485APOS 1 v363023_485apos.htm REGISTRATION STATEMENT

As filed with the Securities and Exchange Commission on December 20, 2013

Securities Act Registration No. 333-185734

Investment Company Act Registration No. 811-22785

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ¨
Pre-Effective Amendment No.        ¨
Post-Effective Amendment No.    1    ý

 

and/or

 

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ¨
Amendment No.   3    ý

 

(Check appropriate box or boxes.)

 

REALTY CAPITAL INCOME FUNDS TRUST

(Exact Name of Registrant as Specified in Charter)

 

405 Park Avenue

15th Floor

New York, NY 10022

(Address of Principal Executive Offices)(Zip Code)

 

Registrant’s Telephone Number, including Area Code: (212) 415-6500

 

John H. Grady James A. Tanaka
President General Counsel
National Fund Advisors, LLC RCS Capital
405 Park Avenue 405 Park Avenue
15th Floor 15th Floor
New York, NY  10022 New York, NY  10022

 

(Name and Address of Agent for Service)

 

With a Copy to:

Steven B. Boehm

Sutherland Asbill & Brennan LLP

700 Sixth Street, NW, Suite 700

Washington, D.C. 20001

 

Approximate date of proposed public offering:  As soon as practicable after the effective date of the Registration Statement.

 

It is proposed that this filing will become effective:

 

¨ Immediately upon filing pursuant to paragraph (b)

¨ On (date) pursuant to paragraph (b)

¨ 60 days after filing pursuant to paragraph (a)(1)

¨ On (date) pursuant to paragraph (a)(1)

x 75 days after filing pursuant to paragraph (a)(2)

¨ 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.

 

 
 

 

Subject to Completion.  Preliminary Prospectus dated February __, 2014

 

 

 

AR Capital Dividend and Value Fund

 

PROSPECTUS

 

[_______________], 2014

 

 

Class A Shares (    )

 

Class C Shares (    )

 

This Prospectus provides important information about the Class A shares and Class C shares of the AR Capital Dividend and Value Fund (the “Fund”) that you should know before investing.  Please read it carefully and keep it for future reference.

 

The U.S. Securities and Exchange Commission has not approved or disapproved these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 
 

TABLE OF CONTENTS

 

Page

 

FUND SUMMARY — ar Capital Dividend and Value fund 1
Investment Objective 1
Fees and Expenses of the Fund 1
Principal Investment Strategies 2
Principal Risks of Investing in the Fund 2
Fund Performance 4
Investment Management 4
Purchase and Sale of Fund Shares 4
Tax Information 5
Payments to Broker-Dealers and Other Financial Intermediaries 5
WHO SHOULD INVEST 6
INVESTMENT OBJECTIVE AND POLICIES 6
PRINCIPAL INVESTMENT STRATEGIES 6
PRINCIPAL INVESTMENT RISKS 7
ADDITIONAL INVESTMENT STRATEGIES 9
ADDITIONAL INVESTMENT INFORMATION 10
MANAGEMENT 10
PRICING OF FUND SHARES 11
HOW TO BUY SHARES 13
HOW TO REDEEM SHARES 18
DISTRIBUTION AND SHAREHOLDER SERVICE PLANS 19
DIVIDENDS, DISTRIBUTIONS AND TAXES 20
FOR MORE INFORMATION 23
APPENDIX / ADVISER’S PRIOR PERFORMANCE 24
PRIVACY POLICY 25

  

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FUND SUMMARY – AR CAPITAL DIVIDEND AND VALUE FUND

 

Investment Objective

 

The investment objective of the Fund is to provide a high level of dividend income, with the potential for capital appreciation.

 

Fees and Expenses of the Fund

 

This table describes the fees and expenses that you may pay if you buy and hold Class A and Class C shares of the Fund. You may qualify for sales charge discounts on Class A shares if you or your family invest, or agree to invest in the future, at least $100,000 in the Fund. More information about these and other discounts is contained in this prospectus under “How to Buy Shares—Classes of Shares Offered” on page 14 and in “Reducing Sales Charge on Class A Shares” on page 44 of the Fund’s Statement of Additional Information.

 

  Class
A
Class
C

Shareholder Fees

(fees paid directly from your investment)

Maximum Sales Charge (Load)

Imposed on Purchases (as a % of offering price)

4.50%(1) None

Maximum Deferred Sales Charge (Load)

(as a % of the original purchase price or redemption proceeds, whichever is lower)

1.00%(2) 1.00%(3)
(1)The initial sales charge may be waived for purchases by certain types of accounts, including fee-based advisory accounts.
(2)Only applies for purchases of greater than $1 million that are redeemed within one year of purchase.
(3)For Class C shares, no deferred sales charge applies after one year.

 

 

  Class
A
Class
C

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

Management Fees 0.[75]% 0.[75]%
Distribution and Service (12b-1) Fees [0.25%(1)] [1.00%]
Other Expenses(2) _____% _____%
Total Annual Fund Operating Expenses _____% _____%
Expense Reimbursement(3) (____)% (____)%
Total Annual Fund Operating Expenses After Expense Reimbursement _____% _____%
(1)The Fund’s distributor has contractually agreed to waive 0.25% of the Distribution and Service (Rule 12b-1) fees for Class A Shares. The current waiver agreement will remain in effect through at least _____, 2015. Excluding this waiver would result in fees of 0.50%.
(2)Because the Fund is new, “Other Expenses” are based on estimated amounts for the current fiscal year.
(3) National Fund Advisors, LLC, the Fund’s investment adviser (“NFA” or the “Adviser”), has contractually agreed to waive a portion or all of its management fees and pay Fund expenses (excluding acquired fund fees and expenses, interest, taxes, and extraordinary expenses) in order to limit the Other Expenses to [0.__%] of average daily net assets of the Fund’s shares (the “Expense Cap”). The Expense Cap will remain in effect through at least ___________, 201_, and may be terminated before that date only by the Trust’s Board of Trustees. The Adviser may recoup any previously waived fees and paid expenses from the Fund pursuant to this agreement for 3 years from the date they were waived or paid, subject to the Expense Cap.

 

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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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

  1 Year 3 Years
Class A    
Assuming redemption at the end of the period $___ $___
Assuming no redemption at the end of the period $___ $___
     
Class C    
Assuming redemption at the end of the period $___ $___
Assuming no redemption at the end of the period $___ $___
     

Portfolio Turnover: The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the Example, affect the Fund’s performance. The portfolio turnover rate for the Fund is not available because the Fund is new.

 

Principal Investment Strategies

 

The Fund will invest substantially all (and under normal market conditions, at least 80%), of its net assets (plus any borrowings for investment purposes) in dividend paying common stocks and other equity securities of issuers that trade in the U.S. on nationally recognized securities exchanges. The fund may invest in Master Limited Partnership (“MLP”) or Real Estate Investment Trust (“REIT”) investments as long as they are liquid and trade on nationally recognized securities exchanges. The MLP securities in which the Fund invests are common units representing limited partnership interests of energy infrastructure MLPs. The Fund may also invest in other investment companies and depositary receipts. Under the supervision of the Adviser, Carnegie Asset Management, LLC (“CAM” or the “Sub-Adviser”) evaluates securities based primarily on its assessment of each issuer’s ability to sustain its current dividend.

 

Although the Adviser anticipates that the Sub-Adviser will typically invest the Fund’s assets in equity securities, the Fund may invest up to 20% of its net assets in debt securities of any maturity, duration, or credit rating.

 

The Fund may invest up to 15% of its net assets in illiquid securities.

 

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Principal Risks of Investing in the Fund

 

Investing in the Fund is subject to various risks, including the risk that you may receive little or no return on your investment, and you may lose all or part of your investment. By itself, the Fund does not constitute a balanced investment program. Before investing in the Fund you should consider carefully the following risks:

 

Market Risk. An investment in the Fund is generally subject to market risk, including the possible loss of the entire principal amount invested. An investment in the Fund represents an indirect investment in the securities owned by the Fund. Like all financial instruments, the value of these securities may move up or down, sometimes rapidly and unpredictably. The value of your investment in the Fund at any point in time may be worth less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.

 

Medium- and Small-Capitalization Company Risk. The Fund may invest in medium- and small-capitalization companies, which may be newly formed or have limited product lines, distribution channels, and financial or managerial resources. The risks associated with these investments are generally greater than those associated with investments in the securities of larger, more-established companies. This may cause the Fund’s NAV to be more volatile when compared to investment companies that focus only on large capitalization companies.

 

Common Stock Risk. While common stock has historically generated higher average returns than debt securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.

 

Depositary Receipts Risk. Depositary receipts may be less liquid than the underlying shares in their primary trading market. Depositary receipt holders may have limited voting rights, and investment restrictions in certain countries may adversely impact the value of the depositary receipts and may cause equity shares of the underlying issuer to trade at a discount or premium to the market price of the depositary receipts.

 

Energy-Related Securities Risk. The Fund’s investment in energy-related securities may subject the Fund indirectly to the underlying risks of the energy industry. The energy industry may be adversy affected by federal, state, and foreign regulations governing energy production, distrubtion, sale, and infrastructure. Federal, state, and foreign governments may also influence the market for energy resources and infrastructure. Short-term fluctuations in energy prices may cause the value of the Fund’s investments to fluctuate.

 

Investment in other Investment Companies Risk. The Fund’s investment in another investment company may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and expenses. Shares of closed-end funds may trade at prices that reflect a premium above or a discount below the investment company’s net asset value, which may be substantial. If investment company securities are purchased at a premium to net asset value, the premium may not exist when those securities are sold and the Fund could incur a loss. Additionally, closed-end fund shares held by the Fund may be non-traded and, therefore, illiquid.

 

Liquidity Risk. The Fund may hold illiquid securities that it may be unable to sell at the preferred time or price and could lose its entire investment in such securities.

 

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REIT Investment Risk. REITs are dependent upon management skills and may not be diversified. As REITs generally pay a higher rate of dividends than most operating companies, to the extent application of the Fund’s investment strategy results in the Fund investing in REIT shares, the percentage of the Fund’s dividend income received from REIT shares will likely exceed the percentage of the Fund’s portfolio that is comprised of REIT shares.

 

Non-Diversification Risk. The Fund is classified as a non-diversified management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). This means that the Fund may invest a greater portion of its assets in a limited number of issuers than would be the case if the Fund were classified as a diversified management investment company. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Additionally, the Fund may be subject to greater risk, because the Fund’s performance may be more sensitive to any single economic, business, political, or regulatory occurrence than the value of shares of a diversified investment company.

 

Management Risk. The NAV of the Fund changes daily based on the value of the securities in which it invests. The Sub-Adviser’s judgments about the attractiveness, value and potential appreciation of particular real estate segment and securities in which the Fund invests may prove to be incorrect and may not produce the desired results.

 

No Operating History. The Fund is a new mutual fund and has no history of operations. During the Fund’s start-up period, the Fund may not achieve the desired portfolio composition. If the Fund commences operations under inopportune market or economic conditions, it may not be able to achieve its investment objective.

 

Fund Performance

 

No performance information is presented because the Fund has not yet commenced investment operations. Updated performance information will be available at the Fund’s website www.arcincomefunds.com. Information relating to the investment performance of the Sub-Adviser to the Fund is included in the Appendix to this Prospectus.

 

Investment Management

 

Adviser. National Fund Advisors, LLC (“NFA”) is the Fund’s investment adviser.

 

Sub-Adviser. Carnegie Asset Management, LLC. (“Carnegie” or “CAM”), is the Fund’s investment sub-adviser.

 

Portfolio Manager(s). Brad Stanley and Mark Painter, portfolio managers at CAM, have primary portfolio management responsibilities for the Fund.  Both have served the Fund in this capacity since inception in 2014.

 

Purchase and Sale of Fund Shares

 

The minimum initial investment in the Fund is $2,500. The minimum subsequent investment in the Fund is $250. The Fund reserves the right to waive these minimum amounts pursuant to agreements with financial intermediaries.

 

4
 

 

You may purchase, redeem, or exchange shares of the Fund on any business day, which is any day the New York Stock Exchange (the “NYSE”) is open for business. Shares may be purchased or redeemed through your financial intermediary.

 

Tax Information

 

Dividends and capital gain distributions that you receive from the Fund, whether you reinvest your distributions in additional Fund shares or receive them in cash, are taxable to you at either ordinary income or capital gains tax rates, unless you are investing through an individual retirement account or a tax-exempt plan. If you are investing through an individual retirement account or a tax-exempt plan, you should consult your tax advisor concerning the tax consequences of an investment in the Fund.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

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

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WHO SHOULD INVEST

 

The Fund may be suitable for you if you are seeking:

 

·a fund offering the potential for current dividend income and capital appreciation.

 

·to add exposure to dividend paying common stocks to your portfolio;

 

·liquidity and portfolio diversification

 

The Fund is designed for long-term investors and not as a trading vehicle. The Fund will take reasonable steps to identify and reject orders from market timers.

 

INVESTMENT OBJECTIVE AND POLICIES

 

The Fund’s investment objective is to provide a high level of dividend income, with the potential for capital appreciation. There can be no assurance that the Fund will achieve its investment objective. The Fund may change its investment objective without shareholder approval, although it has no current intention to do so. Shareholders will be provided 60 days’ prior written notice of any change to the Fund’s investment objective.

 

PRINCIPAL INVESTMENT STRATEGIES

 

The Fund will invest substantially all (and under normal market conditions, at least 80%) of its net assets (plus any borrowings for investment purposes) in dividend paying common stocks and other equity securities. The Sub-Adviser intends to allocate the Fund’s assets among common stocks and other equity securities that, in its view, are paying an attractive dividend and appear capable of sustaining that dividend level over time.

 

The Sub-Adviser evaluates securities based primarily on its assessment of their financial operations and cost of capital, with a secondary consideration for the potential for capital appreciation. In selecting securities for investment, the Sub-Adviser uses proprietary software that screens companies on over 250 financial metrics in order to assess dividend sustainability and growth. The Sub-Adviser focuses its research on companies that currently pay a dividend on their common stock of 6% or more. The Sub-Adviser may utilize fundamental, technical, and other related methodologies to determine the intrinsic value of an underlying security. It may strategically rebalance the Fund’s investment strategies according to the current market conditions, but will remain true to its fundamental analysis with respect to the cost of capital. The Sub-Adviser expects that it will sell a security if, in the judgment of the portfolio manager, the individual security’s dividend potential has been compromised, its fundamentals have deteriorated or may deteriorate, or a more attractive investment opportunity is identified.

 

The securities in which the Fund may invest consist of:

 

·Common Stocks.

 

·Master Limited Partnerships (“MLP”s). The MLP securities in which the Fund invests are common units representing limited partnership interests of energy-related MLPs. The Fund expects to invest in MLPs that primarily derive their revenue from energy infrastructure assets and energy related assets or activities, including businesses involved in natural gas, natural gas

 

6
 

 

 

  liquids, crude oil, refined products, coal, and alternative energy such as ethanol, hydrogen and biodiesel.

 

·Real Estate Investment Trusts (“REIT”s). REITs are pooled investment vehicles that invest primarily in income-producing real estate or real estate-related loans or interests.
·Depositary Receipts.

 

·Shares of other Investment Companies. Subject to the limits contained within Section 12 of the 1940 Act, the Fund may invest in other investment companies, including closed-end funds that are traded on a securities exchange.

 

Although the Adviser anticipates that the Sub-Adviser will typically invest the Fund’s assets in equity securities, the Fund may invest up to 20% of its net assets in debt securities of any maturity, duration, or credit rating.

 

The Fund may invest up to 15% of its net assets in illiquid securities.

 

PRINCIPAL INVESTMENT RISKS

 

An investment in the Fund’s shares is subject to various risks. The value of the Fund’s investments will increase or decrease based on changes in the prices of the investments it holds. This will cause the value of the Fund’s shares to increase or decrease. You may receive little or no return on your investment or you may lose all or part of it. By itself, the Fund does not constitute a balanced investment program. Before investing in the Fund you should consider carefully the following risks. There may be additional risks that the Fund does not currently foresee or consider material. You may wish to consult with your legal or tax advisers before deciding whether to invest in the Fund.

 

Market Risk. An investment in the Fund is generally subject to market risk, including the possible loss of the entire principal amount invested. An investment in the Fund represents an indirect investment in the securities owned by the Fund. Like all financial instruments, the value of these securities may move up or down, sometimes rapidly and unpredictably. The value of your investment in the Fund at any point in time may be worth less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.

 

Medium- and Small-Capitalization Company Risk. The Fund may invest in medium- or small-capitalization companies, which may be newly formed or have limited product lines, distribution channels, and financial or managerial resources. The risks associated with these investments are generally greater than those associated with investments in the securities of larger, more-established companies. This may cause the Fund’s NAV to be more volatile when compared to investment companies that focus only on large capitalization companies. Generally, securities of medium- and small-capitalization companies are more likely to experience sharper swings in market values or less liquid markets, in which it may be more difficult for the Adviser to sell at times and at prices that the Sub-Adviser believes appropriate. Compared to large companies, smaller companies are more likely to have (i) less information publicly available; (ii) more limited product lines or markets and less mature businesses; (iii) fewer capital resources; (iv) more limited management depth; and (v) shorter operating histories. Further, the equity securities of smaller companies are often traded over-the-counter and generally experience a lower trading volume than is typical for securities that are traded on a national securities exchange. Consequently, the Fund may be required to dispose of these securities over a longer period of time (and

 

 

7
 


potentially at less favorable prices) than would be the case for securities of larger companies, offering greater potential for gains and losses and associated tax consequences.

 

Common Stock Risk. While common stock has historically generated higher average returns than debt securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.

 

Depositary Receipts. Depositary receipts may be less liquid than the underlying shares in their primary trading market. Depositary receipt holders may have limited voting rights, and investment restrictions in certain countries may adversely impact the value of the depositary receipts and may cause equity shares of the underlying issuer to trade at a discount or premium to the market price of the depositary receipts.

 

Energy-Related Securities Risk. The Fund’s investment in energy-related securities may subject the Fund indirectly to the underlying risks of the energy industry. The energy industry may be adversy affected by federal, state, and foreign regulations governing energy production, distrubtion, sale, and infrastructure. Federal, state, and foreign governments may also influence the market for energy resources and infrastructure. Short-term fluctuations in energy prices may cause the value of the Fund’s investments to fluctuate.

 

Investment in other Investment Companies Risk. The Fund’s investment in another investment company may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and expenses. Shares of closed-end funds may trade at prices that reflect a premium above or a discount below the investment company’s net asset value, which may be substantial. If investment company securities are purchased at a premium to net asset value, the premium may not exist when those securities are sold and the Fund could incur a loss. Additionally, certain of the closed-end fund shares held by the Fund may be non-traded and, therefore, illiquid.

 

Liquidity Risk. A security is considered to be illiquid if the Fund is unable to sell such security at a fair price within a reasonable amount of time. A security may be deemed illiquid due to a lack of trading volume in the security or if the security is privately placed and not traded in any public market or is otherwise restricted from trading. The Fund may be unable to sell illiquid securities at the time or price it desires and could lose its entire investment in such securities. Further, certain restricted securities require special registration, liabilities and costs, and could pose valuation difficulties.

 

REIT Investment Risk. REITs are dependent upon management skills and may not be diversified. As REITs generally pay a higher rate of dividends than most operating companies, to the extent application of the Fund’s investment strategy results in the Fund investing in REIT shares, the percentage of the Fund’s dividend income received from REIT shares will likely exceed the percentage of the Fund’s portfolio that is comprised of REIT shares.

 

Non-Diversification Risk. The Fund is classified as a non-diversified management investment company under the 1940 Act. This means that the Fund may invest a greater portion of its assets in a

 

8
 

 

limited number of issuers than would be the case if the Fund were classified as a diversified management investment company. The value of a specific security can perform differently from the market as a whole for reasons related to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s properties and services. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Additionally, the Fund may be subject to greater risk, because the Fund’s performance may be more sensitive to any single economic, business, political, or regulatory occurrence than the value of shares of a diversified investment company.

 

Management Risk. The NAV of the Fund changes daily based on the performance of the securities in which it invests. The Sub-Adviser’s judgments about the attractiveness, value and potential appreciation of particular real estate segment and securities in which the Fund invests may prove to be incorrect and may not produce the desired results.

 

No History of Operations. The Fund is a new mutual fund and has no history of operations. During the Fund’s start-up period, the Fund may not achieve the desired portfolio composition. If the Fund commences operations under inopportune market or economic conditions, it may not be able to achieve its investment objective.

 

ADDITIONAL INVESTMENT STRATEGIES

 

In addition to its principal investment strategies, the Fund may, from time to time, invest in the following types of securities.

 

Derivatives. In addition to its principal investment strategies, the Fund may, from time to time, invest in derivatives. Derivatives are instruments, such as futures contracts, the values of which are derived from the values of other securities or indices. Derivative transactions pose additional risks to the Fund, including liquidity, interest rate, management, valuation, and counterparty risk. Changes in the value of derivatives may not correlate perfectly with the underlying asset, rate, or index, and the Fund could lose more than the principal amount invested. An investment in derivatives may also increase the Fund’s volatility and create investment leverage. When a derivative is used for hedging purposes, it may not provide the anticipated protection, causing the Fund to lose money on both the derivative transaction and the exposure the Fund sought to hedge.

 

Foreign Securities. The Fund may invest in foreign (non-U.S.) securities. Investing in securities issued by foreign companies involves considerations and possible risks not typically associated with investing in securities issued by domestic corporations. The values of foreign investments are affected by changes in currency rates or exchange control regulations, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in the United States or abroad), or changed circumstances in dealings between nations. Costs are incurred in connection with conversions between various currencies. In addition, foreign brokerage commissions are generally higher than in the United States, and foreign securities markets may be less liquid, more volatile, and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards, and potential difficulties in enforcing contractual obligations which could extend settlement periods.

 

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ADDITIONAL INVESTMENT INFORMATION

 

Illiquid Securities. The Fund will not invest more than 15% of its net assets in illiquid securities. Illiquid securities involve the risk that the securities will not be able to be sold promptly (i.e., within seven days) at the time desired by the Fund or at prices approximating the value at which the Fund is carrying the securities on its books and records. Restricted securities, which are securities that may not be resold to the public without an effective registration statement under the Securities Act of 1933, as amended, or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration, may be illiquid.

 

Defensive Position. When the Adviser, in consultation with the Sub-Adviser, believes that market or general economic conditions justify a temporary defensive position, the Fund may deviate from its investment objective and invest all or any portion of its assets in short-term debt instruments, government securities, cash or cash equivalents. When and to the extent the Fund assumes a temporary defensive position, it may not pursue or achieve its investment objective.

 

Portfolio Holdings. A description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the Fund’s SAI. The Fund also files its complete schedule of portfolio holdings with the Securities and Exchange Commission (the SEC) on Form N-Q as of the end of its first and third fiscal quarters. The Fund’s full portfolio holdings are published semi-annually in reports sent to shareholders and filed with the SEC on Form N-CSR and such reports are made available on the Fund’s website, generally within 60 days after the end of each semiannual period. The Fund may also post an uncertified whole or partial list of portfolio holdings on its website at www.arcincomefunds.com, no earlier than 15 days after the end of each calendar quarter. The holdings information remains available until the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information is current. Other information regarding the Fund may be found on the Fund’s website.

 

MANAGEMENT

 

Under the terms of the advisory agreement, the Adviser is responsible for formulating the Fund’s investment policies and making ongoing investment decisions. The Adviser has engaged CAM to serve as investment sub-adviser and to make day-to-day investment decisions for the Fund. A discussion regarding the basis for the Board of Trustee’s (the “Board”) approval of the advisory and sub-advisory agreements will be contained in the Fund’s first semi-annual report to shareholders, when available.

 

Investment Adviser

 

NFA, located at 405 Park Avenue, New York, NY 10022, serves as the Fund’s investment adviser. NFA is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended, and was formed in June 2011. NFA is an indirect wholly-owned subsidiary of AR Capital, LLC (“ARC”), which directly and through its wholly-owned subsidiaries and affiliates sponsors a variety of securities offerings, including publicly registered non-traded real estate investment trusts, a publicly registered non-traded Business Development Company (“BDC”), a non-traded oil and gas limited partnership and additional other funds registered under the 1940 Act. As of the date of this prospectus, the Adviser is managing assets in excess of $___ million.

 

 

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Sub-Adviser

 

CAM, located at 1235 Westlakes Dr. Berwyn, PA 19312, is the Fund’s investment sub-adviser. CAM is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The adviser is a Delaware LLC formed in April 2013. As of the date of this prospectus, CAM has no assets under management.

 

Mr. Stanley serves as Portfolio Manager for CAM. Mr. Stanley joined CAM in 2013 after it was formed by its affiliate, Stanley Laman Group, Ltd. (“SLG”). Mr. Stanley joined SLG in 2004. Prior to joining SLG, Mr. Stanley attended Carnegie Mellon University in Pittsburgh, PA. Mr. Stanley graduated from Carnegie Mellon in 2004 and is a CFA charterholder.

 

Mr. Painter also serves as Portfolio Manager for CAM. Mr. Painter joined CAM in 2013 after it was formed by SLG. Mr. Painter joined SLG in 2004. Mr. Painter graduated from Carnegie Mellon in 2004 and is a CFA charterholder.

 

Additional information about accounts managed by the portfolio managers and their ownership of securities in the Fund is available in the Realty Capital Income Funds Trust’s (the “Trust”) SAI.

 

Management Fees

 

The Adviser’s annual advisory fee is 0.75% of the Fund’s average daily net assets.

 

Distributor

 

Realty Capital Securities, LLC (the “Distributor”), located at 405 Park Avenue, New York, NY 10022, serves as the distributor for the Fund. The Distributor is obligated to sell the shares of the Fund on a best efforts basis only against purchase orders for the shares. Shares of the Fund are offered to the public on a continuous basis.

 

Financial Highlights

 

Because the Fund is newly organized, there is no financial or performance information in this Prospectus. You may request a copy of the Fund’s annual and semi-annual reports, when available, at no charge by calling the Fund toll-free at 1-866-271-9244.

 

PRICING OF FUND SHARES

 

The price at which you can purchase and redeem each class of the Fund’s shares is the NAV of that class of shares next determined after we receive your order in proper form, less any applicable sales charge. Proper form means that your request includes the Fund name and account number, states the amount of the transaction (in dollars or shares), includes the signatures of all owners exactly as registered on the account, signature guarantees (if necessary), any supporting legal documentation that may be required, and any outstanding certificates representing shares to be redeemed.

 

The Fund calculates its NAV per share as of the close of regular trading on the NYSE, generally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. Thus, purchase and redemption orders must be received in proper form by the close of regular trading on the NYSE in order to receive that day’s

 

11
 


NAV; orders received after the close of regular trading on the NYSE will receive the NAV next determined. The Fund has authorized one or more brokers to accept on its behalf purchase (and redemption) orders, and these brokers are authorized to designate other intermediaries on the Fund’s behalf. The Fund will be deemed to have received a purchase (or redemption) order when an authorized broker, or that broker’s designee, accepts the order, and that order will be priced at the next computed NAV after this acceptance. The Fund determines NAV per share for each class by dividing that class’s share of the net assets of the Fund (i.e., its assets less liabilities) by the total number of outstanding shares of that class.

 

Investments in securities that are listed on the NYSE are valued, except as indicated below, at the last sale price reflected at the close of the NYSE on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices for the day or, if no asked price is available, at the bid price.

 

Securities not listed on the NYSE but listed on other domestic or foreign securities exchanges are valued in a similar manner. Securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined as reflected on the tape at the close of the exchange representing the principal market for such securities. If after the close of a foreign market, but prior to the close of business on the day the securities are being valued, market conditions change significantly, certain foreign securities may be fair valued pursuant to procedures established by the Board.

 

Readily marketable securities traded in the over-the-counter market, including listed securities whose primary market is believed by the Adviser to be over-the-counter, are valued at the official closing prices as reported by sources as the Board deems appropriate to reflect their fair market value. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices for the day, or if no asked price is available, at the bid price. However, certain debt securities may be valued on the basis of prices provided by a pricing service when such prices are believed by the Board to reflect the fair market value of such securities.

 

Securities for which market prices are unavailable, or securities for which the Adviser determines that bid and/or asked price or a counterparty valuation does not reflect market value, will be valued at fair value pursuant to procedures approved by the Board. Circumstances in which market prices may be unavailable include, but are not limited to, when trading in a security is suspended, the exchange on which the security is traded is subject to an unscheduled close or disruption, or material events occur after the close of the exchange on which the security is principally traded. In these circumstances, the Fund determines fair value in a manner that fairly reflects the market value of the security on the valuation date based on consideration of any information or factors it deems appropriate. These may include recent transactions in comparable securities, information relating to the specific security, and developments in the markets.

 

The Fund’s use of fair value pricing may cause the NAV of Fund shares to differ from the NAV that would be calculated using market quotations. Fair value pricing involves subjective judgments and it is possible that the fair value determined for a security may be materially different than the value that could be realized upon the sale of that security.

 

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Short-term debt securities, which have a maturity date of 60 days or less, are valued at amortized cost, which approximates value. Investments in open-end mutual funds are valued at their closing NAV.

 

Because the Fund may hold securities that are primarily listed on foreign exchanges that trade on weekends or days when the Fund does not price its shares, the value of the securities held in the Fund may change on days when you will not be able to purchase or redeem Fund shares.

 

HOW TO BUY SHARES

 

Purchasing Shares

 

You may buy shares on any business day. This includes any day that the Fund is open for business, other than weekends and days on which the NYSE is closed, including the following holidays: New Year’s Day; Martin Luther King, Jr.; Day, Presidents’ Day; Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving; and Christmas Day.

 

Because Class A and Class C shares are presently offered only through financial intermediaries, shareholders who invest in the Fund should contact their financial intermediary regarding purchase procedures. Shareholders who purchase shares through a financial intermediary are subject to the procedures of their financial intermediary, which may include limitations, investment minimums, cut-off times and restrictions. Financial intermediaries may charge fees for the services they provide to you in connection with processing your transaction order or maintaining your account with them. Financial intermediaries are responsible for placing your order correctly and promptly with the Fund, forwarding payment promptly, as well as ensuring that you receive copies of the Fund’s prospectus.

 

Purchase orders received in “proper form” by the Fund’s transfer agent or its designated agent before the close of trading on the NYSE will be processed at the NAV next calculated after an order is received. On occasion, the NYSE closes before 4:00 p.m. Eastern time. When that happens, purchase orders received after the NYSE closes will be processed the following business day. To be in “proper form,” the purchase order must include:

 

·The Fund name and account number;

 

·Account name(s) and address(es); and

 

·The dollar amount or number of shares to be purchased.

 

All purchases must be made in U.S. dollars and checks must be drawn on U.S. banks. No cash, credit cards, or third-party checks will be accepted. A $25 fee will be charged against your account for any payment check returned to the transfer agent or for any incomplete electronic funds transfer, or for insufficient funds, stop payment, closed account, or other reasons. If a check does not clear your bank or the Fund is unable to debit your pre-designated bank account on the day of purchase, the Fund reserves the right to cancel the purchase. If your purchase is canceled, you will be responsible for any losses or fees imposed by your bank and losses that may be incurred as a result of a decline in the value of the canceled purchase. The Fund (or the Fund’s agent) has the authority to redeem shares in your account(s) to cover any losses due to fluctuations in share price. Any profit on such cancellation will accrue to the Fund. Your investment in the Fund should be intended to serve as a long-term investment vehicle. The Fund is not designed to provide you with a means of speculating on the short-term fluctuations in the

 

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stock market. The Fund reserves the right to reject any purchase request that it regards as disruptive to the efficient management of the Fund, which includes investors with a history of excessive trading. The Fund also reserves the right to stop offering shares at any time.

 

To help the 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 who opens an account. This means that when you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask for other identifying documents or information, and may take additional steps to verify your identity. We may not be able to open your account or complete a transaction for you until we are able to verify your identity.

 

Classes of Shares Offered

 

Mutual funds typically incur costs for the distribution and servicing of their shares. Many funds pay for these costs by charging a variety of fees to their shareholders. Some of the most common fees include:

 

·Sales Charge: A percentage fee deducted from your initial investment.

 

·Contingent Deferred Sales Charge (“CDSC”): A percentage fee deducted from your sales proceeds based on the length of time you own your shares.

 

·Distribution and Service (12b-1) Fees: An annual percentage fee used to pay for distribution and shareholder servicing expenses.

 

To give you flexibility in choosing a fee structure that is most beneficial for you, the Fund offers multiple classes of shares: Class A shares, Class C shares, and Advisor Class shares. Class A and Class C shares are offered in this prospectus. Advisor Class shares of the Fund are offered in a separate prospectus. Not all shareholders will be eligible to purchase all share classes. Each class of shares represents an investment in the same portfolio of securities, but as described below, each class utilizes a distinct combination of the above fees. Because each investor’s financial considerations are different, you should speak with your financial adviser to help you decide which share class is best for you.

 

The Fund reserves the right to reject or cancel any purchase order and to withdraw or suspend the offering of shares at any time. The Fund may also request additional information from you in order to verify your identity. If you do not provide this information or if such information cannot be verified, we reserve the right to close your account to the extent required or permitted by applicable law or regulations, including those relating to the prevention of money laundering.

 

 

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Class A Shares. Class A Shares are presently offered only through financial intermediaries that have been approved by the Fund. Please refer to your financial representative for detailed information on purchasing Class A shares. You can buy Class A shares at the public offering price, which is the NAV plus a sales charge. You may qualify for a reduced sales charge, as described below. The sales charge does not apply to Class A shares acquired through reinvestment of dividends and capital gains distributions. Class A shares are currently subject to an annual distribution fee of 0.25%. The Board has also approved a shareholder service fee of 0.25%; however, the Fund’s Distributor has agreed to waive the fee until at least August 1, 2014.

 

Sales at Net Asset Value. Class A shares of the Fund may be sold at NAV without a sales charge to certain investors without regard to investment amount, including to (i) officers, directors, and employees of any of the Trust, Realty Capital Securities and NFA (as well as their affiliates); and (ii) investment advisers and financial planners who place trades for their own accounts or the accounts of their clients and who charge a management, consulting, or other fee for their services.

 

The Distributor pays a commission to dealers who sell Class A shares in the form of a “reallowance” of a portion of the sales charge paid on the purchase of those shares. The Distributor may enter into agreements with dealers whereby the dealer reallowance is increased or decreased from the amounts indicated in the table below.

 

Sales Charges. The following table describes the sales charges that you may pay if you buy Class A shares.

 

Amount of Purchase

Initial Sales Charge as

% of Public Offering Price(1)

Initial Sales Charge as

% of Net Amount Invested

Reallowance to Dealers as %   of Public Offering Price(1)
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.50%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 and above (2) None None None

(1)Offering price includes the initial sales charge. The initial sales charge you pay may differ slightly from the amount set forth above because of rounding that occurs in the calculation used to determine your initial sales charge.

(2)Generally, no CDSC is imposed upon the sale of Class A shares. However, if you invest $1 million or more in Class A shares, you may pay a CDSC equal to 1% of the current NAV or the original cost of the shares that you sell, whichever is less, if you redeem your shares within one year of purchase.

 

As shown in the table above, reduced initial sales charges on Class A shares are available to shareholders with investments of $100,000 or more in Class A shares. You may qualify for reduced sales charges under the following circumstances:

 

Aggregating Accounts. The size of the total investment applies to the total amount being invested by any “person,” which includes:

 

·you, your spouse and your children under the age of 21;

 

·a trustee or other fiduciary purchasing for a single trust, estate or fiduciary account, although more than one beneficiary may be involved; and

 

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·any U.S. bank or investment adviser purchasing shares for its investment advisory clients.

 

Rights of Accumulation. A person (defined above) may take into account not only the amount being

invested, but also the current NAV of Class A shares already held by such person in order to reduce the sales charge on the new purchase. To be entitled to a reduced sales charge pursuant to the Rights of Accumulation, you must notify your financial intermediary at the time of purchase, and give information related to the other account(s).

 

Letter of Intention. You may reduce your Class A sales charge by establishing a letter of intention. A letter of intention allows a person (defined above) to aggregate purchases of Class A shares during a 12-month period in order to reduce the sales charge. All Class A shares currently owned will be credited as purchases toward completion of the letter at the greater of their NAV on the date the letter is executed or their cost. You should retain any records necessary to substantiate cost basis because the Fund, the Fund’s transfer agent, and your financial intermediary may not maintain this information. Capital appreciation and reinvested dividends and capital gains distributions do not count toward the required purchase amount during this 12-month period.

 

The letter is not a binding obligation. However, 5% of the amount specified in the letter will be held in escrow, and if your purchases are less than the amount specified, the Fund will request that you remit the amount equal to the difference between the sales charge paid and the sales charge applicable to the aggregate purchases actually made. If this amount is not remitted within 20 days after written request, an appropriate number of escrowed shares will be redeemed in order to realize the difference. However, the sales charge applicable to the investment will in no event be higher than if you had not submitted a letter. Please note that no retroactive adjustment will be made if purchases exceed the amount indicated in the letter.

 

At the time of your purchase, you must inform your financial intermediary of any other investment in Class A shares that would count toward reducing your sales load. This includes, for example, investments held in a retirement account, an employee benefit plan, or at a dealer or other financial intermediary other than the one handling your current purchase. In addition, you may be asked to provide supporting account statements or other information to allow us to verify your eligibility for a discount. If you do not let your financial intermediary know that you are eligible for a discount, you may not receive the discount to which you are otherwise entitled.

 

Dealer Commission. The Distributor may pay dealers a commission of up to 1% on investments of $1 million or more in Class A shares.

 

Reinstatement Privilege. If you redeem your Class A shares and then decide to reinvest in Class A shares of the Fund, you have a one-time option, within 120 calendar days of the date of your redemption, to use all or any part of the proceeds of the redemption to reinstate, free of an initial sales load, all or any part of your investment in Class A shares of the Fund. If you redeem your Class A shares and your redemption was subject to a CDSC, you may reinstate all or any part of your investment in Class A shares within 120 calendar days of the date of your redemption and receive a credit for the applicable CDSC that you paid. Your investment will be reinstated at the NAV per share next determined after we receive your

 

 

16
 


request. Your financial intermediary must inform the Fund’s transfer agent must be informed that your new purchase represents a reinstated investment.

 

Reinstated shares must be registered exactly and be of the same class as the shares previously redeemed, and the Fund’s minimum initial investment amount must be met at the time of reinstatement. For the purposes of the CDSC schedule, the holding period will continue as if the Class A shares had not been redeemed. The ability of a shareholder to utilize the reinstatement privilege is subject to the Fund’s right to reject any purchase or exchange order if it believes such shareholder is engaged in, or has engaged in, market timing or other abusive trading practices.

 

Class C Shares. Class C Shares are presently offered only through financial intermediaries that have been approved by the Fund. Please refer to your financial representative for detailed information on purchasing Class C shares. You can buy Class C shares at NAV. There is no sales charge when purchasing Class C shares. Class C shares are subject to an annual distribution fee of 0.75% and an annual shareholder service fee of 0.25%.

 

If you sell your Class C shares within 12 months of their date of purchase, you may pay a CDSC equal to 1% of the current NAV of your shares or their original cost, whichever is less.

 

Minimum Purchase Amount

 

For Class A shares and Class C shares the minimum initial investment in the Fund is $2,500. The Fund reserves the right to change the amount of this minimum from time to time or to waive it in whole or in part for certain accounts. Financial intermediaries may have their own investment minimums, which may be higher or lower than the Fund’s investment minimum. To the extent investments of individual investors are aggregated into an omnibus account established by an investment adviser, broker, or other intermediary, the account minimum applies to the omnibus account, not to the account of the individual investor. The minimum subsequent investment amount is $250 for A and C classes.

 

Other Purchase Information

 

The Fund may limit the amount of purchases and refuse to sell to any person.

 

The Fund has authorized certain broker-dealers and other financial institutions to accept on its behalf purchase and redemption orders. Such broker-dealers are authorized to designate other intermediaries to receive purchase and redemption orders on the Fund’s behalf. The Fund is deemed to have received an order when the authorized broker-dealer or, if applicable, a broker-dealer’s authorized designee receives the order, and the order is processed at the NAV next calculated thereafter. It is the responsibility of the broker-dealer or other financial institution to transmit orders promptly to the Fund’s transfer agent.

 

Frequent Purchases and Redemptions of Fund Shares

 

The Fund discourages market timing. Market timing is an investment strategy using frequent purchases, redemptions and/or exchanges in an attempt to profit from short-term market movements. To the extent that the Fund significantly invests in small or mid-capitalization equity securities, because these securities are often infrequently traded, investors may seek to trade Fund shares in an effort to benefit

 

17
 


from their understanding of the value of these securities (referred to as price arbitrage). Market timing may result in dilution of the value of Fund shares held by long-term shareholders, disrupt portfolio management, and increase Fund expenses for all shareholders.

 

The Board has adopted a policy directing the Fund to reject any purchase order with respect to one investor, a related group of investors or their agent(s), where it detects a pattern of purchases and sales of the Fund that indicates market timing or trading that it determines is abusive. This policy applies uniformly to all Fund shareholders. While the Fund attempts to deter market timing, there is no assurance that it will be able to identify and eliminate all market timers. For example, certain accounts called “omnibus accounts” include multiple shareholders. Omnibus accounts typically provide the Fund with a net purchase or redemption request on any given day where purchasers of Fund shares and redeemers of Fund shares are netted against one another and the identities of individual purchasers and redeemers whose orders are aggregated are not known by the Fund. The netting effect often makes it more difficult for the Fund to detect market timing, and there can be no assurance that the Fund will be able to do so. Brokers maintaining omnibus accounts with the Fund have agreed to provide shareholder transaction information to the extent known to the broker, to the Fund upon request. If the Fund becomes aware of market timing in an omnibus account, they will work with the broker maintaining the omnibus account to identify the shareholder engaging in the market timing activity. In addition, the Fund reserve the right to reject any purchase order for any reason, including purchase orders that it does not think are in the best interest of the Fund or its shareholders or if the Fund thinks that trading is abusive.

 

HOW TO REDEEM SHARES

 

Shareholders should contact their financial intermediaries for detailed information on redeeming their shares. Shares may be redeemed on any business day. Redemption orders received in proper order by the Fund’s transfer agent or by a brokerage firm or other financial institution that sells the Fund’s shares before 4:00 p.m. Eastern time (or before the NYSE closes if the NYSE closes before 4:00 p.m.) will be effective at that day’s NAV. Your brokerage firm or financial institution may have an earlier cut-off time.

 

Redemption payments may be made in the form of a check or federal wire transfer, subject to any applicable redemption fee. A wire transfer fee of $25 may be charged to defray custodial charges for redemptions paid by wire transfer. Any charges for wire redemptions will be deducted from your account by redemption of shares. If you redeem your shares through a broker-dealer or other institution, you may be charged a fee by that institution.

 

By Mail

 

You should contact your financial intermediary to redeem shares. However, if you no longer have a financial intermediary, you may redeem any part of your account in the Fund at no charge by mail. Your request, in proper form, should be addressed to: Realty Capital Income Funds Trust c/o Gemini Fund Services, LLC, 17605 Wright Street, Suite 2, Omaha, NE  68130.

 

“Proper form” means your request for redemption must:

 

·Include the Fund name and account number;

 

·Include the account name(s) and address(es);

 

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·State the dollar amount or number of shares you wish to redeem; and

 

·Be signed by all registered share owner(s) in the exact name(s) and any special capacity in which they are registered.

 

The Fund may require that the signatures be guaranteed if you request the redemption check be mailed to an address other than the address of record, or if the mailing address has been changed within 30 days of the redemption request. The Fund may also require that signatures be guaranteed for redemptions of $25,000 or more. Signature guarantees are for the protection of shareholders. You can obtain a signature guarantee from most banks and securities dealers, but not from a notary public. For joint accounts, both signatures must be guaranteed. Please call the transfer agent at 1-866-271-9244 if you have questions. At the discretion of the Fund, you may be required to furnish additional legal documents to insure proper authorization. The Fund will not make checks payable to any person other than the shareholder(s) of record or a financial intermediary for the benefit of the shareholder(s) of record.

 

Additional Information

 

Redemptions specifying a certain date or share price cannot be accepted and will be returned. You will be mailed the proceeds on or before the fifth business day following the redemption. You may be assessed a fee if the Fund incurs bank charges because you request that the Fund reissue a redemption check. Also, when the NYSE is closed (or when trading is restricted) for any reason other than its customary weekend or holiday closing or under any emergency circumstances, as determined by the Securities and Exchange Commission, the Fund may suspend redemptions or postpone payment dates.

 

Because the Fund incurs certain fixed costs in maintaining shareholder accounts, the Fund may require you to redeem all of your shares in the Fund on 30 days written notice if the value of your shares in the Fund is less than $1,000 due to redemption, or such other minimum amount as the Fund may determine from time to time. You may increase the value of your shares in the Fund to the minimum amount within the 30-day period. All shares of the Fund are also subject to involuntary redemption if the Board determines to liquidate the Fund. An involuntary redemption will create a capital gain or a capital loss, which may have tax consequences about which you should consult your tax adviser.

 

The Fund reserves the right to honor requests for redemption by making payment in whole or in part in readily marketable securities (“redemption in kind”) if the amount of such a request is large enough to affect operations (for example, if the request is greater than $250,000 or 1% of the Fund's assets). The securities will be chosen by the Fund and valued at the Fund's net asset value. A shareholder may incur transaction expenses in converting these securities to cash.

 

DISTRIBUTION and Shareholder Service PlanS

 

The Fund has adopted a distribution and shareholder service plan pursuant to Rule 12b-1 under the 1940 Act for each of its Class A and Class C shares. The plans provide for the Fund to pay annual fees of up to 0.50% for Class A and 1.00% for Class C to the Distributor for distribution and individual shareholder services, including past distribution services. The Distributor is currently waiving 0.25% of the fee for Class A shares. Such waiver is in effect until at least August 1, 2014.

 

The Distributor pays all or a portion of such fees to the financial intermediaries that make the classes available. Because these fees may be used to pay for services that are not related to prospective

 

19
 


sales of the Fund, each class will continue to make payments under its plan even if it is closed to new investors. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The higher fees for Class C shares may cost you more over time than paying the initial sales charge for Class A shares. For additional information about the plans and their terms, see “Distribution and Shareholder Service Plans” in the statement of additional information.

 

DIVIDENDS, DISTRIBUTIONS AND TAXES

 

Dividends and Distributions

 

The Fund will typically distribute substantially all of its net investment income in the form of dividends and taxable capital gains to its shareholders. These distributions are automatically reinvested in the Fund unless you request cash distributions on your application or through a written request to the Fund. The Fund expects that its distributions will consist of both capital gains and dividend income. The Fund may make distributions of its net realized capital gains (after any reductions for capital loss carry forwards) annually.

 

The net income attributable to, and dividends payable on, the shares of each class is reduced by the amount of annual distribution and other expenses of each class. Because Class A shares bear lower annual distribution and other expenses, they will tend to pay higher dividends than Class C shares.

 

Taxes

 

Unless you are investing in the Fund through an individual retirement account or an tax-exempt plan, you generally will be subject to federal income tax (and any other taxes, including state and local income taxes, if applicable) on dividends and capital gains distributions (whether such dividends or distributions are paid in cash or reinvested in additional shares) and will generally recognize gain or loss upon a redemption or exchange of your shares.

 

Generally, dividends paid by the Funds from interest, dividends, or net short-term capital gains will be taxed as ordinary income. Distributions properly designated by the Fund as deriving from net capital gains are taxable as long-term capital gains regardless of how long you have held your shares. Distributions of investment income properly reported by the Fund as derived from “qualified dividend income” will be taxed (subject to certain minimum holding period requirements) at the rates applicable to long-term capital gains for non-corporate investors. Distributions in excess of the Fund’s earnings and profits will be first treated as a return of a capital to the extent of your basis in your Fund shares and thereafter will be treated as gain from the sale of Fund shares. While distributions consisting of a return of capital may themselves be non-taxable, they will lower a shareholder’s basis in the securities so that when the shareholder eventually sells the securities, even if sold at a loss on the original investment, the shareholder may be obligated to pay taxes on gains.

 

The amount of the gain or loss upon a redemption or exchange of your shares is measured by the difference between your adjusted tax basis in the shares redeemed or exchanged and the amount of the proceeds received in exchange for such shares. Any gain or loss arising from the redemption or exchange of shares generally is a capital gain or loss. This capital gain or loss normally is treated as a long-term capital gain or loss if you have held your shares for more than one year at the time of such redemption or

 

20
 


exchange; otherwise, it generally will be classified as short-term capital gain or loss. If, however, you receive a capital gain dividend with respect to any share of the Fund, and if the share is sold before you have held it for at least six months, then any loss on the redemption or exchange of the share, to the extent of the capital gain dividend, is treated as a long-term capital loss.

 

A dividend or distribution made shortly after the purchase of shares of a Fund by a shareholder, although in effect a return of capital to that shareholder, would be taxable to that shareholder as described above. Distributions declared in October, November, or December, payable to shareholders of record in one of those months, and actually paid in January of the following year will be treated as paid on December 31 of the preceding year.

 

Investments by the Fund in foreign securities may be subject to foreign withholding taxes. In that case, the Fund’s yield on those securities would be decreased. Shareholders may be entitled to claim a credit or deduction with respect to foreign taxes paid by the Fund. In addition, the Fund’s investments in foreign securities or foreign currencies may increase or accelerate the Fund’s recognition of ordinary income and may affect the timing or amount of the Fund’s distributions.

 

Investments by the Fund in certain debt instruments or derivatives may cause the Fund to recognize taxable income in excess of the cash generated by such instruments. As a result, the Fund could be required at times to liquidate other investments in order to satisfy its distribution requirements under the Internal Revenue Code. The Fund’s use of derivatives will also affect the amount, timing, and character of the Fund’s distributions.

 

Because of tax law requirements, you must provide the Fund with an accurate and certified taxpayer identification number (for individuals, generally a Social Security number) to avoid “back-up” withholding, which is currently imposed at a rate of 28%.

 

Early in each calendar year, the Fund or your broker will notify you of the amount and tax status of distributions paid to you for the preceding year. In addition, for shares acquired after January 1, 2012, the Fund or your broker will notify you of the amount of gain or loss recognized on any redemption or exchange of Fund shares. For this purposes, you will need to select a cost basis method to be used to calculate your reported gains and losses prior to or at the time of any redemption or exchange. If you do not select a method, a default method will be applied to the transactions. The Fund’s default method is average cost, but your broker may use an alternative default method. The cost basis method used on your account could significantly affect your taxes due and should be carefully considered. You should consult your tax advisor for more information on your own tax situation, including possible foreign, state, and local taxes.

 

Special tax rules apply to investments in the Fund through an individual retirement account or a tax-exempt plan. You should consult a tax advisor to determine the suitability of the Fund as an investment for such individual retirement account or tax-exempt plan.

 

The tax considerations described in this section do not apply to non-U.S. investors. Non-U.S. investors should consult their own tax advisor to discuss the tax consequences of an investment in the Fund by a non-U.S. investor.

 

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The information contained in this prospectus is not a complete description of the federal, state, local, or foreign tax consequences of investing in the Fund. Because each investor’s tax situation is unique, you should consult your tax advisor before investing in the Fund.

 

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FOR MORE INFORMATION

 

Several additional sources of information are available to you. The Statement of Additional Information (the “SAI”), incorporated into this Prospectus by reference, contains detailed information on the Fund’s policies and operations, including policies and procedures relating to the disclosure of portfolio holdings by the Fund’s affiliates. The annual reports, when available, contain management’s discussion of market conditions and investment strategies that significantly affected the Fund’s performance results as of the Fund’s latest annual fiscal year end.

 

Call the Fund at 1-866-271-9244 to request free copies of the SAI and, when available, the Fund’s annual report and the semi-annual report, and to request other information about the Fund and to make shareholder inquiries. You may also obtain this information from the Fund’s website at www.arcincomefunds.com.

 

You may review and copy information about the Fund (including the SAI and other reports) at the Securities and Exchange Commission (the “SEC”) Public Reference Room in Washington, D.C. Call the SEC at 1-202-551-8090 for room hours and operation. You also may obtain reports and other information about the Fund on the EDGAR Database on the SEC’s Internet site at http.//www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.

 

 

 

 

 

 

 

 

Investment Company Act File No. 811-22785

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APPENDIX

 

ADVISER’S PRIOR PERFORMANCE

 

The data below is provided to illustrate the past performance of substantially similar accounts managed by the Fund’s portfolio managers in their capacity as such for Carnegie Asset Management’s (“CAM”) affiliate Stanley Laman Group, Ltd. (“SLG”), as measured against market indices.

 

The performance below does not represent the performance of the Fund, nor should it be considered a substitute for the Fund’s performance. You should not consider this performance data as a prediction or an indication of future performance of the Fund or the performance that one might achieve by investing in the Fund.

 

The Stanley Laman Group, Ltd. Composite (the “Composite”) represents fully discretionary advisory accounts that are managed in accordance with the SLG Dividend and Value investment strategy. As of November 30, 2013, the Composite represented forty-one accounts with gross assets of approximately $168 million. All personnel responsible for managing the accounts included in the Composite are now employed by SLG’s newly formed affiliate, CAM.

 

The performance results are prepared in accordance with Global Investment Performance Standards (“GIPS”). In certain cases, the calculation methodologies prescribed by GIPS may be different from the standard SEC formula used by mutual funds for presenting their performance returns. The returns of the accounts presented were calculated on a total return basis and include all dividends and interest and realized and unrealized gains and losses. All returns are presented after the deduction of a hypothetical 1.40% fee.

 

The private accounts for which results are reported are not subject to the diversification requirements, specific tax restrictions and investment limitations imposed on the Fund by the Investment Company Act of 1940, as amended, or the Internal Revenue Code of 1986, as amended. Consequently, the performance results for such private accounts could have been adversely affected if they had been subject to mutual fund regulations.

 

The performance data below is not the performance results for the Fund.

 

Stanley Laman Group, Ltd.

Average Annual Total Returns as of November 30, 2013

Period Average Total Returns

S&P 500 Index –

Price Return(1)

S&P 500 Index –

Total Return(2)

1 Year 28.24% 27.53% 30.32%
3 Year 14.13% 14.98% 17.49%

Since Inception

(February 2010)

15.42% 14.54% 17.03%
(1)The S&P 500 Index is a broad market-weighted average of large-sized U.S. companies. The S&P 500 Index is unmanaged. Price return reflects capital appreciation only. It reflects neither reinvested dividends nor fees, expenses, or taxes.
(2)The S&P 500 Index is a broad market-weighted average of large-sized U.S. companies. The S&P 500 Index is unmanaged. Total return reflects capital appreciation and reinvested dividends. It does not reflect fees, expenses, and taxes.

 

 

24
 
REALTY CAPITAL INCOME FUNDS TRUST

 

PRIVACY POLICY

 

1. POLICY

 

Realty Capital Income Funds Trust (the “Trust”) is committed to protecting your privacy. This privacy notice, which is required by state and federal law, explains the Trust’s privacy policy (the “Policy”). This Policy’s terms apply both to our current shareholders and to former shareholders as well.

 

2. HOW WE PROTECT YOUR INFORMATION

 

We are committed to maintaining the privacy of our shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

 

3. WHAT KIND OF INFORMATION WE COLLECT

 

The Trust may collect nonpublic personal information regarding investors from sources such as the following:

 

·Account Applications and other forms, which may include a shareholder’s name, address, social security number and/or personally identifiable financial information;

 

·Account History, including information about a shareholder’s losses or gains; and

 

·Correspondence and Communication, with the Trust’s representatives and their affiliates.

 

4. WHO HAS ACCESS TO SHAREHOLDER INFORMATION

 

We do not disclose any non-public personal information about our shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to provide services to shareholders (for example, to a transfer agent, investment adviser or third party administrator). We restrict access to non-public personal information about our shareholders to Trust personnel and employees of Trust service providers with a legitimate business need for the information. We will maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our shareholders. Third parties that handle this information shall agree to follow the standards the Trust has established.

 

5. UPDATING YOUR INFORMATION

 

To help us keep your information up-to-date and accurate, please contact the Trust if there is any change in your personal information.

 

Adopted April 11, 2013

 

25
 

 

Subject to Completion.  Preliminary Prospectus dated February __, 2014

 

 

 

AR Capital Dividend and Value Fund

 

 

PROSPECTUS

 

[_______________], 2014

 

 

Advisor Class Shares (______)

 

This Prospectus provides important information about the Advisor Class shares of the AR Capital Dividend and Value Fund (the “Fund”), that you should know before investing.  Please read it carefully and keep it for future reference.

 

The U.S. Securities and Exchange Commission has not approved or disapproved these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 
 

TABLE OF CONTENTS

 

FUND SUMMARY — AR CAPITAL DIVIDEND AND VALUE FUND 1
Investment Objective 1
Fees and Expenses of the Fund 1
Principal Investment Strategies 2
Principal Risks of Investing in the Fund 2
Fund Performance 4
Investment Management 4
Purchase and Sale of Advisor Class Shares 4
Tax Information 4
Payments to Broker-Dealers and Other Financial Intermediaries 5
WHO SHOULD INVEST 6
INVESTMENT OBJECTIVE AND POLICIES 6
PRINCIPAL INVESTMENT STRATEGIES 6
PRINCIPAL INVESTMENT RISKS 7
ADDITIONAL INVESTMENT STRATEGIES 9
ADDITIONAL INVESTMENT INFORMATION 10
MANAGEMENT 10
PRICING OF FUND SHARES 11
HOW TO BUY SHARES 13
HOW TO REDEEM SHARES 16
DIVIDENDS, DISTRIBUTIONS AND TAXES 18
FOR MORE INFORMATION 20
APPENDIX / ADVISER’S PRIOR PERFORMANCE 21
PRIVACY POLICY 22

 

i
 

FUND SUMMARY – AR CAPITAL DIVIDEND AND VALUE FUND

 

Investment Objective

 

The investment objective of the Fund is to provide a high level of dividend income, with the potential for capital appreciation.

 

Fees and Expenses of the Fund

 

This table describes the fees and expenses that you may pay if you buy and hold Advisor Class shares of the Fund.

 

  Advisor Class

Shareholder Fees

(fees paid directly from your investment)

None

 

 

  Advisor Class

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

Management Fees 0.[75]%
Distribution and Service (12b-1) Fees None
Other Expenses(1) _____%
Total Annual Fund Operating Expenses _____%
Expense Reimbursement(2) (____)%
Total Annual Fund Operating Expenses After Expense Reimbursement _____%

(1)Because the Fund is new, “Other Expenses” are based on estimated amounts for the current fiscal year.

(2) National Fund Advisors, LLC, the Fund’s investment adviser (“NFA” or the “Adviser”), has contractually agreed to waive a portion or all of its management fees and pay Fund expenses (excluding acquired fund fees and expenses, interest, taxes, and extraordinary expenses) in order to limit the Other Expenses to [0.__%] of average daily net assets of the Fund’s shares (the “Expense Cap”). The Expense Cap will remain in effect through at least ___________, 2015, and may be terminated before that date only by the Trust’s Board of Trustees. The Adviser may recoup any previously waived fees and paid expenses from the Fund pursuant to this agreement for 3 years from the date they were waived or paid, subject to the Expense Cap.

 

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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

  1 Year 3 Years
     
Advisor Class $____ $___
     
     

 

 

1
 

Portfolio Turnover: The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the Example, affect the Fund’s performance. The portfolio turnover rate for the Fund is not available because the Fund is new.

 

Principal Investment Strategies

 

The Fund will invest substantially all (and under normal market conditions, at least 80%), of its net assets (plus any borrowings for investment purposes) in dividend paying common stocks and other equity securities of issuers that trade in the U.S. on nationally recognized securities exchanges. The fund may invest in Master Limited Partnership (“MLP”) or Real Estate Investment Trust (“REIT”) investments as long as they are liquid and trade on nationally recognized securities exchanges. The MLP securities in which the Fund invests are common units representing limited partnership interests of energy infrastructure MLPs. The Fund may also invest in other investment companies and depositary receipts. Under the supervision of the Adviser, Carnegie Asset Management, LLC (“CAM” or the “Sub-Adviser”) evaluates securities based primarily on its assessment of each issuer’s ability to sustain its current dividend.

 

Although the Adviser anticipates that the Sub-Adviser will typically invest the Fund’s assets in equity securities, the Fund may invest up to 20% of its net assets in debt securities of any maturity, duration, or credit rating.

 

The Fund may invest up to 15% of its net assets in illiquid securities.

 

Principal Risks of Investing in the Fund

 

Investing in the Fund is subject to various risks, including the risk that you may receive little or no return on your investment, and you may lose all or part of your investment. By itself, the Fund does not constitute a balanced investment program. Before investing in the Fund you should consider carefully the following risks:

 

Market Risk. An investment in the Fund is generally subject to market risk, including the possible loss of the entire principal amount invested. An investment in the Fund represents an indirect investment in the securities owned by the Fund. Like all financial instruments, the value of these securities may move up or down, sometimes rapidly and unpredictably. The value of your investment in the Fund at any point in time may be worth less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.

 

Medium- and Small-Capitalization Company Risk. The Fund may invest in medium- and small-capitalization companies, which may be newly formed or have limited product lines, distribution channels, and financial or managerial resources. The risks associated with these investments are generally greater than those associated with investments in the securities of larger, more-established companies. This may cause the Fund’s NAV to be more volatile when compared to investment companies that focus only on large capitalization companies.

 

2
 

 

Common Stock Risk. While common stock has historically generated higher average returns than debt securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.

 

Depositary Receipts Risk. Depositary receipts may be less liquid than the underlying shares in their primary trading market. Depositary receipt holders may have limited voting rights, and investment restrictions in certain countries may adversely impact the value of the depositary receipts and may cause equity shares of the underlying issuer to trade at a discount or premium to the market price of the depositary receipts.

 

Energy-Related Securities Risk. The Fund’s investment in energy-related securities may subject the Fund indirectly to the underlying risks of the energy industry. The energy industry may be adversy affected by federal, state, and foreign regulations governing energy production, distrubtion, sale, and infrastructure. Federal, state, and foreign governments may also influence the market for energy resources and infrastructure. Short-term fluctuations in energy prices may cause the value of the Fund’s investments to fluctuate.

 

Investment in other Investment Companies Risk. The Fund’s investment in another investment company may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and expenses. Shares of closed-end funds may trade at prices that reflect a premium above or a discount below the investment company’s net asset value, which may be substantial. If investment company securities are purchased at a premium to net asset value, the premium may not exist when those securities are sold and the Fund could incur a loss. Additionally, closed-end fund shares held by the Fund may be non-traded and, therefore, illiquid.

 

Liquidity Risk. The Fund may hold illiquid securities that it may be unable to sell at the preferred time or price and could lose its entire investment in such securities.

 

REIT Investment Risk. REITs are dependent upon management skills and may not be diversified. As REITs generally pay a higher rate of dividends than most operating companies, to the extent application of the Fund’s investment strategy results in the Fund investing in REIT shares, the percentage of the Fund’s dividend income received from REIT shares will likely exceed the percentage of the Fund’s portfolio that is comprised of REIT shares.

 

Non-Diversification Risk. The Fund is classified as a non-diversified management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). This means that the Fund may invest a greater portion of its assets in a limited number of issuers than would be the case if the Fund were classified as a diversified management investment company. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Additionally, the Fund may be subject to greater risk, because the Fund’s performance may be more sensitive to any single economic, business, political, or regulatory occurrence than the value of shares of a diversified investment company.

 

3
 

Management Risk. The NAV of the Fund changes daily based on the value of the securities in which it invests. The Sub-Adviser’s judgments about the attractiveness, value and potential appreciation of particular real estate segment and securities in which the Fund invests may prove to be incorrect and may not produce the desired results.

 

No Operating History. The Fund is a new mutual fund and has no history of operations. During the Fund’s start-up period, the Fund may not achieve the desired portfolio composition. If the Fund commences operations under inopportune market or economic conditions, it may not be able to achieve its investment objective.

 

Fund Performance

 

No performance information is presented because the Fund has not yet commenced investment operations. Updated performance information will be available at the Fund’s website, www.arcincomefunds.com. Information relating to the investment performance of the Sub-Adviser to the Fund is included in the Appendix to this Prospectus.

 

Investment Management

 

Adviser. National Fund Advisors, LLC (“NFA”) is the Fund’s investment adviser.

 

Sub-Adviser. Carnegie Asset Management, LLC. (“Carnegie” or “CAM”), is the Fund’s investment sub-adviser.

 

Portfolio Manager(s). Brad Stanley and Mark Painter, portfolio managers at CAM, have primary portfolio management responsibilities for the Fund.  Both have served the Fund in this capacity since inception in 2014.

 

Purchase and Sale of Advisor Class Shares

 

For Advisor Class shares, the minimum initial investment is $2,500 for persons purchasing shares through certain intermediaries and certain persons in specified relationships with the Adviser or its affiliates. The minimum initial investment is $100,000 for other persons purchasing shares directly from the Fund. The minimum subsequent investment in the Fund is $500. The Fund reserves the right to waive these minimum amounts.

 

You may purchase, redeem, or exchange shares of the Fund on any business day, which is any day the New York Stock Exchange (the “NYSE”) is open for business. Eligible persons may purchase and redeem Advisor Class shares directly through the Fund.

 

Tax Information

 

Dividends and capital gain distributions that you receive from the Fund, whether you reinvest your distributions in additional Fund shares or receive them in cash, are taxable to you at either ordinary income or capital gains tax rates, unless you are investing through an individual retirement account or a tax-exempt plan. If you are investing through an individual retirement account or a tax-exempt plan, you should consult your tax advisor concerning the tax consequences of an investment in the Fund.

 

4
 

Payments to Broker-Dealers and Other Financial Intermediaries

 

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

5
 

WHO SHOULD INVEST

 

The Fund may be suitable for you if you are seeking:

 

·a fund offering the potential for current dividend income and capital appreciation.

 

·to add exposure to dividend paying common stocks to your portfolio;

 

·liquidity and portfolio diversification

 

The Fund is designed for long-term investors and not as a trading vehicle. The Fund will take reasonable steps to identify and reject orders from market timers.

 

INVESTMENT OBJECTIVE AND POLICIES

 

The Fund’s investment objective is to provide a high level of dividend income, with the potential for capital appreciation. There can be no assurance that the Fund will achieve its investment objective. The Fund may change its investment objective without shareholder approval, although it has no current intention to do so. Shareholders will be provided 60 days’ prior written notice of any change to the Fund’s investment objective.

 

PRINCIPAL INVESTMENT STRATEGIES

 

The Fund will invest substantially all (and under normal market conditions, at least 80%) of its net assets (plus any borrowings for investment purposes) in dividend paying common stocks and other equity securities. The Sub-Adviser intends to allocate the Fund’s assets among common stocks and other equity securities that, in its view, are paying an attractive dividend and appear capable of sustaining that dividend level over time.

 

The Sub-Adviser evaluates securities based primarily on its assessment of their financial operations and cost of capital, with a secondary consideration for the potential for capital appreciation. In selecting securities for investment, the Sub-Adviser uses proprietary software that screens companies on over 250 financial metrics in order to assess dividend sustainability and growth. The Sub-Adviser focuses its research on companies that currently pay a dividend on their common stock of 6% or more. The Sub-Adviser may utilize fundamental, technical, and other related methodologies to determine the intrinsic value of an underlying security. It may strategically rebalance the Fund’s investment strategies according to the current market conditions, but will remain true to its fundamental analysis with respect to the cost of capital. The Sub-Adviser expects that it will sell a security if, in the judgment of the portfolio manager, the individual security’s dividend potential has been compromised, its fundamentals have deteriorated or may deteriorate, or a more attractive investment opportunity is identified.

 

The securities in which the Fund may invest consist of:

 

·Common Stocks.

 

·Master Limited Partnerships (“MLP”s). The MLP securities in which the Fund invests are common units representing limited partnership interests of energy-related MLPs. The Fund expects to invest in MLPs that primarily derive their revenue from energy infrastructure assets and energy related assets or activities, including businesses involved in natural gas, natural gas

 

6
 

liquids, crude oil, refined products, coal, and alternative energy such as ethanol, hydrogen and biodiesel.

 

·Real Estate Investment Trusts (“REIT”s). REITs are pooled investment vehicles that invest primarily in income-producing real estate or real estate-related loans or interests.
·Depositary Receipts.

 

·Shares of other Investment Companies. Subject to the limits contained within Section 12 of the 1940 Act, the Fund may invest in other investment companies, including closed-end funds that are traded on a securities exchange.

 

Although the Adviser anticipates that the Sub-Adviser will typically invest the Fund’s assets in equity securities, the Fund may invest up to 20% of its net assets in debt securities of any maturity, duration, or credit rating.

 

The Fund may invest up to 15% of its net assets in illiquid securities.

 

PRINCIPAL INVESTMENT RISKS

 

An investment in the Fund’s shares is subject to various risks. The value of the Fund’s investments will increase or decrease based on changes in the prices of the investments it holds. This will cause the value of the Fund’s shares to increase or decrease. You may receive little or no return on your investment or you may lose all or part of it. By itself, the Fund does not constitute a balanced investment program. Before investing in the Fund you should consider carefully the following risks. There may be additional risks that the Fund does not currently foresee or consider material. You may wish to consult with your legal or tax advisers before deciding whether to invest in the Fund.

 

Market Risk. An investment in the Fund is generally subject to market risk, including the possible loss of the entire principal amount invested. An investment in the Fund represents an indirect investment in the securities owned by the Fund. Like all financial instruments, the value of these securities may move up or down, sometimes rapidly and unpredictably. The value of your investment in the Fund at any point in time may be worth less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.

 

Medium- and Small-Capitalization Company Risk. The Fund may invest in medium- or small-capitalization companies, which may be newly formed or have limited product lines, distribution channels, and financial or managerial resources. The risks associated with these investments are generally greater than those associated with investments in the securities of larger, more-established companies. This may cause the Fund’s NAV to be more volatile when compared to investment companies that focus only on large capitalization companies. Generally, securities of medium- and small-capitalization companies are more likely to experience sharper swings in market values or less liquid markets, in which it may be more difficult for the Adviser to sell at times and at prices that the Sub-Adviser believes appropriate. Compared to large companies, smaller companies are more likely to have (i) less information publicly available; (ii) more limited product lines or markets and less mature businesses; (iii) fewer capital resources; (iv) more limited management depth; and (v) shorter operating histories. Further, the equity securities of smaller companies are often traded over-the-counter and generally experience a lower trading volume than is typical for securities that are traded on a national securities exchange. Consequently, the Fund may be required to dispose of these securities over a longer period of time (and

7
 

potentially at less favorable prices) than would be the case for securities of larger companies, offering greater potential for gains and losses and associated tax consequences.

 

Common Stock Risk. While common stock has historically generated higher average returns than debt securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.

 

Depositary Receipts. Depositary receipts may be less liquid than the underlying shares in their primary trading market. Depositary receipt holders may have limited voting rights, and investment restrictions in certain countries may adversely impact the value of the depositary receipts and may cause equity shares of the underlying issuer to trade at a discount or premium to the market price of the depositary receipts.

 

Energy-Related Securities Risk. The Fund’s investment in energy-related securities may subject the Fund indirectly to the underlying risks of the energy industry. The energy industry may be adversy affected by federal, state, and foreign regulations governing energy production, distrubtion, sale, and infrastructure. Federal, state, and foreign governments may also influence the market for energy resources and infrastructure. Short-term fluctuations in energy prices may cause the value of the Fund’s investments to fluctuate.

 

Investment in other Investment Companies Risk. The Fund’s investment in another investment company may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and expenses. Shares of closed-end funds may trade at prices that reflect a premium above or a discount below the investment company’s net asset value, which may be substantial. If investment company securities are purchased at a premium to net asset value, the premium may not exist when those securities are sold and the Fund could incur a loss. Additionally, certain of the closed-end fund shares held by the Fund may be non-traded and, therefore, illiquid.

 

Liquidity Risk. A security is considered to be illiquid if the Fund is unable to sell such security at a fair price within a reasonable amount of time. A security may be deemed illiquid due to a lack of trading volume in the security or if the security is privately placed and not traded in any public market or is otherwise restricted from trading. The Fund may be unable to sell illiquid securities at the time or price it desires and could lose its entire investment in such securities. Further, certain restricted securities require special registration, liabilities and costs, and could pose valuation difficulties.

 

REIT Investment Risk. REITs are dependent upon management skills and may not be diversified. As REITs generally pay a higher rate of dividends than most operating companies, to the extent application of the Fund’s investment strategy results in the Fund investing in REIT shares, the percentage of the Fund’s dividend income received from REIT shares will likely exceed the percentage of the Fund’s portfolio that is comprised of REIT shares.

 

Non-Diversification Risk. The Fund is classified as a non-diversified management investment company under the 1940 Act. This means that the Fund may invest a greater portion of its assets in a

 

8
 

 

limited number of issuers than would be the case if the Fund were classified as a diversified management investment company. The value of a specific security can perform differently from the market as a whole for reasons related to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s properties and services. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Additionally, the Fund may be subject to greater risk, because the Fund’s performance may be more sensitive to any single economic, business, political, or regulatory occurrence than the value of shares of a diversified investment company.

 

Management Risk. The NAV of the Fund changes daily based on the performance of the securities in which it invests. The Sub-Adviser’s judgments about the attractiveness, value and potential appreciation of particular real estate segment and securities in which the Fund invests may prove to be incorrect and may not produce the desired results.

 

No History of Operations. The Fund is a new mutual fund and has no history of operations. During the Fund’s start-up period, the Fund may not achieve the desired portfolio composition. If the Fund commences operations under inopportune market or economic conditions, it may not be able to achieve its investment objective.

 

ADDITIONAL INVESTMENT STRATEGIES

 

In addition to its principal investment strategies, the Fund may, from time to time, invest in the following types of securities.

 

Derivatives. In addition to its principal investment strategies, the Fund may, from time to time, invest in derivatives. Derivatives are instruments, such as futures contracts, the values of which are derived from the values of other securities or indices. Derivative transactions pose additional risks to the Fund, including liquidity, interest rate, management, valuation, and counterparty risk. Changes in the value of derivatives may not correlate perfectly with the underlying asset, rate, or index, and the Fund could lose more than the principal amount invested. An investment in derivatives may also increase the Fund’s volatility and create investment leverage. When a derivative is used for hedging purposes, it may not provide the anticipated protection, causing the Fund to lose money on both the derivative transaction and the exposure the Fund sought to hedge.

 

Foreign Securities. The Fund may invest in foreign (non-U.S.) securities. Investing in securities issued by foreign companies involves considerations and possible risks not typically associated with investing in securities issued by domestic corporations. The values of foreign investments are affected by changes in currency rates or exchange control regulations, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in the United States or abroad), or changed circumstances in dealings between nations. Costs are incurred in connection with conversions between various currencies. In addition, foreign brokerage commissions are generally higher than in the United States, and foreign securities markets may be less liquid, more volatile, and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards, and potential difficulties in enforcing contractual obligations which could extend settlement periods.

 

9
 

 

ADDITIONAL INVESTMENT INFORMATION

 

Illiquid Securities. The Fund will not invest more than 15% of its net assets in illiquid securities. Illiquid securities involve the risk that the securities will not be able to be sold promptly (i.e., within seven days) at the time desired by the Fund or at prices approximating the value at which the Fund is carrying the securities on its books and records. Restricted securities, which are securities that may not be resold to the public without an effective registration statement under the Securities Act of 1933, as amended, or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration, may be illiquid.

 

Defensive Position. When the Adviser, in consultation with the Sub-Adviser, believes that market or general economic conditions justify a temporary defensive position, the Fund may deviate from its investment objective and invest all or any portion of its assets in short-term debt instruments, government securities, cash or cash equivalents. When and to the extent the Fund assumes a temporary defensive position, it may not pursue or achieve its investment objective.

 

Portfolio Holdings. A description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the Fund’s SAI. The Fund also files its complete schedule of portfolio holdings with the Securities and Exchange Commission (the SEC) on Form N-Q as of the end of its first and third fiscal quarters. The Fund’s full portfolio holdings are published semi-annually in reports sent to shareholders and filed with the SEC on Form N-CSR and such reports are made available on the Fund’s website, generally within 60 days after the end of each semiannual period. The Fund may also post an uncertified whole or partial list of portfolio holdings on its website at www.arcincomefunds.com, no earlier than 15days after the end of each calendar quarter. The holdings information remains available until the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information is current. Other information regarding the Fund may be found on the Fund’s website.

 

MANAGEMENT

 

Under the terms of the advisory agreement, the Adviser is responsible for formulating the Fund’s investment policies and making ongoing investment decisions. The Adviser has engaged CAM to serve as investment sub-adviser and to make day-to-day investment decisions for the Fund. A discussion regarding the basis for the Board of Trustee’s (the “Board”) approval of the advisory and sub-advisory agreements will be contained in the Fund’s first semi-annual report to shareholders, when available.

 

Investment Adviser

 

NFA, located at 405 Park Avenue, New York, NY 10022, serves as the Fund’s investment adviser. NFA is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended, and was formed in June 2011. NFA is an indirect wholly-owned subsidiary of AR Capital, LLC (“ARC”), which directly and through its wholly-owned subsidiaries and affiliates sponsors a variety of securities offerings, including publicly registered non-traded real estate investment trusts, a publicly registered non-traded Business Development Company (“BDC”), a non-traded oil and gas limited partnership and additional other funds registered under the 1940 Act. As of the date of this prospectus, the Adviser is managing assets in excess of $___ million.

 

 

10
 

 

Sub-Adviser

 

CAM, located at 1235 Westlakes Dr. Berwyn, PA 19312, is the Fund’s investment sub-adviser. CAM is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The adviser is a Delaware LLC formed in April 2013. As of the date of this prospectus, CAM has no assets under management.

 

Mr. Stanley serves as Portfolio Manager for CAM. Mr. Stanley joined CAM in 2013 after it was formed by its affiliate, Stanley Laman Group, Ltd. (“SLG”). Mr. Stanley joined SLG in 2004. Prior to joining SLG, Mr. Stanley attended Carnegie Mellon University in Pittsburgh, PA. Mr. Stanley graduated from Carnegie Mellon in 2004 and is a CFA charterholder.

 

Mr. Painter also serves as Portfolio Manager for CAM. Mr. Painter joined CAM in 2013 after it was formed by SLG. Mr. Painter joined SLG in 2004. Mr. Painter graduated from Carnegie Mellon in 2004 and is a CFA charterholder.

 

Additional information about accounts managed by the portfolio managers and their ownership of securities in the Fund is available in the Realty Capital Income Funds Trust’s (the “Trust”) SAI.

 

Management Fees

 

The Adviser’s annual advisory fee is 0.75% of the Fund’s average daily net assets.

 

Distributor

 

Realty Capital Securities, LLC (the “Distributor”), located at 405 Park Avenue, New York, NY 10022, serves as the distributor for the Fund. The Distributor is obligated to sell the shares of the Fund on a best efforts basis only against purchase orders for the shares. Shares of the Fund are offered to the public on a continuous basis.

 

Financial Highlights

 

Because the Fund is newly organized, there is no financial or performance information in this Prospectus. You may request a copy of the Fund’s annual and semi-annual reports, when available, at no charge by calling the Fund toll-free at 1-866-271-9244.

 

PRICING OF FUND SHARES

 

The price at which you can purchase and redeem each class of the Fund’s shares is the NAV of that class of shares next determined after we receive your order in proper form, less any applicable sales charge. Proper form means that your request includes the Fund name and account number, states the amount of the transaction (in dollars or shares), includes the signatures of all owners exactly as registered on the account, signature guarantees (if necessary), any supporting legal documentation that may be required, and any outstanding certificates representing shares to be redeemed.

 

The Fund calculates its NAV per share as of the close of regular trading on the NYSE, generally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. Thus, purchase and redemption orders must be received in proper form by the close of regular trading on the NYSE in order to receive that day’s NAV; orders received after the close of regular trading on the NYSE will receive the NAV next

 

11
 

determined. The Fund has authorized one or more brokers to accept on its behalf purchase (and redemption) orders, and these brokers are authorized to designate other intermediaries on the Fund’s behalf. The Fund will be deemed to have received a purchase (or redemption) order when an authorized broker, or that broker’s designee, accepts the order, and that order will be priced at the next computed NAV after this acceptance. The Fund determines NAV per share for each class by dividing that class’s share of the net assets of the Fund (i.e., its assets less liabilities) by the total number of outstanding shares of that class.

 

Investments in securities that are listed on the NYSE are valued, except as indicated below, at the last sale price reflected at the close of the NYSE on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices for the day or, if no asked price is available, at the bid price.

 

Securities not listed on the NYSE but listed on other domestic or foreign securities exchanges are valued in a similar manner. Securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined as reflected on the tape at the close of the exchange representing the principal market for such securities. If after the close of a foreign market, but prior to the close of business on the day the securities are being valued, market conditions change significantly, certain foreign securities may be fair valued pursuant to procedures established by the Board.

 

Readily marketable securities traded in the over-the-counter market, including listed securities whose primary market is believed by the Adviser to be over-the-counter, are valued at the official closing prices as reported by sources as the Board deems appropriate to reflect their fair market value. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices for the day, or if no asked price is available, at the bid price. However, certain debt securities may be valued on the basis of prices provided by a pricing service when such prices are believed by the Board to reflect the fair market value of such securities.

 

Securities for which market prices are unavailable, or securities for which the Adviser determines that bid and/or asked price or a counterparty valuation does not reflect market value, will be valued at fair value pursuant to procedures approved by the Board. Circumstances in which market prices may be unavailable include, but are not limited to, when trading in a security is suspended, the exchange on which the security is traded is subject to an unscheduled close or disruption, or material events occur after the close of the exchange on which the security is principally traded. In these circumstances, the Fund determines fair value in a manner that fairly reflects the market value of the security on the valuation date based on consideration of any information or factors it deems appropriate. These may include recent transactions in comparable securities, information relating to the specific security, and developments in the markets.

 

The Fund’s use of fair value pricing may cause the NAV of Fund shares to differ from the NAV that would be calculated using market quotations. Fair value pricing involves subjective judgments and it is possible that the fair value determined for a security may be materially different than the value that could be realized upon the sale of that security.

 

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Short-term debt securities, which have a maturity date of 60 days or less, are valued at amortized cost, which approximates value. Investments in open-end mutual funds are valued at their closing NAV.

 

Because the Fund may hold securities that are primarily listed on foreign exchanges that trade on weekends or days when the Fund does not price its shares, the value of the securities held in the Fund may change on days when you will not be able to purchase or redeem Fund shares.

 

HOW TO BUY SHARES

 

Purchasing Shares

 

You may buy shares on any business day. This includes any day that the Fund is open for business, other than weekends and days on which the NYSE is closed, including the following holidays: New Year’s Day; Martin Luther King, Jr.; Day, Presidents’ Day; Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving; and Christmas Day.

 

Purchase orders received in “proper form” by the Fund’s transfer agent or its designated agent before the close of trading on the NYSE will be processed at the NAV next calculated after an order is received. On occasion, the NYSE closes before 4:00 p.m. Eastern time. When that happens, purchase orders received after the NYSE closes will be processed the following business day. To be in “proper form,” the purchase order must include:

 

·The Fund name and account number;

 

·Account name(s) and address(es); and

 

·The dollar amount or number of shares to be purchased.

 

All purchases must be made in U.S. dollars and checks must be drawn on U.S. banks. No cash, credit cards, or third-party checks will be accepted. A $25 fee will be charged against your account for any payment check returned to the transfer agent or for any incomplete electronic funds transfer, or for insufficient funds, stop payment, closed account, or other reasons. If a check does not clear your bank or the Fund is unable to debit your pre-designated bank account on the day of purchase, the Fund reserves the right to cancel the purchase. If your purchase is canceled, you will be responsible for any losses or fees imposed by your bank and losses that may be incurred as a result of a decline in the value of the canceled purchase. The Fund (or the Fund’s agent) has the authority to redeem shares in your account(s) to cover any losses due to fluctuations in share price. Any profit on such cancellation will accrue to the Fund. Your investment in the Fund should be intended to serve as a long-term investment vehicle. The Fund is not designed to provide you with a means of speculating on the short-term fluctuations in the stock market. The Fund reserves the right to reject any purchase request that it regards as disruptive to the efficient management of the Fund, which includes investors with a history of excessive trading. The Fund also reserves the right to stop offering shares at any time.

 

To help the 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 who opens an account. This means that when you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask for other identifying

 

13
 

 

documents or information, and may take additional steps to verify your identity. We may not be able to open your account or complete a transaction for you until we are able to verify your identity.

 

Classes of Shares Offered

 

Mutual funds typically incur costs for the distribution and servicing of their shares. Many funds pay for these costs by charging a variety of fees to their shareholders. Some of the most common fees include:

 

·Sales Charge: A percentage fee deducted from your initial investment.

 

·Contingent Deferred Sales Charge (“CDSC”): A percentage fee deducted from your sales proceeds based on the length of time you own your shares.

 

·Distribution and Service (12b-1) Fees: An annual percentage fee used to pay for distribution and shareholder servicing expenses.

 

To give you flexibility in choosing a fee structure that is most beneficial for you, the Fund offers multiple classes of shares: Class A shares, Class C shares, and Advisor Class shares. Advisor Class shares are offered in this prospectus. Class A and Class C shares of the Fund are offered in a separate prospectus. Not all shareholders will be eligible to purchase all share classes. Each class of shares represents an investment in the same portfolio of securities, but as described below, each class utilizes a distinct combination of the above fees.

 

The Fund reserves the right to reject or cancel any purchase order and to withdraw or suspend the offering of shares at any time. The Fund may also request additional information from you in order to verify your identity. If you do not provide this information or if such information cannot be verified, we reserve the right to close your account to the extent required or permitted by applicable law or regulations, including those relating to the prevention of money laundering.

 

Advisor Class Shares. Eligible shareholders can buy Advisor Class shares at the public offering price, which is the NAV. There is no sales charge when purchasing Advisor Class shares and no CDSC is imposed on redemptions of Advisor Class shares. Advisor Class shares are not subject to an annual distribution fee or a shareholder service fee. Advisor Class shares are available for purchase only by the following persons at the following minimum initial investment amounts:

 

·current officers, directors and employees (and their immediate families) of the Adviser, its affiliates, the Trust’s distributor, and to any trust, pension, profit-sharing, or other benefit plan for such persons, with a minimum initial investment amount of $2,500;

 

·institutional advisory accounts of the Adviser or its affiliates, with a minimum initial investment amount of $2,500;

 

·financial advisory firms that are acquiring shares for the benefit of their advisory or fee-based account clients, where said firm holds the shares in omnibus account for the benefit of their clients and with a minimum omnibus account initial investment amount of $2,500; and

 

·direct purchases with a $100,000 minimum initial investment amount.

  

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Advisor Class shares can be purchased by eligible investors directly through the Fund’s transfer agent or through a brokerage firm or other financial institution that has agreed to sell the Fund’s shares. If you purchase shares through a brokerage firm or other financial institution, you may be charged a fee by the firm or institution. If you are investing directly in the Fund for the first time, please call toll-free 1-866-271-9244 to request a Shareholder Account Application. You will need to establish an account before investing. If you choose to pay by wire, you must call the Fund’s transfer agent, at 1-866-271-9244, to obtain instructions on how to set up your account and to obtain an account number and wire instructions. Wire orders will be accepted only on a day on which the Fund, the custodian, and the transfer agent are open for business. A wire purchase will not be considered made until the wired money and purchase order are received by the Fund. Any delays that may occur in wiring money, including delays that may occur in processing by the banks, are not the responsibility of the Fund or the transfer agent. The Fund presently does not charge a fee for the receipt of wired funds, but the Fund may charge shareholders for this service in the future. If your wire does not clear, you will be responsible for any loss incurred by the Fund. If you are already a shareholder, the Fund can redeem shares from any identically registered account in the Fund as reimbursement for any loss incurred. You may be prohibited or restricted from making future purchases in the Fund.

 

Minimum Purchase Amount

 

For Advisor Class shares, the minimum initial investment is $2,500 for persons purchasing shares through certain intermediaries and certain persons in specified relationships with the Adviser or its affiliates. The minimum initial investment is $100,000 for other persons purchasing shares directly from the Fund. The minimum subsequent investment in the Fund is $500. The Fund reserves the right to waive these minimum amounts.

 

Other Purchase Information

 

The Fund may limit the amount of purchases and refuse to sell to any person.

 

The Fund has authorized certain broker-dealers and other financial institutions to accept on its behalf purchase and redemption orders. Such broker dealers are authorized to designate other intermediaries to receive purchase and redemption orders on the Fund’s behalf. The Fund is deemed to have received an order when the authorized broker-dealer or, if applicable, a broker-dealer’s authorized designee receives the order, and the order is processed at the NAV next calculated thereafter. It is the responsibility of the broker-dealer or other financial institution to transmit orders promptly to the Fund’s transfer agent.

 

Frequent Purchases and Redemptions of Fund Shares

 

The Fund discourages market timing. Market timing is an investment strategy using frequent purchases, redemptions and/or exchanges in an attempt to profit from short-term market movements. To the extent that the Fund significantly invests in small or mid-capitalization equity securities, because these securities are often infrequently traded, investors may seek to trade Fund shares in an effort to benefit from their understanding of the value of these securities (referred to as price arbitrage). Market timing may result in dilution of the value of Fund shares held by long-term shareholders, disrupt portfolio management, and increase Fund expenses for all shareholders.

 

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The Board has adopted a policy directing the Fund to reject any purchase order with respect to one investor, a related group of investors or their agent(s), where it detects a pattern of purchases and sales of the Fund that indicates market timing or trading that it determines is abusive. This policy applies uniformly to all Fund shareholders. While the Fund attempts to deter market timing, there is no assurance that it will be able to identify and eliminate all market timers. For example, certain accounts called “omnibus accounts” include multiple shareholders. Omnibus accounts typically provide the Fund with a net purchase or redemption request on any given day where purchasers of Fund shares and redeemers of Fund shares are netted against one another and the identities of individual purchasers and redeemers whose orders are aggregated are not known by the Fund. The netting effect often makes it more difficult for the Fund to detect market timing, and there can be no assurance that the Fund will be able to do so. Brokers maintaining omnibus accounts with the Fund have agreed to provide shareholder transaction information to the extent known to the broker, to the Fund upon request. If the Fund becomes aware of market timing in an omnibus account, they will work with the broker maintaining the omnibus account to identify the shareholder engaging in the market timing activity. In addition, the Fund reserve the right to reject any purchase order for any reason, including purchase orders that it does not think are in the best interest of the Fund or its shareholders or if the Fund thinks that trading is abusive.

 

HOW TO REDEEM SHARES

 

You may redeem your shares on any business day. Redemption orders received in proper order by the Fund’s transfer agent or by a brokerage firm or other financial institution that sells the Fund’s shares before 4:00 p.m. Eastern time (or before the NYSE closes if the NYSE closes before 4:00 p.m.) will be effective at that day’s NAV. Your brokerage firm or financial institution may have an earlier cut-off time.

 

Shares of the Fund may be redeemed by mail or telephone. You may receive redemption payments in the form of a check or federal wire transfer, subject to any applicable redemption fee. A wire transfer fee of $25 may be charged to defray custodial charges for redemptions paid by wire transfer. Any charges for wire redemptions will be deducted from your account by redemption of shares. If you redeem your shares through a broker-dealer or other institution, you may be charged a fee by that institution.

 

By Mail

 

You may redeem any part of your account in the Fund at no charge by mail. Your request, in proper form, should be addressed to: Realty Capital Income Funds Trust c/o Gemini Fund Services, LLC, 17605 Wright Street, Suite 2, Omaha, NE  68130.

 

“Proper form” means your request for redemption must:

 

·Include the Fund name and account number;

 

·Include the account name(s) and address(es);

 

·State the dollar amount or number of shares you wish to redeem; and

 

·Be signed by all registered share owner(s) in the exact name(s) and any special capacity in which they are registered.

 

The Fund may require that the signatures be guaranteed if you request the redemption check be mailed to an address other than the address of record, or if the mailing address has been changed within

 

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30 days of the redemption request. The Fund may also require that signatures be guaranteed for redemptions of $25,000 or more. Signature guarantees are for the protection of shareholders. You can obtain a signature guarantee from most banks and securities dealers, but not from a notary public. For joint accounts, both signatures must be guaranteed. Please call the transfer agent at 1-866-271-9244 if you have questions. At the discretion of the Fund, you may be required to furnish additional legal documents to insure proper authorization. The Fund will not make checks payable to any person other than the shareholder(s) of record or a financial intermediary for the benefit of the shareholder(s) of record.

 

By Telephone

 

You may redeem any part of your account in the Fund by calling the transfer agent at 1-866-271-9244. The Fund, the transfer agent, and the custodian are not liable for following redemption instructions communicated by telephone to the extent that they reasonably believe the telephone instructions to be genuine. However, if they do not employ reasonable procedures to confirm that telephone instructions are genuine, they may be liable for any losses due to unauthorized or fraudulent instructions. Procedures employed may include recording telephone instructions and requiring a form of personal identification from the caller.

 

The Fund may terminate the telephone redemption procedures at any time.

 

Additional Information

 

Redemptions specifying a certain date or share price cannot be accepted and will be returned. You will be mailed the proceeds on or before the fifth business day following the redemption. You may be assessed a fee if the Fund incurs bank charges because you request that the Fund reissue a redemption check. Also, when the NYSE is closed (or when trading is restricted) for any reason other than its customary weekend or holiday closing or under any emergency circumstances, as determined by the Securities and Exchange Commission, the Fund may suspend redemptions or postpone payment dates.

 

Because the Fund incurs certain fixed costs in maintaining shareholder accounts, the Fund may require you to redeem all of your shares in the Fund on 30 days written notice if the value of your shares in the Fund is less than $1,000 due to redemption, or such other minimum amount as the Fund may determine from time to time. You may increase the value of your shares in the Fund to the minimum amount within the 30-day period. All shares of the Fund are also subject to involuntary redemption if the Board determines to liquidate the Fund. An involuntary redemption will create a capital gain or a capital loss, which may have tax consequences about which you should consult your tax adviser.

 

The Fund reserves the right to honor requests for redemption by making payment in whole or in part in readily marketable securities (“redemption in kind”) if the amount of such a request is large enough to affect operations (for example, if the request is greater than $250,000 or 1% of the Fund's assets). The securities will be chosen by the Fund and valued at the Fund's net asset value. A shareholder may incur transaction expenses in converting these securities to cash.

  

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DIVIDENDS, DISTRIBUTIONS AND TAXES

 

Dividends and Distributions

 

The Fund will typically distribute substantially all of its net investment income in the form of dividends and taxable capital gains to its shareholders. These distributions are automatically reinvested in the Fund unless you request cash distributions on your application or through a written request to the Fund. The Fund expects that its distributions will consist of both capital gains and dividend income. The Fund may make distributions of its net realized capital gains (after any reductions for capital loss carry forwards) annually.

 

The net income attributable to, and dividends payable on, the shares of each class is reduced by the amount of annual distribution and other expenses of each class.

 

Taxes

 

Unless you are investing in the Fund through an individual retirement account or an tax-exempt plan, you generally will be subject to federal income tax (and any other taxes, including state and local income taxes, if applicable) on dividends and capital gains distributions (whether such dividends or distributions are paid in cash or reinvested in additional shares) and will generally recognize gain or loss upon a redemption or exchange of your shares.

 

Generally, dividends paid by the Funds from interest, dividends, or net short-term capital gains will be taxed as ordinary income. Distributions properly designated by the Fund as deriving from net capital gains are taxable as long-term capital gains regardless of how long you have held your shares. Distributions of investment income properly reported by the Fund as derived from “qualified dividend income” will be taxed (subject to certain minimum holding period requirements) at the rates applicable to long-term capital gains for non-corporate investors. Distributions in excess of the Fund’s earnings and profits will be first treated as a return of a capital to the extent of your basis in your Fund shares and thereafter will be treated as gain from the sale of Fund shares. While distributions consisting of a return of capital may themselves be non-taxable, they will lower a shareholder’s basis in the securities so that when the shareholder eventually sells the securities, even if sold at a loss on the original investment, the shareholder may be obligated to pay taxes on gains.

 

The amount of the gain or loss upon a redemption or exchange of your shares is measured by the difference between your adjusted tax basis in the shares redeemed or exchanged and the amount of the proceeds received in exchange for such shares. Any gain or loss arising from the redemption or exchange of shares generally is a capital gain or loss. This capital gain or loss normally is treated as a long-term capital gain or loss if you have held your shares for more than one year at the time of such redemption or exchange; otherwise, it generally will be classified as short-term capital gain or loss. If, however, you receive a capital gain dividend with respect to any share of the Fund, and if the share is sold before you have held it for at least six months, then any loss on the redemption or exchange of the share, to the extent of the capital gain dividend, is treated as a long-term capital loss.

 

A dividend or distribution made shortly after the purchase of shares of a Fund by a shareholder, although in effect a return of capital to that shareholder, would be taxable to that shareholder as described above. Distributions declared in October, November, or December, payable to shareholders of record in

 

18
 

 

one of those months, and actually paid in January of the following year will be treated as paid on December 31 of the preceding year.

 

Investments by the Fund in foreign securities may be subject to foreign withholding taxes. In that case, the Fund’s yield on those securities would be decreased. Shareholders may be entitled to claim a credit or deduction with respect to foreign taxes paid by the Fund. In addition, the Fund’s investments in foreign securities or foreign currencies may increase or accelerate the Fund’s recognition of ordinary income and may affect the timing or amount of the Fund’s distributions.

 

Investments by the Fund in certain debt instruments or derivatives may cause the Fund to recognize taxable income in excess of the cash generated by such instruments. As a result, the Fund could be required at times to liquidate other investments in order to satisfy its distribution requirements under the Internal Revenue Code. The Fund’s use of derivatives will also affect the amount, timing, and character of the Fund’s distributions.

 

Because of tax law requirements, you must provide the Fund with an accurate and certified taxpayer identification number (for individuals, generally a Social Security number) to avoid “back-up” withholding, which is currently imposed at a rate of 28%.

 

Early in each calendar year, the Fund or your broker will notify you of the amount and tax status of distributions paid to you for the preceding year. In addition, for shares acquired after January 1, 2012, the Fund or your broker will notify you of the amount of gain or loss recognized on any redemption or exchange of Fund shares. For this purposes, you will need to select a cost basis method to be used to calculate your reported gains and losses prior to or at the time of any redemption or exchange. If you do not select a method, a default method will be applied to the transactions. The Fund’s default method is average cost, but your broker may use an alternative default method. The cost basis method used on your account could significantly affect your taxes due and should be carefully considered. You should consult your tax advisor for more information on your own tax situation, including possible foreign, state, and local taxes.

 

Special tax rules apply to investments in the Fund through an individual retirement account or a tax-exempt plan. You should consult a tax advisor to determine the suitability of the Fund as an investment for such individual retirement account or tax-exempt plan.

 

The tax considerations described in this section do not apply to non-U.S. investors. Non-U.S. investors should consult their own tax advisor to discuss the tax consequences of an investment in the Fund by a non-U.S. investor.

 

The information contained in this prospectus is not a complete description of the federal, state, local, or foreign tax consequences of investing in the Fund. Because each investor’s tax situation is unique, you should consult your tax advisor before investing in the Fund.

 

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FOR MORE INFORMATION

 

Several additional sources of information are available to you. The Statement of Additional Information (the “SAI”), incorporated into this Prospectus by reference, contains detailed information on the Fund’s policies and operations, including policies and procedures relating to the disclosure of portfolio holdings by the Fund’s affiliates. The annual reports, when available, contain management’s discussion of market conditions and investment strategies that significantly affected the Fund’s performance results as of the Fund’s latest annual fiscal year end.

 

Call the Fund at 1-866-271-9244 to request free copies of the SAI and, when available, the Fund’s annual report and the semi-annual report, and to request other information about the Fund and to make shareholder inquiries. You may also obtain this information from the Fund’s website at www.arcincomefunds.com.

 

You may review and copy information about the Fund (including the SAI and other reports) at the Securities and Exchange Commission (the “SEC”) Public Reference Room in Washington, D.C. Call the SEC at 1-202-551-8090 for room hours and operation. You also may obtain reports and other information about the Fund on the EDGAR Database on the SEC’s Internet site at http.//www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.

 

 

 

 

 

 

 

Investment Company Act File No. 811-22785

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APPENDIX

 

ADVISER’S PRIOR PERFORMANCE

 

The data below is provided to illustrate the past performance of substantially similar accounts managed by the Fund’s portfolio managers in their capacity as such for Carnegie Asset Management’s (“CAM”) affiliate Stanley Laman Group, Ltd. (“SLG”), as measured against market indices.

 

The performance below does not represent the performance of the Fund, nor should it be considered a substitute for the Fund’s performance. You should not consider this performance data as a prediction or an indication of future performance of the Fund or the performance that one might achieve by investing in the Fund.

 

The Stanley Laman Group, Ltd. Composite (the “Composite”) represents fully discretionary advisory accounts that are managed in accordance with the SLG Dividend and Value investment strategy. As of November 30, 2013, the Composite represented forty-one accounts with gross assets of approximately $168 million. All personnel responsible for managing the accounts included in the Composite are now employed by SLG’s newly formed affiliate, CAM.

 

The performance results are prepared in accordance with Global Investment Performance Standards (“GIPS”). In certain cases, the calculation methodologies prescribed by GIPS may be different from the standard SEC formula used by mutual funds for presenting their performance returns. The returns of the accounts presented were calculated on a total return basis and include all dividends and interest and realized and unrealized gains and losses. All returns are presented after the deduction of a hypothetical 1.40% fee.

 

The private accounts for which results are reported are not subject to the diversification requirements, specific tax restrictions and investment limitations imposed on the Fund by the Investment Company Act of 1940, as amended, or the Internal Revenue Code of 1986, as amended. Consequently, the performance results for such private accounts could have been adversely affected if they had been subject to mutual fund regulations.

 

The performance data below is not the performance results for the Fund.

 

Stanley Laman Group, Ltd.

Average Annual Total Returns as of November 30, 2013

Period Average Total Returns

S&P 500 Index –

Price Return(1)

S&P 500 Index –

Total Return(2)

1 Year 28.24% 27.53% 30.32%
3 Year 14.13% 14.98% 17.49%

Since Inception

(February 2010)

15.42% 14.54% 17.03%
(1)The S&P 500 Index is a broad market-weighted average of large-sized U.S. companies. The S&P 500 Index is unmanaged. Price return reflects capital appreciation only. It reflects neither reinvested dividends nor fees, expenses, or taxes.
(2)The S&P 500 Index is a broad market-weighted average of large-sized U.S. companies. The S&P 500 Index is unmanaged. Total return reflects capital appreciation and reinvested dividends. It does not reflect fees, expenses, and taxes.

 

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REALTY CAPITAL INCOME FUNDS TRUST

 

PRIVACY POLICY

 

1. POLICY

 

Realty Capital Income Funds Trust (the “Trust”) is committed to protecting your privacy. This privacy notice, which is required by state and federal law, explains the Trust’s privacy policy (the “Policy”). This Policy’s terms apply both to our current shareholders and to former shareholders as well.

 

2. HOW WE PROTECT YOUR INFORMATION

 

We are committed to maintaining the privacy of our shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

 

3. WHAT KIND OF INFORMATION WE COLLECT

 

The Trust may collect nonpublic personal information regarding investors from sources such as the following:

 

·Account Applications and other forms, which may include a shareholder’s name, address, social security number and/or personally identifiable financial information;

 

·Account History, including information about a shareholder’s losses or gains; and

 

·Correspondence and Communication, with the Trust’s representatives and their affiliates.

 

4. WHO HAS ACCESS TO SHAREHOLDER INFORMATION

 

We do not disclose any non-public personal information about our shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to provide services to shareholders (for example, to a transfer agent, investment adviser or third party administrator). We restrict access to non-public personal information about our shareholders to Trust personnel and employees of Trust service providers with a legitimate business need for the information. We will maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our shareholders. Third parties that handle this information shall agree to follow the standards the Trust has established.

 

5. UPDATING YOUR INFORMATION

 

To help us keep your information up-to-date and accurate, please contact the Trust if there is any change in your personal information.

 

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Subject to Completion.  Preliminary Prospectus dated February __, 2014

 

 

 

AR Capital BDC Income Fund

 

 

PROSPECTUS

 

[_______________], 2014

 

 

Class A Shares (______)

 

This Prospectus provides important information about the Class A shares of the AR Capital BDC Income Fund (the “Fund”), that you should know before investing.  Please read it carefully and keep it for future reference.

 

The U.S. Securities and Exchange Commission has not approved or disapproved these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 
 

 

TABLE OF CONTENTS

 

Page

  

FUND SUMMARY — AR CAPITAL BDC INCOME FUND 1
Investment Objective 1
Fees and Expenses of the Fund 1
Principal Investment Strategies 2
Principal Risks of Investing in the Fund 3
Investment Management 5
Purchase and Sale of Class A Shares 5
Tax Information 5
Payments to Broker-Dealers and Other Financial Intermediaries 6
WHO SHOULD INVEST 6
INVESTMENT OBJECTIVE 6
PRINCIPAL INVESTMENT STRATEGIES 6
PRINCIPAL INVESTMENT RISKS 7
ADDITIONAL INVESTMENT STRATEGIES AND INFORMATION 9
MANAGEMENT 10
PRICING OF FUND SHARES 11
HOW TO BUY SHARES 13
HOW TO REDEEM SHARES 18
distribution and Shareholder service plan 20
DIVIDENDS, DISTRIBUTIONS AND TAXES 20
FOR MORE INFORMATION 22

 

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FUND SUMMARY – AR CAPITAL BDC INCOME FUND

 

 

Investment Objective

 

The Fund’s investment objective is to provide a high level of income, with the potential for capital appreciation.

 

Fees and Expenses of the Fund

 

This table describes the fees and expenses that you may pay if you buy and hold Class A shares of the Fund. You may qualify for sales charge discounts on Class A shares if you or your family invest, or agree to invest in the future, at least $100,000 in the Fund. More information about these and other discounts is contained in this prospectus under “How to Buy Shares—Classes of Shares Offered” on page 14 and in “Reducing Sales Charge on Class A Shares” on page 44 of the Fund’s Statement of Additional Information.

 

  Class A

Shareholder Fees

(fees paid directly from your investment)

 

Maximum Sales Charge (Load)

Imposed on Purchases (as a % of the offering price)

1.50%(1)

Maximum Deferred Sales Charge (Load)

(as a % of the original purchase price or redemption proceeds, whichever is lower)

1.00%(2)

(1)The initial sales charge may be waived for purchases by certain types of accounts, including fee-based advisory accounts.
(2)Only applies for purchases of greater than $1 million that are redeemed within one year of purchase.

 

 

  Class A

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

Management Fees 1.[00]%
Distribution and Service (12b-1) Fees 0.25%(1)
Other Expenses(2) _____%
Total Annual Fund Operating Expenses _____%
Expense Reimbursement(3) (____)%
Total Annual Fund Operating Expenses After Expense Reimbursement _____%
(1)The Fund’s distributor has contractually agreed to waive 0.25% of the Distribution and Service (Rule 12b-1) fees for Class A Shares. The current waiver agreement will remain in effect through at least ______, 2015. Excluding this waiver would result in fees of 0.50%.
(2)Because the Fund is new, “Other Expenses” are based on estimated amounts for the current fiscal year.
(3)National Fund Advisors, LLC, the Fund’s investment adviser (“NFA” or the “Adviser”) has contractually agreed to waive a portion or all of its management fees and pay Fund expenses (excluding acquired fund fees and expenses, interest, taxes, and extraordinary expenses) in order to limit the Other Expenses to [0.__%] of average daily net assets of the Fund’s shares (the “Expense Cap”). The Expense Cap will remain in effect through at least ___________, 201_, and may be terminated before that date only by the Trust’s Board of Trustees. The Adviser may recoup any previously waived fees and paid expenses from the Fund pursuant to this agreement for 3 years from the date they were waived or paid, subject to the Expense Cap.

 

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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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

  1 Year 3 Years
     
Class A $____ $___
     
     

Portfolio Turnover: The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the Example, affect the Fund’s performance. The portfolio turnover rate for the Fund is not available because the Fund is new.

 

Principal Investment Strategies

 

The Fund will invest substantially all (and under normal market conditions, at least 80%), of its net assets (plus any borrowings for investment purposes) in common stocks and other equity securities of business development companies (“BDCs”) that are traded on one or more nationally recognized securities exchanges. The equity securities in which the Fund may invest consist of:

 

·common stocks;

 

·rights or warrants to purchase common stocks;

 

·securities convertible into common stocks; and

 

·preferred stocks.

 

The Fund may also invest up to 20% of its net assets in debt, including high yield bonds, of BDCs and other closed-end investment companies.

 

The Fund’s Sub-Adviser intends to allocate the Fund’s assets among issuers that, in its view, are paying attractive rates of distribution and appear capable of sustaining that distribution level over time. A secondary consideration is the potential for capital appreciation. The Sub-Adviser evaluates securities based on its assessment of their dividend yield, price to book, financial operations, portfolio of investments and management quality, among other factors. In selecting securities for investment, the Sub-Adviser generally seeks to invest in securities with high current distribution rates that it believes will continue to pay distributions at that rate for the foreseeable future.

 

When selecting securities for the Fund, the Sub-Adviser may utilize fundamental, technical, and other related methodologies to determine the intrinsic value of the security. The

2
 

Sub-Adviser expects that it will sell a security if, in the judgment of the portfolio manager, the individual security’s distribution potential has been compromised, its fundamentals have deteriorated or may deteriorate, or a more attractive investment opportunity is identified.

 

The Fund may invest up to 15% of its net assets in illiquid securities.

 

Principal Risks of Investing in the Fund

 

An investment in the Fund’s shares is subject to various risks. The value of the Fund’s investments will increase or decrease based on changes in the prices of the investments it holds. This will cause the value of the Fund’s shares to increase or decrease. You may receive little or no return on your investment or you may lose all or part of it. By itself, the Fund does not constitute a balanced investment program. Before investing in the Fund, you should consider carefully the following risks.

 

Market Risk. An investment in the Fund is generally subject to market risk, including the possible loss of the entire amount invested. An investment in the Fund represents an indirect investment in the securities owned by the Fund. Like all financial instruments, the value of these securities may move up or down, sometimes rapidly and unpredictably. The value of your investment in the Fund at any point in time may be worth less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.

 

Business Development Company Risk. The Fund will emphasize investments in securities issued by publicly-traded BDCs. As a result, the Fund’s portfolio will be significantly affected by the results of BDCs and portfolio investments of each BDC. The Fund may be exposed to greater risk and experience higher volatility than would a portfolio that was not focused on investing in BDCs. BDCs primarily invest in the debt and equity securities of privately held middle market companies. The value of a BDC’s investments will be affected by company-specific performance as well as the overall economic environment. Additionally, most BDCs employ leverage which can magnify the returns of their underlying investments.

 

Investment in other Investment Companies Risk. The Fund’s investment in other investment companies, including BDCs, may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and expenses. Shares of BDCs may trade at prices that reflect a premium above or a discount below the investment company’s net asset value, which may be substantial. If investment company securities are purchased at a premium to net asset value, the premium may not exist when those securities are sold and the Fund could incur a loss.

 

Medium- and Small-Capitalization Company Risk. The Fund may invest in medium- or small-capitalization companies, which may have smaller investment portfolios and less financial or managerial resources. The risks associated with these investments are generally greater than those associated with investments in the securities of larger, more-established companies. This may cause the Fund’s NAV to be more volatile when compared to investment companies that focus only on large capitalization companies. Generally, securities of medium- and small-capitalization companies are more likely to experience sharper swings in market values or less

3
 

liquid markets, in which it may be more difficult to sell at times and at prices that the Sub-Adviser believes appropriate. Consequently, the Fund may be required to dispose of these securities over a longer period of time (and potentially at less favorable prices) than would be the case for securities of larger companies, offering greater potential for gains and losses and associated tax consequences.

 

Common Stock Risk. While common stock has historically generated higher average returns than debt securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.

 

Preferred Stock Risk. There are various risks associated with investing in preferred stock, including credit risk, liquidity risk, interest rate risk, deferral and omission of distributions, subordination to bonds and other debt securities in a company’s capital structure, limited liquidity, limited voting rights, and special redemption rights.

 

Debt Securities Risk. The Fund is directly exposed to the credit risk associated with its investments in debt securities. There is a risk that debt issuers will not make payments, resulting in losses to the Fund. In addition, the credit quality of securities may be lowered if an issuer’s financial condition changes. Lower credit quality may affect liquidity and lead to greater Fund volatility. Default, or the market’s perception that an issuer is likely to default, could reduce the value and liquidity of securities, thereby reducing the value of your investment in the Fund. In addition, default may cause the Fund to incur expenses in seeking recovery of principal or interest on its portfolio holdings.

 

Credit Risk of Underlying Investments. The Fund is indirectly exposed to the credit risk associated with the debt investments of the BDCs in which the Fund invests. BDCs invest in small companies in the initial stages of development. There is an increased risk that such a portfolio company will fail to make payments on its debts as compared to more developed companies. If a portfolio company fails to make payments to a BDC, the BDC’s performance could be negatively affected and, to the extent that the Fund invests in the BDC, the value of Fund’s investment in the BDC may negatively affected as well.

 

Liquidity Risk. A security is considered to be illiquid if the Fund is unable to sell such security within seven days at the price at which the Fund values the security. A security may be deemed illiquid due to a lack of trading volume in the security or if the security is privately placed and not traded in any public market or is otherwise restricted from trading. The Fund may be unable to sell illiquid securities at the time or price it desires and could lose its entire investment in such securities. Further, certain restricted securities require special registration, liabilities and costs, and could be more difficult to value.

 

Non-Diversification Risk. The Fund is classified as a non-diversified management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). This means that the Fund may invest a greater portion of its assets in a limited number of issuers

4
 

than would be the case if the Fund were classified as a diversified management investment company. The value of a specific security can perform differently from the market as a whole for reasons related to the issuer, such as operational performance, financial leverage and investment level performance at the BDC. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Additionally, the Fund’s performance may be more sensitive to any single economic, business, political, or regulatory occurrence than the value of shares of a diversified investment company.

 

Management Risk. The NAV of the Fund changes daily based on the performance of the securities in which it invests. The Sub-Adviser’s judgments about the attractiveness, value and potential appreciation of BDCs in which the Fund invests may prove to be incorrect and may not produce the desired results.

 

No History of Operations. The Fund is a new mutual fund and has no history of operations. During the Fund’s start-up period, the Fund may not achieve the desired portfolio composition. If the Fund commences operations under inopportune market or economic conditions, it may not be able to achieve its investment objective.

 

Investment Management

 

Adviser. National Fund Advisors, LLC (“NFA”) is the Fund’s investment adviser.

 

Sub-Adviser. BDCA Adviser, LLC (“BDCA Adviser” or “the Sub-Adviser”), is the Fund’s investment sub-adviser.

 

Portfolio Manager(s). [___________________] have primary portfolio management responsibilities for the Fund, and have served the Fund in this capacity since inception.

 

[Mr. __________ serves as ____________ for BDCA Adviser, and joined BDCA Adviser in ______________.]

 

Purchase and Sale of Class A Shares

 

For Class A shares, the minimum initial investment is $2,500. The minimum subsequent investment in the Fund is $500. The Fund reserves the right to waive these minimum amounts.

 

You may purchase, redeem, or exchange shares of the Fund on any business day, which is any day the New York Stock Exchange (the “NYSE”) is open for business. Shares may be purchased or redeemed through your financial intermediary.

 

Tax Information

 

Dividends and capital gain distributions that you receive from the Fund, whether you reinvest your distributions in additional Fund shares or receive them in cash, are taxable to you at either ordinary income or capital gains tax rates, unless you are investing through an individual retirement account or a tax-exempt plan. If you are investing through an individual retirement account or a tax-exempt plan, you should consult your tax advisor concerning the tax consequences of an investment in the Fund.

 

5
 

Payments to Broker-Dealers and Other Financial Intermediaries

 

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

 

WHO SHOULD INVEST

 

The Fund may be suitable for you if you are seeking:

 

·a fund offering the potential for current income and capital appreciation;

 

·to add exposure to dividend paying common stocks to your portfolio;

 

·liquidity and portfolio diversification; or

 

·exposure to middle market investments;

 

The Fund is designed for long-term investors and not as a trading vehicle. The Fund will take reasonable steps to identify and reject orders from market timers.

 

INVESTMENT OBJECTIVE

 

The Fund’s investment objective is to provide a high level of income, with the potential for capital appreciation. There can be no assurance that the Fund will achieve its investment objective. The Fund may change its investment objective without shareholder approval, although it has no current intention to do so. Shareholders will be provided 60 days’ prior written notice of any change to the Fund’s investment objective.

 

PRINCIPAL INVESTMENT STRATEGIES

 

The Fund’s principal investment strategies described in this prospectus are the strategies that the Adviser and Sub-Adviser believe are most likely to be important in achieving the Fund’s investment objective.

 

The Fund will invest substantially all (and under normal market conditions, at least 80%), of its net assets (plus any borrowings for investment purposes) in common stocks and other equity securities of BDCs that are traded on one or more nationally recognized securities exchanges. The equity securities in which the Fund may invest consist of:

 

·common stocks;

 

·rights or warrants to purchase common stocks;

 

·securities convertible into common stocks; and

 

·preferred stocks.

 

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The Fund may also invest up to 20% of its net assets in debt, including high yield bonds, of BDCs and other closed-end investment companies.

 

The Sub-Adviser intends to allocate the Fund’s assets among issuers that, in its view, are paying attractive rates of distribution and appear capable of sustaining that distribution level over time. A secondary consideration is the potential for capital appreciation. The Sub-Adviser evaluates securities based partially on its assessment of their dividend yield, price to book, financial operations, portfolio of investments and management quality, among other factors. In selecting securities for investment, the Sub-Adviser generally seeks to invest in securities whose current distribution rates equal or exceed 7.0%, and that it believes will continue to pay distributions at that rate for the foreseeable future.

 

When selecting securities for the Fund, the Sub-Adviser may utilize fundamental, technical, and other related methodologies to determine the intrinsic value of an underlying security. The Sub-Adviser expects that it will sell a security if, in the judgment of the portfolio manager, the individual security’s distribution potential has been compromised, its fundamentals have deteriorated or may deteriorate, or a more attractive investment opportunity is identified.

 

The Fund may invest up to 15% of its net assets in illiquid securities.

 

PRINCIPAL INVESTMENT RISKS

 

An investment in the Fund’s shares is subject to various risks. The value of the Fund’s investments will increase or decrease based on changes in the prices of the investments it holds. This will cause the value of the Fund’s shares to increase or decrease. You may receive little or no return on your investment or you may lose all or part of it. By itself, the Fund does not constitute a balanced investment program. Before investing in the Fund you should consider carefully the following risks. There may be additional risks that the Fund does not currently foresee or consider material. You may wish to consult with your legal or tax advisors before deciding whether to invest in the Fund.

 

Market Risk. An investment in the Fund is generally subject to market risk, including the possible loss of the entire principal amount invested. An investment in the Fund represents an indirect investment in the securities owned by the Fund. Like all financial instruments, the value of these securities may move up or down, sometimes rapidly and unpredictably. The value of your investment in the Fund at any point in time may be worth less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.

 

Business Development Company Risk. The Fund will concentrate its investments in securities issued by BDCs. As a result, the Fund’s portfolio will be significantly affected by the results of BDCs and portfolio investments of each BDC. The Fund may be exposed to greater risk and experience higher volatility than would a more diversified portfolio. BDCs primarily invest in the debt and equity securities of privately held middle market companies. The value of a BDC’s investments will be affected by company-specific performance as well as the overall economic environment. Additionally, most BDCs employ leverage which can magnify the returns of their underlying investments.

 

7
 

 

Investment in other Investment Companies Risk. The Fund’s investment in another investment company, including a BDC, may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and expenses. Shares of BDCs may trade at prices that reflect a premium above or a discount below the investment company’s net asset value, which may be substantial. If investment company securities are purchased at a premium to net asset value, the premium may not exist when those securities are sold and the Fund could incur a loss.

 

Medium- and Small-Capitalization Company Risk. The Fund may invest in medium- or small-capitalization companies, which may have smaller investment portfolios and less financial or managerial resources. The risks associated with these investments are generally greater than those associated with investments in the securities of larger, more-established companies. This may cause the Fund’s NAV to be more volatile when compared to investment companies that focus only on large capitalization companies. Generally, securities of medium- and small-capitalization companies are more likely to experience sharper swings in market values or less liquid markets, in which it may be more difficult for the Adviser to sell at times and at prices that the Sub-Adviser believes appropriate. Consequently, the Fund may be required to dispose of these securities over a longer period of time (and potentially at less favorable prices) than would be the case for securities of larger companies, offering greater potential for gains and losses and associated tax consequences.

 

Common Stock Risk. While common stock has historically generated higher average returns than debt securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.

 

Preferred Stock Risk. There are various risks associated with investing in preferred stock, including credit risk, liquidity risk, interest rate risk, deferral and omission of distributions, subordination to bonds and other debt securities in a company’s capital structure, limited liquidity, limited voting rights, and special redemption rights.

 

Debt Securities Risk. The Fund is directly exposed to the credit risk associated with its investments in debt securities. There is a risk that debt issuers will not make payments, resulting in losses to the Fund. In addition, the credit quality of securities may be lowered if an issuer’s financial condition changes. Lower credit quality may affect liquidity and lead to greater Fund volatility. Default, or the market’s perception that an issuer is likely to default, could reduce the value and liquidity of securities, thereby reducing the value of your investment in the Fund. In addition, default may cause the Fund to incur expenses in seeking recovery of principal or interest on its portfolio holdings.

 

Credit Risk of Underlying Investments. The Fund is indirectly exposed to the credit risk associated with the debt investments of the BDCs in which the Fund invests. BDCs invest in

 

8
 

 

small companies in the initial stages of development. There is an increased risk that such a portfolio company will fail to make payments on its debts as compared to more developed companies. If a portfolio company fails to make payments to a BDC, the BDC’s performance could be negatively affected and, to the extent that the Fund invests in the BDC, the value of Fund’s investment in the BDC may negatively affected as well.

 

Liquidity Risk. A security is considered to be illiquid if the Fund is unable to sell such security at a fair price within a reasonable amount of time. A security may be deemed illiquid due to a lack of trading volume in the security or if the security is privately placed and not traded in any public market or is otherwise restricted from trading. The Fund may be unable to sell illiquid securities at the time or price it desires and could lose its entire investment in such securities. Further, certain restricted securities require special registration, liabilities and costs, and could pose valuation difficulties.

 

Non-Diversification Risk. The Fund is classified as a non-diversified management investment company under the 1940 Act. This means that the Fund may invest a greater portion of its assets in a limited number of issuers than would be the case if the Fund were classified as a diversified management investment company. The value of a specific security can perform differently from the market as a whole for reasons related to the issuer, such as operational performance, financial leverage and investment level performance at the BDC. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Additionally, the Fund may be subject to greater risk, because the Fund’s performance may be more sensitive to any single economic, business, political, or regulatory occurrence than the value of shares of a diversified investment company.

 

Management Risk. The NAV of the Fund changes daily based on the performance of the securities in which it invests. The Sub-Adviser’s judgments about the attractiveness, value and potential appreciation of BDCs in which the Fund invests may prove to be incorrect and may not produce the desired results.

 

No History of Operations. The Fund is a new mutual fund and has no history of operations. During the Fund’s start-up period, the Fund may not achieve the desired portfolio composition. If the Fund commences operations under inopportune market or economic conditions, it may not be able to achieve its investment objective.

 

ADDITIONAL INVESTMENT STRATEGIES AND INFORMATION

 

Derivatives. In addition to its principal investment strategies, the Fund may, from time to time, invest in derivatives. Derivatives are instruments, such as futures contracts, the values of which are derived from the values of other securities or indices. Derivative transactions pose additional risks to the Fund, including interest rate, management, valuation, and counterparty risk. Changes in the value of derivatives may not correlate perfectly with the underlying asset, rate, or index, and the Fund could lose more than the principal amount invested. An investment in derivatives may also increase the Fund’s volatility and create investment leverage. When a derivative is used for hedging purposes, it may not provide the anticipated protection, causing the

 

9
 

 

Fund to lose money on both the derivative transaction and the exposure the Fund sought to hedge.

 

Illiquid Securities. The Fund will not invest more than 15% of its net assets in illiquid securities. Illiquid securities involve the risk that the securities will not be able to be sold promptly (i.e., within seven days) at the time desired by the Fund or at prices approximating the value at which the Fund is carrying the securities on its books and records. Restricted securities, which are securities that may not be resold to the public without an effective registration statement under the Securities Act of 1933, as amended, or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration, may be illiquid.

 

Defensive Position. When the Adviser, in consultation with the Sub-Adviser, believes that market or general economic conditions justify a temporary defensive position, the Fund may deviate from its investment objective and invest all or any portion of its assets in short-term debt instruments, government securities, or cash or cash equivalents. When and to the extent the Fund assumes a temporary defensive position, it may not pursue or achieve its investment objective.

 

Portfolio Holdings. A description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the Fund’s Statement of Additional Information (the “SAI”). The Fund also files its complete schedule of portfolio holdings with the Securities and Exchange Commission (the “SEC”) on Form N-Q as of the end of its first and third fiscal quarters. The Fund’s full portfolio holdings are published semi-annually in reports sent to shareholders and filed with the SEC on Form N-CSR, and such reports are made available on the Fund’s website, generally within 60 days after the end of each semiannual period. The Fund may also post an uncertified whole or partial list of portfolio holdings on its website at www.arcincomefunds.com, no earlier than 15 days after the end of each calendar quarter. The holdings information remains available until the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information is current. Other information regarding the Fund may be found on the Fund’s website.

 

MANAGEMENT

 

Under the terms of the advisory agreement, the Adviser is responsible for formulating the Fund’s investment policies and making ongoing investment decisions. The Adviser has engaged BDCA Adviser to serve as investment sub-adviser and to make day-to-day investment decisions for the Fund. A discussion regarding the basis for the Board of Trustee’s (the “Board”) approval of the advisory and sub-advisory agreements will be contained in the Fund’s first semi-annual report to shareholders, when available.

 

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Investment Adviser

 

NFA, located at 405 Park Avenue, New York, NY 10022, serves as the Fund’s investment adviser. NFA is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended, and was formed in June 2011. NFA is an indirect wholly-owned subsidiary of AR Capital, LLC (“ARC”), which directly and through its affiliates sponsors a variety of securities offerings, including publicly registered non-traded real estate investment trusts, a publicly registered non-traded Business Development Company (“BDC”), a non-traded oil and gas limited partnership and additional other funds registered under the 1940 Act. As of the date of this prospectus, the Adviser is managing assets in excess of $___ million.

 

Sub-Adviser

 

BDCA Adviser, located at 405 Park Avenue, New York, NY 10022, serves as the Fund’s investment sub-adviser. BDCA Adviser is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended, and was formed in _____. BDCA Adviser is an indirect wholly-owned subsidiary of AR Capital (“ARC”), which directly and through its affiliates sponsors a variety of securities offerings, including publicly registered non-traded real estate investment trusts, publicly registered non-traded BDC and other funds registered under the 1940 Act. As of the date of this prospectus, BDCA Adviser had $____ in assets under management.

 

[Portfolio Manager information to be added]

 

Additional information about accounts managed by the portfolio managers and their ownership of securities in the Fund is available in the SAI of Realty Capital Income Funds Trust (the “Trust”).

 

Management Fees

 

The Adviser’s annual management fee is 1.00% of the Fund’s average daily net assets.

 

Distributor

 

Realty Capital Securities, LLC (the “Distributor”), located at 405 Park Avenue, New York, NY 10022, serves as the distributor for the Fund. The Distributor is obligated to sell the shares of the Fund on a best efforts basis only against purchase orders for the shares. Shares of the Fund are offered to the public on a continuous basis.

 

Financial Highlights

 

Because the Fund is newly organized, there is no financial or performance information in this Prospectus. You may request a copy of the Fund’s annual and semi-annual reports, when available, at no charge by calling the Fund toll-free at 1-866-271-9244.

 

PRICING OF FUND SHARES

 

The price at which you can purchase and redeem each class of the Fund’s shares is the NAV of that class of shares next determined after we receive your order in proper form, less any applicable sales charge. Proper form means that your request includes the Fund name and account number, states the amount of the transaction (in dollars or shares), includes the signatures of all owners exactly as registered on the account, signature guarantees (if necessary),

 

11
 

 

any supporting legal documentation that may be required, and any outstanding certificates representing shares to be redeemed.

 

The Fund calculates its NAV per share as of the close of regular trading on the NYSE, generally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. Thus, purchase and redemption orders must be received in proper form by the close of regular trading on the NYSE in order to receive that day’s NAV; orders received after the close of regular trading on the NYSE will receive the NAV next determined. The Fund has authorized one or more brokers to accept on its behalf purchase (and redemption) orders, and these brokers are authorized to designate other intermediaries on the Fund’s behalf. The Fund will be deemed to have received a purchase (or redemption) order when an authorized broker, or that broker’s designee, accepts the order, and that order will be priced at the next computed NAV after this acceptance. The Fund determines NAV per share for each class by dividing that class’s share of the net assets of the Fund (i.e., its assets less liabilities) by the total number of outstanding shares of that class.

 

Investments in securities that are listed on the NYSE are valued, except as indicated below, at the last sale price reflected at the close of the NYSE on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices for the day or, if no asked price is available, at the bid price.

 

Securities not listed on the NYSE but listed on other domestic or foreign securities exchanges are valued in a similar manner. Securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined as reflected on the tape at the close of the exchange representing the principal market for such securities. If after the close of a foreign market, but prior to the close of business on the day the securities are being valued, market conditions change significantly, certain foreign securities may be fair valued pursuant to procedures established by the Board.

 

Readily marketable securities traded in the over-the-counter market, including listed securities whose primary market is believed by the Adviser to be over-the-counter, are valued at the official closing prices as reported by sources as the Board deems appropriate to reflect their fair market value. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices for the day, or if no asked price is available, at the bid price. However, certain debt securities may be valued on the basis of prices provided by a pricing service when such prices are believed by the Board to reflect the fair market value of such securities.

 

Securities for which market prices are unavailable, or securities for which the Adviser determines that bid and/or asked price or a counterparty valuation does not reflect market value, will be valued at fair value pursuant to procedures approved by the Board. Circumstances in which market prices may be unavailable include, but are not limited to, when trading in a security is suspended, the exchange on which the security is traded is subject to an unscheduled close or disruption, or material events occur after the close of the exchange on which the security is principally traded. In these circumstances, the Fund determines fair value in a manner that fairly reflects the market value of the security on the valuation date based on consideration of

 

12
 

any information or factors it deems appropriate. These may include recent transactions in comparable securities, information relating to the specific security, and developments in the markets.

 

The Fund’s use of fair value pricing may cause the NAV of Fund shares to differ from the NAV that would be calculated using market quotations. Fair value pricing involves subjective judgments and it is possible that the fair value determined for a security may be materially different than the value that could be realized upon the sale of that security.

 

Short-term debt securities, which have a maturity date of 60 days or less, are valued at amortized cost, which approximates value. Investments in open-end mutual funds are valued at their closing NAV.

 

Because the Fund may hold securities that are primarily listed on foreign exchanges that trade on weekends or days when the Fund does not price its shares, the value of the securities held in the Fund may change on days when you will not be able to purchase or redeem Fund shares.

 

HOW TO BUY SHARES

 

Purchasing Shares

 

You may buy shares on any business day. This includes any day that the Fund is open for business, other than weekends and days on which the NYSE is closed, including the following holidays: New Year’s Day; Martin Luther King, Jr.; Day, Presidents’ Day; Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving; and Christmas Day.

 

Because Class A shares are presently offered only through financial intermediaries, shareholders who invest in the Fund should contact their financial intermediary regarding purchase procedures. Shareholders who purchase shares through a financial intermediary are subject to the procedures of their financial intermediary, which may include limitations, investment minimums, cut-off times, and restrictions. Financial intermediaries may charge fees for the services they provide to you in connection with processing your transaction order or maintaining your account with them. Financial intermediaries are responsible for placing your order correctly and promptly with the Fund, forwarding payment promptly, as well as ensuring that you receive copies of the Fund’s prospectus.

 

Purchase orders received in “proper form” by the Fund’s transfer agent or its designated agent before the close of trading on the NYSE will be processed at the NAV next calculated after an order is received. On occasion, the NYSE closes before 4:00 p.m. Eastern time. When that happens, purchase orders received after the NYSE closes will be processed the following business day. To be in “proper form,” the purchase order must include:

 

·The Fund name and account number;

 

·Account name(s) and address(es); and

 

·The dollar amount or number of shares to be purchased.
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All purchases must be made in U.S. dollars, and checks must be drawn on U.S. banks. No cash, credit cards, or third-party checks will be accepted. A $25 fee will be charged against your account for any payment check returned to the transfer agent or for any incomplete electronic funds transfer, or for insufficient funds, stop payment, closed account, or other reasons. If a check does not clear your bank or the Fund is unable to debit your pre-designated bank account on the day of purchase, the Fund reserves the right to cancel the purchase. If your purchase is canceled, you will be responsible for any losses or fees imposed by your bank and losses that may be incurred as a result of a decline in the value of the canceled purchase. The Fund (or the Fund’s agent) has the authority to redeem shares in your account(s) to cover any losses due to fluctuations in share price. Any profit on such cancellation will accrue to the Fund. Your investment in the Fund should be intended to serve as a long-term investment vehicle. The Fund is not designed to provide you with a means of speculating on the short-term fluctuations in the stock market. The Fund reserves the right to reject any purchase request that it regards as disruptive to the efficient management of the Fund, which includes investors with a history of excessive trading. The Fund also reserves the right to stop offering shares at any time.

 

To help the 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 who opens an account. This means that when you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask for other identifying documents or information, and may take additional steps to verify your identity. We may not be able to open your account or complete a transaction for you until we are able to verify your identity.

 

Classes of Shares Offered

 

Mutual funds typically incur costs for the distribution and servicing of their shares. Many funds pay for these costs by charging a variety of fees to their shareholders. Some of the most common fees include:

 

·Sales Charge: A percentage fee deducted from your initial investment.

 

·Contingent Deferred Sales Charge (“CDSC”): A percentage fee deducted from your sales proceeds based on the length of time you own your shares.

 

·Distribution and Service (12b-1) Fees: An annual percentage fee used to pay for distribution and shareholder servicing expenses.

 

To give you flexibility in choosing a fee structure that is most beneficial for you, the Fund offers multiple classes of shares: Advisor Class Shares and Class A shares. Class A shares are offered in this prospectus. The Advisor Class shares of the Fund are offered in a separate prospectus. Not all shareholders will be eligible to purchase all share classes. Each class of shares represents an investment in the same portfolio of securities, but as described below, each class utilizes a distinct combination of the above fees. Because each investor’s financial considerations are different, you should speak with your financial adviser to help you decide which share class is best for you.

 

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The Fund reserves the right to reject or cancel any purchase order and to withdraw or suspend the offering of shares at any time. The Fund may also request additional information from you in order to verify your identity. If you do not provide this information or if such information cannot be verified, we reserve the right to close your account to the extent required or permitted by applicable law or regulations, including those relating to the prevention of money laundering.

 

Class A Shares. Class A Shares are presently offered only through financial intermediaries that have been approved by the Fund. Please refer to your financial representative for detailed information on purchasing Class A shares. You can buy Class A shares at the public offering price, which is the NAV plus a sales charge. You may qualify for a reduced sales charge, as described below. The sales charge does not apply to Class A shares acquired through reinvestment of dividends and capital gains distributions. Class A shares are currently subject to an annual distribution fee of 0.25%. The Board has also approved a shareholder service fee of 0.25%; however, the Fund’s Distributor has agreed to waive the fee until at least August 1, 2014.

 

Sales at Net Asset Value. Class A shares of the Fund may be sold at NAV without a sales charge to certain investors without regard to investment amount, including to (i) officers, directors, and employees of any of the Trust, Realty Capital Securities and NFA (as well as their affiliates); and (ii) investment advisers and financial planners who place trades for their own accounts or the accounts of their clients and who charge a management, consulting, or other fee for their services.

 

The Distributor pays a commission to dealers who sell Class A shares in the form of a “reallowance” of a portion of the sales charge paid on the purchase of those shares. The Distributor may enter into agreements with dealers whereby the dealer reallowance is increased or decreased from the amounts indicated in the table below.

 

Sales Charges. The following table describes the sales charges that you may pay if you buy Class A shares.

 

Amount of Purchase

Initial Sales Charge as

% of Public Offering Price(1)

Initial Sales Charge as

% of Net Amount Invested

Reallowance to Dealers as %   of Public Offering Price(1)
Less than $100,000 1.50% [l]% [l]%
$100,000 but less than $250,000 1.00% [l]% [l]%
$250,000 but less than $500,000 0.50% [l]% [l]%
$500,000 and above None None None
(1)Offering price includes the initial sales charge. The initial sales charge you pay may differ slightly from the amount set forth above because of rounding that occurs in the calculation used to determine your initial sales charge.
(2)Generally, no CDSC is imposed upon the sale of Class A shares. However, if you invest $500,000 or more in Class A shares, you may pay a CDSC equal to 1% of the current NAV or the original cost of the shares that you sell, whichever is less, if you redeem your shares within one year of purchase.

 

15
 

 

As shown in the table above, reduced initial sales charges on Class A shares are available to shareholders with investments of $100,000 or more in Class A shares. You may qualify for reduced sales charges under the following circumstances:

 

Aggregating Accounts. The size of the total investment applies to the total amount being invested by any “person,” which includes:

 

·you, your spouse and your children under the age of 21;

 

·a trustee or other fiduciary purchasing for a single trust, estate or fiduciary account, although more than one beneficiary may be involved; and

 

·any U.S. bank or investment adviser purchasing shares for its investment advisory clients.

 

Rights of Accumulation. A person (defined above) may take into account not only the amount being invested, but also the current NAV of Class A shares already held by such person in order to reduce the sales charge on the new purchase. To be entitled to a reduced sales charge pursuant to the Rights of Accumulation, you must notify your financial intermediary at the time of purchase, and give information related to the other account(s).

 

Letter of Intention. You may reduce your Class A sales charge by establishing a letter of intention. A letter of intention allows a person (defined above) to aggregate purchases of Class A shares during a 12-month period in order to reduce the sales charge. All Class A shares currently owned will be credited as purchases toward completion of the letter at the greater of their NAV on the date the letter is executed or their cost. You should retain any records necessary to substantiate cost basis because the Fund, the Fund’s transfer agent, and your financial intermediary may not maintain this information. Capital appreciation and reinvested dividends and capital gains distributions do not count toward the required purchase amount during this 12-month period.

 

The letter is not a binding obligation. However, 5% of the amount specified in the letter will be held in escrow, and if your purchases are less than the amount specified, the Fund will request that you remit the amount equal to the difference between the sales charge paid and the sales charge applicable to the aggregate purchases actually made. If this amount is not remitted within 20 days after written request, an appropriate number of escrowed shares will be redeemed in order to realize the difference. However, the sales charge applicable to the investment will in no event be higher than if you had not submitted a letter. Please note that no retroactive adjustment will be made if purchases exceed the amount indicated in the letter.

 

At the time of your purchase, you must inform your financial intermediary of any other investment in Class A shares that would count toward reducing your sales load. This includes, for example, investments held in a retirement account, an employee benefit plan, or at a dealer or other financial intermediary other than the one handling your current purchase. In addition, you may be asked to provide supporting account statements or other information to allow us to verify your eligibility for a discount. If you do not let your financial intermediary know that you are eligible for a discount, you may not receive the discount to which you are otherwise entitled.

 

16
 

Dealer Commission. The Distributor may pay dealers a commission of up to 1% on investments of $1 million or more in Class A shares.

 

Reinstatement Privilege. If you redeem your Class A shares and then decide to reinvest in Class A shares of the Fund, you have a one-time option, within 120 calendar days of the date of your redemption, to use all or any part of the proceeds of the redemption to reinstate, free of an initial sales load, all or any part of your investment in Class A shares of the Fund. If you redeem your Class A shares and your redemption was subject to a CDSC, you may reinstate all or any part of your investment in Class A shares within 120 calendar days of the date of your redemption and receive a credit for the applicable CDSC that you paid. Your investment will be reinstated at the NAV per share next determined after we receive your request. Your financial intermediary must inform the Fund’s transfer agent must be informed that your new purchase represents a reinstated investment.

 

Reinstated shares must be registered exactly and be of the same class as the shares previously redeemed, and the Fund’s minimum initial investment amount must be met at the time of reinstatement. For the purposes of the CDSC schedule, the holding period will continue as if the Class A shares had not been redeemed. The ability of a shareholder to utilize the reinstatement privilege is subject to the Fund’s right to reject any purchase or exchange order if it believes such shareholder is engaged in, or has engaged in, market timing or other abusive trading practices.

 

Minimum Purchase Amount

 

For Class A shares, the minimum initial investment amount is $2,500. The Fund reserves the right to change the amount of this minimum from time to time or to waive it in whole or in part for certain accounts. Financial intermediaries may have their own investment minimums, which may be higher or lower than the Fund’s investment minimum. To the extent investments of individual investors are aggregated into an omnibus account established by an investment adviser, broker, or other intermediary, the account minimum applies to the omnibus account, not to the account of the individual investor. The minimum subsequent investment amount is $500.

 

Other Purchase Information

 

The Fund may limit the amount of purchases and refuse to sell to any person.

 

The Fund has authorized certain broker-dealers and other financial institutions to accept on its behalf purchase and redemption orders. Such broker-dealers are authorized to designate other intermediaries to receive purchase and redemption orders on the Fund’s behalf. The Fund is deemed to have received an order when the authorized broker-dealer or, if applicable, a broker-dealer’s authorized designee receives the order, and the order is processed at the NAV next calculated thereafter. It is the responsibility of the broker-dealer or other financial institution to transmit orders promptly to the Fund’s transfer agent.

 

 

17
 

 

Frequent Purchases and Redemptions of Fund Shares

 

The Fund discourages market timing. Market timing is an investment strategy using frequent purchases, redemptions and/or exchanges in an attempt to profit from short-term market movements. To the extent that the Fund significantly invests in small or mid-capitalization equity securities, because these securities are often infrequently traded, investors may seek to trade Fund shares in an effort to benefit from their understanding of the value of these securities (referred to as price arbitrage). Market timing may result in dilution of the value of Fund shares held by long-term shareholders, disrupt portfolio management, and increase Fund expenses for all shareholders.

 

The Board has adopted a policy directing the Fund to reject any purchase order with respect to one investor, a related group of investors or their agent(s), where it detects a pattern of purchases and sales of the Fund that indicates market timing or trading that it determines is abusive. This policy applies uniformly to all Fund shareholders. While the Fund attempts to deter market timing, there is no assurance that it will be able to identify and eliminate all market timers. For example, certain accounts called “omnibus accounts” include multiple shareholders. Omnibus accounts typically provide the Fund with a net purchase or redemption request on any given day where purchasers of Fund shares and redeemers of Fund shares are netted against one another and the identities of individual purchasers and redeemers whose orders are aggregated are not known by the Fund. The netting effect often makes it more difficult for the Fund to detect market timing, and there can be no assurance that the Fund will be able to do so. Brokers maintaining omnibus accounts with the Fund have agreed to provide shareholder transaction information to the extent known to the broker, to the Fund upon request. If the Fund becomes aware of market timing in an omnibus account, they will work with the broker maintaining the omnibus account to identify the shareholder engaging in the market timing activity. In addition, the Fund reserve the right to reject any purchase order for any reason, including purchase orders that it does not think are in the best interest of the Fund or its shareholders or if the Fund thinks that trading is abusive.

 

HOW TO REDEEM SHARES

 

Shareholders should contact their financial intermediaries for detailed information on redeeming their shares. Shares may be redeemed on any business day. Redemption orders received in proper order by the Fund’s transfer agent or by a brokerage firm or other financial institution that sells the Fund’s shares before 4:00 p.m. Eastern time (or before the NYSE closes if the NYSE closes before 4:00 p.m.) will be effective at that day’s NAV. Your brokerage firm or financial institution may have an earlier cut-off time.

 

Redemption payments may be made in the form of a check or federal wire transfer, subject to any applicable redemption fee. A wire transfer fee of $25 may be charged to defray custodial charges for redemptions paid by wire transfer. Any charges for wire redemptions will be deducted from your account by redemption of shares. If you redeem your shares through a broker-dealer or other institution, you may be charged a fee by that institution.

 

By Mail

 

You should contact your financial intermediary to redeem shares. However, if you no longer have a financial intermediary, you may redeem any part of your account in the Fund at no

18
 

charge by mail. Your request, in proper form, should be addressed to: Realty Capital Income Funds Trust c/o Gemini Fund Services, LLC, 17605 Wright Street, Suite 2, Omaha, NE  68130.

 

“Proper form” means your request for redemption must:

 

·Include the Fund name and account number;

 

·Include the account name(s) and address(es);

 

·State the dollar amount or number of shares you wish to redeem; and

 

·Be signed by all registered share owner(s) in the exact name(s) and any special capacity in which they are registered.

 

The Fund may require that the signatures be guaranteed if you request the redemption check be mailed to an address other than the address of record, or if the mailing address has been changed within 30 days of the redemption request. The Fund may also require that signatures be guaranteed for redemptions of $25,000 or more. Signature guarantees are for the protection of shareholders. You can obtain a signature guarantee from most banks and securities dealers, but not from a notary public. For joint accounts, both signatures must be guaranteed. Please call the transfer agent at 1-866-271-9244 if you have questions. At the discretion of the Fund, you may be required to furnish additional legal documents to insure proper authorization. The Fund will not make checks payable to any person other than the shareholder(s) of record or a financial intermediary for the benefit of the shareholder(s) of record.

 

Additional Information

 

Redemptions specifying a certain date or share price cannot be accepted and will be returned. You will be mailed the proceeds on or before the fifth business day following the redemption. You may be assessed a fee if the Fund incurs bank charges because you request that the Fund reissue a redemption check. Also, when the NYSE is closed (or when trading is restricted) for any reason other than its customary weekend or holiday closing or under any emergency circumstances, as determined by the Securities and Exchange Commission, the Fund may suspend redemptions or postpone payment dates.

 

Because the Fund incurs certain fixed costs in maintaining shareholder accounts, the Fund may require you to redeem all of your shares in the Fund on 30 days written notice if the value of your shares in the Fund is less than $1,000 due to redemption, or such other minimum amount as the Fund may determine from time to time. You may increase the value of your shares in the Fund to the minimum amount within the 30-day period. All shares of the Fund are also subject to involuntary redemption if the Board determines to liquidate the Fund. An involuntary redemption will create a capital gain or a capital loss, which may have tax consequences about which you should consult your tax advisor.

 

The Fund reserves the right to honor requests for redemption by making payment in whole or in part in readily marketable securities (“redemption in kind”) if the amount of such a request is large enough to affect operations (for example, if the request is greater than $250,000 or 1% of the Fund's assets). The securities will be chosen by the Fund and valued at the Fund's

 

19
 

net asset value. A shareholder may incur transaction expenses in converting these securities to cash.

 

distribution and Shareholder service plan

 

The Fund has adopted a distribution and shareholder service plan pursuant to Rule 12b-1 under the 1940 Act for its Class A shares. The plans provide for the Fund to pay an annual fee of up to 0.50% for Class A to the Distributor for distribution and individual shareholder services, including past distribution services. The Distributor is currently waiving 0.25% of the fee for Class A shares. Such waiver is in effect until at least _____, 2015.

 

The Distributor pays all or a portion of such fees to the financial intermediaries that make the classes available. Because these fees may be used to pay for services that are not related to prospective sales of the Fund, each class will continue to make payments under its plan even if it is closed to new investors. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The higher fees for Class C shares may cost you more over time than paying the initial sales charge for Class A shares. For additional information about the plans and their terms, see “Distribution and Shareholder Service Plans” in the statement of additional information.

 

 

DIVIDENDS, DISTRIBUTIONS AND TAXES

 

Dividends and Distributions

 

The Fund will typically distribute substantially all of its net investment income in the form of dividends and taxable capital gains to its shareholders. These distributions are automatically reinvested in the Fund unless you request cash distributions on your application or through a written request to the Fund. The Fund expects that its distributions will consist of both capital gains and dividend income. The Fund may make distributions of its net realized capital gains (after any reductions for capital loss carry forwards) annually.

 

The net income attributable to, and dividends payable on, the shares of each class is reduced by the amount of annual distribution and other expenses of each class.

 

Taxes

 

Unless you are investing in the Fund through an individual retirement account or an tax-exempt plan, you generally will be subject to federal income tax (and any other taxes, including state and local income taxes, if applicable) on dividends and capital gains distributions (whether such dividends or distributions are paid in cash or reinvested in additional shares) and will generally recognize gain or loss upon a redemption or exchange of your shares.

 

Generally, dividends paid by the Funds from interest, dividends, or net short-term capital gains will be taxed as ordinary income. Distributions properly designated by the Fund as deriving from net capital gains are taxable as long-term capital gains regardless of how long you have held your shares. Distributions of investment income properly reported by the Fund as

 

20
 

derived from “qualified dividend income” will be taxed (subject to certain minimum holding period requirements) at the rates applicable to long-term capital gains for non-corporate investors. Distributions in excess of the Fund’s earnings and profits will be first treated as a return of a capital to the extent of your basis in your Fund shares and thereafter will be treated as gain from the sale of Fund shares. While distributions consisting of a return of capital may themselves be non-taxable, they will lower a shareholder’s basis in the securities so that when the shareholder eventually sells the securities, even if sold at a loss on the original investment, the shareholder may be obligated to pay taxes on gains.

 

The amount of the gain or loss upon a redemption or exchange of your shares is measured by the difference between your adjusted tax basis in the shares redeemed or exchanged and the amount of the proceeds received in exchange for such shares. Any gain or loss arising from the redemption or exchange of shares generally is a capital gain or loss. This capital gain or loss normally is treated as a long-term capital gain or loss if you have held your shares for more than one year at the time of such redemption or exchange; otherwise, it generally will be classified as short-term capital gain or loss. If, however, you receive a capital gain dividend with respect to any share of the Fund, and if the share is sold before you have held it for at least six months, then any loss on the redemption or exchange of the share, to the extent of the capital gain dividend, is treated as a long-term capital loss.

 

A dividend or distribution made shortly after the purchase of shares of a Fund by a shareholder, although in effect a return of capital to that shareholder, would be taxable to that shareholder as described above. Distributions declared in October, November, or December, payable to shareholders of record in one of those months, and actually paid in January of the following year will be treated as paid on December 31 of the preceding year.

 

Investments by the Fund in foreign securities may be subject to foreign withholding taxes. In that case, the Fund’s yield on those securities would be decreased. Shareholders may be entitled to claim a credit or deduction with respect to foreign taxes paid by the Fund. In addition, the Fund’s investments in foreign securities or foreign currencies may increase or accelerate the Fund’s recognition of ordinary income and may affect the timing or amount of the Fund’s distributions.

 

Investments by the Fund in certain debt instruments or derivatives may cause the Fund to recognize taxable income in excess of the cash generated by such instruments. As a result, the Fund could be required at times to liquidate other investments in order to satisfy its distribution requirements under the Internal Revenue Code. The Fund’s use of derivatives will also affect the amount, timing, and character of the Fund’s distributions.

 

Because of tax law requirements, you must provide the Fund with an accurate and certified taxpayer identification number (for individuals, generally a Social Security number) to avoid “back-up” withholding, which is currently imposed at a rate of 28%.

 

Early in each calendar year, the Fund or your broker will notify you of the amount and tax status of distributions paid to you for the preceding year. In addition, for shares acquired after January 1, 2012, the Fund or your broker will notify you of the amount of gain or loss recognized on any redemption or exchange of Fund shares. For this purposes, you will need to

 

21
 

select a cost basis method to be used to calculate your reported gains and losses prior to or at the time of any redemption or exchange. If you do not select a method, a default method will be applied to the transactions. The Fund’s default method is average cost, but your broker may use an alternative default method. The cost basis method used on your account could significantly affect your taxes due and should be carefully considered. You should consult your tax advisor for more information on your own tax situation, including possible foreign, state, and local taxes.

 

Special tax rules apply to investments in the Fund through an individual retirement account or a tax-exempt plan. You should consult a tax advisor to determine the suitability of the Fund as an investment for such individual retirement account or tax-exempt plan.

 

The tax considerations described in this section do not apply to non-U.S. investors. Non-U.S. investors should consult their own tax advisor to discuss the tax consequences of an investment in the Fund by a non-U.S. investor.

 

The information contained in this prospectus is not a complete description of the federal, state, local, or foreign tax consequences of investing in the Fund. Because each investor’s tax situation is unique, you should consult your tax advisor before investing in the Fund.

 

FOR MORE INFORMATION

 

Several additional sources of information are available to you. The SAI, incorporated into this Prospectus by reference, contains detailed information on the Fund’s policies and operations, including policies and procedures relating to the disclosure of portfolio holdings by the Fund’s affiliates. The annual reports, when available, contain management’s discussion of market conditions and investment strategies that significantly affected the Fund’s performance results as of the Fund’s latest annual fiscal year end.

 

Call the Fund at 1-866-271-9244 to request free copies of the SAI and, when available, the Fund’s annual report and the semi-annual report, and to request other information about the Fund and to make shareholder inquiries. You may also obtain this information from the Fund’s website at www.arcincomefunds.com.

 

You may review and copy information about the Fund (including the SAI and other reports) at the Securities and Exchange Commission (the “SEC”) Public Reference Room in Washington, D.C. Call the SEC at 1-202-551-8090 for room hours and operation. You also may obtain reports and other information about the Fund on the EDGAR Database on the SEC’s Internet site at http.//www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.

 

22
 

Investment Company Act File No. 811-22785

 


REALTY CAPITAL INCOME FUNDS TRUST

 

PRIVACY POLICY

 

1. POLICY

 

Realty Capital Income Funds Trust (the “Trust”) is committed to protecting your privacy. This privacy notice, which is required by state and federal law, explains the Trust’s privacy policy (the “Policy”). This Policy’s terms apply both to our current shareholders and to former shareholders as well.

 

2. HOW WE PROTECT YOUR INFORMATION

 

We are committed to maintaining the privacy of our shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

 

3. WHAT KIND OF INFORMATION WE COLLECT

 

The Trust may collect nonpublic personal information regarding investors from sources such as the following:

 

·Account Applications and other forms, which may include a shareholder’s name, address, social security number and/or personally identifiable financial information;

 

·Account History, including information about a shareholder’s losses or gains; and

 

·Correspondence and Communication, with the Trust’s representatives and their affiliates.

 

4. WHO HAS ACCESS TO SHAREHOLDER INFORMATION

 

We do not disclose any non-public personal information about our shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to provide services to shareholders (for example, to a transfer agent, investment adviser or third party administrator). We restrict access to non-public personal information about our shareholders to Trust personnel and employees of Trust service providers with a legitimate business need for the information. We will maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our shareholders. Third parties that handle this information shall agree to follow the standards the Trust has established.

 

5. UPDATING YOUR INFORMATION

 

To help us keep your information up-to-date and accurate, please contact the Trust if there is any change in your personal information.

 

1
 

 

 

Subject to Completion.  Preliminary Prospectus dated February __, 2014

 

 

 

AR Capital BDC Income Fund

 

 

PROSPECTUS

 

[_______________], 2014

 

 

Advisor Class Shares (______)

 

This Prospectus provides important information about the Advisor Class shares of the AR Capital BDC Income Fund (the “Fund”), that you should know before investing.  Please read it carefully and keep it for future reference.

 

The Securities and Exchange Commission has not approved or disapproved these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 
 

TABLE OF CONTENTS

 

Page

 

FUND SUMMARY — AR CAPITAL BDC INCOME FUND 1
Investment Objective 1
Fees and Expenses of the Fund 1
Principal Investment Strategies 2
Principal Risks of Investing in the Fund 2
Investment Management 5
Purchase and Sale of Advisor Class Shares 5
Tax Information 5
Payments to Broker-Dealers and Other Financial Intermediaries 5
WHO SHOULD INVEST 6
INVESTMENT OBJECTIVE 6
PRINCIPAL INVESTMENT STRATEGIES 6
PRINCIPAL INVESTMENT RISKS 7
ADDITIONAL INVESTMENT STRATEGIES AND INFORMATION 9
MANAGEMENT 10
PRICING OF FUND SHARES 11
HOW TO BUY SHARES 13
HOW TO REDEEM SHARES 16
DIVIDENDS, DISTRIBUTIONS AND TAXES 18
FOR MORE INFORMATION 20

 

i
 

 

FUND SUMMARY – AR CAPITAL BDC INCOME FUND 

 

Investment Objective

 

The Fund’s investment objective is to provide a high level of income, with the potential for capital appreciation.

 

Fees and Expenses of the Fund

 

This table describes the fees and expenses that you may pay if you buy and hold Advisor Class shares of the Fund.

 

  Advisor Class

Shareholder Fees

(fees paid directly from your investment)

None

 

 

  Advisor Class

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

Management Fees 1.[00]%
Distribution and Service (12b-1) Fees None
Other Expenses(1) _____%
Total Annual Fund Operating Expenses _____%
Expense Reimbursement(2) (____)%
Total Annual Fund Operating Expenses After Expense Reimbursement _____%
(1)Because the Fund is new, “Other Expenses” are based on estimated amounts for the current fiscal year.
(2)National Fund Advisors, LLC (“NFA” or the “Adviser”) has contractually agreed to waive a portion or all of its management fees and pay Fund expenses (excluding acquired fund fees and expenses, interest, taxes, and extraordinary expenses) in order to limit the Other Expenses to [0.__%] of average daily net assets of the Fund’s shares (the “Expense Cap”). The Expense Cap will remain in effect through at least ___________, 201_, and may be terminated before that date only by the Trust’s Board of Trustees. The Adviser may recoup any previously waived fees and paid expenses from the Fund pursuant to this agreement for 3 years from the date they were waived or paid, subject to the Expense Cap.

 

 

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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

  1 Year 3 Years
     
Advisor Class $____ $___
     
     
1
 

Portfolio Turnover: The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the Example, affect the Fund’s performance. The portfolio turnover rate for the Fund is not available because the Fund is new.

 

Principal Investment Strategies

 

The Fund will invest substantially all (and under normal market conditions, at least 80%), of its net assets (plus any borrowings for investment purposes) in common stocks and other equity securities of business development companies (“BDCs”) that are traded on one or more nationally recognized securities exchanges. The equity securities in which the Fund may invest consist of:

 

·common stocks;

 

·rights or warrants to purchase common stocks;

 

·securities convertible into common stocks; and

 

·preferred stocks.

 

The Fund may also invest up to 20% of its net assets in debt, including high yield bonds, of BDCs and other closed-end investment companies.

 

The Fund’s Sub-Adviser intends to allocate the Fund’s assets among issuers that, in its view, are paying attractive rates of distribution and appear capable of sustaining that distribution level over time. A secondary consideration is the potential for capital appreciation. The Sub-Adviser evaluates securities based on its assessment of their dividend yield, price to book, financial operations, portfolio of investments and management quality, among other factors. In selecting securities for investment, the Sub-Adviser generally seeks to invest in securities with high current distribution rates that it believes will continue to pay distributions at that rate for the foreseeable future.

 

When selecting securities for the Fund, the Sub-Adviser may utilize fundamental, technical, and other related methodologies to determine the intrinsic value of the security. The Sub-Adviser expects that it will sell a security if, in the judgment of the portfolio manager, the individual security’s distribution potential has been compromised, its fundamentals have deteriorated or may deteriorate, or a more attractive investment opportunity is identified.

 

The Fund may invest up to 15% of its net assets in illiquid securities.

 

Principal Risks of Investing in the Fund

 

An investment in the Fund’s shares is subject to various risks. The value of the Fund’s investments will increase or decrease based on changes in the prices of the investments it holds. This will cause the value of the Fund’s shares to increase or decrease. You may receive little or no return on your investment or you may lose all or part of it. By itself, the Fund does not

2
 

constitute a balanced investment program. Before investing in the Fund, you should consider carefully the following risks.

 

Market Risk. An investment in the Fund is generally subject to market risk, including the possible loss of the entire amount invested. An investment in the Fund represents an indirect investment in the securities owned by the Fund. Like all financial instruments, the value of these securities may move up or down, sometimes rapidly and unpredictably. The value of your investment in the Fund at any point in time may be worth less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.

 

Business Development Company Risk. The Fund will emphasize investments in securities issued by publicly-traded BDCs. As a result, the Fund’s portfolio will be significantly affected by the results of BDCs and portfolio investments of each BDC. The Fund may be exposed to greater risk and experience higher volatility than would a portfolio that was not focused on investing in BDCs. BDCs primarily invest in the debt and equity securities of privately held middle market companies. The value of a BDC’s investments will be affected by company-specific performance as well as the overall economic environment. Additionally, most BDCs employ leverage which can magnify the returns of their underlying investments.

 

Investment in other Investment Companies Risk. The Fund’s investment in other investment companies, including BDCs, may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and expenses. Shares of BDCs may trade at prices that reflect a premium above or a discount below the investment company’s net asset value, which may be substantial. If investment company securities are purchased at a premium to net asset value, the premium may not exist when those securities are sold and the Fund could incur a loss.

 

Medium- and Small-Capitalization Company Risk. The Fund may invest in medium- or small-capitalization companies, which may have smaller investment portfolios and less financial or managerial resources. The risks associated with these investments are generally greater than those associated with investments in the securities of larger, more-established companies. This may cause the Fund’s NAV to be more volatile when compared to investment companies that focus only on large capitalization companies. Generally, securities of medium- and small-capitalization companies are more likely to experience sharper swings in market values or less liquid markets, in which it may be more difficult to sell at times and at prices that the Sub-Adviser believes appropriate. Consequently, the Fund may be required to dispose of these securities over a longer period of time (and potentially at less favorable prices) than would be the case for securities of larger companies, offering greater potential for gains and losses and associated tax consequences.

 

Common Stock Risk. While common stock has historically generated higher average returns than debt securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general

3
 

movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.

 

Preferred Stock Risk. There are various risks associated with investing in preferred stock, including credit risk, liquidity risk, interest rate risk, deferral and omission of distributions, subordination to bonds and other debt securities in a company’s capital structure, limited liquidity, limited voting rights, and special redemption rights.

 

Debt Securities Risk. The Fund is directly exposed to the credit risk associated with its investments in debt securities. There is a risk that debt issuers will not make payments, resulting in losses to the Fund. In addition, the credit quality of securities may be lowered if an issuer’s financial condition changes. Lower credit quality may affect liquidity and lead to greater Fund volatility. Default, or the market’s perception that an issuer is likely to default, could reduce the value and liquidity of securities, thereby reducing the value of your investment in the Fund. In addition, default may cause the Fund to incur expenses in seeking recovery of principal or interest on its portfolio holdings.

 

Credit Risk of Underlying Investments. The Fund is indirectly exposed to the credit risk associated with the debt investments of the BDCs in which the Fund invests. BDCs invest in small companies in the initial stages of development. There is an increased risk that such a portfolio company will fail to make payments on its debts as compared to more developed companies. If a portfolio company fails to make payments to a BDC, the BDC’s performance could be negatively affected and, to the extent that the Fund invests in the BDC, the value of Fund’s investment in the BDC may negatively affected as well.

 

Liquidity Risk. A security is considered to be illiquid if the Fund is unable to sell such security within seven days at the price at which the Fund values the security. A security may be deemed illiquid due to a lack of trading volume in the security or if the security is privately placed and not traded in any public market or is otherwise restricted from trading. The Fund may be unable to sell illiquid securities at the time or price it desires and could lose its entire investment in such securities. Further, certain restricted securities require special registration, liabilities and costs, and could be more difficult to value.

 

Non-Diversification Risk. The Fund is classified as a non-diversified management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). This means that the Fund may invest a greater portion of its assets in a limited number of issuers than would be the case if the Fund were classified as a diversified management investment company. The value of a specific security can perform differently from the market as a whole for reasons related to the issuer, such as operational performance, financial leverage and investment level performance at the BDC. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Additionally, the Fund’s performance may be more sensitive to any single economic, business, political, or regulatory occurrence than the value of shares of a diversified investment company.

 

Management Risk. The NAV of the Fund changes daily based on the performance of the securities in which it invests. The Sub-Adviser’s judgments about the attractiveness, value and

4
 

potential appreciation of BDCs in which the Fund invests may prove to be incorrect and may not produce the desired results.

 

No History of Operations. The Fund is a new mutual fund and has no history of operations. During the Fund’s start-up period, the Fund may not achieve the desired portfolio composition. If the Fund commences operations under inopportune market or economic conditions, it may not be able to achieve its investment objective.

 

Investment Management

 

Adviser. National Fund Advisors, LLC (the “Adviser” or “NFA”) is the Fund’s investment adviser.

 

Sub-Adviser. BDCA Adviser, LLC (“BDCA Adviser” or “the Sub-Adviser”), is the Fund’s investment sub-adviser.

 

Portfolio Manager(s). [___________________] have primary portfolio management responsibilities for the Fund, and have served the Fund in this capacity since inception.

 

[Mr. __________ serves as ____________ for BDCA Adviser, and joined BDCA Adviser in ______________.]

 

Purchase and Sale of Advisor Class Shares

 

For Advisor Class shares, the minimum initial investment is $2,500 for persons purchasing shares through certain intermediaries and certain persons in specified relationships with the Adviser or its affiliates. The minimum initial investment is $100,000 for other persons purchasing shares directly from the Fund. The minimum subsequent investment in the Fund is $500. The Fund reserves the right to waive these minimum amounts.

 

You may purchase, redeem, or exchange shares of the Fund on any business day, which is any day the New York Stock Exchange (the “NYSE”) is open for business. Eligible persons may purchase and redeem Advisor Class shares directly through the Fund.

 

Tax Information

 

Dividends and capital gain distributions that you receive from the Fund, whether you reinvest your distributions in additional Fund shares or receive them in cash, are taxable to you at either ordinary income or capital gains tax rates, unless you are investing through an individual retirement account or a tax-exempt plan. If you are investing through an individual retirement account or a tax-exempt plan, you should consult your tax advisor concerning the tax consequences of an investment in the Fund.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

If you purchase shares through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-

5
 

dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.

 

WHO SHOULD INVEST

 

The Fund may be suitable for you if you are seeking:

 

·a fund offering the potential for current income and capital appreciation;

 

·to add exposure to dividend paying common stocks to your portfolio;

 

·liquidity and portfolio diversification; or

 

·exposure to middle market investments;

 

The Fund is designed for long-term investors and not as a trading vehicle. The Fund will take reasonable steps to identify and reject orders from market timers.

 

INVESTMENT OBJECTIVE

 

The Fund’s investment objective is to provide a high level of income, with the potential for capital appreciation. There can be no assurance that the Fund will achieve its investment objective. The Fund may change its investment objective without shareholder approval, although it has no current intention to do so. Shareholders will be provided 60 days’ prior written notice of any change to the Fund’s investment objective.

 

PRINCIPAL INVESTMENT STRATEGIES

 

The Fund’s principal investment strategies described in this prospectus are the strategies that the Adviser and Sub-Adviser believe are most likely to be important in achieving the Fund’s investment objective.

 

The Fund will invest substantially all (and under normal market conditions, at least 80%), of its net assets (plus any borrowings for investment purposes) in common stocks and other equity securities of BDCs that are traded on one or more nationally recognized securities exchanges. The equity securities in which the Fund may invest consist of:

 

·common stocks;

 

·rights or warrants to purchase common stocks;

 

·securities convertible into common stocks; and

 

·preferred stocks.

 

The Fund may also invest up to 20% of its net assets in debt, including high yield bonds, of BDCs and other closed-end investment companies.

 

The Sub-Adviser intends to allocate the Fund’s assets among issuers that, in its view, are paying attractive rates of distribution and appear capable of sustaining that distribution level over time. A secondary consideration is the potential for capital appreciation. The Sub-Adviser

6
 

evaluates securities based partially on its assessment of their dividend yield, price to book, financial operations, portfolio of investments and management quality, among other factors. In selecting securities for investment, the Sub-Adviser generally seeks to invest in securities whose current distribution rates equal or exceed 7.0%, and that it believes will continue to pay distributions at that rate for the foreseeable future.

 

When selecting securities for the Fund, the Sub-Adviser may utilize fundamental, technical, and other related methodologies to determine the intrinsic value of an underlying security. The Sub-Adviser expects that it will sell a security if, in the judgment of the portfolio manager, the individual security’s distribution potential has been compromised, its fundamentals have deteriorated or may deteriorate, or a more attractive investment opportunity is identified.

 

The Fund may invest up to 15% of its net assets in illiquid securities.

 

PRINCIPAL INVESTMENT RISKS

 

An investment in the Fund’s shares is subject to various risks. The value of the Fund’s investments will increase or decrease based on changes in the prices of the investments it holds. This will cause the value of the Fund’s shares to increase or decrease. You may receive little or no return on your investment or you may lose all or part of it. By itself, the Fund does not constitute a balanced investment program. Before investing in the Fund you should consider carefully the following risks. There may be additional risks that the Fund does not currently foresee or consider material. You may wish to consult with your legal or tax advisors before deciding whether to invest in the Fund.

 

Market Risk. An investment in the Fund is generally subject to market risk, including the possible loss of the entire principal amount invested. An investment in the Fund represents an indirect investment in the securities owned by the Fund. Like all financial instruments, the value of these securities may move up or down, sometimes rapidly and unpredictably. The value of your investment in the Fund at any point in time may be worth less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.

 

Business Development Company Risk. The Fund will concentrate its investments in securities issued by BDCs. As a result, the Fund’s portfolio will be significantly affected by the results of BDCs and portfolio investments of each BDC. The Fund may be exposed to greater risk and experience higher volatility than would a more diversified portfolio. BDCs primarily invest in the debt and equity securities of privately held middle market companies. The value of a BDC’s investments will be affected by company-specific performance as well as the overall economic environment. Additionally, most BDCs employ leverage which can magnify the returns of their underlying investments.

 

Investment in other Investment Companies Risk. The Fund’s investment in another investment company, including a BDC, may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and expenses. Shares of BDCs may trade at prices that reflect a premium above or a discount below the

7
 

investment company’s net asset value, which may be substantial. If investment company securities are purchased at a premium to net asset value, the premium may not exist when those securities are sold and the Fund could incur a loss.

 

Medium- and Small-Capitalization Company Risk. The Fund may invest in medium- or small-capitalization companies, which may have smaller investment portfolios and less financial or managerial resources. The risks associated with these investments are generally greater than those associated with investments in the securities of larger, more-established companies. This may cause the Fund’s NAV to be more volatile when compared to investment companies that focus only on large capitalization companies. Generally, securities of medium- and small-capitalization companies are more likely to experience sharper swings in market values or less liquid markets, in which it may be more difficult for the Adviser to sell at times and at prices that the Sub-Adviser believes appropriate. Consequently, the Fund may be required to dispose of these securities over a longer period of time (and potentially at less favorable prices) than would be the case for securities of larger companies, offering greater potential for gains and losses and associated tax consequences.

 

Common Stock Risk. While common stock has historically generated higher average returns than debt securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.

 

Preferred Stock Risk. There are various risks associated with investing in preferred stock, including credit risk, liquidity risk, interest rate risk, deferral and omission of distributions, subordination to bonds and other debt securities in a company’s capital structure, limited liquidity, limited voting rights, and special redemption rights.

 

Debt Securities Risk. The Fund is directly exposed to the credit risk associated with its investments in debt securities. There is a risk that debt issuers will not make payments, resulting in losses to the Fund. In addition, the credit quality of securities may be lowered if an issuer’s financial condition changes. Lower credit quality may affect liquidity and lead to greater Fund volatility. Default, or the market’s perception that an issuer is likely to default, could reduce the value and liquidity of securities, thereby reducing the value of your investment in the Fund. In addition, default may cause the Fund to incur expenses in seeking recovery of principal or interest on its portfolio holdings.

 

Credit Risk of Underlying Investments. The Fund is indirectly exposed to the credit risk associated with the debt investments of the BDCs in which the Fund invests. BDCs invest in small companies in the initial stages of development. There is an increased risk that such a portfolio company will fail to make payments on its debts as compared to more developed companies. If a portfolio company fails to make payments to a BDC, the BDC’s performance could be negatively affected and, to the extent that the Fund invests in the BDC, the value of Fund’s investment in the BDC may negatively affected as well.

 

8
 

Liquidity Risk. A security is considered to be illiquid if the Fund is unable to sell such security at a fair price within a reasonable amount of time. A security may be deemed illiquid due to a lack of trading volume in the security or if the security is privately placed and not traded in any public market or is otherwise restricted from trading. The Fund may be unable to sell illiquid securities at the time or price it desires and could lose its entire investment in such securities. Further, certain restricted securities require special registration, liabilities and costs, and could pose valuation difficulties.

 

Non-Diversification Risk. The Fund is classified as a non-diversified management investment company under the 1940 Act. This means that the Fund may invest a greater portion of its assets in a limited number of issuers than would be the case if the Fund were classified as a diversified management investment company. The value of a specific security can perform differently from the market as a whole for reasons related to the issuer, such as operational performance, financial leverage and investment level performance at the BDC. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Additionally, the Fund may be subject to greater risk, because the Fund’s performance may be more sensitive to any single economic, business, political, or regulatory occurrence than the value of shares of a diversified investment company.

 

Management Risk. The NAV of the Fund changes daily based on the performance of the securities in which it invests. The Sub-Adviser’s judgments about the attractiveness, value and potential appreciation of BDCs in which the Fund invests may prove to be incorrect and may not produce the desired results.

 

No History of Operations. The Fund is a new mutual fund and has no history of operations. During the Fund’s start-up period, the Fund may not achieve the desired portfolio composition. If the Fund commences operations under inopportune market or economic conditions, it may not be able to achieve its investment objective.

 

ADDITIONAL INVESTMENT STRATEGIES AND INFORMATION

 

Derivatives. In addition to its principal investment strategies, the Fund may, from time to time, invest in derivatives. Derivatives are instruments, such as futures contracts, the values of which are derived from the values of other securities or indices. Derivative transactions pose additional risks to the Fund, including interest rate, management, valuation, and counterparty risk. Changes in the value of derivatives may not correlate perfectly with the underlying asset, rate, or index, and the Fund could lose more than the principal amount invested. An investment in derivatives may also increase the Fund’s volatility and create investment leverage. When a derivative is used for hedging purposes, it may not provide the anticipated protection, causing the Fund to lose money on both the derivative transaction and the exposure the Fund sought to hedge.

 

Illiquid Securities. The Fund will not invest more than 15% of its net assets in illiquid securities. Illiquid securities involve the risk that the securities will not be able to be sold promptly (i.e., within seven days) at the time desired by the Fund or at prices approximating the value at which the Fund is carrying the securities on its books and records. Restricted securities,

9
 

which are securities that may not be resold to the public without an effective registration statement under the Securities Act of 1933, as amended, or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration, may be illiquid.

 

Defensive Position. When the Adviser, in consultation with the Sub-Adviser, believes that market or general economic conditions justify a temporary defensive position, the Fund may deviate from its investment objective and invest all or any portion of its assets in short-term debt instruments, government securities, or cash or cash equivalents. When and to the extent the Fund assumes a temporary defensive position, it may not pursue or achieve its investment objective.

 

Portfolio Holdings. A description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the Fund’s Statement of Additional Information (the “SAI”). The Fund also files its complete schedule of portfolio holdings with the Securities and Exchange Commission (the “SEC”) on Form N-Q as of the end of its first and third fiscal quarters. The Fund’s full portfolio holdings are published semi-annually in reports sent to shareholders and filed with the SEC on Form N-CSR, and such reports are made available on the Fund’s website, generally within 60 days after the end of each semiannual period. The Fund may also post an uncertified whole or partial list of portfolio holdings on its website at www.arcincomefunds.com, no earlier than 15 days after the end of each calendar quarter. The holdings information remains available until the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information is current. Other information regarding the Fund may be found on the Fund’s website.

 

MANAGEMENT

 

Under the terms of the advisory agreement, the Adviser is responsible for formulating the Fund’s investment policies and making ongoing investment decisions. The Adviser has engaged BDCA Adviser to serve as investment sub-adviser and to make day-to-day investment decisions for the Fund. A discussion regarding the basis for the Board of Trustee’s (the “Board”) approval of the advisory and sub-advisory agreements will be contained in the Fund’s first semi-annual report to shareholders, when available.

 

Investment Adviser

 

NFA, located at 405 Park Avenue, New York, NY 10022, serves as the Fund’s investment adviser. NFA is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended, and was formed in June 2011. NFA is an indirect wholly-owned subsidiary of AR Capital LLC (“ARC”), which directly and through its wholly-owned subsidiaries and affiliates sponsors a variety of securities offerings, including publicly registered non-traded real estate investment trusts, a publicly registered non-traded Business Development Company (“BDC”), a non-traded oil and gas limited partnership and additional other funds registered under the 1940 Act. As of the date of this prospectus, the Adviser is managing assets in excess of $___ million.

 

 

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Sub-Adviser

 

BDCA Adviser, located at 405 Park Avenue, New York, NY 10022, serves as the Fund’s investment sub-adviser. BDCA Adviser is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended, and was formed in _____. BDCA Adviser is an indirect wholly-owned subsidiary of AR Capital (“ARC”), which directly and through its affiliates sponsors a variety of securities offerings, including publicly registered non-traded real estate investment trusts, publicly registered non-traded BDC and other funds registered under the 1940 Act. As of the date of this prospectus, BDCA Adviser had $____ in assets under management.

 

[Portfolio Manager information to be added]

 

Additional information about accounts managed by the portfolio managers and their ownership of securities in the Fund is available in the SAI of Realty Capital Income Funds Trust (the “Trust”).

 

Management Fees

 

The Adviser’s annual management fee is 1.00% of the Fund’s average daily net assets.

 

Distributor

 

Realty Capital Securities, LLC (the “Distributor”), located at 405 Park Avenue, New York, NY 10022, serves as the distributor for the Fund. The Distributor is obligated to sell the shares of the Fund on a best efforts basis only against purchase orders for the shares. Shares of the Fund are offered to the public on a continuous basis.

 

Financial Highlights

 

Because the Fund is newly organized, there is no financial or performance information in this Prospectus. You may request a copy of the Fund’s annual and semi-annual reports, when available, at no charge by calling the Fund toll-free at 1-866-271-9244.

 

PRICING OF FUND SHARES

 

The price at which you can purchase and redeem each class of the Fund’s shares is the NAV of that class of shares next determined after we receive your order in proper form, less any applicable sales charge. Proper form means that your request includes the Fund name and account number, states the amount of the transaction (in dollars or shares), includes the signatures of all owners exactly as registered on the account, signature guarantees (if necessary), any supporting legal documentation that may be required, and any outstanding certificates representing shares to be redeemed.

 

The Fund calculates its NAV per share as of the close of regular trading on the NYSE, generally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. Thus, purchase and redemption orders must be received in proper form by the close of regular trading on the NYSE in order to receive that day’s NAV; orders received after the close of regular trading on the NYSE will receive the NAV next determined. The Fund has authorized one or more brokers to

11
 

accept on its behalf purchase (and redemption) orders, and these brokers are authorized to designate other intermediaries on the Fund’s behalf. The Fund will be deemed to have received a purchase (or redemption) order when an authorized broker, or that broker’s designee, accepts the order, and that order will be priced at the next computed NAV after this acceptance. The Fund determines NAV per share for each class by dividing that class’s share of the net assets of the Fund (i.e., its assets less liabilities) by the total number of outstanding shares of that class.

 

Investments in securities that are listed on the NYSE are valued, except as indicated below, at the last sale price reflected at the close of the NYSE on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices for the day or, if no asked price is available, at the bid price.

 

Securities not listed on the NYSE but listed on other domestic or foreign securities exchanges are valued in a similar manner. Securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined as reflected on the tape at the close of the exchange representing the principal market for such securities. If after the close of a foreign market, but prior to the close of business on the day the securities are being valued, market conditions change significantly, certain foreign securities may be fair valued pursuant to procedures established by the Board.

 

Readily marketable securities traded in the over-the-counter market, including listed securities whose primary market is believed by the Adviser to be over-the-counter, are valued at the official closing prices as reported by sources as the Board deems appropriate to reflect their fair market value. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices for the day, or if no asked price is available, at the bid price. However, certain debt securities may be valued on the basis of prices provided by a pricing service when such prices are believed by the Board to reflect the fair market value of such securities.

 

Securities for which market prices are unavailable, or securities for which the Adviser determines that bid and/or asked price or a counterparty valuation does not reflect market value, will be valued at fair value pursuant to procedures approved by the Board. Circumstances in which market prices may be unavailable include, but are not limited to, when trading in a security is suspended, the exchange on which the security is traded is subject to an unscheduled close or disruption, or material events occur after the close of the exchange on which the security is principally traded. In these circumstances, the Fund determines fair value in a manner that fairly reflects the market value of the security on the valuation date based on consideration of any information or factors it deems appropriate. These may include recent transactions in comparable securities, information relating to the specific security, and developments in the markets.

 

The Fund’s use of fair value pricing may cause the NAV of Fund shares to differ from the NAV that would be calculated using market quotations. Fair value pricing involves subjective judgments and it is possible that the fair value determined for a security may be materially different than the value that could be realized upon the sale of that security.

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Short-term debt securities, which have a maturity date of 60 days or less, are valued at amortized cost, which approximates value. Investments in open-end mutual funds are valued at their closing NAV.

 

Because the Fund may hold securities that are primarily listed on foreign exchanges that trade on weekends or days when the Fund does not price its shares, the value of the securities held in the Fund may change on days when you will not be able to purchase or redeem Fund shares.

 

HOW TO BUY SHARES

 

Purchasing Shares

 

You may buy shares on any business day. This includes any day that the Fund is open for business, other than weekends and days on which the NYSE is closed, including the following holidays: New Year’s Day; Martin Luther King, Jr.; Day, Presidents’ Day; Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving; and Christmas Day.

 

Purchase orders received in “proper form” by the Fund’s transfer agent or its designated agent before the close of trading on the NYSE will be processed at the NAV next calculated after an order is received. On occasion, the NYSE closes before 4:00 p.m. Eastern time. When that happens, purchase orders received after the NYSE closes will be processed the following business day. To be in “proper form,” the purchase order must include:

 

·The Fund name and account number;

 

·Account name(s) and address(es); and

 

·The dollar amount or number of shares to be purchased.

 

All purchases must be made in U.S. dollars, and checks must be drawn on U.S. banks. No cash, credit cards, or third-party checks will be accepted. A $25 fee will be charged against your account for any payment check returned to the transfer agent or for any incomplete electronic funds transfer, or for insufficient funds, stop payment, closed account, or other reasons. If a check does not clear your bank or the Fund is unable to debit your pre-designated bank account on the day of purchase, the Fund reserves the right to cancel the purchase. If your purchase is canceled, you will be responsible for any losses or fees imposed by your bank and losses that may be incurred as a result of a decline in the value of the canceled purchase. The Fund (or the Fund’s agent) has the authority to redeem shares in your account(s) to cover any losses due to fluctuations in share price. Any profit on such cancellation will accrue to the Fund. Your investment in the Fund should be intended to serve as a long-term investment vehicle. The Fund is not designed to provide you with a means of speculating on the short-term fluctuations in the stock market. The Fund reserves the right to reject any purchase request that it regards as disruptive to the efficient management of the Fund, which includes investors with a history of excessive trading. The Fund also reserves the right to stop offering shares at any time.

 

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To help the 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 who opens an account. This means that when you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask for other identifying documents or information, and may take additional steps to verify your identity. We may not be able to open your account or complete a transaction for you until we are able to verify your identity.

 

Classes of Shares Offered

 

Mutual funds typically incur costs for the distribution and servicing of their shares. Many funds pay for these costs by charging a variety of fees to their shareholders. Some of the most common fees include:

 

·Sales Charge: A percentage fee deducted from your initial investment.

 

·Contingent Deferred Sales Charge (“CDSC”): A percentage fee deducted from your sales proceeds based on the length of time you own your shares.

 

·Distribution and Service (12b-1) Fees: An annual percentage fee used to pay for distribution and shareholder servicing expenses.

 

To give you flexibility in choosing a fee structure that is most beneficial for you, the Fund offers multiple classes of shares: Advisor Class shares and Class A Shares. Advisor Class shares are offered in this prospectus. Class A shares of the Fund are offered in a separate prospectus. Not all shareholders will be eligible to purchase all share classes. Each class of shares represents an investment in the same portfolio of securities, but as described below, each class utilizes a distinct combination of the above fees.

 

The Fund reserves the right to reject or cancel any purchase order and to withdraw or suspend the offering of shares at any time. The Fund may also request additional information from you in order to verify your identity. If you do not provide this information or if such information cannot be verified, we reserve the right to close your account to the extent required or permitted by applicable law or regulations, including those relating to the prevention of money laundering.

 

Advisor Class Shares. Eligible shareholders can buy Advisor Class shares at the public offering price, which is the NAV. There is no sales charge when purchasing Advisor Class shares and no CDSC is imposed on redemptions of Advisor Class shares. Advisor Class shares are not subject to an annual distribution fee or a shareholder service fee. Advisor Class shares are available for purchase only by the following persons at the following minimum initial investment amounts:

 

·current officers, directors and employees (and their immediate families) of the Adviser, its affiliates, the Trust’s distributor, and to any trust, pension, profit-sharing, or other benefit plan for such persons, with a minimum initial investment amount of $2,500;

 

·institutional advisory accounts of the Adviser or its affiliates, with a minimum initial investment amount of $2,500;

 

14
 
·financial advisory firms that are acquiring shares for the benefit of their advisory or fee-based account clients, where said firm holds the shares in omnibus account for the benefit of their clients and with a minimum omnibus account initial investment amount of $2,500; and

 

·direct purchases with a $100,000 minimum initial investment amount.

 

Advisor Class shares can be purchased by eligible investors directly through the Fund’s transfer agent or through a brokerage firm or other financial institution that has agreed to sell the Fund’s shares. If you purchase shares through a brokerage firm or other financial institution, you may be charged a fee by the firm or institution. If you are investing directly in the Fund for the first time, please call toll-free 1-866-271-9244 to request a Shareholder Account Application. You will need to establish an account before investing. If you choose to pay by wire, you must call the Fund’s transfer agent, at 1-866-271-9244, to obtain instructions on how to set up your account and to obtain an account number and wire instructions. Wire orders will be accepted only on a day on which the Fund, the custodian, and the transfer agent are open for business. A wire purchase will not be considered made until the wired money and purchase order are received by the Fund. Any delays that may occur in wiring money, including delays that may occur in processing by the banks, are not the responsibility of the Fund or the transfer agent. The Fund presently does not charge a fee for the receipt of wired funds, but the Fund may charge shareholders for this service in the future. If your wire does not clear, you will be responsible for any loss incurred by the Fund. If you are already a shareholder, the Fund can redeem shares from any identically registered account in the Fund as reimbursement for any loss incurred. You may be prohibited or restricted from making future purchases in the Fund.

 

Minimum Purchase Amount

 

For Advisor Class shares, the minimum initial investment is $2,500 for persons purchasing shares through certain intermediaries and certain persons in specified relationships with the Adviser or its affiliates. The minimum initial investment is $100,000 for other persons purchasing shares directly from the Fund. The minimum subsequent investment in the Fund is $500. The Fund reserves the right to waive these minimum amounts.

 

Other Purchase Information

 

The Fund may limit the amount of purchases and refuse to sell to any person.

 

The Fund has authorized certain broker-dealers and other financial institutions to accept on its behalf purchase and redemption orders. Such broker-dealers are authorized to designate other intermediaries to receive purchase and redemption orders on the Fund’s behalf. The Fund is deemed to have received an order when the authorized broker-dealer or, if applicable, a broker-dealer’s authorized designee receives the order, and the order is processed at the NAV next calculated thereafter. It is the responsibility of the broker-dealer or other financial institution to transmit orders promptly to the Fund’s transfer agent.

 

 

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Frequent Purchases and Redemptions of Fund Shares

 

The Fund discourages market timing. Market timing is an investment strategy using frequent purchases, redemptions and/or exchanges in an attempt to profit from short-term market movements. To the extent that the Fund significantly invests in small or mid-capitalization equity securities, because these securities are often infrequently traded, investors may seek to trade Fund shares in an effort to benefit from their understanding of the value of these securities (referred to as price arbitrage). Market timing may result in dilution of the value of Fund shares held by long-term shareholders, disrupt portfolio management, and increase Fund expenses for all shareholders.

 

The Board has adopted a policy directing the Fund to reject any purchase order with respect to one investor, a related group of investors or their agent(s), where it detects a pattern of purchases and sales of the Fund that indicates market timing or trading that it determines is abusive. This policy applies uniformly to all Fund shareholders. While the Fund attempts to deter market timing, there is no assurance that it will be able to identify and eliminate all market timers. For example, certain accounts called “omnibus accounts” include multiple shareholders. Omnibus accounts typically provide the Fund with a net purchase or redemption request on any given day where purchasers of Fund shares and redeemers of Fund shares are netted against one another and the identities of individual purchasers and redeemers whose orders are aggregated are not known by the Fund. The netting effect often makes it more difficult for the Fund to detect market timing, and there can be no assurance that the Fund will be able to do so. Brokers maintaining omnibus accounts with the Fund have agreed to provide shareholder transaction information to the extent known to the broker, to the Fund upon request. If the Fund becomes aware of market timing in an omnibus account, they will work with the broker maintaining the omnibus account to identify the shareholder engaging in the market timing activity. In addition, the Fund reserve the right to reject any purchase order for any reason, including purchase orders that it does not think are in the best interest of the Fund or its shareholders or if the Fund thinks that trading is abusive.

 

HOW TO REDEEM SHARES

 

You may redeem your shares on any business day. Redemption orders received in proper order by the Fund’s transfer agent or by a brokerage firm or other financial institution that sells the Fund’s shares before 4:00 p.m. Eastern time (or before the NYSE closes if the NYSE closes before 4:00 p.m.) will be effective at that day’s NAV. Your brokerage firm or financial institution may have an earlier cut-off time.

 

Shares of the Fund may be redeemed by mail or telephone. You may receive redemption payments in the form of a check or federal wire transfer, subject to any applicable redemption fee. A wire transfer fee of $25 may be charged to defray custodial charges for redemptions paid by wire transfer. Any charges for wire redemptions will be deducted from your account by redemption of shares. If you redeem your shares through a broker-dealer or other institution, you may be charged a fee by that institution.

 

 

16
 

 

By Mail

 

You may redeem any part of your account in the Fund at no charge by mail. Your request, in proper form, should be addressed to: Realty Capital Income Funds Trust c/o Gemini Fund Services, LLC, 17605 Wright Street, Suite 2, Omaha, NE  68130.

 

“Proper form” means your request for redemption must:

 

·Include the Fund name and account number;

 

·Include the account name(s) and address(es);

 

·State the dollar amount or number of shares you wish to redeem; and

 

·Be signed by all registered share owner(s) in the exact name(s) and any special capacity in which they are registered.

 

The Fund may require that the signatures be guaranteed if you request the redemption check be mailed to an address other than the address of record, or if the mailing address has been changed within 30 days of the redemption request. The Fund may also require that signatures be guaranteed for redemptions of $25,000 or more. Signature guarantees are for the protection of shareholders. You can obtain a signature guarantee from most banks and securities dealers, but not from a notary public. For joint accounts, both signatures must be guaranteed. Please call the transfer agent at 1-866-271-9244 if you have questions. At the discretion of the Fund, you may be required to furnish additional legal documents to insure proper authorization. The Fund will not make checks payable to any person other than the shareholder(s) of record or a financial intermediary for the benefit of the shareholder(s) of record.

 

By Telephone

 

You may redeem any part of your account in the Fund by calling the transfer agent at 1-866-271-9244. The Fund, the transfer agent, and the custodian are not liable for following redemption instructions communicated by telephone to the extent that they reasonably believe the telephone instructions to be genuine. However, if they do not employ reasonable procedures to confirm that telephone instructions are genuine, they may be liable for any losses due to unauthorized or fraudulent instructions. Procedures employed may include recording telephone instructions and requiring a form of personal identification from the caller.

 

The Fund may terminate the telephone redemption procedures at any time.

 

Additional Information

 

Redemptions specifying a certain date or share price cannot be accepted and will be returned. You will be mailed the proceeds on or before the fifth business day following the redemption. You may be assessed a fee if the Fund incurs bank charges because you request that the Fund reissue a redemption check. Also, when the NYSE is closed (or when trading is restricted) for any reason other than its customary weekend or holiday closing or under any emergency circumstances, as determined by the Securities and Exchange Commission, the Fund may suspend redemptions or postpone payment dates.

 

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Because the Fund incurs certain fixed costs in maintaining shareholder accounts, the Fund may require you to redeem all of your shares in the Fund on 30 days written notice if the value of your shares in the Fund is less than $1,000 due to redemption, or such other minimum amount as the Fund may determine from time to time. You may increase the value of your shares in the Fund to the minimum amount within the 30-day period. All shares of the Fund are also subject to involuntary redemption if the Board determines to liquidate the Fund. An involuntary redemption will create a capital gain or a capital loss, which may have tax consequences about which you should consult your tax advisor.

 

The Fund reserves the right to honor requests for redemption by making payment in whole or in part in readily marketable securities (“redemption in kind”) if the amount of such a request is large enough to affect operations (for example, if the request is greater than $250,000 or 1% of the Fund's assets). The securities will be chosen by the Fund and valued at the Fund's net asset value. A shareholder may incur transaction expenses in converting these securities to cash.

 

DIVIDENDS, DISTRIBUTIONS AND TAXES

 

Dividends and Distributions

 

The Fund will typically distribute substantially all of its net investment income in the form of dividends and taxable capital gains to its shareholders. These distributions are automatically reinvested in the Fund unless you request cash distributions on your application or through a written request to the Fund. The Fund expects that its distributions will consist of both capital gains and dividend income. The Fund may make distributions of its net realized capital gains (after any reductions for capital loss carry forwards) annually.

 

The net income attributable to, and dividends payable on, the shares of each class is reduced by the amount of annual distribution and other expenses of each class.

 

Taxes

 

Unless you are investing in the Fund through an individual retirement account or an tax-exempt plan, you generally will be subject to federal income tax (and any other taxes, including state and local income taxes, if applicable) on dividends and capital gains distributions (whether such dividends or distributions are paid in cash or reinvested in additional shares) and will generally recognize gain or loss upon a redemption or exchange of your shares.

 

Generally, dividends paid by the Funds from interest, dividends, or net short-term capital gains will be taxed as ordinary income. Distributions properly designated by the Fund as deriving from net capital gains are taxable as long-term capital gains regardless of how long you have held your shares. Distributions of investment income properly reported by the Fund as derived from “qualified dividend income” will be taxed (subject to certain minimum holding period requirements) at the rates applicable to long-term capital gains for non-corporate investors. Distributions in excess of the Fund’s earnings and profits will be first treated as a return of a capital to the extent of your basis in your Fund shares and thereafter will be treated as gain from the sale of Fund shares. While distributions consisting of a return of capital may

 

18
 

themselves be non-taxable, they will lower a shareholder’s basis in the securities so that when the shareholder eventually sells the securities, even if sold at a loss on the original investment, the shareholder may be obligated to pay taxes on gains.

 

The amount of the gain or loss upon a redemption or exchange of your shares is measured by the difference between your adjusted tax basis in the shares redeemed or exchanged and the amount of the proceeds received in exchange for such shares. Any gain or loss arising from the redemption or exchange of shares generally is a capital gain or loss. This capital gain or loss normally is treated as a long-term capital gain or loss if you have held your shares for more than one year at the time of such redemption or exchange; otherwise, it generally will be classified as short-term capital gain or loss. If, however, you receive a capital gain dividend with respect to any share of the Fund, and if the share is sold before you have held it for at least six months, then any loss on the redemption or exchange of the share, to the extent of the capital gain dividend, is treated as a long-term capital loss.

 

A dividend or distribution made shortly after the purchase of shares of a Fund by a shareholder, although in effect a return of capital to that shareholder, would be taxable to that shareholder as described above. Distributions declared in October, November, or December, payable to shareholders of record in one of those months, and actually paid in January of the following year will be treated as paid on December 31 of the preceding year.

 

Investments by the Fund in foreign securities may be subject to foreign withholding taxes. In that case, the Fund’s yield on those securities would be decreased. Shareholders may be entitled to claim a credit or deduction with respect to foreign taxes paid by the Fund. In addition, the Fund’s investments in foreign securities or foreign currencies may increase or accelerate the Fund’s recognition of ordinary income and may affect the timing or amount of the Fund’s distributions.

 

Investments by the Fund in certain debt instruments or derivatives may cause the Fund to recognize taxable income in excess of the cash generated by such instruments. As a result, the Fund could be required at times to liquidate other investments in order to satisfy its distribution requirements under the Internal Revenue Code. The Fund’s use of derivatives will also affect the amount, timing, and character of the Fund’s distributions.

 

Because of tax law requirements, you must provide the Fund with an accurate and certified taxpayer identification number (for individuals, generally a Social Security number) to avoid “back-up” withholding, which is currently imposed at a rate of 28%.

 

Early in each calendar year, the Fund or your broker will notify you of the amount and tax status of distributions paid to you for the preceding year. In addition, for shares acquired after January 1, 2012, the Fund or your broker will notify you of the amount of gain or loss recognized on any redemption or exchange of Fund shares. For this purposes, you will need to select a cost basis method to be used to calculate your reported gains and losses prior to or at the time of any redemption or exchange. If you do not select a method, a default method will be applied to the transactions. The Fund’s default method is average cost, but your broker may use an alternative default method. The cost basis method used on your account could significantly

 

19
 

affect your taxes due and should be carefully considered. You should consult your tax advisor for more information on your own tax situation, including possible foreign, state, and local taxes.

 

Special tax rules apply to investments in the Fund through an individual retirement account or a tax-exempt plan. You should consult a tax advisor to determine the suitability of the Fund as an investment for such individual retirement account or tax-exempt plan.

 

The tax considerations described in this section do not apply to non-U.S. investors. Non-U.S. investors should consult their own tax advisor to discuss the tax consequences of an investment in the Fund by a non-U.S. investor.

 

The information contained in this prospectus is not a complete description of the federal, state, local, or foreign tax consequences of investing in the Fund. Because each investor’s tax situation is unique, you should consult your tax advisor before investing in the Fund.

 

FOR MORE INFORMATION

 

Several additional sources of information are available to you. The SAI, incorporated into this Prospectus by reference, contains detailed information on the Fund’s policies and operations, including policies and procedures relating to the disclosure of portfolio holdings by the Fund’s affiliates. The annual reports, when available, contain management’s discussion of market conditions and investment strategies that significantly affected the Fund’s performance results as of the Fund’s latest annual fiscal year end.

 

Call the Fund at 1-866-271-9244 to request free copies of the SAI and, when available, the Fund’s annual report and the semi-annual report, and to request other information about the Fund and to make shareholder inquiries. You may also obtain this information from the Fund’s website at www.arcincomefunds.com.

 

You may review and copy information about the Fund (including the SAI and other reports) at the Securities and Exchange Commission (the “SEC”) Public Reference Room in Washington, D.C. Call the SEC at 1-202-551-8090 for room hours and operation. You also may obtain reports and other information about the Fund on the EDGAR Database on the SEC’s Internet site at http.//www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.

 

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Investment Company Act File No. 811-22785

 


REALTY CAPITAL INCOME FUNDS TRUST

 

PRIVACY POLICY

 

1. POLICY

 

Realty Capital Income Funds Trust (the “Trust”) is committed to protecting your privacy. This privacy notice, which is required by state and federal law, explains the Trust’s privacy policy (the “Policy”). This Policy’s terms apply both to our current shareholders and to former shareholders as well.

 

2. HOW WE PROTECT YOUR INFORMATION

 

We are committed to maintaining the privacy of our shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

 

3. WHAT KIND OF INFORMATION WE COLLECT

 

The Trust may collect nonpublic personal information regarding investors from sources such as the following:

 

·Account Applications and other forms, which may include a shareholder’s name, address, social security number and/or personally identifiable financial information;

 

·Account History, including information about a shareholder’s losses or gains; and

 

·Correspondence and Communication, with the Trust’s representatives and their affiliates.

 

4. WHO HAS ACCESS TO SHAREHOLDER INFORMATION

 

We do not disclose any non-public personal information about our shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to provide services to shareholders (for example, to a transfer agent, investment adviser or third party administrator). We restrict access to non-public personal information about our shareholders to Trust personnel and employees of Trust service providers with a legitimate business need for the information. We will maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our shareholders. Third parties that handle this information shall agree to follow the standards the Trust has established.

 

5. UPDATING YOUR INFORMATION

 

To help us keep your information up-to-date and accurate, please contact the Trust if there is any change in your personal information.

 

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Subject to Completion.  Statement of Additional Information dated February __, 2014

 

 

STATEMENT OF ADDITIONAL INFORMATION

 

[      ] [l], 2014

 

 

AR Capital Dividend and Value Fund

 

Class A Shares ([l])

Class C Shares ([l])

Advisor Class Shares ([l])

 

AR Capital BDC Income Fund

 

Class A Shares ([l])

Advisor Class Shares ([l])

 

405 Park Avenue

15th Floor

New York, NY 10022

 

This Statement of Additional Information (“SAI”) is not a prospectus. This SAI should be read in conjunction with the current prospectus (each a “Prospectus” and together the “Prospectuses”) of each of the Dividend and Value Fund and the BDC Income Fund (each a “Fund” and together the “Funds”). The SAI is hereby incorporated by reference into each Prospectus (legally made a part of the Prospectus). This SAI does not include all information that a prospective investor should consider before purchasing the securities of the Dividend and Value Fund or of the BDC Income Fund. Defined terms used herein, and not otherwise defined herein, have the same meanings as in each Prospectus.

 

You should obtain and read the corresponding Prospectus and any related Prospectus supplement prior to purchasing a Fund’s securities. A copy of each Prospectus may be obtained without charge by calling the Funds toll-free at 1-866-271-9244 or by visiting www.arcincomefunds.com. Information on this website is not incorporated herein by reference. The registration statement of which each Prospectus is a part can be reviewed and copied at the Public Reference Room of the SEC at 100 F Street NE, Washington, DC. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-202-551-8090. Each Fund’s filings with the SEC also are available to the public on the SEC’s Internet website at www.sec.gov. Copies of these filings may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street NE, Washington, DC 20549.

 
 

TABLE OF CONTENTS

 

 

  Page
THE FUNDS 1
INVESTMENT POLICIES 1
ADDITIONAL INVESTMENT ACTIVITIES AND ASSOCIATED RISKS 2
DISCLOSURE OF PORTFOLIO HOLDINGS 29
PORTFOLIO TURNOVER 31
MANAGEMENT OF THE FUNDS 31
CODES OF ETHICS 38
DISTRIBUTOR 39
CUSTODIAN 39
TRANSFER AGENT 39
PROXY VOTING POLICIES AND PROCEDURES 39
CONTROL PERSONS AND PRINCIPAL HOLDERS 39
INVESTMENT ADVISORY AND OTHER SERVICES 39
PORTFOLIO MANAGERS 40
ALLOCATION OF BROKERAGE 41
DISTRIBUTION AND SHAREHOLDER SERVICE PLANS 42
REDUCING SALES CHARGE ON CLASS A SHARES 44
CONTINGENT DEFERRED SALES CHARGE 45
PURCHASES AND REDEMPTIONS IN KIND 46
TAX STATUS 47
OTHER INFORMATION 56
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 56
FINANCIAL STATEMENTS 57
APPENDIX A – RATINGS CATEGORIES A-1
APPENDIX B – PROXY VOTING POLICIES AND PROCEDURES B-1
   
 
 

THE FUNDS

 

Each of the AR Capital Dividend and Value Fund and the AR Capital BDC Income Fund (each a “Fund” and together the “Funds”) is a newly organized, continuously offered, non-diversified, open-end management investment company. Each Fund is a series of the Realty Capital Income Funds Trust (the “Trust”). The Trust is a Delaware statutory trust organized under the laws of the State of Delaware on December 28, 2012. The Trust’s principal office is located at 405 Park Avenue, 15th Floor, New York, NY 10022, and its telephone number is 1-866-271-9244. The investment objective and principal investment strategies of each Fund, as well as the principal risks associated with each Fund’s investment strategies, are set forth in that Fund’s Prospectus. Certain additional investment information is set forth below.

 

INVESTMENT POLICIES

 

Fundamental Investment Policies

The following fundamental policies, which may be changed only by the affirmative vote of a majority of the outstanding voting securities of the Fund, apply to each of the Funds. Under the Investment Company Act of 1940, as amended, “majority of the outstanding voting securities of the Fund” means the vote, at an annual or special meeting of shareholders, duly called, of (a) 67% or more of the shares present at such meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy; or (b) more than 50% of the outstanding shares, whichever is less.

 

1.Borrowing. Each Fund may not borrow money, except to the extent permitted by the Investment Company Act of 1940, as amended (the “1940 Act”), including the rules, regulations, and any exemptive orders obtained thereunder.

 

2.Senior Securities. Each fund may not issue senior securities, except to the extent permitted under the 1940 Act, including the rules, regulations, and any exemptive orders obtained thereunder.

 

3.Make Loans. Each fund may not make loans to other parties if, as a result, the aggregate value of such loans would exceed one-third of the fund’s total assets. For the purposes of this limitation, a fund is not considered to make loans by entering into repurchase agreements, lending securities, or acquiring any debt securities.

 

4.Underwriting. Each fund may not underwrite securities of other issuers, except insofar as the fund may be deemed an underwriter under the Securities Act of 1933, as amended (the “Securities Act”), in connection with the disposition of its portfolio securities. Each fund may invest in restricted securities (those that must be registered under the Securities Act before they may be offered or sold to the public) to the extent permitted by the 1940 Act.

 

5.Concentration. The BDC Income Fund will invest more than 25% of its assets in business development companies but otherwise may not invest more than 25% of its total assets in securities issued by companies or entities engaged in any one industry. The Dividend and Value Fund may not invest more than 25% of its total assets in securities issued by companies or entities engaged in any one industry. The limitation on concentration does not apply to investments in securities issued by the U.S. Government or its agencies or instrumentalities.

 

6.Real Estate. Each fund may not purchase or sell real estate or interests in real estate. This limitation is not applicable to investments in securities that are secured by or represent interests in real estate. This limitation does not preclude a fund from investing in mortgage-related securities, such as commercial mortgage-backed securities (“CMBSs”). Nor does this limitation preclude a fund from investing in companies engaged in the real estate business or that have a significant portion of their assets in real estate, including real estate investment trusts (“REITs”).

 

7.Commodities. Each Fund may not purchase or sell commodities or commodity contracts, including commodity futures contracts, unless acquired as a result of ownership of securities or other investments, except that a fund may invest in securities or other instruments backed by or linked to commodities, in companies that are engaged in a commodities business or have a significant portion of their assets in commodities, or in commodity pools and other entities that purchase and sell commodities and commodity contracts.
1
 

 

If a restriction on a Fund’s investments is adhered to at the time an investment is made, a subsequent change in the percentage of Fund assets invested in certain securities or other instruments, or change in average duration of the Fund’s investment portfolio resulting from changes in the value of the Fund’s total assets, will not be considered a violation of the restriction; provided, however, that the asset coverage requirement applicable to borrowings shall be maintained in the manner contemplated by the 1940 Act, as described below. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, reverse repurchase agreements, and firm commitment agreements, with appropriate segregation of assets to cover such obligation. The 1940 Act presently allows funds to borrow from any bank (including pledging, mortgaging or hypothecating assets) in an amount up to 33⅓% of its total assets.

 

Non-Fundamental Investment Policies

The following is an additional investment limitation of the BDC Income Fund and may be changed by the Fund’s Board of Trustees (the “Board”) without shareholder approval.

 

BDC Income Fund

 

1.80% Investment Policy. The Fund has adopted a policy to invest at least 80% of its assets (defined as net assets plus the amount of any borrowings for investment purposes) in common stock and other equity securities of Business Development Companies that are traded on one or more nationally recognized securities exchanges, as discussed in the Prospectus. Shareholders of the Fund will be provided with at least 60 days prior notice of any change in the Fund’s 80% policy. The notice will be provided in a separate written document containing the following, or a similar statement, in boldface type: “Important Notice Regarding Change in Investment Policy.” The statement will also appear on the envelope in which the notice is delivered, unless the notice is delivered separately from other communications to the shareholder.

 

If a restriction on the Fund’s investments is adhered to at the time an investment is made, a subsequent change in the percentage of Fund assets invested in certain securities or other instruments will not be considered a violation of the restriction.

 

ADDITIONAL INVESTMENT ACTIVITIES AND ASSOCIATED RISKS

 

Each Fund’s Prospectus identifies and summarizes the types of securities and assets in which the Fund may invest as part of its principal investment strategies, and the principal risks associated with such investments. This SAI identifies and summarizes other types of securities and assets in which each Fund may invest. Each of these securities and assets is subject to the same kinds of risks as are described in the Prospectuses. Certain additional risks associated with each type of investment are identified and described below and apply to each fund.

 

Below Investment Grade Securities

The Funds may invest in securities that are rated below investment grade. Securities rated below investment grade are regarded as having predominately speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal, and these bonds are commonly referred to as “high yield” or “junk” securities. These securities are subject to a greater risk of default. The prices of these lower-grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn, than are the prices of higher-grade securities. Lower-grade securities tend to be less liquid than investment grade securities. The market values of lower-grade securities tend to be more volatile than investment grade securities. A security will be considered to be below investment grade if it is rated as such by one nationally recognized statistical rating organization (“NRSRO”) (for example, below Baa3 or BBB- by Moody’s Investors Services, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”)) or, if unrated, are judged to be below investment grade by the Adviser or Sub-Adviser. Although a company’s senior debt rating may be, for example, BBB–, an underlying security issued by such company in which a Fund invests may have a lower rating. See Appendix A for a description of certain ratings.

 

Lower-rated securities, or equivalent unrated securities, may be considered speculative with respect to the issuer’s continuing ability to make principal and interest payments. Analysis of the creditworthiness of issuers of

2
 

lower-rated securities may be more complex than for issuers of higher-quality debt securities, and the Fund’s ability to achieve its investment objective may, to the extent the Funds is invested in lower-rated securities, be more dependent upon such creditworthiness analysis than would be the case if the Fund were investing in higher-quality securities. An issuer of these securities has a currently identifiable vulnerability to default and the issuer may be in default or there may be present elements of danger with respect to principal or interest.

 

The secondary markets in which lower-rated securities are traded may be less liquid than the market for higher-grade securities. Less liquidity in the secondary trading markets could adversely affect the price at which a Fund could sell a particular lower-rated security when necessary to meet liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the issuer, and could adversely affect and cause large fluctuations in the net asset value of the Fund’s shares. Adverse publicity and investor perceptions may decrease the values and liquidity of high yield securities.

 

It is reasonable to expect that any adverse economic conditions could disrupt the market for lower-rated securities, have an adverse impact on the value of those securities, or adversely affect the ability of the issuers of those securities to repay principal or interest on those securities. New laws and proposed new laws may adversely impact the market for lower-rated securities.

 

Borrowing and Other Forms of Leverage

The Funds may borrow money to the extent permitted by their investment policies and applicable law. When a Fund borrows money or otherwise leverages its portfolio, the value of an investment in the Fund will be more volatile and other investment risks will tend to be compounded. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the Fund’s holdings. In addition to borrowing money from banks, the Funds may engage in certain other investment transactions that may be viewed as forms of financial leverage (e.g., entering into reverse repurchase agreement and dollar rolls; investing collateral from loans of portfolio securities; entering into when-issued, delayed-delivery, or forward commitment transactions; or using derivatives such as swaps, futures, forwards, and options).

 

Cash Reserves

The Funds’ cash reserves will be held to provide sufficient flexibility to take advantage of new opportunities for investments and for other cash needs. If the Adviser or Sub-Adviser has difficulty finding an adequate number of undervalued equity securities, all or any portion of the Funds’ assets may also be invested temporarily in money market instruments. Money market instruments in which the Funds may invest its cash reserves may consist of obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, commercial paper rated by any NSRO (such as Moody’s or S&P), certificates of deposit, bankers’ acceptances issued by domestic banks having total assets in excess of one billion dollars, or money market mutual funds.

 

Collateralized Mortgage Obligations (“CMOs”) and Multiclass Pass-Through Securities

The Funds may invest in CMOs. CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by Government National Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”), or Federal Home Loan Mortgage Corporation (“Freddie Mac”) certificates, but also may be collateralized by whole loans or private mortgage pass-through securities (such collateral is collectively hereinafter referred to as “Mortgage Assets”). Mortgage Assets may be collateralized by commercial or residential uses. Multiclass pass-through securities are equity interests in a trust composed of Mortgage Assets. Payments of principal of and interest on the Mortgage Assets, and any reinvestment income thereon, may require the Funds to pay debt service on the CMOs or make scheduled distributions on the multiclass pass-through securities. CMOs may be issued by Federal Agencies, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks, and special purpose subsidiaries of the foregoing. The issuer of a series of mortgage pass-through securities may elect to be treated as a Real Estate Mortgage Investment Conduit (“REMIC”). REMICs include governmental and/or private entities that issue a fixed pool of mortgages secured by an interest in real property. REMICs are similar to CMOs in that they issue multiple classes of securities, but unlike CMOs, which are required to be structured as debt securities, REMICs may be structured as indirect ownership interests in the underlying assets of the REMICs themselves. Although CMOs and REMICs differ in certain respects, characteristics of CMOs described below apply in most cases to REMICs as well.

 

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In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a “tranche,” is issued at a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly, or semiannual basis. Certain CMOs may have variable or floating interest rates and others may be Stripped Mortgage Securities. For more information on Stripped Mortgage Securities, see “Stripped Mortgage Securities” below.

 

The principal of and interest on the Mortgage Assets may be allocated among the several classes of a CMO series in a number of different ways. Generally, the purpose of the allocation of the cash flow of a CMO to the various classes is to obtain a more predictable cash flow to certain of the individual tranches than exists with the underlying collateral of the CMO. As a general rule, the more predictable the cash flow is on a CMO tranche, the lower the anticipated yield will be on that tranche at the time of issuance relative to prevailing market yields on other mortgage-backed securities. As part of the process of creating more predictable cash flows on most of the tranches in a series of CMOs, one or more tranches generally must be created that absorb most of the volatility in the cash flows on the underlying mortgage loans. The yields on these tranches are generally higher than prevailing market yields on mortgage-backed securities with similar maturities. As a result of the uncertainty of the cash flows of these tranches, the market prices of and yield on these tranches generally are more volatile.

 

Commercial Mortgage-Backed Securities (“CMBSs”)

The Funds may invest in CMBSs, which are bonds that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the CMBSs are subject to all the risks of the underlying mortgage loans. The value of CMBSs may also change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities markets as a whole. In addition, CMBSs are subject to the credit risk associated with the performance of the underlying mortgage properties, although this can sometimes be reduced by third-party guarantees or other forms of credit support.

 

Derivatives Transactions

The Funds may purchase and sell financial futures contracts and options on such contracts. A financial futures contract is an agreement to buy or sell a specific security or financial instrument at a particular price on a stipulated future date. Although some financial futures contracts call for making or taking delivery of the underlying securities or instruments, in most cases these obligations are closed out before the settlement date. The closing of a contractual obligation may be accomplished by purchasing or selling an identical offsetting futures contract. Other financial futures contracts by their terms call for cash settlements.

 

The Funds may also buy and sell index futures contracts with respect to any stock or bond index traded on a recognized stock exchange or board of trade. An index futures contract is a contract to buy or sell units of an index on a specified future date at a price agreed upon when the contract is made. The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. In addition, the Funds may enter into foreign currency futures contracts, as described below under “Foreign Currency and Currency Hedging Transactions.”

 

When a Fund purchases a futures contract, an amount of cash or liquid portfolio securities generally equal to the settlement price less any margin deposit will be designated as segregated by the Fund’s custodian. When writing a futures contract, the Fund will maintain with its custodian similar liquid assets that, when added to the amounts deposited with a futures commission merchant or broker as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may “cover” its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Fund’s custodian).

 

Each Fund will be authorized to use financial futures contracts and related options for hedging and non-hedging purposes. The Funds may lose the expected benefit of transactions in financial contracts if currency exchange rates or securities prices change in an unanticipated manner. Such unanticipated changes in currency

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exchange rates or securities prices may also result in poorer overall performance than if the Funds had not entered into any futures transactions.

 

When purchasing stocks or bonds, the buyer acquires ownership in the security, however, buyers of futures contracts are not entitled to ownership of the underlying commodity until and unless they decide to accept delivery at expiration of the contract. In practice, delivery of the underlying commodity to satisfy a futures contract rarely occurs because most futures traders use the liquidity of the central marketplace to sell their futures contract before expiration.

 

Price Limits. Some (not all exchanges have price change limits) commodity futures exchanges impose on each commodity futures contract traded on that exchange a maximum permissible price movement for each trading session. If the maximum permissible price movement is achieved on any trading day, no more trades may be executed above (or below, if the price has moved downward) that limit. If a Fund wishes to execute a trade outside the daily permissible price movement, it would be prevented from doing so by exchange rules, and would have to wait for another trading session to execute its transaction.

 

Price Volatility. Despite the daily price limits on various futures exchanges, the price volatility of commodity futures contracts has been historically greater than that for traditional securities such as stocks and bonds. To the extent that a Fund invests in commodity futures contracts, the assets of the Fund, and therefore the prices of Fund shares, may be subject to greater volatility.

 

Marking-to-Market Futures Positions. The futures clearinghouse marks every futures contract to market at the end of each trading day to ensure that the outstanding futures obligations are limited to the mark-to-market change in price from one day for any given futures contract. This process of marking-to-market is designed to prevent losses from accumulating in any futures account. Therefore, if a Fund’s futures positions have declined in value, the Fund may be required to post additional margin to cover this decline. Alternatively, if the Fund’s futures positions have increased in value, this increase will be credited to the Fund’s account.

 

The Funds may also purchase and sell commodity futures contracts and can hold substantial positions in such contracts. The Funds’ investments in commodity futures contracts and related instruments may involve substantial risks. Some of the special characteristics and risks of these investments are described below.

 

Commodity futures contracts are agreements between two parties. One party agrees to buy a commodity from the other party at a later date at a price and quantity agreed-upon when the contract is made. Commodity futures contracts are traded on futures exchanges. These futures exchanges offer a central marketplace in which to transact futures contracts, a clearing corporation to process trades, a standardization of expiration dates and contract sizes, and the availability of a secondary market. Futures markets also specify the terms and conditions of delivery as well as the maximum permissible price movement during a trading session. Additionally, the commodity futures exchanges may have position limit rules that limit the amount of futures contracts that any one party may hold in a particular commodity at any point in time. These position limit rules are designed to prevent any one participant from controlling a significant portion of the market.

 

In the commodity futures markets, the exchange clearing corporation takes the other side in all transactions, either buying or selling directly to the market participants. The clearinghouse acts as the counterparty to all exchange-traded futures contracts. That is, the Fund’s obligation is to the clearinghouse, and the Fund will look to the clearinghouse to satisfy the Fund’s rights under the futures contract.

 

Options on Securities and Stock Indexes. Each Fund may write covered call and put options and purchase call and put options on securities, stock indices, or futures contracts that are traded on U.S. exchanges. Each Fund may also enter into over-the-counter put and call options on securities and baskets of securities, indexes, and other financial instruments.

 

An option is a contract that gives the purchaser of the option, in return for the premium paid, the right to buy (in the case of a call option) a specified security or futures contract, as applicable, or to sell (in the case of a put option) a specified security from or to the writer of the option at a designated price during the term of the option. An option on a securities index gives the purchaser of the option, in return for the premium paid, the right to receive

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from the seller cash equal to the difference between the closing price of the index and the exercise price of the option.

 

Each Fund may write a call or put option only if the option is “covered.” A call option on a security written by a Fund is covered if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option on a security is also covered if the Fund owns a call option on the same security and in the same principal amount as the call option written where the exercise price of the call option held (a) is equal to or less than the exercise price of the call option written or (b) is greater than the exercise price of the call option written if the difference is maintained by the Fund in cash or liquid portfolio securities in a segregated account with its custodian. A put option on a security written by a Fund is “covered” if the Fund maintains similar liquid assets with a value equal to the exercise price designated as segregated at its custodian, or else owns a put option on the same security and in the same principal amount as the put option written where the exercise price of the put option held is equal to or greater than the exercise price of the put option written. The value of the underlying securities on which options may be written at any one time will not exceed 25% of the total assets of the Fund, and the Fund will not purchase put or call options if the aggregate premium paid for such options would exceed 5% of its total assets at the time of purchase.

 

Each Fund will cover call options on stock indices by owning securities whose price changes, in the opinion of the Adviser or Sub-Adviser, are expected to be similar to those of the index, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. Nevertheless, where a Fund covers a call option on a stock index through ownership of securities, such securities may not match the composition of the index. In that event, the Fund will not be fully covered and could be subject to risk of loss in the event of adverse changes in the value of the index. The Fund will cover put options on stock indices by segregating assets equal to the option’s exercise price, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations.

 

Each Fund will receive a premium for writing a put or call option, which will increase the Fund’s gross income in the event the option expires unexercised or is closed out at a profit. If the value of a security or an index on which the Fund has written a call option falls or remains the same, the Fund will realize a profit in the form of the premium received (less transaction costs) that could offset all or a portion of any decline in the value of any portfolio securities underlying the option. A rise in the value of the security or index underlying a call option written by a Fund, exposes the Fund to possible loss or loss of opportunity to realize appreciation in the value of any portfolio securities underlying or otherwise related to the call option. By writing a put option, the Fund assumes the risk of a decline in the underlying security or index. To the extent that the price changes of any portfolio securities being hedged correlate with changes in the value of the underlying security or index, writing put options on securities or indices will increase the Fund’s losses in the event of a market decline, although such losses will be offset in part by the premium received for writing the option.

 

Each Fund may also purchase put options to hedge its investments against a decline in value. By purchasing a put option, the Fund will seek to offset a decline in the value of the portfolio securities being hedged through appreciation of the put option. If the value of the Fund’s investments does not decline as anticipated, the Fund’s loss will be limited to the premium paid for the option plus related transaction costs. The success of this strategy will depend, in part, on the accuracy of the correlation between the changes in value of the underlying security or index and the changes in value of the Fund’s security holdings being hedged.

 

Each Fund may purchase call options on individual securities to hedge against an increase in the price of securities that the Fund anticipates purchasing in the future. Similarly, each Fund may purchase call options to attempt to reduce the risk of missing a broad market advance, or an advance in an industry or market segment, at a time when the Fund holds uninvested cash or short-term debt securities awaiting investment. When purchasing call options, the Fund will bear the risk of losing all or a portion of the premium paid if the value of the underlying security or index does not rise.

 

There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position, and for certain options not on an exchange no market usually exists. Trading could be interrupted, for

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example, because of supply and demand imbalances arising from a lack of either buyers or sellers, or the options exchange could suspend trading after the price has risen or fallen more than the maximum specified by the exchange. Although the Fund may be able to offset to some extent any adverse effects of being unable to liquidate an option position, the Fund may experience losses in some cases as a result of such inability.

 

Foreign Currency Transactions and Currency Hedging Transactions. In order to hedge against foreign currency exchange rate risks from adverse changes in the relationship between the U.S. dollar and foreign currencies (including to hedge against anticipated future changes which otherwise might adversely affect the prices of securities that the Fund intends to purchase at a later date), each Fund may enter into forward foreign currency exchange contracts (forward contracts), foreign currency futures contracts (foreign currency futures), and foreign currency swap agreements (foreign currency swaps), as well as purchase put or call options on foreign currencies, as described below.

 

A forward currency contract is an obligation to purchase or sell a specific currency for an agreed price on a future date that is individually negotiated and privately traded by currency traders and their customers. A foreign currency future is an exchange-traded contract for the purchase or sale of a specified foreign currency at a specified price at a future date. A foreign currency swap is an agreement between two parties to exchange principal and interest payments on a loan made in one currency for principal and interest payments of a loan of equal value in another currency. Each Fund may enter into a foreign currency forward contract, foreign currency futures contract or foreign currency swap, or purchase a currency option, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency or expects to receive a dividend or interest payment on a portfolio holding, in order to “lock in” the U.S. dollar value of the security or payment. In addition, each Fund may enter into a foreign currency forward contract, futures contract or swap or purchase a currency option in respect of a currency which acts as a proxy for a currency in which the Fund’s portfolio holdings or anticipated holdings are denominated. This second investment practice is generally referred to as “cross-hedging.” Because in connection with the Fund’s foreign currency transactions an amount of the Fund’s assets equal to the amount of the Fund’s current commitment will be segregated to be used to pay for the commitment, the Fund will always have cash or other liquid assets available that are sufficient to cover any commitments under these transactions. The segregated assets will be marked-to-market on a daily basis.

 

Each Fund may enter into a forward contract to attempt to minimize the risk to the Fund from adverse changes in the relationship between the U.S. dollar and foreign currencies. Forward contracts may limit potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not engaged in such contracts.

 

Each Fund may enter into exchange-traded foreign currency futures for the purchase or sale for future delivery of foreign currencies. U.S. exchange-traded futures are regulated by the Commodity Futures Trading Commission. This investment technique will be used only to hedge against anticipated future changes in exchange rates which otherwise might adversely affect the value of the Fund’s portfolio securities or adversely affect the prices of securities that the Fund intends to purchase at a later date.

 

Each Fund may enter into foreign currency swaps to shift its currency exposure from one currency to another currency. Each Fund may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of foreign portfolio securities and against increases in the U.S. dollar cost of foreign securities to be acquired. As is the case with other kinds of options, however, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received, and the Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against fluctuation in exchange rates although, in the event of rate movements adverse to the Fund’s position, the Fund may forfeit the entire amount of the premium plus related transaction costs.

 

The successful use of foreign currency transactions will usually depend on the Adviser’s or Sub-Adviser’s ability to forecast currency exchange rate movements correctly. Should exchange rates move in an unexpected manner, the Fund may not achieve the anticipated benefits of forward contracts, foreign currency futures or may realize losses.

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Swap Transactions. Swap agreements are two party over-the-counter contracts entered into primarily by institutional investors that agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a “basket” of credit default swaps or securities representing a particular index. The “notional amount” of the swap agreement is only used as a basis upon which to calculate the obligations that the parties to a swap agreement have agreed to exchange.

 

Swap agreements will tend to shift investment exposure from one type of investment to another. For example, if a Fund agreed to exchange payments in U.S. dollars for payments in a foreign currency, the swap agreement would tend to decrease the Fund’s exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. Depending on how they are used, swap agreements may increase or decrease the overall volatility of the Fund’s investments and its share price and yield. Caps and floors have an effect similar to buying or writing options.

 

Most swap agreements entered into are cash settled and calculate the obligations of the parties to the agreement on a “net basis.” Thus, a Fund’s current obligations (or rights) under a swap agreement generally will be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). The Fund’s current obligations under a swap agreement will be accrued daily (offset against any amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the segregation of permissible liquid assets of the Fund.

 

Specific swap agreements include foreign currency swaps; index swaps; interest rate swaps (including interest rate locks, caps, floors, and collars); credit default swaps; and total return swaps (including equity swaps).

 

Interest Rate Swap Transactions. An interest rate swap agreement involves the exchange of cash flows based on interest rate specifications and a specified principal amount, often a fixed payment for a floating payment that is linked to an interest rate. In an interest rate cap one party receives payments at the end of each period in which a specified interest rate on a specified principal amount exceeds an agreed rate; conversely, in an interest rate floor one party may receive payments if a specified interest rate on a specified principal amount falls below an agreed rate. Interest rate collars involve selling a cap and purchasing a floor, or vice versa, to protect the Fund against interest rate movements exceeding given minimum or maximum levels.

 

Credit Default Swap Transactions. Credit default swap agreements and similar agreements may have as reference obligations debt securities that are or are not currently held by either Fund. The protection “buyer” in a credit default contract may be obligated to pay the protection “seller” an up-front payment or a periodic stream of payments over the term of the contract provided generally that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled.

 

Total Return Swap Transactions. In a total return or “equity” swap agreement one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. The underlying reference asset of a total return swap may include an individual security, an equity index, loans or bonds.

 

Commodity Swap Transactions. Each Fund may invest in total return swaps to gain exposure to specific commodities or the overall commodity markets. A total return commodity swap is an agreement to make payments of the price appreciation from a specified commodity, basket of commodities, or commodity index during the specified period, in return for payments equal to a fixed or floating rate of interest or the price appreciation from another specified commodity, basket of commodities, or commodity index. Alternatively, a total return swap can be structured so that one party will make payments to the other party if the value of the relevant commodity, basket of commodities, or commodity index increases, but receive payments from the other party if the value of that commodity, basket of commodities, or commodity index decreases. If the commodity swap is for one period, the

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Fund will pay a fixed fee, established at the outset of the swap. Each Fund may enter into exchanges for risk (“EFRs”), in which a position in a futures contract is exchanged for an over-the-counter swap, (or an over-the-counter swap is exchanged for a futures contract) with a commodity broker in accordance with exchange rules.

 

Credit Derivatives. Credit derivative transactions include those involving default price risk derivatives and market spread derivatives. Default price risk derivatives are linked to the price of reference securities or loans after a default by the issuer or borrower, respectively. Market spread derivatives are based on the risk that changes in market factors, such as credit spreads, can cause a decline in the value of a security, loan or index. There are three basic transactional forms for credit derivatives: swaps, options, and structured instruments. The use of credit derivatives is a highly specialized activity which involves strategies and risks different from those associated with ordinary portfolio security transactions. The risk of loss in a credit derivative transaction varies with the form of the transaction. For example, if a Fund purchases a default option on a security, and if no default occurs with respect to the security, the Fund’s loss is limited to the premium it paid for the default option. In contrast, if there is a default by the grantor of a default option, the Fund’s loss will include both the premium it paid for the option and the decline in value of the underlying security that the default option hedged. If a Fund is a buyer in a credit default swap agreement and no credit event occurs, the Fund recovers nothing if the swap is held through its termination date. However, if a credit event occurs, the Fund may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value. As a seller, a Fund generally receives an up-front payment or a fixed rate of income throughout the term of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value.

 

Structured Notes. Structured notes are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market, or interest rate (an “embedded index”), such as selected securities or commodities, an index of securities or commodities, or specified interest rates, or the differential performance of two assets or markets. When a Fund purchases a structured note, it will make a payment of principal to the counterparty. Some structured notes have a guaranteed repayment of principal while others place a portion (or all) of the principal at risk. The possibility of default by the counterparty or its credit provider may be greater for structured notes than for other types of money market instruments. The terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted upwards or downwards (but not ordinarily below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments that may be made on a structured product may vary widely, depending upon a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index or indexes or other assets. Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss. Structured notes may not have an active trading market.

 

Commodity Forward Contracts. A commodity forward contract, which may be standardized and exchange-traded or customized and privately negotiated, is an agreement for one party to buy, and the other party to sell, a specific quantity of an underlying commodity or other tangible asset for an agreed-upon price at a future date. A forward contract generally is settled by physical delivery of the commodity or other tangible asset underlying the forward contract to an agreed upon location at a future date (rather than settled by cash) or will be rolled forward into a new forward contract. Non-deliverable forwards (“NDFs”) specify a cash payment upon maturity. NDFs are normally used when the market for physical settlement of the currency is underdeveloped, heavily regulated or highly taxed.

 

Risks of Derivatives Transactions. Derivatives transactions can be highly volatile and involve various types and degrees of risk, depending upon the characteristics of the particular derivative, including the imperfect correlation between the value of such instruments and the underlying assets, the possible default of the other party to the transaction and illiquidity of the derivative instruments. Derivatives transactions may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in derivatives could have a large potential impact on the Fund’s performance, effecting a form of investment leverage on the Fund’s portfolio. In certain types of derivatives transactions, the Fund could lose the entire amount of its investment; in other types of derivatives transactions the potential loss is theoretically unlimited.

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The market for many derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for derivatives transactions. The Fund could experience severe losses if it were unable to liquidate its position because of an illiquid secondary market. Successful use of derivatives transactions also is subject to the ability of the Adviser or Sub-Adviser to predict correctly movements in the direction of the relevant market and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the securities, currency, interest rate, or other reference asset underlying the derivatives transactions. Derivatives transactions entered into to seek to manage the risks of the Fund’s portfolio of securities may have the effect of limiting gains from otherwise favorable market movements. For example, the use of currency instruments for hedging purposes may limit gains from a change in the relationship between the U.S. dollar and foreign currencies. The use of derivatives transactions may result in losses greater than if they had not been used (and a loss on a derivatives transaction position may be larger than the gain in a portfolio position being hedged), may require the Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Fund can realize on an investment, or may cause the Fund to hold a security that it might otherwise sell. Amounts paid by the Fund as premiums and cash or other assets held as collateral with respect to derivatives transactions may not otherwise be available to the Fund for investment purposes. To the extent derivatives transactions would be deemed to be illiquid, they will be included in the maximum limitation of 15% of net assets invested in restricted or illiquid securities.

 

The use of currency transactions can result in the Fund incurring losses as a result of the imposition of exchange controls, political developments, government intervention or failure to intervene, suspension of settlements, or the inability of the Fund to deliver or receive a specified currency.

 

Structured notes and related instruments carry risks similar to those of more traditional derivatives such as futures, forward, and option contracts. However, structured instruments may entail a greater degree of market risk and volatility than other types of debt obligations. The Fund will be subject to credit risk with respect to the counterparties to certain Derivatives transactions entered into by the Fund. Derivatives may be purchased on established exchanges or, as described herein, through privately negotiated transactions referred to as over-the-counter (“OTC”) derivatives. Exchange-traded derivatives generally are guaranteed by the clearing agency which is the issuer or counterparty to such derivatives. However, many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day and once the daily limit has been reached in a particular contract no trades may be made that day at a price beyond that limit or trading may be suspended. There also is no assurance that sufficient trading interest to create a liquid secondary market on an exchange will exist at any particular time and no such secondary market may exist or may cease to exist. Each party to an OTC derivative bears the risk that the counterparty will default. OTC derivatives are less liquid than exchange-traded derivatives because the other party to the transaction may be the only investor with sufficient understanding of the derivative to be interested in bidding for it. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.

 

There is no limit on the amount of a Fund’s assets that can be put at risk through the use of futures contracts and the value of the Fund’s futures contracts and options thereon may equal or exceed 100% of the Fund’s total assets. No Fund has a current intention of entering into futures transactions other than for traditional hedging purposes.

 

Each Fund is subject to legal requirements that are designed to reduce the effects of any leverage created by the use of derivative instruments. Under these requirements, a Fund must identify liquid assets, or engage in other measures, with regard to its derivative transactions. Each Fund will cover its derivative obligations by segregating liquid assets or covering its obligations with an offsetting position, as determined by the Adviser or Sub-Adviser, in accordance with procedures approved by the Board.

 

Each Fund will be operated so that it will not be considered a commodity pool (i.e., a pooled investment vehicle which trades in commodity futures contracts and options thereon and the operator of which is registered with the Commodity Futures Trading Commission). In addition, each Fund has claimed an exclusion from the definition

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of commodity pool operator and, therefore, is not subject to registration or regulation as a pool operator under the Commodity Exchange Act.

 

Each Fund’s intention to qualify as a regulated investment company (“RIC”) under the Internal Revenue Code (the “Code”) will limit the extent to which the Fund can engage in certain derivatives transactions. With respect to purchases of derivatives, the Fund will comply with applicable law and guidance.

 

Exchange-Traded Notes (“ETNs”)

Each Fund may invest in ETNs. ETNs have many features of senior, unsecured, unsubordinated debt securities. Their returns are linked to the performance of a particular asset, such as a market index, less applicable fees, and expenses. ETNs are listed on an exchange and traded in the secondary market. A Fund may hold the ETN until maturity, at which time the issuer is obligated to pay a return linked to the performance of the relevant asset. ETNs do not typically make periodic interest payments and principal is not protected.

 

The market value of an ETN may be influenced by, among other things, time to maturity, level of supply, and demand of the ETN, volatility and lack of liquidity in the underlying assets, changes in the applicable interest rates, the current performance of the asset to which the ETN is linked, and the credit rating of the ETN issuer. The market value of an ETN may differ from the performance of the applicable asset and there may be times when an ETN trades at a premium or discount to the underlying asset’s value. This difference in price may be due to the fact that the supply and demand in the market for ETNs at any point in time is not always identical to the supply and demand in the market for the assets on which the ETN’s return is based. A change in the issuer’s credit rating may also impact the value of an ETN despite the underlying asset remaining unchanged. ETNs are also subject to tax risk. No assurance can be given that the Internal Revenue Service (“IRS”) will accept, or a court will uphold, how the Fund characterizes and treats ETNs, including the income it pays, for tax purposes.

 

An ETN that is tied to a specific market index may not be able to replicate and maintain exactly the composition and relative weighting of securities, commodities, or other components in the applicable market index. ETNs also incur certain expenses not incurred by their applicable market index, and the Fund would bear a proportionate share of any fees and expenses borne by the ETN in which it invests.

 

A Fund’s decision to sell its ETN holdings may be limited by the availability of a secondary market. In addition, although an ETN may be listed on an exchange, the issuer may not be required to maintain the listing and there can be no assurance that a secondary market will exist for an ETN. Some ETNs that use leverage in an effort to amplify the returns of an underlying market index can, at times, be relatively illiquid and may therefore be difficult to purchase or sell at a fair price. Leveraged ETNs may offer the potential for greater return, but the potential for loss and speed at which losses can be realized also are greater.

 

Floating Rate and Variable Rate Demand Notes

Each Fund may purchase taxable or tax-exempt floating rate and variable rate demand notes for short-term cash management or other investment purposes. Floating rate and variable rate demand notes and bonds may have a stated maturity in excess of one year, but may have features that permit a holder to demand payment of principal plus accrued interest upon a specified number of days’ notice. Frequently, such obligations are secured by letters of credit or other credit support arrangements provided by banks. The issuer has a corresponding right, after a given period, to prepay in its discretion the outstanding principal of the obligation plus accrued interest upon a specific number of days’ notice to the holders. The interest rate of a floating rate instrument may be based on a known lending rate, such as a bank’s prime rate, and is reset whenever such rate is adjusted. The interest rate on a variable rate demand note is reset at specified intervals at a market rate.

 

Foreign Currency Transactions

Each Fund may engage in currency exchange transactions to protect against uncertainty in the level of future foreign currency exchange rates and to increase current return. There can be no assurance that appropriate foreign currency transactions will be available for the Fund at any time or that the Fund will enter into such transactions at any time or under any circumstances even if appropriate transactions are available to it.

 

Each Fund may engage in both “transaction hedging” and “position hedging.” When it engages in transaction hedging, the Fund enters into foreign currency transactions with respect to specific receivables or

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payables of the Fund generally arising in connection with the purchase or sale of its portfolio securities. Each Fund may engage in transaction hedging when it desires to “lock in” the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging, the Fund may attempt to protect against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold or on which the dividend or interest payment is declared, and the date on which such payments are made or received.

 

Each Fund may purchase or sell a foreign currency on a spot (i.e., cash) basis at the prevailing spot rate in connection with transaction hedging. Each Fund may also enter into contracts to purchase or sell foreign currencies at a future date (“forward contracts”) and purchase and sell foreign currency futures contracts. For transaction hedging purposes, each Fund may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives the Fund the right to assume a short position in the futures contract until expiration of the option. A put option on currency gives the Fund the right to sell a currency at a specified exercise price until the expiration of the option. A call option on a futures contract gives the Fund the right to assume a long position in the futures contract until the expiration of the option. A call option on currency gives the Fund the right to purchase a currency at the exercise price until the expiration of the option.

 

When it engages in position hedging, the Fund enters into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which securities held by the Fund are denominated or are quoted in their principle trading markets or an increase in the value of currency for securities which the Fund expects to purchase. In connection with position hedging, each Fund may purchase put or call options on foreign currency and foreign currency futures contracts and buy or sell forward contracts and foreign currency futures contracts. Each Fund may also purchase or sell foreign currency on a spot basis.

 

The precise matching of the amounts of foreign currency exchange transactions and the value of the portfolio securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the values of those securities between the dates the currency exchange transactions are entered into and the dates they mature. It is impossible to forecast with precision the market value of each Fund’s portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, it may be necessary for a Fund to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security or securities being hedged is less than the amount of foreign currency the Fund is obligated to deliver and if a decision is made to sell the security or securities and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security or securities of the Fund if the market value of such security or securities exceeds the amount of foreign currency the Fund is obligated to deliver. To offset some of the costs of hedging against fluctuations in currency exchange rates, the Fund may write covered call options on those currencies.

 

Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in the value of such currency.

 

Each Fund may also seek to increase its current return by purchasing and selling foreign currency on a spot basis, by purchasing and selling futures contracts on foreign currencies and options on foreign currencies and on foreign currency futures contracts, and by purchasing and selling foreign currency forward contracts. The value of any currency, including U.S. dollars and foreign currencies, may be affected by complex political and economic factors applicable to the issuing country. In addition, the exchange rates of foreign currencies (and therefore the values of foreign currency options, forward contracts, and futures contracts) may be affected significantly, fixed, or supported directly or indirectly by U.S. and foreign government actions. Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts, and futures contracts because exchange rates may not be free to fluctuate in response to other market forces. Foreign governmental restrictions or taxes could result in adverse changes in the cost of acquiring or disposing of foreign currencies.

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Foreign Securities

Each Fund may invest in foreign (non-U.S.) securities. Investing in securities issued by foreign companies involves considerations and possible risks not typically associated with investing in securities issued by domestic corporations. The values of foreign investments are affected by changes in currency rates or exchange control regulations, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in the United States or abroad), or changed circumstances in dealings between nations. Costs are incurred in connection with conversions between various currencies. In addition, foreign brokerage commissions are generally higher than in the United States, and foreign securities markets may be less liquid, more volatile, and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards, and potential difficulties in enforcing contractual obligations which could extend settlement periods.

 

Investments in foreign securities, especially in emerging market countries, will expose the Fund to the direct or indirect consequences of political, social, or economic changes in the countries that issue the securities or in which the issuers are located. Certain countries in which a Fund may invest, especially emerging market countries, have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties, and extreme poverty and unemployment. Many of these countries are also characterized by political uncertainty and instability. The cost of servicing external debt will generally be adversely affected by rising international interest rates because many external debt obligations bear interest at rates that are adjusted based upon international interest rates. In addition, with respect to certain foreign countries, there is a risk of:

 

·the possibility of expropriation of assets;

 

·confiscatory taxation;

 

·difficulty in obtaining or enforcing a court judgment;

 

·economic, political, or social instability; and

 

·diplomatic developments that could affect investments in those countries.

 

Each Fund may invest in sponsored and unsponsored American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), and similar depositary receipts. ADRs, typically issued by a financial institution (a depositary), evidence ownership interests in a security or a pool of securities issued by a foreign company and deposited with the depositary. Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the United States. GDRs are receipts issued outside the United States, typically by non-United States banks and trust companies, which evidence ownership of either foreign or domestic securities. Generally, GDRs, in bearer form, are designated for use outside the United States. Ownership of ADRs and GDRs entails similar investment risks to direct ownership of foreign securities traded outside the U.S., including increased market liquidity, currency, political, information, and other risks. Income and gains earned by the Fund in respect of foreign securities may be subject to foreign withholding and other taxes, which will reduce the Fund’s return on such securities.

 

Forward Commitments and Dollar Rolls

Each Fund may enter into contracts to purchase securities for a fixed price at a future date beyond customary settlement time (“forward commitments”) if the Fund sets aside on its books liquid assets in an amount sufficient to meet the purchase price, or if the Fund enters into offsetting contracts for the forward sale of other securities it owns. In the case of to-be-announced (“TBA”) purchase commitments, the unit price and the estimated principal amount are established when the Fund enters into a contract, with the actual principal amount being within a specified range of the estimate. Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Fund’s other assets. Where such purchases are made through dealers, the Fund relies on the dealer to consummate the sale. The dealer’s failure to do so may result in the loss to the Fund of an advantageous yield or price. Although the Fund will generally enter into forward commitments with the intention of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, the Fund may

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dispose of a commitment prior to settlement if the Adviser or Sub-Adviser deems it appropriate to do so. The Fund may realize short-term profits or losses upon the sale of forward commitments.

 

Each Fund may enter into TBA sale commitments to hedge its portfolio positions or to sell securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. Unsettled TBA sale commitments are valued at current market value of the underlying securities. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss on the commitment without regard to any unrealized gain or loss on the underlying security. If the Fund delivers securities under the commitment, the Fund realizes a gain or loss from the sale of the securities based upon the unit price established at the date the commitment was entered into.

 

Each Fund may enter into dollar roll transactions (generally using TBAs) in which it sells a debt security for delivery in the current month and simultaneously contracts to purchase similar securities (for example, same type, coupon and maturity) at an agreed upon future time. By engaging in a dollar roll transaction, the Fund foregoes principal and interest paid on the security that is sold, but receives the difference between the current sales price and the forward price for the future purchase. The Fund would also be able to earn interest on the proceeds of the sale before they are reinvested. The Fund accounts for dollar rolls as purchases and sales. Dollar rolls may be used to create investment leverage and may increase the Fund’s risk and volatility.

 

The obligation to purchase securities on a specified future date involves the risk that the market value of the securities that the Fund is obligated to purchase may decline below the purchase price. In addition, in the event the other party to the transaction files for bankruptcy, becomes insolvent, or defaults on its obligation, the Fund may be adversely affected.

 

Government Mortgage Pass-Through Securities

Each Fund may invest in mortgage pass-through securities representing participation interests in pools of residential mortgage loans purchased from individual lenders by an agency, instrumentality, or sponsored corporation of the United States government (“Federal Agency”) or originated by private lenders and guaranteed, to the extent provided in such securities, by a Federal Agency. Such securities, which are ownership interests in the underlying mortgage loans, differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts (usually semiannually) and principal payments at payments (not necessarily in fixed amounts) that are a “pass-through” of the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of such securities and the servicer of the underlying mortgage loans.

 

The government mortgage pass-through securities in which a Fund may invest include those issued or guaranteed by Ginnie Mae, Fannie Mae, and Freddie Mac. Ginnie Mae certificates are direct obligations of the U.S. Government and, as such, are backed by the “full faith and credit” of the United States. Fannie Mae is a federally chartered, privately owned corporation. Freddie Mac is a corporate instrumentality of the United States. Fannie Mae and Freddie Mac certificates are not backed by the full faith and credit of the United States, but the issuing agency or instrumentality has the right to borrow, to meet its obligations, from an existing line of credit with the U.S. Treasury. The U.S. Treasury has no legal obligation to provide such line of credit and may choose not to do so.

 

Certificates for these types of mortgage-backed securities evidence an interest in a specific pool of mortgages. These certificates are, in most cases, “modified pass-through” instruments, wherein the issuing agency guarantees the payment of principal and interest on mortgages underlying the certificates, whether or not such amounts are collected by the issuer on the underlying mortgages. The Housing and Economic Recovery Act of 2008 (“HERA”) authorized the Secretary of the Treasury to support Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (“FHLBs”) (collectively, the “GSEs”) by purchasing obligations and other securities from those government-sponsored enterprises. HERA gave the Secretary of the Treasury broad authority to determine the conditions and amounts of such purchases.

 

On September 6, 2008, the Federal Housing Finance Agency (“FHFA”) placed Fannie Mae and Freddie Mac into conservatorship. As the conservator, FHFA succeeded to all rights, titles, powers, and privileges of Fannie Mae and Freddie Mac and of any stockholder, officer, or director of Fannie Mae and Freddie Mac with respect to

14
 

Fannie Mae and Freddie Mac and the assets of Fannie Mae and Freddie Mac. FHFA selected a new chief executive officer and chairman of the board of directors for Fannie Mae and Freddie Mac.

 

In connection with the conservatorship, the U.S. Treasury, exercising powers granted to it under HERA, entered into a Senior Preferred Stock Purchase Agreement (SPA) with each of Fannie Mae and Freddie Mac pursuant to which the U.S. Treasury will purchase up to an aggregate of $100 billion of each of Fannie Mae and Freddie Mac to maintain a positive net worth in each enterprise. This agreement contains various covenants that severely limit each enterprise’s operations. In exchange for entering into these agreements, the U.S. Treasury received $1 billion of each enterprise’s senior preferred stock and warrants to purchase 79.9% of each enterprise’s common stock. On February 18, 2009, the U.S. Treasury announced that it was doubling the size of its commitment to each enterprise under the Senior Preferred Stock Program to $200 billion. The U.S. Treasury’s obligations under the Senior Preferred Stock Program are for an indefinite period of time for a maximum amount of $200 billion per enterprise. On December 24, 2009, the U.S. Treasury announced further amendments to the SPAs which included additional financial support for each GSE through the end of 2012 and changes to the limits on their retained mortgage portfolios. It is difficult, if not impossible, to predict the future political, regulatory or economic changes that could impact the GSEs.

 

Fannie Mae and Freddie Mac 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 Senior Preferred Stock Purchase Agreement is intended to enhance each of Fannie Mae’s and Freddie Mac’s ability to meet its obligations. 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.

 

Hybrid Securities

Each Fund may acquire hybrid securities. A hybrid security combines an income-producing debt security (“income producing component”) and the right to receive payment based on the change in the price of an equity security (“equity component”). The income-producing component is achieved by investing in non-convertible, income-producing securities such as bonds, preferred stocks, and money market instruments, which may be represented by derivative instruments. The equity component is achieved by investing in securities or instruments such as cash-settled warrants or options to receive a payment based on whether the price of a common stock surpasses a certain exercise price or options on a stock index. A hybrid security comprises two or more separate securities, each with its own market value. Therefore, the “market value” of a hybrid security is the sum of the values of its income-producing component and its equity component.

 

A holder of a hybrid security faces the risk of a decline in the price of the security or the level of the index involved in the equity component, causing a decline in the value of the security or instrument, such as a call option or warrant, purchased to create the hybrid security. The equity component has risks typical to a purchased call option. Should the price of the stock fall below the exercise price and remain there throughout the exercise period, the entire amount paid for the call option or warrant would be lost. Because a hybrid security includes the income-producing component as well, the holder of a hybrid security also faces risks typical to all debt securities.

 

Illiquid Securities

Each Fund may invest in illiquid securities. A Fund will not invest in illiquid securities if immediately after such investment more than 15% of the Fund’s net assets would be invested in such securities. For this purpose, illiquid securities include, among others, securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale. Securities that have legal or contractual restrictions on resale but have a readily available market are not deemed illiquid for purposes of this limitation.

 

Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act or which are otherwise not readily marketable. Securities which have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. The Funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities, and the Funds might be unable to dispose of restricted or other illiquid securities promptly or at

15
 

reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. The Funds might also have to register such restricted securities in order to dispose of them, resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.

 

In recent years, a large institutional market has developed for certain securities that are not registered under the Securities Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer’s ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.

 

Rule 144A under the Securities Act allows a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. Rule 144A establishes a safe harbor from the registration requirements of the Securities Act of resales of certain securities to qualified institutional buyers, which generally creates a more liquid market for securities eligible for resale under Rule 144A than other types of restricted securities.

 

The Adviser and Sub-Adviser will monitor the liquidity of restricted securities in the Fund’s portfolio, under the supervision of the Board. In reaching liquidity decisions, the Adviser and Sub-Adviser will consider, among other things, the following factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer).

 

Inflation-Protected Securities

Each Fund may invest in U.S. Treasury Inflation Protected Securities (“U.S. TIPS”), which are debt securities issued by the U.S. Department of Treasury, the principal amounts of which are adjusted daily based upon changes in the rate of inflation. Each Fund may also invest in other inflation-protected securities issued by non-U.S. governments or by private issuers. U.S. TIPS pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. The interest rate on these bonds is fixed at issuance, but over the life of the bond this interest may be paid on an increasing or decreasing principal value that has been adjusted for inflation.

 

Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed for U.S. TIPS, even during a period of deflation. However, because the principal amount of U.S. TIPS would be adjusted downward during a period of deflation, the Fund will be subject to deflation risk with respect to its investments in these securities. In addition, the current market value of the bonds is not guaranteed, and will fluctuate. If a Fund purchases in the secondary market U.S. TIPS whose principal values have been adjusted upward due to inflation since issuance, the Fund may experience a loss if there is a subsequent period of deflation. Each Fund may also invest in other inflation-related bonds which may or may not provide a guarantee of principal. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal amount.

 

The periodic adjustment of U.S. TIPS is currently tied to the CPI-U, which is calculated by the U.S. Department of Treasury. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation, and energy. Inflation-protected bonds issued by a non-U.S. government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can no assurance that the CPI-U or any non-U.S. inflation index will accurately measure the real rate of inflation in the prices of goods and services. If interest rates rise due to reasons other than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure. In addition, there can be no assurance that the rate of inflation in a non-U.S. country will be correlated to the rate of inflation in the United States.

 

Infrastructure Investments

Each Fund may invest in securities and other obligations of U.S. and non-U.S. issuers providing exposure to infrastructure investment. Infrastructure investments may be related to physical structures and networks that provide necessary services to society, such as transportation and communications networks, water and energy

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utilities, and public service facilities. Securities, instruments, and obligations of infrastructure-related companies and projects are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection with capital construction programs, high leverage, costs associated with environmental and other regulations, the effects of economic slowdown, surplus capacity, increased competition from other providers of services, uncertainties concerning the availability of fuel at reasonable prices, the effects of energy conservation policies, and other factors. Infrastructure companies and projects also may be affected by or subject to regulation by various government authorities, including rate regulation; service interruption due to environmental, operational or other mishaps; the imposition of special tariffs and changes in tax laws, regulatory policies and accounting standards; and general changes in market sentiment towards infrastructure and utilities assets.

 

Initial Public Offerings

Each Fund may purchase debt or equity securities in initial public offerings (“IPOs”). These securities, which are often issued by unseasoned companies, may be subject to many of the same risks of investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. Securities issued in an IPO frequently are very volatile in price, and the Fund may hold securities purchased in an IPO for a very short period of time. As a result, the Fund’s investments in IPOs may increase portfolio turnover, which increases brokerage and administrative costs and may result in taxable distributions to shareholders.

 

At any particular time, or from time to time, a Fund may not be able to invest in securities issued in IPOs, or invest to the extent desired because, for example, only a small portion (if any) of the securities being offered in an IPO may be made available to the Fund. In addition, under certain market conditions, a relatively small number of companies may issue securities in IPOs. There can be no assurance that investments in IPOs will improve the Fund’s performance.

 

Inverse Floaters

Inverse floaters constitute a class of CMOs with a coupon rate that moves inversely to a designated index, such as LIBOR (London Interbank Offered Rate). Inverse floaters have coupon rates that typically change at a multiple of the changes of the relevant index rate. Any rise in the index rate (as a consequence of an increase in interest rates) causes a drop in the coupon rate on an inverse floater while any drop in the index rate causes an increase in the coupon rate of an inverse floater. In some circumstances, the coupon on an inverse floater could decrease to zero. In addition, like most other debt securities, the value of inverse floaters will decrease as interest rates increase and their average lives will extend. Inverse floaters exhibit greater price volatility than the majority of mortgage-backed securities. In addition, some inverse floaters display extreme sensitivity to changes in prepayments. As a result, the yield to maturity of an inverse floater is sensitive not only to changes in interest rates, but also to changes in prepayment rates on the related underlying mortgage assets. As described above, inverse floaters may be used alone or in tandem with interest-only stripped mortgage instruments.

 

Investment Companies

Each Fund may invest in securities of other open- or closed-end investment companies. Each Fund may purchase shares of closed-end funds that are managed by an affiliate of the Adviser or Sub-Adviser only to the extent that they are traded on a national exchange. Each Fund may also invest a portion of its assets in pooled investment vehicles other than registered investment companies. For example, some vehicles which are commonly referred to as “exchanged traded funds” may not be registered investment companies because of the nature of their underlying investments. As a stockholder in an investment company or other pooled vehicle, the Fund will bear its ratable share of that investment company’s or vehicle’s expenses, and would remain subject to payment of the fund’s advisory and administrative fees with respect to assets so invested. Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies or vehicles. In addition, the securities of other investment companies or pooled vehicles may be leveraged and will therefore be subject to leverage risks (in addition to other risks of the investment company’s or pooled vehicle’s strategy). The Fund will also incur brokerage costs when purchasing and selling shares of investment companies and other pooled vehicles.

 

An investment in the shares of another fund is subject to the risks associated with that fund’s portfolio securities. To the extent a Fund invests in shares of another fund, that Fund’s shareholders would indirectly pay a

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portion of that Fund’s expenses, including advisory fees, brokerage, and other distribution expenses. These fees and expenses are in addition to the direct expenses of the Fund’s own operations.

 

Loan Participation and Assignments

Investment in secured or unsecured fixed or floating rate loans (“Loans”) arranged through private negotiations between a borrowing corporation, government, or other entity and one or more financial institutions (“Lenders”) may be in the form of participations in Loans (“Participation”) or assignments of all or a portion of Loans from third parties (“Assignments”). Participations typically result in the Fund having a contractual relationship only with the Lender, not with the borrower. The Fund has the right to receive payments of principal, interest, and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Fund generally has no direct right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, nor any rights of set-off against the borrower, and the Fund may not directly benefit from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the selling Lender, the Fund may be treated as a general creditor of that Lender and may not benefit from any set-off between the Lender and the borrower.

 

When a Fund purchases Assignments from Lenders, it acquires direct rights against the borrower on the Loan. In an Assignment, the Fund is entitled to receive payments directly from the borrower and, therefore, does not depend on the selling bank to pass these payments onto the Fund. However, because Assignments are arranged through private negotiations between potential assignees and assignors, the rights and obligations acquired by the Fund as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender.

 

Assignments and Participations are generally not registered under the Securities Act, and thus may be subject to the Funds’ limitation on investment in illiquid securities. The lack of a liquid secondary market could have an adverse impact on the value of such securities and on the Funds’ ability to dispose of particular Assignments or Participations when necessary to meet the Funds’ liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the borrower.

 

Money Market Instruments

Each Fund may invest, for defensive purposes or otherwise, some or all of their assets in high-quality fixed-income securities, money market instruments, and money market mutual funds, or hold cash or cash equivalents in such amounts as the Adviser or Sub-Adviser deems appropriate under the circumstances. In addition, each Fund may invest in these instruments pending allocation of its respective offering proceeds. Money market instruments are high-quality, short-term, fixed-income obligations, which generally have remaining maturities of one year or less and may include U.S. Government securities, commercial paper, certificates of deposit, and bankers’ acceptances issued by domestic branches of U.S. banks that are members of the Federal Deposit Insurance Corporation (“FDIC”), and repurchase agreements.

 

Margin Payments

When a Fund purchases or sells a futures contract, it is required to deposit with its custodian an amount of cash, U.S. Treasury bills, or other permissible collateral equal to a small percentage of the amount of the futures contract. This amount is known as “initial margin.” Initial margin requirements are established by the exchanges on which futures contracts trade and may, from time to time, change. The nature of initial margin is different from that of margin in security transactions in that it does not involve borrowing money to finance transactions. Rather, initial margin is similar to a performance bond or good faith deposit that is returned to the Fund upon termination of the contract, assuming the Fund satisfies its contractual obligations. In addition, brokers may establish margin deposit requirements in excess of those required by the exchanges.

 

Subsequent payments to and from the broker occur on a daily basis in a process known as “marking to market.” These payments are called “variation margin” and are made as the value of the underlying futures contract fluctuates. For example, when a Fund sells a futures contract and the price of the underlying index rises above the delivery price, the Fund’s position declines in value. The Fund then pays the broker a variation margin payment equal to the difference between the delivery price of the futures contract and the value of the index underlying the

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futures contract. Conversely, if the price of the underlying index falls below the delivery price of the contract, the Fund’s futures position increases in value. The broker then must make a variation margin payment equal to the difference between the delivery price of the futures contract and the value of the index underlying the futures contract.

 

When a Fund terminates a position in a futures contract, a final determination of variation margin is made, additional cash is paid by or to the Fund, and the Fund realizes a loss or a gain. Such closing transactions involve additional commission costs.

 

Mortgage Dollar Rolls

Each Fund may enter into mortgage dollar rolls with a bank or a broker-dealer. A mortgage dollar roll is a transaction in which the Fund sells mortgage-related securities for immediate settlement and simultaneously purchases the same type of securities for forward settlement at a discount. While the Fund begins accruing interest on the newly purchased securities from the purchase or trade date, it is able to invest the proceeds from the sale of its previously owned securities, which will be used to pay for the new securities, in money market investments until future settlement date. The use of mortgage dollar rolls is a speculative technique involving leverage, and can have an economic effect similar to borrowing money for investment purposes.

 

Mortgage-backed and Asset-backed Securities

Mortgage-backed securities, including collateralized mortgage obligations (“CMOs”) and certain stripped mortgage-backed securities, represent a participation in, or are secured by, mortgage loans. Asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The cash flow generated by the underlying assets is applied to make required payments on the securities and to pay related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed or mortgage-backed securities depends on, among other things, the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses, and the actual prepayment experience on the underlying assets. Each Fund may invest in any such instruments or variations as may be developed, to the extent consistent with its investment objectives and policies and applicable regulatory requirements. In general, the collateral supporting asset-backed securities is of a shorter maturity than mortgage loans and is likely to experience substantial prepayments.

 

Mortgage-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed securities include both interest and a partial repayment of principal. Besides the scheduled repayment of principal, repayments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans. If property owners make unscheduled prepayments of their mortgage loans, these prepayments will result in early payment of the applicable mortgage-backed securities. In that event a Fund may be unable to invest the proceeds from the early payment of the mortgage-backed securities in an investment that provides as high a yield as the mortgage-backed securities. Consequently, early payment associated with mortgage-backed securities may cause these securities to experience significantly greater price and yield volatility than that experienced by traditional debt securities. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and demographic conditions. During periods of falling interest rates, the rate of mortgage prepayments tends to increase, thereby tending to decrease the life of mortgage-backed securities. During periods of rising interest rates, the rate of mortgage prepayments usually decreases, thereby tending to increase the life of mortgage-backed securities. If the life of a mortgage-backed security is inaccurately predicted, the Fund may not be able to realize the rate of return it expected.

 

Adjustable rate mortgage securities (“ARMs”), like traditional mortgage-backed securities, are interests in pools of mortgage loans that provide investors with payments consisting of both principal and interest as mortgage loans in the underlying mortgage pool are paid off by the borrowers. Unlike fixed-rate mortgage-backed securities, ARMs are collateralized by or represent interests in mortgage loans with variable rates of interest. These interest rates are reset at periodic intervals, usually by reference to an interest rate index or market interest rate. Although the rate adjustment feature may act as a buffer to reduce sharp changes in the value of adjustable rate securities,

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these securities are still subject to changes in value based on, among other things, changes in market interest rates or changes in the issuer’s creditworthiness. Because the interest rates are reset only periodically, changes in the interest rate on ARMs may lag changes in prevailing market interest rates. Also, some ARMs (or the underlying mortgages) are subject to caps or floors that limit the maximum change in the interest rate during a specified period or over the life of the security. As a result, changes in the interest rate on an ARM may not fully reflect changes in prevailing market interest rates during certain periods. Each Fund may also invest in “hybrid” ARMs, whose underlying mortgages combine fixed-rate and adjustable rate features.

 

Mortgage-backed and asset-backed securities are less effective than other types of securities as a means of “locking in” attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. The automatic interest rate adjustment feature of mortgages underlying ARMs likewise reduces the ability to lock-in attractive rates. As a result, mortgage-backed and asset-backed securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have a similar risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the Fund.

 

At times, some mortgage-backed and asset-backed securities will have higher than market interest rates and therefore will be purchased at a premium above their par value. Prepayments may cause losses on securities purchased at a premium.

 

Asset-backed securities may be collateralized by the fees earned by service providers. The values of asset-backed securities may be substantially dependent on the servicing of the underlying asset and are therefore subject to risks associated with negligence by, or defalcation of, their servicers. In certain circumstances, the mishandling of related documentation may also affect the rights of the security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in added costs and delays in addition to losses associated with a decline in the value of the underlying assets.

 

Preferred Securities

There are two basic types of preferred securities, traditional and hybrid-preferred securities. Traditional preferred securities consist of preferred stock issued by an entity taxable as a corporation. Preferred stocks, which may offer fixed or floating rate dividends, are perpetual instruments and considered equity securities. Preferred securities are subordinated to senior debt instruments in a company’s capital structure, in terms of priority to corporate income and claim to corporate assets, and therefore will be subject to greater credit risk than debt instruments. Alternatively, hybrid-preferred securities may be issued by corporations, generally in the form of interest-bearing notes with preferred securities characteristics, or by an affiliated trust or partnership of the corporation, generally in the form of preferred interests in subordinated debentures or similarly structured securities. The hybrid-preferred securities market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature or have stated maturity dates. Hybrid-preferred securities are considered debt securities. Due to their similar attributes, the Adviser and Sub-Adviser also consider senior debt perpetual issues, certain securities with convertible features as well as exchange-listed senior debt issues that trade with attributes of exchange-listed perpetual and hybrid-preferred securities to be part of the broader preferred securities market.

 

Traditional Preferred Securities. Traditional preferred securities pay fixed or floating dividends to investors and have “preference” over common stock in the payment of dividends and the liquidation of a company’s assets. This means that a company must pay dividends on preferred stock before paying any dividends on its common stock. In order to be payable, distributions on such preferred securities must be declared by the issuer’s board of directors. Income payments on preferred securities may be cumulative, causing dividends and distributions to accumulate even if not declared by the board of directors or otherwise made payable. In such a case, all accumulated dividends must be paid before any dividend on the common stock can be paid. However, many traditional preferred stocks are non-cumulative, in which case dividends do not accumulate and need not ever be paid. Each Fund may invest in non-cumulative preferred securities, whereby the issuer does not have an obligation

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to make up any missed payments to its stockholders. There is no assurance that dividends or distributions on the traditional preferred securities in which a Fund invests will be declared or otherwise made payable. Preferred securities may also contain provisions under which payments must be stopped (i.e., stoppage is compulsory, not discretionary). The conditions under which this occurs may relate to, for instance, capitalization levels. Hence, if a company incurs significant losses that deplete retained earnings automatic payment stoppage could occur. In some cases the terms of the preferred securities provide that the issuer would be obligated to attempt to issue common shares to raise funds for the purpose of making the preferred payments. However, there is no guarantee that the issuer would be successful in placing common shares.

 

Preferred stockholders usually have no right to vote for corporate directors or on other matters. Shares of traditional preferred securities have a liquidation preference that generally equals the original purchase price at the date of issuance. The market value of preferred securities may be affected by, among other factors, favorable and unfavorable changes impacting the issuer or industries in which they operate, movements in interest rates and inflation, and the broader economic and credit environments, and by actual and anticipated changes in tax laws, such as changes in corporate and individual income tax rates. Because the claim on an issuer’s earnings represented by traditional preferred securities may become onerous when interest rates fall below the rate payable on such securities, the issuer may redeem the securities. Thus, in declining interest rate environments in particular, a Fund’s holdings of higher rate-paying fixed rate preferred securities may be reduced, and the Fund may be unable to acquire securities of comparable credit quality paying comparable rates with the redemption proceeds.

 

Hybrid-preferred Securities. Hybrid-preferred securities are typically junior and fully subordinated liabilities of an issuer or the beneficiary of a guarantee that is junior and fully subordinated to the other liabilities of the guarantor. In addition, hybrid-preferred securities typically permit an issuer to defer the payment of income for eighteen months or more without triggering an event of default. Generally, the maximum deferral period is five years. Because of their subordinated position in the capital structure of an issuer, the ability to defer payments for extended periods of time without default consequences to the issuer, and certain other features (such as restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments on the hybrid preferred securities have not been made), these hybrid-preferred securities are often treated as close substitutes for traditional preferred securities, both by issuers and investors. Hybrid-preferred securities have many of the key characteristics of equity due to their subordinated position in an issuer’s capital structure and because their quality and value are heavily dependent on the profitability of the issuer rather than on any legal claims to specific assets or cash flows. Hybrid-preferred securities are typically issued with a final maturity date. In certain instances, a final maturity date may be extended and/or the final payment of principal may be deferred at the issuer’s option for a specified time without default. No redemption can typically take place unless all cumulative payment obligations have been met, although issuers may be able to engage in open-market repurchases without regard to whether all payments have been paid.

 

Many hybrid-preferred securities are issued by trusts or other special purpose entities established by operating companies and are not a direct obligation of an operating company. At the time the trust or special purpose entity sells such preferred securities to investors, it purchases debt of the operating company (with terms comparable to those of the trust or special purpose entity securities), which enables the operating company to deduct for tax purposes the interest paid on the debt held by the trust or special purpose entity. The trust or special purpose entity is generally required to be treated as transparent for U.S. federal income tax purposes such that the holders of the trust preferred securities are treated as owning beneficial interests in the underlying debt of the operating company. Accordingly, payments on the hybrid-preferred securities are generally treated as interest rather than dividends for U.S. federal income tax purposes and, as such, are not eligible for the DRD or the reduced rates of tax that apply to qualified dividend income. The trust or special purpose entity in turn would be a holder of the operating company’s debt and would have priority with respect to the operating company’s earnings and profits over the operating company’s common stockholders, but would typically be subordinated to other classes of the operating company’s debt. Typically a preferred security has a credit rating that is lower than that of its corresponding operating company’s senior debt securities.

 

Within the category of hybrid-preferred securities are senior debt instruments that trade in the broader preferred securities market. These debt instruments, which are sources of long-term capital for the issuers, have structural features similar to other preferred securities such as maturities ranging from 30 years to perpetuity, call features, quarterly payments, exchange listings and the inclusion of accrued interest in the trading price.

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In some cases traditional and hybrid securities may include loss absorption provisions that make the securities more equity like. This is particularly true in the financial sector, the largest preferred issuer segment. Events in global financial markets in recent periods have caused regulators to review the function and structure of preferred securities more closely. While loss absorption language is relatively rare in the preferred market today, it may become much more prevalent.

 

In one version of a preferred security with loss absorption characteristics, the liquidation value of the security may be adjusted downward to below the original par value under certain circumstances. This may occur, for instance, in the event that business losses have eroded capital to a substantial extent. The write down of the par value would occur automatically and would not entitle the holders to seek bankruptcy of the company. Such securities may provide for circumstances under which the liquidation value may be adjusted back up to par, such as an improvement in capitalization and/or earnings.

 

Another preferred structure with loss absorption characteristics is the contingent capital security (sometimes referred to as “CoCo’s”). These securities provide for mandatory conversion into common shares of the issuer under certain circumstances. The mandatory conversion might relate, for instance, to maintenance of a capital minimum, whereby falling below the minimum would trigger automatic conversion. Since the common stock of the issuer may not pay a dividend, investors in these instruments could experience a reduced income rate, potentially to zero; and conversion would deepen the subordination of the investor, hence worsening standing in a bankruptcy. In addition, some such instruments have a set stock conversion rate that would cause an automatic write-down of capital if the price of the stock is below the conversion price on the conversion date.

 

Preferred securities may be subject to changes in regulations and there can be no assurance that the current regulatory treatment of preferred securities will continue.

 

Convertible Preferred Securities. Some preferred securities, generally known as convertible preferred securities, provide for an investor option to convert their holdings into common shares of the issuer. These securities may have lower rates of income than other preferred securities, and the conversion option may cause them to trade more like equities than typical fixed income instruments.

 

Floating Rate Securities. Each Fund may invest in floating rate preferred securities, which provide for a periodic adjustment in the interest rate paid on the securities. The terms of such securities provide that interest rates are adjusted periodically based upon an interest rate adjustment index. The adjustment intervals may be regular, and range from daily up to annually, or may be event-based, such as a change in the prime rate. Because of the interest rate reset feature, floating rate securities provide the Fund with a certain degree of protection against rises in interest rates, although the interest rates of floating rate securities will participate in any declines in interest rates as well.

 

Private Funds

Each Fund may also invest in private investment funds, vehicles, or structures such as “hedge funds” or private equity funds. Private funds may utilize leverage without limit and, to the extent a Fund invests in private funds that utilize leverage, the Fund will indirectly be exposed to the risks associated with that leverage and the values of its shares may be more volatile as a result. If a fund or investment pool in which a Fund invests is not publicly offered or there is no public market for its shares, the Fund may be prohibited by the terms of its investment from selling its shares in the fund or pool, or may not be able to find a buyer for those shares at an acceptable price. Securities issued by private funds are generally issued in private placements and are restricted securities. An investment in a Private fund may be highly volatile and difficult to value. The Fund would bear its pro rata share of the expenses of any Private fund in which it invests.

 

Real Estate Companies

Each Fund may invest in real estate securities, including securities issued by REITs and other issuers in the real estate industry. Such investments will be affected by factors generally affecting the value of real estate and the earnings of companies engaged in the real estate industry. These include, among others: (1) changes in general economic and market conditions; (2) risks related to local economic conditions, overbuilding and increased competition; (3) increases in property taxes and operating expenses; (4) changes in zoning laws; (5) casualty and condemnation losses; (6) variations in rental income, neighborhood values or the appeal of property to tenants; (7) the availability of financing; and (8) changes in interest rates. The value of investments in the real estate industry may go through cycles of relative under-performance and over-performance in comparison to the broader securities markets in general. Other factors may contribute to the risk of investing, directly or indirectly, in the commercial real estate industry.

 

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Current Adverse Economic Conditions. The volatility in the broader credit markets over the past several years has caused the global financial markets to become more volatile. The real estate industry has been dramatically impacted as a result. The confluence of the dislocation in the credit markets generally, along with the broad-based stress in the United States real estate industry, has created a difficult operating environment for owners and investors in real estate and investors should be aware that the general risks of investing in real estate may be magnified.

 

In addition, recent instability in the United States, European and other credit markets has at times made it more difficult for borrowers to obtain financing or refinancing on attractive terms or at all. In particular, because of conditions in the credit markets, borrowers may be subject to increased interest expenses for borrowed money and tightening underwriting standards. There is also a risk that a general lack of liquidity or other adverse events in the credit markets may adversely affect the ability of real estate companies to finance real estate developments and projects or to refinance completed projects.

 

For example, adverse developments relating to sub-prime mortgages in the United States have adversely affected the willingness of some lenders to extend credit, which may make it more difficult for real estate companies to obtain financing, on attractive terms or at all, so that they may commence or complete real estate development projects, refinance completed projects or purchase real estate. It also may adversely affect the price at which companies can sell real estate, because purchasers may not be able to obtain financing on attractive terms or at all. These developments also may adversely affect the broader economy, which in turn may adversely affect the real estate markets. Such developments could, in turn, reduce the number of real estate funds publicly-traded during the investment period and reduce a Fund’s investment opportunities in the real estate industry.

 

Development Risks. Certain commercial real estate companies engage in the development or construction of real estate properties. To the extent a Fund directly or indirectly invests in such companies, the Fund will be exposed to a variety of risks inherent in real estate development and construction. These include the risk that there will be insufficient tenant or consumer demand to occupy newly developed properties or produce the revenues needed to make the development project successful, the risk that prices of construction materials or construction labor may rise materially during the development, and the risk that other legal, regulatory, economic or other factors beyond the real estate company’s control will adversely affect the viability of a development project.

 

Lack of Insurance. Certain issuers of real estate securities in which a Fund may directly or indirectly invest may fail to carry comprehensive liability, fire, flood, earthquake, extended coverage and rental loss insurance, or the insurance that is in place may be insufficient or subject to various policy specifications, limits and deductibles. Should any type of uninsured loss occur, a real estate company could lose its investment in, and anticipated profits and cash flows from, a number of properties. As a result, the Fund’s investment performance may be adversely affected.

 

Financial Leverage. Many real estate companies utilize a high degree of financial leverage, which increases investment risk and could adversely affect a company’s operations and market value in periods of rising interest rates. In addition, the financial covenants associated with borrowings may limit a real estate company’s flexibility and adversely affect its ability to operate effectively.

 

Environmental Issues. In connection with the ownership (direct or indirect), operation, management, and development of real properties that may contain hazardous or toxic substances, a real estate company may be considered an owner, operator, or responsible party of such properties, and may therefore be potentially liable for environmental issues, including removal or remediation costs, governmental fines, and liabilities for injuries to persons and property, as well as other costs. The existence of any such material environmental liability could have a

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material adverse effect on the results of operations and cash flow of any such real estate company and, as a result, the amount available to make distributions on shares of a Fund could be reduced.

 

There are also special risks associated with the particular commercial real estate sectors in which a Fund may invest. These include:

 

Retail Properties. Retail properties are affected by the overall health of the economy and may be adversely affected by, among other things, the growth of alternative forms of retailing, bankruptcy, departure or cessation of operations of a tenant, a shift in consumer demand due to demographic changes, changes in spending patterns and lease terminations.

 

Office Properties. Office properties are affected by the overall health of the economy, and other factors such as a downturn in the businesses operated by their tenants, obsolescence and non-competitiveness.

 

Industrial Properties. Industrial properties are affected by the overall health of the economy and other factors such as downturns in the manufacturing, processing, and shipping of goods.

 

Hotel Properties. The risks of hotel properties include, among other things, the necessity of a high level of continuing capital expenditures, competition, increases in operating costs that may not be offset by increases in revenues, dependence on business and commercial travelers and tourism, increases in fuel costs and other expenses of travel, and adverse effects of general and local economic conditions. Hotel properties tend to be more sensitive to adverse economic conditions and competition than many other commercial properties.

 

Healthcare Properties. Healthcare properties and healthcare providers are affected by several significant factors, including federal, state, and local laws governing licenses, certification, adequacy of care, pharmaceutical distribution, rates, equipment, personnel, and other factors regarding operations, continued availability of revenue from government reimbursement programs and competition on a local and regional basis. The failure of any healthcare operator to comply with governmental laws and regulations may affect its ability to operate its facility or receive government reimbursements.

 

Multifamily Properties. The value and successful operation of a multifamily property may be affected by a number of factors, such as the location of the property, the ability of the management team, the level of mortgage interest rates, the presence of competing properties, adverse economic conditions in the locale, oversupply, and rent control laws or other laws affecting such properties.

 

Shopping Centers. Shopping center properties are dependent upon the successful operations and financial condition of their tenants, particularly certain of their major tenants, and could be adversely affected by bankruptcy of those tenants. In some cases a tenant may lease a significant portion of the space in one center, and the filing of bankruptcy could cause significant revenue loss, including the loss of revenue from smaller tenants with co-tenancy rights. Like others in the commercial real estate industry, shopping centers are subject to environmental risks and interest rate risk. They also face the need to enter into new leases or renew leases on favorable terms to generate rental revenues. Shopping center properties could be adversely affected by changes in the local markets where their properties are located, as well as by adverse changes in national economic and market conditions.

 

Self-Storage Properties. The value and successful operation of a self-storage property may be affected by a number of factors, such as the ability of the management team, the location of the property, the presence of competing properties, changes in traffic patterns, and effects of general and local economic conditions with respect to rental rates and occupancy levels.

 

Real Estate Investment Trusts (“REITs”)

Each Fund may invest in REITs. REITs are pooled investment vehicles that invest primarily in either real estate or real estate related loans. In addition to the general risks associated with investments in real estate, investing in REITs will subject a Fund to various risks, including:

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Dependence on Tenants. The value of a Fund’s investments in REITs and the ability to make distributions to its shareholders depend upon the ability of the tenants of the properties in which such REITs invest to generate enough income in excess of their operating expenses to make their lease payments. Changes beyond the control of a REIT’s portfolio companies may adversely affect their tenants’ ability to make their lease payments and, in such event, would substantially reduce both their income from operations and ability to make distributions to such REIT’s portfolio companies and, consequently, the Fund.

 

Risks of Investing in Net-Leased Real Estate. Where REITs invest in properties with net leases, in addition to satisfying their rent obligations, tenants in such properties are responsible for the payment of real estate taxes, insurance, and ordinary maintenance and repairs. However, under the provisions of future leases with such tenants, the REITs may be required to pay some expenses, such as the costs of environmental liabilities, roof and structural repairs, insurance, certain non-structural repairs, and maintenance. If such properties incur significant expenses that must be paid by such REITs under the terms of these leases, the REITs business, financial condition, and results of operations will be adversely affected and the amount of cash available to meet expenses and to make distributions to holders of their common stock may be reduced.

 

Tax Risk. Qualification as a REIT under the Code in any particular year is a complex analysis that depends on a number of factors. There can be no assurance that the entities in which a Fund invests with the expectation that they will be taxed as a REIT will qualify as a REIT. An entity that fails to qualify as a REIT would be subject to a corporate level tax, would not be entitled to a deduction for dividends paid to its shareholders, and would not pass through to its shareholders the character of income earned by the entity. If a Fund were to invest in an entity that failed to qualify as a REIT, such failure could significantly reduce the Fund’s yield on that investment.

 

Dividends paid by REITs will not generally qualify for the reduced U.S. federal income tax rates applicable to qualified dividends under the Code. A Fund’s investments in REITs may include an additional risk to shareholders. Some or all of a REIT’s annual distributions to its investors may constitute a non-taxable return of capital. Any such return of capital will generally reduce a Fund’s basis in the REIT investment, but not below zero. To the extent that the distributions from a particular REIT exceed the Fund’s basis in such REIT, the Fund will generally recognize gain. In part because REIT distributions often include a non-taxable return of capital, Fund distributions to shareholders may also include a non-taxable return of capital. Shareholders that receive such a distribution will also reduce their tax basis in their shares of such Fund, but not below zero. To the extent that the distribution exceeds a shareholder’s basis in the Fund’s shares, such shareholder will generally recognize a capital gain.

 

Key Personnel Risk. Where investments are made in REITs, success may depend to a significant degree upon the contributions of certain of executive officers and other key personnel who may be difficult to replace. There can be no guarantee that all, or any particular one of such key personnel, will remain affiliated with the REIT’s adviser. If any of such key personnel were to cease their affiliation with the REIT’s adviser, operating results could suffer. Further, separate key person life insurance may not be maintained on such key personnel. The future success of such REITs depends, in large part, upon their adviser’s ability to hire and retain highly skilled managerial, operational, and marketing personnel. Competition for such personnel is intense, and there can be no assurance of success in attracting and retaining such skilled personnel. If such key personnel are lost or their services are unable to obtain, the ability to implement investment strategies could be delayed or hindered, and the value of the Fund’s investment may decline.

 

Non-Traded REITs. A Fund may invest in any Non-Traded REITs that are consistent with the Fund’s investment objective and strategy and that, in the Adviser’s or Sub-Adviser’s judgment, offer attractive investment opportunities for the Fund. However, no Fund will invest in any Non-Traded REITs that are sponsored by or distributed by affiliates of the Adviser [or any Sub-Adviser]. By their very nature, Non-Traded REITs are illiquid investments, and it is unlikely that a Fund would be able to sell any of its investments in Non-Traded REITs promptly or at all. Even if a Fund is able to sell its shares in a Non-Traded REIT, it is likely that the Fund would have to sell them at a substantial discount to the price it paid for the shares. If a Fund invests in Non-Traded REITs, there is an increased risk that the Fund may be forced to dispose of other investments at unfavorable times or prices in order to satisfy its obligations.

 

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Unlike Listed REITs, which typically construct their investment portfolios before offering shares to the public, Non-Traded REITs typically commence offering shares before or concurrently with the process of constructing their investment portfolios. As such, while a Fund may be able to evaluate any information about a Non-Traded REIT existing portfolio that is publicly available before making an investment, the Fund will not be able to evaluate or approve any future acquisitions to be made by such Non-Traded REIT after the Fund makes its investment. Instead, the Fund must rely on the management of a Non-Traded REIT to implement the REIT’s investment strategies effectively. A Non-Traded REIT’s ability to achieve its investment objectives will also depend on the amount raised in its offering, which may not be known at the time the Fund makes its investment.

 

A Non-Traded REIT’s ability to achieve its investment objectives and to pay distributions is dependent upon the performance of its adviser in acquiring of investments, selecting tenants for properties and securing independent financing arrangements. The Fund will have no opportunity to evaluate the terms of transactions or other economic or financial data concerning a REIT’s investments. The Fund must rely entirely on the management ability of the REIT’s board of directors. Neither the Adviser or Sub-Adviser can be sure that such advisers will be successful in obtaining suitable investments on financially attractive terms or that, if such investments are made, that the Fund’s goals and objectives will be achieved.

 

A Non-Traded REIT could suffer from delays in locating suitable investments, particularly as a result of its reliance on its adviser at times when management of its adviser is simultaneously seeking to locate suitable investments for other affiliated programs. Delays encountered in the selection, acquisition and/or development of income-producing properties, likely would adversely affect such REIT’s ability to make distributions and the value of overall returns. Generally, such REITs may fund distributions of unlimited amounts from any source, including borrowing funds, using proceeds from this offering, issuing additional securities or selling assets in order to fund distributions if they are unable to make distributions with cash flows from operations. If such delays are encountered, all or a substantial portion of distributions may be paid from offering proceeds or from borrowings in anticipation of future cash flow, which may constitute a return of the Fund’s capital. In particular, where properties are acquired prior to the start of construction or during the early stages of construction, it typically will take several months to complete construction and rent available space.

 

In the case of Non-Traded REITs, there are many factors that can affect the availability and timing of cash distributions to shareholders. Distributions will be based principally on cash available from such REITs’ operations. The amount of cash available for distributions is affected by many factors, such as ability to buy properties as offering proceeds become available, rental income from such properties and operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. In the case of REITs with no prior operating history, there can be no assurance of the ability to pay or maintain current level of distributions or that distributions will increase over time. There can be no assurance that rents from the properties will increase, that the securities such REITs buy will increase in value or provide constant or increased distributions over time, or that future acquisitions of real properties, mortgage, bridge or mezzanine loans or any investments in securities will increase cash available for distributions to shareholders. Actual results may differ significantly from the assumptions used by the REITs board of directors in establishing the distribution rate to shareholders. Such REITs may not have sufficient cash from operations to make a distribution required to qualify for or maintain REIT status. Such REITs may pay distributions from unlimited amounts of any source, including borrowing funds, offering proceeds, issuing additional securities or selling assets.

 

Repurchase Agreements

Repurchase agreements, which may be viewed as a type of secured lending by a Fund, typically involve the acquisition by the Fund of debt securities from a selling financial institution such as a bank, savings and loan association, or broker-dealer. The repurchase agreements will provide that the Fund will sell back to the institution, and that the institution will repurchase, the underlying security (“collateral”) at a specified price and at a fixed time in the future, usually not more than seven days from the date of purchase. The collateral will be maintained in a segregated account and, with respect to repurchase agreements, will be marked to market daily to ensure that the full value of the collateral, as specified in the repurchase agreement, does not decrease below the repurchase price plus accrued interest. If such a decrease occurs, additional collateral will be requested and, when received, added to the account to maintain full collateralization. The Fund will accrue interest from the institution until the date the repurchase occurs. Although this date is deemed by the Fund to be the maturity date of a repurchase agreement, the maturities of the collateral securities are not subject to any limits and may exceed one year.

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Reverse Repurchase Agreements

Reverse repurchase agreements involve sales by a Fund of portfolio securities concurrently with an agreement by the Fund to repurchase the same securities at a later date at a fixed price. Reverse repurchase agreements are speculative techniques involving leverage. Reverse repurchase agreements involve the risk that the market value of the securities the Fund is obligated to repurchase under the agreement may decline below the repurchase price. Reverse repurchase agreements involve the risk that the buyer of the securities sold might be unable to deliver them when the Fund seeks to repurchase the securities. If the buyer files for bankruptcy or becomes insolvent, the Fund may be delayed or prevented from recovering the security that it sold.

 

Securities Loans

Each Fund may make secured loans of its portfolio securities, on either a short-term or long-term basis, amounting to not more than one third of its total assets, thereby potentially realizing additional income. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. If a borrower defaults, the value of the collateral may decline before the Fund can dispose of it.

 

Short Sales

Short sales are transactions in which a Fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing it at the market price at or prior to the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to repay the lender any dividends or interest that accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker (or by the Fund’s custodian in a special custody account), to the extent necessary to meet margin requirements, until the short position is closed out. The Fund also will incur transaction costs in effecting short sales.

 

The Fund will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will generally realize a gain if the security declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends, interest, or expenses the Fund may be required to pay in connection with a short sale. An increase in the value of a security sold short by the Fund over the price at which it was sold short will result in a loss to the Fund. There can be no assurance that the Fund will be able to close out the position at any particular time or at an acceptable price. The Fund’s ability to engage in short sales may from time to time be limited or prohibited because of the inability to borrow certain securities in the market, legal restrictions on short sales, or other reasons.

 

Special Purpose Acquisition Companies

Each Fund may invest in stock, warrants, and other securities of special purpose acquisition companies (“SPACs”) or similar special purpose entities that pool funds to seek potential acquisition opportunities. Unless and until an acquisition meeting the SPAC’s requirements is completed, a SPAC generally invests its assets (less a portion retained to cover expenses) in U.S. Government securities, money market securities, and cash; if an acquisition that meets the requirements for the SPAC is not completed within a pre-established period of time, the invested funds are returned to the entity’s shareholders. Because SPACs and similar entities have no operating history or ongoing business other than seeking acquisitions, the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable acquisition. Some SPACs may pursue acquisitions only within certain industries or regions, which may increase the volatility of their prices. In addition, these securities, which are typically traded in the over-the-counter market, may be considered illiquid and/or be subject to restrictions on resale. Each Fund’s affiliates may create a SPAC for purchase by the Fund to assist the Fund in purchasing certain assets not otherwise available to the Fund.

 

Stripped Mortgage Securities

Stripped Mortgage Securities may be issued by Federal Agencies, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks

27
 

and special purpose subsidiaries of the foregoing. Stripped Mortgage Securities usually are structured with two classes that receive different proportions of the interest and principal distribution of a pool of mortgage assets. A common type of Stripped Mortgage Security 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). PO classes generate income through the accretion of the deep discount at which such securities are purchased, and, while PO classes do not receive periodic payments of interest, they receive monthly payments associated with scheduled amortization and principal prepayment from the mortgage assets underlying the PO class. The yield to maturity on a PO or an IO class security is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets. A slower than expected rate of principal payments may have an adverse effect on a PO class security’s yield to maturity. If the underlying mortgage assets experience slower than anticipated principal repayment, the Fund may fail to fully recoup its initial investment in these securities. Conversely, a rapid rate of principal payments may have a material adverse effect on an IO class security’s yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments or principal, the Fund may fail to fully recoup its initial investment in these securities.

 

Structured Investments

A structured investment is a security having a return tied to an underlying index or other security or asset class. Structured investments generally are individually negotiated agreements and may be traded over-the-counter. Structured investments are organized and operated to restructure the investment characteristics of the underlying security. This restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, or specified instruments (such as commercial bank loans) and the issuance by that entity or one or more classes of securities (“structured securities”) backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued structured securities to create securities with different investment characteristics, such as varying maturities, payment priorities and interest rate provisions, and the extent of such payments made with respect to structured securities is dependent on the extent of the cash flow on the underlying instruments. Because structured securities typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. Investments in structured securities are generally of a class of structured securities that is either subordinated or unsubordinated to the right of payment of another class. Subordinated structured securities typically have higher yields and present greater risks than unsubordinated structured securities. Investments in government and government-related and restructured debt instruments are subject to special risks, including the inability or unwillingness to repay principal and interest, requests to reschedule or restructure outstanding debt, and requests to extend additional loan amounts.

 

Warrants

Each Fund may invest in warrants, which are instruments that give the Fund the right to purchase certain securities from an issuer at a specific price (the “strike price”) for a limited period of time. The strike price of warrants typically is much lower than the current market price of the underlying securities, yet they are subject to similar price fluctuations. As a result, warrants may be more volatile investments than the underlying securities and may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying securities and do not represent any rights in the assets of the issuing company. Also, the value of the warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to the expiration date. These factors can make warrants more speculative than other types of investments.

 

In addition to warrants on securities, each Fund may purchase put warrants and call warrants whose values vary depending on the change in the value of one or more specified securities indices (“index warrants”). Index warrants are generally issued by banks or other financial institutions and give the holder the right, at any time during the term of the warrant, to receive upon exercise of the warrant a cash payment from the issuer based on the value of the underlying index at the time of exercise. In general, if the value of the underlying index rises above the exercise price of the index warrant, the holder of a call warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the value of the index and the exercise price of the warrant; if the value of the underlying index falls, the holder of a put warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the exercise price of the warrant and the value of the index. The holder of a warrant would not be entitled to any payments from the issuer at any time when, in the case of a call

28
 

warrant, the exercise price is greater than the value of the underlying index, or, in the case of a put warrant, the exercise price is less than the value of the underlying index. If the Fund were not to exercise an index warrant prior to its expiration, then the Fund would lose the amount of the purchase price paid by it for the warrant.

 

Each Fund will normally use index warrants in a manner similar to its use of options on securities indices. The risks of the Fund’s use of index warrants are generally similar to those relating to its use of index options. Unlike most index options, however, index warrants are issued in limited amounts and are not obligations of a regulated clearing agency, but are backed only by the credit of the bank or other institution which issues the warrant. Also, index warrants generally have longer terms than index options. Index warrants are not likely to be as liquid as certain index options backed by a recognized clearing agency. In addition, the terms of index warrants may limit the Fund’s ability to exercise the warrants at such time, or in such quantities, as the Fund would otherwise wish to do.

 

When, As and If Issued Securities

Each Fund may purchase securities on a “when, as and if issued” basis under which the issuance of the security depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization, leveraged buyout, or debt restructuring. An increase in the percentage of the Fund’s assets committed to the purchase of securities on a “when, as and if issued” basis may create investment leverage and increase the volatility of the Fund’s net asset value. The Fund may also sell securities on a “when, as and if issued” basis provided that the issuance of the security will result automatically from the exchange or conversion of a security owned by the Fund at the time of the sale.

 

When-Issued, Delayed Delivery and Forward Commitment Securities

To reduce the risk of changes in securities prices and interest rates, a Fund may purchase securities on a forward commitment, when-issued or delayed delivery basis. This means that delivery and payment occur a number of days after the date of the commitment to purchase. The payment obligation and the interest rate receivable with respect to such purchases are determined when the Fund enters into the commitment, but the Fund does not make payment until it receives delivery from the counterparty. The Fund may, if it is deemed advisable, sell the securities after it commits to a purchase but before delivery and settlement takes place.

 

Securities purchased on a forward commitment, when-issued or delayed delivery basis are subject to changes in value based upon the public’s perception of the creditworthiness of the issuer and changes (either real or anticipated) in the level of interest rates. Purchasing securities on a when-issued or delayed delivery basis can present the risk that the yield available in the market when the delivery takes place may be higher than that obtained in the transaction itself. Purchasing securities on a forward commitment, when-issued or delayed delivery basis when the Fund is fully, or almost fully invested, results in a form of leverage and may cause greater fluctuation in the value of the net assets of the Fund. In addition, there is a risk that securities purchased on a when-issued or delayed delivery basis may not be delivered, and that the purchaser of securities sold by the Fund on a forward basis will not honor its purchase obligation. In such cases, the Fund may incur a loss.

 

Zero-Coupon and Payment-in-Kind Bonds

Each Fund may invest in so-called “zero-coupon” bonds and “payment-in-kind” bonds. Zero-coupon bonds are issued at a significant discount from their principal amount in lieu of paying interest periodically. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Because zero-coupon and payment-in-kind bonds do not pay current interest in cash, their value is subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest currently. Both zero-coupon and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest currently in cash. Each Fund is required to accrue interest income on such investments and to distribute such amounts at least annually to shareholders even though the investments do not make any current interest payments. Thus, it may be necessary at times for the Funds to liquidate other investments in order to satisfy its distribution requirements under the Code.

 

DISCLOSURE OF PORTFOLIO HOLDINGS

 

The Trust has adopted policies and procedures with respect to the disclosure of each Fund’s portfolio holdings and ongoing arrangements to make available such information to the general public and to certain persons

29
 

on a selective basis. Except as noted below, the Trust does not provide portfolio holdings to any third party until they are made available on the Trust’s website or through some other means of public dissemination. The Funds’ full portfolio holdings are published semi-annually in reports sent to shareholders and such reports are made available on the Trust’s website, within 60 days after the end of each semi-annual period. These semi-annual holdings are also filed with the Securities and Exchange Commission (the “SEC”) within 70 days of the end of each semi-annual period, as part of Form N-CSR. Quarterly holdings reports are filed with the SEC within 60 days at the end of the first and third fiscal quarters, as part of Form N-Q. In addition, pursuant to policies and procedures approved by the Board, a Fund may post an uncertified whole or partial list of portfolio holdings on its website at www.arcincomefunds.com quarterly, no earlier than 15 days after the end of each calendar quarter. One day after the full holdings have been published, employees of the Adviser or a Fund’s Sub-Adviser may freely distribute them to third-parties. This information remains available until the Trust files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information is current. In addition to information on portfolio holdings, other Fund statistical information may be found on the Trust’s website.

 

Pursuant to the Trust’s portfolio holdings disclosure policies and procedures, the following are exceptions to the general rule that holdings are not disclosed to third parties until posted to the website:

 

1. Each Funds’ portfolio holdings may be disclosed prior to public release to certain third parties (e.g., rating and ranking organizations, financial printers, pricing information vendors, and other research firms) for legitimate business purposes. Disclosure is conditioned on receipt of a written confidentiality agreement, including an agreement not to trade on the basis of the information disclosed. The portfolio holdings may be disclosed to such third parties on an as-needed basis and such disclosure must be authorized by an officer of the Fund.

 

2. Each Funds’ portfolio holdings may also be disclosed between and among the Funds’ Adviser, Distributor, Transfer Agent, Administrator, independent registered public accounting firm, and outside legal counsel, and a Fund’s Sub-Adviser for legitimate business purposes within the scope of their official duties and responsibilities, subject to their continuing duty of confidentiality and duty not to trade on the basis of any material nonpublic information, as such duties are imposed under the Code of Ethics and the Inside Information Policies and Procedures applicable to the Adviser, Sub-Adviser, Distributor, and Administrator, and as imposed on the other parties by agreement or under applicable laws, rules and regulations.

 

3. Each Fund’s Adviser, Sub-Adviser, Distributor, Transfer Agent, and Administrator may for legitimate business purposes within the scope of their official duties and responsibilities disclose portfolio holdings to one or more broker-dealers during the course of, or in connection with, normal day-to-day securities transactions with such broker-dealers, subject to the broker-dealer’s legal obligation not to use or disclose material nonpublic information concerning the each Fund’s portfolio holdings.

 

4. Each Fund may provide certain information (other than complete portfolio holdings) related to its portfolio holdings or derived from its portfolio holdings to the media so long as the Funds’ chief compliance officer, or his or her designated representative, determines that the Fund has a legitimate business purpose for disclosing the information and the dissemination cannot be reasonably seen to give the recipient of such information an advantage in trading Fund shares or in any other way harm the Fund or its shareholders. Such information may include a small number of portfolio holdings (including information that the Fund no longer holds a particular security) or general information about the Funds’ portfolio holdings that cannot be used to determine each Fund’s portfolio holdings or any portion thereof. Information about a security may not be released if it could reasonably be seen to interfere with the current or future purchase or sale activities of the Fund or is contrary to applicable law.

 

5. Fund portfolio holdings may also be disclosed to any person as required by applicable laws, rules, and regulations. Examples of such required disclosure include, but are not limited to, disclosure (1) in a filing or submission with the SEC or another regulatory body, (2) in connection with a lawsuit, or (3) as required by court order. A Fund may from time to time post portfolio holdings on the Trust’s website on a more-timely basis than 15 days after calendar quarter-end if warranted by market conditions or other circumstances.

 

Occasions may arise where the Adviser, a Sub-Adviser, a Fund or an affiliate of a Fund may have a conflict of interest in connection with a recipient’s request for disclosure of portfolio holdings information. In order to protect the interests of shareholders and the Fund and to ensure no adverse effect on the shareholders or the Fund, in

30
 

the limited instances where a designated person is considering making non-public portfolio holdings information, the designated person will disclose the conflict to the chief compliance officer. If the chief compliance officer of the Trust determines, to the best of his/her knowledge following appropriate due diligence, that the disclosure of non-public portfolio holdings information would be in the best interests of shareholders and the Fund and will not adversely affect the shareholders or the Fund, the chief compliance officer may approve the disclosure. The chief compliance officer will document in writing any such exception (which identifies the legitimate business purpose for the disclosure) and will provide a report to the Board for its review at a subsequent Board meeting. Any such exceptions log shall be retained in the Fund’s records.

 

PORTFOLIO TURNOVER

 

Although the Funds generally will not invest for short-term trading purposes, portfolio securities may be sold without regard to the length of time they have been held when, in the opinion of the Adviser or Sub-Adviser, investment considerations warrant such action. Portfolio turnover rate is calculated by dividing (1) the lesser of purchases or sales of portfolio securities for the fiscal year by (2) the monthly average of the value of portfolio securities owned during the fiscal year. A 100% turnover rate would occur if all the securities in a Fund’s portfolio, with the exception of securities whose maturities at the time of acquisition were one year or less, were sold and either repurchased or replaced within one year. A high rate of portfolio turnover (100% or more) generally leads to higher transaction costs and may result in a greater number of taxable transactions.

 

MANAGEMENT OF THE FUNDS

 

The Board has overall responsibility to oversee the business affairs of the Funds, including the complete and exclusive authority to oversee and to establish policies regarding the management, conduct, and operation of the Funds’ business. The business of the Trust is managed under the supervision of the Board in accordance with the Declaration of Trust, as may be amended from time to time, which has been filed with the SEC and is available upon request. The Board consists of 4 individuals, 3 of whom are not “interested persons” (as defined under the 1940 Act) of the Trust, the Adviser, and each Fund’s Sub-Adviser. Pursuant to the Declaration of Trust, the trustees shall elect officers including a President, a Secretary, and a Treasurer, and shall appoint a Chief Compliance Officer. The Board has the power to incur and pay any expenses, which, in the opinion of the Board, are necessary or incidental to carry out any of the Trust’s purposes. The trustees, officers, employees, and agents of the Trust, when acting in such capacities, shall not be subject to any personal liability except for his or her own bad faith, willful misfeasance, gross negligence, or reckless disregard of his or her duties.

 

Board Leadership Structure

The Board currently is comprised of 4 Trustees, 3 of which are not “interested persons” (as that term is defined in the 1940 Act) of the Trust (the “Independent Trustees”). Nicholas Schorsch, who, among other things, serves as Chairman of the Board, is an “interested person” (as that term is defined in the 1940 Act) of the Trust. Because the Trust is new, the Board has not yet selected a lead independent trustee, although it is the intent of the Board to do so in the future. The Independent Trustees regularly meet outside the presence of management, both in-person and by telephone.

 

The Board has established a committee structure that includes an Audit Committee. All Independent Trustees are members of the Audit Committee, which allows all of the Independent Trustees to participate in the full range of the Board’s oversight responsibilities. The Board reviews its structure regularly and believes that its leadership structure is appropriate given the recent formation of the Trust, the number of Trustees overseeing the Trust and the Board’s oversight responsibilities, as well as the Trust’s business activities.

 

Board Risk Oversight

The Board is comprised of 4 individuals, 3 of whom are Independent Trustees, with a standing independent Audit Committee with a separate chair. The Board is responsible for overseeing risk management, and the full Board regularly engages in discussions of risk management and receives compliance reports that inform its oversight of risk management from its Chief Compliance Officer at quarterly meetings and on an ad hoc basis, when and if necessary. The Audit Committee considers financial and reporting risk within its area of responsibilities. Generally, the Board believes that its oversight of material risks is adequately maintained through the compliance-reporting

31
 

chain where the Chief Compliance Officer is the primary recipient and communicator of such risk-related information.

 

Trustees and Officers

Following is a list of the trustees and executive officers of the Trust and their principal occupations over the last five years.

 

Name, Address, and
Age

Position Held and

Length of Time Served

Principal Occupation
During Past  5 Years
Number of Portfolios
Overseen by Trustee
Other Directorships
Held by Trustee During
Past 5 Years
Non-Interested Trustees(1)

Robert H. Burns

405 Park Avenue

15th Floor

New York, NY 10022

(82)

Trustee since 2013 Hotelier,  Villa Feltrinelli on Lago di Garda (a small, luxury hotel in Northern Italy) , as well as developing hotel projects in Asia, focusing on Vietnam and Chine, from 2009 to present 1 American Realty Capital Trust, Inc. from January 2008 to January 2013  (a real estate investment trust); American Realty Capital New York Recovery REIT, Inc. from October 2009 to present; American Realty Capital Healthcare Trust, Inc. from March 2012 to present; American Realty Capital Trust V, Inc. from January 2013 to present

Dr. Robert J. Froehlich

c/o 405 Park Avenue

15th Floor

New York, NY 10022

(60)

Trustee since 2013 Retired. Board of Directors and Co-Owner of Kane County Cougars Professional Baseball Team from  January 2013 to present; Owner and Operator, 5/3 Bank Ballpark from January 2013 to present 1 American Realty Capital Daily Net Asset Value Trust, Inc. from November 2012 to present (a publicly registered, non-traded real estate investment program); Davidson Investment Advisors from July 2009 to present; American Sports Enterprise, Inc. from January 2013 to present; American Realty Capital Healthcare Trust II, Inc. from January 2013 to present

Leslie D. Michelson

c/o 405 Park Avenue

15th Floor

New York, NY 10022

(62)

Trustee since 2013 Chairman & Chief Executive Officer, Private Health Management (healthcare company) from April 2007 to present 1 American Realty Capital Properties, Inc. from October 2012 to present; American Realty Capital Healthcare Trust, Inc. director from January 2011 to July 2012, lead independent director from July 2012 to present; Business Development Corporation of America from January 2011 to present; Molecular Insight Pharmaceuticals, Inc. from November 2011 to January 2013 (a biotechnology company); American Realty Capital – Retail Centers of America, Inc. from March 2012 to October 2012; American Realty Capital New York Recovery REIT, Inc. from October 2009 to August 2011; American Realty Capital Trust, Inc. from January 2008 to July 2012, lead
32
 

 

Name, Address, and
Age

Position Held and
Length of Time Served

Principal Occupation
During Past  5 Years
Number of Portfolios
Overseen by Trustee
Other Directorships
Held by Trustee During
Past 5 Years

independent director from July 2012 to  January 2013; American Realty Capital Daily Net Asset Value Trust, Inc. from August 2011 to February 2012; ARC Realty Finance Trust, Inc. lead independent director from January 2013 to present; Highlands Acquisition Company from 2007 to 2009 (special purpose acquisition company); Landmark Imaging from 2007 to 2010 (privately-held diagnostic imaging and treatment company); ALS-TDI from June 2004 to present (also vice chairman; philanthropy dedicated to curing Lou Gehrig’s disease)
Interested Trustees and Officers

Nicholas S. Schorsch(2)

405 Park Avenue

15th Floor

New York, NY 10022

(52)

Trustee, Chairman and Chief Executive Officer  since 2012 Chairman and Chief Executive Officer, Business Development Corporation of America from May 2010 to present; Chief Executive Officer, American Realty Capital Trust, Inc. from  August 2007 to March 2012;  Chairman and Chief Executive Officer, American Realty Capital New York Recovery REIT, Inc. from October 2009 to present; Chief Executive Officer, Adviser of Phillips Edison – ARC Shopping Center REIT Inc. from December 2009 to present: Chairman and Chief Executive Officer, American Realty Capital – Retail Centers of America, Inc. from July 2010 to present; Chairman and Chief Executive Officer, American Realty Capital Healthcare Trust, Inc. from August 2010 to present; Chairman and Chief Executive Officer, American Realty Capital Daily Net Asset Value Trust, Inc. from
September 2010 to present; Chairman and
1 Business Development Corporation of America from May 2010 to present; American Realty Capital Trust, Inc. from August 2007 to January 2013; American Realty Capital Trust IV, Inc. from February 2012 to present; American Realty Capital Healthcare Trust II, Inc. from October 2012 to present; ARC Realty Finance Trust, Inc. from November 2012 to present; American Realty Capital Trust V, Inc. from January 2013 to present; American Energy Capital Partners GP, LLC from October 2013 to present; ARCT V since January 2013 to present; American Realty Capital Hospitality Trust, Inc. since August 2013 to present

 

33
 

 

Name, Address, and
Age

Position Held and
Length of Time Served

Principal Occupation
During Past  5 Years
Number of Portfolios
Overseen by Trustee
Other Directorships
Held by Trustee During
Past 5 Years
    Chief Executive Officer, American Realty Capital Properties, Inc. from  December 2010 to present; Chairman and Chief Executive Officer, ARCT III from October 2010 to February 2013; Chairman and Chief Executive Officer, American Realty Capital Global Trust, Inc. from July 2011 to present; Chief Executive Officer, American Realty Capital Trust IV, Inc. from February 2012 to present; Chief Executive Officer, ARC Realty Finance Trust, Inc. from November 2012 to present; Chief Executive Officer, American Realty Capital Trust V, Inc. from January 2013 to present; Chief Executive Officer, American Realty Capital PECO II Advisors, LLC from July 2013 to present    
Officers

John H. Grady

405 Park Avenue

15th Floor

New York, NY 10022

(51)

 

President and Secretary since 2013 President, National Fund Advisors, LLC from October 2012 to present; President, American National Stock Transfer, LLC from October 2012 to present; Chief Operating Officer, Realty Capital Securities from October 2012 to present; Executive Vice President, RCS Advisory Services, LLC from October 2012 to present; Chief Operating Officer, American Realty Capital from October 2012 to present; General Counsel and Chief Operating Officer, Steben & Company (firm focused on the operation and distribution of managed futures funds) from  February 2008 to September 2012 N/A N/A

 

Nicholas Radesca

405 Park Avenue

15th Floor

New York, NY 10022

(47)

 

Executive Vice President since 2013 Executive Vice President and Chief Financial Officer, National Fund Advisors, LLC from December 2012 to present; Chief Financial Officer and Treasurer, Business Development N/A N/A
34
 

 

Name, Address, and
Age

Position Held and

Length of Time Served

Principal Occupation
During Past  5 Years
Number of Portfolios
Overseen by Trustee
Other Directorships
Held by Trustee During
Past 5 Years

 

 

Corporation of America from February 2013 to present; Chief Financial Officer and Treasurer, BDCA Adviser, LLC from February 2013 to present; Chief Financial Officer and Treasurer , ARC Realty Finance Trust, Inc. from January 2013 to present; Chief Financial Officer and Treasurer, ARC Realty Finance Advisors, LLC from January 2013 to present; Chief Financial Officer, American Realty Capital from December 2012 to present; Solar Senior Capital Management, LLC  from March 2008 to May 2012 – serving as Chief Financial Officer and Corporate Secretary for Solar Capital Ltd. and its predecessor company Solar Senior Capital Ltd. (both publicly traded business development companies)

Christopher Pike

405 Park Avenue

15th Floor

New York, NY 10022

(45)

Vice President since 2013

 

Vice President and Chief Investment Officer, National Fund Advisors, LLC from May 2012 to present; Director of Investment Research, American Realty Capital and Realty Capital Securities from August 2011 to May 2012; Equity Research Analyst, Fagenson & Company, Inc. from December 2009 to August 2011; Equity Research Analyst, Merrill Lynch from March 2006 to December 2008

 

N/A N/A

Gerard Scarpati

Brandywine Two

5 Christy Drive

Suite 209

Chadds Ford, PA 19317

(57)

 

Treasurer and Chief
Financial Officer since
2013
President, Vigilant Compliance, LLC (an investment management services company) from August 15, 2004 to present N/A N/A

Salvatore Faia

Brandywine Two

5 Christy Drive

 

Chief Compliance
Officer since 2013
Compliance Director, Vigilant Compliance, LLC (an investment N/A N/A

 

35
 

 

Suite 209

Chadds Ford, PA 19317

(50)

 

management services company) from  2010  to present; Independent Compliance Consultant from 2009 to 2010

Erik Naviloff

80 Arkay Drive

Suite 110

Hauppauge, NY 11788

(44)

Assistant Treasurer since 2013 Vice President of Gemini Fund Services, LLC from 2011 to present; Assistant Vice President, Gemini Fund Services, LLC from 2007 to  2012; Senior Accounting Manager, Fixed Income, Dreyfus Corporation  from 2002 to 2007 N/A N/A

James Ash

80 Arkay Drive

Suite 110

Hauppauge, NY 11788

(36)

Assistant Secretary since 2013 Senior Vice President, Gemini Fund Services, LLC from 2012 to present; Vice President, Gemini Fund Services, LLC from 2011 to  2012; Director of Legal Administration, Gemini Fund Services LLC from 2009 to  2011;  Assistant Vice President of Legal Administration, Gemini Fund Services, LLC from 2008 to 2011 N/A N/A

Dawn M. Dennis

80 Arkay Drive

Suite 110

Hauppauge, NY 11788

(47)

Assistant Secretary since 2013 Student from 2009 to July 2011; Paralegal , Gemini Fund Services, LLC from July 2011 to April 2013; Senior Paralegal, Gemini Fund Services, LLC from May 2013 to present N/A N/A

 ________________

(1)The Trustees of the Trust who are not “interested persons” of the Trust as defined under the 1940 Act (“Independent Trustees”).
(2)Affiliated with the Adviser and/or the Distributor.

 

Qualifications and Experience of the Trustees

In addition to the information set forth in the table above, the following sets forth additional information about the qualifications and experience of each of the Trustees.

 

Roberts Burns – Mr. Burns’ experience in the hotel industry and expertise in hotel management, hotel design and building make him well qualified to serve as a Trustee.

 

Robert Froehlich – Mr. Froehlich is a global strategist who has spoken in 107 countries and an accomplished author, having written six books on investing. Prior to his retirement, Mr. Froehlich spent three years as head investment strategist and chair of investment strategy committees for multiple global asset management companies. Mr. Froehlich’s investment expertise and experience as a financial expert make him well qualified to serve as a Trustee.

 

Leslie Michelson – As set forth in the chart above, Mr. Michelson’s more than twenty years of senior management experiences at various corporations, his service on the board of directors of other public companies in

36
 

the past, and his legal education make him well qualified to serve as a Trustee. In addition to the directorships set forth in the chart above, Mr. Michelson has also held and/or holds the following directorships and/or executive officer positions: Mr. Michelson served as vice chairman and chief executive officer of the Prostate Cancer Foundation, the world’s largest private source of prostate cancer research funding, from April 2002 until December 2006 and currently serves on its board of directors. Mr. Michelson served on the board of directors of Catellus Development Corp. from 1997 until 2004 when the company was sold to ProLogis. Mr. Michelson was a member of the Audit Committee of the board of directors for 5 years and served at various times as the chairman of the Audit Committee and the Compensation Committee. From April 2001 to April 2002, he was an investor in, and served as an adviser or director of, a portfolio of entrepreneurial healthcare, technology and real estate companies. From March 2000 to August 2001, he served as chief executive officer and as a director of Acurian, Inc., an Internet company that accelerates clinical trials for new prescription drugs. From 1999 to March 2000, Mr. Michelson served as an adviser of Saybrook Capital, LLC, an investment bank specializing in the real estate and health care industries. From June 1998 to February 1999, Mr. Michelson served as chairman and co-chief executive officer of Protocare, Inc., a manager of clinical trials for the pharmaceutical industry and disease management firm. From 1988 to 1998, he served as chairman and chief executive officer of Value Health Sciences, Inc., an applied health services research firm he co-founded. Mr. Michelson has been a director of Nastech Pharmaceutical Company Inc., a NASDAQ-traded biotechnology company focused on innovative drug delivery technology, from 2004 to 2008, and of G&L Realty Corp., a NYSE-traded medical office building REIT from 1995 to 2001. Mr. Michelson has served as chairman and chief executive officer of Private Health Management, a retainer-based primary care medical practice management company from April 2007 to present.

 

Nicholas Schorsch – Mr. Schorsch’s current experience as chairman and chief executive officer of various entities and his significant real estate acquisition experience, make him well qualified to serve as our Trustee and Chairman of the Board.

 

The Board has determined that each Trustee on an individual basis and in combination with the other Trustees is qualified to serve, and should serve, on the Board. To make this determination the Board considered a variety of criteria, none of which in isolation was controlling. Among other things, the Board considered each Trustee’s experience, qualifications, attributes and skills.

 

Board Committees

Audit Committee. The Board has an Audit Committee that consists of the trustees who are not “interested persons” (as defined under the 1940 Act) of the Trust, the Adviser, and each Fund’s Sub-Adviser (the “Independent Trustees”). The Audit Committee’s responsibilities include: (1) recommending to the Board the selection, retention or termination of the Trust’s independent auditors; (2) reviewing with the independent auditors the scope, performance and anticipated cost of their audit; (3) discussing with the independent auditors certain matters relating to the Trust’s financial statements, including any adjustment to such financial statements recommended by such independent auditors, or any other results of any audit; (4) reviewing on a periodic basis a formal written statement from the independent auditors with respect to their independence, discussing with the independent auditors any relationships or services disclosed in the statement that may impact the objectivity and independence of the Trust’s independent auditors and recommending that the Board take appropriate action in response thereto to satisfy itself of the auditor’s independence; and (5) considering the comments of the independent auditors and management’s responses thereto with respect to the quality and adequacy of the Trust’s accounting and financial reporting policies and practices and internal controls. The Audit Committee operates pursuant to an Audit Committee Charter. The Audit Committee is responsible for seeking and reviewing nominee candidates for consideration as Independent Trustees as is from time to time considered necessary or appropriate. The Audit Committee generally will consider shareholder nominees to the extent required pursuant to rules under the Exchange Act. The Audit Committee is also responsible for reviewing and setting Independent Trustee compensation from time to time when considered necessary or appropriate. In the year ended December 31, 2013, the Audit Committee held __ meetings.

 

Trustee Ownership

The following table indicates the dollar range of equity securities that each Trustee beneficially owned in the Funds as of the date of this SAI.

 

37
 

 

Name of Trustee Dollar Range of
Equity Securities in
the BDC Income
Fund
Dollar Range of
Equity Securities in
the Dividend and
Value Fund
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Trustee in
Family of Investment Companies
Non-Interested Trustees
Robert H. Burns None None __
Dr. Robert J. Froehlich None None __
Leslie D. Michelson None None __
Interested Trustees and Officers
Nicholas S. Schorsch None None __

 

Compensation

The Non-Interested Trustees were elected to the Board effective April 2013, and prior to that date had not received any compensation from the Trust. Effective April 2013, each Non-Interested Trustee receives from the Trust an annual fee of $10,000 representing the payment of an annual retainer plus $1,000 for each regular or special meeting attended. All Trustees are reimbursed for their travel expenses and other reasonable out-of-pocket expenses incurred in connection with attending Board meetings. The Board currently holds (1) four regularly scheduled Board meetings and (2) four regularly scheduled Audit Committee meetings. The Board may also hold special Board meetings and special meetings of its Audit Committee throughout the year. The interested Trustees receive no compensation directly from the Trust.

 

The table below details the amount of compensation the trustees are expected to receive from the Trust during the fiscal period ended March 31, 2014. The Trust does not have a bonus, profit sharing, pension or retirement plan.

 

Name of Person,
Position
Aggregate
Compensation from the
Trust
Pension or Retirement Benefits Accrued as
Part of the Fund
Estimated Annual
Benefits Upon
Retirement
Total Compensation
from Fund Complex
Paid to Trustees
Non-Interested Trustees
Robert H. Burns $ 15,000 $-0- $-0- $ 15,000
Dr. Robert J. Froehlich $ 15,000 $-0- $-0- $ 15,000
Leslie D. Michelson $ 15,000 $-0- $-0- $ 15,000
Interested Trustees
Nicholas S. Schorsch $  -0- $-0- $-0- $-0-

 

CODES OF ETHICS

 

The Trust, the Adviser, each Fund’s Sub-Adviser, and the Distributor have adopted a code of ethics under Rule 17j-1 of the 1940 Act (collectively, the “Ethics Codes”). Rule 17j-1 and the Ethics Codes are designed to prevent unlawful practices in connection with the purchase or sale of securities by covered personnel (“Access Persons”). The Ethics Codes permit Access Persons, subject to certain restrictions, to invest in securities, including securities that may be purchased or held by the Fund. Under the Ethics Codes, Access Persons may engage in personal securities transactions, but are required to report their personal securities transactions for monitoring purposes. In addition, certain Access Persons are required to obtain approval before investing in initial public offerings or private placements. The Ethics Codes can be reviewed and copied at the SEC’s Public Reference Room

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in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. The codes are available on the EDGAR database on the SEC’s website at www.sec.gov, and also may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, DC 20549.

 

DISTRIBUTOR

 

The Distributor for the Funds, Realty Capital Securities, LLC, is located at 405 Park Avenue, New York, NY 10022. The Distributor is not obligated to sell any specific amount of shares of each Fund and will sell shares, as agent for the Funds, on a continuous basis only against orders to purchase shares. The Distributor is an “affiliated person” of the Adviser, which is itself an affiliated person of the Funds.

 

CUSTODIAN

 

Union Bank, N.A. (“Union Bank”), Institutional Custody Services, 350 California Street, 6th Floor, San Francisco, CA 94104 serves as custodian of the Trust’s portfolio securities and other assets. Under the terms of the custody agreement between the Trust and Union Bank, Union Bank maintains cash, securities and other assets of the Fund. Union Bank is also required, upon the order of the Trust, to deliver securities held by Union Bank, and to make payments for securities purchased by the Trust.

 

TRANSFER AGENT

 

American National Stock Transfer, LLC (“ANST”), located at 405 Park Avenue, New York, NY 10022, serves as the transfer agent for the Trust. ANST has entered into an agreement with Gemini Fund Services to serve as sub-transfer agent to the Trust.

 

PROXY VOTING POLICIES AND PROCEDURES

 

The Board has delegated to the Adviser the responsibility to vote proxies related to the securities held in each Fund’s portfolio. Where a Fund is managed by a Sub-Adviser, the Adviser has further delegated the responsibility to vote proxies to the Sub-Adviser. Under this authority, the Adviser or the Sub-Adviser is required by the Board to vote proxies related to portfolio securities in the best interests of the Fund and its shareholders. The Adviser or Sub-Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review each Fund’s proxy voting record. [To be revised]

 

The Trust will annually disclose its complete proxy voting record on Form N-PX. The Trust’s most recent Form N-PX will available without charge, upon request by calling 1-866-271-9244. The Trust’s Form N-PX also is available on the SEC’s web site at www.sec.gov.

 

CONTROL PERSONS AND PRINCIPAL HOLDERS

 

AR Capital, LLC, an affiliate of the Adviser, owns all of the initial shares issued by the Funds prior to the commencement of investment operations and the public launch of the Funds. No other person owns of record or is known by the Funds to own beneficially 5% or more of the Funds’ outstanding equity securities.

 

 

INVESTMENT ADVISORY AND OTHER SERVICES

 

The Adviser

National Fund Advisors, LLC, located at 405 Park Avenue, Suite C, New York, NY 10022, serves as each Fund’s investment adviser. The Adviser is an indirect, wholly-owned subsidiary of AR Capital, LLC (“ARC”). ARC is primarily an investment adviser to REITs. ARC is a full-service investment banking, asset management and real estate advisory firm that serves both institutions and individual investors. ARC, both directly and through its affiliates, sponsors a variety of securities offerings, including publicly registered non-traded real estate investment trusts as well as fixed income note offerings, a publicly registered non-traded business development company and

39
 

other funds registered under the 1940 Act. ARC was formed by Nicholas S. Schorsch and William M. Kahane in 2007. Both Mr. Schorsch and Mr. Kahane have extensive backgrounds in real estate and capital markets, with expertise in transaction structure and execution. Collectively, ARC’s executive team has acquired and managed over $10 billion of real estate since 2001. The Adviser is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. The Adviser is a Delaware limited liability company formed in June 2011. As of the date of this SAI, the Adviser manages assets in excess of $__ million. Under the general supervision of the Board, the Adviser will supervise each Fund’s Sub-Adviser. In addition, the Adviser will supervise and provide oversight of the Funds’ service providers. The Adviser will furnish to the Fund necessary personnel for servicing the management of the Fund. The Adviser will compensate all Adviser personnel who provide services to the Funds.

 

The Sub-Advisers

 

Carnegie Asset Management, LLC

 

Carnegie Asset Management, LLC. (“Carnegie” or “CAM"), located at 1235 Westlakes Dr. Berwyn, PA 19312 is the Dividend and Value Fund’s investment sub-adviser. CAM is a Delaware LLC formed in April 2013. As of the date of this SAI, CAM has no assets under management. CAM will carry out the investment and reinvestment of the net assets of the Fund, furnish a continuous investment program with respect to the Fund, and determine which securities should be purchased, sold, or exchanged. [To be revised]

 

The Adviser’s annual advisory fee is [0.75%] of the Dividend and Value Fund’s average daily net assets. [The Adviser pays the Sub-Adviser an annual sub-advisory fee equal to [0.70%.]

 

BDCA Adviser, LLC

 

BDCA Adviser, LLC (“BDCA Adviser”), is the BDC Income Fund’s investment sub-adviser. BDCA Adviser currently manages in excess of [__]. [To be revised]

 

[The Adviser’s annual management fee is 1.00% of the Fund’s average daily net assets. The Adviser pays the Sub-Adviser an annual sub-advisory fee equal to [l%].]

 

The Administrator

RCS Advisory Services, LLC, located at 405 Park Avenue, 15th Floor, New York, NY 10022, serves as the Funds’ administrator. Pursuant to an administrative agreement, the Administrator provides the Fund with necessary administrative services. The Administrator has entered into a contract with Gemini Fund Services, LLC (“Gemini”, pursuant to which Gemini serves as sub-administrator and performs many of the administrative services for the Trust. In addition, the Administrator makes available the office space, equipment, personnel and facilities required to provide such administrative services to the Fund. For these administrative services, the Fund pays the Administrator a base annual fee (per Fund) as follows: 0.26% on the first $250 million of net assets; 0.245% on net assets from $250 million to $500 million; 0.23% on net assets from $500 million to $1 billion, and 0.22% on net assets greater than $1 billion. The base annual fee is subject to a $30,000 minimum annual fee per Fund. Because the Fund is new, no information is available regarding fees paid to the Administrator for administrative services.

 

PORTFOLIO MANAGERS

 

AR Capital Dividend and Value Fund

 

[Portfolio manager information to be included]

 

The following table provides information about the other accounts for which the portfolio manager is primarily responsible for. The reporting information is provided as of [       ], 2014:

 

Portfolio Manager Registered Investment Companies Other Pooled Investment Vehicles Other Accounts
  Number of Total Number of Total Number of Total
40
 

 

  Accounts Assets (in millions) Accounts Assets (in millions) Accounts Assets (in millions)
Brad Stanley [l] [l] [l] [l] [l] [l]
Mark Painter [l] [l] [l] [l] [l] [l]

 

AR Capital BDC Income Fund

 

[Portfolio manager information to be included]

 

The following table provides information about the other accounts for which the portfolio manager is primarily responsible for. The reporting information is provided as of [       ], 2014:

 

Portfolio Manager Registered Investment Companies Other Pooled Investment Vehicles Other Accounts
Number of Accounts Total Assets (in millions) Number of Accounts Total Assets (in millions) Number of Accounts Total Assets (in millions)
  [l] [l] [l] [l] [l] [l]

 

 

Potential Conflicts of Interest [To be revised]

[The portfolio managers’ management of “other accounts” may give rise to potential conflicts of interest in connection with their management of the respective Fund’s investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as a Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio manager could favor one account over another. Another potential conflict could include the portfolio manager’s knowledge about the size, timing and possible market impact of Fund trades, whereby the portfolio manager could use this information to the advantage of other accounts and to the disadvantage of a Fund. However, the Adviser and each Fund’s Sub-Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated. There can be no assurance that these policies and procedures will be effective, however.]

 

Compensation [To be revised]

[The portfolio managers’ annual compensation will be comprised of a base salary plus discretionary bonus, which may be delivered in cash, shares of the Fund managed, or common stock of an affiliated publically traded company. The discretionary bonus is based on several factors, including: (1) the success of the Fund managed in relation to the investment mandate set forth herein; (2) the success of the Adviser, Sub-Adviser and/or affiliates; and (3) the success of other accounts managed by the Adviser or Sub-Adviser.]

 

ALLOCATION OF BROKERAGE

 

Specific decisions to purchase or sell securities for a Fund are made by that Fund’s portfolio manager[s], who is an employee of a Sub-Adviser. Each Sub-Adviser is authorized by the trustees to allocate the orders placed on behalf of each Fund to brokers or dealers who may, but need not, provide research or statistical material or other services to the Funds, the Adviser or Sub-Advisers for the Funds’ use. Such allocation is to be in such amounts and proportions as the Sub-Adviser may determine.

 

In selecting a broker or dealer to execute each particular transaction, a Sub-Adviser will take the following into consideration:

 

·the best net price available;

 

·the reliability, integrity, and financial condition of the broker or dealer;

 

·the size of and difficulty in executing the order; and

 

41
 
·the value of the expected contribution of the broker or dealer to the investment performance of the Fund on a continuing basis

 

Brokers or dealers executing a portfolio transaction on behalf of a Fund may receive a commission in excess of the amount of commission another broker or dealer would have charged for executing the transaction if the Sub-Adviser determines in good faith that such commission is reasonable in relation to the value of brokerage and research services provided to the Fund. In allocating portfolio brokerage, the Sub-Adviser may select brokers or dealers who also provide brokerage, research, and other services to other accounts over which the Sub-Adviser exercises investment discretion. Some of the services received as the result of Fund transactions may primarily benefit accounts other than the Fund, while services received as the result of portfolio transactions effected on behalf of those other accounts may primarily benefit the Fund.

 

Affiliated Party Brokerage. The Adviser, the Sub-Advisers and the affiliates of the Adviser and each Sub-Adviser will not purchase securities or other property from, or sell securities or other property to, the Funds, except that a Fund may in accordance with rules under the 1940 Act engage in transactions with accounts that are affiliated with a Fund as a result of common officers, directors, advisers, members, managing general partners or common control. These transactions would be effected in circumstances in which the Adviser or Sub-Adviser determined that it would be appropriate for a Fund to purchase and another client to sell, or a Fund to sell and another client to purchase, the same security or instrument each on the same day.

 

The Adviser and each Sub-Adviser places its trades under a policy adopted by the trustees pursuant to Section 17(e) and Rule 17(e)(1) under the 1940 Act, which place limitations on the securities transactions effected through affiliated brokers. The policy of the Funds with respect to brokerage is reviewed by the trustees from time to time. Because of the possibility of further regulatory developments affecting the securities exchanges and brokerage practices generally, the foregoing practices may be modified.

 

DISTRIBUTION AND SHAREHOLDER SERVICE PLANS

 

Rule 12b-1

Rule 12b-1 permits an investment company to pay expenses associated with the distribution of its shares in accordance with a plan adopted by its board of directors and approved by its shareholders. Pursuant to such rule, the Funds’ Board has approved and entered into the Class A Plan and the Class C Plan for the Dividend and Value Fund, and the Class A Plan for the BDC Income Fund. The plans are described below.

 

In adopting the plans, the Board (including a majority of trustees who are not interested persons of the Fund, hereafter referred to as the independent trustees) determined that there was a reasonable likelihood that the plans would benefit the Funds and the affected class of the respective Fund’s shareholders. Some of the anticipated benefits include improved name recognition of a Fund generally and growing assets in the Fund, which helps retain and attract investment management talent, provides a better environment for improving Fund performance, and can lower the total expense ratio for that Fund. Pursuant to Rule 12b-1, information about revenues and expenses under the plans is presented to the Board quarterly.

 

Continuance of the plans must be approved by the Board, including a majority of the independent trustees, annually. The plans may be amended by a vote of the Board, including a majority of the independent trustees, except that the plans may not be amended to materially increase the amount spent for distribution without majority approval of the shareholders of the affected class. The plans terminate automatically in the event of an assignment and may be terminated upon a vote of a majority of the independent trustees or by a majority of the outstanding shareholder votes of the affected class.

 

All fees paid under the plans will be made in accordance with Section 2830 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

 

The Share Class Plans

Class A and C shares of the AR Capital Dividend and Value Fund and Class A shares of the BDC Income Fund are made available to persons purchasing through broker-dealers and other financial intermediaries that provide various administrative, shareholder and distribution services. The Funds’ Distributor enters into contracts with various

42
 

broker-dealers and other financial intermediaries, with respect to the sale of the Funds’ shares and/or the use of the Funds’ shares in various investment products or in connection with various financial services.

 

Certain recordkeeping and administrative services that would otherwise be performed by the Funds’ transfer agent may be performed by a financial intermediary for Class A and C investors in the Dividend and Value Fund, and Class A investors in the BDC Income Fund. In addition to such services, the financial intermediaries provide various individual shareholder and distribution services.

 

To enable the Funds’ shares to be made available through such financial intermediaries, and to compensate them for such services, the Funds’ Board has adopted the Class A and C Plans for the Dividend and Value Fund, and the Class A Plan for the BDC Income Fund. Pursuant to the plans, the following fees are paid and described further below.

 

AR Capital Dividend and Value Fund

Class A. Class A pays the Fund’s Distributor 0.50% annually of the average daily net asset value of the Class A shares, 0.25% of which is paid for certain ongoing individual shareholder and administrative services and 0.25% of which is paid for distribution services, including past distribution services. This payment is fixed at 0.50% and is not based on expenses incurred by the Distributor. The Distributor is currently waiving 0.25% of the fee for Class A shares. Such waiver is in effect until at least ______, 2015.

 

Class C. Class C pays the Fund’s Distributor 1.00% annually of the average daily net asset value of the Fund’s Class C shares, 0.25% of which is paid for certain ongoing individual shareholder and administrative services and 0.75% of which is paid for distribution services, including past distribution services. This payment is fixed at 1.00% and is not based on expenses incurred by the Distributor.

 

AR Capital BDC Income Fund

Class A. Class A pays the Fund’s Distributor 0.50% annually of the average daily net asset value of the Class A shares, 0.25% of which is paid for certain ongoing individual shareholder and administrative services and 0.25% of which is paid for distribution services, including past distribution services. This payment is fixed at 0.50% and is not based on expenses incurred by the Distributor. The Distributor is currently waiving 0.25% of the fee for Class A shares. Such waiver is in effect until at least ______, 2015.

 

The Distributor then makes these payments to the financial intermediaries (including underwriters and broker-dealers, who may use some of the proceeds to compensate sales personnel) who offer the Class A and Class C shares of the Dividend and Value Fund, and Class A shares of the BDC Income Fund for the services described below. No portion of these payments is used by the Distributor to pay for advertising, printing costs or interest expenses.

 

Payments may be made for a variety of individual shareholder services, including, but not limited to:

 

1.providing individualized and customized investment advisory services, including the consideration of shareholder profiles and specific goals;