or timing of issue(s):

 

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Single- or modified-single-trigger cash severance;

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Single-trigger acceleration of unvested equity awards;

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Full acceleration of equity awards granted shortly before the change in control;

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Acceleration of performance awards above the target level of performance without compelling rationale;

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Excessive cash severance (generally >3x base salary and bonus);

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Excise tax gross-ups triggered and payable;

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Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or

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Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or

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The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote.

 

Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.

 

In cases where the golden parachute vote is incorporated into a company’s advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.

 

Equity-Based and Other Incentive Plans

 

Please refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.

 

General Recommendation: Vote case-by-case on certain equity-based compensation plans²¹ depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an “Equity Plan Scorecard” (EPSC) approach with three pillars:

 

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Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) in relation to peers and considering both:

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SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and

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SVT based only on new shares requested plus shares remaining for future grants.

 

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Plan Features:

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Quality of disclosure around vesting upon a change in control (CIC);

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Discretionary vesting authority;

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Liberal share recycling on various award types;

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Lack of minimum vesting period for grants made under the plan; and

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Dividends payable prior to award vesting.

 

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Grant Practices:

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The company’s three-year burn rate relative to its industry/market cap peers;

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Vesting requirements in CEO’s recent equity grants (3-year look-back);

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The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years);

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The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;

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Whether the company maintains a sufficient claw-back policy; and

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Whether the company maintains sufficient post-exercise/vesting share-holding requirements.

 

Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’ interests, or if any of the following egregious factors (“overriding factors”) apply:

 

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Awards may vest in connection with a liberal change-of-control definition;

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The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing – for non-listed companies);

 

 

²¹ Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case.

 

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The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances;

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The plan is excessively dilutive to shareholders’ holdings;

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The plan contains an evergreen (automatic share replenishment) feature; or

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Any other plan features are determined to have a significant negative impact on shareholder interests.

 

Further Information on certain EPSC Factors:

 

Shareholder Value Transfer (SVT)

 

The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans, and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued.

For omnibus plans, unless limitations are placed on the most expensive types of awards (for example, full-value awards), the assumption is made that all awards to be granted will be the most expensive types.

 

For proposals that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size, and cash compensation into the industry cap equations to arrive at the company’s benchmark.²²

 

Three-Year Value-Adjusted Burn Rate

 

A “Value-Adjusted Burn Rate” is used for stock plan evaluations. Value-Adjusted Burn Rate benchmarks are calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company’s GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year’s burn-rate benchmark.

 

The Value-Adjusted Burn Rate is calculated as follows:

 

Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted average common shares * stock price).

 

 

²² For plans evaluated under the Equity Plan Scorecard policy, the company’s SVT benchmark is considered along with other factors.

 

Egregious Factors

 

Liberal Change in Control Definition

 

Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal definition of change in control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a “potential” takeover, shareholder approval of a merger or other transactions, or similar language.

 

Repricing Provisions

 

Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without prior shareholder approval. “Repricing” typically includes the ability to do any of the following:

 

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Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;

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Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise price of the original options or SARs;

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Cancel underwater options in exchange for stock awards; or

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Provide cash buyouts of underwater options.

 

While the above cover most types of repricing, ISS may view other provisions as akin to repricing depending on the facts and circumstances.

 

Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by ISS), without prior shareholder approval, even if such repricings are allowed in their equity plan.

 

Vote against plans that do not expressly prohibit repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.

 

Problematic Pay Practices or Significant Pay-for-Performance Disconnect

 

If the equity plan on the ballot is a vehicle for problematic pay practices, vote against the plan.

 

ISS may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment. Considerations in voting against the equity plan may include, but are not limited to:

 

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Severity of the pay-for-performance misalignment;

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Whether problematic equity grant practices are driving the misalignment; and/or

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Whether equity plan awards have been heavily concentrated to the CEO and/or the other NEOs.

 

Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))

 

General Recommendation: Vote case-by-case on amendments to cash and equity incentive plans.

 

Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:

 

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Addresses administrative features only; or

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Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of independent directors, per ISS’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time for any reason (including after the company’s initial public offering), or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below).

 

Vote against proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:

 

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Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of independent directors, per ISS’ Classification of Directors.

 

Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company’s IPO and/or proposals that bundle material amendment(s) other than those for Section 162(m) purposes.

 

Vote case-by-case on all other proposals to amend equity incentive plans, considering the following:

 

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If the proposal requests additional shares and/or the amendments include a term extension or addition of full value awards as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments;

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If the plan is being presented to shareholders for the first time (including after the company’s IPO), whether or not additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments; and

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If there is no request for additional shares and the amendments do not include a term extension or addition of full value awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown only for informational purposes.

 

In the first two case-by-case evaluation scenarios, the EPSC evaluation/score is the more heavily weighted consideration.

 

Specific Treatment of Certain Award Types in Equity Plan Evaluations

 

Dividend Equivalent Rights

 

Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should be captured.

 

Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)

 

For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.

 

Other Compensation Plans

 

401(k) Employee Benefit Plans

 

General Recommendation: Vote for proposals to implement a 401(k) savings plan for employees.

 

Employee Stock Ownership Plans (ESOPs)

 

General Recommendation: Vote for proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).

 

Employee Stock Purchase Plans—Qualified Plans

 

General Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply:

 

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Purchase price is at least 85 percent of fair market value;

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Offering period is 27 months or less; and

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The number of shares allocated to the plan is 10 percent or less of the outstanding shares.

 

Vote against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.

 

Employee Stock Purchase Plans—Non-Qualified Plans

 

General Recommendation: Vote case-by-case on nonqualified employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features:

 

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Broad-based participation;

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Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;

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Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20 percent from market value; and

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No discount on the stock price on the date of purchase when there is a company matching contribution.

 

Vote against nonqualified employee stock purchase plans when the plan features do not meet all of the above criteria. If the matching contribution or effective discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of the assessment.

 

Option Exchange Programs/Repricing Options

 

General Recommendation: Vote case-by-case on management proposals seeking approval to exchange/reprice options taking into consideration:

 

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Historic trading patterns--the stock price should not be so volatile that the options are likely to be back “in-the-money” over the near term;

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Rationale for the re-pricing--was the stock price decline beyond management’s control?;

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Is this a value-for-value exchange?;

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Are surrendered stock options added back to the plan reserve?;

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Timing--repricing should occur at least one year out from any precipitous drop in company’s stock price;

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Option vesting--does the new option vest immediately or is there a black-out period?;

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Term of the option--the term should remain the same as that of the replaced option;

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Exercise price--should be set at fair market or a premium to market; and

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Participants--executive officers and directors must be excluded.

 

If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company’s total cost of equity plans and its three-year average burn rate.

 

In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the company’s stock price demonstrates poor timing and warrants additional scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.

 

Vote for shareholder proposals to put option repricings to a shareholder vote.

 

Stock Plans in Lieu of Cash

 

General Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.

 

Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.

 

Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.

 

Transfer Stock Option (TSO) Programs

 

General Recommendation: One-time Transfers: Vote against or withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval.

 

Vote case-by-case on one-time transfers. Vote for if:

 

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Executive officers and non-employee directors are excluded from participating;

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Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and

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There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants.

 

Additionally, management should provide a clear explanation of why options are being transferred to a third-party institution and whether the events leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.

 

Ongoing TSO program: Vote against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure, and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:

 

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Eligibility;

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Vesting;

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Bid-price;

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Term of options;

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Cost of the program and impact of the TSOs on company’s total option expense; and

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Option repricing policy.

 

Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.

 

Director Compensation

 

Shareholder Ratification of Director Pay Programs

 

General Recommendation: Vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:

 

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If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and

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An assessment of the following qualitative factors:

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The relative magnitude of director compensation as compared to companies of a similar profile;

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The presence of problematic pay practices relating to director compensation;

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Director stock ownership guidelines and holding requirements;

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Equity award vesting schedules;

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The mix of cash and equity-based compensation;

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Meaningful limits on director compensation;

 

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The availability of retirement benefits or perquisites; and

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The quality of disclosure surrounding director compensation.

 

Equity Plans for Non-Employee Directors

 

General Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on:

 

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The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;

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The company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and

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The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk).

 

On occasion, non-employee director stock plans will exceed the plan cost or burn-rate benchmarks when combined with employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative factors:

 

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The relative magnitude of director compensation as compared to companies of a similar profile;

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The presence of problematic pay practices relating to director compensation;

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Director stock ownership guidelines and holding requirements;

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Equity award vesting schedules;

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The mix of cash and equity-based compensation;

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Meaningful limits on director compensation;

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The availability of retirement benefits or perquisites; and

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The quality of disclosure surrounding director compensation.

 

Non-Employee Director Retirement Plans

 

General Recommendation: Vote against retirement plans for non-employee directors. Vote for shareholder proposals to eliminate retirement plans for non-employee directors.

 

Shareholder Proposals on Compensation

 

Bonus Banking/Bonus Banking “Plus”

 

General Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the named executive officers or a wider group of employees), taking into account the following factors:

 

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The company’s past practices regarding equity and cash compensation;

§

Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at least 50 percent for full tenure); and

§

Whether the company has a rigorous claw-back policy in place.

 

Compensation Consultants — Disclosure of Board or Company’s Utilization

 

General Recommendation: Generally vote for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid.

 

Disclosure/Setting Levels or Types of Compensation for Executives and Directors

 

General Recommendation: Generally vote for shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.

 

Generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation (such as types of compensation elements or specific metrics) to be used for executive or directors.

 

Generally vote against shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.

 

Vote case-by-case on all other shareholder proposals regarding executive and director pay, taking into account relevant factors, including but not limited to: company performance, pay level and design versus peers, history of compensation concerns or pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.

 

Golden Coffins/Executive Death Benefits

 

General Recommendation: Generally vote for proposals calling for companies to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based employee population is eligible.

 

Hold Equity Past Retirement or for a Significant Period of Time

 

General Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors will be taken into account:

 

§

The percentage/ratio of net shares required to be retained;

§

The time period required to retain the shares;

 

§

Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements;

§

Whether the company has any other policies aimed at mitigating risk taking by executives;

§

Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s existing requirements; and

§

Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus.

 

Pay Disparity

 

General Recommendation: Vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The following factors will be considered:

 

§

The company’s current level of disclosure of its executive compensation setting process, including how the company considers pay disparity;

§

If any problematic pay practices or pay-for-performance concerns have been identified at the company; and

§

The level of shareholder support for the company’s pay programs.

 

Generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio in a specific way to set or limit executive pay.

 

Pay for Performance/Performance-Based Awards

 

General Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:

 

§

First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent options or restricted stock, indexed options, or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards; and

 

§

Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test.

 

In general, vote for the shareholder proposal if the company does not meet both of the above two steps.

 

Pay for Superior Performance

 

General Recommendation: Vote case-by-case on shareholder proposals that request the board establish a pay-for-superior performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles:

 

§

Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group median;

§

Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested, equity awards;

§

Provide the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan;

§

Establish performance targets for each plan financial metric relative to the performance of the company’s peer companies; and

§

Limit payment under the annual and performance-vested long-term incentive components of the plan to when the company’s performance on its selected financial performance metrics exceeds peer group median performance.

 

Consider the following factors in evaluating this proposal:

 

§

What aspects of the company’s annual and long-term equity incentive programs are performance driven?

§

If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group?

§

Can shareholders assess the correlation between pay and performance based on the current disclosure? and

§

What type of industry and stage of business cycle does the company belong to?

 

Pre-Arranged Trading Plans (10b5-1 Plans)

 

General Recommendation: Generally vote for shareholder proposals calling for the addition of certain safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include:

 

§

Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K;

§

Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary circumstances, as determined by the board;

§

Request that a certain number of days that must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan;

§

Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;

§

An executive may not trade in company stock outside the 10b5-1 Plan; and

§

Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive.

 

Prohibit Outside CEOs from Serving on Compensation Committees

 

General Recommendation: Generally vote against proposals seeking a policy to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.

 

Recoupment of Incentive or Stock Compensation in Specified Circumstances

 

General Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company’s financial position or reputation, or if the senior executive failed to manage or monitor risks that subsequently led to significant financial or reputational harm to the company.

Many companies have adopted policies that permit recoupment in cases where an executive’s fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant financial restatements. Misconduct, negligence, or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact.

 

In considering whether to support such shareholder proposals, ISS will take into consideration the following factors:

 

§

If the company has adopted a formal recoupment policy;

§

The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock compensation;

§

Whether the company has chronic restatement history or material financial problems;

§

Whether the company’s policy substantially addresses the concerns raised by the proponent;

§

Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; and

§

Any other relevant factors.

 

Severance and Golden Parachute Agreements

 

General Recommendation: Vote case-by-case on shareholder proposals requiring that executive severance (including change-in-control related) arrangements or payments be submitted for shareholder ratification.

 

Factors that will be considered include, but are not limited to:

 

§

The company’s severance or change-in-control agreements in place, and the presence of problematic features (such as excessive severance entitlements, single triggers, excise tax gross-ups, etc.);

§

Any existing limits on cash severance payouts or policies which require shareholder ratification of severance payments exceeding a certain level;

§

Any recent severance-related controversies; and

§

Whether the proposal is overly prescriptive, such as requiring shareholder approval of severance that does not exceed market norms.

 

Share Buyback Impact on Incentive Program Metrics

 

General Recommendation: Vote case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following factors:

 

§

The frequency and timing of the company’s share buybacks;

§

The use of per-share metrics in incentive plans;

§

The effect of recent buybacks on incentive metric results and payouts; and

§

Whether there is any indication of metric result manipulation.

 

Supplemental Executive Retirement Plans (SERPs)

 

General Recommendation: Generally vote for shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.

 

Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.

 

Tax Gross-Up Proposals

 

General Recommendation: Generally vote for proposals calling for companies to adopt a policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax equalization policy.

 

Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity

 

General Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of employment prior to severance payment and/or eliminating accelerated vesting of unvested equity.

 

The following factors will be considered:

 

§

The company’s current treatment of equity upon employment termination and/or in change-in-control situations (i.e., vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.); and

§

Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements.

 

Generally vote for proposals seeking a policy that prohibits automatic acceleration of the vesting of equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of any related performance goals between the award date and the change in control).

 

6.   Routine/Miscellaneous

 

Adjourn Meeting

 

General Recommendation: Generally vote against proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.

 

Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against proposals if the wording is too vague or if the proposal includes “other business.”

 

Amend Quorum Requirements

 

General Recommendation: Vote case-by-case on proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding, taking into consideration:

 

§

The new quorum threshold requested;

§

The rationale presented for the reduction;

§

The market capitalization of the company (size, inclusion in indices);

§

The company’s ownership structure;

§

Previous voter turnout or attempts to achieve quorum;

§

Any provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve sufficiently; and

§

Other factors as appropriate.

 

In general, a quorum threshold kept as close to a majority of shares outstanding as is achievable is preferred.

 

Vote case-by-case on directors who unilaterally lower the quorum requirements below a majority of the shares outstanding, taking into consideration the factors listed above.

 

Amend Minor Bylaws

 

General Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections).

 

Change Company Name

 

General Recommendation: Vote for proposals to change the corporate name unless there is compelling evidence that the change would adversely impact shareholder value.

 

Change Date, Time, or Location of Annual Meeting

 

General Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is unreasonable.

 

Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling or location is unreasonable.

 

Other Business

 

General Recommendation: Vote against proposals to approve other business when it appears as a voting item.

 

7.  Social and Environmental Issues

 

Global Approach – E&S Shareholder Proposals

 

ISS applies a common approach globally to evaluating social and environmental proposals which cover a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.

 

General Recommendation: Generally vote case-by-case, examining primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors will be considered:

 

§

If the issues presented in the proposal are being appropriately or effectively dealt with through legislation or government regulation;

§

If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;

§

Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive;

§

The company’s approach compared with any industry standard practices for addressing the issue(s) raised by the proposal;

§

Whether there are significant controversies, fines, penalties, or litigation associated with the company’s practices related to the issue(s) raised in the proposal;

§

If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources; and

§

If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage.

 

Endorsement of Principles

 

General Recommendation: Generally vote against proposals seeking a company’s endorsement of principles that support a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue that is beyond its own control and may limit its flexibility with respect to future developments. Management and the board should be afforded the flexibility to make decisions on specific public policy positions based on their own assessment of the most beneficial strategies for the company.

 

Animal Welfare

 

Animal Welfare Policies

 

General Recommendation: Generally vote for proposals seeking a report on a company’s animal welfare

standards, or animal welfare-related risks, unless:

 

§

The company has already published a set of animal welfare standards and monitors compliance;

§

The company’s standards are comparable to industry peers; and

 

§

There are no recent significant fines, litigation, or controversies related to the company’s and/or its suppliers’ treatment of animals.

 

Animal Testing

 

General Recommendation: Generally vote against proposals to phase out the use of animals in product testing, unless:

 

§

The company is conducting animal testing programs that are unnecessary or not required by regulation;

§

The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or

§

There are recent, significant fines or litigation related to the company’s treatment of animals.

 

Animal Slaughter

 

General Recommendation: Generally vote against proposals requesting the implementation of Controlled Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.

 

Vote case-by-case on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at the company.

 

Consumer Issues

 

Genetically Modified Ingredients

 

General Recommendation: Generally vote against proposals requesting that a company voluntarily label genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities.

 

Vote case-by-case on proposals asking for a report on the feasibility of labeling products containing GE ingredients, taking into account:

 

§

The potential impact of such labeling on the company’s business;

§

The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure compares with industry peer disclosure; and

§

Company’s current disclosure on the feasibility of GE product labeling.

 

Generally vote against proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators and the scientific community.

 

Generally vote against proposals to eliminate GE ingredients from the company’s products, or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current regulations.

 

Reports on Potentially Controversial Business/Financial Practices

 

General Recommendation: Vote case-by-case on requests for reports on a company’s potentially controversial business or financial practices or products, taking into account:

 

§

Whether the company has adequately disclosed mechanisms in place to prevent abuses;

§

Whether the company has adequately disclosed the financial risks of the products/practices in question;

§

Whether the company has been subject to violations of related laws or serious controversies; and

§

Peer companies’ policies/practices in this area.

 

Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation

 

General Recommendation: Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices.

 

Vote case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:

 

§

The potential for reputational, market, and regulatory risk exposure;

§

Existing disclosure of relevant policies;

§

Deviation from established industry norms;

§

Relevant company initiatives to provide research and/or products to disadvantaged consumers;

§

Whether the proposal focuses on specific products or geographic regions;

§

The potential burden and scope of the requested report; and

§

Recent significant controversies, litigation, or fines at the company.

 

Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless such information is already publicly disclosed.

 

Generally vote against proposals requesting that companies adopt specific policies to encourage or constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.

 

Product Safety and Toxic/Hazardous Materials

 

General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain, unless:

 

§

The company already discloses similar information through existing reports such as a supplier code of conduct and/or a sustainability report;

§

The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; or

§

The company has not been recently involved in relevant significant controversies, fines, or litigation.

 

Vote case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:

 

§

The company’s current level of disclosure regarding its product safety policies, initiatives, and oversight mechanisms;

§

Current regulations in the markets in which the company operates; and

§

Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company.

 

Generally vote against resolutions requiring that a company reformulate its products.

 

Tobacco-Related Proposals

 

General Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products, considering:

 

§

Recent related fines, controversies, or significant litigation;

§

Whether the company complies with relevant laws and regulations on the marketing of tobacco;

§

Whether the company’s advertising restrictions deviate from those of industry peers;

§

Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and

§

Whether restrictions on marketing to youth extend to foreign countries.

 

Vote case-by-case on proposals regarding second-hand smoke, considering;

 

§

Whether the company complies with all laws and regulations;

§

The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and

§

The risk of any health-related liabilities.

 

Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.

 

Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.

 

Climate Change

 

Say on Climate (SoC) Management Proposals

 

General Recommendation: Vote case-by-case on management proposals that request shareholders to approve

the company’s climate transition action plan²³, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:

 

§

The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other market standards;

§

Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3);

§

The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions (Scopes 1, 2, and 3 if relevant);

§

Whether the company has sought and received third-party approval that its targets are science-based;

§

Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050;

§

Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;

§

Whether the company’s climate data has received third-party assurance;

§

Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;

§

Whether there are specific industry decarbonization challenges; and

§

The company’s related commitment, disclosure, and performance compared to its industry peers.

 

Say on Climate (SoC) Shareholder Proposals

 

General Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following:

 

§

The completeness and rigor of the company’s climate-related disclosure;

§

The company’s actual GHG emissions performance;

§

Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and

§

Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.

 

Climate Change/Greenhouse Gas (GHG) Emissions

 

General Recommendation: Generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks, considering:

 

§

Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities;

 

 

²³ Variations of this request also include climate transition related ambitions, or commitment to reporting on the implementation of a climate plan.

 

§

The company’s level of disclosure compared to industry peers; and

§

Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate change-related performance.

 

Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:

 

§

The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities;

§

The company’s level of disclosure is comparable to that of industry peers; or

§

There are no significant, controversies, fines, penalties, or litigation associated with the company’s GHG emissions.

 

Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:

 

§

Whether the company provides disclosure of year-over-year GHG emissions performance data;

§

Whether company disclosure lags behind industry peers;

§

The company’s actual GHG emissions performance;

§

The company’s current GHG emission policies, oversight mechanisms, and related initiatives; and

§

Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.

 

Energy Efficiency

 

General Recommendation: Generally vote for proposals requesting that a company report on its energy efficiency policies, unless:

 

§

The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or

§

The proponent requests adoption of specific energy efficiency goals within specific timelines.

 

Renewable Energy

 

General Recommendation: Generally vote for requests for reports on the feasibility of developing renewable energy resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business.

 

Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s evaluation of the feasibility and financial impact that such programs may have on the company.

 

Generally vote against proposals that call for the adoption of renewable energy goals, taking into account:

 

§

The scope and structure of the proposal;

§

The company’s current level of disclosure on renewable energy use and GHG emissions; and

 

§

The company’s disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate climate change risks.

 

Diversity

 

Board Diversity

 

General Recommendation: Generally vote for requests for reports on a company’s efforts to diversify the board, unless:

 

§

The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; or

§

The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.

 

Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:

 

§

The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;

§

The level of gender and racial minority representation that exists at the company’s industry peers;

§

The company’s established process for addressing gender and racial minority board representation;

§

Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;

§

The independence of the company’s nominating committee;

§

Whether the company uses an outside search firm to identify potential director nominees; and

§

Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.

 

Equality of Opportunity

 

General Recommendation: Generally vote for proposals requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data, unless:

 

§

The company publicly discloses equal opportunity policies and initiatives in a comprehensive manner;

§

The company already publicly discloses comprehensive workforce diversity data; or

§

The company has no recent significant EEO-related violations or litigation.

 

Generally vote against proposals seeking information on the diversity efforts of suppliers and service providers. Such requests may pose a significant burden on the company.

 

Gender Identity, Sexual Orientation, and Domestic Partner Benefits

 

General Recommendation: Generally vote for proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome.

 

Generally vote against proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions regarding benefits should be left to the discretion of the company.

 

Gender, Race/Ethnicity Pay Gap

 

General Recommendation: Vote case-by-case on requests for reports on a company’s pay data by gender or race/ ethnicity, or a report on a company’s policies and goals to reduce any gender or race/ethnicity pay gaps, taking into account:

 

§

The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy on fair and equitable compensation practices;

§

Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race, or ethnicity pay gap issues;

§

The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry peers; and

§

Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.

 

Racial Equity and/or Civil Rights Audit Guidelines

 

General Recommendation: Vote case-by-case on proposals asking a company to conduct an independent racial equity and/or civil rights audit, taking into account:

 

§

The company’s established process or framework for addressing racial inequity and discrimination internally;

§

Whether the company adequately discloses workforce diversity and inclusion metrics and goals;

§

Whether the company has issued a public statement related to its racial justice efforts in recent years, or has committed to internal policy review;

§

Whether the company has engaged with impacted communities, stakeholders, and civil rights experts;

§

The company’s track record in recent years of racial justice measures and outreach externally; and

§

Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial inequity or discrimination.

  

Environment and Sustainability

 

Facility and Workplace Safety

 

General Recommendation: Vote case-by-case on requests for workplace safety reports, including reports on accident risk reduction efforts, taking into account:

 

§

The company’s current level of disclosure of its workplace health and safety performance data, health and safety management policies, initiatives, and oversight mechanisms;

§

The nature of the company’s business, specifically regarding company and employee exposure to health and safety risks;

§

Recent significant controversies, fines, or violations related to workplace health and safety; and

§

The company’s workplace health and safety performance relative to industry peers.

 

Vote case-by-case on resolutions requesting that a company report on safety and/or security risks associated with its operations and/or facilities, considering:

 

§

The company’s compliance with applicable regulations and guidelines;

§

The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring; and

§

The existence of recent, significant violations, fines, or controversy regarding the safety and security of the company’s operations and/or facilities.

 

Natural Capital- Related and/or Community Impact Assessment Proposals

 

General Recommendation: Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental impact of company operations, considering:

 

§

Alignment of current disclosure of applicable company policies, metrics, risk assessment report(s) and risk management procedures with any relevant, broadly accepted reporting frameworks;

§

The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations;

§

The nature, purpose, and scope of the company’s operations in the specific region(s);

§

The degree to which company policies and procedures are consistent with industry norms; and

§

The scope of the resolution.

 

Hydraulic Fracturing

 

General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations, considering:

 

§

The company’s current level of disclosure of relevant policies and oversight mechanisms;

§

The company’s current level of such disclosure relative to its industry peers;

§

Potential relevant local, state, or national regulatory developments; and

§

Controversies, fines, or litigation related to the company’s hydraulic fracturing operations.

 

Operations in Protected Areas

 

General Recommendation: Generally vote for requests for reports on potential environmental damage as a result of company operations in protected regions, unless:

 

§

Operations in the specified regions are not permitted by current laws or regulations;

§

The company does not currently have operations or plans to develop operations in these protected regions; or

§

The company’s disclosure of its operations and environmental policies in these regions is comparable to industry peers.

 

Recycling

 

General Recommendation: Vote case-by-case on proposals to report on an existing recycling program, or adopt a new recycling program, taking into account:

 

§

The nature of the company’s business;

§

The current level of disclosure of the company’s existing related programs;

§

The timetable and methods of program implementation prescribed by the proposal;

§

The company’s ability to address the issues raised in the proposal; and

§

How the company’s recycling programs compare to similar programs of its industry peers.

 

Sustainability Reporting

 

General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:

 

§

The company already discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or

§

The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame.

 

Water Issues

 

General Recommendation: Vote case-by-case on proposals requesting a company report on, or adopt a new policy on, water-related risks and concerns, taking into account:

 

§

The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;

§

Whether or not the company’s existing water-related policies and practices are consistent with relevant internationally recognized standards and national/local regulations;

§

The potential financial impact or risk to the company associated with water-related concerns or issues; and

§

Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers.

 

General Corporate Issues

 

Charitable Contributions

 

General Recommendation: Vote against proposals restricting a company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are in the best interests of the company.

 

Data Security, Privacy, and Internet Issues

 

General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and management policies and procedures, considering:

 

§

The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech, information access and management, and Internet censorship;

§

Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of information on the Internet;

§

The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other telecommunications;

§

Applicable market-specific laws or regulations that may be imposed on the company; and

§

Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship.

 

ESG Compensation-Related Proposals

 

General Recommendation: Vote case-by-case on proposals seeking a report or additional disclosure on the company’s approach, policies, and practices on incorporating environmental and social criteria into its executive compensation strategy, considering:

 

§

The scope and prescriptive nature of the proposal;

§

The company’s current level of disclosure regarding its environmental and social performance and governance;

§

The degree to which the board or compensation committee already discloses information on whether it has considered related E&S criteria; and

§

Whether the company has significant controversies or regulatory violations regarding social or environmental issues.

 

Human Rights, Human Capital Management, and International Operations

 

Human Rights Proposals

 

General Recommendation: Generally vote for proposals requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed.

 

Vote case-by-case on proposals to implement company or company supplier labor and/or human rights standards and policies, considering:

 

§

The degree to which existing relevant policies and practices are disclosed;

§

Whether or not existing relevant policies are consistent with internationally recognized standards;

§

Whether company facilities and those of its suppliers are monitored and how;

§

Company participation in fair labor organizations or other internationally recognized human rights initiatives;

§

Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;

 

§

Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;

§

The scope of the request; and

§

Deviation from industry sector peer company standards and practices.

 

Vote case-by-case on proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering:

 

§

The degree to which existing relevant policies and practices are disclosed, including information on the implementation of these policies and any related oversight mechanisms;

§

The company’s industry and whether the company or its suppliers operate in countries or areas where there is a history of human rights concerns;

§

Recent significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and whether the company has taken remedial steps; and

§

Whether the proposal is unduly burdensome or overly prescriptive.

 

Mandatory Arbitration

 

General Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory

arbitration on employment-related claims, taking into account:

 

§

The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace claims;

§

Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of mandatory arbitration agreements on workplace claims; and

§

The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements compared to its peers.

 

Operations in High-Risk Markets

 

General Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk” markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account:

 

§

The nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption;

§

Current disclosure of applicable risk assessment(s) and risk management procedures;

§

Compliance with U.S. sanctions and laws;

§

Consideration of other international policies, standards, and laws; and

§

Whether the company has been recently involved in recent, significant controversies, fines, or litigation related to its operations in “high-risk” markets.

 

Outsourcing/Offshoring

 

General Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated with outsourcing/plant closures, considering:

 

§

Controversies surrounding operations in the relevant market(s);

 

§

The value of the requested report to shareholders;

§

The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and

§

The company’s existing human rights standards relative to industry peers.

 

Sexual Harassment

 

General Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace sexual harassment, taking into account:

 

§

The company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment;

§

Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual harassment issues; and

§

The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers.

 

Weapons and Military Sales

 

General Recommendation: Vote against reports on foreign military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.

 

Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses, and withdrawal from these contracts could have a negative impact on the company’s business.

 

Political Activities

 

Lobbying

 

General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying

(including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering:

 

§

The company’s current disclosure of relevant lobbying policies, and management and board oversight;

§

The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and

§

Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities.

 

Political Contributions

 

General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering:

 

§

The company’s policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes;

§

The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and

§

Recent significant controversies, fines, or litigation related to the company’s political contributions or political activities.

 

Vote against proposals barring a company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.

 

Vote against proposals to publish in newspapers and other media a company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.

 

Political Expenditures and Lobbying Congruency

 

General Recommendation: Generally vote case-by-case on proposals requesting greater disclosure of a company’s alignment of political contributions, lobbying, and electioneering spending with a company’s publicly stated values and policies, considering:

 

§

The company’s policies, management, board oversight, governance processes, and level of disclosure related to direct political contributions, lobbying activities, and payments to trade associations, political action committees, or other groups that may be used for political purposes;

§

The company’s disclosure regarding: the reasons for its support of candidates for public offices; the reasons for support of and participation in trade associations or other groups that may make political contributions; and other political activities;

§

Any incongruencies identified between a company’s direct and indirect political expenditures and its publicly stated values and priorities; and

§

Recent significant controversies related to the company’s direct and indirect lobbying, political contributions, or political activities.

 

Generally vote case-by-case on proposals requesting comparison of a company’s political spending to objectives

that can mitigate material risks for the company, such as limiting global warming.

 

Political Ties

 

General Recommendation: Generally vote against proposals asking a company to affirm political nonpartisanship in the workplace, so long as:

 

§

There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions or trade association spending; and

 

§

The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibit coercion.

 

Vote against proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.

 

8.  Mutual Fund Proxies

 

Election of Directors

 

General Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.

 

Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes

 

General Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote.

 

Converting Closed-end Fund to Open-end Fund

 

General Recommendation: Vote case-by-case on conversion proposals, considering the following factors:

 

§

Past performance as a closed-end fund;

§

Market in which the fund invests;

§

Measures taken by the board to address the discount; and

§

Past shareholder activism, board activity, and votes on related proposals.

 

Proxy Contests

 

General Recommendation: Vote case-by-case on proxy contests, considering the following factors:

 

§

Past performance relative to its peers;

§

Market in which the fund invests;

§

Measures taken by the board to address the issues;

§

Past shareholder activism, board activity, and votes on related proposals;

§

Strategy of the incumbents versus the dissidents;

§

Independence of directors;

§

Experience and skills of director candidates;

§

Governance profile of the company; and

§

Evidence of management entrenchment.

 

Investment Advisory Agreements

 

General Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors:

 

§

Proposed and current fee schedules;

§

Fund category/investment objective;

§

Performance benchmarks;

§

Share price performance as compared with peers;

§

Resulting fees relative to peers; and

§

Assignments (where the advisor undergoes a change of control).

 

Approving New Classes or Series of Shares

 

General Recommendation: Vote for the establishment of new classes or series of shares.

 

Preferred Stock Proposals

 

General Recommendation: Vote case-by-case on the authorization for or increase in preferred shares, considering the following factors:

 

§

Stated specific financing purpose;

§

Possible dilution for common shares; and

§

Whether the shares can be used for antitakeover purposes.

 

1940 Act Policies

 

General Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors:

 

§

Potential competitiveness;

§

Regulatory developments;

§

Current and potential returns; and

§

Current and potential risk.

 

Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation.

 

Changing a Fundamental Restriction to a Nonfundamental Restriction

 

General Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:

 

§

The fund’s target investments;

 

§

The reasons given by the fund for the change; and

§

The projected impact of the change on the portfolio.

 

Change Fundamental Investment Objective to Nonfundamental

 

General Recommendation: Vote against proposals to change a fund’s fundamental investment objective to non-fundamental.

 

Name Change Proposals

 

General Recommendation: Vote case-by-case on name change proposals, considering the following factors:

 

§

Political/economic changes in the target market;

§

Consolidation in the target market; and

§

Current asset composition.

 

Change in Fund’s Subclassification

 

General Recommendation: Vote case-by-case on changes in a fund’s sub-classification, considering the following factors:

 

§

Potential competitiveness;

§

Current and potential returns;

§

Risk of concentration; and

§

Consolidation in target industry.

 

Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value

 

General Recommendation: Vote for proposals authorizing the board to issue shares below Net Asset Value (NAV) if:

 

§

The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders approve the underlying proposal, as required under the Investment Company Act of 1940;

§

The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and

§

The company has demonstrated responsible past use of share issuances by either:

§

Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or

§

Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts to NAV and economic dilution to existing non-participating shareholders.

 

Disposition of Assets/Termination/Liquidation

 

General Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the following factors:

 

§

Strategies employed to salvage the company;

§

The fund’s past performance; and

§

The terms of the liquidation.

 

Changes to the Charter Document

 

General Recommendation: Vote case-by-case on changes to the charter document, considering the following factors:

 

§

The degree of change implied by the proposal;

§

The efficiencies that could result;

§

The state of incorporation; and

§

Regulatory standards and implications.

 

Vote against any of the following changes:

 

§

Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series;

§

Removal of shareholder approval requirement for amendments to the new declaration of trust;

§

Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act;

§

Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund’s shares;

§

Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements; or

§

Removal of shareholder approval requirement to change the domicile of the fund.

 

Changing the Domicile of a Fund

 

General Recommendation: Vote case-by-case on re-incorporations, considering the following factors:

 

§

Regulations of both states;

§

Required fundamental policies of both states; and

§

The increased flexibility available.

 

Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval

 

General Recommendation: Vote against proposals authorizing the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser.

 

Distribution Agreements

 

General Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors:

 

§

Fees charged to comparably sized funds with similar objectives;

§

The proposed distributor’s reputation and past performance;

§

The competitiveness of the fund in the industry; and

§

The terms of the agreement.

 

Master-Feeder Structure

 

General Recommendation: Vote for the establishment of a master-feeder structure.

 

Mergers

 

General Recommendation: Vote case-by-case on merger proposals, considering the following factors:

 

§

Resulting fee structure;

§

Performance of both funds;

§

Continuity of management personnel; and

§

Changes in corporate governance and their impact on shareholder rights.

 

Shareholder Proposals for Mutual Funds

 

Establish Director Ownership Requirement

 

General Recommendation: Generally vote against shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.

 

Reimburse Shareholder for Expenses Incurred

 

General Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the reimbursement of the proxy solicitation expenses.

 

Terminate the Investment Advisor

 

General Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the following factors:

 

§

Performance of the fund’s Net Asset Value (NAV);

§

The fund’s history of shareholder relations; and

§

The performance of other funds under the advisor’s management.

 

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Founded in 1985, Institutional Shareholder Services group of companies (ISS) empowers investors and companies to build for long-term and sustainable growth by providing high-quality data, analytics and insight. ISS, which is majority owned by Deutsche Bourse Group, along with Genstar Capital and ISS management, is a leading provider of corporate governance and responsible investment solutions, market intelligence, fund services, and events and editorial content for institutional investors and corporations, globally. ISS’ 2,600 employees operate worldwide across 29 global locations in 15 countries. Its approximately 3,400 clients include many of the world’s leading institutional investors who rely on ISS’ objective and impartial offerings, as well as public companies focused on ESG and governance risk mitigation as a shareholder value enhancing measure. Clients rely on ISS’ expertise to help them make informed investment decisions. This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the “Information”) is the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.

 

The Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies.

 

The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.

 

ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.

 

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© 2025 | Institutional Shareholder Services and/or its affiliates

 

PART C

 

Other Information

 

ITEM 28. EXHIBITS

 

(a)	(1)		Amended and Restated Agreement and Declaration of Trust dated October 13, 2017. (2)
	(4)		Amended Schedule A dated December 17, 2025 to the Amended and Restated Agreement and Declaration of Trust. (14)
(b)			By-Laws dated March 10, 2016. (1)
(c)			Not applicable.
(d)	(1)	(i)	Master Investment Advisory Contract, dated June 24, 2016, between HSBC Funds and HSBC Global Asset Management (USA) Inc. (1)
	(1)	(ii)	Investment Advisory Contract Supplement, dated June 24, 2016, regarding HSBC U.S. Treasury Money Market Fund. (1)
	(1)	(iii)	Investment Advisory Contract Supplement, dated June 24, 2016, regarding HSBC U.S. Government Money Market Fund. (1)
(e)	(1)		Form of Selling Agreement. (1)
	(2)		Form of Dealer Agreement. (1)
	(3)		Distribution Agreement, dated May 31, 2017, between HSBC Funds and Foreside Distribution Services, L.P. (2)
	(4)		First Amendment to the Distribution Agreement, dated June 7, 2018, between HSBC Funds and Foreside Distribution Services, L.P. (3)
	(5)		Second Amendment to the Distribution Agreement, dated March 7, 2019, between HSBC Funds and Foreside Distribution Services, L.P. (14)
	(6)		Third Amendment to the Distribution Agreement, dated March 24, 2021, between HSBC Funds and Foreside Distribution Services, L.P. (5)
	(7)		Novation to the Distribution Agreement, dated September 30, 2021, between HSBC Funds and Foreside Distribution Services, L.P. (6)
(f)			Not applicable.
(g)			Master Services Agreement, effective November 7, 2022, between State Street Bank and Trust Company and HSBC Funds. (9)
(h)	(1)		Operational Support Services Agreement, dated December 13, 2023, between HSBC Global Asset Management (USA) Inc. and HSBC Funds on behalf of HSBC U.S. Government Money Market Fund, and HSBC U.S. Treasury Money Market Fund. (12)
	(2)		Expense Limitation Agreement effective February 28, 2026, between HSBC Global Asset Management (USA) Inc. and HSBC Funds. (14)

 

 

	(3)		Amended and Restated Administration Services Agreement, effective November 7, 2022, between HSBC Global Asset Management (USA) Inc. and HSBC Funds. (9)
	(4)		Transfer Agency and Service Agreement, effective November 7, 2022, between State Street Bank and Trust Company and HSBC Funds. (9)
	(5)		Amended and Restated Fund PFO/Treasurer, CCO, Secretary and AMLO Agreement, effective April 1, 2024, between Foreside Fund Officer Services, LLC and HSBC Funds. (13)
(i)			Opinion and Consent of Counsel. (14)
(j)	(1)		Power of Attorney. (10)
	(3)		Consent of Independent Registered Public Accounting Firm. (14)
(k)			Not applicable.
(l)			Not applicable.
(m)	(1)		Master Distribution Plan relating to Class A Shares, dated March 27, 2024 (Money Market Funds). (13)
(n)			Multiple Class Plan, dated March 27, 2024. (13)
(o)			Not applicable.
(p)	(1)		Code of Ethics for HSBC Funds. (3)
	(2)		Code of Ethics for HSBC Global Asset Management (USA) Inc. (13)
	(3)		Code of Ethics for Foreside Fund Officer Services, LLC. (13)

 

EX-101.INS	XBRL Instance Document
EX-101.SCH	XBRL Taxonomy Extension Schema Document
EX-101.CAL	XBRL Taxonomy Extension Calculation Linkbase
EX-101.DEF	XBRL Taxonomy Extension Definition Linkbase
EX-101.LAB	XBRL Taxonomy Extension Label Linkbase
EX-101.PRE	XBRL Taxonomy Extension Presentation Linkbase

 

*     *     *     *     *     *     *     *     *     *     *     *

 

(1)	Incorporated herein by reference from post-effective amendment No. 214 to the Registration Statement as filed with the SEC on June 27, 2016.
(2)	Incorporated herein by reference from post-effective amendment No. 227 to the Registration Statement as filed with the SEC on February 28, 2018.
(3)	Incorporated herein by reference from post-effective amendment No. 230 to the Registration Statement as filed with the SEC on January 31, 2019.
(4)	Incorporated herein by reference from post-effective amendment No. 243 to the Registration Statement as filed with the SEC on December 20, 2019.
(5)	Incorporated herein by reference from post-effective amendment No. 284 to the Registration Statement as filed with the SEC on August 13, 2021.
(6)	Incorporated herein by reference from post-effective amendment No. 285 to the Registration Statement as filed with the SEC on February 28, 2022.
(7)	Incorporated herein by reference from post-effective amendment No. 286 to the Registration Statement as filed with the SEC on April 29, 2022.

 

 

(8)	Incorporated herein by reference from post-effective amendment No. 287 to the Registration Statement as filed with the SEC on June 28, 2022.
(9)	Incorporated herein by reference from post-effective amendment No. 291 to the Registration Statement as filed with the SEC on November 30, 2022.
(10)	Incorporated herein by reference from post-effective amendment No. 292 to the Registration Statement as filed with the SEC on December 29, 2022.
(11)	Incorporated herein by reference from post-effective amendment No. 293 to the Registration Statement as filed with the SEC on January 26, 2023.
(12)	Incorporated herein by reference from post-effective amendment No. 296 to the Registration Statement as filed with the SEC on February 28, 2024.
(13)	Incorporated herein by reference from post-effective amendment No. 312 to the Registration Statement as filed with the SEC on February 28, 2025.
(14)	Filed herewith.

 

ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

 

Not applicable.

 

ITEM 30. INDEMNIFICATION

 

Article VII, Section 7.5 of the Registrant's Amended and Restated Agreement and Declaration of Trust provides for the indemnification of the trustees, officers, employees, agents and other controlling persons of the Registrant. The Amended and Restated Agreement and Declaration of Trust is incorporated by reference as Exhibit (a)(1). Section 17(h) of the Investment Company Act of 1940 provides that no instrument pursuant to which Registrant is organized or administered shall contain any provision which protects or purports to protect any trustee or officer of Registrant against any liability to Registrant or its shareholders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.

 

Pursuant to the Distribution Agreement, Foreside Distribution Services, L.P. agrees to indemnify the Registrant, its officers, trustees, employees, and any person who controls the Trust (within the meaning of Section 15 of the Securities Act of 1933) against certain liabilities. A copy of the Registrant's Distribution Agreement is incorporated by reference as Exhibit (e)(3).

 

The Registrant may be party to other agreements that include indemnification, or substantially similar, provisions for the benefit of the Registrant's trustees, officers, employees and any person who controls the Trust.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant by the Registrant pursuant to the Registrant's organizational instruments or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and, therefore, is unenforceable.

 

ITEM 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS

 

HSBC Global Asset Management (USA) Inc., 66 Hudson Boulevard E., 29^th Floor, New York, New York 10001, serves as investment adviser (“Adviser”) and is a wholly-owned subsidiary of HSBC USA, Inc., a registered bank holding company. Information as to the directors and officers of the Adviser, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers of the Adviser in the last two years, is included in its application for registration as an investment adviser on Form ADV (File No. 801-69413) filed under the Investment Advisers Act of 1940, as amended, and is incorporated by reference thereto.

 

 

ITEM 32. PRINCIPAL UNDERWRITER

 

(a) Foreside Distribution Services, L.P. (the “Distributor”) serves as principal underwriter for the following investment companies registered under the Investment Company Act of 1940, as amended:

 

1.

HSBC Funds

 

(b) The following are the Officers of the Distributor, the Registrant’s underwriter. The Distributor’s main business address is 190 Middle Street, Suite 301, Portland, Maine 04101.

 

Name	Address	Position with Underwriter	Position with Registrant
Teresa Cowan	190 Middle Street, Suite 301, Portland, ME 04101	President	None
Chris Lanza	190 Middle Street, Suite 301, Portland, ME 04101	Vice President	None
Kate Macchia	190 Middle Street, Suite 301, Portland, ME 04101	Vice President	None
Jennifer A. Brunner	190 Middle Street, Suite 301, Portland, ME 04101	Vice President and Chief Compliance Officer	None
Gabriel E. Edelman	190 Middle Street, Suite 301, Portland, ME 04101	Secretary	None
Susan L. LaFond	190 Middle Street, Suite 301, Portland, ME 04101	Treasurer	None
Weston Sommers	190 Middle Street, Suite 301, Portland, ME 04101	Financial and Operations Principal and Chief Financial Officer	None

 

(c) Not applicable.

 

ITEM 33. LOCATION OF ACCOUNTS AND RECORDS

 

The account books and other documents required to be maintained by the Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder will be maintained at the offices of: HSBC Global Asset Management (USA) Inc., 66 Hudson Boulevard E., 29^th Floor, New York, New York 10001; SS&C Global Investor and Distribution Solutions, Inc., 2000 Crown Colony Drive, Quincy, MA 02169; State Street Bank and Trust Company, One Congress St., Boston, MA 02114; Foreside Fund Officer Services, LLC, 190 Middle Street, Suite 301, Portland, ME 04101.

 

ITEM 34. MANAGEMENT SERVICES

 

Not applicable.

 

ITEM 35. UNDERTAKINGS

 

None.

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 pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this registration statement on Form N-1A (File No. 033-07647) (the “Registration Statement”) to be signed on its behalf by the undersigned, thereto duly authorized, in the City of New York, and State of New York on the 27^th day of February, 2026.

 

HSBC FUNDS

 

By:		/s/ Stefano Michelagnoli*
		Stefano Michelagnoli
		President

 

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated as of the 27^th day of February, 2026.

 

/s/ Stefano Michelagnoli*		/s/ Maria Clem Sell
Stefano Michelagnoli		Maria Clem Sell
President		Treasurer
/s/ Susan C. Gause*		/s/ Susan S. Huang*
Susan C. Gause		Susan S. Huang
Trustee		Trustee
/s/ Marcia L. Beck*		/s/ Hugh T. Hurley*
Marcia L. Beck		Hugh T. Hurley
Trustee		Trustee
*/s/ Brenden Carroll
Brenden Carroll

 

* Brenden Carroll, as attorney-in-fact, on behalf of Susan C. Gause, Susan S. Huang, Marcia L. Beck, Hugh T. Hurley and Stefano R. Michelagnoli pursuant to a power of attorney incorporated herein by reference to Exhibit (j)(1) in post-effective amendment No. 292 to the Registration Statement as filed with the SEC on December 29, 2022.

 

CERTIFICATE

 

The undersigned Secretary for HSBC Funds (the “Trust”) hereby certifies that the Board of Trustees of the Trust duly adopted the following resolution at a meeting of the Board held on December 14, 2022.

 

RESOLVED, that the Trustees and officers of the Trust who may be required to execute any amendments to the Trust’s Registration Statements be, and each hereby is, authorized to execute a power of attorney appointing Brenden Carroll, Devon Roberson and Elise Kletz, jointly and severally, their attorneys-in-fact, each with power of substitution, for said Trustees and officers in any and all capacities to sign the Registration Statements under the Securities Act of 1933 and the 1940 Act of the Trust and any and all amendments to such Registration Statements, and to file the same, with exhibits thereto, and other documents in connection therewith, with the SEC, the Trustees and officers hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or may have caused to be done by virtue hereof.

 

Dated: February 27, 2026

 

	/s/ Charles Booth
	Charles Booth,
	Secretary

EXHIBITS

 

(a)	(4)		Amended Schedule A dated December 17, 2025 to the Amended and Restated Agreement and Declaration of Trust.
(e)	(5)		Second Amendment to the Distribution Agreement, dated March 7, 2019, between HSBC Funds and Foreside Distribution Services, L.P.
(h)	(2)		Expense Limitation Agreement effective February 28, 2026, between HSBC Global Asset Management (USA) Inc. and HSBC Funds.
(i)			Opinion and Consent of Counsel.
(j)	(3)		Consent of Independent Registered Public Accounting Firm.

 

EX-101.INS	XBRL Instance Document
EX-101.SCH	XBRL Taxonomy Extension Schema Document
EX-101.CAL	XBRL Taxonomy Extension Calculation Linkbase
EX-101.DEF	XBRL Taxonomy Extension Definition Linkbase
EX-101.LAB	XBRL Taxonomy Extension Label Linkbase
EX-101.PRE	XBRL Taxonomy Extension Presentation Linkbase

 

ATTACHMENTS / EXHIBITS

AMENDED SCHEDULE A DATED DECEMBER 17, 2025 TO THE AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST

SECOND AMENDMENT TO THE DISTRIBUTION AGREEMENT, DATED MARCH 7, 2019, BETWEEN HSBC FUNDS AND FORESIDE DISTRIBUTION SERVICES, L.P.

EXPENSE LIMITATION AGREEMENT EFFECTIVE FEBRUARY 28, 2026, BETWEEN HSBC GLOBAL ASSET MANAGEMENT (USA) INC. AND HSBC FUNDS

OPINION AND CONSENT OF COUNSEL

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

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XBRL TAXONOMY EXTENSION DEFINITION LINKBASE

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