Organization
PowerShares DB Silver Fund (the Fund), a separate series of PowerShares DB Multi-Sector Commodity Trust
(the Trust), a Delaware statutory trust organized in seven separate series, was formed on August 3, 2006. DB Commodity Services LLC, a Delaware limited liability company (DBCS or the Managing Owner), seeded
the Fund with a capital contribution of $1,000 in exchange for 40 General Shares of the Fund. The fiscal year end of the Fund is December 31
st
. The term of the Fund is perpetual (unless terminated earlier in certain circumstances) as provided for in the Fourth
Amended and Restated Declaration of Trust and Trust Agreement of the Trust (the Trust Agreement).
The Fund offers
common units of beneficial interest (the Shares) only to certain eligible financial institutions (the Authorized Participants) in one or more blocks of 200,000 Shares, called a Basket. The proceeds from the offering of Shares
are invested in the Fund. The Fund commenced investment operations on January 3, 2007. The Fund commenced trading on the American Stock Exchange (now known as the NYSE Alternext US LLC (the NYSE Alternext)) on January 5, 2007
and, as of November 25, 2008, is listed on the NYSE Arca, Inc. (the NYSE Arca). The Fund also holds United States Treasury Obligations and other high credit quality short-term fixed income securities for deposit with the Funds
Commodity Broker as margin.
Fund Investment Overview
The Fund seeks to track the changes, whether positive or negative, in the level of the DBIQ Optimum Yield Silver Index Excess Return (the DBIQ-OY SI ER, or the Index)
over time, plus the excess, if any, of the Funds interest income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund. The Index is intended to
reflect the change in market value of the silver sector. The single commodity comprising the Index is silver (the Index Commodity).
The Commodity Futures Trading Commission (the CFTC) and/or commodity exchanges, as applicable, impose position limits on market participants trading in the commodity included in the Index. The
Index is comprised of futures contracts on the Index Commodity that expire in a specific month and trade on a specific exchange (the Index Contracts). As disclosed in the Funds Prospectus, if the Managing Owner determines in its
commercially reasonable judgment that it has become impracticable or inefficient for any reason for the Fund to gain full or partial exposure to the Index Commodity by investing in the Index Contract, the Fund may invest in (i) a futures
contract referencing the Index Commodity other than the Index Contract or, in the alternative, invest in (ii) other futures contracts not based on the Index Commodity ((i) and (ii) collectively, the Alternative Futures
Contracts) if, in the commercially reasonable judgment of the Managing Owner, such Alternative Futures Contracts tend to exhibit trading prices that correlate with the Index Commodity. Please see
http://www.dbxus.com
with respect to the
most recently available weighted composition of the Fund and the composition of the Index on the Base Date.
The Fund does not
employ leverage. As of December 31, 2012 and 2011, the Fund had $62,388,173 (or 100%) and $77,721,498 (or 100%), respectively, of its holdings of cash, United States Treasury Obligations and unrealized appreciation/depreciation on futures
contracts on deposit with its Commodity Broker. Of this, $5,082,000 (or 8.15%) and $14,060,925 (or 18.09%), respectively, of the Funds holdings of cash and United States Treasury Obligations are required to be deposited as margin in support of
the Funds long futures positions. For additional information, please see the audited Schedule of Investments as of December 31, 2012 and 2011 for details of the Funds portfolio holdings.
Index Composition
The Index is composed of one underlying Index Commodity. The closing level of the Index is calculated on each business day by the Index Sponsor based on the closing price of the futures contracts for the
underlying Index Commodity and the notional amount of such Index Commodity.
The composition of the Index may be adjusted in
the event that the Index Sponsor is not able to calculate the closing price of the Index Commodity.
The Index includes
provisions for the replacement of futures contracts as they approach maturity. This replacement takes place over a period of time in order to lessen the impact on the market for the futures contracts being replaced. With respect to the Index
Commodity, the Fund employs a rule-based approach when it rolls from one futures contract to another. The Index replaces the underlying futures contracts on an optimum yield basis.
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Rather than select a new futures contract based on a predetermined schedule (e.g., monthly),
the Index Commodity rolls to the futures contract which generates the best possible implied roll yield. The futures contract with a delivery month within the next thirteen months which generates the best possible implied roll yield will
be included in the Index. As a result, the Fund is able to potentially maximize the roll benefits in backwardated markets and minimize the losses from rolling in contangoed markets.
In general, as a futures contract approaches its expiration date, its price will move towards the spot price in a contangoed market.
Assuming the spot price does not change, this would result in the futures contract price decreasing and a negative implied roll yield. The opposite is true in a backwardated market. Rolling in a contangoed market will tend to cause a drag on the
Index Commoditys contribution to the Funds return while rolling in a backwardated market will tend to cause a push on the Index Commoditys contribution to the Funds return.
The DBIQ-Optimum Yield Silver is calculated in USD on both an excess return (unfunded) and total return (funded) basis.
The futures contract price for the Index Commodity will be the exchange closing price for the Index Commodity on each weekday when banks
in New York, New York are open (the Index Business Days). If a weekday is not an Exchange Business Day (as defined in the following sentence) but is an Index Business Day, the exchange closing price from the previous Index Business Day
will be used for the Index Commodity. Exchange Business Day means, in respect of the Index Commodity, a day that is a trading day for the Index Commodity on the relevant exchange (unless either an Index disruption event or force majeure
event has occurred).
On the first New York business day (the Verification Date) of each month, the Index
Commodity futures contract will be tested in order to determine whether to continue including it in the Index. If the Index Commodity futures contract requires delivery of the underlying commodity in the next month, known as the Delivery Month, a
new Index Commodity futures contract will be selected for inclusion in the Index. For example, if the first New York business day is May 1, 2013, and the Delivery Month of the Index Commodity futures contract currently in such Index is June
2013, a new Index Commodity futures contract with a later Delivery Month will be selected.
For the
underlying Index Commodity of the Index, the new Index Commodity futures contract selected will be the Index Commodity futures contract with the best possible implied roll yield based on the closing price for each eligible Index
Commodity futures contract. Eligible Index Commodity futures contracts are any Index Commodity futures contracts having a Delivery Month (i) no sooner than the month after the Delivery Month of the Index Commodity futures contract currently in
the Index, and (ii) no later than the 13
th
month
after the Verification Date. For example, if the first New York business day is May 1, 2013 and the Delivery Month of an Index Commodity futures contract currently in the Index is June 2013, the Delivery Month of an eligible new Index Commodity
futures contract must be between July 2013 and May 2014. The implied roll yield is then calculated and the futures contract on the Index Commodity with the best possible implied roll yield is then selected. If two futures contracts have the same
implied roll yield, the futures contract with the minimum number of months prior to the Delivery Month is selected.
After the selection of the replacement futures contract, the monthly roll for the Index Commodity subject to a roll in that particular month unwinds the old futures contract and enters a position in the
new futures contract. This takes place between the 2
nd
and
6
th
Index Business Day of the month.
On each day during the roll period, new notional holdings are calculated. The calculations for the futures contracts on the old Index
Commodity that are leaving the Index and the futures contracts on the new Index Commodity are then calculated.
On all days
that are not monthly index roll days, the notional holdings of the Index Commodity future remains constant.
General
DBIQ, DBLCI, and Deutsche Bank Liquid Commodity Index are trademarks of Deutsche Bank AG London (the
Index Sponsor).Trademark applications in the United States are pending with respect to the Trust, the Fund and aspects of the Index. Any use of these trademarks must be with the consent of or under license from the Index Sponsor. The
Trust, the Fund and the Managing Owner have been licensed by the Index Sponsor to use the above noted trademarks. The Index Sponsor is an affiliate of the Trust, the Fund and the Managing Owner.
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The Index Sponsor obtains information for inclusion in, or for use in the calculation of,
the Index from sources the Index Sponsor considers reliable. None of the Index Sponsor, the Managing Owner, the Fund, or any of their respective affiliates accepts responsibility for or guarantees the accuracy and/or completeness of the Index or any
data included in the Index.
A patent application directed to the creation and operation of the Trust is pending at the United
States Patent and Trademark Office.
The Trustee
Under the Trust Agreement, Wilmington Trust Company, the Trustee of the Fund, has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Trust and the
Fund. The Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner. The Trustee is compensated by the Managing
Owner. Under the Trust Agreement, the Managing Owner, from the assets of the Fund, will indemnify the Trustee for any liability or expense relating to the ongoing operations and termination of the Fund incurred without gross negligence or willful
misconduct of the Trustee.
The Managing Owner
The Managing Owner was formed on May 23, 2005. The Managing Owner is an indirect wholly owned subsidiary of Deutsche Bank AG. The Managing Owner serves as the commodity pool operator and commodity
trading advisor of the Fund. The Managing Owner was formed to be the managing owner of investment vehicles such as the Trust and the Fund and has been managing such investment vehicles since January 2006. The Managing Owner is registered as a
commodity pool operator and commodity trading advisor with the CFTC and is a member of the National Futures Association (the NFA). As a registered commodity pool operator and commodity trading advisor, with respect to the Fund, the
Managing Owner must comply with various regulatory requirements under the Commodity Exchange Act (the CEAct) and the rules and regulations of the CFTC and the NFA, including investor protection requirements, antifraud prohibitions,
disclosure requirements, and reporting and recordkeeping requirements. The Managing Owner is also subject to periodic inspections and audits by the CFTC and NFA.
The Managing Owners main business offices are located at 60 Wall Street, New York, New York 10005, telephone (212) 250-5883.
The Fund pays the Managing Owner a management fee (the Management Fee) monthly in arrears, in an amount equal to
0.75% per annum of the daily net asset value of the Fund. The Management Fee is paid in consideration of the Managing Owners commodity futures trading advisory services.
Pursuant to the Trust Agreement, the Fund will indemnify the Managing Owner against any losses, judgments, liabilities, expenses and
amounts paid in settlement of any claims sustained by it in connection with its activities on behalf of the Fund incurred without negligence or misconduct.
The Commodity Broker
Deutsche Bank Securities Inc., a Delaware
corporation, serves as the Funds clearing broker (the Commodity Broker). The Commodity Broker is also an indirect wholly-owned subsidiary of Deutsche Bank AG and an affiliate of the Managing Owner. In its capacity as clearing
broker, the Commodity Broker executes and clears the Funds futures transactions and performs certain administrative and custodial services for the Fund. As custodian of the Funds assets, the Commodity Broker is responsible, among other
things, for providing periodic accountings of all dealings and actions taken by the Trust on behalf of the Fund during the reporting period, together with an accounting of all securities, cash or other indebtedness or obligations held by it or its
nominees for or on behalf of the Fund.
A variety of executing brokers execute futures transactions on behalf of the Fund.
Such executing brokers give-up, or transfer for clearing, all such transactions to the Commodity Broker. The Commodity Broker is registered with the CFTC as a futures commission merchant and is a member of the NFA in such capacity.
The Fund pays to the Commodity Broker all brokerage commissions, including applicable exchange fees, NFA fees, give-up fees,
pit brokerage fees and other transaction related fees and expenses charged in connection with trading activities. The Commodity Brokers brokerage commissions and trading fees are determined on a contract-by-contract basis. Brokerage
commissions and fees in any future fiscal year or any part of any future fiscal year may be greater. On average, total charges paid to the Commodity Broker were less than $10.00 per round-turn trade
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for the Years Ended December 31, 2012, 2011 and 2010.
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A round-turn trade is a completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.
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The Administrator, Custodian and Transfer Agent
The Managing Owner, on behalf of the Fund, has appointed The Bank of New York Mellon as the administrator (the Administrator)
of the Fund and has entered into an Administration Agreement in connection therewith. The Bank of New York Mellon serves as custodian (the Custodian) of the Fund and has entered into a Global Custody Agreement (the Custody
Agreement) in connection therewith. The Bank of New York Mellon serves as the transfer agent (the Transfer Agent) of the Fund and has entered into a Transfer Agency and Service Agreement in connection therewith.
The Bank of New York Mellon, a banking corporation organized under the laws of the State of New York with trust powers, has an office at
2 Hanson Place, Brooklyn, New York 11217. The Bank of New York Mellon is subject to supervision by the New York State Banking Department and the Board of Governors of the Federal Reserve System.
Pursuant to the Administration Agreement, the Administrator performs or supervises the performance of services necessary for the
operation and administration of the Fund (other than making investment decisions), including receiving and processing orders from Authorized Participants to create and redeem Baskets, net asset value calculations, accounting and other fund
administrative services. The Administrator retains certain financial books and records, including: Basket creation and redemption books and records, fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses,
the registrar, transfer journals and related details, and trading and related documents received from futures commission merchants.
The Administration Agreement will continue in effect unless terminated on at least 90 days prior written notice by either party to the other party. Notwithstanding the foregoing, the Administrator
may terminate the Administration Agreement upon 30 days prior written notice if the Fund has materially failed to perform its obligations under the Administration Agreement.
The Administration Agreement provides for the exculpation and indemnification of the Administrator from and against any costs, expenses,
damages, liabilities or claims (other than those resulting from the Administrators own bad faith, negligence or willful misconduct) which may be imposed on, incurred by or asserted against the Administrator in performing its obligations or
duties under the Administration Agreement.
The Administrators monthly fees are paid on behalf of the Fund by the
Managing Owner out of the Management Fee.
The Administrator and any of its affiliates may from time-to-time purchase or sell
Shares for their own account, as agent for their customers and for accounts over which they exercise investment discretion.
The Administrator receives a transaction processing fee in connection with orders from Authorized Participants to create or redeem
Baskets in the amount of $500 per order. These transaction processing fees are paid directly by the Authorized Participants and not by the Fund.
The Distributor
ALPS Distributors, Inc. (the Distributor)
provides certain distribution services to the Fund. Pursuant to the Distribution Services Agreement among the Managing Owner, in its capacity as managing owner of the Fund, the Fund and the Distributor, the Distributor assists the Managing Owner and
the Administrator with certain functions and duties relating to distribution and marketing services to the Fund including reviewing and approving marketing materials.
The Distribution Services Agreement is terminable without penalty on sixty days written notice by the Managing Owner or by the Distributor. The Distribution Services Agreement will automatically
terminate in the event of its assignment.
Pursuant to the Distribution Services Agreement, the Fund will indemnify and hold
harmless the Distributor and each of its directors and officers and each person, if any, who controls the Distributor within the meaning of Section 15 of the 1933 Act, against any loss, liability, claim, damages or expenses (including the
reasonable cost of investigating or defending any alleged loss, liability,
4
claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising by reason of any person acquiring any Shares, based upon the ground that the registration
statement, prospectus, statement of additional information, shareholder reports or other information filed or made public by the Fund (as from time-to-time amended) included an untrue statement of a material fact or omitted to state a material fact
required to be stated or necessary in order to make the statements not misleading under the 1933 Act or any other statute or the common law.
Invesco PowerShares Capital Management LLC
Under the License Agreement among Invesco PowerShares Capital Management LLC (the Licensor) and the Managing Owner in its own capacity and in its capacity as managing owner of the Fund (the
Fund and the Managing Owner, collectively, the Licensees), the Licensor granted to each Licensee a non-exclusive license to use the PowerShares
®
trademark (the Trademark) anywhere in the world, solely in connection with the marketing and promotion of the Fund and to use or refer to the
Trademark in connection with the issuance and trading of the Fund as necessary.
Invesco Distributors, Inc.
Through a marketing agreement between the Managing Owner and Invesco Distributors, Inc. (Invesco Distributors), an affiliate
of Invesco PowerShares Capital Management LLC (Invesco PowerShares), the Managing Owner, on behalf of the Fund, has appointed Invesco Distributors as a marketing agent. Invesco Distributors assists the Managing Owner and the
Administrator with certain functions and duties such as providing various educational and marketing activities regarding the Fund, primarily in the secondary trading market, which activities include, but are not limited to, communicating the
Funds name, characteristics, uses, benefits, and risks, consistent with the prospectus. Invesco Distributors will not open or maintain customer accounts or handle orders for the Fund. Invesco Distributors engages in public seminars, road
shows, conferences, media interviews, and distributes sales literature and other communications (including electronic media) regarding the Fund.
Tax Reporting
The Fund has retained the services of PricewaterhouseCoopers
LLP to assist with certain tax reporting requirements of the Fund and its Shareholders.
Regulation
Futures exchanges in the United States are subject to regulation under the CEAct by the CFTC, the governmental agency having
responsibility for regulation of futures exchanges and trading on those exchanges. No U.S. governmental agency regulates the over-the-counter (the OTC) foreign exchange markets.
The CEAct and the CFTC also regulate the activities of commodity trading advisors and commodity pool operators
and the CFTC has adopted regulations with respect to certain of such persons activities. Pursuant to its authority, the CFTC requires a commodity pool operator (such as the Managing Owner) to keep accurate, current and orderly records with
respect to each pool it operates. The CFTC may suspend the registration of a commodity pool operator if the CFTC finds that the operator has violated the CEAct or regulations thereunder and in certain other circumstances. Suspension, restriction or
termination of the Managing Owners registration as a commodity pool operator would prevent it, until such time (if any) as such registration were to be reinstated, from managing, and might result in the termination of the Fund. The CEAct gives
the CFTC similar authority with respect to the activities of commodity trading advisors, such as the Managing Owner. If the registration of a managing owner as a commodity trading advisor were to be terminated, restricted or suspended, the managing
owner would be unable, until such time (if any) as such registration were to be reinstated, to render trading advice to the Fund. The Fund itself is not registered with the CFTC in any capacity.
The CEAct requires all futures commission merchants, such as the Commodity Broker, to meet and maintain specified fitness and
financial requirements, segregate customer funds from proprietary funds and account separately for all customers funds and positions, and to maintain specified books and records open to inspection by the staff of the CFTC.
The CEAct also gives the states certain powers to enforce its provisions and the regulations of the CFTC.
Shareholders are afforded certain rights for reparations under the CEAct. Shareholders may also be able to maintain a private right of
action for certain violations of the CEAct. The CFTC has adopted rules implementing the reparation provisions of the CEAct which provide that any person may file a complaint for a reparations award with the CFTC for violation of the CEAct against a
floor broker, futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, and their respective associated persons.
5
Pursuant to authority in the CEAct, the NFA was formed and registered with the CFTC as a
registered futures association. At the present time, the NFA is the only non-exchange self-regulatory organization for commodities professionals. NFA members are subject to NFA standards relating to fair trade practices, financial
condition, and consumer protection. As the self-regulatory body of the commodities industry, the NFA promulgates rules governing the conduct of commodity professionals and disciplines those professionals who do not comply with such standards. The
CFTC has delegated to the NFA responsibility for the registration of commodity trading advisors, commodity pool operators, futures commission merchants, introducing brokers and their respective associated persons and floor brokers. The Commodity
Broker and the Managing Owner are members of the NFA (the Fund itself is not required to become a member of the NFA).
The
CFTC has no authority to regulate trading on foreign commodity exchanges and markets.
Employees
The Fund has no employees.
Available Information
The Fund files with or submits to the SEC annual, quarterly and current reports and other information meeting the informational
requirements of the Exchange Act. These reports are available on the Managing Owners website at
http://dbfunds.db.com
. Investors may also inspect and copy these reports, proxy statements and other information, and related exhibits and
schedules, at the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SECs Internet site at
http://www.sec.gov
.
The Fund also posts monthly performance reports and its annual report, as required by the CFTC, on the Managing Owners website at
the address listed above.
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An
investment in the securities of the Fund involves a high degree of risk. Investors should consider carefully all of the risks described below, together with the other information contained in this report and the Prospectus, before making a decision
to invest in the securities of the Fund. If any of the following risks occur, the business, financial condition and results of operations of the Fund may be adversely affected.
Investment and Trading Related Risks
The Value of the Shares Relates
Directly to the Value of the Futures Contracts and Other Assets Held by The Fund and Fluctuations in the Price of These Assets Could Materially Adversely Affect an Investment in The Funds Shares.
The Shares are designed to reflect as closely as possible the changes, positive or negative, in the level of the Index, over time, through
its portfolio of exchange traded futures contracts on the Index Commodity. The value of the Shares relates directly to the value of its portfolio, less the liabilities (including estimated accrued but unpaid expenses) of the Fund. The price of the
Index Commodity may fluctuate widely. Several factors may affect the price of the Index Commodity, including, but not limited to:
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Global supply and demand of the Index Commodity which may be influenced by such factors as forward selling by the various commodities producers,
purchases made by the commodities producers to unwind their hedge positions and production and cost levels in the major markets of the Index Commodity;
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Domestic and foreign interest rates and investors expectations concerning interest rates;
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Domestic and foreign inflation rates and investors expectations concerning inflation rates;
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Investment and trading activities of mutual funds, hedge funds and commodity funds; and
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Global or regional political, economic or financial events and situations.
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Net Asset Value May Not Always Correspond to Market Price and, as a Result, Baskets May be Created or Redeemed at a Value that Differs from the Market Price of the Shares.
The net asset value per Share will change as fluctuations occur in the market value of its portfolio. Investors should be aware that the
public trading price of a Basket of Shares may be different from the net asset value of a Basket of Shares (i.e., 200,000 Shares may trade at a premium over, or a discount to, net asset value of a Basket of Shares) and similarly the public trading
price per Share may be different from its net asset value per Share. Consequently, an Authorized Participant may be able to create or redeem a Basket of Shares at a discount or a premium to the public trading price per Share. This price difference
may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for Shares are closely related, but not identical to, the same forces influencing the prices of the Index Commodity comprising the Index,
trading individually or in the aggregate at any point in time. Investors also should note that the size of the Fund in terms of total assets held may change substantially over time and from time-to-time as Baskets are created and redeemed.
Authorized Participants or their clients or customers may have an opportunity to realize a riskless profit if they can
purchase a Basket at a discount to the public trading price of the Shares or can redeem a Basket at a premium over the public trading price of the Shares. The Managing Owner expects that the exploitation of such arbitrage opportunities by Authorized
Participants and their clients and customers will tend to cause the public trading price to track net asset value per Share closely over time.
The value of a Share may be influenced by non-concurrent trading hours between the NYSE Arca and the various futures exchanges on which the Index Commodity is traded. While the Shares trade on the NYSE
Arca from 9:30 a.m. to 4:00 p.m. Eastern Standard Time, the trading hours for the futures exchanges on which the Index Commodity is traded may not necessarily coincide during all of this time. For example, while the Shares trade on the NYSE Arca
until 4:00 p.m. Eastern Standard Time, liquidity in the global silver market will be reduced after the close of the COMEX at 2:30 p.m. Eastern Standard Time. As a result, during periods when the NYSE Arca is open and the futures exchanges on which
the Index Commodity is traded is closed, trading spreads and the resulting premium or discount on the Shares may widen and, therefore, increase the difference between the price of the Shares and the net asset value of the Shares.
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Regulatory and Exchange Position Limits and Other Rules May Restrict the Creation of Baskets and the
Operation of the Fund.
CFTC and commodity exchange rules impose speculative position limits on market participants,
including the Fund, trading in certain commodities. These position limits prohibit any person from holding a position of more than a specific number of such futures contracts. The purposes of speculative position limits are to diminish, eliminate or
prevent sudden or unreasonable fluctuations or unwarranted changes in the prices of futures contracts.
The CFTC and commodity
exchange rules impose speculative position limits on market participants trading in the Index Commodity included in the Index (Silver, the Affected Index Commodity). Currently, speculative position limits (i) for corn, oats, wheat,
soybean, soybean oil and cotton are determined by the CFTC and (ii) for all other commodities are determined by the futures exchanges. Pursuant to the statutory mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the
Dodd-Frank Act, which was signed into law on July 21, 2010, the CFTC adopted final regulations on October 18, 2011, or the Regulations, which, in pertinent part, impose new federal position limits on futures and options on a subset of
energy, metal, and agricultural commodities, or the Referenced Contracts, and economically equivalent swaps. The Regulations were to go into effect 60 days after the term swap is further defined pursuant to Section 721 of the
Dodd-Frank Act. However, on September 28, 2012, a federal court issued an order vacating the Regulations. At this time, it is not certain whether the CFTC will appeal the federal courts order or propose new position limits rules identical
to the Regulations but in conformity with procedural guidelines set forth in the federal courts order.
Generally,
speculative position limits in the physical delivery markets are set at a stricter level during the spot month, the month when the futures contract matures and becomes deliverable, versus the limits set for all other months. If the Managing Owner
determines that the Funds trading may be approaching any of these speculative position limits, the Fund may reduce its trading in that commodity or trade in other commodities or instruments that the Index Sponsor determines comply with the
rules and goals of the Index. Below is a chart that sets forth certain relevant information, including current speculative position limits for the Affected Index Commodity that any person may hold, separately or in combination, net long or net
short, for the purchase or sale of any commodity futures contract or, on a futures-equivalent basis, options thereon. Speculative position limit levels remain subject to change by the CFTC or the relevant exchanges.
Exchanges may also establish accountability levels applicable to futures contracts. An exchange may order a person who holds or controls
aggregate positions in excess of specified position accountability levels not to further increase the positions, to comply with any prospective limit which exceeds the size of the position owned or controlled, or to reduce any open position which
exceeds position accountability levels if the exchange determines that such action is necessary to maintain an orderly market.
Under current regulations, subject to any relevant exemptions, traders, such as the Fund, may not exceed speculative position limits,
either individually or in the aggregate with other persons with whom they are under common control or ownership. Under the vacated Regulations, the CFTC would have certain persons to aggregate exchange listed futures and economically equivalent swap
positions owned or controlled by such persons.
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Affected Index Commodity
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Exchange
(Symbol)
2
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Exchange Position Limits
3
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Silver
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COMEX (SI)
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1,500 Spot Month
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6,000 Single Month
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6,000 All Months Combined
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Legend:
2
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COMEX means the Commodity Exchange Inc., New York, or its successor.
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3
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Subject to the Position Limit, Position Accountability and Reportable Level table in the Interpretations & Special Notices section at the end of Chapter 5 of
each exchanges rulebook.
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Because the Fund may be subject to position limits, and, consequently, the
Funds ability to issue new Baskets, or the Funds ability to reinvest income in additional futures contracts corresponding to the Affected Index Commodity may be limited to the extent these activities would cause the Fund to exceed its
applicable position limits. Limiting the size of the Fund may affect the correlation between the price of the Shares, as traded on the NYSE Arca, and the net asset value of the Shares. That is, the inability to create additional Baskets could result
in Shares trading at a premium or discount to net asset value of the Shares.
Under the vacated Regulations, the CFTC, among
other things, established speculative position limits on exchange listed futures and options on physical commodities (including certain energy, metals and agricultural products) and economically equivalent over-the-counter derivatives. Under the
vacated Regulations the CFTC also established aggregate position limits for certain other contracts
8
based on the same underlying commodity, including certain contracts traded on non-U.S. exchanges. Depending on the outcome of any future CFTC or futures exchange rulemaking, as applicable, the
rules concerning position limits may be amended in a manner that is detrimental to the Fund. For example, if the amended rules are detrimental to the Fund, its ability to issue new Baskets, or reinvest income in additional futures contracts
corresponding to the Affected Index Commodity may be limited to the extent these activities would cause the Fund to exceed the applicable position limits. Limiting the size of the Fund may affect the correlation between the price of the Shares, as
traded on the NYSE Arca, and the net asset value of the Shares. That is, the inability to create additional Baskets could result in Shares in the Fund trading at a premium or discount to net asset value of the Shares.
The Funds Performance May Not Always Replicate Exactly the Changes in the Level of the Index.
It is possible that the Funds performance may not fully replicate the changes in the level of the Index due to disruptions in the
markets for the Index Commodity, the imposition of speculative position limits or due to other extraordinary circumstances. As the Fund approaches or reaches position limits with respect to the Index Contract, the Fund may commence investing in
other futures contracts based on the Index Commodity and in futures contracts based on commodities other than the Index Commodity that, in the commercially reasonable judgment of the Managing Owner, tend to exhibit trading prices that correlate with
the Index Contract. In addition, the Fund is not able to replicate exactly the changes in the levels of the Index because the total return generated by the Fund is reduced by expenses and transaction costs, including those incurred in connection
with the Funds trading activities, and increased by interest income from the Funds holdings of short-term high credit quality fixed income securities. Tracking the Index requires trading of the Funds portfolio with a view to
tracking the Index over time and is dependent upon the skills of the Managing Owner and its trading principals, among other factors.
The Fund Is Not Actively Managed and Tracks the Index During Periods in which the Index Is Flat or Declining as well as when the Index Is Rising.
The Fund is not actively managed by traditional methods. Therefore, if positions in the Index Commodity are declining
in value, the Fund will not close out such positions, except in connection with a change in the composition or weighting of the Index. The Managing Owner will seek to cause the net asset value of the Fund to track the Index during periods in which
the Index is flat or declining as well as when the Index is rising.
The NYSE Arca May Halt Trading in the Shares of the Fund Which
Would Adversely Impact Your Ability to Sell Shares.
The Shares are listed for trading on the NYSE Arca under the
market symbol DBS. Trading in Shares may be halted due to market conditions or, in light of NYSE Arca rules and procedures, for reasons that, in the view of the NYSE Arca, make trading in Shares inadvisable. In addition, trading is
subject to trading halts caused by extraordinary market volatility pursuant to circuit breaker rules that require trading to be halted for a specified period based on a specified market decline. There can be no assurance that the
requirements necessary to maintain the listing of the Shares will continue to be met or will remain unchanged. The Fund will be terminated if its Shares are delisted.
The Lack of An Active Trading Market for the Shares May Result in Losses on Your Investment in the Fund at the Time of Disposition of Your Shares.
Although the Shares are listed and traded on the NYSE Arca, there can be no guarantee that an active trading market for the Shares will be
maintained. If you need to sell your Shares at a time when no active market for them exists, the price you receive for your Shares, assuming that you are able to sell them, likely will be lower than that you would receive if an active market did
exist.
The Shares Are A Relatively New Securities Product and Their Value Could Decrease if Unanticipated Operational or Trading
Problems Arise.
The mechanisms and procedures governing the creation, redemption and offering of the Shares have been
developed specifically for this securities product. Consequently, there may be unanticipated problems or issues with respect to the mechanics of the operations of the Fund and the trading of the Shares that could have a material adverse effect on an
investment in the Shares. In addition, although the Fund is not actively managed by traditional methods, to the extent that unanticipated operational or trading problems or issues arise, the Managing Owners past experience and
qualifications may not be suitable for solving these problems or issues.
9
As the Managing Owner and its Principals have Been Operating Investment Vehicles like the Fund Since
January 2006, their Experience may be Inadequate or Unsuitable to Manage the Fund.
The Managing Owner was formed to be
the managing owner of investment vehicles such as the Fund and has been managing such investment vehicles since January 2006. The past performances of the Managing Owners management of other commodity pools are no indication of its ability to
manage investment vehicles such as the Fund. If the experience of the Managing Owner and its principals is not adequate or suitable to manage investment vehicles such as the Fund, the operations of the Fund may be adversely affected.
You May Not Rely on Past Performance or Index Results in Deciding Whether to Buy Shares.
Although past performance is not necessarily indicative of future results, the Funds performance history might (or might not)
provide you with more information on which to evaluate an investment in the Fund. Likewise, the Index has a history which might (or might not) be indicative of future Index results, or of the future performance of the Fund. Therefore, you will have
to make your decision to invest in the Fund without relying on the Funds past performance history or the Indexs closing level history.
Fewer Representative Commodities May Result In Greater Index Volatility.
The Index is concentrated in terms of the number of commodities represented. The Fund is concentrated in a single commodity. You should be aware that other commodities indexes are more diversified in
terms of both the number and variety of commodities included. Concentration in fewer commodities may result in a greater degree of volatility in an Index and the net asset value of the Fund which tracks the Index under specific market conditions and
over time.
Price Volatility May Possibly Cause the Total Loss of Your Investment.
Futures contracts have a high degree of price variability and are subject to occasional rapid and substantial changes. Consequently, you
could lose all or substantially all of your investment in the Fund.
The following table* reflects various measures of
volatility** of the Index as calculated on an excess return basis:
|
|
|
|
|
Volatility Type
|
|
Volatility
|
|
Daily volatility over full history
|
|
|
26.83
|
%
|
Average rolling 3 month daily volatility
|
|
|
24.99
|
%
|
Monthly return volatility
|
|
|
27.96
|
%
|
Average annual volatility
|
|
|
24.51
|
%
|
The following table reflects the daily volatility on an annual basis of the Index:
|
|
|
|
|
Year***
|
|
Daily
Volatility
|
|
1988
|
|
|
10.76
|
%
|
1989
|
|
|
18.53
|
%
|
1990
|
|
|
19.38
|
%
|
1991
|
|
|
23.42
|
%
|
1992
|
|
|
15.66
|
%
|
1993
|
|
|
28.36
|
%
|
1994
|
|
|
23.28
|
%
|
1995
|
|
|
26.38
|
%
|
1996
|
|
|
17.64
|
%
|
1997
|
|
|
24.66
|
%
|
1998
|
|
|
29.20
|
%
|
1999
|
|
|
21.73
|
%
|
2000
|
|
|
14.42
|
%
|
2001
|
|
|
17.20
|
%
|
2002
|
|
|
17.43
|
%
|
2003
|
|
|
20.32
|
%
|
2004
|
|
|
35.48
|
%
|
2005
|
|
|
21.33
|
%
|
2006
|
|
|
41.21
|
%
|
2007
|
|
|
21.28
|
%
|
2008
|
|
|
43.01
|
%
|
2009
|
|
|
31.13
|
%
|
2010
|
|
|
26.40
|
%
|
2011
|
|
|
39.26
|
%
|
2012
|
|
|
25.27
|
%
|
*
|
As of December 31, 2012. Past Index levels are not necessarily indicative of future changes, positive or negative, in the Index levels.
|
**
|
Volatility, for these purposes means the following:
|
Daily Volatility
: The relative rate at which the price of the Index moves up and down, found by calculating the annualized standard deviation of the daily change in price.
10
Monthly Return Volatility
: The relative rate at which the price of the Index moves up
and down, found by calculating the annualized standard deviation of the monthly change in price.
Average Annual
Volatility
: The average of yearly volatilities for a given sample period. The yearly volatility is the relative rate at which the price of the Index moves up and down, found by calculating the annualized standard deviation of the daily change in
price for each business day in the given year.
***
|
As of December 31, except 1998 which is as of July 31.
|
Unusually Long Peak-to-Valley Drawdown Periods With Respect To the Index May Be Reflected in Equally Long Peak-to-Valley Drawdown Periods with Respect to the Performance of the Shares.
Although past Index levels are not necessarily indicative of future Index levels, the peak-to-valley drawdown periods
that the Index has experienced have been unusually long and has lasted for multi-year drawdown periods.
Because it is
expected that the Funds performance will track the change of the underlying Index, the Fund would suffer a continuous drawdown during the period that the Index suffers such a drawdown period, and in turn, the value of your Shares will also
suffer.
Fees and Commissions are Charged Regardless of Profitability and May Result in Depletion of Assets.
The Fund is directly subject to the fees and expenses described herein which are payable irrespective of profitability. Such fees and
expenses include asset-based fees of 0.75% per annum. Additional charges include brokerage fees of approximately 0.04% per annum in the aggregate and selling commissions. The Fund is expected to earn interest income at an annual rate of
0.07% per annum, based upon the yield on 3-month U.S. Treasury bills as of January 31, 2013. Because the Funds current interest income does not exceed its fees and expenses (other than selling commissions), the Fund will need to have
a positive performance that exceeds the difference between the Funds interest income and its fees and expenses (other than selling commissions) in order to break even. If the aggregate of the Funds performance and interest income do not
exceed the Funds fees and expenses described herein, then the expenses of the Fund could, over time, result in losses to your investment therein. You may never achieve profits, significant or otherwise.
You Cannot Be Assured of the Managing Owners Continued Services, Which Discontinuance May Be Detrimental to the Fund.
You cannot be assured that the Managing Owner will be willing or able to continue to service the Fund for any length of time. If the
Managing Owner discontinues its activities on behalf of the Fund, the Fund may be adversely affected.
Possible Illiquid Markets May
Exacerbate Losses.
Futures positions cannot always be liquidated at the desired price. It is difficult to execute a
trade at a specific price when there is a relatively small volume of buy and sell orders in a market. A market disruption, such as when foreign governments may take or be subject to political actions which disrupt the markets in their currency or
major exports, can also make it difficult to liquidate a position.
11
There can be no assurance that market illiquidity will not cause losses for the Fund. The
large size of the positions which the Fund may acquire increases the risk of illiquidity by both making its positions more difficult to liquidate and increasing the losses incurred while trying to do so.
You May Be Adversely Affected by Redemption Orders that Are Subject To Postponement, Suspension or Rejection Under Certain Circumstances.
The Fund may, in its discretion, suspend the right of redemption or postpone the redemption settlement date,
(1) for any period during which an emergency exists as a result of which the redemption distribution is not reasonably practicable, or (2) for such other period as the Managing Owner determines to be necessary for the protection of the
Shareholders. In addition, the Fund will reject a redemption order if the order is not in proper form as described in the participant agreement among the Authorized Participant, the Managing Owner and the Managing Owner in its capacity as managing
owner of the Fund or if the fulfillment of the order, in the opinion of its counsel, might be unlawful. Any such postponement, suspension or rejection could adversely affect a redeeming Authorized Participant. For example, the resulting delay may
adversely affect the value of the Authorized Participants redemption proceeds if the net asset value of the Fund declines during the period of delay. The Fund disclaims any liability for any loss or damage that may result from any such
suspension or postponement.
Because the Futures Contracts Have No Intrinsic Value, the Positive Performance of Your Investment Is
Wholly Dependent Upon an Equal and Offsetting Loss.
Futures trading is a risk transfer economic activity. For every
gain there is an equal and offsetting loss rather than an opportunity to participate over time in general economic growth. Unlike most alternative investments, an investment in Shares does not involve acquiring any asset with intrinsic value.
Overall stock and bond prices could rise significantly and the economy as a whole prosper while Shares trade unprofitably.
Failure of
Commodity Futures Markets to Exhibit Low to Negative Correlation to General Financial Markets Will Reduce Benefits of Diversification and May Exacerbate Losses to Your Portfolio.
Historically, commodity futures returns have tended to exhibit low to negative correlation with the returns of other assets such as
stocks and bonds. Although commodity futures trading can provide a diversification benefit to investor portfolios because of its low to negative correlation with other financial assets, the fact that the Index is not 100% negatively correlated with
financial assets such as stocks and bonds means that the Fund cannot be expected to be automatically profitable during unfavorable periods for the stock or bond market, or vice-versa. If the Shares perform in a manner that correlates with the
general financial markets or do not perform successfully, you will obtain no diversification benefits by investing in the Shares and the Shares may produce no gains to offset your losses from other investments.
Shareholders Will Not Have the Protections Associated With Ownership of Shares in an Investment Company Registered Under the Investment Company Act
of 1940.
The Fund is not registered as an investment company under the Investment Company Act of 1940, and is not
required to register under such Act. Consequently, Shareholders do not have the regulatory protections provided to investors in registered and regulated investment companies.
Trading on Commodity Exchanges Outside the United States is Not Subject to U.S. Regulation.
If speculative position limits with respect to an Index Contract underlying the Index Commodity has been reached, a portion of the Funds trades may take place on markets or exchanges outside the
United States. Trading on commodity exchanges outside the United States is not regulated by any United States governmental agency and may involve certain risks not applicable to trading on United States exchanges, including different or diminished
investor protections. In trading contracts denominated in currencies other than U.S. dollars, Shares are subject to the risk of adverse exchange-rate movements between the dollar and the functional currencies of such contracts. Investors could incur
substantial losses from trading on foreign exchanges which such Investors would not have otherwise been subject had the Funds trading been limited to U.S. markets.
12
Various Actual and Potential Conflicts of Interest May Be Detrimental to Shareholders.
The Fund is subject to actual and potential conflicts of interest involving the Managing Owner, various commodity
futures brokers and Authorized Participants. The Managing Owner and its principals, all of whom are engaged in other investment activities, are not required to devote substantially all of their time to the business of the Fund, which also presents
the potential for numerous conflicts of interest with the Fund. As a result of these and other relationships, parties involved with the Fund have a financial incentive to act in a manner other than in the best interests of the Fund and the
Shareholders. The Managing Owner has not established any formal procedure to resolve conflicts of interest. Consequently, investors are dependent on the good faith of the respective parties subject to such conflicts to resolve them equitably.
Although the Managing Owner attempts to monitor these conflicts, it is extremely difficult, if not impossible, for the Managing Owner to ensure that these conflicts do not, in fact, result in adverse consequences to the Shareholders.
The Fund may be subject to certain conflicts with respect to the Commodity Broker, including, but not limited to, conflicts that result
from receiving greater amounts of compensation from other clients, or purchasing opposite or competing positions on behalf of third party accounts traded through the Commodity Broker.
Tax Related Risks
Shareholders of The Fund Will Be Subject to Taxation on
Their Allocable Share of the Funds Taxable Income Whether or Not They Receive Cash Distributions.
Shareholders
of the Fund will be subject to U.S. federal income taxation and, in some cases, state, local, or foreign income taxation on their allocable share of the Funds taxable income, whether or not they receive cash distributions from the Fund.
Shareholders of the Fund may not receive cash distributions equal to their share of the Funds taxable income or even the tax liability that results from such income.
Items of Income, Gain, Loss and Deduction With Respect to Shares of the Fund Could Be Reallocated if the IRS Does Not Accept the Assumptions or Conventions Used by the Fund in Allocating Such Items.
U.S. federal income tax rules applicable to partnerships are complex and often difficult to apply to publicly traded
partnerships. The Fund will apply certain assumptions and conventions in an attempt to comply with the applicable rules and to report items of income, gain, loss and deduction to such Funds Shareholders in a manner that reflects the
Shareholders beneficial interest in such tax items, but these assumptions and conventions may not be in compliance with all aspects of the applicable tax requirements. It is possible that the IRS will successfully assert that the conventions
and assumptions used by the Fund do not satisfy the technical requirements of the Code and/or Treasury Regulations and could require that items of income, gain, loss and deduction be adjusted or reallocated in a manner that adversely affects one or
more Shareholders.
The Current Treatment of Long Term Capital Gains Under Current U.S. Federal Income Tax Law May Be Adversely
Affected, Changed or Repealed in the Future.
Under current law, long-term capital gains are taxed to non-corporate
investors at reduced U.S. federal income tax rates. This tax treatment may be adversely affected, changed or repealed by future changes in, or the expiration of, tax laws at any time.
PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISERS AND COUNSEL WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE SHARES; SUCH TAX CONSEQUENCES MAY
DIFFER WITH RESPECT TO DIFFERENT INVESTORS.
Other Risks
Failure of Futures Commission Merchants or Commodity Brokers to Segregate Assets May Increase Losses; Despite Segregation of Assets, The Fund Remains at Risk of Significant Losses Because The Fund
May Only Receive a Pro-Rata Share of the Assets, or No Assets at All.
The CEAct requires a clearing broker to
segregate all funds received from customers from such brokers proprietary assets. If the Commodity Broker fails to do so, the assets of the Fund might not be fully protected in the event of the Commodity Brokers bankruptcy. Furthermore,
in the event of the Commodity Brokers bankruptcy, the Fund could be limited to recovering either a pro rata share of all available funds segregated on behalf of the Commodity Brokers combined customer accounts or the Fund may not recover
any assets at all, even though certain property specifically traceable to the Fund was held by the Commodity Broker. The Commodity Broker may, from time-to-time, have been the subject of certain regulatory and private causes of action.
13
In the event of a bankruptcy or insolvency of any exchange or a clearing house, the Fund
could experience a loss of the funds deposited through its Commodity Broker as margin with the exchange or clearing house, a loss of any unrealized profits on its open positions on the exchange, and the loss of profits on its closed positions on the
exchange.
The Effect of Market Disruptions and Government Intervention are Unpredictable and May Have an Adverse Effect on the Value of
Your Shares.
The global financial markets have in the past few years gone through pervasive and fundamental
disruptions that have led to extensive and unprecedented governmental intervention. Such intervention has in certain cases been implemented on an emergency basis, suddenly and substantially eliminating market participants ability
to continue to implement certain strategies or manage the risk of their outstanding positions. In additionas one would expect given the complexities of the financial markets and the limited time frame within which governments have felt
compelled to take actionthese interventions have typically been unclear in scope and application, resulting in confusion and uncertainty which in itself has been materially detrimental to the efficient functioning of the markets as well as
previously successful investment strategies.
The Fund may incur major losses in the event of disrupted markets and other
extraordinary events in which historical pricing relationships become materially distorted. The risk of loss from pricing distortions is compounded by the fact that in disrupted markets many positions become illiquid, making it difficult or
impossible to close out positions against which the markets are moving. The financing available to market participants from their banks, dealers and other counterparties is typically reduced in disrupted markets. Such a reduction may result in
substantial losses to the affected market participants. Market disruptions may from time to time cause dramatic losses, and such events can result in otherwise historically low-risk strategies performing with unprecedented volatility and risk.
Regulatory Changes or Actions, Including the Implementation of the Dodd-Frank Act, May Alter the Operations and Profitability of the
Fund.
The regulation of commodity interest transactions in the United States is a rapidly changing area of law and is
subject to ongoing modification by governmental and judicial action. Considerable regulatory attention has been focused on non-traditional investment pools that are publicly distributed in the United States. The Dodd-Frank Act seeks to regulate
markets, market participants and financial instruments that previously have been unregulated and substantially alters the regulation of many other markets, market participants and financial instruments. Because many provisions of the Dodd-Frank Act
require rulemaking by the applicable regulators before becoming fully effective and the Dodd-Frank Act mandates multiple agency reports and studies (which could result in additional legislative or regulatory action), it is difficult to predict the
impact of the Dodd-Frank Act on the Fund, the Managing Owner, and the markets in which the Fund may invest, the Net Asset Value of the Fund or the market price of the Shares. The Dodd-Frank Act could result in the Funds investment strategy
becoming non-viable or non-economic to implement. Therefore, the Dodd-Frank Act and regulations adopted pursuant to the Dodd-Frank Act could have a material adverse impact on the profit potential of the Fund and in turn the value of your Shares.
Lack of Independent Advisers Representing Investors.
The Managing Owner has consulted with counsel, accountants and other advisers regarding the formation and operation of the Fund. No counsel has been appointed to represent you in connection with the
offering of the Shares. Accordingly, you should consult your own legal, tax and financial advisers regarding the desirability of an investment in the Shares.
Possibility of Termination of the Fund May Adversely Affect Your Portfolio.
The Managing Owner may withdraw from the Trust upon 120 days notice, which would cause the Fund to terminate unless a substitute managing owner was obtained. Owners of 50% of the Shares have the
power to terminate the Fund. If it is so exercised, investors who may wish to continue to invest in a vehicle that tracks the Funds Index will have to find another vehicle, and may not be able to find another vehicle that offers the same
features as the Fund. Such detrimental developments could cause you to liquidate your investments and upset the overall maturity and timing of your investment portfolio. If the registrations with the CFTC or memberships in the NFA of the Managing
Owner or the Commodity Broker were revoked or suspended, such entity would no longer be able to provide services to the Fund.
14
Shareholders Do Not Have the Rights Enjoyed by Investors in Certain Other Vehicles.
As interests in separate series of a Delaware statutory trust, the Shares have none of the statutory rights normally
associated with the ownership of shares of a corporation (including, for example, the right to bring oppression or derivative actions). In addition, the Shares have limited voting and distribution rights (for example,
Shareholders do not have the right to elect directors and the Fund is not required to pay regular distributions, although the Fund may pay distributions at the discretion of the Managing Owner).
An Investment in the Shares May Be Adversely Affected by Competition From Other Methods of Investing in Commodities.
The Fund constitutes a relatively new type of investment vehicle. The Fund competes with other financial vehicles, including other
commodity pools, hedge funds, traditional debt and equity securities issued by companies in the commodities industry, other securities backed by or linked to such commodities, and direct investments in the underlying commodities or commodity futures
contracts. Market and financial conditions, and other conditions beyond the Managing Owners control, may make it more attractive to invest in other financial vehicles or to invest in such commodities directly, which could limit the market for
the Shares and reduce the liquidity of the Shares.
Competing Claims Over Ownership of Intellectual Property Rights Related to the Fund
Could Adversely Affect the Fund and an Investment in the Shares.
While the Managing Owner believes that all
intellectual property rights needed to operate the Fund are either owned by or licensed to the Managing Owner or have been obtained, third parties may allege or assert ownership of intellectual property rights which may be related to the design,
structure and operations of the Fund. To the extent any claims of such ownership are brought or any proceedings are instituted to assert such claims, the negotiation, litigation or settlement of such claims, or the ultimate disposition of such
claims in a court of law if a suit is brought, may adversely affect the Fund and an investment in the Shares, for example, resulting in expenses or damages or the termination of the Fund.
The Value of the Shares Will be Adversely Affected if the Fund is Required to Indemnify the Trustee or the Managing Owner.
Under the Trust Agreement, the Trustee and the Managing Owner have the right to be indemnified for any liability or expense either incurs
without negligence or misconduct. That means the Managing Owner may require the assets of the Fund to be sold in order to cover losses or liability suffered by it or by the Trustee. Any sale of that kind would reduce the net asset value of the Fund
and, consequently, the value of the Shares.
The Net Asset Value Calculation of the Fund May Be Overstated or Understated Due to the
Valuation Method Employed When a Settlement Price is not Available on the Date of Net Asset Value Calculation.
Calculating the net asset value of the Fund includes, in part, any unrealized profits or losses on open commodity futures contracts. Under
normal circumstances, the net asset value of the Fund reflects the settlement price of open commodity futures contracts on the date when the net asset value is being calculated. However, if a commodity futures contract traded on an exchange (both
U.S. and, to the extent it becomes applicable, non-U.S. exchanges) could not be liquidated on such day (due to the operation of daily limits or other rules of the exchange upon which that position is traded or otherwise), the Managing Owner may
value such futures contract pursuant to policies the Managing Owner has adopted, which are consistent with normal industry standards. In such a situation, there is a risk that the calculation of the net asset value of the Fund on such day will not
accurately reflect the realizable market value of such commodity futures contract. For example, daily limits are generally triggered in the event of a significant change in market price of a commodity futures contract. Therefore, as a result of the
daily limit, the current settlement price is unavailable. Because the Managing Owner may value such futures contract pursuant to policies the Managing Owner has adopted, which are consistent with normal industry standards, there is a risk that the
resulting calculation of the net asset value of the Fund could be under or overstated, perhaps to a significant degree.
Although the
Shares are Limited Liability Investments, Certain Circumstances such as Bankruptcy of the Fund or Indemnification of the Fund by the Shareholders will Increase the Shareholders Liability.
The Shares are limited liability investments; investors may not lose more than the amount that they invest plus any profits recognized on
their investment. However, Shareholders could be required, as a matter of bankruptcy law, to return to the estate of the
15
Fund any distribution they received at a time when the Fund was in fact insolvent or in violation of its Trust Agreement. In addition, although the Managing Owner is not aware of this provision
ever having been invoked in the case of any public futures fund, Shareholders agree in the Trust Agreement that they will indemnify the Fund for any harm suffered by it as a result of:
|
|
|
Shareholders actions unrelated to the business of the Fund, or
|
|
|
|
Taxes imposed on the Shares by the states or municipalities in which such investors reside.
|
An Insolvency Resulting From Another Series in the Trust or the Trust Itself May Have a Material Adverse Effect On the Fund.
The Fund is a series or a part of a Delaware statutory trust. Pursuant to Delaware law, the organization of the Trust provides that the
assets and liabilities of the Fund is separate from the assets and liabilities of all other series of the Trust, as well as the larger Trust itself. Though such organization may, under state law, protect the assets of the Fund in an insolvency
action brought by the creditors of another series of the Trust, this may be insufficient to protect the assets of the Fund from such creditors in an insolvency action in Federal court, or in a court in a foreign jurisdiction. Accordingly, an
insolvency resulting from another series in the Trust or the Trust itself may have a material adverse effect on the Fund.