CODI Compass Diversified

Inverse Floater Risk. An inverse floater is a derivative debt instrument created by depositing a municipal security in a trust. The trust then issues two securities: a short-term floating rate security, which is referred to as a "floater," and a long-term floating rate security, which is referred to as an "inverse floater." A floater entitles the holder to interest payments based on specified short-term interest rates and to an option to tender the security for repayment of its principal value. An inverse floater entitles the holder to interest payments based on a rate that varies inversely to changes in the rate payable on the floater and to a residual interest in the underlying municipal security held in trust. The Fund, as a holder of an inverse floater, retains the entire risk of loss on the underlying municipal security and thus could lose more than its principal investment. An inverse floater produces less income (and may produce no income) and may decline in value when the rate payable on the floater rises, and produces more income and may increase in value when the rate payable on the floater falls. An inverse floater involves leverage, which may magnify the Fund's gains or losses, and exhibits greater price and income volatility than a bond with a similar maturity. The tender of a floater, the failure of a remarketing agent to sell a floater or certain other events may require the dissolution of the trust or the liquidation of the underlying municipal security. In that event, the Fund, as a holder of an inverse floater, and thus a residual interest in the underlying municipal security, may lose some or all of its investment. An inverse floater is also subject to the risks associated with derivatives and municipal securities.